Rising of Gold/Silver vs Rising Value of Housing

[Lindsey]

I am discussing the purchase of precious metals with my partner. He believes that the belief that the price of silver rising as the dollar is devalued is the same as the belief people had that housing would always rise because of inflation. Please help me explain to him how these are different.

[Brian4Liberty]

Wish I could help. That analogy could turn out to be accurate. There are no guarantees. Past performance is no guarantee of future results. Gold, silver and real estate will never go to zero, but they can and do go down.

[oyarde]

I am discussing the purchase of precious metals with my partner. He believes that the belief that the price of silver rising as the dollar is devalued is the same as the belief people had that housing would always rise because of inflation. Please help me explain to him how these are different.

So , what does he think is a better investment ?

[thoughtomator]

If he has that impression he doesn't understand the reasons for the bubble at all.

Tell him that nobody's loaning anyone a half-million dollars on a no-job, no-income, and no-asset basis in order to buy silver.

[cubical]

It is not really the same thing, but if anything he has it backwards. Saying gold will "revert to a mean" is the same thing as saying "housing prices will never fall".

Show him a chart of interest rates. Ask him what is the only possible direction. Ask him if the 50+ trillion in credit can be rolled over at higher interest rates. As soon just a few borrowers can't pay back loans at higher rates, it will snowball into a deflationary depression. Then tell him the fed can and has at every chance shown it is willing to sacrifice dollar value for financial stability. Ask him who would want to hold dollars or promises to be paid in dollars(bonds) if everyone knew the fed was buying debt with newly created cash. Show him base money and explain to him debts are "leveraged" off of base money. Ask him what the money supply will look like once base money nearly fully replaces the credit market.

If he wants to know why nothing has happened yet with the explosion of base money, show him excess reserves. Explain to him that once they start being converted to require reserves, which will happen one way or another, it will only serve as a massive catalyst both are raising rates and expanding money supply.

If he ask why can't rates stay at 0% forever, tell him we would turn into Zimbabwe since in order to keep rates at 0%, the fed has to be in the market buying short term assets. This causes inflation which causes people to dump debt and the fed will be the only buyer(vicious cycle).


This is a rough view on how I feel things will play out, but there are many variable. It may or may not be right.

[Brian4Liberty]

If he has that impression he doesn't understand the reasons for the bubble at all.

Tell him that nobody's loaning anyone a half-million dollars on a no-job, no-income, and no-asset basis in order to buy silver.

That's a sure sign that a bubble is reaching its peak. When your barber is making leveraged purchases of metals, it may be time to sell.

[MikeStanart]

Ask him this: If you lived in Zimbabwe, would you feel secure holding Zimbabwe dollars, or gold & silver.

He can't compare housing crisis with silver/gold.

[oyarde]

That's a sure sign that a bubble is reaching its peak. When your barber is making leveraged purchases of metals, it may be time to sell.

The guy who used to be my Barber ( The Mrs. cuts it now ) has a great building, brick , probably 130 yrs old

[oyarde]

These are not ordinary times , debt, money supply etc are all new territory , our currency appears, to , me, to be about worthless and about to get worse....

[Steven Douglas]

I am discussing the purchase of precious metals with my partner. He believes that the belief that the price of silver rising as the dollar is devalued is the same as the belief people had that housing would always rise because of inflation. Please help me explain to him how these are different.

The belief that housing will always rise because of inflation remains true, and is well founded. That has nothing to do with the massive inflation and subsequent collapse of the housing bubble, which operated on fundamentals that were only similar to the "monetary inflation on the whole".

As long as monetary inflation on the thin-air supply side is perpetually greater than monetary deflation on the back-into-the-vacuum destruction side, price inflation (upward pressure on general prices) will be the result. That is as true for housing as it is for precious metals or anything else that has real value in exchange.

Monetary inflation propagates throughout the economy and eventually turns into general price inflation. But that kind of propagation takes time. For that process to even happen, new debt-based thin-air currency has to be injected into the market through specific loan channels. The housing bubble was a specific channel where the credit floodgates were deliberately opened as wide as possible.

The housing bubble was a case of an artificially selective kind of credit inflation, with its own CREDIT-SPECIFIC boom and bust. The price bubble was far more localized in the economy (by sector, not geography), as it was confined primarily to All Things Land And Real Estate (read=what the banks and speculators had the most faith in). Easy credit, artificially low interest rates, government guarantees, along with all the massive abuses in the financial system (putting all the AAA-rated lipstick on millions of repackaged high-risk sub-prime debt pigs), fueled and prolonged the rampant belief--even with financial institutions--that housing could only go up, never down. There would always be another sucker willing to pay more down the road. That was a case of selective ease of access to specifically channeled currency that caused everything in a particular industry to be overvalued, and all based on the fundamental of an increasingly spiraling number of artificially induced bids in the market.

The housing bubble was like a bunch of gambler's anonymous members let out of their cages, and put into Gamblers Frenzy Fantasyland. Most found themselves on winning streaks, and after relatively short wave of successive wins suddenly believed that they had indeed found the holy grail -- as cash cow meets perpetual motion machine. After that it was no longer gambling; it was a SURE THING. Eventually winning streaks took on an immortality of their own, as millions thought of (fervently believed in) that it was now the new rule, rather than the artificially fueled exception that it was.

To mix my metaphors nicely, the speed addiction really did STIMULATE, even as it seemed to "provide" free energy (rather than reallocate it without any regard to future health).


Now, how does that relate to silver, and what are the differences? A key problem is in how to discern how much a given increase or decrease in prices can be attributed to what kinds of behavior in ANY market (public or private). What are the underlying fundamentals?

Here's one glaring difference:

With silver, there are no banks offering loose credit, no political mandate that anyone should own any precious metals, no government programs in place that guarantees loans for the purpose of buy (bidding up) silver or any other commodity. In fact, it is highly discouraged by both government and the financial sector (apart from those that actually deal in PM's). The risk really is all yours. Worse yet, it is made even more risky, as the MF GLOBAL FIASCO proved, where even allocated holdings can be STOLEN, with no legal recourse in that particular Lawless Financial Sector and all its tangled webs.

That doesn't mean there aren't artificial manipulations going on with precious metals, nor does it mean that recent demand for PM's is not driven by (as a reaction to) monetary policy. Both are true. We just aren't privy to what they are, let alone how they equate to silver being overvalued or undervalued. We do know is that governments are scrambling left and right for PM's--especially gold.

There is no free, perfectly competitive and wholly undistorted PM market. As it is now, we have naysayers on the one hand who will declare with utter conviction that PM's are in a bubble, and that a correction is coming. On the other hand, we have goldbugs and silverbugs (me among them) who are declaring with equal conviction that PM's are undervalued, with prices that are artificially suppressed, not inflated.

All of the above would be moot, of course, were it not for the fact that we can at least say, without refutation, that ALL fiat currencies are falling exponentially in value against everything--housing and PM's--AS THEY WERE DESIGNED TO. The fiat currency fundamentals absolutely guarantee that all fiat currencies will FALL EXPONENTIALLY in value, which means that all raw tangible assets will rise in price over time. That means that it's not an either/or between housing and silver. Once the housing bubble finally corrects--as well as it can--it will continue to rise in price right along with everything else. And even if there was a "correction" for any PM, gold or silver", it's only a jumping up and down in an fiat currency elevator that is on a crash course, and headed straight for the global basement.