A client emailed to ask me about a book they had seen. It talked about how the only way to invest was to put money into gold, how house prices were still not done falling, but that REITs were the way to go. That the dollar was about to collapse because of the government printing money and gold was the place to be. They also said to turn your dollars into other currencies (Canadian dollars) since the dollar was going to be unstable. Here is the response I wrote back, and thought some of you might find it interesting:
The premises are not dissimilar from what a dozen pundits are throwing out there. Most mainstream folks will agree, conceptually, with some of his thoughts. The difference is that he ignores certain checks and balances that would come into play so he can take the thoughts to their theoretical extremes (you know how well fear sells!). But some thoughts I have on it are this:
Long-Term Treasuries: Obviously rates are going to go up. They are at nearly zero which means they have to go up at some point. But we know this, which is why most of our bond portfolios are more heavily weighted toward shorter duration bonds which have less timing risk. But in the meantime, we still want some longer term ones because they are yielding pretty decent. Running away from completely from an asset class just seems extreme to me.
Real Estate: This one confuses me, he says the real estate is going to drop, but recommends you buy REITs? Sounds like a great hedge on being right no matter what happens! But yes, I do think that there is still some instability in residential real estate but that it is still a historic low time. So not over investing in real estate right is a good idea, but the low prices can still make it an attractive long-term investment.
US Currency: The scale of the capital market in America, and for Dollars, is more vast than most people can even comprehend. I do think there will be inflation coming, but that inflation will not necessarily be just in dollars. Europe is going to inflate their way out of debt as well and the emerging economies are already showing some signs of overheating (China has been steadily increasing its core interest rate recently to combat inflation.) The point is, America is still the largest market for basically every economy on earth. Looking at Canada is a great example. How much of Canada’s economy is based on exporting to the US? And if the dollar “weakens” against other goods, then all it does it make it more profitable to produce here instead of importing (which, conversely, will create jobs and spending IN the US, which strengthens the economy and the dollar). To not risk collapsing their economy, other countries will have to weaken their currency to match the dollar, to compete with our local manufactures. And this story repeats all over the world.
Gold can be a great investment, but the price of gold has two components: hard demand and speculative demand. Hard demand is the demand for real uses (e.g. manufacturing). Speculative demand is the amount that speculators have bid the price up. It has been a little while, but the last time I saw some research nearly 80% of the price of gold was based on speculative demand, not hard demand. So, it might be a great investment, but it can be a HIGHLY volatile investment. This is neither good nor bad, and it should (and is) a part of your portfolio. But we cannot put a huge chunk of your money into something that can turn on a dime like gold can. Speculators can change their mind quick and when they do, that price of gold can drop to the hard demand lever QUICK.
These folks like to use fear and statistics to sound academic and sell books. And MANY of the things he is pointing out are correct. But it is rarely, if ever, the whole story. I like to take a step back when I get entrenched in these types of things and do a reality check. What country has one of the most productive work forces? What country has one of the highest standards of living? What country has the largest, bar none, capital markets? Which country is still one of the most advanced in research and technology? What country has the largest economy, by orders of magnitude, than any other country in the world? (Fun fact, if you took New York City by itself, just within the city limit, its GDP would make it 13th largest economy in the WORLD. Only 12 COUNTRIES have a larger economy than the city of New York.)
My point being: This guy’s investments could be a good plan, but they are a risky plan because they are an extreme bet on one thing. I always advocate a more measured approach. Which is why you should have some commodities, but are not 40% in gold, which is why your bonds should probably be weighted towards shorter term bonds, and why you might have a strong showing in international equities, as well as US equities. But people should not bet the farm on one idea.
And if America fails, your money won’t be worth anything anyways, so I wouldn’t worry about it! I would say that if you want to read the book, go for it. More education can’t hurt, just make sure to take it with a grain of salt. There are lots of great books out there that can help you understand this stuff better. I usually like to go right to source though, and read pure economics books so I can interpret data for myself.
Hope this helps!