In our opinion, the banking system in the developed world remains in a downward spiral. Financial institutions must raise money to strengthen their balance sheets and they must decrease leverage.  They try to accomplish this by making as many bullish statements as possible, and to get as much positive PR from central bankers as possible. Then, they try to sell more stock and more bonds to investors.

In our opinion, investors should use every rally in U.S. and European financials as a selling opportunity.  We believe that it will take at least two or three more years for the balance sheets of the financial institutions to be repaired.  On top of that, we believe that government regulators want to end the use of high, 30 to 1 leverage by investment banks.

Without the big leverage, how will they make a lot of money?  Could it be that U.S. and European financial stocks will experience a continuing decline like the U.S. and European technology and telecom stocks did beginning in 2000?  This is the opinion of our friend Larry Jeddeloh of The Institutional Strategist (, and I think that he is correct.  We plan to stay away from U.S. and European financials until the market proves us wrong.


A review of the 1970’s gold price shows periods of big declines during the long uptrend…much like what we are seeing in this current uptrend.

The background environment was similar.  Inflation was rising along with oil and gold. The dollar was generally declining and politicians were all over the media talking about how inflation would be cured in no time.  When this didn’t work they started in with the ‘we will make gold sales from government inventories’ ploy (and they did make sales).  Government officials and central bankers, who view the rising price of gold as a negative report card on their policies, went to the media with witticisms like gold is a barbarous relic, and that speculators are destroying the economy and should be punished.  Of course, Congress and the Executive Branch held themselves blameless, saying that they have not hurt the economy with their fiscal policies, but that it’s the fault of greedy speculators…and foreigners.

During this period, gold went from about $35 to over $870, but by no means was it a straight line.

1. Gold went from $35.94 average price in 1970 to $120.17 in July of 1973…an increase of 233%.

2. Then, gold fell from $120.17 to below $95 in Nov 1973…a decline of over 20% in four months.

3. Then, in March 1975, COMEX gold peaked at $187.50 for a rise of over 90% in 17 months.

4. Then, in August 1976, COMEX gold hit a low of $101…a 46% decline in 17 months.  So, during a two year and nine month period, the price of gold was only modestly higher than November 1973’s low of $95.  Then it began to move rapidly as inflation in the U.S. began to be a problem in 1977, 1978 and 1979.

5. In October 1978, COMEX gold peaked at $249.40 for a rise of 147% in two years and two months.  By this time, inflation in the developed world was high and rising…much like inflation in the developing world is today.

6. In November 1978 COMEX gold bottomed at $191.20 for a decline of 24% in one month…Inflation continued to be a problem.

7. Then, in January 1980, COMEX gold peaked at $873…an increase of over 350% in fourteen months.  After this gold price peak, inflation began to moderate.  Paul Volker had taken over at the Federal Reserve and was administering some strong anti-inflationary interest rate increases which lead to a recession.  He remained a strong and steady force for moderation in money supply growth and reduced the public’s inflationary expectations.

In our opinion, we are at the beginning of a period of inflation in the emerging world that may be like the equivalent of early 1978 in the developed world.  The developing nations are making the same mistakes such as price controls, which incentivize consumption, export restrictions, which incentivize global hoarding, tariffs and many other artificial boundaries which create market dislocations and lead to higher prices.

Government officials are beginning to blame the speculators for the problems that the government policies have fostered.

We can be sure that we will see the old stand bys: government threats of sales from their inventories and restrictions on trading commodities in many parts of the world.

None of this will work until they implement higher interest rates and other tight monetary and fiscal policies which will slow economic activity and moderate inflationary expectations.  Then, we can expect an end to inflation.

Between now and the time that officials implement these policies (I don’t know how long it will take them to get wise), we will see more inflation and much higher gold and other commodity prices.

The primary purchasers of gold will be the newly wealthy citizens of the emerging world, and anybody else who wants to protect themselves from inflation will also look to gold and other commodities.  Governmental officials will label these investors as greedy speculators, but in reality, they are people combating the rising cost of living and the erosion of their savings…in other words, they have little choice.


ROTH-(A four letter word you should use…if you aren’t already.)

While putting money into a ROTH vehicle does not give you a tax benefit now, the money you put into it will grow tax free…not tax-deferred like a regular IRA or 401K where your withdrawals are subject to income tax…but tax free.  According to the present legislation, there are no taxes on how large it can grow, and there are no taxes on withdrawals.  In addition, there are no minimum distribution requirements after age 70 ½ on ROTH IRA’s.

The advantage of ROTH over traditional tax deferred retirement plans can be huge depending on where you are in your life, how much you have accumulated in IRA’s, pensions and 401K’s, and how much of your IRA money you will need to withdraw in the future to maintain your standard of living beyond retirement.

Say you have saved a million in a traditional IRA or 401K, the reality is that some of that belongs to the tax collectors.  Depending on your tax brackets, as much as fifty percent could be considered pledged to the government.  When you reach 70 ½, the government mandates that you start taking some out…in order to pay them their “fair share”.  Such is not the case with the ROTH.  The current tax code says every penny of that is yours, and you can grow it to…whatever.
ROTH IRA’s have been around for over 10 years, but some tax law changes are making this valuable financial vehicle available to higher income earners.  Investors who have not been eligible to take advantage of a ROTH IRA due to their income level, should look to 2010 with anticipation…and a plan, because in 2010 the ROTH door is opening wider.

The change taking place in 2010 is that there will no longer be an income limit on people who want to convert some of their traditional IRA assets to ROTH IRA assets.  The amount converted will be taxed as an IRA withdrawal, but once in the ROTH IRA, the assets can grow without limit and never be taxed…according to current tax law.

The IRS is offering investors some flexibility with how they pay the taxes on their conversions.  For example, the taxes due on conversions done in 2010 can be paid half on the person’s 2011 tax return, and half on their 2012 tax return.  Your tax advisor should be able to help formulate the plan.

ROTH 401K’s are similar in that the assets can grow tax free.  Because they have higher contribution limits than do IRA’s, they are gaining in popularity among employers.


Who knows how or if the U.S. Government will be able to fix the long-term problems that face Social Security system.  So, our recommendation is that people plan, save and invest for their own retirement.  Tax deferred savings is good, but we anticipate higher taxes in the coming years, due to demographic changes and rising government spending, so having ‘permanent’ tax free savings seems a no-brainer to us.

We encourage investors to check with their employer on the availability of a ROTH 401K.  Retirement savings in a ROTH IRA or 401K combined with an effective investment strategy can make for much larger retirement nest eggs over time.  Your tax advisor should be able to assist you with converting part of your traditional tax-deferred savings to a ROTH IRA, and Guild Investment Management can help you with the investment strategy.  Please contact us for more details on our investment management services.

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