Saturday, August 2, 2008

Why Invest In Gold - 3 Significant Financial Events That Investors Should Not Ignore

While there is never a wrong time to be investing in gold, the recent collapse and bailout of the GSE's, failure of IndyMac Bank, and the sharp rise in the CPI make it more imperative than ever, for you to protect your wealth with gold. I'm going to review those three financial events and explain why I feel that it is so crucial for you to be buying gold bullion now.

The Failure of IndyMac Bank

On Friday, IndyMac became the largest bank to fail in two decades. On Monday morning, depositors lined up for blocks and waited for hours to withdraw their money from the bank. Unless, of course, their deposits on account, were over the FDIC limit.

At this point, no one knows how long depositors will have to wait to receive the remainder of their funds or exactly how much they will eventually receive. That is, of course, if they collect anything at all.

What Could Happen

1. The problems at IndyMac are not just an isolated incident, but indicative of a U.S. banking system that has been deeply affected by the worsening credit-mortgage crisis.

2. The Federal Deposit Insurance Corporation's insurance fund has a capital reserve of $53 billion. The IndyMac failure could use up 10% of those reserves.

3. The FDIC has a secret list of 90 other 'problem' banks. The FDIC chairman has assured the public that its reserves would be adequate to handle the additional bank failures that are expected to occur.

4. A few more well publicized bank failures could cause depositors to start pulling money out of even the strongest banks. A widespread panic could start a nation-wide bank run.

Why You Should Buy Gold

Investors who own gold do not have to worry about FDIC insurance, bank failures, and the danger of holding large amounts of cash. Gold is safe, stable, and secure.

The Bailout of the GSEs

Last weekend, the Federal Reserve and the U.S. Treasury attempted to restore investor confidence in Freddie Mae and Freddie Mac by agreeing to open up their discount lending window (loan money) to the beleaguered GSEs. For the time being, it seems to have worked.

The Treasury is now lobbying Congress for a permission to invest (buy shares) in either company, if the need arises. And that is in addition to a desire to increase the companies' $2.25 billion dollar lines of credit.

What Could Happen

1. A government bailout of the GSEs would increase our national debt, increasing interest rates at a time when the economy can hardly afford it.

2. The Federal Reserve has repeatedly stated that the GSEs are in no danger of failing. But, what if they're wrong? Between the two of them, Fannie and Freddie guarantee almost half of all the $12 trillion U.S. mortgage debt.

3. Their ability to function is critical for mortgage prices.

4. However, if the GSE's collapse, the ability to obtain an affordable mortgage will be the least of anyone's concerns.

Why You Should Invest In Gold

Owning gold is like having an insurance policy. It has been around for centuries and will continue to exist for centuries more. Owning gold will give you peace of mind and protect your assets from any possible financial catastrophe.

The Rise in Consumer Prices

The Bureau of Labor Statistics reported that the Consumer Price Index (CPI) rose 1.1% in May and is up 5% from one year ago. That's a seasonally adjusted annual rate of 7.9%. Over the same period, food rose 8.7%. And, energy alone is up almost 54%.

That means if you have cash invested in a typical bank savings account, CD, or Treasury bond or bill, you are getting a negative return on your money.

What Could Happen

1. Inflation is rising but the Federal Reserve will be hard pressed to raise interest rates because of the weak economy and stressed-out financial system.
2. That means a weaker dollar. A weaker dollar means a continued rise in inflation. If your investments don't keep pace with inflation, that means less and less purchasing power as time goes on.

Why You Should Be Buying Gold

Gold is a proven hedge against inflation. Did you know that during the five years after WWII that inflation was at its highest, gold had a real return of over 130% compared to a negative 12% for the Dow Industrial Average? Gold is a stable asset that keeps its purchasing power and preserves wealth.

Still not convinced that you should be investing in gold? Throughout history, fiat currencies have collapsed. Stocks, bonds, futures, and options are subject to the fate of the markets and companies associated with them. We've experienced hyperinflation, recessions, and depressions. Both governments and countries have risen and fallen. But, through it all, gold has survived and will continue to be a safe-haven for those wise enough to recognize its true value.

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