本文发表在 rolia.net 枫下论坛The doomsayer and the price of gold
Friday, February 29, 2008
By Stacey Laliberte
Gold still has a long way to go in these inflationary times.
Through many years of marital bliss my wife and I have had different pet names for each other, sweetie, honey, baby cakes etc. Lately I’ve been saddled with a much darker, more morose moniker: the doomsayer. Not only has my wife been calling me the doomsayer but my neighbors as well.
Why the doomsayer? Well as it turns out, when discussing things economic, my outlook has not been entirely rosy. It wasn’t always this way; I was quite optimistic between 2002 and the summer of 2007. That all changed in the summer of 2007 when the subprime crisis hit the financial markets. Like any good investor I began to read up on this new crisis to see if the summer’s market panic was warranted. The more I read, the more convinced I became that all was not well in the world’s financial markets.
When news of the subprime contagion first broke, money managers, central bankers, and analysts alike told us all to be calm. The subprime crisis was but a momentary blip on the road to riches. Sensing that some investors were still worried about their investments, the same folks assured us that the subprime issue was an isolated anomaly, and that it was well contained.
I don’t have to tell anybody reading this article that the subprime contagion has been anything but momentary, or contained. Investors have become shell-shocked since the summer of 2007, constantly bombarded with a steady barrage of subprime related bad news. At the G7 meeting recently held in Tokyo, German finance minister Peer Steinbruck stated that many central bankers expect subprime losses could reach as high as $400 billion. Throw on top of that a $400 billion pile of bad news, equity losses, rising unemployment, and downgraded credit ratings for bond insurers, and one is left with no choice but to become somewhat of a doomsayer.
From an investment standpoint, I would like to think that I’m anything but gloomy. Throughout the years economies have experienced both booms and busts. Through each of these cycles savvy investors have managed to make money. I may be pessimistic about the economy, but I also think there is opportunity in the coming economic downturn.
In my article: What if a recession? Part three; I stated that I thought the price of gold would rise going into a recession. That was in November of 2007, or $250 per ounce ago. My professional investment friends chided me for making such a brash assumption, but lo and behold the price of gold has taken off since writing that article. I was just lucky as they say, (as I was with oil and uranium over the last few years). Maybe I should clarify things for you a little bit here: I am not an investment professional, I am a Canadian licensed Aircraft Maintenance Engineer - I fix jets. If this is a worry to anyone reading this article, they should probably stop reading now. If the fact that I am but a humble greasy mechanic doesn’t bother you then read on as I try to explain why I think gold is still a good place to put your investment dollars.
Gold is still the number one hedge against inflation and uncertainty. This is good for gold investors providing the coming economic downturn is inflationary. If we experience a recession and it turns out to be deflationary in nature - all bets are off. In a deflationary scenario it is likely that the value of everything would fall. I believe that this will not be an issue, and that we are more likely to see inflation versus deflation.
One of the most overlooked culprits contributing to rising inflation is the U.S. dollar itself. The world’s reserve currency has been rapidly losing value over the last six years. As the U.S. dollar loses its value it takes more dollars to buy things - think energy and everyday consumables. In 2002 the world witnessed the introduction of the euro, at the time of its introduction the euro traded at 88 cents USD. It now costs $1.50 USD to purchase one euro; that’s a devaluation of 70% against the euro. Things are not looking good for the U.S. greenback.
Adding to inflationary pressures are record high energy prices. Many think that the price of oil is going to fall off a cliff when the economy slows down. As I wrote in my article: What if a recession? Part one, I don’t believe that we will ever see a so-called normalization of oil prices. I do believe that an economic slowdown will result in a softening of oil prices, but $35.00 per barrel prices will forever be visible only in our rear view mirrors. High energy prices and a decreasing U.S dollar will definitely result in an increase in inflation.
Confidence in the dollar is currently shaky at best. In August of 2007, foreign holders of U.S. Treasury bills dumped $163 billion of their holdings. Cooler heads prevailed and the mini confidence crisis ended. Why did the sell-off stop? One of my mechanic type friends says that it was sort of like a bus hanging over the edge of a cliff. The front wheels of the bus were hanging over oblivion, and the rear wheels were ever so tenuously gripping Terra Firma. Inside the bus, the terrified passengers huddled at the rear of the cabin too scared to jump lest they cause the very thing they were trying to prevent.
Devaluation of the U.S. dollar can only cause higher inflation. If the above-mentioned bus slips into oblivion, it would cause hyperinflation. If the world starts to dump their U.S. Treasury bills we could see inflation the likes of which have not been seen since Germany’s currency crisis after the First World War.
Another source of inflationary pressure is something that the “professional” money folk are citing as a glimmer of hope in an otherwise gloomy economic outlook. A shrinking trade deficit. Yes, U.S. exports are on the rise but this is not necessarily a good thing when it comes to inflation. Years of trade imbalances have seen trillions of dollars migrate to faraway lands. Now that U.S exports are on the rise many of those same dollars will come home to roost. The net effect of those U.S. dollars coming home will be more U.S. dollars in the U.S. economy. We all know what happens when the money supply increases – inflation increases.
Am I right in thinking that we are headed for inflationary times? According to recent data released by the U.S. Commerce Department, inflation grew in the fourth quarter of 2007 by 2.7% picking up sharply from the third quarter’s inflation rate of 2%. This rate of inflation is higher than the Fed’s so called 2% comfort zone. Running parallel to the increasing inflation rate has been an increase in the price of gold.
As uncertainty and inflation take hold, more and more investors will flock to quality. Although gold has been on the rise lately, I still haven’t run into too many doomsayers bragging about their gold investments. To me this indicates that there is still time to get in on what I feel will be the next big investment trend. The general public has not yet caught gold fever. Who can’t remember the dinner parties where guests talked about their latest junior oil stock, or last year’s sure bet uranium plays?
The day that the dinner party talk turns to gold investments, or the big money managers acknowledge gold as the place to be, is the day this doomsayer will take his gold profits off the table. Who knows, maybe I’ll buy my wife something nice with the profits, and shed my newfound nickname?
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