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Greenspan's Fiscal Solution: Inflation


Commodities and precious metals will likely outperform in an inflationary environment. Despite investors' caution, gold is still in the early stages of a bull market.

First, let me say that last night's Minyanville Summer Soiree was a great success. I feel honored and privileged to be part of such a great community. As Toddo likes to say, his guiding philosophy is to surround himself by "people who are good at what they do, but better at who they are." I think he's done a great job in doing that.

Now on to some items of the day. The Wall Street Journal published an op-ed piece by former Fed Chairman Alan Greenspan this morning. The key message was that the US government has essentially zero default risk due to its printing presses, but US Treasurys aren't free of interest rate risk. Should Treasury net debt issuance double overnight, the credit risk would stay the same, but the government would be paying much higher rates. He offered 1979-1980 as an example where the yield on the 10-year note surged almost 400 basis points within a matter of months.

Greenspan mentioned a few ways out of our fiscal problems. We can't grow out of it, he says. The only ways are through "politically toxic cuts, or rationing of medical care, a marked rise in the eligible age for health and retirement benefits, or significant inflation."

And therein lies the strategy for our politicians: significant inflation. It's the path of least resistance! Literally. With the engineered CPI numbers kept low, let's try to inflate our problems out of this mess. Whether or not it works, that's another story for another day.

Now what's the strategy for investors? I believe in an inflationary environment, all asset classes will rise. That's including the S&P 500. But commodities and precious metals will likely outperform. With gold hitting a new all-time high, I know some investors are nervous about purchasing the yellow metal. But considering how many investors aren't exposed to gold, this is still indicative of the early stages of a big bull market.

Regardless, there are also many gold mining plays that have yet to play catch-up. Jaguar Mining (JAG), for example, is one to consider as it has yet to reach new highs. Seabridge Gold (SA) is also another long-term play that offers more than an ounce of gold for each shareholder! I like those numbers.
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Position in JAG, SA, gold stocks

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