For how long will cash be king and the friend of investors?
Posted on 08 January 2012 with 4 comments from readers
For how long will cash be king, or to be more precise the venerable old US dollar and its pegged currencies in the Gulf States for readers of ArabianMoney?
US treasuries almost beat gold in 2011 with a 9.8 per cent return. If you held 50:50 gold and silver then the gain on gold was cancelled by the loss on silver and you broke even. UAE deposits paid around two per cent. Most stock markets lost money heavily in 2011.
King for a day?
So if cash has become king how long will this last? For as long as this global deflation of asset prices continues is a reasonable answer. That after all is part of the current appeal of cash. It is keeping its value as other assets fall and of course gaining in relative terms.
However, markets always tend to over-react to the downside. Cash will become over-bought and financial markets over-sold. Then you would be well advised to swap your paper money for real assets.
That is how the January edition of the ArabianMoney newsletter sees it, along with the actionable investment advice that we cannot provide on this free website. We are holding subscriptions at 2011 prices until the end of tomorrow January 9th (subscribe here).
If you look at the British pound sterling then we can give a very stark example of why cash will not be king forever. The UK base money supply has tripled over the past three years and yet British treasuries pay low yields and the currency is stable.
How can that last in the medium let alone long-term? That new cash supply will eventually have to be reflected in price levels, and that can only mean inflation. Just because the new money sits on bank balance sheets at the moment does not mean that it will stay there.
All over the world central banks are playing a dangerous game with the money supply. Cash will eventually be severely devalued simply because the supply will be overwhelming and too much supply meeting too little demand equals lower prices.
Getting real
So while for the moment sitting in cash, and particularly the US dollar and its associates, makes good sense with an impending financial crisis in the eurozone on the near horizon, investors should not forget that when the going gets really tough it will be time to abandon cash for real assets.
When will investors actually do that? Probably too late for them all to get real assets at bargain prices. Hence there is an argument for buying some things that seem cheap now and not later, and that includes gold and silver that got artificially low in price at the end of 2011.
The ArabianMoney January newsletter has many more thoughts on this scenario. For 2012 may be the worst of years for financial markets and still be the best for finding bargains!
4 Comments posted by readers:
I just don’t see inflation becoming a severe problem for several more years. China, Bangladesh, and central American countries keep flooding the USA with cheap goods as part of their mercantilism development model. The latest job figures put QE 3 in doubt, unless Europe falls apart as their dumb politicians refuse to print money because they are paranoid about runaway inflation. If Northern Europe insists on not reducing the general debt level by haircuts or money printing, or more probably a combination of both, they will end up wishing for inflation.
I finally saw some fellow on CNBC pointing out that platinum was selling at a significant discount to gold. (I noted that here a few months ago.) He said that has hardly ever happened before because platinum is both more useful, and MUCH rarer than gold. Only South Africa and Russia export significant quantities of platinum, which is very difficult to mine. Does the fact that gold is now quite a bit more expensive, mean that gold is overpriced? Maybe, but gold is worth whatever people are willing to pay for it as an alternate form of wealth storage. Platinum is too rare to serve that purpose because too much of what is mined is consumed by industry for chemical catalyst production. If platinum goes way down, and you can’t figure out what to do with all the money from your oil well, you might want to pick up a few platinum coins from a reputable dealer. Watch the Kitco site graph of it to decide when it may have bottomed. Or you can just look at the pretty images of the coins after you enlarge them. I like the way the Aussies imprint kangaroos on one side of their gold ingots. But I like ounce coins because they will be easier to sell during the Apocalypse.
i believe i’ll be trading bullets if it gets to that….the zombies can have ‘em HOT(for a bad attitude) or cold(for a bushel of potatoes)…they can take their pick.
saying deflated house prices are a problem after they INFLATED from ‘03-’07 i don’t get…..other than the equity in them was pileged n WASTED on pools, RV’s, dinner out everynite.
maybe its all the DR. Spock babies who didn’t get spanked having no delayed gratification…….i got spanked…..thank god.
my brand of beer is up 30% in three years…..food?….gas???
the CPI has been tweeked 10 timnes in 14 years to fool the masses…..read shadow stats…..its now 39% houses……HOUSES?……a house used to be a place to live NOT AN EQUITY BANK.
platinum is down lately because of the end of OVERT QE……we get more n more QE march 1 to the end of this reset…..this is a temporary lull.
the EURO is at Rickards 1.27 QE threshold for ben.
we ain’t seen nothing yet.
the developed west is just silly and stupid…….my dad would have NEVER ALLOWED this in our house………..the women, the children, the minorities and the socialists run the show now.
what more could you expect.
Euroland is entering recession again (some countries are already there); in Germany, factory orders have fallen the most over the past 3 months, when compared to the past 3 years. The ECB is getting ready to print . . . and this is not a good sign.
The FED is now saying that they will start a program of “GDP Targeting”, which is a euphemism for money printing by another name. Openly, they (the FED) don’t realize that the “informed public” has broken the code, and realized that the only thing the FED can do is to print money, yet the FED openly says that they don’t need to enter QE3. Wonderful; that’s just more “deceit”.
I suspect that by the end of 2012, cash will no longer be king.
P.S. @ Boatman: I like your use of the phrase “hot bullets or cold bullets”. In my case, I hope I don’t have to turn my bullets into hot ones!
@obewon….well, i’m not actually in the bunker-mentality group yet.