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.

Zion, IL
By A.B. Dada
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Times Online (UK) has a reasonable article titled Dollar faces new sell-off if Gulf states end greenback pegs that discusses the concern of some Middle East oil-producing States in divesting themselves of the so-called dollar peg. Currently, the petrodollar is the primary currency used to purchase oil. This petrodollar is already on its way out as Iran and Venezuela are looking to more currencies to be used to purchase oil. This can have a big negative consequence on the value of the dollar as more foreign States start using other currencies to hoard and redeem for oil. The concern here in the States is that the dollar’s loss as the petro reserve currency would cause oil prices to skyrocket, meaning a weaker dollar here and abroad. This view is justified, but there are many caveats to supporting it fully.

The Times article also speaks about foreign currencies that are pegged to the dollar as a reserve. When a foreign currency has a dollar tie, it means that more dollars created through monetary inflation cause that foreign currency’s value to fall against other currency. This makes foreigners less trustworthy of their own governments, due to their purchasing power reduced. If a foreign currency has a dollar tie, newly created dollars don’t just devalue old dollars, they also devalue the other currency’s value as well. That’s bad news for those foreigners.

The problem with predicting a true dollar collapse verses other currencies is that some of the dollar’s fall in value is truly speculation in believing it is weaker than other currencies, such as the Euro, the Yen and the Ruble. In truth, these foreign currencies are just as weak as the dollar as most of the central banks of foreign currencies are also devaluing their currencies, but it is the speculation in the dollar’s weakness that causes it to fall more against gold. Combined with the previously mentioned de-hedging of gold, it is quite possible that the gold-dollar ratio could fall if those same speculators catch on that almost all fiat currencies are inflated constantly, at seemingly connected values.

What is also forgotten is the strength of U.S. consumers in terms of acquiring foreign goods. U.S. consumers far outspend any other nation in terms of durable and disposable goods (clothes, paper products, food, fuel, etc). With a weak dollar, foreign goods become more expensive for United States Americans, which causes the foreign economies to destabilize as their inventories go up, and their labor demand down. Reduce spending in the U.S., and the Chinese and Indian companies don’t know who to sell to. To prevent this decline in sales, the foreign central banks like to inflate their money supply in lock-step with the United State Federal Reserve. This makes foreign goods not rise in price, but in the long run it harms the foreign manufacturers and laborers since the currencies they’re paid in fall in value against goods that country imports (usually fuel but also raw materials). The countries that have a strict central bank combined with a high demand export product (say, gasoline or steel) generally profit greatly as the cost of their goods go up, but they purchase little from outside their country, so they have no need to inflate their currencies to keep their export consumers happy. Currently, there are few countries that are truly not worried about foreign competition in terms of raw materials or energy, but that could change based on supply and demand.

I have little faith in the dollar, but not because it will fall in value versus any other fiat currency. My faith in the dollar is lost because I have no faith in any fiat currency. All fiat currencies, backed with non-full reserve banking (a.k.a. fractional reserve banking), fall in value versus raw materials as they’re inflated away. This shows up as price increases, when it is in fact buying power decreasing from dilution through monetary expansion. Because all fiat currencies are inflated, they all lose value versus real goods over time. It is how you price those real goods that shows the reality of each currency’s decline against other material goods. If you just judge the buying power of the dollar versus the buying power of the Euro, the dollar seems to fall in value versus the Euro. If you plot both versus real costs of goods, you see that both currencies are falling in value over time, but the dollar falls faster. If you had a decision: jump off a cliff holding a big rock, or jump off a cliff holding a small rock, you may chose the small rock versus the big one (yes, I know, you’ll fall at the same rate eventually, but not initially). I prefer to not jump at all. The analogy in currencies is: hold dollars (big rock), which are falling fast, or hold euros (small rock), which are falling slower, or hold gold (don’t jump at all), which is rising against all currencies over any plot of time in the past decade or two.

My recommendation is to plot your life expenses (food, fuel, insurance, clothing, housing, and income) versus other goods and versus gold. If you earn $5000 a month, compare what your income would be in gold and euros at the current exchange rate, and then compare what the price of your expenses are in dollars, euros and gold at the current exchange rate. Over time (years, months, even weeks) you’ll see that gold is particularly strong, whereas euros and dollars are particular weak and getting weaker (with the dollar the weakest currently, but that’s mostly speculative pressure).

It is very difficult for people to view “real costs” when it comes to gold ounce purchasing power, mostly because they are unable to understand that the rising cost of goods in dollars is really just a fall in value of those dollars. In a market economy, prices rise for two reasons: the supply of goods goes down, or the demand goes up. In a fiat-based economy, prices rise also if the value of the fiat currency falls. Since we have no idea how fast a fiat currency is being inflated through monetary expansion, it is almost impossible to truly know if prices are rising due to low supply, high demand, or too much new currency created. Even worse, some purchases that cause a low supply of goods or a high demand of goods is a malinvestment due to monetary expansion! If you feel wealthier, you may splurge on a nicer new car, or a new kitchen, or a new home, because you feel richer even if you’re poorer due to the value lost of your earnings through monetary expansion. This malinvestment causes the supply of that good to go down, the demand to go up, and makes that product even more expensive even if your purchase was wrong due to your not realizing your wages went up but their value went down.