US Debt Deal
So the US debt deal has been passed and was presented to Obama a few hours before the deadline which Obama signed. The deal increases the US debt limit immediately by $400B and another $500B by February. This avoids a default by the US government.
Part of the debt deal is to cut the US deficit by at least $2.1 trillion over 10 years. If you divide that, it's around $200B a year. To put that amount in context, in 2010, the interest alone paid by the US on its debt is $164B. The Department of Defense budget in 2010 is $663.7B. In short, the spending cuts are insignificant.
Here's the sad part, the budget cut is not really a cut in spending. According to Presidential hopeful Ron Paul, the budget cut is akin to a family "saving" $100,000 in expenses by deciding not to buy a Lamborghini, and instead getting a fully loaded Mercedes, when really their budget dictates that they need to stick with their perfectly serviceable Honda.
I know a lot of people are confused on what this US debt crisis is all about and all the rhetoric by both the Republicans and Democrats are making it harder to understand. But here's what the US debt crisis is in simple terms.
Let's say a father is making $60,000 a year but the family is spending $100,000 a year. All they have been doing is paying the interest on their credit cards. In the meantime, they keep spending money on cars, gas, luxury items but not on building new businesses. Eventually, their debts grows to a point where they will default on their debt and may have to file for bankruptcy. But at the last minute, the father says, don't worry, I've solved our problem. I just got a new credit card!
That my friends is the US debt situation in a nutshell.
So what does this mean for your investment? Well, if you're looking at the stock market right now, you'll know all the world markets are down. Why? The US agreed to cut spending, but they did not raise taxes to increase revenue. So you got the father cutting down on food cost, medical cost, etc. But the mom did not find work to increase income and help pay for the debt. Is it a wonder why the market is reacting badly? How long do you think the US can keep this up? They're going to reach another debt ceiling in 2012. What then?
The Dow Jones is now below 12,000 again, the same level it was back in June. What's interesting is, gold is now at its all time high of $1656.60 as of this writing. It was boosted by reports that the Bank of Korea announced that it bought gold for the first time since 1998. Reminding investors of gold's appeal as a safe haven.
Investment in gold is not similar to investing in real estate or stocks. It pays no rent or dividend, it's a static investment. When you invest in gold, you are merely protecting the value of your money or buying power. When you see the price of gold going up, it's not because the cost of gold is rising, it's because the value of the currency is decreasing and gold basically is a hedge against the decrease in value.
Here's an example.
If you compare the value of gold to value of other real assets, you'll see that they're pretty much the same or better.
In May 2006, the average home price in Vancouver is around $518,716. Gold is at CAD$756.92.40 per oz.
On May 2011, the average home price in Vancouver is around $770,000. Meanwhile, gold is at CAD$1,417.27 per oz.
In currency terms, the cost of buying an average home in Vancouver has increased by 48% from 2006 to 2011. But in gold terms, you can buy an average home for 685 oz of gold in 2006 ($518,716/$756.92) but in 2011, you only need 543 oz of gold ($770,000/$1,417.27) to buy an average home in Vancouver or a drop of 20.7% in gold terms.
Let me clarify that by explaining what I mean by currency terms.
In the circles of gold investing, they differentiate currency and money. When they talk about currency, they talk about the paper currencies we use like the US Dollar or Canadian Dollar. When they talk about money, money is a medium of exchange which can be gold, silver, cows, coffee, etc. Currency is Fiat money or backed by promise of the government to pay. But money is backed by a physical asset like gold or silver.
So when I say in currency terms, it means part of the cost of the increase in housing is due to the devaluation of the currency. So in actual money or gold terms, the cost of housing has actually decreased.
How about in silver terms? Silver price back in May 5, 2006 was at CAD$15.42/oz and at CAD$33.08/oz on May 6, 2011. In 2006, you needed 33,604 oz of silver to buy an average Vancouver home but only needed 23,277 oz of silver in May 2011 which equals to a drop of 30.7% in silver terms.
Note that the May 6, 2011 price I'm accounting for silver is after the margin call requirement which resulted in a 23% in silver prices.
If you account for the price of silver today August 2, 2011 at CAD$39.21. You only need 19,638 oz of silver to buy an average Vancouver home or a 41.5% drop in home prices in silver terms.
So in terms of gold and silver, the prices of homes in Vancouver has actually dropped.
Gold and silver is still considered a speculative investment. In the mutual fund world, normally, when you invest in precious metals funds, you are investing in mining stocks, hence it is considered speculative. However, you may still want to consider investing in these assets either in funds in the near term while the world economy is in a turmoil to protect your buying power. As with any investments, there are of course no guarantee these prices will continue going higher. Eventually, all investments follow a bull and bear cycle and it is impossible to predict when the top or a bottom of a market is going to happen.
As I mentioned in my previous e-mails, after the huge price drop in silver from $47.015 on May 2 to $36.35 on May 5, 2011. The price of silver is now back up to US$40.21 today.
Interesting isn't it?
========================
Insurance Trivia
Here's something else that interesting.
Do you know how much your body part is worth? Here are some examples celebrity insurance policies:
Part of the debt deal is to cut the US deficit by at least $2.1 trillion over 10 years. If you divide that, it's around $200B a year. To put that amount in context, in 2010, the interest alone paid by the US on its debt is $164B. The Department of Defense budget in 2010 is $663.7B. In short, the spending cuts are insignificant.
Here's the sad part, the budget cut is not really a cut in spending. According to Presidential hopeful Ron Paul, the budget cut is akin to a family "saving" $100,000 in expenses by deciding not to buy a Lamborghini, and instead getting a fully loaded Mercedes, when really their budget dictates that they need to stick with their perfectly serviceable Honda.
I know a lot of people are confused on what this US debt crisis is all about and all the rhetoric by both the Republicans and Democrats are making it harder to understand. But here's what the US debt crisis is in simple terms.
Let's say a father is making $60,000 a year but the family is spending $100,000 a year. All they have been doing is paying the interest on their credit cards. In the meantime, they keep spending money on cars, gas, luxury items but not on building new businesses. Eventually, their debts grows to a point where they will default on their debt and may have to file for bankruptcy. But at the last minute, the father says, don't worry, I've solved our problem. I just got a new credit card!
That my friends is the US debt situation in a nutshell.
So what does this mean for your investment? Well, if you're looking at the stock market right now, you'll know all the world markets are down. Why? The US agreed to cut spending, but they did not raise taxes to increase revenue. So you got the father cutting down on food cost, medical cost, etc. But the mom did not find work to increase income and help pay for the debt. Is it a wonder why the market is reacting badly? How long do you think the US can keep this up? They're going to reach another debt ceiling in 2012. What then?
The Dow Jones is now below 12,000 again, the same level it was back in June. What's interesting is, gold is now at its all time high of $1656.60 as of this writing. It was boosted by reports that the Bank of Korea announced that it bought gold for the first time since 1998. Reminding investors of gold's appeal as a safe haven.
Investment in gold is not similar to investing in real estate or stocks. It pays no rent or dividend, it's a static investment. When you invest in gold, you are merely protecting the value of your money or buying power. When you see the price of gold going up, it's not because the cost of gold is rising, it's because the value of the currency is decreasing and gold basically is a hedge against the decrease in value.
Here's an example.
If you compare the value of gold to value of other real assets, you'll see that they're pretty much the same or better.
In May 2006, the average home price in Vancouver is around $518,716. Gold is at CAD$756.92.40 per oz.
On May 2011, the average home price in Vancouver is around $770,000. Meanwhile, gold is at CAD$1,417.27 per oz.
In currency terms, the cost of buying an average home in Vancouver has increased by 48% from 2006 to 2011. But in gold terms, you can buy an average home for 685 oz of gold in 2006 ($518,716/$756.92) but in 2011, you only need 543 oz of gold ($770,000/$1,417.27) to buy an average home in Vancouver or a drop of 20.7% in gold terms.
Let me clarify that by explaining what I mean by currency terms.
In the circles of gold investing, they differentiate currency and money. When they talk about currency, they talk about the paper currencies we use like the US Dollar or Canadian Dollar. When they talk about money, money is a medium of exchange which can be gold, silver, cows, coffee, etc. Currency is Fiat money or backed by promise of the government to pay. But money is backed by a physical asset like gold or silver.
So when I say in currency terms, it means part of the cost of the increase in housing is due to the devaluation of the currency. So in actual money or gold terms, the cost of housing has actually decreased.
How about in silver terms? Silver price back in May 5, 2006 was at CAD$15.42/oz and at CAD$33.08/oz on May 6, 2011. In 2006, you needed 33,604 oz of silver to buy an average Vancouver home but only needed 23,277 oz of silver in May 2011 which equals to a drop of 30.7% in silver terms.
Note that the May 6, 2011 price I'm accounting for silver is after the margin call requirement which resulted in a 23% in silver prices.
If you account for the price of silver today August 2, 2011 at CAD$39.21. You only need 19,638 oz of silver to buy an average Vancouver home or a 41.5% drop in home prices in silver terms.
So in terms of gold and silver, the prices of homes in Vancouver has actually dropped.
Gold and silver is still considered a speculative investment. In the mutual fund world, normally, when you invest in precious metals funds, you are investing in mining stocks, hence it is considered speculative. However, you may still want to consider investing in these assets either in funds in the near term while the world economy is in a turmoil to protect your buying power. As with any investments, there are of course no guarantee these prices will continue going higher. Eventually, all investments follow a bull and bear cycle and it is impossible to predict when the top or a bottom of a market is going to happen.
As I mentioned in my previous e-mails, after the huge price drop in silver from $47.015 on May 2 to $36.35 on May 5, 2011. The price of silver is now back up to US$40.21 today.
Interesting isn't it?
========================
Insurance Trivia
Here's something else that interesting.
Do you know how much your body part is worth? Here are some examples celebrity insurance policies:
- Shirley MacLaine, who is widely known for her beliefs in reincarnation and extraterrestrial life, owns a $25-million policy protecting her acting fortune against an alien abduction, according to Parade Magazine.
- When the iconic late ’70s band Kiss was at its peak, Gene Simmons had his extra-long tongue—rumoured to be surgically enhanced—insured for $1 million.
- In 2008, the New York Daily News and several other media outlets reported that Welsh pop singer Tom Jones had his chest hair insured for $7 million.
- According to ABC News, country star Dolly Parton has insured her 42-inch bust for $600,000.
- Aquafresh insures Ugly Betty’s America Ferrera’s teeth for $10 million.
- Several media sources have reported that the Rolling Stones’ guitarist, Keith Richards, has insured the middle finger on his left hand for $1.6 million.
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