Three Ways to Brace for a Double-Dip Recession: Going for the Gold

[Editor's Note: This is the first installment of a three-part series that will detail how investors can brace for a double-dip recession. Parts II (global markets) and III recession-proof stocks) will appear tomorrow (Thursday) and Friday, respectively.]

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The last time the U.S. economy suffered through a double-dip recession, this country was struggling to overcome the fallout from an Arab oil embargo, Vietnam War-era deficits, and an inflationary spiral that just wouldn't let go.

Defensive Investing
That 1981-82 double-dip downturn – the result of an economic "shock treatment" aimed at curing those ills – consisted of two recessions that were separated by a single quarter of growth.

The current backdrop is very different from the one that was in place back then, but the threat of a double-dip recession is no less real. Indeed, with each passing week, and with every new economic report that comes out, the possibility that the U.S. economy will backslide into a double-dip recession seems to become more of a probability – or even a likelihood.

"For me a 'double-dip' is another recession before we've healed from this recession [and] the probability of that kind of double-dip is more than 50%," Robert Shiller, professor of economics at Yale University and co-developer of Standard and Poor's S&P/Case-Shiller home price indexes, told Reuters. "I actually expect it."


Will That Be a Single, or a Double?

Technically speaking, a recession is defined as two consecutive quarters of economic decline. A "double-dip" recession occurs when one recession is separated from a second by a short period of GDP growth.

In our current circumstances, however, GDP may not be the only factor that determines whether the country makes a return trip to recession-land. In fact, despite the U.S. economy having enjoyed four consecutive quarters of positive growth since July 2009, the National Bureau of Economic Research (NBER) – the official arbiters of U.S. recessions – have yet to classify the country's latest downturn as done.

And for investors, the technical definition may not matter. In this three-part series, part of Money Morning's ongoing look at defensive-investing strategies, we'll explore three safe havens from the country's current plight – whether a double-dip downturn is declared or not.

If nothing else, it's time to take precautions. And there are three easy ways an investor can brace for a double-dip recession. Over the next several days, in each installment, we'll focus on one of these strategies. Simply put:

Part I: Buy Gold.
Part II: Go Global.
Part III: Acquire U.S. stocks that are "recession proof."

Why even bother with such precautions?

Just look at the facts.

The world's No. 1 economy lost 8.4 million jobs during the recession that got its start in December 2007, making it the worst national downturn since the Great Depression and the biggest loss of employment since the end of World War II.

The U.S economy shrank a larger-than-expected 4.1% from the fourth quarter of 2007 to the second quarter of 2009, the Commerce Department recently reported. Household spending fell 1.2% last year – the biggest decline in 67 years and double what was previously believed, the government said.

Like its 1930s predecessor, the 2007 downturn has left the country psychologically scarred: More than seven of every 10 Americans say the country is still stuck in the recession, a recent Bloomberg National Poll concluded.

While 70% of the country says that joblessness remains the key problem to fix, that early July poll also found that Americans are highly skeptical of the Obama administration's stimulus program, and are fearful of additional spending. Indeed, more than half of those polled say the U.S. deficit is "dangerously out of control."

It's All About Jobs

If the consumer caution that leaps from such sentiments isn't the perfect recipe for a double-dip downturn, consider these additional ingredients: The unemployment rate remained unchanged at 9.5% in July, as the economy shed 131,000 jobs. What's more, the number of U.S. workers filing new claims for jobless benefits unexpectedly rose last week to 484,000 – the highest level nearly six months.

This information only corroborated what U.S. Treasury Secretary Timothy F. Geithner and U.S. Federal Reserve Chairman Ben S. Bernanke have already acknowledged: Unemployment will shackle economic growth for years to come.

"Unemployment is the most important problem we have right now," Bernanke told the House Financial Services Committee. He expects the unemployment to remain above 7% thoughout 2012.

Yet the solutions Bernanke has offered to keep the economy from crumbling have created a separate obstruction to growth – and a fearful paralysis among the all-important U.S. consumer.

The Fed has "pushed monetary stimulation to the highest point in American history" and "tripled our balance sheet," Bernanke said.

Unfortunately, unlike previous pump-priming Fed forays, the present stimulus hasn't jump-started job growth.

"The economy is muddling through," Ethan Harris, head of North America economics at Bank of America-Merrill Lynch Global Research in New York (NYSE: BAC), told Bloomberg News in a recent interview. "We're probably not going to see a really strong number for a while. We need to see some pickup in job growth."

A Slow-Growth to No-Growth Economy

So far, the sovereign debt crisis in Europe has been the only thing that's saved the dollar from the kind of percipitous decline it experienced in 2007 and 2008. That's because investors viewed the greenback as more of a safe haven than the European euro – despite the increasingly rickety state of U.S. finances.

But with a national debt that totals about 60% of gross domestic product (GDP), it won't be long before the United States gets infected with the same virus – and experiences a sovereign debt crisis of its own. In fact, the government's gross debt of $13.3 trillion already equates to about 91% of GDP.

Indeed, like a high-performance engine that's been wound up way past the redline, the U.S. economy is threatening to sputter, and may actually stall. After zooming along at superspeedway-like 5% in the 2009 final quarter, U.S. GDP advanced at a slower 3.7% pace in the first three months of the New Year – before skidding to
a much-slower-than-expected 2.4% pace for the second quarter.

That stumble prompted economists to slash their U.S. growth forecasts to 2.3% (from 3.3%) for the current quarter, and to cut their full-year targets to 2.9% for 2010 and 2.6% for 2011. As we've already seen, however, those projections are overly optimistic, ignoring the very real possibility of another full-blown downturn – the textbook definition of a double-dip recession.

The stock market bull market that began in March 2009 appears to have run out of steam, as both the Dow Jones Industrial Average and Standard & Poor's 500 Index are down this 1% and 3%, respectively, since the start of the year.

And that means it's no longer advisable to stand pat. Investments exist that can meet the dual objectives of creating a safe haven from an economic maelstrom – while at the same time providing investors with some major capital gains.

Gold is one such investment. Let's take a closer look.

Step One: Buy Gold

Face it, the U.S. dollar is in deep trouble.

The anemic economy recovery has forced the Fed to continue its stimulus measures at the expense of the greenback. The Fed's latest announcement – that it would reinvest the proceeds from expiring mortgage-backed securities into longer-term U.S. Treasuries – is just the latest piece of evidence that the dollar is doomed.

In fact, the consumer price index (CPI) rose 0.3% in July, it's first increase in four months, and a move that signals a marked shift in inflationary expectations. Producer prices rose 0.2% for the month.

In the long run, given the recent actions of spendthrift governments like that of the United States, inflation is the likeliest possible outcome. And gold offers investors a tangible asset that has inherent value, compared to a fiat currency that's only as good as the word of the government that issued it.

There are numerous ways an investor can stock up on the yellow metal – the most straightforward of which is to own coins or bullion.

Getting Your Hands on Gold
"There's nothing like holding a gold coin or gold bar in your hands. This is the oldest and most direct form of gold ownership," said Peter Krauth, a well-known commodities expert who is also the editor of the Global Resource Alert. "Bullion dealers are the easiest way for most investors to buy smaller quantities of gold. Do some homework to check them out before you buy."

Most dealers charge premiums of about 3% to 6% above the "spot" price for physical gold. But you'll pay much more if you wait for the economy to tank before stocking up.

"When things get hairy – as they were back in November 2008, in the depths of the global financial crisis – premiums can go up by three to five times, with some dealers charging 10% to 15% above spot," says Krauth. "Obviously, you'll be better off buying gold on price dips and under calmer circumstances."

A few dealers that have an established reputation are:

  • Kitco.com: Premiums are fair and the selection is usually quite good. They have offices in both New York and Montreal.
  • Asset Strategies International Inc. (assetstrategies.com): This dealer is located in Rockville, MD. Asset Strategies also offers gold storage options outside U.S. borders.
  • Camino Coin LLC (caminocompany.com): Burlingame, CA.
  • American Precious Metals Exchange (apmex.com): Oklahoma City, OK.
  • The Tulving Co. (tulving.com): Newport Beach, CA
  • Gainesville Coins (gainesvillecoins.com): Lutz, FL.

Depending on your situation, gold exchange-traded funds (ETFs) may be a more practical way of gaining exposure to the gold market. But remember, ETFs don't give you gold, per se; they give you a claim on gold. It's not quite as safe as owning physical bullion, but it's a whole lot better than nothing – and you don't have to worry about shipping or storage.

One of the easiest ways to buy such a claim on gold is through the SPDR Gold Trust ETF (NYSE: GLD). With a total value of $50 billion, GLD is now the largest physically backed gold ETF in the world, holding 1,300 metric tons (or 42 million ounces) of the yellow metal in a London vault. GLD shares, which represent one-tenth of a gold ounce, can easily be bought and sold by investors through their brokerage account.

Another option to acquire paper gold is through Perth Mint Certificates (PMC). Locked away in a vault and insured, this is the only bullion-storage program that is government-backed, with the state of Western Australia standing firmly behind it.

You'll need to commit at least $10,000 to get started in PMCs. There are also small-but-reasonable fees to obtain your certificate and trade your holdings. It's also a great way to gain some international diversification for your gold holdings, by owning it outside of your home country. For more information, go to Perthmint.com (note that Kitco and Asset Strategies also offer the PMCs).

Actions to Take: Although the odds of a double-dip recession seem to be escalating with each new economic report that comes out, the reality is that U.S. consumers and investors alike are increasingly embracing a double-dip mindset. This new reality demands a new "defensive-investing" mindset, and a three-part strategy that consists of:

  • Part I: Buy Gold.
  • Part II: Go Global.
  • Part III: Acquire U.S. stocks that are "recession proof."

In this installment of our three-part look at "double-dip-recession" investing, Money Morning focused on gold investing.

There are numerous ways an investor can stock up on the yellow metal, including:

I. Buy and Hold Physical Gold: Owning coins or bullion is probably the most straightforward way to invest in gold. Most dealers charge premiums of about 3% to 6% above the "spot" price for physical gold. But you'll pay much more if you wait for the economy to tank before stocking up.

Make sure to deal with a dealer that has an established reputation for fairness and quality service. Among the dealers that meet all these requirements are:

  • Kitco.com: Premiums are fair and the selection is usually quite good. They have offices in both New York and Montreal.
  • Asset Strategies International Inc. (assetstrategies.com): This dealer is located in Rockville, MD. Asset Strategies also offers gold storage options outside U.S. borders.

II. Buy Gold-Focused Exchange-Traded Funds (ETFs): Depending on your situation, gold ETFs may be a more-practical way of gaining exposure to the gold market. But remember, ETFs don't give you gold, per se; they give you a claim on gold. One such ETF is the well-known SPDR Gold Trust ETF (NYSE: GLD). GLD shares, which represent one-tenth of a gold ounce, can easily be bought and sold by investors through their brokerage account.

III. Buy Perth Mint Certificates (PMC): Locked away in a vault and insured, this is the only bullion-storage program that is government-backed, with the state of Western Australia standing firmly behind it. You'll need to commit at least $10,000 to get started in PMCs. For more information, go to Perthmint.com (note that Kitco and Asset Strategies also offer the PMCs).

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Join the conversation. Click here to jump to comments…

  1. Werner S | August 18, 2010

    Hi,
    You hit the nail on its head!
    By all means I would prefer physical gold to certificates, and if I were a US resident/or citizen, I would hold my gold abroad. Gold ownerwship has been prohibited before in the US and nothing says it wont happen again.
    Mind you I would not trust most other countries either, politicians having the bad habit of copying other politicians stupidities!
    I look forward to reading your two coming instalments.
    Thanks for your analysis.

  2. Bruce g Shaw | August 18, 2010

    I suggest you not recommend GLD as a good way to invest in Gold. The bullion that they store is neither allocated nor unencumbered. In other words it may all be leased gold,(paper, or fools gold) that is backing the investmrnt. Also note that the IRS consideres GLD to be a collectable that takes it out of capital gains treatment and puts it in the much higher tax bracket. Better ETF's might be: SGOL, PHYS, IAU, CEF, GTU. Oh, and allocated gold means that the bullion is specifically assigned to your account.

  3. Zahida | June 17, 2011

    sign me up

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