Gold Investment

Zion, IL
By A.B. Dada
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It’s been a long while since my last update, mostly because life has become increasingly busy. My church printing co-op is growing leaps and bounds, my consulting business is still showing growth, and travel has taken a lot out of me. I’m putting about 70 hours a week into preparing for a fall in future income, and it is paying dividends today.

The gold market continues to shock me, but not because I feel it is in bubble mode. When the stock market was in bubble mode, everyone and their mother was talking stocks — including friends of mine who were not really able to invest. When the bubble moved to housing, those same people were talking houses. No one I know talks about gold, except those who have listened to me for the past 5 years or so. I know of many people who cashed in their gold holdings in 2007, selling with a 250-400% profit over a half decade. Good for them.

Today the old media announces that JPMorgan Chase is buying Bear Stearns, for $2 per share, a 93.3% discount. The Fed is guaranteeing the purchase, with your future income as security. The Fed also lowered the Fed rate, which to me means that a 2.25%-2.5% rate will be lock come this Tuesday.

I’ve been watching the liquidity that the Fed has created recently, and the hundred billion or so that they’ve created is even more ridiculous when you consider the options. The Fed created money for one reason — to pad the banks’ reserve ratios so they don’t go bankrupt. The banks make trillions in bad loans, and the Fed does the wrong thing — it gives the banks MORE money to back up their empty reserves.

I’ve thought another option would be available for the Fed. It isn’t an option that I would particularly like, but it is one that makes more sense. Instead of the Fed creating more money to back up the banks bad loans (which is what more reserves are doing), the Fed would be better off injecting that money into the banks of borrowers who have bad loans. The borrowers could pay down their mortgages to be equity neutral (instead of upside down), the money would flow back to the banks to zero out their over-extension, and the cash would virtually disappear in the process. Instead of the Fed dropping hundreds of billions to cancel the debts, the Fed instead is giving the banks more ammunition to continue the problems that too much liquidity initially created.

What the Fed did is doom those in trouble. The banks will be “safe,” but you and I will pay more for gas, food, oil, and housing still. The Fed made a huge mistake, as the Fed has always made huge mistakes. There is no turning back.

I look at gold as a reasonable place to hold my assets, but I also look at another option: cash. Not cash on a saving or checking account balance book, but cold hard cash. I call it a Saver Strike. Pull your cash out of checking, savings, CDs, 401Ks, stocks, bonds, and money markets. Put it under your mattress, or in a safe in the basement. For every dollar you withdraw from the villainous banks, they lose upwards of $8-9 in liquidity. It’s the ultimate way to protect against future inflation.

Gold is great, but the gold you buy means your old dollars cycle back to people who put it into the banks. The banks use the money multiplier effect to create more liquidity, which destroys the value of the dollars backing up the new liquidity as reserves. It’s ugly. By monetizing your dollars in cash form, you put tremendous pressure on the banks. The Fed won’t generally print more physical money, they’ll just shore up bank reserves in digital form. That new money can’t be withdrawn because there aren’t enough physical dollars to withdraw them. I believe the most recent M0 money supply figure was in the range of $1 trillion. By injecting hundreds of billions of liquidity onto bank’s books, the Fed is creating MORE virtual money that can’t be withdrawn and sockdrawered.

The future is ugly. Gold will likely see a 20% or so correction (I figure around the middle to the end of April), but then it will springboard again. I foresaw $1000 gold as hitting us just after New Year’s, but I was a bit early. Now $1000 gold seems normal. Just look at the news. Banks have no real money. People owe a ton on debt, but they don’t have real money. Many Americans have negative net worth. Cash is king, but only in paper or metal form. Digital cash is fraudulent, so why bother using it?

If you have cash in the bank, or stocks, or bonds, or whatever digital form you save in, cashing it out is giving the banks and the Fed the 1-2 punch: 1. the banks lose their reserves, and 2. the Fed has to make the decision to actually have the Treasury print money, or let the economy hit real deflation.

For me, the ultimate investment is a balance if real cash (physical) and real metals (physical). You’re protected against inflation and deflation.

By buying gold EFT shares or investing your physical cash in digital investments, you’re losing the ability to protect against rampant inflation or rampant deflation. Instead, consider removing yourself from the digital investment domain and become the ultimate wealthy investor: the hoarder.