Marc Courtenay's  Instablog

Many of us wonder if inflation is going to take off anytime soon. That, as well as the devaluation of the dollar has moved billions of dollars into precious metals ETFs like GLD and SLV.

Even the Central Fund of Canada (AMEX:CEF), which is selling for about a 10% premium above its net asset value (NAV), has a market cap of over $2.5 billion. It's a closed-end fund that actually buys, stores and insures the gold and silver it uses to establish the NAV for the shareholders.

ASA Ltd (NYSE:ASA), a relatively small closed-end fund which invests in many "things" related to precious metals as well as the metals themselves as seen their market cap rise to over one-half billion dollars, and since the lows of November 2008 its share price has more than doubled.

Folks usually buy precious metals for 3 reasons. First, as a hedge against inflation. Secondly, as a "substitute currency-buying power protector" when confidence in paper currencies are eroding. The third reason is as "insurance" against the unseen catastrophe, disaster or financial panic.

That brings us to the Mayan Calendar. There's a growing group of unique people who think that the Mayan Calendar, and a few other exotic symbols, predicts some enormous global changes in the year 2012. There are even some financial gurus who buy into that kind of thinking (remember Y2K).

Well, my crystal ball only predicts things slightly past the end of my nose, so that is why I tend to invest with 2 major criteria. First, I want to be buying or selling what the "Smart Money" and the "Exchange Specialists" are buying and selling. Secondly, I do like a hedge against uncertainty and those random "Black Swan events". With that second criterion in mind, I'd like that hedge to have historically intrinsic value and be very much in demand.

That's why I like to own precious metals and the proxies for precious metals. I even like the stocks and ETFs of the precious metals producers. That's why I own a small amount of GDX, Silver Wheaton (NYSE:SLW), Compania de Minas Buenaventura (NYSE:BVN), Freeport McMoRan Gold & Copper (NYSE:FCX) IAM Gold (NYSE:IAG) and I'm trying to buy a little Silver Standard Resources (Nasdaq:SSRI) below $20 a share.

Back to the subject of inflation, frankly I don't see much in the near-term. I see quite a bit of over-supply, whether we look at housing, natural gas or automobiles. There's a lot of oil stored out there too, and although the price of oil is high right now, it's hard to understand why it should stay this high. $70 a barrel ought to be the near-term average from the supply figures I'm reading.

Inflation is coming in the future and the monetary policies in the G-20 countries virtually assure it. Black Swan events and the rise and fall of the dollar will factor into the deflation versus inflation debate over the next few years as well. How soon inflation will be a major problem is a tough call.

My colleague Terry Coxon who is an editor for the Casey Report and who has a great deal of experience and insight on investing, put this whole topic into perspective today and I'll conclude this article with his words:

Investment Implications

The big plus about the Mayan calendar is that, right or wrong, it is very definite about things. Human civilization will come to an end, I'm told, on Dec. 21, 2012 – not on the 20th and not on the 22nd. There was no room for monetarists in those step-sided pyramids, but there still are few what-to-do implications from the monetarist findings.

1. When you hear would-be opinion leaders cite the current absence of rising prices at the supermarket as proof that all the new money isn't a source of inflation, don't believe them. It is much too early for the inflation bomb to be going off, even though the powder has been packed and the fuse has been lit.
2. If the large and growing federal deficits and the Federal Reserve's unprecedentedly easy policies tempt you to leverage up on inflation-sensitive assets, such as gold, give the idea a second thought. It likely will be a year or more until price inflation becomes obvious and undeniable (which is what it would take to bring the general public into the gold market). In the meantime, your inflation-sensitive assets could get paddled rudely as the deleveraging that began last year continues.
3. Read points 1 and 2 again to make sure they have sunk in.
   

For at least the next year, the simple, fire-and-forget strategy is 50-50 gold and cash – gold for what looks to be inevitable but on its own schedule, cash to be ready for the bargains that may show up while we're waiting for the inevitable to arrive.

DISCLOSURE: I own GLD, SLV, CEF, GDX,SLW,BVN, and IAG.

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