[Editors’ note: The following article first appeared as a post on the Minera Andes (TSX: T.MAI, Stock Forum) Bullboard. To view the original post click here.]
A number of people have been asking me what I think we should do in this bind. We have no lodestone to point toward inflation or deflation while we seek to preserve wealth against the depredations of markets and ministers. We don't know what the U.S. government and its agents will attempt in coming weeks and months, and we don't know how political and monetary authorities in Europe and Asia will respond. I'm middle-aged, assuming I live to be 112, and I have never seen market turmoil or geopolitical turmoil quite like this.
I've been thinking about the question for days and so far, I can offer nothing better than some of my own thoughts to throw out there and see how they bounce off the rest of you.
As I have said, I think we're in for further deflation in virtually all asset values until the deleveraging cycle is complete. That will take months, at the very least. Each round of selling forces more redemptions and margin calls, and the spiral is self-reinforcing. Stock and commodities can be expected to continue falling until the excessive leverage is flushed from the markets--but not in a straight line.
The selling isn't restricted to banks and hedge funds. CalPERS, the world's largest pension fund, has now admitted to losing over $50 billion of its asset base, and has been forced to sell stocks just to cover the pension checks they're mailing out. CalPERS used to tell us they never sell stocks. Well, now they do. And CalPERS isn't alone, not by a long shot.
The Fed/Treasury have signaled that they are prepared to extend unlimited credit to cover losses at banks, primary dealers, insurance companies, pension funds, automakers and any other sector that can disguise itself as a financial. This indicates continued exponential increases in borrowings and the monetary base. Even so, all this monetary expansion shows few signs of filling up the Tier-1 capital abyss.
The Fed and Treasury convinced both the White House and Congress that the banking system hung by a thread, and the only hope was to appropriate hundreds of billions of dollars from taxpayers, and use it immediately to take "troubled assets" off the banks' books. The credit thrown around to date has done nothing but buy Treasury bills, fuel M&A sprees, fund special dividend payouts and even fill up the bonus pools. http://www.guardian.co.uk/business/2008/oct/17/executivesalaries-banking
So far, exactly none of the T.A.R.P. funds have been used to buy "troubled mortgage-related assets." Now we know what T.A.R.P. really stands for: Treacherous A$$es Rape the Public.
After chewing on this for days, I've decided that I'm about as well situated for a bout of deflation, as I am for inflation when it finally kicks in, as it must. And that stance is the same for both scenarios.
I've read several so-called "analysts" postulating that gold will perform badly in deflation, but well in inflation. That is historically erroneous. Gold performed very well in the Great Depression, as long as you told FDR to shove it sideways and kept your gold, or lived outside the U.S. Conversely, during the inflationary 80s and 90s, gold chopped downward for two decades. Gold does perform well under conditions of high inflation expectations, but gold really is a hedge against crisis. It's a bridge, a metallic monetary span across the abyss of social upheaval and economic harshness that characterizes crashes, panics and upheavals of all types.
What these people forget is that our world is a Keynesian world. In a Keynesian world, inflation is the norm. Your money loses several percent of its value each year, just like spring turns into summer. That's the only world that anyone under 75 can remember. So when inflation stops, and real deflation takes its place, it's not a walk on the beach. It's a shocking and disruptive event, what we call a "crisis." In a crisis, especially a monetary or financial crisis (we have both) people turn to gold. They always have.
These erroneous analysts offer as evidence that "gold is performing badly in the current deflation." Let me put that in perspective. Gold is well off its March peak, but viewed from last October to now, gold is far ahead of any stock index. Year over year, gold is down from $780 to $730. In the same time frame, the SPX is down from 1500+ to under 900.
Their next mistake is assuming that gold is falling because of monetary deflation. Gold, like oil and copper and gasoline, is primarily under the compression of heavy Comex futures selling. Margin calls and redemptions are the result of the equities collapse underway. If you think for a minute that $65 West Texas Intermediate means crude oil consumption has been cut in half, you don't quite grasp how markets work. Everything happens at the margins, and paper trading trumps physical--for now. This scenario will have a short half-life, but the end is not yet.
The next few months will be as hair-raising as the last, if not more so. Both bank holidays and market holidays are a probability, and maybe simultaneously. I think a reasonable amount of cash should be in the cookie jar, and whatever you can afford in precious metals, where you can reach out and touch it. I have some food storage on hand, but not enough for you.
Hoard the most critical and essential elements of survival. Around my house, that's whole-bean coffee, jasmine rice and Special Dark Chocolate. Before we get through 2009, a bag of Eight O'Clock Italian Roast will buy 1000 shares of Fannie Mae. Not that you'd want them.
In a persistent deflation, money is scarce, valuable and hard to get. Gold is money, no matter what Wall Street tells you.
Even if a deep deflationary recession or depression does not drive a skyrocketing gold price, I'm confident that gold will at the very least retain the value of your money. If you lose your job, if systems break down, the money you put into gold will not be wasted, and the cash you keep out of the bank will come in handy.
On the other hand, if severe inflation results from worldwide monetary expansion, precious metals will again act as a bridge to carry purchasing power across currency failures.
A little cash, a little gold and silver, a little stash of essentials, and a lot of perseverance and flexibility. That's all the strategy I've come up with so far.
This article was written by a member of the Stockhouse community.
Read more articles by gabrielgray.