The Present Situation
The
'better-than-expected' poor employment figures of last week were generally
taken as a sign that the recovery is there, but L-shaped with a slightly
rising bias. The new stimuli from government will be positive and hitting
where they should. Tax breaks on new equipment and infrastructural
development tastes the same as digging holes and filling them in did in the
1930's. We have to wait and see if the economy will respond. We sincerely
hope it will. But do investors even in the U.S. believe that a recovery will
see a fall in the gold price? We think not!
The Future of the Dollar
We ask the question,
will a recovery help the U.S. Dollar? One of the factors that U.S. investors
have looked at in the past, but has broken down this year is the belief that
if the Dollar falls gold will rise and vice versa. Cast your mind back to the
pre-credit crunch time and what did we see?
The U.S. Trade
Deficit was a regular +$60 billion a month because imports were
cheaper than locally made goods and consumers bought imports. Consequently
the Dollar drifted over time, lower. With U.S. consumers more thrifty than
then and buying cheap imports in place of local products, we expect the same
to be true in a slow recovery. In fact, the Trade deficit has already been
rising faster than expected for this very reason. As Asia adds to its
expertise as time goes by the quality of their goods, but not necessarily the
price, will rise and claim more market share than ever before. So in even a
slow recovery, expect a rising Trade deficit. This is Dollar negative.
What should be of
great concern to all is the internationalization of the Yuan. [Subscribers
can access an article on this through our archives, or on request] Once this
internationalization of the Yuan has gained traction we will see the use of
the U.S. Dollar in international trade decline and fairly rapidly. The unused
Dollars will have nowhere to go except home. On the world's foreign exchanges
the result will be a decline in the Dollar's exchange rate. Unless there is a
structural change in the import demand within the U.S., the U.S. will contribute
to the Dollar's fall still. The only quick way out for the U.S. is
Protectionism, which will help stop this decline. However, this will bring a
far greater level of instability and uncertainty in foreign exchanges than we
see now. This will be extremely gold positive.
The Positive Impact of a Recovery on Gold
The overall impact
of a recession or even worse, is that the quantity
of money shrinks, even in the investment world. Yes, in that scene gold is
sought out as a preserver of wealth, but perhaps not in as great a volume as
in an uncertain, unstable, recovering economy.
The shock of the
last three years on the developed world could not have been greater as the
U.S. economy and its position in the global economy reached it zenith, then buckled. In the years since then there
has been a considerable metamorphosis in investment thinking. The rosy future
has gone. The fact that any day could bring some more bad news, more
uncertainty and more instability, is firm in all of our minds. Consequently,
prudence is taking as greater place as muted optimism in the investment world
and investment strategies are adjusted accordingly.
As part of that new
prudence gold investments have found a solid place in successful portfolios.
The strategy is to act as a counter to poor performing other investments. As
this attitude to gold continues to grow, more and more investment managers
are getting to know the value of gold even if they don't want it in their
portfolios. More and more of those managers are turning from disliking gold,
to liking it. This does not necessarily mean that there is a steady drift by
developed world investment managers into gold, but it does mean that each
time there is another shock to the monetary system and investment world the
speed and investment volumes with which investment managers turn to gold,
increases. So battered are we in the last three years by bad news that we are
extremely sensitized to it and react quickly.
The benefits of even
a slow recovery over a recession, as far as it concerns gold, is that greater
volumes of investment funds will be available for investment in gold and gold
related products.
But a very Slow Recovery
A rapid recovery
would have fanned a positive attitude to investments and could well have
deflected U.S. investment managers from investing in gold. Even as the
recovery struggles to take hold, current doubts about the recovery keeps fear
and uncertainty in place. The failure of the recovery to gain pace after so
much has been injected into the economy so far, has fanned uncertainty and
increased cautionary investing policies. It is going to take far more than
simply unemployment figures that were not as bad as expected, to convince
investors that a recovery has really taken hold. If the current efforts of
the Obama Administration fail, it will be nigh on
impossible to convince the investing public that all is well in downtown,
U.S.A.
Such a mood is
internationally infectious and will spread globally. Should that happen gold
will accelerate its move to center stage, in the investing world.
Julian D. W. Phillips
Gold/Silver Forecaster – Global Watch
GoldForecaster.com
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