Wednesday, August 25, 2010

Fool’s Gold

With the stock market starting to make a correction back to somewhat normal levels that support the underlying fundamentals, folks like Gold, especially since it has done so well over the last year. Ah, I love those investors who buy high and sell low; keeping up the age old tradition that what goes up must go higher and what goes down must go lower. Last I checked, buying into the upswing and selling into the down swing generally loses money every time.

On the flip side, folks are getting into gold, because interest rates are so low that the only place is for rates to go up. But, the FED is committed to keep interest rates low, which allows for inflation to get a little bit out of control. If the threat of heavy inflation looms, the interest rates will have to be hiked to control inflation. This hedge against inflation is all well and good in a normal market or better phrased the market of the past, when everyone was using credit like crazy and living beyond their means. This is no longer the case.

The reason being is that spending is now being curbed by both the individual and the corporations. Unemployment is high and will remain high until 10% is considered the new 5% as far as unemployment is considered. People are saving and not spending. What is occurring is a massive correction to make up for all the overspending that has gone on for the past 30 years. What this is going to or rather has created is a long period of deflation. The deflation is still in its early stages, but eventually the price of gold will bust under the deflationary pressures.

I still believe gold is a solid long term investment, but do you want to buy in now or at a lower price later? Wait for deflation to chip away at the price of gold, but also be weary that this not a fool proof investment. Recent news showed McDonalds raised $30 million to expand its Asian venture which was financed through debt backed by the yuan. If this is the beginning of a trend for companies to finance operations through debt backed by currency other than the US Dollar, then the US Dollar is in for a beating. Should you start shorting the US Dollar against the yuan? I’m not sure about that just yet, but unless we start getting our act together and reducing our debt, then we could find the US Dollar going the way of the Mexican Peso. Better get your wheel barrow out for a trip to the grocery store!

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