Thursday, March 5, 2009

Paper implosions

Occur in deflationary crashes, the ongoing global depression being the first historic example that finds every country in the world on a paper/fiat currency standard. If you understand history and you understand how all paper money experiments fail, then you understand that gold is the best form of money for a reason.

Humans are not as smart as we like to think we are and our greed and sloth are legendary. Digging gold out of the ground is hard, dangerous work. Printing pieces of paper or creating digital entries on a computer - well, that's a wee bit easier. But paper backed by nothing but the hot, foul air coming from the mouths of bankstas and government apparatchiks can deteriorate in value quickly.

People talk about the U.S. Dollar, the Yen, the Swiss Franc and the Euro and argue over which will do the best. The fact of the matter is that they are all sinking now and will be for some time. Yes, the dollar may do better than the Pound and the Yen may do better than the Euro, but gold has been money for a few thousand years. As our economy goes deeper and deeper into this depression, do you honestly believe deep down in your gut that government has the ability to turn the economy around? Can you point to a single example in history where the government "stimulated" its way to a strong economy and sound currency (and I'm not talking about a brief unstable bubble like the one we just had in housing)?

The currency storms and instability are just beginning. We have watched Iceland, Russia, Latvia and Britain experience harsh currency swings recently. Just look at this two year weekly chart of the British pound:

Now, it is true that gold bugs are always pointing to hyperinflation right around the corner. I think it's still a ways off for the U.S., though the risk is elevating every day and has gotten much higher for countries in Eastern Europe. Swift traders who can identify trends and use appropriate risk management can hop from currency to currency and make money and/or retain purchasing power. I think it's a workable idea if you have the time, skills, and stomach for the increasing counterparty risk due to banking instability and government interventionism.

But without exploring the hyperinflation route, one must understand that in times of economic depression and credit contraction/debt deflation, gold is a good long term investment to anchor your portfolio and acts as valuable insurance. Physical gold is not a get rich quick scheme (at least I hope not, as that means we're all screwed), it is an anchor in a time of global monetary instability.

I think we are very close to another buying opportunity in gold and I will be starting to accumulate more physical metal once the price gets under $900/ounce. Since I know that the Dow to gold ratio is on its way back to parity or even less than one over the next few years, I believe the minimum upside potential for gold is $1500-$2000/ounce. General stocks, on the other hand, are going much, much lower from here over the next few years. Real estate is going significantly lower from here. Long-term U.S. Treasury bonds are going lower from here using a multi-year time horizon.

Once you accept that the "Greater Depression" (as Doug Casey calls it) has begun, your investment alternatives are limited unless you are a trader or like shorting the market. Gold or other solid cash equivalent kept in an arrangement that minimizes counterparty risk is your best no brainer investment and I think gold will significantly outperform the U.S. Dollar. Gold mining stocks, which thrive more than any sector of the economy in a credit-contraction induced depression, are your best and essentially only reasonable speculative long-term investment option when playing from the long/bullish side.

Can you believe it? If you can't, get ready for some pain dead ahead. This message is not related to trading, but to investing. Those looking to bottom fish general stocks or real estate better understand that we are setting up for an INTERMEDIATE-term bottom, not THE bottom of this secular bear market in stocks and real estate.

From the trading side, I am looking to buy gold miners GG and RGLD right now and have put low-ball bids on July call options for both. I won't go full in until I see how bad the final plunge/rinse in the general markets is, as a panic bottom will drag gold stocks with it to a certain extent. I remain short KSS and AZO and think the retail sector (I follow $RLX) is about to go cliff diving and make new lows.

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