Jan 30 2009 3:51PM
Money Allocation in a Time of Crisis
I can’t respond to all I have been asked for individual situations, but here are some general principles you can use as guidelines.
1) We are temporarily in a deflationary period, which means that dollars will become more valuable for a while, so you should be out of debt. Built up your cash reserves ready to be deployed in the coming hyper-inflation.
2) Commodity Storage: Commodities, including food will never be cheaper than they are today. Buy extra commodities and store them. Don’t buy three cans of tuna, buy a case! This is a classic example of “buy low, sell high.” You will buy at today’s low prices and consume at tomorrow’s higher prices. It is really an investment strategy in a period of runaway inflation, which we will be headed into, probably within six months to a year. When commerce is crippled by inflation, you may not be able to buy what you want, when you want it, at a price you would like to pay. Take advantage now; it’s just practical counsel.
Go to any store and start accumulating extra – ranging from diapers, to soap, to motor oil, to fertilizer, etc. This is the buying opportunity of a lifetime.
Every family should have at least a half bag of “junk silver” (pre-1964 dimes, quarters and halves), which are valued not for their face value, but for their silver content. At least a half bag for each member of the family, but do the best you can.
3) Reduce Spending. Other than commodity storage, reduce your spending to a bare minimum.
Every car in your garage should be a used car – at least two years old. If you need a car now is a good time to buy as there is a huge glut of good-quality used cars on the sales lots. You can bargain from a position of strength with the car dealer.
You will be just as comfortable in a well-cared-for three-year-old car as you will be in a new one. Buying a new car is a big no-no, regardless of how great the deal sounds that the dealers offer you.
Go to a car dealer and look over these mouth-watering deals on used cars.
4) Real Estate. Don’t use cheap mortgage money to buy a bigger house today. Prices are still plummeting, and the unsold inventory is still huge and has to be worked through before these houses will become decent inflation hedges when bought at future reasonable prices. Real estate prices are still plummeting, and we probably won’t see the bottom for another year or two.
Don’t go for the big ads in the Sunday paper promoting new-home sales. I’m perfectly happy to live in my relatively modest home, which is actually bigger than it looks, but is anything but a show-off home. We bought it at a very reasonable price. Yes prices are down, but I borrowed against the home and invested the money before the decline. Even though the investments (gold, silver, oil and CEF) are currently down with everything else, they are gradually coming back up. I will have converted my home equity from fallow asset to a growing asset.
Strangely enough the ultimate result of this deflation will be inflation. As the government fights deflation with trillions of newly created dollars, and the money begins circulating in the economy, it will bare its inflationary fangs.
It is not too soon to start preparing for inflation this time, so some of that excess cash flow you have after reducing your debts should be steadily put into inflation hedges while you wait patiently.
1) Precious Metals have obviously bottomed out. Silver is up from around $9.30 to today’s market of over $12. Gold is flirting around $900 on its way to $1,000. The world is buying the metals as a hedge against calamity, and there are certainly enough calamities to stimulate buying.
The liquidating of metals futures is pretty well behind us, so it won’t be depressing metals prices as much. Buy, buy, buy!
Actually the accumulation of gold and silver is the offensive benefit of your basic defensive strategy. Precious metals will not just protect your purchasing power and protect you from runaway inflation, but will also help you to turn small amounts of dollars into genuine fortunes.
If you think this is outrageous, let me tell you what I really think. The day will come sometime in the next few years when gold will be measured in many thousands of dollars per ounce, and silver in many hundreds of dollars per ounce. So it’s not just a way to make a great deal of money as measured in cash dollars, but to protect your purchasing power.
The markets will eventually evolve the monetary uses of these metals. I don’t know exactly how it will work, but history tells us it will.
My personal bias is toward silver; it’s the poor-man’s gold, which will be attractive to many times more buyers that gold will. I expect it to out-perform gold.
2) Oil Income Trusts. Obviously, the Canadian Oil Income Trusts I recommended took a terrible beating with the price of oil crashing from $150 to below $40. But remember the principle of “buy low, sell high.” Oil will rebound. It is low now only because people are scared to take vacations with a car because of their serious financial problems created by this crisis. Less gas bought is converting itself into lower gas prices.
OPEC will cut production to push up the price of gas, so the auguries are there for much higher oil. How high will it go? I can only guess, and that guess is around $75 - $80 per barrel. That’s almost twice the present barrel price, so the oil-income trusts will do very well indeed. Right now they are yielding over 20 percent; a great return.
By Howard Ruff
The Ruff Times
Howard J. Ruff, the legendary author and financial advisor, has re-edited and re-issued his 1978 mega best seller, How to Prosper During the Coming Bad Years, still the biggest-selling financial book in history, with 2.6 million copies in print. He is founder and editor of The Ruff Times financial newsletter. This article is from a recent article in The Ruff Times. The newsletter is much more comprehensive and deals with a broad spectrum of middle-class financial issues and includes an Investment Menu from which you can build your portfolio. (You can learn about it here).
The Ruff Times has served more than 600,000 subscribers – more than any financial-advisory newsletter in the world. His updated and revised book, How to Prosper During the Coming Bad Years in the 21st Century, is in book stores or at www.rufftimes.com. You can get it free when you subscribe to The Ruff Times, or if you buy the book at your favorite bookstore, you can deduct $10 from the subscription price.