Fleckenstein: Protect yourself from Financial Armageddon with gold

Bill Fleckenstein is a well-known money manager and write over at MSN Money. He has been fairly bearish on the medium-term outlook for U.S. equities and technology stocks in particular for some time. His viewpoint stems from what he sees as a reckless monetary policy. Witness his book, “Greenspan’s Bubbles: The Age of Ignorance at the Federal Reserve.”

Today, Fleckenstein has a column out recommending gold to protect yourself from the fallout in this severe financial downturn. Key excerpts are below.

Note, Fleckenstein reminds us that the FDIC is ‘nationalizing companies all the time.’ The ‘nationalization’ debate is a red herring.

Philosophically, I am opposed to government intervention, as longtime readers know. But we are faced with financial Armageddon.
It was precipitated, in essence, by (a) the Alan Greenspan Federal Reserve’s insane meddling in the market for two decades, combined with its failure to do its regulatory job generically, and (b) the abdication of responsibility on the part of all regulators, including Congress.

When one looks at the litany of financial companies that have ended up in the trash heap, it’s sort of hard to make the case that any regulators (with the exception of maybe some state insurance commissioners) did their jobs in anything approaching an acceptable manner over the past decade.

What lies before us now is the prospect of bank nationalization — an idea that seems to arouse an awful lot of hysteria. Perhaps we should use the phrase “government-assisted reorganization,” which is nothing new.

Near as I can tell, whenever the Federal Deposit Insurance Corp. steps in to take over a bank (as it did with Washington Mutual and Wachovia), a government-assisted reorganization has taken place. That is effectively what transpired at American International Group (AIG), Fannie Mae (FNM) and Freddie Mac (FRE), and is likely to be the outcome for others, such as Citigroup (C), and possibly for Bank of America (BAC)…

Unfortunately, the assumptions built into the Treasury’s stress-test plan are a little disappointing. They look too optimistic for 2010 to be really useful, though I would think stock bulls would still embrace this process.

The status quo is bearish. Addressing the problems head on is the first step in the healing process. However, I would caution people not to get too comfortable with the results of these somewhat sanguine tests.
Of course, to the extent that these broken financial entities require government money, that will create a funding problem down the road. That is not today’s worry. Today’s worry is financial Armageddon.

Defend yourself with gold
The funding problem is, however, a reason to own gold, as gold is the only defense against the money-printing press. Not that the gold market was too worried about the printing press last week.

I thought it might be worth making a couple of points about gold, given the rout it suffered last week. As gold dropped 8% (roughly $80 per ounce), the key gold exchange-traded fund, SPDR Gold Shares (GLD), saw no liquidation. But the double-short ETF ProShares UltraShort Gold (GLL) experienced record volume.

Thus, the recent decline in the price of gold has been precipitated by some combination of short-selling in the gold ETF (where the short interest has been rising quite aggressively) and/or the short-selling and liquidation of gold futures.

Those of us who believe gold belongs in one’s portfolio need to remember that the folks who don’t like it really don’t like it. After all, gold is easy to hate. It’s just a price, and it appears to many that today’s price is too high.

A lot of people want to see stocks trade higher, and many of them believe a sinking gold price is a sign that stocks should go up. So they have a vested interest in rooting gold lower…

But gold is going much higher. At root is a revulsion for fiat currencies across the board. As policy makers dither in Europe, the U.S. and elsewhere, expect gold to gain in appeal. It is not just a hedge against inflation, but an alternative investment when one doubts the worth of fiat currencies.

The full article by Fleckenstein is linked below.

Nationalization isn’t the worst fear – Bill Fleckenstein, MSN Money

  1. hbl says

    While I understand the arguments about gold doing well in any times of major economic uncertainty (inflation or deflation) there have always been two big factors that concerned me regarding the sustainability of its price:
    1. What happens when gold jewelery demand dries up? (Traditionally 70% of gold demand is for jewelry).
    2. What happens when the world’s highly leveraged economies fail to create inflation — how many who bought gold for inflation protection give up and sell for cash or even treasuries which at least yield something?

    Now I’ve seen anecdotally that jewelry demand (#1) may have already collapsed and been filled in by investment demand… So the remaining question for me is how #2 plays out — no matter how bad deflation gets will inflationistas always assume hyperinflation is right around the corner or will they give up either by choice or forced liquidation? The cliff diving possibility has always seemed very real — despite being far from certain.

Comments are closed.

This website uses cookies to improve your experience. We'll assume you're ok with this, but you can opt-out if you wish. Accept Read More