Why the Hype?

“What wise men do in the beginning, idiots do at the end”

Hard Assets
As you can see I’ve been posting many articles about gold, precious metals and commodities. The simple reasoning behind it, is that we are now heading into a recessionary stage, where most people begin pulling out of equities and paper-IOUs and transfer over to hard assets. We have already seen a huge move of this sort from the Stock Market boom of the late 90s into the Real Estate sector, but no doubt this has too become speculative, appreciating the average price of a home by over 50%.

I asked myself however, while housing has already begun its decline, what makes it any less speculative than say commodities or precious metals that have seen a phenomenal increase in price over the past few years.

But when thinking it over a bit, I realized that the buying of a home and the purchase of gold, silver or platinum bullion vary extremely. It is not what they bought but why they bought.

Why Real Estate
Real Estate is property, usually in the form of a home. Everyone needs a home. However homes are costly and are expensive to build. In addition the area in which a home is located will send up the price indefinitely, hence the famous buyers beware “Location, Location, Location!”.

Financing a home can also be complicated. Very few people ever buy a home with cash. Many take on mortgages, loans and financing help with which to place a down payment and enough trust to the lender to mortgage the property.

In 2001, after the post-tech-boom recession the Federal Reserve made money and credit readily available for all those who needed it. Flushing the economy with liquidity and making loans and home equity financing easier to do.

Thus set stage for a wave of speculation in housing, inviting millions of developers, lenders and speculators alike into a house-flipping, easy-money making frenzy. Many, who for years were able only to rent, now leaped at the opportunity to begin the venture of buying their own home. This fueled the market giving off steam for an ever increasing tolerance to the risks of home owning.

As we mentioned however, houses are not bought for cash and could easily be returned to those who hold the deed of lien. When dealing with hundreds of thousands of dollars worth of real estate those who aren’t in the “Know” can get severely hurt.

Why Precious Metals
Precious metals, such as Gold, silver and platinum on the other hand, are bought with entirely different intention. Although similar to the “Real estate is the safest investment” mantra often repeated, gold and silver are bought with real money and remain in the sole possession of the buyer.

Now remember that buying into a frenzy can be detrimental regardless of what asset class you’re buying into, but think about it. Unemployment is at very low levels. This means that one can assume that the average American has a roof over their heads. This means that regardless of status everyone is paying something to someone to sleep. There is and always will be a demand for homes, albeit at different prices.

Metals and commodities follow the same suit but how many people have invested recently in assets such as corn, wheat, sugar, lumber or oil. More so we have come so accustomed to paying for these resources in cash that we often forget that the primary medium of wealth for centuries has been in gold and silver. It’s only a 35 year old novelty to use cash, unbacked by any hard asset, in its stead.

This is what I mean when I say that people will turn to hard assets. Things that they can carry around with them, feel and touch. Not promises that they have to check quotes on every 20 minutes or worry about how they’ll pay back thousands of dollars in mortgages over a lifetime loan.

The transition will be massive and it will take years. The last time we had a bull market in commodities it lasted 16 years from 1964 – 1980. In that time many commodities soared 10-15 times in value. Instead of how many shares Wall Street traded that day many will want to be in on how many bushels of soybeans were produced in the past month. Interest in Tech companies and the newest iPod will be replaced by Farms and farming tools to make agriculture more efficient.

But don’t get me wrong. The same euphoric speculation and risk-tolerance we have seen in stocks and real estate will show up in time. So when you hear from the waiter at McDonalds about that new gold mine that just opened up or how they made a fortune in corn futures, time to get out!

Learning about commodities and how to trade can take time and effort. If you’re interested simply go to the nearest bookstore (or any online retailers) and grab a book or two on the subject (You may have trouble finding some though, I found Jim Rogers book “Hot Commodities” alone on the bottom shelf!).

Until then, go to your local coin shop, buy a few coins and hold it through all the while. Remember, Buy what you know. (I know a guy who bought a gold sovereign with a hefty premium and later found out it only sells for spot price). You won’t regret it!


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