Two Certainties: $1,300 Gold and Taxes

by Addison Wiggin

  • Gold hits next magic number… Frank Holmes on why it's heading higher still… Silver making an impressive run of its own

  • "Policy uncertainty"… Washington plays chicken with your income tax rates

  • Byron King on one of the "largest financial crimes in history"

  • Ireland, Greece and France, oh my… Inside the euroland of Oz

  • Dispatch from the "Goldline hearings"… Is this guy for real?

 

  It didn’t last long. Gold has breached the magic number of $1,300 — both in London and New York — but then retraced.

  Silver, gold's often overlooked but still precious sister, is at $21.40, a level not seen since the nutty days of early 1980.

The recent surge in silver is driven, largely, by late inflows into silver ETFs. Institutional interest in silver ETFs have lagged gold and even platinum and palladium ETFs for much of this year, but now they're making up for lost time.

The silver ETF SLV added 73 tons in assets yesterday alone, for a grand total of 9,583 tons.

  “We think gold’s bull run may have further to go,” says U.S. Global Investors chief Frank Holmes taking us back to the macro. “Since mid-August, prices have risen on the back of a significant increase in net long positions on the Comex, and investor interest is near highs for the year.

"In addition, central bankers have also been stocking up on gold — for the first time since 1988, they will be net buyers of bullion in 2010.

“This could also be just the beginning. BCA Research says gold is in a bull market and will ‘remain that way until macro and/or industry-specific trends change significantly.’ BCA cites low real interest rates and high policy uncertainty as the twin engines powering gold higher.

“Washington has yet to show how it will reduce the gaping federal deficit, and the Federal Reserve is expected to keep interest rates near zero well into 2011. When you throw in a possible return to quantitative easing, the prospects for higher gold prices look even stronger.”

  Case in point: If you’d hoped to start your year-end tax planning over the next few weeks, forget it. Word from Washington is the Senate won’t vote on income tax rates until after the Nov. 2 election.

“The reality is we’re not going to pass” a bill till later, says Dick Durbin, the Democrat secondhand henchman in the Senate.

That’s because the two parties are basically playing chicken with the tax code… daring each other to extend the Bush-era tax cuts for everyone, or only on incomes below $250,000 for couples filing jointly.

We’ve been warning about this since the spring: Something’s gotta happen by Dec. 31, or everyone’s rates are going up. Even the lowest bracket would rise from 10% to 15%. As it is, a small-business owner who files as an individual has no choice but to go into Mogambo bunker mode.

Never mind that. Congress believes they've already fixed everything wrong with small business.

  On Monday, the president signs into law a bill with a host of tax credits and loans for small business. New expensing rules will probably help… but more loans?

Only 4% of small business owners surveyed by the National Federation of Independent Business say their biggest problem is access to credit. Nine times as many say they’re worried most about… guess what? Uncertainty with government regulations and the tax code.

  Major U.S. stock indexes have made up for all of yesterday’s losses, and then some. The Dow charged back past 10,800 as two data points emerged from the Commerce Department that were merely lousy, instead of abysmal…

  • Orders for durable goods fell 1.3% in August, in line with the Street’s forecast. If you exclude the volatile aircraft and defense categories, the number actually rose 4.1%. (Not that it makes up for a 5.3% drop in July.)

  • New home sales did not fall in August. They merely stayed flat, thus matching the second-worst month on record. (The worst was in May, after the homebuyer tax credit expired.)

Then again, this may be another case of stocks-up-dollar-down. The dollar index has slipped another 1%, below 79.4.

  “What do you get if you cross a South American republic and crusading environmental groups with an American oil company?” asks The Wall Street Journal editorial page, catching onto something Byron King has been writing about for nine months.

“Chevron,” Byron explains, “is involved in a frustrating — 'frivolous' is a better word — lawsuit in Ecuador, concerning alleged ‘environmental damage’ by Texaco back in the 1970s and 1980s. Chevron merged with Texaco in 2001, so the litigation against Chevron followed the merger. There's big money involved — $113 billion.”

And “it turns out that the litigation against Chevron in Ecuador is, at root, a massive, transnational criminal enterprise.”

Here’s the CliffsNotes version: A lawsuit filed in Ecuador is trying to hold Chevron responsible for environmental damage caused after Texaco surrendered its Ecuador operations to the state-owned oil company. In other words, it’s a legal shakedown operation, complete with “expert witnesses” shot through with conflicts of interest.

“There's a wide-ranging conspiracy of U.S. and Ecuadorean lawyers, consultants and other players all working to fabricate a baseless — and astronomical — damage claim against Chevron. The goal is to co-opt the Ecuadorean legal system to impose a punishing financial verdict against an American company.

“As crimes go,” Byron concludes, “this action against Chevron makes the billions that Bernie Madoff stole look like peanuts. This case is doubtless among the largest financial crimes in history.”

We’re pleased to see the Journal finally catching up to something Byron’s been writing about all year. And Chevron isn’t even one of the companies he recommends. That’s how thorough he is, and how extensive his contacts are.

If you’d like access to everything Byron recommends in both of his newsletters — plus every other stock pick we publish — we’ve reopened the Agora Financial Equity Reserve for the next six days. For an extraordinarily low one-time fee, you get a host of services and privileges, plus a special report called 8 Stocks for RIGHT NOW — with the cream of the crop from all our editors. The report is due out next Wednesday, which is when this offer closes. So you might as well act now.

  A day after it was revealed Irish GDP went negative during the second quarter, the credit default swap market is giving Ireland a one-in-three chance of default. According to CMA DataVision, the Ireland’s cumulative probability of default is now over 35%.

Not as bad as Greece’s 51%, but still No. 4 on the list. Venezuela, Greece and Argentina are the top three.

  The German finance minister is warning Germany won’t lift a finger to keep the European bailout fund going past 2013. That sets up an interesting conflict with the International Monetary Fund.

A source "close to the IMF" told a writer from Reuters that if Greece is still in trouble three years on despite cutting its deficit, “We would not walk away from Greece, we would not abandon them.”

We don't know if any of this is true or not. But keep it in mind because if Germany balks, again, even two or three years down the road, we're likely to see another crisis in the euro and a spike in the US dollar — regardless whether the fundamentals for the U.S. dollar have improved or, as is likely, not.

  Depending on whom you believe, 300,000 people turned out yesterday in Paris to protest plans to raise the retirement age from 60 to 62. That’s what the unions say. Police say it was more like 65,000. In any event, Jack Forde, our man in Paris, sends along this view from near his home…

62 is “still very young,” Mr. Forde (with an 'e') says, “considering the French live longer than just about anyone else in the Western World. Their retirements come with a steady pension and full health care. But like the U.S., the demographic imbalance is making it impossible to afford.”

  As we expected, the Goldline hearings in Congress yesterday were mostly “consumer advocate” theater, and not an opening salvo in the war on gold. The star witness was a neurologist from suburban New York who says a Goldline salesman talked him into converting a $140,000 IRA into collectible coins. When gold didn’t go to the moon within six months, he sold them at a $60,000 loss. “I felt robbed,” he said.

We don’t know much about Goldline’s sales practices. But we sure know this guy didn’t do his homework. Yet this will be the basis for legislation likely to make life harder

for coin dealers large and small, bullion or otherwise. Oy.

If you'd like to do your own homework on the rare and collectible coin markets, may we suggest Agora Financial's own Beginners Guide to Coin Collecting. It's free.

  “I have also left the USA,” writes a reader as we wind down our “America: Love It or Leave It?” discussion, “and am now living in Ecuador, although I am planning on moving to Spain soon. I am surprised that none of your readers mentioned health care as a reason to leave.

“In America, workers are held hostage to jobs they hate because working independently or taking early retirement means no access to health care unless you are willing to pay a thousand dollars a month for insurance. International health insurance costs me less than $100 a month.”

  “As a foreigner, I've already relocated from a country to another, from Brazil to the U.S.,” comments another on our blog site, offering a different take. “It surely pains me to see that the American government has become more of a thug in the past decade, much like the Brazilian governments have been for all my life.

“But there is one thing that frightens me: Even Brazilian thugs in government don't take themselves too seriously. There may be a lot of huff and puff, but it's mostly all show. American thugs in government, however, seem hellbent on getting their way, the Constitution be damned.

"In other words, even the Brazilian military dictatorship was too incompetent to be oppressive (100 victims over 20 years), but I fear the competence of an American dictatorship.

“Thomas Jefferson was right when he recommended a revolution to every generation. Perhaps if people had revolted when he was president, he'd have held fast to the principles that he himself wanted America to be set on, rather than compromising them, laying her surely in the course of abuse of federal power.”

  “The U.S. has the worst tax system,” writes a third reader, “taxing its citizens on basis of citizenship. Most of the countries in the world tax people on residence, where people live and work. That is fair. The U.S. system is not fair to its own citizens.

"In addition, the U.S. taxation system is complicated for citizens living overseas. For example, the U.S. government requires disclosure of foreign bank accounts, for which failure to file is a $10,000 fine. It is lot of work to prepare this disclosure. Tax preparation costs can be several thousands of dollars per year.

"Furthermore, the system creates a void of job opportunity overseas for its own citizens. Foreign companies do not want to employ U.S. citizens, because the U.S. government and its regulations are big problem. That is why many more U.S. people are giving up their citizenship. It is not worth the time, effort and risks.”

The 5: True fact. The number of U.S. citizens choosing to expatriate jumped some 300% between 2008-2009.

Having said that, we don't think these figures are putting the fear of God into anyone concerned with extorting the electorate: In 2008, 235 people filed for expatriate status; in 2009, that figure jumped to a whopping 743. In 2007 — before Joe Six-pack was aware there was even a crisis brewing — 407 U.S. citizens expatriated.

The figures jump wildly, but they are barely even remarkable. Further, the motivation to expatriate appears to jibe very little with the macroeconomic or political environment. Still, there's hope…

  “As someone who recently expatriated (falling back on a German citizenship from birth)," our final reader writes, clarifying a point we made yesterday about the “exit tax,” "and having taken tax advice from a prominent accounting firm, the straight scoop is that taxes are owed on exit ON THE CAPITAL GAINS of the assets held since acquisition.

“In my case, before expatriating, I had sold a company a couple years before, paid taxes on the gain in that year (15%) to Uncle Sam and had only minimal additional gains since then. The exit tax will be on those small gains since I sold the company, not on all the gains from the sale of the company itself (which would, in fact, be double taxation).”

 

“If you have a house you bought 20 years ago and it's appreciated five times even after the recent declines, yes, you would owe long-term capital gains on that house. That could be a problem if you can't raise the cash for the taxes otherwise or can't sell the house.

 

“If you are small fry, i.e., not a public figure and not a multimillionaire, and you expatriate, I seriously doubt anyone from IRS will come out and audit you in your new home country, and even if they do, it's not clear what they could do about it.

“So my recommendation to your other reader is the like Nike ad — 'Just do it.' It's a very liberating experience.”

The 5: Indeed, the assets are taxed “as if those assets are being sold” — even if you have no intention of selling them. And it does not apply if your net worth is less than $2 million. Work it, if you're so inclined.

Or if you're a Reserve member, join us at Rancho Santana for Chill 3.0 Dec. 15-19, 2010. December is one of the finer months at the ranch. We'll give you the grand tour. Then you can decide for yourself if it fits the bill for expatriating some of your own cash.

Have a good weekend,

Addison Wiggin

The 5 Min. Forecast

P.S. Readers of our most expensive service are sitting on gains right now of 32%… 55%… 62%… even 111%. And that's after collecting gains as high as 130% earlier this year. And for the next 24 hours, we're making this service available for 25% off the regular price. Here's where you can learn what it's all about.

 

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