Friday, May 29, 2009
All the little guy can do
is hedge when you get right down to it. This is why I started this blog and why I pound the table regarding Gold to anyone who will listen (and believe me, my friends and family are tired of it despite the fact that most have no exposure to Gold or Gold miners in their portfolios). Look, the deflationary versus hyperinflationary outcomes are really the only ones left on the table at this point. I favor deflation, as it is the natural, current market-driven force. Can I guarantee a massive dollar devaluation won't take place? Not unless I can predict with 100% certainty what China, Russia, the Middle East, and Brazil will do!
You see, the United States has painted itself into a corner. We are debtors with soiled reputations. Our creditors help to call the shots. Yes, we are still the big dog and can drag the world into economic depression (as we have already done), but what happens next is more important from a "big picture" view. A 1930s repeat should happen, as Europe is in the same basket-case scenario we are and, make no mistake about it, the British Pound should collapse before the U.S. Dollar does. But the "import" countries are maxed out on all their credit cards and the countries that own the credit card companies (i.e. China, Japan, Middle East oil producing countries, Brazil) are hurting because their best customers are curled up in the fetal position begging for more credit and asking to print up paper tickets in return for labor and vital industrial goods.
The citizens of America and Europe will default for sure. But the currency/government games are much different, as governments just keep issuing more debt without a care in the world. Will we just wither on the vine for the next 20 years like Japan or will we have a currency crisis and go the banana republic route? I favor the Japan scenario, but a determined coalition of some of our creditors could shoot themselves in the foot to spite and dethrone the current system. Not that I think China or Brazil are great countries and not like Japan isn't loaded with debt, which makes the currency game more tricky. I don't see the world as ready to accept China as the beacon for safe financial investment and I don't accept the de-coupling theory (yet). But once the U.S. exported most of its manufacturing jobs and relied on "smarts," financial trickery and endless credit to support its economy, this did create a bit of vulnerability, no?
Gold is a hedge against any monetary storm, whether a deflationary credit crisis or hyperinflationary blow-out/currency devaluation. Yes, you can argue that the Dollar is better in deflation (it does pay interest, after all) and oil is better in hyperinflation, but all the little guy can do is hedge IMO and Gold wins in either scenario. Buying physical Gold means you don't have to care which scenario plays out, as you are protected either way. Gold is money and the strongest currency possible, as it is no one's liability.
Gold is the only investment I know of that can prosper in aggressive deflation or aggressive inflation/hyperinflation. And physical Gold held outside the system is the only way I know of for the little guy to keep their money away from the prying eyes of an out-of-control government hell-bent on turning a democracy into a socialist and/or fascist parade.
I'll leave you with the chart that got me off my ass in an aha! moment and made me realize there is an alternative to "buy and hold" - the Dow to Gold ratio (below is a monthly log candlestick chart from 1980 to today's close):
Keep the faith. Keep your Gold (but don't buy more now when prices are high!).