(This is Part 7 of a series. Go back to Part 6.)
So commodities will most likely be in a long bull market.
That is, unless an economic depression becomes so great that it overwhelms the tendency towards higher commod prices. Which could happen. But even then, the central banks' response will probably be to flood the system with even more liquidity, creating even higher price inflation down the road.
One possible scenario is a banking crisis within two or three years, followed by a massive reflation which will put us into hyperinflation mode by the end of the decade and beyond. Commodities are likely to do well in such an environment, although in an extremely volatile way.
For example, production is now coming on strong in China’s steel industry. Next year China will become a net exporter of steel instead of an importer for the first time. That could cause steel prices to fall from their current red-hot levels even though demand is steadily increasing. The same could happen in other areas. Expect extreme volatility in all markets.
Let's remember: There is no such thing as a risk-free investment in the current environment. It's not like 20 years ago when you could throw a dart at the stock or bond listings and prosper; everything carries substantial risk now, and nothing whatever can be guaranteed.
In the end, for maximum probability we’re led to the premier commodities, the precious metals gold and silver. Because they represent real money, they have tended to hold their purchasing power through both inflations and depressions. It’s likely they’ll do so this time, but again, nothing can ever be guaranteed when it comes to markets.
Considering all the above, in my opinion it is probably prudent to begin accumulating a substantial position in the precious metals.
I believe that the purchasing power of gold and silver, more than anything else, will at least stand a chance to survive the coming turmoil. After all, gold and silver are money, cannot be created at will, and have been used as a store of value for thousands of years. Yes, it's different
this time—but it's also the same.
I wouldn't be surprised to see gold above $1300 in the next two or three years. If gold, now $430 an ounce, were to rise the 2400% this time that it did in the 1970s it could ultimately reach $6300 or more. If silver, now $7.40 and ounce, were to rise the 2700% that it did last time it could ultimately reach $110 or more.
In a hyperinflation, of course, such numbers soon become rather meaningless. What matters is that you're doing the best you can to protect your purchasing power.
I don't recommend holding gold or silver stocks. There's too many other variables, such as quality of management and price/earnings ratios. I favor investing in the metals themselves, though not necessarily in bullion bars sitting in your living room.
There are some interesting funds available now that hold gold and/or silver bullion and trade just like stocks, with all the convenience and low commission rates which that fact implies.
Some examples are the Central Fund of Canada (CEF),
a closed-end fund (on the Amex) which holds roughly equal amounts of gold and silver bullion, & StreetTracks Gold Shares (GLD), an exchange-traded fund (on the NYSE) which holds gold bullion. Check them out in Yahoo! Finance. Others can be found with a websearch. As always, caveat emptor.
The dollar, in my opinion, is a dying currency. The other fiat currencies of the world are right behind it, of course; they're just not dying as fast.
And the relatively glacial pace of this process compared with everyday life can fool us into believing that it's not happening. But it does appear to be happening. And in this process, it’s possible that the dollar could eventually become worthless or almost so.
Because of that potential eventuality, it probably makes sense as well to get some non-numismatic gold and silver coins as a hedge against a time down the line when such coins might be the only available means to buy anything. But that’s a whole other subject.
As said before, if you can take care of yourself during these upcoming times you could become an oasis of emotional and financial stability in the midst of turmoil, something which may prove crucial to those whom you love as well as to many others in those times.
(This is the end of Part 7. Go to Part 8.)
—jim sloman, 03.09.05
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