Sage Advice(?)

"The dollar is going to crash!" "Buy gold NOW!!" "The Fed is trying to print their way out of this economic crisis!!!"

The rhetoric goes on and on... and gold HAS done well. If you watch TV, there's no end to ads telling you to sell your gold for cash, put your retirement into gold, or buy gold NOW... if you keep up with any of the investment blogs/newsletters, with very few exceptions (Harry Dent being one of them), there are very few that are bearish of gold. Warren Buffet is as well, but I think he has an agenda which I won't go into at this time. A contrarian may look at this and say that if everybody is bullish, it's probably better to be bearish.

But be careful about the virtues of being a contrarian. They tend to get the turning points right, but unless timed perfectly, often get the majority of the trend wrong; shorting all the way up on a hyperbolic blow-off top, and trying to catch a falling knife that can be detrimental to your wealth (got that one from Louis Yamada on Fast Money ;-). We've all done it, and if you haven't, you probably will at one point or another. They may finally catch the turning point, but only after substantial losses that must be made up. It is the one in a million (billion?) who can successfully catch tops and bottoms CONSISTENTLY.

But the wisdom of the crowd cannot be dismissed (if subscribing to a trend following strategy). Gold and silver have been on a rip-roaring rally for an unprecedented 13th year now. With the exception of those who finally bought in the last few months, if you had bought anywhere in the last 13 years you probably did very well. But the problem for the trend follower is whether they'll be able to see the turning point which will inevitably be coming. People tend to think that what has been happening will continue to happen. People tend to think in a linear fashion, and often fail to see the curve just ahead. Imagine slowly climbing up on a roller coaster... you see the blue sky up ahead as you ratchet up to the top, but fail to see the curve and the heart-pounding drop until you're on a vertical dive headed straight back to the ground. That's what makes it fun! You get the picture. But the point is, both trend-followers and contrarians have a place in the investment world; it's just a matter of timing. So where are we now? Inflation or deflation?

My guess is that looking at the devaluation of the dollar for the last CENTURY since the creation of the Fed and the closing of the gold window, we are in fact on a super-secular INflationary cycle by virtue of the devaluation of our currency, which just so happens to be the reserve currency of the world. But everybody knows this. This is not some kernel of wisdom that can't be found anywhere else on the web. It is in fact very common knowledge. But even so, we are probably not at the end of the inflationary cycle, since the dollar has not yet COMPLETELY crashed (even though it's lost 90% of its value), and it is still (for the most part) being accepted around the world (although increasingly to a lesser degree). So there is probably more devaluation and more devastation to come (but probably not in a straight line). I doubt it will end until we've gone through a period of hyper-inflationary period like those of the Weimar Republic of post WW-II Germany, Argentina, and most recently, Zimbabwe under the Mugabe regime. But because of the fact that the dollar is the reserve currency of the world, I would venture to guess that WW-III will probably play a role somewhere along the way as well.

So should you buy gold? Now? With gold still not too far from all-time highs? Well, before I get into trouble with any regulators, only YOU can decide what you should or shouldn't do with your money - I don't portend to know what's going to happen with any great degree of accuracy or certainty, and this is a blog... on the interweb... it is NOT individual investment advice, and you are STUPID if you follow what you read on a blog without doing some thinking on your own (but if you do, you are not alone - yours truly included). If you take losses following investment advice from a blog, you probably deserve whatever losses you take. Hopefully that will be a learning lesson for you and you will start to do some thinking on your own (I know I have and continue to do so on a daily basis).

So now that we've gotten that out of the way, my guess is that we are probably in a secular deflationary cycle (within a larger super-cycle of inflationary cycle). The secular deflation (in my opinion) will likely follow the path of Japan lasting a decade or two (depending on policy decisions made by the government). If Ron Paul wins this election (or someone like him in the years to come) and we can get the debt liquidated that's keeping the zombie banks/corporations alive, we will get out of this much quicker like Iceland. If we shove the mess into the dark crevices of the shadow banking system and pretend they don't exist, we will probably spend the next decade or two with high unemployment, stagnant growth and national debt ratcheting up to 250% of GDP and beyond (SO VOTE FOR RON PAUL!!!).

But if oBOMBa or any of the other crony capitalists like Romney take the White House, you should probably expect more of the same. Printing away every time there's a bout of deflation which will likely come in bursts and spurts - like in late 2007 to early 2009. This will lead to more Fed action composed of more bailouts and money printing (again unless if someone like Ron Paul can help get the Fed abolished). Everyone will see the massive growing debt and be scared into having concerns about inflation (just like we are now). And they will eventually be right... as for the timing.. well, we'll see...

The elected officials will see the growing discontent and promise the moon and the stars... With more and more people joining the ranks of the unemployed, food stamps and welfare recipients, any candidate who DOESN'T promise more free money will have a hard time getting elected. So more free everything for everyone! (paid for by more free money from the Fed, which they won't mention) Debt to GDP will keep growing until it pops one day and the hyper-inflation FINALLY gets unleashed. But it probably won't be for awhile. Japan has been in deflation for more than two decades. Even if you assume that the US has been in deflation since the popping of the Nasdaq bubble, we probably still have at least another decade to go (and another 150% or so on the debt to GDP). Since the USD is the reserve currency of the world, the dynamics can potentially be different. It may really be different this time, as the proverbial saying goes...

As for gold and silver, I'm waiting for the next deflationary spike. With the confluence of events going on this year (I'm not talking about the end of the Mayan calendar), I think this may very well be the year for it to start (but I could very well be wrong, so make your own conclusions). As Jim Rogers often says, tops tend to get stretched longer than most people think possible, and the drops tend to be sharper than everyone expects as well. The consolidation/correction in gold that's likely to come in the next deflationary spike will probably be more than what a lot of people are expecting. I think THAT will probably be either the last or second to last best opportunity to buy gold before the parabolic move higher and hyperinflation finally gets unleashed. But if you have the staying power and the time horizon, buying in increments even at current levels will probably pay off someday. But just be prepared to hold it through some major volatility.

And finally, a kernel of wisdom: even if you get the small moves wrong, if you get the bigger trend right, you will probably do well. So think long term. Think about the bigger picture. Don't get swayed by this or any other blog, TV ad, or investment advice from a "guru". Do your own thinking always seek the TRUTH. And when you do find it, don't be afraid to take action. But don't take so much risk as to let it be detrimental to your way of life. Keep your mistakes small and even if you get it wrong, if you learn from the experience, you will come out stronger and wiser. God bless, and best of luck to us all.