Gold mine sounds like it’s all shaft
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Dear Mr. Berko:
We are 83 and 82, have worked hard, saved hard and lived frugally. We have a $25,000 certificate of deposit that soon comes due. So we listened with interest to an advertisement on satellite radio, free with our new used car, about buying gold because of inflation. We called the toll-free number, and the man told us that inflation will — and we took detailed notes – “sustain itself at 20 percent or more for five or more years.” That’s scary. He suggested we invest the entire CD in gold, which would buy 25 ounces. He thinks gold could more than double in less than five years. Because our parents were shopkeepers and dairy farmers in Germany in the 1930s, we are very worried about inflation. It was terrible. We have 14 more $25,000 CDs. Should we do this? If not, what should we do to hedge against inflation? We must do something right away. We also have 400 shares of Alliance One International. Please tell us what to do with this stock, which we inherited in 1995 when it was $16.
D.R., Erie, Pa.
Dear D.R.:
I will gladly share my advice and experience with you, because there are no sweeter words than “I told you so.” But first I want both of you to do 50 push-ups, 100 sit-ups, run in place for 20 minutes, swim two miles, then calm down because there’s less than a 0.25 percent chance that your Fast Eddy salesman will be even half right.
You really gotta be Elmer Fudd dumb to pay attention to an unknown, fly-by-night outfit that advertises on satellite radio, let alone purchase gold from that outfit. Satellite radio does not vet its clients and frequently attracts low-class, corrupt shoestring vagabond advertisers whose product and promises seldom match their sales pitch. So, if you believe they’re selling gold at a fair price, think again. You would be buying gold at their costs plus the cost of creating the gold commercial, the cost of running the commercial on various Sirius channels, the cost of shipping the gold to you, the cost of insurance, the cost of the advertiser’s toll-free number, the 12 percent commissions paid to the salesperson who would take your order over the phone, etc., ad nauseam, and so on.
My dad often counseled me: “Son, never test the depth of a stream with both feet.” That’s good advice. Dad also defined a gold mine as “a big hole in the ground with a liar standing at the top.” Now I don’t know for certain how high inflation will be in the coming two to five years. Neither does the salesman with whom you talked on that toll-free call. I understand your fear, so I repeat for your comfort that I’m certain as sunshine that inflation will not sustain itself at “20 percent or more for five years.”
But if you must buy gold, which I do not recommend for you, please consider investing in just 5 ounces and keep the remaining $20,000 of “hard-saved money” in a certificate of deposit. At ages 83 and 82, a mistake in judgment can be extremely dangerous to your financial health.
But, please, and I’ll beg a thousand times, do not buy even a gram of gold from that radio flimflam man. There are a good number of coin dealers and jewelers in Erie from whom you can buy all the gold you want. And there’s no shipping cost, no insurance costs, no advertising costs, etc. Those folks will treat you fairly. And though you might pay a premium over the spot market, that premium will be niggardly.
As you know, I don’t care much for gold as an inflation hedge and usually recommend Treasury Inflation Protected Securities, or TIPS, which I believe could be a better, less volatile and safer inflation hedge than gold. I’ve discussed TIPS in previous columns and recommend you check them out on the Internet. Go to www.treasurydirect.gov and follow the bouncing ball.
Alliance One International Inc. (AOI-$5.45) doesn’t butter my muffin or sweeten my tea. AOI buys, processes, stores, sells and ships leaf tobacco in the United States, Europe and Asia. In 2008, it made $72 million, or 88 cents a share, on $2.1 billion in revenues. The best time to have sold AOI was when you inherited the shares, because it was trading then in the high teens.
Today, AOI trades at less than six times the $1 it expects to earn in 2009. Still, I would sell those 400 shares and add the proceeds to your CD. I recommend selling AOI for three reasons.
1. AOI has a market cap of about $500 million and long-term debt of almost $1 billion.
2. In 2012, about $500 million of this debt matures and must be renegotiated, paid off, forgiven, partially forgiven, refinanced or exchanged for preferred stock, common stock or something else.
3. The new, huge federal tax, plus new state taxes, on a pack of smokes could dampen revenues and demand in the United States.
Please address your financial questions to Malcolm Berko, P.O. Box 1416, Boca Raton, Fla. 33429 or e-mail him at malber@comcast.net. © 2009 Creators Syndicate Inc.
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