Inflation, Deflation and precious metals part 1

13 Jan

Usually this blog discusses Japan and issues dealing with the Japanese. This is primarily because I have put in enough time here that I am comfortable making conclusions about the Japanese mindset. I feel fairly confident about the forecasting and issues discussed here about East Asia.

However I wanted to diverge from the familiar topic of how Japan is heading towards the rocks onto a different subject of Precious Metals and investing. As those of us who believe that the world’s political decision makers continue to choose the path of inflation I see a clear path towards saving my hard earned money. This is in two words, precious metals.

A major decision barrier for today’s educated contrarian investor is the inflation v deflation debate. I have toyed with this problem for awhile now and have come to the conclusion that it is in fact possible to have both existing simultaneously. I believe we will see the price of things needed for daily life increase and prices for things unnecessary to drop. So energy and food prices will rise while many manufactured goods such as sneakers, power tools and television sets will drop. Obviously this is a generalized conclusion based upon somewhat limited data but I believe that eventually we will see this dichotomy prevail in world markets.

What does it mean ? I think it means a drop in lifestyle for your average western consumer. I also think it means a rise in the living standards of the emerging world middle class who will want to consume the lower priced shoes, tools, and tv sets.

Assuming that most reading what I am writing are western consumers I am afraid to say that the facts speak for themselves. The USA is approximately 5% of the worlds population, but consumes about 25% of the worlds energy. Does anyone realistically believe this is a situation that can be maintained for any period of length without adjustment ?

As energy and food prices rise your average North American will continually be put into a position of scrimping on consumption in order to maintain the lifestyle choices. Simply put, heat your pool or buy the next semesters textbooks, go out to eat once a week or keep every family members wireless contacts paid. In an earlier time such as the 20th century Americans could choose both. I don’t think this is going to be rule going forward.

What can your average Joe do in order to keep his savings from inflating away ? I am certain that the answer is precious metals. Now within the metals community there are a number of different viewpoints on optimal decisions. For many gold is the one and only solution but frankly I find that mindset to be flawed. Gold has never been the only monetized metal and to ignore other possibilities seems somewhat foolhardy to me. I think that to a certain degree gold only folks are most likely in the elder generation and so have far more resources to fall back on. As of today an ounce of gold will cost you about $1650 dollars which is not something the average 20, 30 or even 40 year old can easily set aside to purchase.

However what I feel is a critical issue is how the precious metals have been “paperized” or “digitized”. Many investors buy an ETF or other digital representation of precious metals. Perhaps 90+% of all traded metals are in fact paper or digital. People invest in precious metals over the computer and receive a monthly statement telling them whether they have made or lost dollars or euros or whatever national currency they use.

This is a dangerous method of saving. If in fact that over 90% of the precious metals market is digital then in fact it is subject to the business of price controls. People normally would use the word “manipulation” but I want to avoid using this term as I believe control is a more accurate way of describing things.

Currently there are 67 trillion dollars in Forex derivatives traded annually, and over 639 trillion dollars in total derivative transactions through the first half of 2012. In comparison the US GDP total is 15 trillion. There is a lot of money slushing around the world and with record low interest rates it is easy for those in positions of wealth to borrow record amounts of cash.
With most precious metals transactions being done via digits and derivatives the market itself is subject to possible price control. I would like to get into details about this but again realize that I should probably call it a post here and hope to follow up on this at some point in the near future.

Thanks for reading

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