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-- Posted Friday, 13 August 2004 | Digg This Article
Rick’s Picks Friday, August 13, 2004 For investors who’d rather be smart than lucky
Today's e-mail brought this $64,000 Question from a paid-up subscriber: "Even if the price of oil declines," wrote Edward M., "the economic damage is still done. With this is mind, what is keeping gold and especially silver down?" To answer this question, I will begin by asking you another: How close are you, as an investor, to hitting the panic button because of fears of a weak dollar? Do you feel like it's nearly time to swap your spare dollars for all the hard assets you can get your hands on? Of course not. In the first place, if you're an average American adult, you have practically no cash to invest. In fact, nearly your entire net worth is vested in your home, which, although 80 percent mortgaged, is doing far better at keeping pace with inflation than you, I or practically anyone else could as investors. Why gamble on gold when you can invest in a home, live in it as its value increases year after year, and get a generous tax break every time you write a check to the mortgage holder? Why, indeed? Gold's day will surely arrive, as I keep saying. But at the moment, it is still residential real estate's day, even if there's only the barest glint of twilight left to hold homeowners-cum-investors in thrall. But come tomorrow, what? My deepest fear is that the illusion that inflated home prices constitute "wealth" will vanish in mere months or even weeks as real estate prices come to reflect a degree of pessimism equal in its irrationality to the optimism that drove the 1990s investment mania. The result, when home prices begin to implode, is that most of us will lack the wherewithal, not to mention the desire, to protect ourselves from inflation. Why is that? Because, by then, we will be in the maw of deflation, no doubt wishing we had the means to invest in bonds yielding a "paltry" three percent -- which, in an environment of falling asset values, would be a princely sum.
No Deflation Opportunities
That, in brief, is the bearish case against bullion. And although I doubt Bob Prechter's $200 target for gold will be reached, I am forced to acknowledge, for the reasons stated above, that it is nonetheless possible. Be that as it may, gold's long-term bullish prospects are not in doubt, since eventually all of the world's already hollow currencies will have to be benchmarked against the only real money left -- i.e., gold. In the meantime, the coming deflation will provide no great opportunities for investors. It will not be the dot-com boom in reverse, and there will be no instant billionaires -- only former billionaires and centimillionaires whose fortunes have been greatly reduced. For as I have asserted here before, even the savviest investors will be doing well to hold onto merely half of their capital as asset values plummet during the next ten years. In such a difficult economic environment it is unlikely there will be any one-decision investments -- even including gold, which has traditionally been a safe haven in the worst of times. Gold and silver will go bonkers someday, and every potentially gold- and silver-bearing property on the planet will be in play. But in the meantime we need to remain open-minded to the possibility that cash or near-cash assets, even if yielding only 1%, might be the best and only place for investors to be.
There are many reasons to fear that the coming depression will be far worse than that of the 1930s. To wit: 1) The dollar was fundamentally sound; 2) the U.S. was a net creditor rather than a massive borrower; 3) financial leverage was insignificant compared with the estimated $210 trillion derivatives pyramid that exists today; 4) the supply chain of goods and services was not nearly so specialized or fragile (in fact, 30 percent of the U.S. labor force was involved in agricultural, effectively living off the land), and just-in-time inventory had not yet been invented; 5) home-equity loans did not exist; 6) the economy excelled at producing tangible goods rather than vaporous financial services and products; 7) mortgagees were not in hock up to their ears; 8) borrowed sums amounting to several times the country's GDP were not tied to adjustable rates: 9) the Federal Reserve's ability to tamper with the economy was in its infancy, and 10) America's wealth was based on savings and productivity, not on widly inflated asset values, particularly financial assets.
Huge Wrong-Way Bet
Meanwhile, deflation has become unavoidable simply because so many of us are positioned, as borrowers, to benefit from its opposite, inflation. The hundreds of trillions of dollars worth of securitized debt on the world's balance sheet cannot possibly be subjected to falling asset values without triggering a catastrophic economic implosion. We can pray this doesn't happen, but at the same time, each of us must take steps to protect ourselves against what is foreseeable. A good place to start is with the assumption that there are no killings to be made right now in the stock market or in real estate. *** Information and commentary contained herein comes from sources believed to be reliable, but this cannot be guaranteed. Past performance should not be construed as an indicator of future results, so let the buyer beware. Rick's Picks does not provide investment advice to individuals, nor act as an investment advisor, nor individually advocate the purchase or sale of any security or investment. From time to time, its editor may hold positions in issues referred to in this service, and he may alter or augment them at any time. Investments recommended herein should be made only after consulting with your investment advisor, and only after reviewing the prospectus or financial statements of the company. Rick's Picks reserves the right to use e-mail endorsements and/or profit claims from its subscribers for marketing purposes. All names will be kept anonymous and only subscribers’ initials will be used unless express written permission has been granted to the contrary. All Contents © 2004, Rick Ackerman. All Rights Reserved. www.rickackerman.com
-- Posted Friday, 13 August 2004 | Digg This Article
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