The market for discretionary goods is very large and volatile. There are certainly many things people can do without, but spending will never go to nothing. The performance of the market is irrelevant to our need for food and shelter. People may frequent restaurants less often and moderate their living conditions, but they will eat something, wear something and live somewhere. Homes will be heated, electricity will flow, cell phones will transmit and some form of transportation will still be required. As unemployment grows people will flock to reasonably priced entertainment. Prices may adjust as usage is moderated but these things will never go away.
What if the government was actually able to create some magic program to target the bulk of its money printing effort towards the residential real estate market and suddenly inventories started to drop and house prices stabilized, would it even matter? The stock market would probably rally, the airwaves would probably be filled with people forecasting the next long bull market, every government official would credit his brilliant economic policy, but would it last?
A liquidity trap occurs when people give up on long term investments due to excessively low returns (interest rates) and maintain hoards of cash in checking accounts or paper instead. I keep a sizeable amount of cash for deflation protection, just in case, and the interest on my savings account is so pathetic I began withdrawing my savings on a regular basis a few months ago. I doubt I’ll take it all out, and it’s spread across several institutions, but I want enough to live for 3-6 months without a bank. The interest return just isn’t enough to compensate me for the risk of failure or bank holiday. I would rather keep the cash in a safety deposit box. Cash that sits outside the system is cash that will not be leant (times 10, look up fractional reserve banking) and cash that will not circulate. This is bad for the economy, but good for people with cash. Holding gold and silver is similar, but it also provides a bonus inflation protection, just in case. I have found that I’m always about 6 to 12 months ahead of everybody else, so I will play Gerald Celente and predict this will be a growing trend in 2009.
I do my own non-scientific research to determine the future potential upside for gold. Here’s how it works — I tell everyone who will listen that I’m buying gold and silver, not just mining shares and exchange traded funds, but actual physical metal, then gauge their reaction. The more ridicule I get, the bigger the potential upside remaining in the gold bull market. I’ve been doing this for about 18 months and I still don’t know a single other person who has begun to accumulate metal, but I can definitely see the tide turning. People aren’t laughing as much anymore, they still aren’t buying, but they are listening. When owning gold to preserve capital is as common a practice to these ordinary people as it is to me, that will be the appropriate time to start exiting the market.
The government is looking for a new bubble to entice hoarders of cash to spend. Those who believe in gold as the ultimate investment (a growing community) are the only people consistently prepared to dump dollars at first opportunity. Rather than depress the price of gold to maintain stability in currency markets, could a massive deliberate devaluation of the dollar versus gold be the more appropriate policy to stimulate spending and boost the velocity of dollars? Gold fever will cause dollars to move, there’s no doubt about it.
The developments in Canada these past few days are outrageous. I believe we may be about to witness the wholesale fleecing of a nation’s wealth by stealth coup, in a first world democracy. The unholy alliance of liberals, socialists and separatists with no aim other than to empty the treasury by flooding the country will billions of dollars, to be paid by future generations (with their freedom?).
