Good investments for
deflation As we discussed on the previous
page, are
tangible assets good investments in times of deflation,
generally speaking, good investments for deflation
are based solely on safety. Remember, during deflation,
the goal is to preserve one's capital for the bottom:
the ultimate buying opportunity. Good investments
for deflation will not be focused on return on capital
but rather return of capital – there's a
big difference.
The conventional analysts' battle cry is "diversification."
They recommend having your assets spread across different
stocks, stock funds and/or foreign stock markets.
Advocates of junk bonds likewise counsel investors
that having lots of different debt instruments will
reduce risk.
This strategy is bogus. Owning an array of investments
is financial suicide during deflation. Stocks, bonds
and commodities are not good investments for deflation.
They all go down, and the logistics of getting out
of them can be a nightmare. There can be weird exceptions
to this rule (learn more in Conquer the
Crash), but all assets usually go down in price
during deflation except one: cash.
Good investments for deflation: Cash?
Cash is the only asset that assuredly is a good investment
for deflation. One safe "parking place" for capital
during a deflationary crash is cash notes — for example,
$100 bills, £50 notes or the equivalent in your home
currency — in a safe depository that you can always
access. That way, you will have money if the bank
fails, you will have money if credit collapses, and
you will have money if the government defaults on
its debt.
Good investments for deflation: Gold and
Silver?
As discussed in the section about the deflation
gold relationship, gold cannot be considered a
sure-fire safe haven during deflation; in fact, the
reality is quite the opposite.
However, many people are surprised to find that Robert
Prechter advocates buying gold and silver during a
deflation anyway. Prechter says:
"First, it could be different this time, for some
reason I cannot foresee. In a world of fiat currencies,
prudence demands hedging against a rush to tangible
money.
"Second, these metals should perform well
on a relative basis compared to most other investments.
Unlike so many commodities, they will not fall 90
percent from today's prices, much less to zero,
like so many stocks and bonds. These metals are
downright inexpensive compared to their top values
in 1980. Even if the precious metals continue to
decline, they will fall much less in percentage
terms than most other assets because they have already
fallen so far.
"Third, the question of whether there will
be further bear market in the metals is important
primarily to speculators and quibblers. Gold and
silver have declined in dollar value for over two
decades, which is between 90 percent and 100 percent
of the total time I had expected them to fall. It
may not be prudent to try to finesse the final months.
"Fourth, the metals should soar once the period
of deflation is over. Silver rebounded ferociously
after it bottomed in 1932, tripling in just two
years, rewarding those who continued to hold it.
If deflation again keeps precious metals prices
down, the rebound after the bottom should be no
less robust. Given the likely political inflationary
forces, it could well be much stronger. So by all
means, you want to own precious metals prior to
the onset of the post-depression recovery.
"Fifth and foremost, if you buy gold and silver
now, you'll have it. If investors worldwide begin
to panic into hard assets, locking up supplies,
if governments ban gold sales, if gold and silver
prices go through the roof, you won't be stuck entirely
in paper currency. You will already own something
that everyone else wants."
For more on deflation, Download Robert Prechter's FREE 60-page eBook, The Guide to Understanding Deflation.
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