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Of Gold, Silver, Mr. Bubbles, and Tulips



-- Posted Friday, 26 October 2007 | Digg This ArticleDigg It! | Source: GoldSeek.com

In the early stages of the precious metals bull market back in 2001, there were precious few articles written on the subject that took a bullish point of view, so I wrote more of my own stuff because of the dearth of material in existence. I don’t seem to have as much time to write articles as I used to, but that is not a problem anymore. Now there are many good articles to choose from covering the bull market in commodities, precious metals and related financial topics. These great writers do the work for me, so for the most part I just send out their articles to people so they can get updated on the latest market conditions. A bull market continues to add participants which include writers and investors as it chugs along and picks up steam. This is the fuel that drives bull markets higher and higher, more people equal more money which results in higher prices. This increasing progression of movement into a particular sector at some point will take on a parabolic fashion eventually culminating in bubble, such as we have seen in the NASDAQ and more recently the housing sector. This is of course nothing new as bubbles are a product of human tendencies to follow the crowd and have been happening since the days of tulips and the South Sea back in the 17th and 18th centuries.

Ref:

http://en.wikipedia.org/wiki/The_South_Sea_Company

http://en.wikipedia.org/wiki/Tulip_mania..

 

 

 

Anonymous 17th-century watercolor of the Semper Augustus, the most famous bulb, which sold for a record price roughly equal in value to 60 tons of butter.

  

We need not be concerned pertaining to bubbles affecting precious metals and commodities yet as we are presently not at that stage, although things are about to get much more exciting.

 

Recently the Federal Reserve, now run by Ben Bernanke cut the Benchmark lending rate by .50%. This was a desperation move to save the housing bubbles trapped banking sector. More importantly, history says this means there will be more cuts to follow. Sadly, these rates really do not have as much to do with the rates that people get for loans and are more a bank to bank rate so again, the big guy wins, and the little guy loses. Of course this is how the Fed is designed to run, to benefit the few at the top. Now we have Alan Greenspan (aka Mr. Bubbles) warning that we may get double digit interest rates down the road. I warned you six years ago, when accolades reigned down upon him as he was being hailed as the Maestro, and being knighted by the Queen as Sir Alan, that one day when history was finished writing this mans story, he would be vilified. That eventually the truth would come out about the damage he had done while in control of the FED. Stock market bubbles, housing bubbles, and debt bubbles all are due to his policies. How short is our memory, does anyone remember this same guy three years ago almost ordering people to get into variable rate ARMS? (http://www.usatoday.com/money/economy/fed/2004-02-23-greenspan-debt_x.htm)

And now he says that interest rates, the same ones he affected for many years, may go into double digits? What will the ARM holders do now Alan? This is plain and simply either extreme foolishness on his part, or criminal and this to be considered one of the most damaging lies of all time.

 

More importantly than Alan Greenspan's legacy for the knowledgeable investors in precious metals, are that his comments on interest rates signal that the Fed has decided to inflate its way out of trouble. Cutting rates now means the Fed will be even further behind the real interest rate curve (defined by subtracting the annual change in the CPI from the yield on one year US Treasuries) and will continue to be behind all the way up to the peak of interest rates, and metal prices yet to be attained, whenever that may be. Importantly ...THIS SCENARIO IS EXACTLY WHAT DROVE THE METALS TO THE MOON IN THE 70'S! To understand real rates in very simple terms, it means that prices are going up faster than the rate of return in your bank account, and anyone who has gone grocery shopping, purchased gas, paid for medical coverage, paid taxes, and paid for just about any other thing that is a necessity to live knows this to be fact.

 

I believe that after this massive inflationary cycle, a period of strong deflation will follow, with the possibility at the extreme, of a depression. This is not something that will happen over night and will take a few years but with the markets swinging this wildly from one extreme to the other is exactly why gaining knowledge on how to take action in your personal finances is a must.  

 

 There are a couple of important things to remember as action items that need to be taken care of when the time is right. Do not forget what I am about to tell you!

 

Firstly, when deflation takes over after interest rates and metal prices have peaked, the signals will be huge policy reversals being enacted to force this reversal. They could be items such as budgets deficits being aggressively slashed, the money being replaced by some substitute such as the Amero, or gold or silver being legalized as money again for example. It could end up being virtually any historic key line of demarcation being crossed that portends great change and reversal. Think of the Niagara River starting to flow in the opposite direction. You will see this news on the front page of the paper. Of course the article will not tell you, “Here it is, the signal Mike told you about!” so you will have to use some judgment. Paul Volcker creating an intentional recession in 1980 is an example of how this was done previously.

Ref:

http://www.answers.com/topic/paul-volcker

 

At this time, you should sell most of your silver holdings and transfer them into gold. I have always believed as this bull market unfolded it would be better to be more heavily weighted with silver at the outset, and incrementally transfer into to gold along the way, and nearly to completeness at the end. The key is not to try and hit the absolute price peaks, but to maintain purchasing power of assets owned near the peak. The good producing gold mining stocks themselves will continue to throw off good income for years to come after the metal peak and will probably maintain levels, or continue to rise in price for some time after the underlying has peaked. The junior stocks that are not yet in production and especially exploration only stocks will be an immediate sell at the time of the peak. Silver will be hard to predict its behavior at this time and since several fold gains will have been made by then, the need to preserve is more important than the need for more gains.

 

The second important thing to do is to use some metal profits lock in some high rate of return interest rate opportunities such as U.S. Treasuries and select foreign currency denominated vehicles. Looking for safety is the key as is laddering into this strategy in over a period of time. This should be done during the period approaching the peak, and after the peak has been hit. The need to try and hit exact timing is minimized in this way.

 

The third thing to do is to begin plans to pay off debt you may have using profits in the metal sector. Keep in mind, if you have a mortgage locked in at 5%, and you are able to get a higher return on short term investments, then you should delay paying off until the rate you are receiving reaches equilibrium with the rate you are paying out. Fourth, never sell all the gold as this will be a time of great uncertainty, but do sell some over a period of time as opportunities present themselves! Fifth, start looking for the next big thing to invest in. My present guess is that it will be stocks with P/E’s of 15 or less, real estate, and small business opportunities. It will most certainly be things that the general public at that time disdains.

 

I have warned about the housing sector collapse coming way ahead of the mess we are now faced with. In 2005, I sold a second property I owned, a fully paid for vacation home that I loved, putting my money where my mouth was.  I caught more flak from my readers on this topic than any other subject I talked about. Many insisted houses have always been a good investment and they never go down. History tells a different story, so let’s looks at one history lesson. In Tokyo, real estate fell in some cases to 1/100th from it lofty peak in 1990 and has still not even begun to recover, so that kills the old argument I always hear, because "they are not making any more land in Tokyo" either. Concerning housing and subprime loans, roughly half of the loans out there are adjustable rate loans, and a significant portion of these loans already has at least one delinquent payment. Of the ARMS in existence, a majority are now starting to reset to the higher rates, and this trend will continue after peaking well into next year and not fully abate until 2012.

 

 

 

This fact alone guarantees that there will be no short term housing sector price recovery and prices must fall further. Simply, when these loans reset, the monthly house payment of the panic stricken homeowner will go up hundreds of dollars and there will be no escape for them as many will not qualify for a fixed rate loan given the current subprime loan cancer running through the banking sector. The individual banks simply are not willing to lend any more money than they already have loaned out. Actual bank runs reminiscent of 1929 have recently happened at major institutions such as Countrywide, Wells Fargo and Northern Rock. You may think that you have nothing to worry about because banks are FDIC insured. Well, FDIC only has a small portion of money on hand to cover all the accounts that exist. This is why I have been as adamant about spreading risk around to as many locations as possible. Even if they covered all the loans in the case of a massive default, which I believe they would do, the money would have to be severely devalued due to over use of the printing press to accomplish the task, and this has already become the legacy of our once mighty dollar. I believe the early signs of trouble as we have seen in the banking sector due to the subprime mess and fractional reserve banking are just the tip of the iceberg and other severe problems will begin to show up soon in other financial institutions here in America and abroad.

 

Speaking of the dollar, it has broken the key level of .80 on the dollar index chart and is now plowing to depths never before seen in its history.

 

 

 

I believe it is going much lower than the current levels unfortunately.  I have warned consistently through the years that one must get out of the dollar any way possible and offered many alternative ways on how one might go about doing this. Buy gold, silver, and get an account at Everbank, and buy the currencies. I pounded the table for people to buy the Canadian when it was at .63 to the dollar, it is now at 1.02 plus 6 years of interest for me. Not a bad return for just a regular savings account! Just for the record, I recently lightened up on what I deemed the commodity currencies of Canada and Australia, and move more into what I call the monetary currencies, the Japanese Yen and Swiss Franc. The Chinese Yuan may be another good candidate but I have a promise to myself to not invest in either China or Russia because they have already shown that they are not faithful partners with which to invest in.

 

These currencies, although they may be convenient, are only alternatives to the best monetary currencies of all which are gold and silver. Gold and silver are simply reasserting themselves because in these modern times from one end of the globe to the other, the only choice available is paper money backed by nothing. In past history we used to have gold and silver coin, and paper notes such as gold and silver certificates which were convertible into bullion. Now there is only paper currency which is being printed to infinity and the more there is of something the less it is worth. People the world over are wising up to this fact with Americans probably in last place in coming to the realization that saving in paper money is a losing proposition. What we are witnessing is Gresham’s law in action, where bad money drives out good.

Ref:

http://en.wikipedia.org/wiki/Gresham%27s_law

 

 Of gold and silver and their related equities, it is really a simple strategy, just make sure you have some, and more than you think you probably should.

 

 

Michael J. Dogariu

m2trains@hotmail.com

October 25, 2007


-- Posted Friday, 26 October 2007 | Digg This Article | Source: GoldSeek.com




 



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