Prechter misses and dismisses the gold safehaven pursuit
I did not get that at all from reading this interview with him, He just sees some complicating factors:
financialsense.com . Note passages in bold:
JIM: Is there a potential in your mind for having the broader part of the economy in a mass deflation as a result of the contraction of the money supply, credit and the unwinding of all these malinvestments and poor investments that we have made, but at the same time have certain pockets, let’s say in the area of commodities, where we can see rising prices for example in gold, silver or in energy? The reason I bring this up is Marc Faber, whom we both know, subscribes to the view of deflation but perhaps partial commodity inflation.
BOB: Well, you cannot be 100% certain about monetary trends; you simply have to study the issue and express what you think the probabilities are. To me, the greatest probabilities are that we will have a deflation, as defined by the dictionary, which is a contraction of the overall supply of money and credit. I have very little doubt in my mind that that is what is developing right now and will ripple through out the entire financial world. Now as to exactly how prices will react, historically, prices have always fallen in that situation—commodity prices, stock prices, most bond prices—right on down the line. Certainly that happened to commodities and even to silver in the early 1930s. It did not happen to gold in the 1930s because the price was fixed by the government. You can’t use that as an example in any shape or form.
The question to me is—and I try to remain open minded about this—we have to realize that money is only as good as its ultimate guarantor. When gold is your money, for example, and there is a lot of it supplying the base of the money supply, you know that gold cannot renege on itself. It is real, it is physical, and it’s providing a base for your money supply. The credit supply can contract, but ultimately, the total money supply has to stop no lower than the value of the entire supply of gold underlying your monetary system.
Today, we have no gold underlying our monetary system at all. All we have is the credit worthiness of the United States government, and that relies on its tax collecting ability. Despite my belief that gold has had a bear market rally, I can imagine a scenario in which the ultimate guarantor of the money comes under suspicion and people begin to fear that the guarantor will not be able to support the amount of money outstanding by collecting taxes, perhaps because the economy has collapsed, tax income has collapsed and government spending hasn’t been reigned in. This would be the primary reason why people might decide to buy real money and perhaps other assets with the paper cash that they have. It is an imaginable scenario.
I think the most useful way to approach this is market analysis. That is why we watch the gold and silver markets extremely carefully. So far, we have watched gold go to a new high over the past several months. Very few people have commented that silver futures actually peaked in the summer of last year. They have not confirmed the new high in gold. Usually when you get a true inflation-generated bull market, gold and silver are moving more or less together on the upside. When we see a divergence like this, we pay attention. If those highs are taken out in the silver market and gold continues past 370, 380, 390 or perhaps to 400, then I would probably concede that the monetary world is extremely worried about the integrity of the US dollar, the monetary unit itself. So far, everything has behaved exactly as it should in the classic deflationary scenario.
We are flexible, and I think as you have read in Conquer The Crash, I told people that by all means, they should have some gold and silver in their portfolio, that this is a good idea even if it might go down in dollar terms, and I can talk about some of the reasons if you would like as well. Every monetary question is open to different scenarios. I am a very stanch deflationist, but I am not dogmatic, and if the market forces me to change my mind, I will take another look.
JIM: Let’s move on to the second part of your book, where you talk about what steps should be taken. Then I want to bring up the subject of gold again. In the first part of your book you lay out the scenario. You document the sub-par economic growth, the gross malinvestments in the economy, the extreme valuations, public sentiment and psychology. In the second part of the book you say, “This is what I recommend that you do to help prepare yourself for this crash and depression.” Why don’t you briefly mention, Bob, some of the actions that you strongly recommend that people take. Maybe what the Fed governor said.
BOB: I don’t suppose you could add “Fire the Fed governor” to that list, because most individuals don’t have the power to that. The first big grouping falls into the category of giant errors you can make, things not to do. Number one, don’t invest in most bonds, particularly corporates and municipals. Back in the early 1930s, many bonds that did not have a AAA or AA rating fell substantially in price. And if anyone has been paying attention in the last 15 months, they will notice that Standards and Poor’s and Moody’s have been downgrading bond issues at a record pace. So bonds that used to be AA are now BB or worse. These are the kinds of bonds that will ultimately come under default pressure if we head into a depression. Don’t invest in most bonds that most financial planners will tell you are perfectly fine. I don’t think they are.
As we have already mentioned, real estate has been in a bubble, and I think that bubble has already burst and is deflating. So you should divest yourself of all non-essential real estate. You are welcome to keep your home if you see it as a consumption item, but whatever investment real estate you have you should get out of immediately and get liquid.
Some people recommend collectables. I think now is the absolutely worst time to be in collectables. Premiums have already begun to collapse in some areas that people swore would never come down, such as memorabilia, rock-n-roll records and art works. Coins peaked in 1989 and have been in the doldrums ever since. You can’t get for your stamp collection today what you could get even five years ago, much less 15. So collectables are not the place to be.
What should you do, then? Now we are into the second category, which are the positive actions you could take. The very best thing you can own is safe cash equivalents. It may sound easy, but they are rather hard to find. I think the safest cash equivalents in the world are probably Swiss Government Bonds, preferably local cantonal bonds. You can’t pick up a phone to your US broker and buy them. You have to go through a special outlet such as a Swiss bank to get them. I explain in the book how you can chase down those kinds of investments. Singapore has some bonds that are extremely safe. It has one of the wealthiest governments in the world. It doesn’t have short-term paper because it doesn’t need to borrow short term.
For the average American, I think the answer is Treasury bills or Treasury-only money market funds. I list five of them in the books that have no nuisance charges. You can write wire funds and write checks off of them, as with a bank. It certainly is a better alternative than using a bank. Still, most people have to use banking services, so I have a list of the safest banks in each state as well. There is no downside to any of these suggestions. What is the downside to having your money in a safer bank than the one you have now? It certainly can’t hurt you. Take the half a day off and do it. Look into these options, and move your money into one of these funds or into a safer bank.
Finally, I think it is important to have a modicum of precious metals. If gold and silver break out and prove that they are in a bull market, we will probably move quite a bit of money into the precious metals. Again that opens of a whole new set of questions. What types of metals should you own, and where should you keep them? |
