Debt deflation is occurring in the residential and commercial real estate sector. For most, the house is their largest asset AND their largest liability. In the U.S., the residential market is dismal. In our neighborhood, houses typically sell in weeks but there are a couple of listings in immaculate shape that are not moving. The mood of borrowers as shifted from reckless expansion to fearful contraction. The days of “flipping” a real estate property are over. Those that did not get out before the summer of ‘08 are watching their gains wither away.
On the other hand, monetary inflation is alive and well. Since there are no forced restrictions on monetary expansion, the Fed is using its one tool to slow the economic slide in the U.S. The one disrupter is time. Over 700 banks are on the FDIC watch list and more failures are on the way. The FDIC itself will be bailed out by the U.S. Treasury. Time allows banks to invest their cheap money and make a spread that flows to net income and ultimately capital. The Financial Accounting Standards Board (FASB) has been accommodating and relaxed its requirement to properly value the loans on the balance sheets of banks to their realistic lower value. In the strictest sense, this is fraud. Allowing this misrepresentation to occur in publicly traded entities puts the investing public at risk.
Ben Bernanke will do everything in his power to keep deflation from occurring. This sets the stage for higher commodity prices thus I have included the following for informational purposes only.
Gold has been in a trading range of consolidation. I believe this is good for this will provide a good base for the next leg up.
As you can see by the chart, the long term trend is up. Gold and silver are the only investments without an attached liability. China continues on the prowl to increase its gold reserves and will ultimately become the largest government holder of gold. Stability is best achieved by having substantial gold reserves backing a country’s currency as history has shown us time and time again.
Gold producers are booking substantial profits whereas many other sectors are in the red. The general investing public will figure this out soon and will cause the gold stock to achieve new highs. Overall gold production is down thus the senior producers will focus on quality junior producers’ reserves and will open the checkbook to acquire them. For those with patience, the reward will be substantial.
The silver chart shows more volatility but tracks well with gold. The silver producers are also producing notable profits and time IS on their side.
I’m asked “I don’t have much money so how can I protect myself if the financial crisis worsens?” I’m not a financial advisor but I will share with you what I did for my kids.
1. I opened up an Internet trading account with Scottrade. (There are others out there as well)
2. As our budget allowed, we put a $100-$150 in the account on a periodic basis. (50 Bucks will do as well)
3. We bought gold and/or silver stocks with whatever money we had in the account. We did not worry about the price of the stock on the day of the purchase, this is “dollar cost” averaging.
4. If the stock pays dividends, we included that cash in our next purchase
What stocks did I consider? (See Disclaimer below)
Goldcorp (Symbol: GG) has been a favorite of mine for some time. It is a senior producer and pays a dividend. I like dividends, they beat the 0% the bank pays for your money.
Silvercorp (Symbol: SVM) They pay a dividend as well. These means their cashflow is sufficient to distribute money back to the stockholder. Their cost per ounce of silver: Total cash cost for silver adjusted for by-product credits 2009: ($2.77) 2008: ($10.99) 2007: ($7.25) Their byproducts pay for the cost of mining. It is my understanding that they are the lowest cost silver producer in the world. Gimme some of that lovin’!
Minefinders (Symbol: MFN) just announced their first profitable quarter in the company’s history. See: http://finance.yahoo.com/news/Minefinders-Announces-2009-iw-1972541723.html?x=0&.v=1
U.S. Gold (Symbol: UXG) I like Rob McEwen (CEO) who has put a sizeable portion of his wealth in the company: See: http://www.usgold.com/presentation/20100309_pdac/
Mag Silver (Symbol: MVG) They have a lot of potential and are higher risk because they are mainly in the exploration phase. See: http://www.magsilver.com/s/Home.asp
Since gold and silver have been in a trading range, the stocks are priced accordingly. I don’t worry about being unable to buy 100 shares at a time. U.S. Gold closed at $2.88. 30 shares plus the $7 commission puts the cost just less than $100.
Energy stocks with dividends include Chevron (CVX) and Penn West Energy (PWE). These are higher priced stocks so one would need a little more cash to begin accumulating them.
Do I believe my kids should place all their savings in stocks? NO! You still need a savings account to handle unexpected circumstances that arise. Investing in stock should be in addition to a saving plan not a replacement. Stock investing will be emotionally challenging for most people. Often, the day after I buy a stock, its price goes down. However, I am investing for the long term, not the next day. Are these stock guaranteed winners? No, any investment has risk as well as reward. Invest at your own risk. Caveat emptor!
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