Softpanorama (slightly skeptical) Open Source Software Educational Society

May the source be with you, but remember the KISS principle ;-)

"Gold always shines bright"  and "Commodities rulez" strategies

1. Introduction
2. Popular 401K investors delusions
3. Fashionable mutual funds mix
4. Follow the leader
5. Naive siegelism
6. "Financial alchemist" strategy
7. Stable value only or "Depression might start tomorrow" strategy.
8. Bonds-based strategy
9. "Gold always shines bright"  and "Commodities rulez" strategies
10. Lifecycle strategies
11. Economic cycle based market timing
12. Combination of lifetime strategies with market timing.
13. Conclusions
14. Webliography
15. Old News

This is a strategy which bets on the unstoppable desire of governments to abuse printing press,  with possible replay of stagflation and/or a significant energy or currency crisis.  As recent event had shown it can be a very profitable strategy. The problem is that it is usually is not available to 401K investors. 

Gold and energy stocks are just asset classes but some people, especially those who distrust government, have a tendency to use them as the major part of their portfolio. This approach works only for Roth and IRA (or SEPA) as most 401K plans do not have access to gold or other precious metals ETF and seldom have access to pure energy related mutual funds.

The concern is that  the current world economic landscape have so serious built-in imbalances that debt-based economy is unsustainable "in the long run" and eventually might lead to (or at least contains significant probability of)  a serious economic downturn. Meanwhile the country is expected to enter another stagflation period, the period associated with a significant and lasting pain for those who kept significant portion of assets in stock and bond portfolios. Many in this category of thinkers predict eventual market crash a la 1937. Typical example are so called "gold bugs". 

Still somehow the USA economy is humming forward for the last 35 years since fiat currency was introduced by Nixon's in his landmark 1971 decision to remove the US from gold standard. So far there were no major crisis (recession 2001-2002 was pretty mild; but that can probably be explained by rapid expansion into former USSR region that occurred at this time as well as dollarization of this part of the globe).

Actually any particular year you can find extremely plausible and convincing predictions of the major crises that looms directly in frond of us.  Some optimism can serve as a useful antidote to this strategy.

Nevertheless the key assumption might be valid: the US currency is a fiat currency and the temptation to abuse fiat currency by the government  historically proved to be irresistible. While excesses of Greenspan era and Bush's tax cuts are two recent examples this became more plausible. With Iraq war this became even more probably: generally wars were/are the most powerful causes of inflation. It is unclear if Iraq war can  serve this role due to its limited scope and availability of Iraq oil to offset costs: government tries to provide both guns and butter and can do this only by unleashing the money press.

But from this point of view the idea of confiscation of existing 401K accounts by Fed looks a realistic option (notes that CPI currently understates inflation): if you gradually sink the dollar then the deficit problem is much easier to handle. Assuming 40% sinking in 10 years and the fact that holders of 401K accounts have very limited options of hedging against inflation the only realistic countermove is owning a real estate. 

But against this view is the fact that long term Treasury interest rate is around  5% which suggests that institutional investors have little worry about the problem of sinking dollar. If you think about it  China and other Asian countries are one huge deflation factor: currently and in the next ten-twenty years they have nowhere else to sell all the products they make.

Last modified: October 22, 2008