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According to various sources, Berkshire
Hathaway lost $310 million in the first quarter
of 2005 betting against the U.S. Dollar. This
$310 million loss generated a plethora of headlines
over the weekend about Warren Buffett's "failed"
bet against the U.S. Dollar. Just by chance, we
decided to click on the top news headline on yahoo.com
and we were taken to a Reuters article titled
"Berkshire Loses Currency Bet". At the
bottom of most articles on the yahoo website,
there are sponsored links from advertisers. One
link that caught our attention was an advertisement
from a currency trading website called fxcm.com.
Your authors are not currency traders, and we
have never heard of fxcm.com, but that is beside
the point. What is important is that, for the
first time in recent history, currency trading
has gone mainstream.
For most of the 1990s, mom and pop investors
learned how to surf the Internet. By the end of
the decade, almost every major portal website
such as AOL, Yahoo, or MSN had banner advertisements
from sponsors such as Datek, E-trade, Ameritrade,
Schwab and TD Waterhouse. Tens of millions of
Americans would wake up every day and get bombarded
with ads from various online brokers. You couldn't
get a sports score or check a stock quote without
seeing an ad for "free real time quotes"
or "$8 online trading". Combine this
new distribution phenomenon with a skyrocketing
stock market, and Americans started trading online
in droves.
As the NASDAQ imploded and the housing bubble
took its place, links to E-trade & Schwab
were replaced by advertisements for LendingTree.com
& E-loan. By this time, nearly every American
had a web connection at home or work. With interest
rates coming down and FICO scores becoming as
American as apple pie, online loans started to
take off. All you needed to do was spend a few
minutes typing in your personal information and
thousands of dollars could be yours via a cash-out
refinancing or home equity loan. This trend still
continues today.
The Dollar decline over the last
two years has become a topic to be discussed at
cocktail parties. Ask someone if they have plans
to travel to Europe and they will reply, "I
wouldn't go there today because our Dollar is
worthless." Just a few weeks ago, an image
of a shrinking Dollar graced the cover of Newsweek.
So it is only appropriate that mom & pop investors
get the chance to take advantage of fluctuating
currencies by entering the forex trading game.
The advertisement for fxcm.com is just the first
sign of this trend.
In addition to interest in foreign currencies,
the weak Dollar has increased the popularity of
online commodity trading accounts. You cannot
go a day without seeing a Lind Waldock commercial
on CNBC. Nor can you go a day without hearing
about "peak oil". The public understands
oil better than other commodities because everyone
has to fill up their tank with gasoline. A weekly
trip to the gas station and glancing at fuel prices
is no different than a weekly glance at the business
section to check stock prices. Take a look at
the charts of most oil companies' stocks and you'll
see that massive amounts of money have moved into
energy over the past year.
This brings us to gold and silver. These two
precious metals are commodities, but also have
monetary value as well. Since biblical times,
gold and silver have been used as money. Until
the 1970s, the U.S. Dollar was literally as good
as gold. When Richard Nixon declared that the
Dollar would no longer be backed by gold, the
Dollar price of gold skyrocketed to unimaginable
levels. In fact, there was one point in time about
25 years ago that one could purchase the Dow Jones
Industrial Average (currently at 10,000) for just
one ounce of gold. Back then, any investor who
wanted to buy gold either had to purchase coins,
bars or futures contracts.
Since 2001, a new bull market in
gold and silver has begun. While the price of
gold has gone up almost 75% since then, the prices
of most gold mining stocks have gone up four or
five fold. Yet even with
this great bull market taking place, those who
want to purchase gold itself (rather than a mining
company's stock) still face hurdles. Sure
you could walk into a coin shop (most of these
are extinct) or jewelry store and pay up for a
few coins. And you could even buy shares in an
exchange traded fund linked to the gold price.
But as far as purchasing
physical gold, there is no equivalent to E-loan
or Ameritrade. When you visit Yahoo.com
or MSN.com, you will not see an advertisement
for buying gold coins. The only place we have
ever seen ads for gold coins on a regular basis
(not including financial sites) are on conservative
websites such as newsmax.com. Once the public
catches on to the gold bull market, expect to
see advertisements for coins continue to pop up.
As the gold price explodes, we expect to see online
coin shops advertising on MSN.com or CNN. At that
point, it may be a good time to sell.
May 3, 2005
Todd Stein & Steven McIntyre
Texas Hedge Report
*****
Todd Stein & Steven McIntyre are internationally
known analysts and editors of The Texas Hedge
Report, a market newsletter that highlights under
and overvalued securities in the equity, bond,
currency, and commodity markets
For more information, go to http://www.texashedge.com
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