wages and salaries

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Many people are rightly concerned that the US Federal debt has been exploding in the last few years. A quick look at the following chart will show why:

This chart doesn't try to show all the debts of the United States, just the publicly acknowledged debt of the federal government. So it doesn't include state and local debt, and it also omits unfunded liabilities (promises to pay in the future for things like medicare and social security). This is the number that grows each year by the size of that year's deficit.

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Subscriber Mark Cloney recently wrote to me with some great questions:

Hello, Sir Charles – I have a couple questions for you:

  • How can someone on a tight budget best get invested in silver and/or gold?  I don't have a lot of savings, but I do not want to see them destroyed by more and more "quantitative easing".

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Since I published Gold101 there have been some wonderful articles giving additional details on buying and storing physical gold.

The first, called "Gold coin shortage likely to become chronic" by Michael J. Kosares, outlines the reasons why gold bullion coins have been so hard to find at reasonable premiums, and why these forces will probably keep premiums high in the future as well. BTW, Michael's book, The ABCs of Gold Investing: How to Protect and Build Your Wealth With Gold is well worth reading if you are new to buying gold.

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Here are a few resources to help you move some of your savings into gold.

Remember that gold is a form of cash, not an investment. It doesn't grow in value, create new jobs, earn profits, or generate income for you. It is simply a currency that no government can counterfeit or debase. You should hold it as a way to reduce the volatility of your portfolio, or for long term saving. Don't imagine that owning gold will make you rich: If gold doubles in price due to massive creation of fiat currency, most of the other things you need to buy will eventually double in price as well. Gold can preserve your wealth, but not really grow it. For that you need real investments and prudent speculations.

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Yesterday the NY Times ran an article headlined, "Average U.S. Income Showed First Rise Over 2000".

The big claim is that after peaking in 2000, incomes fell, bottoming in 2003, and have now climbed back to make new highs in 2006.

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The first part of this interview covered Paul van Eeden's background and laid out his views on gold, inflation and interest rates. In this final segment, we'll discuss what to do about this situation – how to translate this view of the world into investment action.

More on Gold, Inflation and Interest Rates continued – Episode 5

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Last year, in July of 2007, I attended the Agora Financial investment Symposium in Vancouver, BC. There were a lot of excellent speakers and sessions covering all aspects of investment, with quite a bit of emphasis on natural resources and a strong international flavor. One of the speakers who impressed me the most was Paul van Edeen. On my return home I subscribed to his newsletter – which has since become one of my favorites.

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I recently came across a presentation made on May 20th to the US Senate Committee on Homeland Security and Governmental Affairs by Dr. Benn Steil, a Senior Fellow and Director of International Economics at the Council on Foreign Relations in New York, entitled "Financial Speculation in Commodity Markets" (pdf). Dr. Steil also gave a speech the week before at the New York Hard Assets Investment Conference entitled "Is the Dollar Doomed?" (text and audio).

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As the likelihood that an official "recession declaration" will be issued for the US economy increases, true prices of many items continue to fall. Gasoline, for example, is now at it's lowest price in about 10 years. Uranium also continues to slump, ending January at 2.63 grams per pound.

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The Charts section has been updated with a new chart of the Dow Jones Industrial Average, this one from 1900 to present.  The three big bull markets of this 107 year period, and the following bear markets, are easily seen.  It is clear that a lot of money can be made – and lost – investing in stocks over the long run.

From 1904 to 1929 the Dow grew 12 times in value from 47 to 568 gold grams, then gave up 89% of that gain, ending at 64 grams in 1933.  In the next phase, the Dow grew almost 14 times, to 893 grams in 1966.  This was followed by a long decline, losing almost 96% of it's value, finally bottoming around 37 grams in 1980.  Then the next bull market emerged, growing over 37 times to 1,393 gold grams in 1999.  The 8 years following this all time peak have been a downward march, representing a loss of almost 56% to the August 31, 2007 close of 618.262 gold grams.

What will the future hold?  I would love to hear comments from technicians on this topic… But if the last two market cycles are any guide, I suspect we will see the Dow trading below 200 gold grams sometime in the next 5 to 10 years, and it may not be until around 2035 that a new high is made.

There are many roads that could lead to the 200 gram level; the Dow could move sideways as the value of the dollar shrinks, or the Dow could keep making "new highs" in terms of a plummeting dollar, or the dollar could stabilize or even strengthen while the Dow collapses in nominal terms.

But if your goal is to build your real wealth, the key is to keep your eye on the ball: investing in assets that are growing in gold value, regardless of their price as viewed in the fun-house mirrors of fiat currencies.  The Custom Chart service can help you identify those opportunities, and we will be bringing more tools online in the future as well.

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