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The basic unwillingness of politicians to face economic and financial
realities has caused the United States and European Union to face currency
collapse. The politicians are content literally to paper over the problem
with massive amounts of newly printed currency. This means that savvy
investors, facing major real losses, are turning increasingly to gold. In
essence, even though currencies are no longer on a gold standard, they are increasingly
being "redeemed" for gold in the marketplace.
For decades, fiscally irresponsible US Administrations have gradually
reduced the world's richest nation, with a currency perceived as 'good as
gold,' to the position of the largest global debtor, with a debased currency.
Furthermore, US stock markets have offered little real return. Indeed, the
Dow stands just below 11K, down over 3K points from its all-time high on
October 9, 2009. Discounting for inflation shows a loss close to 4K points, or a fall of over 25 percent from its all-time
high. Meanwhile, equities in emerging markets have often shown handsome
returns.
The recent political wrangling in Washington has damaged the financial
credibility of the United States, prompting a long overdue debt downgrade by
ratings house Standard & Poor's. This removes a fundamental pillar
supporting the dollar as the global reserve asset of choice.
In Europe, the unwillingness of politicians to face the fatal
structural flaws within the euro is encouraging a fear-driven economic
recession, sovereign debt defaults, a banking crisis, and, potentially, a
currency collapse. This is hurting the euro's formerly bright prospects of
replacing the dollar as global reserve.
This week's Merkel-Sarkozy summit meeting amounted to nothing
constructive. The most popular topic was instituting a Tobin tax on forex transactions. This would, of course, drive
financial markets out of the EU to more friendly environments. But more
importantly, it leaves the major structural issues of a two-speed Europe
unaddressed.
With nothing achieved by the EU's ruling Franco-German axis, European
banks are correctly seen as increasingly vulnerable to further EU sovereign
debt defaults. Of course, former communist Merkel and her French 'poodle,'
the socialist Sarkozy, will find no problem in transferring toxic bank assets
to the public purse. But it will require more market anguish before they dare
to do it. Once this happens, the euro will be locked on the same railway to
devaluation as the dollar.
China's yuan has strong fundamentals, but is
not properly situated to vie for a place on the world stage. It is neither
backed by hard assets nor freely floating. Though this policy is changing, it
is not yet a true alternative to the dollar as it maintains a fixed exchange
'band' to restrain its true value.
Naturally, private investors and foreign central banks are turning to
the very monetary instrument that they never should have abandoned: bullion
gold. That is why the gold price is rising in $50 leaps per day, with only
small corrections. Gold is being re-monetized. [Learn the difference between
rare and bullion gold in Euro Pacific Precious Metals' new special report, free
for download HERE. Please note: Euro
Pacific Capital and John Browne are not affiliated with Euro Pacific Precious
Metals.]
Still, despite our continued warnings, and perhaps motivated by yield
or a misplaced sense of safety, some investors still are tempted into dollars
and US Treasuries, driving them to negative real yields of up to three
percent. This may prove to be one of the largest financial traps in history,
potentially devastating the savings of many investors. It reflects a
fundamental investment strategy flaw.
It has been held that most wise investors should look not at yield and
capital appreciation, but at total return. The only need to differentiate
between yield and capital growth is for tax purposes. Some investors avoid
gold still, because of its lack of yield. This can be a costly mistake when
gold's meteoric capital gains are taken into account.
Some are skeptical because of the performance of silver during the
spring. However, it must be remembered that silver is still up some 125%
year-over-year. The drop from $50 to $35 was directly related to an
unprecedented triple-margin hike by the Chicago Mercantile Exchange. The
exchange made the same move against gold, but the yellow metal shrugged it
off through buoyant demand.
Indeed, while silver is temporarily hobbled by worries of global
depression and a corresponding drop in industrial demand, gold appears to
have no such reservations. Silver may ultimately surge well past gold as the
emerging markets prove themselves able to stand on their own despite an
ailing West. But gold is a pure monetary trade, and its signal is
indisputable.
As long as politicians continue
to paper over their problems by issuing more fiat money, gold will regain its
crown as the king of monetary instruments.
John Browne
Senior Market Strategist
Euro Pacific Capital, Inc.
20271 Acacia Street, #200 Newport Beach, CA 92660
Toll-free: 888-377-3722 / Direct: 203-972-9300 Fax:
949-863-7100
www.europac.net
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