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The Game, by Oliver Velasquez
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 anyway, 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 ways one may hedge 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 1970s, Black Monday in 1987, the stock market bubble of the late 1990s,
to recent inflationary policies that have crippled the dollars purchasing power.
Today rates are at a low as the Federal Reserve Bank, headed by Chairman Ben
Bernanke, 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 50 basis points.
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 1970s. 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.
If you would like a free brochure explaining Housing Futures from the Chicago
Mercantile Exchange and more information on the strategies we're using to protect
against a market downturn, please request the information here or contact me
directly at oliver@wisdomfinancialinc.com Phone:
1-888-397-9184.
Oliver Velasquez, Metals Market Strategist, Wisdom
Financial Inc.
Disclaimer: Futures and options trading can involve substantial risk. Past
Performance is not indicative of future results.
