Universal Coin & Bullion’s INVESTORS PROFIT SEPTEMBER ... · Universal Coin & Bullion’s INVESTOR’S PROFIT ADVISORY Numismatic Literary Guild Award Winner for Best Dealer Publication

BY: PAUL MONTGOMERY

SEPTEMBER2006

Universal Coin & Bullion’s

INVESTOR’S PROFITADVISORY

Numismatic Literary Guild Award Winner for Best Dealer Publication industry wide!

Universal Coin & Bullion • 7410 Phelan Boulevard • Beaumont, TX 77706

Hi, I’m Paul Montgomery,how do you like me so far?It was around this time last

year that Mike Fuljenzinvited me to become editorand publisher of thisnewsletter. Taking chargeof an award-winning publi-cation posed a big challengeto fill big shoes… and Irelish big challenges.Of course, I was aware

going in that analyzing andpredicting what’s happening

in financial markets in general and coin markets in particularpresents many potential hidden dangers for the ego. Thereare lots of ways to trip and fall. Second-guessing marketscarries the inherent and ever-present risk of winding upwith egg on your face.

Nevertheless, from the very beginning I set it as myprimary goal to keep you ahead of the curve on majorgeopolitical and macroeconomic developments that couldhave an impact on your rare coin investments. It’s been mypurpose to sort through the complicated maze of interactionswith external factors that make the value of gold and rarecoins rise or fall and give you a well-reasoned analysis andinsight into what’s happening, why, and what to expect.

Looking back over the issues we’ve covered during thelast 12 months, I’m pleased and relieved to say my battingaverage is pretty respectable. Not a hundred percent, ofcourse. After all, if I could see the future perfectly, I’dprobably be richer than Bill Gates. But so far I’ve beenright more times than wrong.

Since practically every factor related to gold and rarecoin values is an ongoing story, it occurs to me it could beuseful to review where we’ve been and update where itlooks like we’re going on these stories.

he year of living dangerousl

AUL MONTGOMERYP Numismatic Consultant

CLUB MONTH ISSUE TOPIC AVG.UCB OCT. HOW GLOBAL MARKETS EFFECT COIN PRICES PDG**UCB NOV. POST RITA RECOVERY: Back to Business as Usual PDG**UCB DEC. MAKING A LIST AND CHECKING IT TWICE PDG**UCB JAN. WHAT NEXT FOR GOLD? $600...$650...HIGHER? PDG**UCB FEB. WHY RARE COINS? PDG**UCB MAR. GOLD IS CHEAP! PDG**UCB APRIL RISK = OPPORTUNITY BY ANOTHER NAME PDG**UCB MAY RETURN OF THE GOLD STANDARD PDG**UCB JUNE $200 OIL....$2000 GOLD? TSTC*UCB JULY GOLD UP, DOLLAR DOWN TSTC*UCB AUG. THE RETURN OF STAGFLATION TSTC*

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** Pretty Darn Good / *To Soon To Call

T YA retrospective on my first 12 months as editor… The hits, the misses, and the don’t-know-yets.

College: Baylor University

Degree: Bachelor of Science

ANA: Life Member

DRFT: Universal Coin & Bullion

Awarded the Lee Martin Founders’ Award,Extraordinary Merit, for best investment newsletter!

RARECOINS

Board Member: ICTA (industry council of tangible assets) / PNG (Professional Numismatist Guild)

Forecasting markets and economies requires fearlessnerves and thick skin. It’s a risky proposition at best,and there’s no lack of helpful souls willing to point outfaulty predictions.

We’ve been pretty much on the money with our marketand economic forecasts to date. Naturally, there have beensome surprises along the way, but overall things are trackingpretty much as I anticipated. Some of my forecasts havebeen what you might call works-in-progress that will takeawhile to play out and see whether my analysis was ontarget or not. But here’s my scorecard so far…

Fearless Forecast #1:Economic impact of Hurricanes Katrina and Rita

significant but temporary.

This time last year, our staff, headquartered inBeaumont on the Texas Gulf Coast, faced a wild scramble.First many of us played host to our family and friends whofled from the devastation wreaked by Hurricane Katrina.Then we ourselves had to flee the wrath of Hurricane Ritaand set up a temporary office until we could come home.Along with incalculable human misery, the economicimpact of these killer storms was huge.

Nonetheless, even sitting in the midst of the destructionand coping with the personal trials left behind by the storms,I said last November, “My own forecast of the economicimpact from Katrina-Rita is this: We will see a temporaryslowdown in growth but not a reversal for the last half of2005, followed by GDP growth gains throughout 2006.”

Sure enough, the U.S. GDP growth rate, which hadbeen moving up during thesecond and third quarters of2005 to just over 4%,plunged to less than halfthat in the fourth quarter, toa sickly 1.7% growth.However, GDP reboundedsharply in the first quarterof 2006 to 5.6%, the fastestrate in nearly three years.

That was frankly amore enthusiastic recoverythan I expected. And I don’tthink that growth rate willhold up for the rest of theyear. Economic indicators from about March on have beenshowing mixed to neutral or even negative trends. When allthe numbers are in for the year, I think we’ll see an annualizedGDP growth rate of under 4% for 2006. Not exactlyblistering, but better than the post-hurricane quarter lastyear and certainly not the recession that some feared themassive storm damage could trigger.

Fearless Forecast #2:High risk economy outlook for 2006.

Early in the year, my assessment of the economic outlookfor 2006 was this: “I call it The Crapshoot Economy.Those who love to take chances rolling the dice should love2006. There’s likely to be plenty of risk to satisfy even themost jaded adrenaline junkies.”

I pointed out 16 risks that could have an impact onthe economy:

These weren’t necessarily predictions, just statements ofrisk factors that could happen. All of these risks are still onthe table and affect the rare coin and precious metals market.

The economy is slowing, the Fed keeps tightening theinterest rate screws, inflation keeps bubbling under the lidof Fed rate increases, housing is slumping fast, the dollarrally faded at the beginning of the year, oil set a recordhigh in midsummer, consumers are still spending but morecautiously, several Bush cabinet members have left andrumors say others will follow, civil war in Iraq is a fact notyet officially admitted, several terrorist plots have beenfoiled but worries remain about the ones still unknown.

A major terrorism eventalmost happened in August,but sharp-eyed British securityagents, with some help fromtheir Pakistani counterparts,foiled the deadly plot to blowup 10 airliners bound fromEngland to the U.S. Muslimfanatics were just days awayfrom executing the attack. It’svirtually inevitable that one ofmany such plots will go unde-tected and unknown until thecarnage hits the headlines.

As volatile as these risks are, things can changeovernight, or even in a matter of hours. It’s almost a giventhat by the time you read this, major new developments willhave popped since I wrote it.

Markets hate uncertainty. I think they have a lot of ityet to face for the rest of the year. The economic outlook isstill a crapshoot.

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FEARLESS FORECASTS: MOSTLY ON THE MONEY

Source: Bureau of Economic Analysis, U.S. Dept. of Commerce

• Economic slowdown • White House shake-up, policy changes

• Over-tightening by Fed • Another catastrophic hurricane season

• Sharp declines in housing • Spread of socialism in Latin America

• Collapse of the dollar rally • Sharp rises in oil and gas prices

• War with rogue states • Huge debt mountain “accident”

• Major terrorism event • Lukewarm consumer spending

• Avian flu pandemic • Mid-term election upheaval

• Civil war in Iraq • Outbreak of rapid inflation

Fearless Forecast #3:Gold atop $550 in 2006.

At the beginning of the year, I boldly declared thatgold would top $550 this year and had a good chance tomove to $650 or even higher. At the time I was writingthat, in late December, it was no sure thing because goldwas dipsy-doodling around $500 and showing uncom-fortable signs of slipping into a trend reversal.

Wouldn’t you know it?...The January issue had barelybeen mailed when gold found its feet and traipsed acrossthe top of my $550 target. I was relieved that it hadn’tcontinued south as it hinted in December, but the way ithovered around the $550 mark for three months left opento question whether it had the will power to go higher asI had suggested it could easily do.

Just as I was beginning to second-guess my call ongold’s possible move to $650 and beyond, the yellowmetal caught a gust of wind and sailed all the way to$725 by May.

Other metals and commodities got swept up in thegust, too. Silver, platinum, copper, oil, and other com-modities took off almost in perfect formation.

As a matter of fact, things got a little overheated asspeculators rushed in like a shark feeding frenzy. Acorrection was inevitable, and that’s exactly what we got.

When it started looking more certain that the Fedwould not take a break in interest rate increases, themarkets got panicky and ran for cover, gold and com-modities in particular.

The price rubber band for gold had got stretched prettywell above the medium term trend line and way above thelong term major trend. So when it cut loose to revert tothe mean, the snap back was sharp and sudden, over-shooting the trendline momentarily before a rebound pop.

I expect we’ll continue to see some fairly wildvibrations in the gold market (as well as other metals andcommodities) for the rest of the year as rate anxieties andgeopolitical dangers (Israel, Libya, Iraq, Iran, North

Korea, Africa, Latin America) keepthe markets in a twitchy fuzz. Thedaily headlines will continue to inciteknee-jerk gyrations in the markets,but the broader view of gold shows asolid bull market continuation.

Despite the recent whipsawaction in gold markets, the gold bullis NOT dead as some analysts werequick to declare when prices fell inearly summer. The long term trendis solidly positive. Even with a bigcorrection, gold is still well ahead ofthe trend. Nothing has changed in thefundamentals to suggest any majorchanges in the trend into next year.

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Source: Kitco

Source: Kitco

Fearless Forecast #4:$200 Oil…$2000 Gold.

It wasn’t so much a prediction as an acknowledgementthat it was possible for oil to reach $200 and gold hit$2,000. What I said was this: “The more I look at thecase for $200 oil, the more it doesn’t look so far-fetchedas it may seem at first. Oil prices multiplied 3 times overthe last four years. At this pace, if it continues, oil wouldbe at $245 a barrel by 2010. If that scenario proves to betrue, it’s entirely possible, even likely, that we could seegold at somewhere around $2,000 an ounce by then. I’mnot predicting that will happen. I am saying there arecredible reasons to believe it could.”

Those credible reasons are still in play – declining oilproduction, escalating Asian demand (mainly China andIndia) for both oil and gold, the escalation of dangerousgeopolitical and terrorist threats to oil supplies.

We may have to wait several years to tally my scoreon this one, but I’ll lean with it until I see evidence tothe contrary.

Fearless Forecast #5:Continuation of the long term

gold up, dollar down trend.

After a dramatic dip following the hurricane disasterslast fall, the dollar mounted what the buck bulls believedwas a sustained rally. The Federal Government wasraising interest rates in “measured” steps that the worldmarkets liked, while other world central banks weremuttering about raising rates but sitting on their handsand doing nothing about it.

By January, though, rumors were beginning to floaton Wall Street that the incoming Fed chairman, BenBernanke, would probably back off from the rate hikesfor awhile. Around the same time, other central banksstarted getting serious about rate hikes. The dollar lostits edge and the rally sputtered and fizzled.

The buck got a brief bounce in the spring wheninflation indicators kept rising, forcing the Fed to keeptapping the brakes with rate bumps. It was a shortbounce, though, not the beginning of another rally, andthe downtrend line remained intact.

Gold honored the traditional inverse relation with thedollar by soaring in a mirror image of the dollar’s slide.When the buck bounced, gold dipped. When the dollarslipped again, gold regained momentum.

The EU, Canada, Australia, and China have raisedinterest rates this year. Japan, which has had been stuckon zero interest rates for years, broke the lock this summerand started charging for the yen again.

Meanwhile, more central banks are diversifying theirreserve holdings out of dollars –into gold, euros, and a smatteringof other currencies like the yen,Swiss franc, Canadian loonie,and Australian dollar.

The dollar has more competi-tion, and its weaknesses (massivedebt and trade deficits) remainlarge liabilities dragging on itsperceived value.

These influences point to acontinued decline for the dollar,and if the classic pattern holdstrue, that means further gainsfor gold.

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FEARLESS FORECASTS: TOO SOON TO CALLSome of the forecasts I’ve made over the last twelve months will take some time to play out. It’s too soon

to know whether I was right or wrong about them. As things are shaping up, indications continue to supportthese forecasts, or at least I haven’t seen anything to change my mind about the direction they’re going.

Source: Sharelynx

Fearless Forecast #6:A return to stagflation.

Stagnant economy, rapidly rising inflation – that’sstagflation. Many people had either forgotten or neverknew what the word stagflation meant. The term wascoined by a British lawmaker to describe conditions ofthe 70s after the Arab oil embargo upset the economicapplecart. Many young people involved in finance andinvestments these days weren’t even born or were still indiapers then.

In recent months, though, a growing anxiety hasbeen spreading about signs of slowing economic growthwhile energy-driven inflation keeps pressuring pricesdespite the continuation of interest rate increases intendedto contain it.

This forecast is still a work-in-progress. We maynot yet officially be in what would be considered a periodof bonafide stagflation, but we’re headed straight for it.Once we’re in stagflation, it takes a long time – maybeas much as a decade – to dig out of it.

I would love to be totally wrong about this one. Butunfortunately it’s looking like I’ll be on target aboutthis, too.

THREE BIG IDEAS

Along with my fearless forecasts, overthe last dozen months I’ve also sharedwith you three Big Ideas that I hopeyou’ve found of value in under-standing how global macroeco-nomics affects the market for thecoins on your favorites list.

Although coin values do notnecessarily jiggle up and downlike stock market charts, whathappens on the world geopoliticaland financial scene eventuallyfilters into the cost of that doubleeagle you want or the gold 2 1/2Indian you have been thinking oftrading up.

My objective in presenting these bigideas has been to help you know how andwhen these external factors will affect thecoin markets so you can make informed decisionsabout your coin investments. Big ideas like these bearrepeating from time to time to refresh understanding ofthe major concepts involved.

Big Idea #1:Montgomery’s Circle Theory of Coin Economics

I hope you’re well familiar with this one by now.I’ve referred to it several times in relation to severalrecent developments.

To review in the simplest terms, my Circle Theory ofCoin Economics states that an ultra-thin market such asrare coins is disproportionately affected by the infusionof new cash into the coin market.

The coin market is normally fairly stable, with coinsand cash basically just rotating among the same generalplayers with some incremental funds added graduallyfrom new investors and collectors. Any substantial newmoney coming into the coin market puts huge pricingpressure on rare coins. The supply is finite, so when thedemand part of the equation shoots up, prices have toshoot up, too.

That additional cash – and it doesn’t take a lot –tends to materialize as spillover from increased interestin gold. As mainstream investors who don’t normallythink about gold start getting the fever, a lot moremoney gets thrown in the direction of the yellow metal.A certain amount of it spills into gold coins, and a portionof that into rare coins.

In general, accordingto my circle theory,

a gold bull is arare coin

bull.

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GOLD

COINS

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CKS & BONDS

TOTA

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TOTA

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Trillions Billions Millions

TotalGlobal Economy

Measured in Trillions of Dollars

Measured inTrillions of Dollars

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(Trillions)

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Measured in...

...Per Day

Big Idea #2:Risk Is Opportunity By Another Name.

My dad often reminds me, “Great opportunity alwayscomes disguised as great risk.” That certainly applies toinvestments and most especially to rare coins.

The big idea that came to me while pondering thispearl of wisdom is that things aren’t always what theymay seem…and that can be very good.

Conventional wisdom says that low risk goes withlow rewards and high rewards come at high risk. Butthere’s another possibility. Sometimes a rare chancecomes along that offers high rewards with low risk. Thetrick is to identify real risk versus real opportunity to gainan important edge over the rest of the investment world.

Two developments over the past few years havegreatly reduced the risks involved with investing in rarecoins – 1. the establishment of reputable third-party grad-ing of rare coins so buyers know what they’re getting, and2. the codification of coin industry ethical standards bythe Professional Numismatists Guild (PNG).

With a built-in demand value because of theirscarcity, rare coins only needed the additional assur-ance that what-you-buy-is-what-you-get to reducetransaction risks.

Of course, no investment is without risk…otherwisethere would be no point to investing. But rare coins nowoffer the enviable option of high reward at low risk –opportunity by another name.

Big Idea #3:Return of the gold standard.

I’m sure we raised eyebrows with that headline earlierthis year. But when readers got into the details behind it,a lot of heads started nodding “Yes.” If you missed itbefore, this is an important idea to understand.

Even though no official gold standard exists today,individuals can create their own personal gold standardand tap into a surging grass-roots movement to realaccountability for money.

This defacto neo-gold standard is much different thanthe government-sponsored monetary systems of the past.This one actually does what it’s supposed to.

What posed as a gold standard in past history wasnothing of the sort. “The hard fact is that the gold standardwe all love and cherish never was all we like to rememberit was…noble in concept but flawed in execution,” I saidin May. Governments could suspend the gold standardwhen it suited them or change the official price of gold atwill to manipulate currency values. So it wasn’t really anaturally regulating standard as it was intended. “That’sno gold standard. It’s a fiat currency system masqueradingas a gold standard,” I wrote.

More and more investors are grasping the idea thatthey can unilaterally, on their own, use gold in its variousforms (including rare coins) to create for themselves agold standard to protect their wealth. It’s a movementthat’s spreading globally.

The neo-gold standard is still in its infancy as peopleexperiment with various forms of implementing it. Butthis is one big idea that is catching on and picking upspeed. The day may come when the movement becomesso irresistible that it may force a return to an official goldstandard in some form not even invented yet.

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My dad often reminds me,

“Great opportunityalways comes disguised

as great risk.”

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Words to the Wise…In this retrospective issue, all the “Words to the Wise” are quotes from Editor Paul Montgomery’s commentaries over the past year.

• Economic uncertainty always raises the gold tide and lifts gold coins along with it.

• It’s an axiom of history that when people feel threatened by uncertainty, they turn to gold for securityand comfort. It’s been like that for 5,000 years.

• The higher the wall of worry rises, the higher will rise the value of gold and rare coins.

• Gold has reclaimed its place as money – not just as a commodity and last-resort financial refuge –and is considered by many these days to be the “fourth currency.” It has joined the dollar, euro, andyen as an alternate instrument of world commerce.

• A gold standard does exist out there – unofficial, unknown to most people, outside the control of anygovernment – and it grows stronger by the day as fiat currencies like the dollar and euro reveal theirvulnerable underbellies.

• Recognizing the difference between real risk and perceived risk and distinguishing the opportunitythat lies within is what separates the visionary investor from the rest of the crowd.

So I ask the question again, how do you like me so far? Am I covering the topics you are interested in?If not, please drop me a line and let me know what you’d like to see more of – I look forward to hearing fromyou. You can email me [email protected] or simply return the postage-free comment card.

I’ll do my best...

Customer Service Hotline:We can never say it too often: We value you as ourcustomer. If you have any questions or concerns,we want to hear from you. To make it easy for youto contact us for special attention above andbeyond the usual, we’ve established a customerservice hotline and email address for your conven-ience. Our hotline will be answered during normalbusiness hours - email will be checked daily.We’ll make it a point to get back with you withinone business day of your request. If you havecomments and suggestions for our newsletter, I’dlove to get your feedback…same email address.We thank you for your input and look forward toserving you in the future.

Hotline:

409-861-4807Email:

[email protected]

LOOKING AHEAD...I think you might agree that I’ve been on a pretty

good roll for this first year. You might be wondering, “Ishe that smart or just that lucky?” To tell you the truth, Iimagine it’s some of both, but I like to think it’s more ofthe former than the latter.

I hope to make the next 12 months of commentariesas insightful as the ones we’ve produced so far. Fromwhat I’m seeing on the horizon, the wild and woollytimes ahead almost certainly will make it even morechallenging to cut through the confusion and uncoverwhat’s really going on underneath.

OCTOBER Issue...Coming In the

Are we on the brink of World War III?

Next month, Paul Montgomery probes the explosive geopolitical environment that could

set off the next global-scale conflict tomorrow, next week, next year. It may already have

begun. Learn why and what it means for gold investors in the next issue.

Important Disclosure Notification: In the opinion of the Publisher, all statements made herein by third parties are believed to be reliable, truthful and accurate to thebest knowledge of the Publisher. However, the Publisher disclaims and is not liable for any liability or losses, which may be incurred by other third parties, while relyingon information published herein. All readers of Investor’s Profit Advisory are encouraged and advised to independently verify all representations made herein, or by itsrepresentatives, before making investment or collecting decisions. Universal Coin & Bullion wants you to carefully examine the collectible coins you ordered. Except forspecial orders, bullion related items and trades, if you are not 100% satisfied with the value of your purchases, please return them in the original packaging within ten daysof receipt for a refund. Other returns of numismatic items may be subject to restocking fee of up to 20%. Our policy is that payments for coins received and con-firmed for liquidation by UCB and refunds will be processed and sent in 10-15 business days after receipt and confirmation unless specified otherwise in writing by man-agement. Some experts may recommend that in typical times, a diversified investor’s portfolio contain a rare coin or precious metals component of 5% minimum to 25%maximum. The collectible coin market is speculative and unregulated. Many areas of numismatics lend themselves to third party grading and authentication. Certificationdoes not eliminate all risks associated with the grading of coins. Coin collecting recommendations are meant for those who are financially suited for the risks and holdingtimes involved, which usually span 2-5 years, or possibly more. Past performance is not a guarantee of future results. Universal Coin & Bullion, it principals and repre-sentatives do not guarantee a profit, or guarantee that losses may not be incurred as a result of following its recommendations. They may also have positions in areas theyrecommend. Subscribers should not look at this publication as giving legal or investment advice. Customer agrees the exclusive and mandatory venue and jurisdiction ofany dispute or suit arising between Universal Coin & Bullion and customer shall be in a federal or state court located in Jefferson County, Texas. Customer agrees to payall costs, including, but not limited to, attorney’s fees and prejudgment interest, for any action brought by Universal Coin & Bullion to collect payment of unpaid invoic-es, and for any action brought by customer against Universal Coin & Bullion, in which Universal Coin & Bullion prevails based upon the provisions in these terms andconditions, or regarding any unpaid invoice. Reproduction or quotation of this newsletter is prohibited without written permission of the Publisher. Please allow 2-3 weeksfor shipping after receipt of good funds. Investor’s Profit Advisory is published by Universal Coin & Bullion, Ltd., 7410 Phelan Blvd., Beaumont, Texas 77706

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