Questions and Answers
By Thomas G. Cloud - October 31, 2002

After receiving so many e-mails over the past month, I decided it would be easier to answer some of the more frequently asked questions herein as I think they will also appeal to many of you. I have taken these questions in no particular order and will try to answer each one to the best of my ability. From this point forward, my plans are to try to answer a general group of questions like this every three months since I no longer answer them on my radio show. By answering a wide variety of questions, I hope my responses will help you get through the uncertain economic times that are not only directly behind us, but directly in front of us as well.

Question: The DOW has finally dropped to where it is only trading at 20 times earnings. Do you believe it is time to get back into stocks?
Answer: As I have said on many occasions, I personally believe the DOW will drop so that the price earnings ratio will return to the norm (i.e., levels it experienced up until the mid '90's). To be comfortable putting a large percentage into stocks, I would want to see the price earnings ratios between eight and ten times earnings.

Question: What do you believe the stock market will do during the remainder of 2002?
Answer: The stock market may rise another 5% and finish the year somewhere between 8700 and 9000. There are many dynamics that the government and Fed are using - including the reduction of reserve requirements - that have added liquidity to the market. After the market reaches 8700-9000, I expect the market will resume a bear market position winding up between 6000 to 6600 before it hits bottom.

Question: When you mention deflation, are you talking about falling prices in stocks and other investments or are you talking about consumer prices?
Answer: Certainly one could use the term deflation in any subject matter being discussed. The deflation I have been talking about is deflation in consumer prices that is caused by the lack of velocity due primarily to current equity markets. Looking back to the 1980-98 time frame, we saw a deflationary move in gold, silver, and in many commodities like wheat, soybeans, and oil. I now believe the deflationary spiral that began in equities will spread to other financial assets in the near future. The most likely prospect will be real estate.

Question: Are you bullish on municipal bonds?
Answer: I have continued to recommend zero coupon treasuries in the form of target maturity funds at American Century. I also continue to recommend straight treasury accounts like the Capital Preservation Fund also at American Century. Both of these are better alternatives than munis. But if you must invest in munis, you should stick with those that are general obligation bonds rated A or better.

Question: Should we be worried about the recent jump in the yield on the ten-year Treasury notes?
Answer: This has been brought about by the huge amount of liquidity that the Fed has put into the market to keep this economy out of a recession. Other causes are monies moving out of the U.S. to Europe by investors in the Pacific Rim and Japan. It causes the Fed to raise rates to attract new money for our ever-increasing debt. I do not believe the economy is strong enough for ten year Treasuries to continue upward at the sharp rates of the past month.

Question: What is your view on the current real estate market?
Answer: If you are inquiring about residential properties, they are very near the top. This will be the next area of financial investments to be hurt. We have already begun to see the drop in the San Jose-San Francisco area as well as in New York and Boston. With so many companies (both large and small) terminating such a substantial number of jobs, we can only expect that many mortgage defaults are forthcoming. Also homes have been refinanced over and over again in just a few years; therefore, the average equity in homes is at an all time low. Watch for 2003 to be the year that residential real estate hits the news as equities have done during 2002. We can only hope that this market falls slowly, not reacting like a bubble. In order for this to happen, interest rates must stay stable and low.

Question: What's wrong with the dollar?
Answer: There are so many dynamics that have changed on the dollar since September 11 2001, so it's hard to know where to begin. First of all, we had a surplus of over $236 billion in the Federal budget in fiscal year 2000 and now we are expecting a budget deficit of $120 billion in fiscal 2003 that began October 1. That makes us have to go out and sell more debt meaning Treasury bills, notes and bonds, to attract the shortage. This has led to a spiraling dollar over the last fourteen months. I believe this will pick up in the year 2003 and we will see the dollar continue to drop as more and more money is created by the Fed here in the US.

Question: How do I profit from the falling dollar?
Answer: One option is go into an international bond fund like the one at American Century. This fund has seen double-digit returns for the past twelve months and it may be poised for a second year of the same. American Century is a no load firm and you can contact them directly at (800) 345-2021 if you are interested in establishing an account. A second option is to buy physical currency like the new EURO or the British Pound. This is no different from buying gold. Basically you are trading your dollars in for another currency and you hope that after a designated amount of time the currency you have acquired beats the dollar. This is a liquid investment and is one I would be happy to discuss in greater detail. Foreign currency in the form of international bonds or physical currency should most definitely be a part of every portfolio.

Question: I took your advice and invested in Rydex Ursa back in late 2000. My fund has now gone up 75%. Should I liquidate this fund?
Answer: I would stay in the fund for now. As mentioned earlier, I feel the stock market will drop in the first quarter of 2003. Remember if you invest in Rydex funds, you must have a minimum investment of $25,000. If you don't, you should go through Schwab for as little as $2,500. To learn more about these particular funds, check them out at www.rydexfunds.com or phone them at (800) 820-0888.

Question: You were the first writer that I saw who mentioned the gold dinar. Do you have an update? Will this become a reality?
Answer: For those of you who did not see my last Internet update, please visit www.turamali.com and click on "market updates" to read my article "Gold-Unstoppable". Within that article, I discuss the Muslims who may change gold forever with their push for a new gold backed currency called the gold dinar. At this point, there is really not any new information. However, it is expected that this will become a reality sometime during mid 2003. As I stated then, I believe this will alter the fundamental side of gold forever.

Question: In Bob Prechter's new book, "Conquer the Crash", he recommends on page 209 that every client acquire precious metals for their portfolio?
Answer: You can also read my newsletter from July '02 or review the model portfolio or asset allocation model that appears on our web site. I continue to believe that precious metals should comprise 10% to 15% of every portfolio. Of that percentage, currently 80% should be in gold with the remaining 20% placed into silver and platinum. I also recommend bullion coins, but not rare coins for this type of portfolio. With gold up over 20% in the past thirteen months, we may have just seen the beginning of this bull market that most likely will continue throughout the decade.

Question: Would you explain the difference between premium and commission when used as terms in purchasing gold?
Answer: When the spot price of gold is $315 per ounce, a gold dealer will buy one ounce Gold American Eagles at approximately 4% over the spot price of gold. This is called the premium. The investor will pay a set commission to the dealer that is a fee determined by you and your dealer. For instance, if you are dealing with someone who charges a 3% commission, you will in actuality pay a total of 7% over the current spot price of gold.

Question: Do I get the premium back when I sell?
Answer: Yes, you do get back part of the premium which is determined between the bid/ask spread of the company where you are liquidating the coin at the time. Usually the bid/ask spread for major refiners is approximately 2%. In this case, the investor would receive 2% over the spot price of gold when selling a one-ounce Gold American Eagle.

Question: Is it possible for me, a moderate investor, to buy gold at wholesale and still have help to liquidate my gold when I want to sell?
Answer: This is a question I deal with more and more every day as the interest in gold continues to explode. I would be happy to discuss this personally with any investor and can explain how you can acquire gold from our coin affiliate, National Numismatic Associates. We have a program that allows an investor to buy gold at true wholesale prices (and wholesale is defined as what I, as a dealer, normally pay for gold).

Question: What kind of gold are you recommending to your clients?
Answer: I believe it is prudent to stick with one of the eight most recognized coins worldwide. Those are always liquid. They include, Gold American Eagles, Canadian Maple Leafs, Australian Kangaroos, South African Kruggerands, Austrian Philharmonics, Swiss Francs, and British Sovereigns.

Question: I know you relocated in July and have changed your address and e-mail. Could you please provide that information again?
Answer: Since July 15, 2002, our new address has been 5805 State Bridge Road, Suite G-336, Duluth, GA, 30097. Our local phone is now (770) 441-1550 and our toll free number remains (800) 247-2812. The new e-mail address is tgcloud@bellsouth.net. Please make sure to note this change. After next month, you will not be able to reach me at my old e-mail address. Thanks!