If You Want to Buy Gold, Check This Indicator First
By Tom Dyson
Tuesday, February 17, 2009
A gas barbecue is the best analogy for what's going on with the economy right now.
The feds have opened up the gas to full blast. There's a loud hissing sound. The air stinks of gas. And they're pressing the ignition furiously. But so far, the gas hasn't caught the spark. When the gas catches the flame, there's going to be a fireball. There'll be a run on the dollar and on all paper currencies. Prices for almost everything will start rising... possibly in a Zimbabwe-style runaway inflation.
Today I'm going to show you the indicator you need to watch so you know when the spark's about to catch. When this indicator flashes, you should immediately move your money out of dollars and into the investments I recommend at the end of this letter.
Money is a commodity. Like any other commodity, its price is a function of both supply and demand. When demand is higher than supply, its price goes up... and the price of the stuff it buys falls. When demand is lower than supply, its price is low... and the price of the stuff it buys goes up.
People forget this. They usually think about supply only. They think increases in the money supply automatically lead to price inflation. They're forgetting about demand for money. If demand for money rises at the same speed as supply, then the price of money stays the same. Demand for money could even rise faster than supply. Then prices for other goods would fall.
This is what's happening right now. The feds are increasing money supply by the trillion. But there's huge demand for money, too. It's so strong, it's neutralizing the Fed's supply increases. The spark won't ignite the gas, and we're still caught in deflation.
Money supply is guaranteed. The Fed controls it. But money demand is all about people's confidence and sentiment. It could change rapidly at any moment. That's why it's the spark in this situation. If you're trying to anticipate the fireball, it's the thing to watch.
Money demand is a little different than demand for a regular commodity. That's because money doesn't waste as you consume it. Think about a $20 bill. It could go round and around in the economy hundreds of times... but it'll still be a $20 bill. So the way you measure demand for that $20 bill is by how long people hold on to it before they spend it.
In Zimbabwe, for example, people spend their money as soon as they receive it. Every hour they hold their cash, it loses half its value. So they turn it into food or gas or whatever other essential commodity they need, immediately. Demand for money in Zimbabwe is extremely low. Think how fast banknotes circulate in Zimbabwe. Every day, each banknote gets used in thousands of transactions as people rush to get rid of it.
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In America, demand for money is extremely high. Obama keeps warning about "the deepest economic crisis" and "the perfect storm." He's unintentionally scaring people into saving money and reducing debt. They're stuffing money under their mattresses. Banknotes circulate slowly. They don't get used in many transactions each day.
The fireball ignites when demand for money falls and people start spending again. Economists at the St. Louis Federal Reserve Bank track and indicator they call the "velocity of money" and it moves inversely to money demand. When this chart starts rising, watch out: We're headed for huge inflation.
At that point, you should turn your paper money into gold and silver. For your investments, you should be compounding your wealth in safe businesses that pay you sustainable incomes and dividends.
Good investing,
Tom |
WE CHRISTEN THEE "CAPITAL NONE"
One of the fun things about a market bust is conjuring up with "spoof" names for unproductive companies that hit the skids.
For instance, back in the days of the Nasdaq bust, WorldCom became "WorldCon"... Netscape became "Regretscape"... and MicroStrategy became "MicroTragedy."
So what are the best spoof names nowadays? Well, if green energy keeps struggling, you have First Solar turning into "Worst Solar." And there's one full-blown bust we'll go ahead and label right now. It's one of America's largest credit-card companies, Capital One, from now on known as "Capital None."
Capital None is on the wrong end of our "real assets vs. landfill stuffing" trade. Its business depends on folks borrowing money and spending it on stuff they don't need... stuff that will end up in a landfill someday. Capital None's share price is down 61% this year. Shares hit a new low last week. If the name fits, wear it!
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Credit-card issuer Capital One Financial Corp. wrote off an additional $1 billion for bad loans and posted a worse-than-expected loss in the fourth quarter due to a rising default rate.
The bank expects losses to worsen this year based on its expectation that the unemployment rate will hit 8.7% and home prices will fall another 10%.
Capital One lost $1.42 billion, or $3.74 a share, in the fourth quarter ended Dec. 31, compared with a profit of $226.6 million, or 60 cents a share, in the year-earlier period. Analysts had estimated a profit of 33 cents a share.
The bank said 7.08% of its credit-card and auto loans were in default, up from 5.85% in the third quarter.
– Wall Street Journal
Confidence among U.S. consumers approached its lowest level since 1980 this month after job losses mounted and the slide in home values deepened.
The Reuters/University of Michigan preliminary index of consumer sentiment fell for the first time in three months, to 56.2. The gauge reached a low of 55.3 in November.
– Bloomberg
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