Finding the Right Safe Haven for This Crisis

Dude, where’s the Dharma? submits:

“Is it safe?”

That question still brings shivers up my spine as I recall the 1976 movie, Marathon Man, starring Dustin Hoffman, Roy Scheider, and Laurence Olivier. If you haven’t seen the film, here’s the scene in question on YouTube.

Terrifying.

That question, no doubt, is running through the mind of many an investor at the moment as they search for a safe haven. Like Dustin Hoffman’s character in the movie, many financial advisors may well be telling clients this or that investment is “very safe, so safe you wouldn’t believe it.” Also like Hoffman’s character, they may not know what they’re talking about because, I suspect, experience isn’t much of a guide these days.

You don’t know if I do either, so I’ll just lay out my arguments and you can decide if they make sense.

I believe the world is in the final stages of what has been the longest unanchored credit expansion (by which I mean a period of undefined monetary units) in modern history. Previous credit expansions ended, after a manic phase, with prices quickly finding some equilibrium in relation to the monetary anchor’s price. In modern history that anchor has been gold and/or silver.

“Oh no,” you might be thinking, “it’s another lecture from a gold bug.”

Yes and no.

I think the past 39 years has demonstrated the potential for an unanchored monetary system. In “The Fed vs. Gold” I charted the US$/Gold price for each of the post 70s crisis Fed Chairmen, and prior to Mr. Bernanke’s tenure (and the end of Greenspan’s), even though the US$ was not convertible to gold at a fixed rate, the price behaved, more or less, as if it was.

The point being, convertibility isn’t the key, rather, one measures monetary stability, Central Bankers need to shoot at a target and the market needs to have some sense of what that target is. No commodity or inflation target, no bond vigilantes.

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