Comment: WARNING: long, speculative, and possibly irrelevant rant ahead

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WARNING: long, speculative, and possibly irrelevant rant ahead

The bull market in Ag and Au should continue until real interest rates turn positive.

Real interest rates are likely to remain negative until the Fed abandons its inflationary policies. The Fed likely will not abandon those policies until the federal government brings its budget deficits and debt back to more sustainable levels, since at present levels, the federal government likely could not afford to pay market rates of interest on its debts. The federal government likely cannot reduce its debt levels sufficiently through increases in revenue, resulting from either higher tax rates or higher rates of economic growth. So, I conclude, the bull market will continue until the federal government makes very substantial spending cuts, on the order of several hundreds of billions per year at the very least. How likely is that to occur? The politicians, the media, and the general population is hysterical about the mere $109 billion in spending cuts tied to "sequestration," which are almost certainly going to be reduced and/or delayed in the end.

Moreover, no one in a position of power really wants to cuts spending. The only reason there's any effort at all (puny as it is) is that the Republican Party, facing a grassroots conservative movement in the last couple years, feels like it has to put on a show, and convince its constituents that it really is what it obviously isn't: interested in reducing the size of government. As long as either the Democratic Party or the neocon-led Republican Party remain in power, they, or rather the special interests behind them, will never make any significant spending cuts in my opinion, which will doubly increase deficits because the failure to lighten the burden of government on society is going to make sport of those bubbly economic projections put out by the CBO.

I'm now pretty much convinced that (barring major changes in personnel in D.C.) the current regime of massive deficits and currency debasement is going to continue until it can't. That is, until the dollar can no longer function as the medium of international trade, and as a result the gigantic trade deficits of the US start causing major domestic inflation, which has been long delayed by the special status of the dollar. The PTB will already have a new world monetary order ready to be rolled out to smoothly replace the dollar. I expect it will be an international currency, such as the Special Drawing Rights (perhaps renamed "bancors" as per Keynes' original scheme), with all major currency pegged to it at fixed exchange rates, and perhaps in relation to gold. Over time, this will take up the role of the declining dollar, as the primary reserve asset of central banks, and as the primary medium for international trade. We'll see oil and the other important commodities denominated in bancors (or whatever it's called) on international markets, but I think a major support of the synthetic currency will be something new: carbon credits will be priced in bancors, under a regime (coming into place before our eyes right now) where international authorities take over the job of "rationing carbon," issuing credits, collecting taxes, etc.

Under this pessimistic scenario, you would want to sell gold in the late stages of the decline of the dollar, before it was stabilized through a peg to the bancor. What to buy with your winnings? Well, in the world of the early 2020's or whenever this occurs, the State is likely going to be more economically oppressive than at present: higher taxes, tighter regulations. Land might be a really terrible investment for political reasons, for all the usual reasons (property taxes, can't take it with you, etc), but especially in light of the totalitarian regime of "green" regulations which will likely be in place by that time. God help you if the local enviro-commisar finds that your land has a larger than approved carbon footprint, or blocks the migratory path of the fully laden African swallow, or frightens butterflies, or is designated as an area for "re-wilding." That leaves financial assets. Bonds, paradoxically, might be very attractive. As soon as the Fed steps off the gas, interest rates could surge, and bonds could crash. People who bought bonds yielding 15% in 1980 have made out like bandits over the last 30 years. Of course, this is assuming that the new international monetary regime doesn't immediately start inflating in the same way as the old: probably a dubious assumption. What about equities? During the final decline of the dollar, one would expected large nominal gains in equities, followed by a major decline once the dollar gets pegged to the relatively hard SDR and interest rates are allowed to rise. Again, this might be a good buying opportunity, but that depends on what happens next, under the new monetary system. To give a very general answer to the question in the OP, I would say that one should expect to sell their gold in the terminal phase of the decline of the dollar (note: I'm not talking about currency collapse, just high inflation and notable inflows of foreign held dollars indicating a final loss of confidence in the dollar as a medium for international trade), and then hold cash through the transition to the next monetary system, buying up assets on the cheap after interest rates rise. As of right now, I would expect land is not going to be a good buy, at any price, for the aforementioned reasons. I would plan to buy quality bonds and equities, but what exactly that means is impossible to predict so far in advance. Who knows what will be the stable industries or fiscally sound nations/corporations in ten years time.

This is not investment advice, always DYODD.


"Alas! I believe in the virtue of birds. And it only takes a feather for me to die laughing."