Invest in the primary trend because ‘diversification’ seems certain to lose

Banks that look steel plated appear strong. They survive because of FDIC guarantees on deposits. Shares of publicly traded First Security Group are selling at about F$2; before the 2007 meltdown they traded for more than F$100.

(This is the second of two parts. Part 1 is here) Suppose now that you have $150,000 to husband. What do you do?

In today’s investing environment, with interest rates at near zero, there is no way this $150,000 can earn 6% to 11% after inflation. (Does any living sensible American still trust the government’s laughably low inflation numbers?) Indeed, the agonizing by-product of the Fed holding interest rates chronically low in a world where pension funds have built in expectations of 6% earnings is about to crash in a tidal wave of surprise on everyone. A pension fund based on 6% earnings projections cannot pay its obligations for long when it earns only 1%.

Yet the Fed has announced it will keep interest rates low until 2015, maybe 2016.

The primary trend is your friend

The first principle of investing is ALWAYS ALIGN YOUR INVESTMENTS WITH THE PRIMARY TREND. That is the trend that once begun, runs 15 – 20 years, up or down, bull or bear.

What are the present primary trends? For stocks & the US dollar and all things that promise to pay US dollars in the future, the trend is DOWN. For silver & gold, the trend is UP.

(Since 2001, the U,S, dollar index has dropped from 120 to about 80 today, a 33% loss. In January 2000 the Dow peaked at 11,722, and on 17 October 2012 stood at 13,557. That appears to be a 15.6% gain, but adjusted for inflation the Dow today would have to be at 15,752.34 merely to EQUAL the 2000’s purchasing power. Stated the other way, in 2000-dollar terms, today’s 13,557 Dow is worth only 10,088.35, a 14% loss. The nominal gain is illusory, a mere will-o-the-wisp to deceive investors. Since 2001 gold has risen from $252 to $1,751.50 on 17 October, a 595% gain. Silver has risen from $4.02 to $33.197, a 725% gain. Against gold and silver, stocks have lost about 85% of their value, and they will lose another 85% before this primary trend ends.)

Yet this flies in the face of Philadelphia and New York wisdom. And even though I have proven its accuracy for hundreds of customers over the past 12 years, when I dare to offer it, it creates controversy and suspicion. Why not put the money in safe CDs earning one-half of one percent with no risk? No reasoning from my side persuades.

Never mind that I am not the lone gold and silver nut running loose in the countryside. The fellow who made $500 million on the sub-prime mortgage collapse, Kyle Bass persuaded the University of Texas endowment, second largest in the country at about $19 billion, to buy nearly a billion dollars’ worth of gold and take delivery. (He trusts the futures exchange, right?) The Harvard endowment, largest in the country, also owns substantial gold.

Exactly who is behind the curve? Have times changed enough to make the old outlooks and assumptions obsolete, even deadly? Doesn’t the performance prove exactly that? And no fundamental change in the environment lies on the horizon.

Inflation is corrosion

More bad icing atop the half- baked cake: inflation. Inflation is eating away six to ten to fifteen percent yearly, so any investment that does not make at least enough to cover the inflation loss is losing value, whatever the numbers show. They may show a nominal 6% gain, but the accurate calculation is Investment PLUS Interest earned LESS Inflation Loss. Worse yet, inflation is growing and promises to grow far worse than it is now, so that $150,000 will dwindle quickly. At 10% inflation, its value is halved in a little over six years. Halved in six years. Purchasing power gutted in six years to fifty cents on the dollar. $150,000 won’t buy new automobile in 20 years.

As much as I am sure of any sublunary proposition, I am certain that if an investor put that money into silver & gold, and followed my swapping strategy, at the end of six years the investment would at least retain its present purchasing power and probably be worth much more.

No diversification

When I advise against diversification, jaws drop and tongues loll. Even more than they believe you really can get justice in a US court, people believe in diversifying their portfolio. After all, it’s the Eleventh Commandment.

First, I oppose it because it’s not really diversification. How does it “diversify” your portfolio by buying stocks from three different industry groups or eight different mutual funds? Aren’t they all still stocks, and aren’t stocks in a primary down trend? How does it “diversify” by buying bonds or CDs or mutual funds? Isn’t everything else you own or earn denominated in dollars, and aren’t dollars in a primary downtrend?

Second, I oppose diversification because it is planning for failure. Why diversify? You expect some of your choices to fail, so you make eight choices, hoping maybe three of them actually make money to offset the loss in the other five. This is planning for failure.

Doesn’t it make more sense to plan for success? Identify the primary trend, make dead sure of that, then load your boat to ride that wave? And if it does not go as expected, to pull out with ruthless intolerance as soon as it goes the wrong way? Whoops, that requires more labor and input from the investor, something more vigorous than “trust somebody else to invest and watch my money.” I reckon you get what you pay for, whether in time or money.

The only other investment

Under present circumstances the only investment besides silver & gold I can recommend is any enterprise that produces an inflation- and depression-proof stream of income. That might be a business that you own (a restaurant, store, factory, or farm) or it might be a specific stock well set in both inward and outward circumstances to prosper and keep on prospering. For example, maybe some well-managed silver or gold miners or some oil producers or explorers or companies introducing a superior technology, but this is not “stock ownership” in the mainstream sense. It’s value investing.

Well, I’ve done it again. Probably shocked the socks off half of y’all. I reckon you can’t teach an old dog new tricks.

From the November 2012 Moneychanger newsletter. Used by permission. Franklin Sanders is publisher of The Moneychanger, a privately circulated monthly newsletter that focuses on gold and silver and the application of Christianity to economics, culture and family life. We have subscribed to this newsletter for more than 20 years, and consider it a must read. F$99 a year. Franklin is an active trader in gold and silver (he’ll swap your green Federal Reserve rectangles and give you real money in return). He trades with savers and investors outside Tennessee. Subscribe to his daily price report and market commentary on the website. F. Sanders, The Moneychanger, P.O. Box 178, Westpoint, Tenn. 38486 Tel. 888-218-9226.

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