Saturday, August 23, 2008

First Post

Another and Friend Of Another wrote about the changing gold market starting more than ten years ago and ending seven years ago. Many of their predictions came true then, but their boldest predictions are unfolding right now.

I don't believe that anyone knows what the future holds with certainty. Heisenberg's Uncertainty principle applies in life as it does in Quantum Physics. And just like in physics, the future of life is determined by the playing out of various probabilities. So when I appear to be predicting the future I am simply assigning higher probabilities to certain outcomes.

When I look to the future, I am looking to the end of this round. We are going from here to “there”, and it is the “there” that I am focusing on. There are many paths to get us from here to “there”, and in most cases the various paths have very similar probabilities while the final destination has a much higher probability. So by focusing on the endgame, I believe I can predict the outcome of our current crisis with greater certainty than many of the false prophets who are attempting to predict the exact road that will take us “there”. Does this make any sense?

When will we get “there”? In my view it could be as soon as a year from now or as long as four years from now. How will we know we are “there”? For one thing, many of the great questions about this crisis will have been answered. Though things may be very different and, in many cases, bad, things will have settled down for the most part. Stability will begin to reemerge. It will once again feel somewhat safe to invest in stocks and real estate because the bottom of each will have been clearly reached. What will “there” look like? The purpose of this blog is to make some predictions about this. How can we get from here to “there” in one piece? The answer as I see it will be very clear in this blog.

On to some predictions. Some of these will be quite controversial and I welcome the opportunity to defend and explain the rationale behind my statements. So please feel free to comment with your questions, criticisms or links to supporting articles.

First on the value of gold. When we get “there”, I believe that gold will be a world class store of personal wealth unlike anything else. I believe that governments and central banks around the world will welcome the high price of gold because it will bring a newfound stability to the world. I believe the future value of gold will be north of $30,000 per ounce based on the current amount of paper currency in existence. I believe a value north of $50,000 is likely. And I believe that between here and “there” we will see massive creation of new paper money so the future value of gold will likely be much, much higher. If “there” is one year from now, add 30% to 100% to that value. If it is four years from now, who knows.

On the values of other metals like silver and platinum, I believe that they will remain near current levels, with a fairly wide margin of error. If Another and FOA are 100% correct, they may be worth less than they are currently worth. But with the massive printing and scarcity of commodities, I could see them rising in value substantially and then falling in value due to demand destruction or something similar in the final analysis. The bottom line is that these metals do not share with gold the one thing that will make gold shoot to the moon. That is the world class fame as a store of wealth, and the commitment of the biggest players on earth, the central banks of the world. In the final analysis I believe other metals will be mere commodities, while gold will soar as the lone survivor in a world of failed fiat, government created money.

On the value of real estate. This is a tough one, because real estate is caught right in the middle of the fray. I have to keep reminding myself about some key aspects of real estate in my analysis. First is that houses are basically commodities. So as inflation skyrockets, so too should the price of houses. Currently the prices are falling because they just came off a bubble. But ultimately they should bottom out and then rise in the face of inflation. But even though they are essentially commodities, they cannot be shipped overseas and sold in the market which is paying the most for houses. So they are limited to the availability of "local money". On the other hand, wealthy foreigners can and do come over and buy property when it is relatively cheap. We saw this in the 1980's with Japan, and we are currently seeing the Sovereign Wealth Funds of the Middle East snatching up our countries' assets.

Another thing about houses is that we have likely borrowed a lot of the money for all this building of the last few years from foreigners. And through high inflation of the money supply and financial collapses we will likely have a de facto default on those loans in the near future. In other words, China and others have financed all this building of new homes and will never be paid back for their efforts. But they can't take back the homes. They are stuck here. So in that way it would make sense if we saw an influx of foreign money buying up our “fire sale” of home inventories.

So that brings me to my prediction. This is a reprint of a comment I posted a couple days ago on another blog:

Getting from here to there is going to be painful and confusing. But I've been trying to figure out what "there" is going to look like.

For the last two decades the American Dream has been home ownership for everyone. Easy credit made that almost possible. But over the last decade people went from mortgaging 3 years salary to more than twice that amount. They were essentially enslaving themselves for the dream of home ownership.

When we finally get to "there", we'll still have the same homes that are standing now, and we'll have the same amount of people as now. We will also have the same percentage of people willing to enslave their futures in order to live in a nicer house.

The big difference, I think, will be that these same people will be enslaved to landlords rather than to mortgage companies.

There is still a lot of money in the world, and that money is already starting to look at foreclosures as a future investment. Landlording is going to become big business, and the dream of everyone owning their own home is going to be a chapter in the history books.

When money is created in the form of a loan so that someone can buy an oversized house, that money flows through to the builder and out into the world. It is not destroyed by crashing prices, it is already in circulation. And all that money is going to come back in strong hands and the home ownership will be consolidated from the many weak hands to the few strong hands.

It's the same as in the stock market, through consolidation those on margin are shaken out and the strong hands not on margin take control.

I think the "there" will look a lot like here, except most houses will be occupied by renters, not by homeowners, even in the nicer neighborhoods.

A lot of people are thinking that home prices are going to crash so low that everyone will once again be able to own their own home. I don't believe it is going to work out that way. I think we are getting close to the point where we will see wholesale buying of foreclosed homes... in cash!

Well, this feels like a really long blog post. So I'll end it here. On my next post I'll make some predictions about other methods of gold investing like futures, mining stocks and ETF's. Thank you for reading and please come again.

FOFOA

8 comments:

eye-on-washington said...

Hello,

I have read your comments on economicrot, and traveled your link to your site. You are a thoughtful writer, who appears to try and formulate opinions based upon information and ideas. I am not sure I agree with all your predictions, but the future is so volatile it is really hard to look ahead with any degree of certainty. And, I am not sure I wish to go so far out in the future that I lose my reach and the ability to feel the future. I see a future of many positive creations, that they might be able to steer this damaged ship to more safe waters. I will keep checking what you write, and your links. There are so many sites out there that i read and think about. I will put your site on my list.

jerry

FOFOA said...

Hi Jerry,

Thanks for coming to my site. I appreciate your comments. I am not trying to be a prophet who knows the future. I don't think that is a wise thing to be. But as I look at the predicament we are in, some consequences, some end results, seem almost to be foregone conclusions.

And when I discovered the Thoughts of Another I was spellbound. This mysterious writer from 10 years ago just had the ring of truth, and the ring of someone who could see the world from a high vantage point. I don't know who Another is or was, but I have given it a great deal of thought. I encourage you to check it out. It is the first link in my first post. Be sure to read the forward by Michael J. Kosares.

"Then, in October of 1997 at the internet's only gold discussion forum of the day (hosted by Kitco), a series of remarkable postings began appearing under the pseudonym "ANOTHER", offering plausible answers to those questions..."

FOFOA

wismadche said...

Fofoa,

You may get this post twice - if so I apologize as I am still learning how to blog and comment. I am not a Luddite, but there are days it wouldn't take much!

I agree with your assessment of Au as the future world class store of wealth. It does indeed have a long history as wealth and the heavy breathers (CBs and oil) have committed to its continued importance. I am not convinced, however, that silver has no future as a medium of exchange.

While Ag does not currently occupy the public interest as Au does, it has also functioned as a monetary unit since before the time of Christ. If Au goes to $50K, $100K, or more (and the more currency we print, the higher it will go), I can see Ag rising to $1K or more as the “poor man’s” gold. When gold does go ballistic, few will be able to afford it. But there is still a good supply of 90% and 40% silver coins and American Eagles (and other stuff).

I don’t understand the mechanics of price manipulation very well yet (I’m an engineer, not an accountant), but according to Ted Butler, silver has been manipulated down by massive concentrated shorting by the same banks that are manipulating gold (per Ted Butler’s research). Why would these banks be manipulating silver? Is it to help keep gold down because of the historical ratio of Au/Ag prices? Can the large banks do this without the cooperation of governments?

I am interested to know what you think about this.

FOFOA said...

"I am not convinced, however, that silver has no future as a medium of exchange."

Hello wismadche,

Okay, the argument goes like this, in simplest terms:

As much as the Austrian economists would like us to go back to "hard money" it simply ain't gonna happen. And I cannot disagree with them that silver should be transactional legal tender. I can only say I agree with FOA and Another 100% that it simply won't.

That's not to say it won't be a barter item at some point, especially in a SHTF scenario.

And that's also not to say it won't have a sharp spike in its SPECULATIVE commodity value when the COMEX fails. But don't expect it to stay up there. Depending on how much you have, that would be a good opportunity to trade some out for gold... IMVHO.

On the other hand, TPTB will have no way to contain the store of value function once paper is discredited, which is why the non$-factions are going with the tide where it leads. This is why physical gold will go up and stay up, and silver will not, speculative spikes and TEOTWAWKI barter notwithstanding.

Understand that things like gold and silver will have vastly different values, differing by orders of magnitude, depending on if they are viewed as 1) commodities, 2) transactional mediums, or 3) wealth reserves. Wealth reserve carries the highest value. And transactional mediums possibly carry the lowest, because velocity of circulation lowers their value. Commodities can be the lowest as well depending on supply and demand and economic considerations.

So when you say that silver should follow gold proportionally wherever it goes, you are saying that it will also follow its phase transition to wealth reserve. This is a subject that Ted Butler does not discuss. He simply sees them both exploding on the commodity markets once the leverage is shaken out.

Sincerely,
FOFOA

Andy said...

"Well, this feels like a really long blog post." <-- HA!

Congrats on 2 years.

Andy

kobajashi said...

congrats on "FOUR" years FOFOA


you rock!!!

JulesFlying said...
This comment has been removed by the author.
tcelfer said...

I settled in to read this first 'long' post, finally, only to find that for a fofoa post, it's rather short ;)

Congrats on 5 years -- We will watch together, yes?

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