Tuesday, October 6, 2009

The New Gold


With increasing talks of deflation instead of inflation, some people are questioning the rationality of investing in Gold. Gold has a wicked history of being an unreliable inflation hedge. It has, though, at times been a haven against sudden currency depreciation. On one side, the Treasury is printing so much money leading to inflation. The other, the Treasury may not print enough and thus reasons to deflation.

For the longest time, the US is considered the world’s safe haven. The US dollar is the world’s leading reserve currency, dominating in global politics, economy and military. Most importantly, its status allows US to borrow abroad in securities denominated in its own currency. After Wall Street’s financial crisis, US’s real estate meltdown and credit crunch, it has become obvious that the US is no longer the untouchable rock of superiority.

There has to be a limit to the lending elasticity or overconsumption it has enjoyed through the years. So long as people and capital are unemployed, cost-push inflation is not seen as a threat thus stimulus is believed to be cost-free. The risk, of course, is if the obligations continue to exceed the levels justifiable by assets, the bubble cycles will persist and sooner or later, a ‘sudden stop’ (the cessation of capital inflows to both the private and public sectors) is unavoidable.

Some would argue that if borrowing is to improve such assets as infrastructures that would provide jobs, services and other benefits, it would be a win-win situation for all. In my humble opinion, they are right but the key question is really the pace for return versus interest due. If the pace of return is slower, then do we have enough time for the results to show before the bank is dried out?

For the reasons above, I have stayed away from stock markets (overvalued medium of exchange). Stock values will not fall to zero. They have option values (beautiful invention of the numbers game). Nonetheless, if stock value fell 90% in the Great Depression, in today’s even more leveraged environment, what do you perceive as a realistic market correction?

The world we live in is an arbitrager’s dream, with each of them running around thinking they can predict better than others. The fact is the ones with the chips make and change the rules.

When the government (the ones who make the chips) operates at a deficit, what it is doing by definition is spending money without having taxed it out of anybody first. It is printing money into existence and spending it. Because it is spending it in various ways it makes the receiving classes (owners and selected welfare groups) happy. It is actively and thoroughly redistributing income, but doing so in a way which very few people understand. The result is a naturally increasing tendency to inflate and spend. A side effect is a skewed economy open to exploitation.

It should be no surprise that all currencies that have gone into this inflationary spiral unchecked have perished, with dramatically negative consequences for the people and countries who possessed the currency. Because the United States has begun this process, a spirit of self-preservation strongly suggests reducing your holdings of fiat currency and increasing your holdings of commodity currency.

Gold is the primary form of commodity currency in the world and will soon no longer be seen as a placeholder for value, but as an investment for an uncertain future.

Mark my words.

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