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.
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 wildly inflated asset values, particularly financial assets.
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.
August 13, 2004
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