hyperinflation

The Gold Bubble? What Gold Bubble?

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Monty Pelerin produced the following list on his blog today:

COMMODITY PRICE % INCREASES YEAR OVER YEAR

Agricultural Raw Materials 24%
Industrial Inputs Index 25%
Metals Price Index 26%
Coffee 45%
Barley 32%
Oranges 35%
Beef 23%
Pork 68%
Salmon 30%
Sugar 24%
Wool 20%
Cotton 40%
Palm Oil 26%
Hides 25%
Rubber 62%
Iron Ore 103%

Commentators are often speaking about Gold as the mother of all bubbles.  Gold is up 30% over the same one-year period. Why do people talk about a gold bubble? It would make more sense to talk about an iron ore bubble, a rubber bubble or a cotton bubble. What about the oranges bubble? The gold bubble? What gold bubble?

Invest in gold or gold stocks?

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David Berman of the Globe and Mail writes about the pros and cons of owning gold versus gold stocks.  Sometimes I wonder how much experience financial journalists have in investing.  Usually, I think that they don’t really invest much besides perhaps their own RRSP’s.  I would guess that many of them, particularly the full-time staff writers, have very little hands-on experience, though they do watch the industry closely and this makes them knowledgable.  But there is no substitute for experience and competence.

One thing Berman doesn’t discuss is commissions.  I’ve had some experience trading gold mining stocks but very little with physical gold; the reason for that is the expense and risk that is involved in buying and owning gold.  If you visit the Kitco site, you will see that gold sells at a premium of about $60 or more per ounce, plus shipping and handling of $30 plus $4 per $1000. So if I were to purchase about $10,000 of physical gold, my expenses equal 10 x 4 = $40 + $30 (for shipping) and 8.33 oz *60 = $500 premium on the gold itself = $570 total costs. That’s roughly 5.7% commission. Then one has to consider storage costs. I would leave it in my house, which could be broken in and the gold stolen. Thus, I find that gold mining stocks are much more attractive than physical gold, since the discount brokerage fee of $9.99 per transaction means that I can take possession of $10,000 worth of stock at a commission of 0.1%. Thus, commissions are an important factor when deciding what to invest in.

But I think there will come a time when I will want to own physical gold.  If I lived in the US, I would consider storing a few thousand in gold, but I’ve more confidence today that the Loonie will maintain a semblance of its value, probably losing no more than 2-7% per annum. That’s why I am shorting the US dollar in favor of the Loonie.  But if I were an American, I would consider having some gold on hand, because paper money becomes worthless when hyperinflation hits, and then people resort to alternative currencies.  At that point, silver and gold coins may come back into circulation.  These will not necessarily be government approved currency, but coins with intrinsic value minted by third parties.  Once the Federal Reserve has discredited the US dollar completely, people will have no choice but to barter or do transactions in other currencies.  In Austria after WW I, the Swiss Franc was a sought after currency.  For us in Canada, it will be a very funny irony if the Loonie ever becomes a currency of preference in the US.

The New Berlin Wall: Heroes Earnings Assistance and Relief Tax Act 2008

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Yesterday I sent my application for Canadian citizenship via registered mail to the Sydney, Ontario, Processing Centre.  An American citizen from birth, I’ve lived outside the USA, first as a student then as a permanent resident of Canada, since 1986.  I’ve never really felt that I needed Canadian citizenship.  My reason for applying now is that it is inconvenient being an American living in Canada.  So before my citizenship ceremony in a year or so, I will be renouncing my US citizenship.  Likely, for a few days while awaiting the ceremony, I will be a stateless person. [actually, I became a Canadian on February 28, 2011, and informed the US Consulate in Toronto of my relinquishment on April 7, 2011]

The United States is the only country in the world that requires that all its residents and all its citizens, even if living abroad, pay tax, though there is an earned income exemption of $70,000 [over 90,000 today] and foreign tax, dollar per dollar, credit.  The threshold for filing is ridiculously low.  As a married person filing a separate return, I must file if I make more than $2000; this despite the knowledge that as a resident of Canada, it is difficult to imagine very many scenarios where I might be liable for tax, since the rate here is higher than in the USA, particularly for lower income earners.  But it is a hassle to file every year, and it creates a lot of anxiety for me.  Last year, my accountant forgot a certain form and he was sick when I was required to send the amendment, and so I had to do it myself and that created a huge headache.

So I am not going to renounce my citizenship because I owe tax.  I am liable to the IRS for nothing.  I am doing it first of all because I am tired of filing a frivolous return to the IRS each year; frivolous because I owe nothing, and cannot possibly owe anything living here in Canada.

But there is another even more important reason which I call the “New Berlin Wall”.  Since 2008, the US has placed particular restrictions on wealthy people who wish to expatriate.  If I were to own 2 million in assets or if my average net income tax liability over the last five years were $139,000 , I would be a “covered expatriate” upon renouncing my citizenship.  The law penalizes these individuals with exorbitant expatriation tax that boggles the mind.  Why?  To keep them in the USA.  So it is a Berlin Wall designed to keep people from leaving the US.

I am long way from being a covered expatriate.  But with the devaluation of the dollar due to hyperinflation, I foresee being there soon.  Therefore, I’ve decided to leave before the law applies to me; because it was much easier to leave East Berlin before the Wall was built.

Oh and by the way, Go Canada Go!!!

[corrections, 20 April 2011]