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How Americans Should React to the Fannie Mae BailoutBy
Thursday, July 17, 2008
A little prediction I made last year is – unfortunately – coming true. The gigantic problem with these quasi-government agencies has Washington D.C. working day and night on structuring a bailout. I'm certain the government will do whatever it takes to ensure Fannie and Freddie continue to operate – but that doesn't mean bailing out the shareholders. All the government will do is guarantee Fannie and Freddie's debts. That means a huge amount of taxpayer money is about to go into troubled mortgages... A huge amount of money the government doesn't have and won't be able to increase taxes enough to afford. The government is going to pay for guns, butter, and housing. I believe this means a big rise in the price of gold and silver... If you haven't positioned yourself against a severe dislocation in the U.S. mortgage system, you're making a big mistake. Writing the most recent issue of my investment advisory (out last week) – my third strong endorsement of buying silver in as many years – I couldn't help but feel like Chicken Little. Are things really this bad? Could the mortgage debacle get a lot worse?Well, let me ask you, which do you think is more likely?
I think Scenario Two is more likely. No government in history has ever repaid debts as large as those already assumed by our government (in terms of GDP). Paying off these debts will put more pressure on the U.S. dollar. The single best way to protect yourself is to buy sliver. When I explained this for the first time in May 2006, gold was trading for $675 an ounce and silver was trading around $14. Today gold is trading for $935 – an increase of 38% in about two years. Silver is now around $18, an increase of 28.5%. These numbers tell me that, while you would have done well in precious metals over the last two years (far, far better than in stocks), the real move into gold and silver hasn't started yet. What should you do? The answer seems obvious and urgent. Make sure you own a substantial amount of gold and silver. I would recommend at least a 5% position in gold and a 5% position in silver. I wouldn't allocate more than 15% of your portfolio. That should be plenty to hedge yourself. Don't forget, well-run companies will also appreciate along with other assets during an inflationary period. So you don't need to dump high-quality stocks and buy a huge position in gold and silver.
Good investing,
Further Reading:
Why You Must Buy Gold, or Even Better, Silver, Now Market NotesGOLDCORP WEIGHS IN: IT'S A BULL MARKET IN GOLD STOCKS As our friend David Galland predicted four months ago, the gold stocks have arrived. David's argument for a rally in gold shares boils down to this: After years of digesting the costs (hiring workers, buying new equipment, and upgrading facilities) associated with getting a mothballed industry back into fighting shape, big gold producers are finally enjoying lots of cash flow. Add the increasing price of gold, and you've got the ingredients for a big bull market in gold miners. It's a solid thesis... but let's check with old man market to see what he thinks. Have a look at Goldcorp... Goldcorp is one of the "flagships" of the gold-mining industry. It is one of the few gold miners with a market cap over $10 billion... and widely considered one of the best-managed mining companies on the planet. As today's chart shows, the market likes the bull case for gold shares. Goldcorp is showing classic bull-market behavior... the tendency to make "higher highs and higher lows." Shares reached an all-time high this week. Thesis proved. |
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