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Sunday, April 17, 2011

Gold: is it too late to buy?

It's tough to buy into something that's already moved 500 percent over the last ten years. Seems like you're buying at the top. Seems like it's very expensive. It must be in the middle of a speculative bubble. Right?

The answer is that you have to know why you're buying it. You really should know exactly why you buy anything. If you're going to get an air conditioner or a car or a blender you probably research it pretty thoroughly.

Yet with investments most people have no real idea why they hold what they hold. The best they can do is repeat the idiot's mantra: Asset allocation and portfolio re-balancing. Asset allocation means you have no understanding at all of what you're doing so just get a little of everything. This is a sure way to lose all your money over time in an economy that is deleveraging.

Is our economy deleveraging?

Deleveraging means repairing its balance sheet from having too much debt. Does this sound like our economy? If not, then by all means, buy lots of stocks and bonds and balance and rebalance them to your heats content. And laugh at the idiots buying gold.

If you do believe the economy has too much debt and must find a solution soon then you do believe that we are in a period of deleveraging: a period when governments, consumers, corporations, must reign in spending and pay down debts.

In this environment all assets prices must fall over time. Real Unemployment must continue to rise. The housing bust continues as credit gets tighter and tighter and massive inventories liquidate very slowly.

If you see these conditions then you ask: What will the government do about it?

A) Will they reign in spending, pay down debt, and let assets fall to whatever low price they naturally reach?

B) Will they ramp up paper money creation to fuel spending, service debt, and prop up asset prices?

In the history of paper money, no country with access to a printing press, has ever chosen choice A. They all choose choice B.

This is the meaning of Quantitative easing. The world has been on this path for two solid years now. This is why gold is rising.

Will governments suddenly change path?

How you answer that question tells you whether this is a good time to buy gold.

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