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speedybure (< 20)

Austrian Investing: Exploiting The State

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April 01, 2009 – Comments (2) | RELATED TICKERS: SLW , AUY

This is the ideal time for those who subscribe to the Austrian School of Economics to profit from the vast ignorance in American society. I say this because we understand the consequences of both credit and money inflation. Though all of you reading this probably already know this is a currency crisis and we still have not seen the magnitude of wealth destruction in the not too distant future. I don’t see the massive increases in the money supply stopping any time soon, as the government is doing exactly the opposite of what free market forces are telling us, which has now put hyperinflation on the table. But before the inflation rears its ugly head, the ideal situation for wealth preservation and creation is now.

Again, most Austrians have heard the following: own precious metals, both gold and silver. Although not recognized as legal tender, they are recognized as global currencies just like they have been for over (5000) years. The intrinsic value will continue to increase relative to all currencies as long as the fiat money system is in place. In short buying precious metals ensures wealth preservation and should make it easier to sleep at night and in light of current circumstances, ownership is a necessity.  I recognize that we will always need cash for day to day needs, so obviously we need to hold some at all times. It would be prudent to keep foreign currencies as well that could be exchanged for USD at many commercial banks.

Purchasing equities or commodity futures can be used to increase wealth while most of societies will be depreciated into oblivion. Austrians have the foresight to know what not to invest in, giving us a huge leg up. I have no doubt that every individual who subscribes the Austrian school will outperform even Warrant Buffet. Yes he’s a great investor in general, but his lack of economic knowledge has and will continue to diminish the real value of his wealth.  We know the dangers of fractional reserve banking/ unsecured credit. Yet Warren Buffet has no idea how American Express, Goldman Sachs or General Motors operates. We also know technology will likely move to countries than can generate real capital formation. Those are some of the most obvious death traps but it would take all day to list them all.

The Austrian approach to investing is identical to the saying “Austrian Economics is the real economics”. That being said, this approach significantly reduces the risk inherent when it comes to equity investing. In my opinion Austrian Investing begins with a top down approach, more simply said as the evaluation of basic macro-economic factors. Austrian economics allows us to see the future consequences of government intervention. For example the current crisis provided us with opportunity to recognize the markets inefficiencies. There are huge discrepancies between supply and demand in many industries, which I will elaborate in the next few paragraphs.  I’m not in the forecasting business but the actions our government has embarked on coupled with foreign government brings me to a historically unprofitable industry.

My favorite industry is the precious metals mining industry, yes the historically unprofitable gold and silver miners. The intrinsic value of these metals has risen enormously and will continue to do so indefinitely. The U.S, even if it manages to avoid hyperinflation has severely debased the currency, continuing to do so as I write this. Central banks in most industrialized and emerging countries have expanding their money supply, creating global inflation, augmenting the problem. This has started and will accelerate the demand for real assets around the world. Avoiding money supply figures, this can be illustrated by the fact global interest rates are at an all time low. In other words mining these precious metals has become extremely profitable for the foreseeable future. The large and medium producers will hold their input costs between 350-450/oz for gold and 3.50-4.50/oz for silver. They have the ability to purchase vast quantities of oil and gas now in addition to buy future contracts going out over several years. To sum it up, gold and silver miners ensure the majority of their input costs stay low for many years and in some cases over a decade, while I expect the price of gold to surpass $2500-$3500 over the next 2-5 years, and $45-$60 for silver.

Oil is a no brainer, when it comes to equity investing. There is a decreasing supply and increasing demand, which is temporarily out of whack because the world is somehow convinced the rest of the world needs the U.S economy. It has already started to rise again, which I suspect will gain steam over the next 2-5 years. I think $200-$250 in a low ball prediction, but assuming it reaches $200 a barrel, the real gains in these equities will be extraordinary. Avoid companies that have significant refining operations as the crack spread (the price of selling the refined product less the cost of refining) can be very narrow at high oil prices.  Though I think oil futures are a better tool to take advantage of this opportunity, I don’t recommend it to anyone.

Agriculture equities and futures also provide a great opportunity for wealth creation. Though I am only familiar with wheat, those who think could suit them well, I advise either watching videos on YouTube or writing to the master of commodities, Jim Rogers. There is also an ETN (RJI) that replicates his index, which is a great idea as well. Obviously you need to do your own research, but that is not particularly difficult. For example In my first few hours researching wheat, The gap between consumption and production has been increasing over a long period of time.

Those with a strong conviction that we will experience unprecedented inflation, power over many which the government has abused to profit. Taking out a personal loan or a student loan can be very advantageous and potentially in free in real terms. Remember creditors bear the blunt of inflation, so rather than buying real assets or your child’s tuition with your savings, take out personal/student loans and use that money to buy real assets (gold,silver,equities,futures,etc). In this manner you will pay back the interest and principal in depreciated dollars.  It would irresponsible to advocate such action, I wish to merely point a way exploit the government just as they have exploited us.   

Conclusion: Increasing or preserving your real wealth will allow you to buy up assets for pennies on the dollar when this fiasco is over. Malinvestment will likely accelerate as the Fed pumps excess reserves into the system while keeping the interest rate at 0% while the natural rate is significantly higher.

2 Comments – Post Your Own

#1) On April 01, 2009 at 11:42 PM, edgebander (98.84) wrote:

While I have heard many arguments advocating this particular school of economics I have yet to hear of were do we put our money, or which commodities do we put them, in what currency.  If the US is going to hell and a handbasket, (which I agree with), all the other currencies and countries are doing the same thing they are spending way to much.  Which currency do we buy our commodities in, or doesn't it matter. 

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#2) On April 02, 2009 at 12:03 AM, speedybure (< 20) wrote:

First of all gold and silver is the only medium of exchange(though not recognized by the public) that never looses its value. It can't be replicated, its commoditty based and its durable. Paper money has always failed because government always manages to have a monopoly control of the mint. To answer your question, you should always own some precious metals, and resource equities in which there is high demand and limited supply. Additionally some currencies are stronger than others and the asian countries realize the importance of gold as their central bank has been buying. But it is wise to own various currencies an stocks bought on foreign exchanges denominated in various currencies. China is the new world economy and though they have engaged in stimulus packages, they are far less harmful if used to for productive purposes unlike the U,S who borrowed trillions and squandered it. The remimbi or hong kong dollars purchasing power is artifically low because it is pegged to the dollar. Personaly I prefer the CAD and AUD as they tend to do well when natural resource prices are high. I hope this helps

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