In the 1970’s the delinking of the dollar from gold under Nixon ushered in  a decade of inflation.  The wealthy and other investors sought refuge in tangible assets and foreign currencies.  Tangible assets had the advantage of not generating 1099 and W-2 income that was subject to tax.  Inflation pushed people into higher tax brackets, making the marginal tax rates especially onerous.

Americans decided it was better to buy a second home, collect art or gems, and anything tangible that became more valuable with inflation rather than work harder to make more money that was lost to bracket creep and taxes.

Howard Ruff, Harry Brown and Doug Casey were the hard asset crowd teaching middle class investors how to own gold and Swiss Francs.  While still in my twenties I opened up an account at a Swiss bank with a mere $10,000.

Unexpected to the hard asset gurus, Fed Chairman Volcker, named under Carter, and Reagan got inflation under control and restored the value to the dollar.  Two dramatic results occurred.  Wealth was moved from hard assets to financial assets.  The incredible growth in the wealth in the upper income was largely a result of this shift.  It was less because the wealthy were getting a bigger share of the pie than because their assets went from unmeasured tangible assets to readily measured financial assets.  This was a result of less inflation and lower taxes on marginal income.

The second effect was a flood of capital from foreign countries to the United States.  These two shifts propelled the stock market of the 1980’s.  The freeing of domestic capital and the attraction of foreign capital created jobs, new companies and an increase in wealth across all income categories.

Today as a result of higher inflationary expectations, a weaker dollar, higher taxes, and massive regulation especially of the financial sector we are seeing domestic capital going overseas to find better opportunities and we are seeing a reduction of foreign capital seeking opportunities in the United States.  Foreign investment here is up since 2009 but still down from 2008. But the combination of domestic and foreign capital is down and that is bad for future unemployment and revenue that this government direly needs.

Without the kick in reported income that came from the shift in the 1980s we may not expect that tax decreases would yield the same results they did then, but raising taxes on a declining revenue base and a weakening dollar is a losing game.  This administration is in way over its head and they are still digging.

It takes a deliberate effort to be informed in a world of nonstop media.  Fear and drama sells much better than a considered deliberation of facts and options.

Books in the 1970’s touting an inevitable inflationary spiral had middle class consumers buying gold and Swiss Francs.  Little is inevitable. Few expected the country to subdue inflation and enter an era where the dollar reigned supreme, economic growth accelerated, interest rates fell, unemployment dropped and working Americans became rich as they accumulated equities in their 401k’s.

Popular names like Harry Brown, Howard Ruff and many others who made nice livings selling doom and gloom faded into the overstocked book sections.  By the time the common consumers are receiving investment advice on popular television shows and retail bookstores, it is too late to make money on their advice.  Do you really think that the truly wealthy take advice from these clowns?

In fact I would advise that if you are considering investment advice that is receiving any prominent shelf space at your local Borders or Barnes and Nobles, you should ignore it.

Popular advisors seem to sell impending disaster much better than rational analysis.  And they become much more lethal if they have been recently correct.

During extremes in market movements it pays to be a contrarian.  A contrarian view today may consider that the dollar in undervalued, gold is overvalued, and that American equities may be a good place to be.

The problems we face are real and serious, but not so terribly unique.  Economic progress is up despite a century of destructive wars, depressions, oil shocks, terrorist attacks, genocides, inflations and other serious problems.  We seem to be at our best when facing the worst.

Ignore most of the media and populist disaster peddlers.  They have been wrong too often.

While I share the great concern about her destructive economic policies of this administration, I am getting a contrarian tick about the dollar and gold.

Every right wing talk show and business TV show is flooded with adds selling gold to consumers.  “The dollar decline is inevitable” the pitchmen warn, “Gold is the only safe money.”

When there is this much noise and whenever anything is inevitable it is time to be cautious.

I remember during the seventies when inflation seemed inevitable. The doomsday newsletters like Harry Brown and Howard Ruff had middle class investors buying gold coins, opening us accounts in Swiss banks and investing in Swiss Franc CDs.  Gold reached over 800 dollars an ounce.

And then the inevitable did not happen.

Volcker and Reagan wrestled inflation out of the system, the dollar soared and gold plummeted. Silver which ran as high as $50 an ounce came crashing down to under $5. The real reason for its rise and spectacular bubble was not the desire for sound money but the manipulations of the notorious Hunt brothers.

Middle class investors who bought into the fear and invested heavily in foreign currencies and gold were badly damaged.

It is challenging enough to get accurate information about domestic stocks. Understanding the factors affecting currency values and foreign markets are far beyond the scope of middle class investors (and most professional investors as well.)

Interest rates are near zero. They cannot go down any further, and given the deficit will likely go up.  When interest rates go up the costs of holding a non interest bearing asset like gold goes up, and this puts down ward pressure on the price of the metal.

While the dollar may seem vulnerable its value on world markets are relative to other currencies. As we see the Dubai fantasy teetering on the brink of bankruptcy and countries like Greece nearing default, the dollar may start looking better if for no other reason than other countries are looking worse.

The amount of uncertainty multiplies greatly when you leave our borders. If you are concerned and want some gold limit your exposure to 10% of  your assets and even dollar average that to avoid buying at a top. Consider gold stocks like Newmont or Goldcorp that you can sell easily and quickly if the market turns against you.

Do not put gold in your 401k or retirement account. The tax protection is better suited to income investments, even low yielding but secure Treasuries. If you think interest rates are going up (I do) avoid long term bonds of any nature. Bond face values drop as interest rate rise.

Successful investing requires controlling your emotions.  Anger and fear over this administration’s policies can easily influence your investment decisions.  Rarely does such emotional influence lead to better decisions.