In the closing weeks of 2008, Americans have once again been shocked by a massive Wall Street scandal. Former Nasdaq chairman, Bernie Madoff was arrested for masterminding a $50 billion fraud. The "Bernie Mad(e)off-with-investors'-money" Ponzi scheme is just the latest Wall Street scandal to see the light of day.
I firmly believe that the Madoff $50 billion Ponzi scheme will be just the first of many Wall Street frauds that will be revealed in 2009. In the past, Americans trusted their hard-earned savings to Wall Street bankers, brokers, fund managers, and so-called professional money managers.
I seriously doubt that most Americans will do so in the future. Many Americans are now very understandably asking, “In whom can we trust?”
Americans should also be asking that same question with regard to the Federal Reserve's attempt to inflate its way out of massive US debt and a nasty downturn in the economy. This economic downturn is different in that it was born not just from excessive speculation but also of massive leverage and downright fraud. So there are an awful lot of excesses that need to be wrung out of the system.
The debts of the United States already stand at five times America's annual GDP and rising rapidly. Some Americans, such as us here at Oxbury Research, are now questioning how these huge loans will ever be repaid. Unfortunately, the answer is that the loans will be repaid by every current holder of US dollars and by future generations of Americans. It is sad that generations still unborn will be paying for the immense greed of a few.
Both President-elect Barack Obama and Fed head Ben Bernanke are students of the Great Depression and FDR's economic policies. I only hope that they don't adopt all of FDR's policies, particularly what FDR did in 1934.
First, FDR confiscated all gold from American citizens. Then, more importantly, FDR devalued the US dollar by 75 per cent versus gold. Since the US was still on a gold standard, all Americans and all overseas holders of US dollars lost 75 per cent of all their monetary wealth almost instantly. This was the easy way for the US government to wipe out 75 per cent of its national debt in one day!
Can something similar happen again? I believe it can. This time, however, the US government will be more subtle. The Federal Reserve will simply “print” so much money that the value of the US dollar will decline steadily which, in turn, will allow the US government to pay back their debt with much “cheaper” dollars.
Ben Bernanke is already rapidly going down that path and creating incredible amounts of “funny money” almost daily. The effect of his policy will be the same as FDR's policies were in 1934 – a drastically reduced lifestyle for most Americans.
What can someone do to preserve their purchasing power and to preserve the wealth that they do have for their descendants? I believe the answer lies in something that has been a store of wealth for people for thousands of years – gold.
Gold is respected throughout the world for its value and rich history. Coins containing gold first appeared around 800 B.C., and the first pure gold coins were struck during the reign of King Croesus of Lydia about 300 years later.
There are myriad reasons to own gold. Some of the reasons would include: US dollar weakness, inflation, deflation, supply & demand, geopolitical risks, and diversification. A wonderful article titled Eight Reasons to Own Gold was written by yours truly and can be found at Investopedia.com, which is an online subsidiary of Forbes magazine.
There are, of course, numerous ways for investors to own gold – gold bars and bullion, gold coins, gold ETFs such as GLD, gold mutual funds, or individual gold stocks. Today I want to draw investors' attention to one specific gold stock – Randgold Resources.
Randgold Resources is a gold mining company with major gold mines located in politically-stable areas of Western Africa. Major discoveries to date include the 7.5 million ounce Morila deposit in southern Mali, the 7+ million ounce Loulo deposit in western Mali, and the 4+ million ounce Tongon deposit in the Ivory Coast.
Gold production at the company's flagship Loulo mine in western Mali is being expanded. Higher output from the Loulo mine means that Randgold Resource's annual gold production will jump 50%, rising from 400,000 ounces in 2008 to more than 600,000 ounces in 2011.
Randgold Resources trades on the Nasdaq exchange under the symbol of GOLD. It is a very liquid stock with average daily volume in excess of 1 million shares. The company's market cap is in excess of $3 billion.
Randgold Resources is one of the few mining companies whose shares have actually risen in 2008! I believe that this is so because the company is extremely well-run. The company's CEO, Mark Bristow, has stuck to a “boring” long-term strategy and has eschewed deal-making and debt.
Mr. Bristow has instead focused on organic growth. He pursued only projects that would generate returns of at least 20 per cent, and repaid any debt incurred out of cash flows. As a result of Mr. Bristow's conservative strategy, the company is completely debt-free and has more than $250 million of cash sitting on its balance sheet!
Randgold Resources's stock price has ranged between $22.28 and $56.28 over the past 52 weeks. The stock is currently trading near $43. I believe that this price offers an excellent entry point for investors looking to own a high-quality, well-run gold company.
Disclosure: No positions.