Wednesday, September 2, 2009

A Crisis in Confidence

Let's take a look at gold today:

My Take:

Fear is creeping back into the markets folks. I see it in many areas. Treasury yields have collapsed as investors run for the hills into government bonds. You need to wonder(given our massive treasury issuance's) if this is the equivalent to running into a burning building.

Stocks have steadily fallen throughout the week as jittery investors look for someplace to hide.

Today it was quite apparent that gold and silver benefited from this flight to safety.

Right now its obvious that there is a lot of capital that is looking for a "safe haven" to ride out the storm. The problem is no one really knows where to hide! The confidence in the stock market has been shattered after such brutal volatility over the past 10 years.

When people ask me where to hide I must admit I have to just shrug my shoulders. I tell them that nothing is totally safe right now.

I mean let's go through the list of the supposed "safe havens":

1) Treasuries? HA! This may be the biggest bubble of them all. We are selling trillions of this stuff without the means to pay it back. Safe? Hardly. Shorting treasuries as a hedge is probably a smart thing to do if you park money here.

2) Money markets or CD's? Works for me as long as you are under the FDIC insurance limits. The problem here is will the dollar be worth anything over long term if we continue to print the USD like Monopoly money?

3) The mattress? Having a stash here in case of a banking holiday makes some sense, but anything more than that is just asking for disaster unless you live on top of a deserted mountain or live in an area with a 0% crime rate.

4) Stocks? HA! That's a funny one. This will make sense once the dividend yields get back up to around 6%. The average dividend yields right now are way too low given the risk you must take holding stocks at such elevated levels with high P/E ratio's.

5) Munies? I would stay on the short maturation end. Many states face the real threat of going bankrupt. California anyone? If you go there, avoid states with bubble economies.

6) High yield bonds? This has worked well over the past 6 months but I think this run is just about over. Corporate defaults are just beginning, and the Fed is rapidly running out of bailout money. Enter at your own risk.

5) Gold or Silver? I must admit I find myself gravitating towards these two. I own both metals, but there are risks here as well. Deflation can makes the metals risky, but the collapsing US dollar is an even bigger risk in my view.

The Bottom Line:

The way I see it, we could see 1932 all over again where both bonds and stocks collapsed. Take notice when you start seeing movements in gold. Moves higher in gold are a great fear indicator, and they can also be a great warning signal that inflation might be right around the corner.

If we do see inflation in the near term, it will be as a result of a collapsing dollar in my opinion. Remember, Argentina's currency collapsed 73% in a matter of weeks when the people lost confidence in its currency. Prices soared as a result.

What I see today is a lack of confidence in our economy and our government's response to it. Creating trillions of dollars in order to bailout a bunch of insolvent companies is making investors think twice as to whether or not they want to be invested in anything involving US dollars.

So what should you do with your retirement if almost every asset class looks shaky? Stay diversified in all of them and hope for the best. Also, hold something hard that will have value regardless of what the US does to it's own currency.

The way I see it, there really isn't much else you can do during such unprecedented economic times.

Must watch of the day:

As you can see below, the debt time bomb is ticking as our government is rapidly running out of money. That mattress option is looking better by the minute!:

Does the FDIC need a bailout?:

Analyst Jim Bianco thinks its possible:


getyourselfconnected said...

great write up! I covered some gold stuff as well tonight. I think currency jitters are becoming more pronounced as well. September just started and things are already heating up. Or is that melting down?

EDC said...


great post very insightful.

Gotta add a few thoughts.
Gold is not a measurement of inflation, we had inflation from 82-2002 but gold went from 850-250 per ounce. The chances of inflation in our credit based currency is impossible. As long as we have a trade deficit exporting nations have no choice but to recycle dollars. No choice.

The trade to gold today is interesting especially after we had the junk financial rally for the past two weeks which is ending in a disaster. The gold flight could be HFT related to catch emotion of that market. Gold is a very emotional market and can go.
Gold is not an inflation trade. As you mention confidence in your post which is spot on, gold would fit the need of confidence in government. The flight to gold would better fit that fear trade versus inflation. Their can't be inflation in wages are falling or if people see willing to work for less or when velocity of money is off all most 75%.
Exporting nations have no choice but to buy our dollar. This gives us an advantage that as of now has no exit strategy and it would almost take a decade to devise such a plan.
Back to gold.
If we were to take all the gold ever mined it would make a cube of 65-75 feet in length width and height.
There isn't enough of it out there which would give it immediate appeal and loss.

Jeff said...



Yeah something is a brewin. I have been busy but I don't like how the market is acting. Currency issues are definately lurking.

I will hop over and say hello. Its been crazy the last few days.

I am pretty much off until after Labor Day so I will be around more.



Jeff said...


Great insights.

I try to keep it simple on here. Price "inflation" can happen in a variety of ways.

1970's inflation via higher wages is different from the currency collapse inflation that we are seeing today.

The result is the same: Higher prices!

I agree with all of your econimic analysis. However, I still believe gold is an inflation trade.

Inflation meaning higher prices. I agree with you when you say fear is the biggest driving force here.

Capital has to flow somewhere and gold makes a lot of sense. Your cube onfo is intersting and cool!

Paper dollars all of the sudden don't look so valueable anymore.

johndaniels said...

where to put your money?

anything that wont go to 0!

gold / silver wont go to 0.

everything simply can. FDIC is down and almost out. digital assets are vulnerable.

johndaniels said...

and gold silver is the most liquid issue you can be in. everything else requires some broker or other systemic administrator to get a digital representation of your money.

Jeff said...


Great points.

I have thought a lot about investing in things that don't involve Wall St speculation.

Blowing bubbles and seeing 50% price swings in stocks is not how I want to invest.

The stability of gold which has traded in a very tight 900-1000 range is EXTREMELY appealing to me.

Flipdippy said...

Gold, hot damn. Up again huge today...what is this telling us? Seems like a flight to safety but being right before labor day but maybe it doesn't mean anything.

When the banksters return after labor day, my gut is telling me equities are going to take a sunday morning, I had 12 beers last night and a pizza before passing out kind of dump.

Jeff said...


Yeah. I'm loving it. Got into gold in the low 900's.

Silver soared as well. Own a nice chunk of that too. I am a happy investor today:)

Anonymous said...

I do make a distinction between Gold and other commodities when trying to determine inflation vs fear as the driver.

As others have noted, gold is a very emotional/fear based commodity. Not to denigrate anyone, but gold is often a haven for nutjobs, conspiracy theorists, and doomsday prophets - all are attracted to it as a store of wealth and many are very passionate about it - part of the reason they are called "goldbugs".

No other commodity class has this distinction. Oil and silver both get some of this (and can get a boost from fear based traders), but they are the only "sexy" commodities that average joe 6 pack likes to invest in when he gets fearful.

Want to get a real gague on inflation? Look at something like wheat, pork bellies, copper, potash etc. These unsexy commodities do not attract all the nutjobs, conspiracy theorists and doomsday prophets which can really add to volatility. Stick with something that has inherent value that most people havent heard of - and thus attracts no emotion. You will never hear of a "potashbug". Thus, if you want the inflation gauge - check the unsexies and see how they are doing.

Jeff said...


Well Said. there are a lot of moonbats that love the yellow stuff.

I plan on hopping into natural gas here shortly and diversify my commodity holdings.

The government will eventually come to the realization that its retarded to pay ridiculous amounts for oil to fuel cars when we have practically unlimited amounts of nat gas in this couuntry that ciosts practically nothing.

I plan on doing a post around this. The cost to switch a car from using oil to natural gas is not difficult and relatively inexpensive.

Anonymous said...

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Jeff said...

Hi Patricia

I am glad you are enjoying blog.

Its always nice to hear comments from my readers.

Good luck with your investments.

Anonymous said...

Very thoughtfull post on confidence .It should be very much helpfull

Karim - Creating Power

Anonymous said...

Very thoughtfull post on confidence .It should be very much helpfull

Karim - Creating Power