Strategic Debt?

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back40's picture
Status: Member (Offline)
Joined: Jan 27 2009
Posts: 14
Strategic Debt?

Discuss the pro's and con's of using debt to "bet" on inflation.  Is it possible to "use" the system?  In other words, let's say I can borrow 100k from a bank at 6% fixed over 30 years using real estate as collateral.  I use 50k to buy precious metals and hold the other 50k in tiered CD's at that same bank.  Everything inflates.  My PM's double in value and my CD's start paying out 10% while the value of the property is going up at the same time.  And the bank owes itself my payments for an extended period of time if for some reason I am temporarily unable to service the debt. Your thoughts on the variables/risks/etc??  6% is more than a reasonable cost of doing business if a 20%+ return on that money can be returned.

Also - thoughts on loose diamonds as an investment.  Is it true that this market is completely manipulated and that the market can be flooded at any time to dilute values?  

Do we know that current gold price is not a bubble? 

I realize your answers will be different based on your belief of the future - whether you think we're just in a cylce or on our way to survivalist retreats.  I'm interested in all perspectives.

I think there will be a significant economic disruption, but that some semblance of economic order as we know it will eventually return, perhaps in the form of a global currency.  I'm not sure if it will be an "event" or a process or both.

FreeX40's picture
Status: Member (Offline)
Joined: Nov 6 2008
Posts: 6
Re: Strategic Debt?
back40 wrote:

Do we know that current gold price is not a bubble? 


I came across an interesting article on base money and the price of Gold. The study compares global increases in M0 from 1971 when the Bretton Woods agreement was reneged upon until 2008. The discounting mechanism of the Gold market maps quite closely with rising inflationary expectations caused by money creation.

In my opinion, the authors have taken a very conservative view of what qualifies as money creation (only M0, which entails outstanding currency i.e. banknotes and coins in circulation is counted). This automatically excludes much of the government spending which has taken place since June of 2008 not to mention projected future deficits.

As to whether Gold is overvalued. I guess that depends on each persons individual view of the value that Gold serves. Beyond its natural shine I stronly believe the intrinsic value of the physical element Au is almost zero. The only real value that I see in Gold is the difficulty experienced in rapidly expanding its supply. As long as the metal is traded freely, this scarcity translates into a potential vehicle for storing value. I say potential, because gold can only perform this function of retaining value when systemic trust in other parallel more easily tradeable instruments is low or when these instruments have been pegged to Gold as in the Gold Standard.

Considering that at current prices, the value of all the Gold in the world is roughly equal to global M0 only (all the notes an coins in circulation that is), and that systemic trust is on the decline, being eroded with every new bailout and debt issuance, Gold does not seem overvalued at all. Until such time as Gold is once more adopted as a global standard and the price is fixed or global monetary systems are revamped and stabilised (not debt based), the only place I can see Gold going is up.

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