Prepare Right Now for Tomorrow's Tempest

The world has ventured so far into uncharted territory in its collective response to the global financial crisis that we have no clear precedent at our disposal from which to discern the ultimate result.

But that doesn't mean we are incapable of identifying the likely consequences of all this government largesse created in response to the specter of systemic deleveraging throughout our precarious financial system. The intentions of all key government and central banks engaged in this battle against deflation remain both explicit and crystal-clear: They will continue to undertake whatever extraordinary measures they consider necessary to thwart the deflationary beast lurking in the shadows.

Buying time at an ever-increasing cost
Given the extraordinary scale of interventions already executed, perhaps the most foreboding sign of all is just how little they appear to have accomplished, aside from buying a little time. At the realized rate, moreover, this has been some seriously costly time!

The U.S. Federal Reserve has already completed two debt-monetization campaigns, one "Twist," and a dizzying array of bank rescue facilities and liquidity injections. Yet even after all those historic interventions, a hyperaccommodative zero-bound interest rate, and a massive economic stimulus package, the U.S. economy has unfortunately failed to reach the kind of "escape velocity" that might encourage authorities to ease up on the accelerator. Further intervention will inevitably follow. Indeed, because governments and the moneyed interests fear a deflationary spiral above any other scenario, I believe we find ourselves mired in an unseemly vicious circle that gold expert Jim Sinclair has deftly labeled "QE to infinity." The debt issuance, central bank balance sheet expansion, and corresponding currency debasement that still looms on the horizon even after all that has been done to date speaks to the unspeakable scale of the underlying crisis.

After much initial reluctance, Europe has opened the monetary spigots with some gigantic emergency measures of its own. But there, too, each successive response seems only to apply a little salve to a wound that never heals. Noting the tremendously disappointing market response to Europe's $125 billion bailout of Spanish banks announced on June 9, The Economist concedes: "it's a plaster, not a cure." And as Europe's prolonged malaise weighs upon the world economy, the International Monetary Fund has urged both Japan and England to consider additional stimulus in their respective nations. I have long bemoaned the dynamic of competitive currency devaluation that has taken shape as this crisis matures, and now the world stage appears to be set for some sort of coordinated or roughly simultaneous easing initiative by four of the world's major money centers. These are truly remarkable times, and I understand it can be very daunting for investors to make sense of it all and devise their strategy accordingly. Fortunately, a voice from the past can now be heard once again to help Fools navigate their way through the current and forthcoming stages of fiat currency devaluation as a predictable consequence of worldwide efforts to avoid a great depression of staggering proportion.

Understanding the familiar dynamics in play
Recognizing the remarkable relevance of the material to our present predicament, New York fund manager Roger Lipton has resurrected a true classic by publishing a brand-new edition of Harry Browne's 1970 book: How You Can Profit From the Coming Devaluation. In this book, Browne correctly predicted the U.S. dollar devaluation and subsequent inflationary cycle of the 1970s, and he succeeded in presenting the predictable boom-and-bust cycles of inflationary monetary policy in an easily absorbed manner. It's a quick read, and well worth the time. James Grant, noted financial historian and editor of Grant's Interest Rate Observer, wrote the foreword for the new edition. Grant writes: "I commend this volume to every investor and to one particular central banker: For your sake and ours, Ben Bernanke, please read every word."

The work contains too many gems to share here, but permit me to include just a few. I enjoyed Browne's definition of a recession as "the liquidation period following an inflationary cycle." Browne continues: "The government invokes inflation as a way of appearing to create prosperity; as a way of financing, on a subtle basis, its own programs. Once under way, the inflationary program must be sustained to ward off the recession that will inevitably follow." I find this an elegant means of understanding the circumstances that set the scene for our current predicament. You see, when Browne published his book, the dollar was pegged at a gold price of $35 per ounce, whereas today an ounce of gold fetches more than $1,600! That epic degree of dollar devaluation vis-a-vis gold offers a window onto the mother of all inflationary cycles -- an extended period of apparent prosperity that was really nothing of the sort because it left us precisely where we find ourselves today: between a rock and an unimaginably hard place. Browne cautioned back in 1970: "And so the binge continues, guaranteeing an even worse readjustment period ahead. The longer the cycle lasts, the bigger the inflation, the greater number of miscalculations to be liquidated, the worse the recession to come."

How to profit from the ongoing devaluation
Browne conducts a useful exercise in his book by exploring the likely performance of various asset classes through each of the potential scenarios resulting from the bust of an inflationary cycle. For each type of investment, Browne scores its desirability within the context of continued inflation, recession, depression, runaway inflation, and devaluation. Not surprisingly, gold and silver emerged from this exercise with a golden outlook for gains through most of the scenarios considered. For those interested in adapting their investment strategies to the specter of continued fiat currency devaluation, the one unavoidable conclusion is that gold and silver have an immutable role to play.

The way I see it, we're still in the early stages of this global financial crisis and the related devaluation of paper currencies. I consider my long-standing target of $2,000 gold such a simple threshold to reach that I expect it will appear laughably conservative in hindsight. In fact, for those paying close attention to the supply side of the equation, $2,250 gold is coming into clearer view. In silver, I believe the upside could be greater still, and I have positioned my own portfolio accordingly. I consider some bullion exposure critical, and for that I recommend Central Fund of Canada as a one-stop shop for reliably unencumbered gold and silver. Accordingly, my bullish CAPScall on Central Fund of Canada has remained in place since November 2006!

Mining stocks have proven a tough nut to crack thus far in this precious-metal bull market, as a combination of rising costs and way too much poor execution have contributed to a shocking degree of underperformance by the miners relative to the underlying metal prices. But I remain steadfast in my expectation for meaningful outperformance by the miners going forward, with the top-quality producers likely to yield some legendary returns from their currently impaired state. While major producer Goldcorp (NYSE: GG  ) offers a low-risk starting point, I gravitate toward smaller-cap operators that appear to be in the midst of a major turnaround. I just visited Brigus Gold's (NYSE: BRD  ) Black Fox mine in Ontario, and that company's long-awaited turnaround is finally taking shape. On the silver side, though the well-known Silver Wheaton (NYSE: SLW  ) will certainly remain a core holding, I'm excited by the remarkable growth prospects of quality miners Aurcana, Endeavour Silver (NYSE: EXK  ) , and First Majestic Silver (NYSE: AG  ) .

We need not be hapless victims to the currency devaluation that's heaped upon our shoulders by governments and central banks engaged in an all-out global war against deflation. By making a bit of room for gold and silver exposure within their investment portfolios, Fools would do well to heed the seasoned advice of Harry Browne and profit from the coming devaluation.

Looking for more ideas? Download The Motley Fool's special free report "The Tiny Gold Stock Digging Up Massive Profits." Our analysts have uncovered a little-known gold miner that we believe is poised for greatness; find out which company it is and why we strongly believe in its future -- for free!

Fool contributor Christopher Barker can be found blogging actively and acting Foolishly within the CAPS community under the username TMFSinchiruna. He tweets. He owns shares of Aurcana, Brigus Gold, Endeavour Silver, Goldcorp, and Silver Wheaton. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


Read/Post Comments (5) | Recommend This Article (27)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On June 17, 2012, at 8:12 AM, skypilot2005 wrote:

    Sinchi wrote:

    “We need not be hapless victims to the currency devaluation that's heaped upon our shoulders by governments and central banks engaged in an all-out global war against deflation. By making a bit of room for gold and silver exposure within their investment portfolios, Fools would do well to heed the seasoned advice of Harry Browne and profit from the coming devaluation.”

    I agree.

    There is serious money to be made. It will take patience and time invested in our own D. D. Nothing is “Free” in life.

    Sky

  • Report this Comment On June 17, 2012, at 8:17 AM, silverminer wrote:

    Well said, Sky, and I don't know many that invest more time in conducting DD than yourself. That time, combined with your strength of conviction and enduring patience, will reward you handsomely.

  • Report this Comment On June 18, 2012, at 8:17 AM, Noneleft01 wrote:

    Here is another "voice from the past" speaking directly into the current crisis in Europe, decades before the disasterous Euro currency even began.

    "A common currency means common government; the one is meaningless and impossible without the other."

    Enoch Powell, 1971

    This is now positively arresting to read today. If one man could see then what is so obviously unfolding before our eyes today, why cannot the euro-dictators (who have assumed power over our sovereign nation states) not stop pushing our continent towards disaster with ever more rabid enthusiasm?

    Give us our countries, and our currencies, back!

  • Report this Comment On June 18, 2012, at 5:06 PM, Ram48 wrote:

    Chris, do you think the micro-caps can survive this impending storm?

    Specifically an explorer like Alexandria; with very little capital and promising news seemingly ignored by the current market, Iyo do they have a chance?...( down to a nickle today,,,crazy).

  • Report this Comment On June 18, 2012, at 7:22 PM, rfaramir wrote:

    "governments and central banks engaged in an all-out global war against deflation"

    Deflation simply means the money in your pockets becoming MORE valuable, due to generally falling prices, due to a decreased supply of money and credit.

    When the powers that be try to scare you or trick you or bully you into supporting a war on deflation, be assured that they are trying to get you to go war against your own best interests.

Add your comment.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 1914699, ~/Articles/ArticleHandler.aspx, 9/1/2014 7:41:10 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement