It wasn’t so long ago that irrational exuberance over the housing market had seized investors’ logic, and the same thing is happening to US stocks right now. Fair-weather investors are abandoning gold equities and jumping into the U.S. market in the hopes of making an easy buck, just as people bought property near the housing peak hoping to flip it before those adjustable-rate mortgages reset… My advice: don’t gamble your savings on the hope that there will be a greater fool who will come along and buy your inflated assets at even higher prices.
So writes Peter Schiff (www.blog.europacmetals,com) in edited excerpts from his latest Gold Letter to subscribers entitled THE GOLD BULL VS THE PAPER TIGER.
[The following article is presented by Lorimer Wilson, editor of www.FinancialArticleSummariesToday.com and www.munKNEE.com and may have been edited ([ ]), abridged (…) and/or reformatted (some sub-titles and bold/italics emphases) for the sake of clarity and brevity to ensure a fast and easy read. This paragraph must be included in any article re-posting to avoid copyright infringement.]
Schiff goes on to say in further edited excerpts:
The Return of Irrational Exuberance
So-called experts are pointing to the buoyancy of US stocks and weakness of the precious metals as proof of their viewpoint – but the fundamentals of the economy are still dismal. Unemployment remains persistently high and manufacturing continues to struggle. In April, the Fed reported that industrial production shrank 0.5%.
The only growing part of the economy is consumption and services. Indeed, US consumer confidence just hit a 5-year high! This week’s revisions to first-quarter GDP revealed that the household savings rate fell to an abysmal 2.3% and real disposable income plunged by an annualized rate of 8.4%. It seems that both rising asset prices and consumer confidence are based solely on the expectation of an improving economy that is still unsupported by the data itself.
The Currency War Heats Up
Perhaps people think things are different this time because of the news from the fronts of the international currency war. Everywhere you look, once-strong economies have begun to vie for exports by devaluing their currencies.
- Switzerland had one of the strongest European economies before its central bank capped the value of the franc against the euro in 2011, vastly diminishing its citizens’ purchasing power.
- The Japanese yen, once the most stable currency in Asia, is falling victim to even more grotesque devaluation policies.
- Out of irrational fear that their exports will not be able to compete with the yen, Australia and New Zealand are the latest to jump into the fray by cutting interest rates.
Dollar By Default?
Many are examining these conditions and concluding that the U.S. dollar is now the last resort for global capital, however, this is a narrow and flawed view. The foreign exchange market is typically quoted based on relative valuations, examining one fiat currency through the lens of another. It says nothing of the fundamental value of a currency in terms of goods and services. It is entirely possible for all fiat currencies to collapse simultaneously, even as certain currencies “rise” relative to others. In fact, that is the likely outcome of this race to debase, which in turn is tremendously bullish for gold.
The only way to avoid the collateral damage of the currency war is to refuse to participate. That means selling fiat cash and buying precious metals, commodities, and equities. That is precisely what people are doing in those countries where currency devaluation is well underway – from Japan to Switzerland, everyday citizens are buying gold and silver in record quantities.
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A Great Paradox
How can it be that people are rushing to buy physical precious metals around the world and yet the price keeps falling? [Because] this correction is being driven by institutional investors in the paper gold market…Big money [is] betting against gold and on the Fed. I believe they are in for a rude awakening.
The correction was kicked off by whispers that the Fed might start drawing down QE3 in September that would, indeed, be reason to re-evaluate one’s precious metals holdings but, predictably, the Fed immediately backpedaled, insisting that it would, if anything, only “taper” the QE at some point in the future. John Williams, head of the San Francisco Fed, then came out and said, “You could even imagine a scenario where we adjust it downward based on good data and then adjust it back.”
How many times are the mainline financial institutions going to fall for this song-and-dance? It’s as if these investors are parents of a drug addict wiring money yet again on a promise that this time the kid will clean up his act. It’s not going to happen until he hits rock bottom! In the case of the Fed, ‘rock bottom’ means a dollar crisis with US consumer prices spiraling out of control.
Stay The Course
Given all of the above, anyone considering abandoning gold and giving the U.S. markets another whirl should think twice. Lots of people make and lose short-term fortunes, but I’ve always encouraged investors to grow their wealth along fundamental long-term trends. Ignoring this advice means gambling your savings on the hope that there will be a greater fool who will come along and buy your inflated assets at even higher prices.
[Editor’s Note: The author’s views and conclusions in the above article are unaltered and no personal comments have been included to maintain the integrity of the original post. Furthermore, the views, conclusions and any recommendations offered in this article are not to be construed as an endorsement of such by the editor.]
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