I can remember the words way back at the beginning of my career in 1983, “Don’t fight the Fed.” In fact, I can remember my “Money and Banking” professor telling us this in 1981 during the depths of that recession. It made sense while I was a wet behind the ears college student. It made sense as to me as a “green” stockbroker just starting out but as the 80′s progressed, some things just didn’t make sense to me anymore. I saw people who couldn’t rub two nickels together all of a sudden moving into big new houses with brand new cars and $100,000++ boats covered up in their backyards during the winter. I was thinking “What the heck?”
I figured out early on that “debt” was the source of everything when it came to “the good life.” I watched the ’91 recession get aborted and again in ’96-97 which then turned into the internet bubble. Then came the bust of the stock market and the 2001 recession which was also aborted by another reflation. At this point (’98-99), Gold was trading below $300 while the cost of production was around $335 per ounce, it just didn’t make sense. But still in the back of my mind I was thinking about this phrase “Don’t fight the Fed.” “Value” took over and my decision was to go all in and “Fight the Fed!”
Looking back, the choice was either buy Gold or short Treasury securities (bet on interest rates to go up). Either choice was equally “fighting the Fed,” however, with shorting Treasuries you have already been taken out behind the woodshed and shot right between the eyes. Buying Gold? It worked, and quite well. But here we are with interest rates (at ridiculously low levels) finally beginning to rise and some calling “triple top” on the bond market. Should you now “short” the bond market? In my opinion there is very little risk to this strategy but… BUT, what is your upside? Without leverage all you can “win” is 100% AND guess what? You “win” Dollars! This is like going to a carnival and playing one of their games. Most people spend $10 and never win but you are excellent at the “ring toss” or whatever, you only spent $1 yet… you win a $2 teddy bear.
“Fighting the Fed” by purchasing Gold is an entirely different game, here you spend $1 Dollar to “play the game” and you don’t win some crummy teddy bear. You don’t even win ALL the teddy bears behind the counter. No, you win the whole carnival! I am not being overly dramatic here, I assure you. When the system comes down, you could have MILLIONS in the bank and still be a complete loser. Your bank could (will) fail, FDIC will pay ($250,000) and you will be in financial tatters because $250,000 will not even buy a wheelbarrow by the time this whole episode is over.
Read More at milesfranklin.com . By Bill Holter.