And How You Should Consider Protecting Yourself

Not two days have elapsed and they’re at it again already. Wall Street and their bailout-crazed government lackeys, that is.

Just because Congress said ‘no’ to the first version of the $700 billion bailout plan doesn’t seem to have fazed its backers. "If at first you don’t succeed, try and try again" seems to be their motto. ‘No’ is evidently the wrong answer. Obviously the voting public (and Congress) are too stupid to realize the magnificent benefits of the master strategy and so the Senate has decided to vote upon essentially the exact same legislation.

The new bill still incorporates $700 billion to buy troubled assets from banks, but just like one of those over-hyped junk mail sales letters you throw in the trash, the proposal includes several new provisions (Special Bonuses Available! You must act now!!!) which are intended to attract more Republicans votes in the House.

Special Bonus #1: Temporarily raises the FDIC insurance cap to $250,000 from $100,000. The FDIC may not charge member banks more to cover the increase, and allows the FDIC to borrow from the Treasury to cover any losses that might occur from the higher insurance limit. (OK, this makes some kind of plausible sense.)

Special Bonus #2: Extends renewable energy tax breaks for individuals and businesses, including a deduction for solar panel purchases. (We had no idea that solar panels were a key part of the credit and mortgage disaster. Perhaps those sneaky charlatans at Goldman Sachs are planning to corner the market?)

Special Bonus #3: Continues numerous other expiring tax breaks such as a research and development credit for businesses and also state and local sales tax deductions for individuals. (Don’t worry, these tax breaks don’t make any sense to us either, considering that this is supposedly critical legislation to resuscitate the financial sector.)

Special Bonus #4: Offers relief from the Alternative Minimum Tax for millions of Americans. (A good idea but again, what does this have to do with failed mortgages and banks presently standing in front of the firing squad and awaiting execution?)

Special Bonus #5: Introduces a "Mental Health Parity" provision which requires health insurance companies to cover mental illness at parity with physical illness. (At last, this is making sense! You must be mentally ill not to love this bailout package. Either that or you shortly will be mentally ill once the full effects of hyperinflation take hold in the economy.)

The Senate bill requires the president to send a legislative proposal to Congress that obligates the financial industry to reimburse taxpayers for any net losses associated with the program after five years. Collective punishment is a wonderful thing, as this means that all the financial companies — even the ones astute enough to avoid the need for a bailout — get to pay for the incompetence of the others. But don’t feel too sorry for them, as we’re sure that they’ll be more than happy to pass on any extra costs to you.

And of course there’s another way that you (the lucky American taxpayer) really gets to enjoy the benefits of collective punishment. Never mind that you lived within your means, only bought what you could truly afford, and never defaulted on a single payment on anything in your life. You get to bail out everyone else who was less responsible to the tune of $2,300 per person. And that’s a conservative estimate as we’re sure it will be much more than that overall.

What’s more, your beloved US dollar gets destroyed in the process.

Why We Think The Bailout Package Is Doomed

You may or may not be aware that the Federal Reserve pumped $630 billion into the global financial system by increasing its existing currency swaps with foreign central banks by $330 billion to $620 billion.

And the Term Auction Facility, the Fed’s emergency loan program, expanded by $300 billion to $450 billion. This is the largest liquidity infusion since last year’s credit seizure and it came hours before the U.S. House of Representatives first rejected that $700 billion bailout on Monday.

Do you realize what that means? The Fed poured $630 billion into the market before the vote, and yet the S&P 500 was already down dramatically and tanked even further after the vote. A mere $630 billion from Bernanke (only slightly less than the $700 billion that Paulson wants) failed to arrest the slide in the market.

If we’re truly facing an economic catastrophe, that’s irrefutable proof that Paulson’s $700 billion will do nothing of note except blow out the U.S. government’s debt obligations and the U.S. dollar with it.

If the dollar gets cut in half due to these shenanigans (all too likely if trillions in obligations come due), then your cost of living doubles. Won’t that be fun, especially when you know that $700+ billion of your dollars went to rescue bankers who made highly risky bets that the real estate market would go up forever?

Fortunately, there’s a way to protect yourself, and it doesn’t mean hiding all your cash in a mattress.

A Golden Future Amidst The Financial Hurricane

Short term fluctuations aside, long term security involves gold. Physical gold (in the form of coins or ingots or high-carat jewelry), gold futures, and gold ETFs and stocks are about the only way to protect your savings from the depredations of Wall Street, the Fed and the government.

Here’s how the underlying asset itself is doing, as represented by the nearest COMEX futures contract:

Gold is struggling to close over $900/oz right now, but don’t let that worry you. The yellow metal is one of the most volatile assets around and the long term trend is up.

If you’re very conservative and don’t feel happy buying at a reduced price (in our opinion anything under $900/oz is a bargain), then wait for a strong close over $1000/oz. But by then we think it will run away and you’re likely to be chasing a train as it leaves the station.

The AMEX HUI (Gold Bugs Index) is also showing some strong support right now. It’s underperformed the metal, strangely enough, but is poised for what should be a new upturn. We’ll be happier seeing the HUI close over each of those moving averages, but for now gold stocks are available at bargain prices.

Two of the better-performing HUI components include Kinross Gold Corporation and Golden Star Resources.

Kinross is a Canadian-based gold mining company with eight mines in the United States, Brazil, Russia and Chile. It’s the third-largest gold mining company in North America by reserves and seventh in the world in production and has been the top-performing senior gold equity on the Toronto Stock Exchange and the NYSE in 2006 and 2007. From the chart, it’s worth a buy at $14 if you’re lucky enough for it to fall that low again:

Golden Star is a much smaller mid-tier gold mining company with two operating mines situated along the prolific Ashanti Gold Belt in Ghana, West Africa. It’s obviously suffered in the recent commodity downturn, but this is a stock that traded at $3 only a few months ago and has suffered no adverse corporate developments since that time:

Whatever you choose to do, we hope you take the threat of an eroding U.S. dollar very seriously and act accordingly. Since the government appears intent on selling you out via this insane bailout plan, you need to protect yourself now.

Good investing,

Nick Thomas
Analyst, Oxbury Research