Last week's column on the Kondratieff cycle drew some interesting responses, chiefly from gold bugs.
  The most fascinating was from Bob Ewen, vice-president of Toronto based MMI Group. Ewen says federal reserve chairman Allan Greenspan is well aware of the dangers of deflation in a Kondratieff winter and has been frantically printing his way out of his troubles by flooding the financial system with liquidity.
  Therefore, Ewen says, "We will likely skip economic winter. I say likely because deflation is now fighting reflation, with reflation currently winning."
The result, in Ewen's opinion, is that despite all odds, the U.S. federal reserve will succeed in creating a "short artificially induced economic spring with slow growing inflation." Economic summer and high inflation, a 1970s type economy, should follow.
  I asked veteran gold executive Philip Spicer, chairman of the Central Fund of Canada, if he buys the artificial spring theory. "No, I don't," he replied, "The economy and financial markets are reaching the point of serious vulnerability." Credit availability has now reached greater excess than in the 1920s, he says.
  Spicer and other "gold bugs" like Dow Theory Letters' Richard Russell believe only a combination of gold bullion and gold stocks offers investors true insurance against the central banks' continual attempts to flood the economy with "fiat" dollars.
  "Fiat" currencies are those no longer backed with precious metals: in effect they are paper promises backed by nothing more than faith in governments and the central banks. Spicer says the temptation for governments to run the printing presses results inevitably in the "silent tax" of inflation, slowly confiscating the wealth of prudent savers and investors.
  Aptly has short-seller Bill Fleckenstein (at www.realmoney.com) dubbed Sir Allan Greenspan "Sir Prints a Lot."
  The Daily Reckoning (www.dailyreckoning.com) notes U.S. debts, obligations, and money supply are currently running wild. "In the week ended on May 28th, another $8.7-billion of new credits screamed out of the Fed. The Fed's assets have been growing about six times as fast as the nation's supply of goods and services."
  These trends are why Russell, the veteran stock market observer, believes investors should hold a 10% position in gold in some form: not as an investment per se, but as insurance against the politicians completely destroying their fiat currencies, as Germany did between the wars. I'd concur with the 10% guideline.
  Like most gold bugs, Russell believes the gold bull market is still in its early stages and that investors shouldn't trade in and out. "Take your position in gold and gold shares and that's it, hold 'em and sit tight," Russell writes at www.dowtheoryletters.com, "In bull markets I advocate taking an initial position, adding to your position on corrections, and riding the bull to the point where the item becomes emotional and overpriced."
  Russell believes investors should hold both gold coins or bullion and gold shares (often held in precious metals mutual funds).
  "Gold coins are the real deal --pure money. If possible, you should take possession of the coins, hide 'em, hold 'em, bury them, do whatever you have to do to take possession of the coins."
  But gold shares, or gold equity funds, have the potential for leverage, Russell says. As the price of gold rises, the mines make more money; since their costs don't change much, the rising price of bullion exerts great leverage on their earnings. "Nevertheless, owning a share of mining stock is still a piece of paper saying that you are a part-owner in a corporation that mines gold. That ain't the same as holding the end product in your sweating palm."
  Russell's number 1 gold stock recommendation is Newmont.
  Canadian investors have any number of gold mutual funds to choose from, such as Mackenzie's Universal Precious Metals or AGF Precious Metals, which are equity funds holding gold mining or exploration stocks. Royal Precious Metals is a no-load fund but now has less emphasis on the speculative juniors former manager John Embry specialized in. Embry now runs a gold fund at Sprott Securities.
  There is also an exchange traded fund gold, iGold, from Barclays Global, which holds a dozen Canadian gold majors trading on the TSX, such as Barrick and Placer Dome. These can be held in RRSPs: Most of these funds qualify as Canadian content.
  Until recently, however, it was difficult for Canadians to own gold bullion or precious metals inside their RRSPs. There are two main choices available. Spicer's Central Fund is a closed end fund which owns both gold and silver bullion and currently sells at a premium of between 14% and 18%. The firm has just unveiled a new fund, Central Gold-Trust, which owns only gold bullion. The actual metal is held at the treasury vaults of the Canadian Imperial Bank of Commerce. Spicer expects it will begin trading on the TSX under the symbol GTU.un
  For most retail investors, its administration fee is 0.4% and after all other costs, the total expense ratio is less than 1%, Spicer says. The admin fee drops to 0.3% or less for large institutional investors buying more than $100 -million worth.
  The other alternative is Millennium Bullion Fund which recently became available in all provinces of Canada (as are the Central funds). This open end mutual fund (www.bullionfund.com) holds equal parts gold, silver and platinum bullion, held at the Bank of Nova Scotia. Its MER is 2%.
  Canadians are fortunate these products already exist. The rest of the world is still waiting for a global ETF which holds gold bullion. One is in the works at the World Gold Council; if it comes to market, it can only help push the price of the metal higher.
  If indeed the gold bull is in its early stages, Canadians have had ample opportunity to get aboard soon enough to profit from the soaring gold price the enthusiasts believe is inevitable.

jchevreau@nationalpost.com