Tuesday, September 6, 2011
Beggar Thy Golden Neighbor
Every country wants to devalue their currency. In other words, every government around the world wants to destroy its citizens' savings. This is the madness that passes for PhD level economics. Destroy the value of people's labor to "stimulate" further indebtedness as wages fail to keep up with the cost of living. But how can every country devalue at the same time?
They can't, some say. I say, of course they can. They can all devalue against Gold and have been for a decade now. The so called bastion of stability, the Swiss, a country that got rid of most of their Gold, has now decided to peg to the Euro, cost be damned. This is irresponsibility defined and destroys confidence.
Confidence destroyed constitutes the fundamental underpinning of a strengthening Gold bull market. We have just begun the parabolic phase with the summer blast up to the $1900 USD/oz level. There's no turning back now. The scramble for physical Gold is now going to intensify and the price movements are going to get more intense to the upside. Any government can devalue relative to Gold even if they can't spark lending in the economy. This is a retarded goal, but speculation is all about exploiting the retardedness built into the system by apparatchiks without a clue. An anchorless global fiat system is of course going to explode and be replaced with something more rational, but the transition will create winners and losers.
Those thinking Gold is too expensive are going to be profoundly shocked at what comes next. Roubini. Gartman. Nadler. The pied pipers of the financially damned. We are in a massive deflationary collapse being fought tooth and nail with unfettered money printing. A massive war between inflation and deflation. But I have long stopped trying to pick a winner in this tug-of-war and instead settled upon the obvious beneficiary - Gold.
Financial instability and lack of confidence benefit Gold. Those who say Gold can't be a hedge against both inflation and deflation are completely wrong. This is like saying Democrats and Republicans can't both be for pro-welfare and pro-warfare policies since they are opposing parties. And yet, Obama is a war president and Bush signed into law Medicare Part D. If the inflation or deflation are mild, Gold doesn't do well. But Gold benefits from the monetary extremes that destroy confidence. We are there and things are about to deteriorate further (short term expected bounce in the stock market aside).
I agree this is no 2008, but that is only because the problems are worse and Gold will rise this time during the market collapse, regardless of the movements of the US Dollar Index. I actually remain a US Dollar bull for those interested in playing the paper currency games, but I'll take the "long physical Gold held outside the banking system" trade instead, thank you very much.
Gold is by far the best asset class for the next few years and will remain the premier asset class until the Dow to Gold ratio hits 2, and I am increasingly convinced that we will go below 1 this cycle.