Rising Dollar Could Create Deflationary Environment

I see that its possible that we could see asset-price deflation in the near future and an accompanying bear market. A few weeks ago I discussed the reality that the next Great Recession will actually be led by a bear market as opposed to the bear market simply resulting from The Great Recession. I should note that the recent bubble-like levels of subprime corporate credit and junk bonds have set up the potential for a collapse in debt valuations. Shades of 2008.

The rising dollar is also somewhat deflationary. A rising dollar can help create an environment where deflation takes root. The elements of a deflationary surprise are all in place. Given the composition and economic beliefs of the current Federal Reserve governing bodies, it is more than likely that monetary policy would become even more easy and quantitative easing would resume should we get close to 0% The head of Switzerland's central bank has warned that maintaining stable prices would be harder to achieve if the Alpine country votes to require the bank to keep a minimum amount of gold in its vaults. The adoption of the so-called 'Save Our Swiss Gold' initiative would be a 'fatal error of judgment’.

On Nov. 30, the Swiss are scheduled to vote in a referendum on the initiative to make the Swiss National Bank to hold a fifth of its assets in gold, a level it would need to meet within five years. The SNB currently has assets of around $550 billion.

The requirement would also prohibit the bank from selling any of its gold in the future and repatriate gold held overseas. A recent poll showed the vote was too close to call with 44% of respondents in favor of the initiative, 39% against and 17% undecided. A majority of voters and a majority of Switzerland's 26 cantons need to approve the initiative for it to pass. This proposals would damage the SNB's ability to deal with inflation, as well as jobs could be endangered.

Vast new fortunes were earned in the 25-year boom that began under Reagan and continued under Clinton. But the income of middle-class Americans rose significantly. These incomes have fallen during the Obama presidency, and not because the rich have gotten richer. They've fallen because bad federal fiscal policies have yielded the weakest recovery in the postwar history of America. Yet even as the recovery continues to disappoint, the president increasingly turns to the politics of envy by demanding that the rich pay their 'fair share.' The economics of envy is failing in America as it has failed everywhere else. I may not tell you what you want to hear, but I tell you what you need to hear in order to preserve your economic health and well-being.

The investment world has gotten by for a long time in spite of a couple serious disastrous decisions made by the Fed, we still haven't learned our lesson. Soon we will have no choice. In the future, we will have to do our due diligence and invest in real assets, and then manage them properly. Gone will be the days of buying in at high prices and then flipping at even higher prices.

Good investments will be those backed by assets and earnings that provide a decent profit for years to come. It will be much harder than investing in the post-1980 generation, but there will also be a tremendous number of opportunities. There will be far more real money made in the next 20 years than was ever made in this bubble economy. The difference is that this money won't be going to restructuring the New Economy. Real investing may not be fun. But the wealth it creates lasts for generations, and it helps build a real economy, instead of a bubble economy. Everybody has a chance to contribute, actually does sound like fun to me.

Gold is a good place to put your money these days as its value as a currency sits outside of government policies. Gold will be much higher in 5 years from now Central banks bought gold heavily during the financial crisis that followed the collapse of Lehman Brothers in a bid to diversify their currency reserves, adding 1,800 tonnes to their holdings in the six years to June 2014. Central banks do not accumulate gold for no reason; you hold gold as part of your reserves to guard against these worst case scenarios It would make sense that in a financial crisis situation in which global countries found their dollar reserves were no longer useful, for whatever reason, they would want to use alternatives, and these other country have been accumulating a large amount of gold in recent years.

This is how major investors need to think about gold investing today. If you are a long term investor, keep your physical holdings. I have to say that gold on a big picture basis is showing why central banks are buying physical gold and wanting to keep it in their home country. Eventually gold is going higher. And if you ask, what will gold be doing two years from now? I would say, it's more likely to be on an upward path.