Home > Coming Events, Silver > Poor Man’s Gold is Breaking Out — Sell Your House and Buy Silver?

Poor Man’s Gold is Breaking Out — Sell Your House and Buy Silver?

July 18, 2011


   Investors have pushed silver above the recent channel high at around $39 or so per ounce and I fully expect a retest of $50 if any more talk is given about QE3 — Silver rises because of the rising digital money supply, not from speculation. Owning cash is speculative whereas owning metals is conservative or a safe haven at current prices.

Many people will tell you that silver and gold are in a bubble but the fact is that commodities in general are one of the only asset classes that work here because the consolidated banking system is holding our economy hostage and Bernanke is solely focused on saving the banks. Right now, shorting European banks and going long silver and gold looks to be about as good of a “trade” as possible — investors are essentially betting that Europe will face massive credit problems because of the obvious insolvency of Greece, Italy, Portugal, Spain, and Ireland.

The next shoe to drop is the US… We are facing the exact same issues as Greece. Japan is also a debt zombie and has been for years now. Their deflationary spiral is confusing to say the least, but they are essentially bankrupt as well in my view.

Low global interest rates are the only thing holding the current order afloat, but any hike in interest rates could derail the system and for that reason owning real assets outside of the financial system makes a good deal of sense.

I would normally be getting bullish on real estate, but the oil prices and gasoline prices make suburbia look unsustainable. If you want to buy a house make sure to buy in a market where prices are down 50% or more from the peak… I think the stock market bubble is finally about to pop, but there is no objective way to predict the exact timing of the ultimate collapse.

What’s clear to me is that there will be a stock market collapse but this time oil and commodity prices will not fall along with stocks. The reason for this is the debasement of currency as a solution to the collapsing economy — globalization and robots make this time different from the depression as corporate profits are in a bull market without the need for workers. While we may see those profits continue to rise, I view the fact that margins are at all time highs as a one time or short term gain with the possibility of mean reversion in the future. Stocks are up 100% or so and investors usually do better when buying when others are fearful (keep in mind that the fears should be about a falling stock market not legitimate fears like the fact that only 63% of US men have a job). Real estate would normally be a safe place to invest, and even if interest rates go up with higher inflation then buying a house in Florida that is down 65% from the peak would seem like a good place to invest. That said with Freddie (FMCC 0.36 ↓-1.91%) and Fannie (FNMA 0.34 ↑0.00%) in free fall and with the banks holding years of inventory on their books it’s clear that the supply and demand factors are in control of the pricing mechanism and that higher interest rates may not actually help this “inflation hedge.” If nobody can get a loan and no one has the money to pay cash for a 2 bedroom 2 bath home, Foreclosure Street may extend a lot further than many believe.

Another reason that real estate is not working as an inflation hedge this time around (RE was a great investment in the 1970′s and 1980′s for example) is that the banking system is nearly insolvent and the demographic situation in America has completely changed. The US is not producing enough children to replace the elderly who are dying off and the boomers are heading towards old age.

Gen X and Gen Y are not having kids at the same rate as the boomers. Times have changed. The younger generations grew up with fear mongering, the cold war, environmental concerns, nuclear fears, etc.. etc… They are less likely to have kids because of some of these fears and that fact has made real estate a less attractive investment than past recessions.

I still believe real estate will be a better long term investment than equities, for example, as the recent pump and dump QE policies have simply created a bubble again which will pop. Ultimately, those with dry powder in a diversified basket of commodities, cash, gold, foreign stocks and bonds, foreign currencies, etc… will be able to buy stocks on the cheap, but in my view real estate at present levels makes more financial sense. In the end, real estate has been a debt financed purchase for decades but uncertainty and stagflation make this asset a tough call for the medium term but a decent investment for the longer term. If the dollar is devalued and rents skyrocket, those with large mortgages will benefit. Conversely, if the economy contracts and inflation hawks keep a lid on oil and gold prices, real estate will muddle through as long as banks will lend and gas prices don’t rise too far from current levels. Many people like to say that gas prices are cheap compared to Europe, but anyone who has driven through Texas can see that America is a fundamentally different place than England with its strong public transportation system and densely populated cities.

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