Crisis Investing in 2009

Never mind your hat; Buy Gold and hold on for your financial life...

THE STORM that's been coming for so long is upon us, writes Louis James, senior editor for metals at Casey Research.

We've been calling for a crisis to strike for several years now, at least since August 2005, detailing our case for its imminence with increasing urgency over the last two years, urging people to "rig for stormy weather." And now, as people around the world are so painfully aware, it's here.

We wish more people had taken us seriously back then. As we watch the debacle unfold and people who should know better take huge losses, we are often beside ourselves with exasperation. Did people think we were kidding? Exaggerating? Well, maybe they did, or maybe they thought we might be on to something, but the magnitude of the problems we were predicting just seemed too great to take seriously.

In all fairness, who would have believed back in 2005 that in 2008 the United States would see cascading bank failures and de facto nationalization of major financial institutions?

Well, we did. And those who listened then have profited. But even newcomers should remember that a genuine crisis won't be easy for anyone, not even us. The bailout plans, for example, are worse than robbing Peter to pay Paul, they're robbing Peter to pay Peter – with a hefty transaction fee for the service.

Faced with such lose-lose propositions, you have to batten down the hatches, plug all the leaks, and hold on tight. And holding on to – or backing up the truck on – Gold Bullion and certain gold stocks is definitely the right thing to do, we believe, at this time.

Homestake Mining Company (now part of mining giant Barrick Gold) demonstrated this during the Great Depression. For more than 100 years, the company operated the Homestake mine in South Dakota (ever watch the "Deadwood" TV series...?). In 1935, right in the middle of the Great Depression, Homestake recovered enough gold to make $11.39 million in net income, a record that stood for nearly 40 years – and that was at a time when the US government had set the price of gold at $35 per ounce.

Homestake shares showed some volatility, but weathered the great stock market crash of 1929, ending the year slightly up. From 1926 to the end of 1935, they went ten-to-one, soaring from $50 to $500. With fluctuations as you'd expect, they held on to those gains until taking off again during the 1970s bull market for gold. Companies in our portfolio now have the potential to do the same thing in our opinion.

And remember, physical Gold Investment in the metal itself offers the ultimate financial safe haven.

The Dollar, in contrast, is being debased at a mind-boggling pace. The economic fallout is affecting the European Union and could cause the Euro currency to bust apart at the seams as well. At a time when serious market malaise has people fleeing to cash, cash has become a minefield. Even money market funds are "breaking the buck", delivering losses on the one refuge seen by many investors as a "sure thing".

Anyone who thinks about it can see what that must mean for Buying Gold and gold stocks. The Gold Price has recovered considerably in the last few months, lighting a fire under our whole sector. We would not want to be caught short of any great stocks that are positioned to maximize returns during the "Mania Phase" of this market – or interim bull rallies that can charge upward at any time.

Even above $900, gold is still relatively cheap – it's only $338.50 in 1980 dollars (and that's using the US government's much-understated CPI stats). So even after rising three-fold in the last decade, it could still have a long way up to go. But that's not the only reason to own it.

Gold is the one asset you can own that – no matter what else happens – won't go to zero. The same is true to varying degrees for other metals and commodities, but it's utterly true of gold. Any other form of money is paper, whether it's dollars, futures, or even gold stocks. It's still paper, and all paper can go to zero.

In times like these, the speculative upside of owning physical gold is spectacular – but the ability to sleep sounder at night knowing you own a significant chunk of something with intrinsic value is priceless.

What happens if other asset classes do drop close to zero? Why, we here at Casey Research would cash in and buy with both hands, of course. Blue chips for pennies on the dollar would get our attention, as would prime commercial real estate and many other investments that should be near bottom even as gold nears its top.

We've warned repeatedly for investors to hold on to their hats. We now think we've underestimated how very rough this ride is going to be. Never mind the hats; hold on for your financial life.