The following is an excerpt from commentary that originally appeared at Treasure Chests for the benefit of subscribers on Tuesday, July 1st, 2008.
Many people are now being rudely awakened from slumber with respect to the effects on prices resulting from inflation, even if they only see the effects (rising prices) and not the cause. More specifically, as the cost of energy shoots higher, the lights are finally coming on for many consumers previously in the dark about what lies ahead. They are beginning to realize that even if prices come down from these lofty levels, they will still be high, never mind about going even higher. So, this realization is beginning to change a lot of attitudes, attitudes that were previously reluctant to accept the reality of the situation. Given, it's taking a lot of doing (i.e. oil at $140, etc.), but one would need be 'brain dead' not to see (feel) the effects of escalating energy and food prices on personal budgets. Denial has worked for many up to this point, but many in this group will also be the ones panicking later on when they finally accept reality.
As a result, and as process unfolds, expect increasing numbers to see the light with respect to the primary virtue associated in investing in precious metals - that being an inflation hedge and store of wealth that cannot be confiscated via debasement. And because the economy is being ruined due to the mal-investment and misplaced policies an out of control inflation cycle creates, which eventually leads to destabilization of asset bubbles (stocks, real estate, etc.), investors will also increasingly seek the 'safety' of precious metals. Here, buying gold and silver is a simple act of saving, as opposed to the speculating that goes on in volatile paper money /assets. And that's what people want once they've had their bell rung in an investment. They want to save what they have left, simplicity, and to make sure they are not getting cheated by more confidence men.
So you see, all this brings us back to gold's age old role as the ultimate reserve currency, where not only will it be replacing the US Dollar ($) in this respect shortly, no new fiat currencies will be coming along to displace it again for a very long time. This next generation of investors will not be as trusting as the current batch, where those who are not prepared for what's coming are about to get parted with a good portion of their savings. Here, many will find out what liquidity risk is all about, where collapsing asset bubbles will leave the hapless locked into worthless investments they assumed were 'safe'. Gold and silver never have this problem of course, which again, is why they will return to reserve currency status, led by the former. Gold and silver are rock solid stores of wealth that are the antitheses to all varieties of debasement. An increasingly large group is now questioning the US $ hegemony financial system, even in constituencies that are suppose to remain loyal to the end.
It's the desire for self-preservation that cause defections however, where for our purposes, we should also witness this with precious metals short sellers soon as well due to this same desire. Here, as increasing numbers begin to accept that the larger economy is in real trouble, and that even more inflation will be necessary to pay for grander bail outs, a panic will set in to cover precious metals short positions. This in turn will bring in a herd like and predatory hedge fund speculator community like a heat-seeking missile to the sector, where not only will the metals run higher, those shorting precious metals shares, especially the juniors, will be the ones who have their bells rung this time around. You can't get away with shorting a market with positive fundamentals forever and not get burned at some point. This is the lesson mentally challenged hedge fund types that think the bureaucracy can keep the situation contained indefinitely are about to find out.
With quarter's end upon us, both investors and speculators alike should realize that like the defections discussed above, the body of complicit hedge funds to the buy stocks / $ and sell commodities / precious metals trade adopted at the beginning of April are likely to violently abandoned this failed strategy starting anytime now. (i.e. however the trend may not become evident until after the July 4th long weekend.) Of course because markets suffer from thin trade close to long weekends, where price managers like to take advantage of low volumes to support their un-natural trades. (i.e. stocks / $ higher verses commodities / precious meals lower), this trend may not start in earnest for a few more days. With seasonal tendencies heavily in favor of a majority of commodities starting in July, not the least of which being gold and silver if you wish to place them in this camp, any shenanigans perpetuated by price managers over the next week or so should be quickly reversed as July matures if history is a good guide.
Do we have fundamental justification to believe this to be likely? You better believe it, as many are now waking up to the effects of the credit crunch, which appears deflationary on the surface, but in the end will cause hyperinflation as fiat currencies are debased at accelerating rates to compensate for collapsing credit growth, asset bubbles, and economies. This is a very important understanding to have right now, or it would be easy to interpret the chart we are about to show you below incorrectly, even if it were to break to the downside first. For this to occur, precious metals shares would need to break down hard with the broad market, leading the metals lower, which is not happening, at least not yet. Of course it's this fear, and the volatility price managers create, that holds many investors back from entering precious metals shares under current circumstances. This is another thing the bureaucracy's price managers count on, which paints a picture of possible deflation for the loose minded. You see - they are hoping to break down precious metals shares against the metals to paint a picture of deflation so that stepped up measures to bailout the economy will not be questioned. (See Figure 1)
Figure 1
This is why the above is the most important chart in the investment universe right now, because if indicator / price breaks to the downside were to occur, then the bureaucracy would have its justification for hyperinflation, monetization, and sweeping bailouts by any other name. There's only one problem for the price fixers they are having trouble getting around however, no matter how much deflating asset bubbles leak air, and in spite of short selling efforts, they cannot get those pesky precious metals shares to break down, try as they might. The reason for this found in the 'important understanding' that was highlighted for you above, that being in and of themselves, collapsing credit and asset bubbles will not engender wholesale deflation until the bureaucracy has played all their cards. And if you have not been keeping track, before this occurs, we would need to see the Fed's portfolio spent in bailing out its constituents, along with the currency being debased to a greater degree.
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Good investing all.
