Posted on 02/13/2010 8:30:53 AM PST by SeekAndFind
Edited on 02/13/2010 10:15:52 AM PST by Admin Moderator. [history]
The best way to seek refuge from the coming storm of inflation is gold. But not in the way you might think.
I recently received $100 trillion in the mail.
It's in Zimbabwean dollars and it's the bill with the largest figure ever printed in the history of ******" holiday card from Jonathan Hoenig, an old friend who started out as a financial writer like me before he deduced that he could make a ton more running his own hedge fund.
When Zimbabwe first printed the 100-trillion-dollar bill, in January 2009, it was worth about $30 U. S. By the time Hoenig sent it to everyone on his Christmas-card list, it was entirely worthless, the victim of Zimbabwe's inflation rate — incomprehensible billions of percent. The point was not to ridicule an African nation shredded by famine, an AIDS epidemic, and perhaps the most brutal dictator of the 21st century. The point was to dramatize a fundamental misconception that Americans hold as inviolable — that three bucks will always buy a slice of pizza or a gallon of gas.
I'm worried about inflation. Real worried. Our bipartisan addiction to spending and borrowing pairs with a hostility toward employers that makes real recovery difficult. I think we're about to experience the kind of vicious inflation that remakes entire economies. Not Zimbabwe or Weimar Germany. But the kind of Carter-level double-digit wealth erosion that Time magazine described in 1980 as "so far beyond anything that Americans have experienced in peacetime ... as to inspire a contagion of fear."
Happily, there's a play. There's always a play.
Commodities rise in lockstep with inflation. So anyone worried about inflation could hedge by buying a broad-based mutual fund that tracks the Goldman Sachs Commodity Index, like the Oppenheimer Commodity Strategy Total Return Fund. But commodities are complicated and volatile. What if I want more active management than I'd get from a broad-based commodity mutual fund, which is confined by the tight strictures of the prospectus?
I've been intrigued by the explosive growth of the managed-futures market since it started taking off around 2003. The idea is obvious enough: An investor who hasn't the skill or time to trade commodity futures hires someone to do so for him. Until recently, that's been the exclusive province of wealthy "accredited" investors who buy hedge funds that can go short, international, lever up, and weight however they see fit. In the mid '90s, Austrian investor Christian Baha came up with the notion of a leveraged managed-futures fund that would comprise approximately half financial futures (bets on stock indices, currencies, bonds, and interest rates) and half commodities (metals, energy, grains, and agricultural markets like coffee, cattle, and hogs).
When Baha opened to retail investors, he named his vehicle — unfortunately — Superfund, but the science was grounded in the core idea of modern portfolio theory: that diversity creates less risk without sacrificing return.
The results have been amazing. A hypothetical index of managed futures has outperformed the S&P 500 since 1980 by thousands of percent. Performance is just one part of the equation. To me, the more attractive part for the average guy who's got individual stocks in his broker account and equity funds in his IRA is the portfolio diversification and low correlation of managed futures to other asset classes. The appeal of getting in on that action for a tiny commitment — you can open an account at one of Superfund's futuristic retail centers for as little as $5,000 — is undeniable.
But wait, there's more.
Superfund just started a new tranche of its signature fund called Superfund Gold. It invests in an array of commodities futures in exactly the same way, but your initial investment is denominated not in dollars but in gold. Suppose you buy $10,000 worth of Superfund Gold. If gold were trading at $1,000 an ounce, your $10,000 would be worth ten ounces of gold. Suppose the value of the fund doubles over the next five years and you decide to redeem all your shares. Rather than getting $20,000, you would instead receive as many dollars as it would take to buy 20 ounces of gold. Thus, if the price of gold doubles — akin to saying the value of a dollar is halved — you'd receive $40,000, since that's what it'd take to buy 20 ounces at $2,000 an ounce.
If you believe, as I do, that $20,000 will barely buy in five years what $10,000 buys today, then the ability to invest without fear of being paid back in devalued dollars is a major bonus. Because at some point, even investing prowess and foresight that causes piles of American currency to be delivered to one's doorstep won't mean much if the country has sunk to where a wheelbarrow of money buys a loaf of bread.
Interesting. I’m hoping this article gets some attention from FR’s investment gurus.
It isn’t a hedge against possible inflation.
It’s a hedge against the psychotic, adolescent, insane policies of people, in government, who think that they think.
One hopes that all those “brilliant” independents out there, (really democrats), will vote with their brains instead of their intestines and auto-erotic activities.
IMHO
Invest now in people.
This is likely to be a long, hard pull.
The currency could indeed collapse if things continue on the current course.
I suggest a different use of your money.
Help young couples get started.
Work to make sure that somehow those you know who can’t find work have a roof over their heads.
If you have adult children out of work, now is not the time for tough love.
Involve yourself in churches and charities.
How many stories have you read about people who did this during the depression of the thirties? Was it worth doing?
If you believe their analysis then go into debt. After all, their premise is that the government is so far in debt that the only way forward is to depreciate the dollar so that they can pay off the debt with worthless money.
Okay, suppose you believe this to be true. You do not need to buy gold or the author's investment fund to benefit from this knowledge. All you need to do is go into debt like the government. You should take on debt in exchange for useful things. Then when the author's prediction comes true you can pay off with the debt with worthless dollars.
Does the above sound attractive to you?
Do you want to be deep in debt right now?
Would that make you feel comfortable?
Are you certain enough of your estimate of the timing of the inevitable collapse to take on a big debt load right now?
Unless you can answer the above questions with: yes, YES, YES!! and HELL YES! then I would suggest thinking very carefully before investing your money in what the author is selling.
That is the best advice I’ve heard so far.
I remember the first Carter Administration very well and it wasn’t much fun. I think the second Carter Administration will be exponentially worse and made all the more vile because it’s absolutely intentional this time around.
Sounds good.
But what enforcement will there be to actually ensure you’d get your profits in what gold would cost?
Devil, details ... all of that.
Spot on and well said.
I started doing that a couple of years ago.
My niece and her new husband made took out an unwise loan at 10.5% for a car (they’re young and they know better now). I refinanced it for them at 5%. They don’t know it, but they’ll get all of the interest back from me when the debt is paid off.
Another nephew was just married and both he and his wife were laid off a couple of months later. He’s got a young baby now. He has a job but it doesn’t pay much and he’s always looking for better. I “loaned” them a little to get them through. I’m never going to collect that “loan” and never expected to.
What is money for if not for that kind of thing?
Damn good advice.
actually, that thinking is the reason i didn’t pay off one of my mortgages.
instead of taking dollars and paying off a 20 year fixed note, i put some of it in gold (after the election). that investment alone has paid off fairly well (almost 50%).
now... if the dollar collapses, and continues its 100 year devaluation, then in the future my actual cash would be worth less... my gold would be worth more... and my work would pay more dollars (in theory, assuming work is still available) for the same amount of work. at that point, the loan value would have dropped in terms of hours worked per mortgage payment.
the only situation where this would not work, would be deflation. and since the goal of the progressives is to diminish the value of the cash holdings of the upper class, i doubt this will happen.
therefore, my overall suggestion would be to get a long term (20 or 30 year) fixed loan... something within your means. worst case, deflation hits and the dollars in your bank are worth more (but your home value dropped). continue paying with the money you have in your bank, and the monthly drain on that money would diminish as the monthly goods would decrease in price.
the best case scenario would be radical inflation as the dollar deflates. at that point, you could pay off your home with one years pay. meanwhile, your gold holdings have radically increased in dollars (not value)
of course... this is just my humble rantings. your mileage may vary.
yup... i do the same thing. although i do expect repayment, as i see it as a form of getting them back on their feet. there is never any interest, and the length of the loan depends on the situation. the repayment ‘schedule’ would never be too much for them to manage. it’s just the fact that it is not charity.
i see it as people have pride, especially men, and to give them charity does not help them. getting them use to a monthly payment schedule using a friendly and forgiving loan, helps get them back to normalcy.
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