Categorized | Gold and Silver

The Flow of Money into Gold

The first thing I learned in my Thermodynamics class as a young engineering student was that energy can neither created nor destroyed, only transferred. During the course of my research, I have seen how this concept applies equally to wealth: Wealth is neither created nor destroyed, it is only transferred.

Depending on the current environment, fundamental factors, and market sentiment, bull markets can be created in many different asset classes, ranging from real estate, equities, commodities, and so on. Money is always flowing somewhere, and will never change. If money would stop flowing then economies would stop growing, as new capital is not providing the means for new production. There were times in history where real –estate did not move for decades, while other asset classes had enormous returns. You have to be on the ball with the investment game and never lose sight of what the environment is like to make smart financial decisions. Increasing your education in economics and finance, can help you have a better feel what is most likely going to do well as an investment for the decades to come.

What I also leant is that energy also follows that path of least resistance. When interest rates where lowered in 2001 after the tech bubble crash, money started flowing into Real- estate. Real estate is a tangible investment that most people understand and know the business with little effort. Real –estate is real and is an asset that you can touch. What also lit the explosion of new money entering into the system besides low interest rates was aided by government corporation (Freddie Mae, Freddie Mac) and in Canada: CMHC. These corporation, with the purpose of lending unqualified home-buyers liquidity to purchases homes. In this event, extra demand was in the market chasing a supply that could not keep up with the extra demand created from government corporations. When governments get involved in a investment market, to entice more people to enter the market this create artificial demand and therefore, bubbles. Bubbles like balloons have a limit to their elasticity. When they pop the consequences are disastrous as home values drop to more realistic valuations. A lot of money can be made by investing in bubbles, however, a lot of money can be lost as well. People that make the most money in bubbles are the ones with insider information.

On the other hand, bull markets are formed when the fundamentals for a given asset improve. Although, there may be some short term corrections which shake out the weak investors. Ultimately, short correction are out-lived and bull market continues, especially if fundamentals improve. For instance, gold has been in bull market since 2001. It began in 2001 at $250/oz and now in 2012 it is hovering above $1700/oz, close to a 600% gain. In other words, if your wealth was tied up into gold for the past decade, you would have seen a 6 fold increase. The irony, is that most bank advisors and mainstream nullifies this investment and regarding it as a bubble. As we seen above inorder for it to be a buble, we must see mass panic and/or artificial government stimulus. He have neither in this market.

Yes you can make money in real-estate and other investments; however, in general over the last decade you have lost money in terms of gold if you were not invested in this market. Historically, when gold is in a bull market the Dow Jones/gold ratio meets at 1:1. We are far from this.


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