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In the past 25
years interest rates have fallen from as high as 15% to as low as 1.25%.
During this time our economy has gone through different cycles, everything
from stagflation, recession, to historic bull markets, and real estate booms.
Today, in my opinion, we are living one recession away from a massive
depression which can be credited to the Federal Reserve's monetary policy.
Historically, it's never been a good sign to have both gold prices and the
stock market trade at such peak levels like we have today. During the past
ten years we have gone through a huge stock market bubble, and today we're in
the midst of a housing bubble that has only just begun to burst. All of these
shifts in our economy can be traced back to the Federal Reserve and their
manipulation of interest rates.
In order to
understand the Fed game we must first understand how the Fed works. Let's
look for example at our current mess. Housing boomed over the past six years
as the Fed lowered rates to historic lows, more real estate was purchased as
mortgage rates fell. This created a soaring number of new homeowners, as well
as drove up home prices across the nation, creating an unrealistic economy
that is now entering the stage of foreclosures and declining prices in many
markets across the country. Although home ownership maybe at a record high,
this is starting to change. Unfortunately, too many of these homeowners in
the US have become in reality lessees. As long as a person has income, he can
use debt to live very well. But as soon as things change and get tight like
today, many opt to letting their assets go instead of paying them off. Many
of these new homeowners aren't able to pay the monthly payment and suddenly
they're out of a house. Any equity is transient, and if the house is
foreclosed, they will most likely lose that too. But that doesn't matter
because so many are using their home as an ATM anyways, and there is a big
problem with that. Massive debt is created throughout our economy and any assets
left are sold in a declining market. This is exactly where we are today
because of the Fed's monetary policy. So, how can the average investor then
protect their assets from such a tragic game?
There are a
couple of things that may work against a weakening dollar and the current
housing crisis we're facing. This would be to diversify your portfolio with
gold and maybe hedge real estate through the use of the new CME housing
futures. Believe it or not, there is a market for housing futures as many are
turning to ways to hedge against the declining housing market. Through
housing futures, one can actually shift the risk from an individual homeowner
with a huge mortgage, to a speculator trying to cash in. If there is a
housing bubble and it does burst, housing futures and investing in gold may
be able to provide a cushion of support to the savvy investor. This is why
I'm writing this article to give the average investor more arsenals in their
investment strategies. The Fed for too long has been following a consistent
policy of flooding the economy with easy money, leading to an artificial boom
followed by a recession or depression when that bubble does burst. Just as it
provides an infusion of liquidity into the economy by cutting rates, the
Federal Reserve has become the chief instrument in contracting the nation's
money supply by increasing interest rates. This type of manipulation has
created abrupt fluctuations in our economy that date way back to the great
depression of 1929, to the recession of the 70's, Black Monday in 1987, the
stock market bubble of the late 90's, to recent inflationary policies that
have crippled the dollars purchasing power. Today rates are at a low as the
federal reserve, headed by Chairman Ben Bernake, have shifted from focusing on
inflation as its main concern to tackling the credit crisis facing the
economy due to the bubble in the housing market. Certainly there is a
relationship that is easy to comprehend. Those affected by the credit crunch
are being thrown a line as rates are falling. Stocks, on the other hand, are
closing at record highs as they are picking up more investment capital
because of the rate cut. The monetary policy has gone from consistent rate
hikes to an abrupt rate cut on Sept 18 of ½ a point. This monetary
policy has hurt the dollar tremendously and has given way to commodities such
as gold to rally. So, if you're wondering what economic sector will mostly
benefit from all this, I believe it has to be commodities, especially gold.
Historically, in these cycles precious metals have exploded. In fact, gold
rose from a low of $35 to over $850 an ounce in the last commodities boom
back in the 70's. History seems to be repeating itself as gold prices are
soaring. The precious metal is up 20% just this year. Even at today's levels,
I believe there is still enormous opportunity as gold is still undervalued
and is one of the cheapest assets you can buy.
It's only common
sense. At some point in the future, I believe interest rates will be moving
up from today's artificially low levels. When the economy does start to
recover, the Fed has to raise rates to slow the flood of cheap money and the
inflation they have created. But, even without raising rates in the short
term, world tensions, the global energy crisis, and a weak economy have
already pushed gold higher. There is also increasing continued demand for
gold worldwide, coming from China, India, and Russia, as they have all been
raking in profits from the rise in the price of precious metals. As the
commodity bull-market gathers more steam, gold will undoubtedly continue to
shine.
Olivier Velasquez
Metals Market Strategist
Wisdom
Financial, Inc.
Direct toll free: 866-465-0017
International: 949-548-2021
Olivier Velasquez is
the Metals Market at Wisdom Financial. You can find out more about Mr.
Velasquez and his services at www.wisdomfinancilinc.com. . If you would like a free brochure on participating in
Gold and Oil Futures and more information on the strategies we're
implementing to participate in commodity trends please contact him at oliver@wisdomfinancialinc.comThe
risk of loss in trading commodity futures contracts can be substantial. You
should therefore carefully consider whether such trading is suitable for you
in light of your financial condition.
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