Are you sure you should be doing that?

Tuesday, March 11, 2008

Why safe investments aren't

Michael Panzner's latest explains a point I've learned and repeated here before: "refuge" investments like gold are not as safe and predictable as you might assume. Borrowing money to invest boosts prices, and then when credit becomes tight, forced sales can deflate prices just as rapidly. We're all in a bouncy castle, like it or not.

4 comments:

Contrarian Investors' Journal said...

We certainly agree with Michael Panzer. We've said something like that in Inflation or deflation first? about a year ago. Indeed, in a severe deflation, gold prices can fall in nominal terms as the supply of fiduciary media contracts.

But in times of deflation, there is still an argument for holding gold. If deflation occurred in the context of banking collapses, then cash in bank is unsafe. The only other alternative in such a scenario is still gold. More details at Should you hold gold or cash in times of deflation?.

SACKERSON said...

How about cash in shoeboxes?

dearieme said...

The mice, Sacks, the mice.

Contrarian Investors' Journal said...

Haha.... :-) cash in shoeboxes is theoretically better than gold in times of severe deflation.

But with money printer Bernanke around, the risk is that shoebox cash may be confetti in due time.