The Game

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 anyways, 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 70's, Black Monday in 1987, the stock market bubble of the late 90's, 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 70's. 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.

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