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Wednesday, November 12, 2008

Jim Rogers Expects Inflation; He's Long Silver and Short Long Term Treasuries

Jim Rogers says he expects the actions by governments around the globe to save their economies will cause inflation and crash the US dollar. As such, Rogers is short long-term US Treasuries (US Treasury Rates at a Glance) and long silver.

Rogers has a good long-term record. For one, he has been short the banking stocks this past year as they have crashed and burned. Rogers was also a co-founder with George Soros of the Quantum Fund. " During Roger's ten years with the fund, the portfolio gained more than 4,000%, while the S&P rose less than 50%.

Today "Business Intelligence - Middle East" reported in "Jim Rogers says get rid of dollars, buy silver " the following quotes from Rogers speaking to a group of private bank clients:
  • "The fact that the dollar is gaining rapidly is only temporary"
  • "Within a year you'll have to get rid of the dollar"

Rogers also said US government bonds are extremely overvalued.
  • "They are "the world's last bubble."
Rogers explained that government economic rescue plans will force governments to issue more debt, print money and flood the markets with liquidity which will flare up inflation after the crisis is over and create worse problems.

Rogers says "zombie banks" kept alive by Paulson and Bernanke should be allowed to fail. He compared it to Japan which refused to let banks fail in the 1990s.
  • "It's 18 years later and their stock market is 75% or 80% below what it was 18 years ago"
  • "I know we are going to get aggressive rate cuts everywhere, that's why I'm long short-term government bonds in the US, but shorting long-term government bonds because it's not going to help, it's going to add to inflation."
Rogers expects investors to return to precious metals as a hedge against inflation.
  • “Silver will do better than gold. It’s been beaten down horribly. If you put a gun to my head and said you have to buy one, I would buy silver rather than gold.”

Rogers think gold may fall as central banks and the International Monetary Fund (IMF) sell the metal to raise cash.
  • The IMF has gigantic amounts of gold. Maybe gold is going to go down for a while. If gold does go down, I’m going to buy more.
Another way to hedge against high inflation is to buy TIPS or Treasury Inflation Protected Securities.

I recently bought Vanguard's TIPS fund (VIPSX Charts) which, like Silver, is down about 30% from its peak set earlier this year. As I describe on page 9 of the November 2008 issue of "Kirk Lindstrom's Investment Newsletter," I like to triple diversify the fixed income side of my asset allocation into
  1. Bond funds that do well when rates fall,
  2. Cash, CD and Treasury-Bill ladders, Money Funds and quality short-term bond funds for current income
  3. I-Bonds and TIPS for inflation protection.
By having three fixed income buckets, I can rebalance after one of the buckets has a period of out performance. For more on that strategy, see " Using Asset Allocation to make money in a Flat Market."

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