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Want a racing certainty for the coming year? Take a
look at the US Dollar & gold... Who can say what 2008 may bring? A
post-Olympics crash in China,
perhaps, tipping its near-10% annual rate of expansion into an historic
slump.
The first annual fall in UK
house prices since 1995, maybe, unwinding a chunk of the near-quadrupling of London real estate values...
In the United States, a bottom might finally be found in Florida or Californian real estate. But
we'd expect Paris Hilton to win the White House with Ron Paul as her running mate before then.
Yes, the Dow Jones stock index could push higher still to new all-time
highs...even measured in terms of the Euro, rather than simply counted in the
fast-vanishing US Dollar.
But the New Year has already brought the world one new all-time high that
clearly says otherwise – and it only took one trading session for the
Gold Market to jump 2% and break its three-decade record of $850 per ounce.
The anti-everything-else, gold clearly signals more trouble ahead for the
rest of the world's investment markets – starting with the very value
of money itself. That's the nagging doubt that drove Gold Prices higher every
year between 2001 and 2007.
And here at BullionVault,
we think it will take more than a bounce in the Dollar to reverse gold's
seven-year bull market, too.
We don't doubt that newly-penned gags on Jay Leno's Tonight show might turn
up this year alongside a pause in
the Dollar's collapse.
By the end of Sept., says the latest data from the International Monetary
Fund (IMF), the US Dollar accounted for less than 64% of foreign currency
reserves worldwide. That might cue the Greenback to thumb its nose at the
Euro, now risen above 26% of official cash reserves
worldwide.
Factor in the Dollar-doom cover stories from magazines including The
Economist and Newsweek, and the case for a contrarian play only gets
stronger. Everyone agrees the Dollar looks sure to keep falling, even the
policy wonks of the world's central banks! And as a very successful options
trader once reminded me, the markets are always sure to do whatever it takes
to screw the most people the most.
So maybe it's time for a surprise from the Greenback, now one-third cheaper
than this time six years ago. Spanking the world's central bankers –
and sucker-punching private investors, now busy gearing up on the forex markets – a turnaround in the US currency
might just coincide with a genuine political crisis in the 13-nation Eurozone, too.
But "with Bernanke at the Fed and Paulson at the Treasury, and a Euro that could
face some problems (a break-up, some believe) because
of badly deteriorating economic conditions in Italy, Spain, Portugal, and
Greece," as Marc Faber writes in the latest edition of his Gloom, Boom
& Doom report, "precious metals are likely to outperform financial
assets for some years to come."
Indeed, whatever comes in the Presidential race – and no matter what
happens to inflation in the cost of living, now running at multi-decade highs
in Europe and China, despite their surging currencies – the real driver
of gold's seven-year bull market looks to be the New Year's one racing
certainty.
Governments and central banks the world over will refuse in 2008 to protect
cash savers and bond buyers. They'll cut or hold interest rates in the
forlorn hope of helping debtors instead, destroying the buying power of all
official money.
Yes, gold might fail to rise as a result. But that would prove a
heart-stopping shock, far more surprising than the most likely
"shock" – that gold keeps on rising even if the US Dollar
stops falling against other government currencies.
Just take a look at how the Gold Market got here today. The new record highs
hit on 2 Jan. 2008 came for nearly everyone Buying Gold on the last trading
day of 2007, no matter whether they bought in US Dollars, the Euro, British
Pounds, Swiss Francs...Canadian, Aussie or New Zealand Dollars...Indian
Rupees or South African Rand...Thai Baht or Chinese Remnimbi.
Only Japanese investors still hold a currency today worth more against gold
than at some point in the past. And the irony there is so tasty,
Burger King should offer it on the Whopper.
Near-zero interest rates failed to kick-start the Japanese economy for 18
years after its real-estate and financial bubbles popped. Tinkering with
target rates of less than 1% since 1995, the Bank of Japan still hasn't
worked any magic by trying to destroy the value of the currency it prints.
Yet it's the Japanese lesson of the early 1990s that's now pushing the US
Fed, Bank of England, ECB in Frankfurt and pretty much every other
developed-world central bank to offer up more money via cheap interest rates
as a way of defending the current financial bubble from collapse.
How come? Mistaking more money for more wealth whenever they look at Japan,
central bankers now have this error scratched onto their corneas. "The
failure to end deflation [meaning falling prices, wages and real estate
values] in Japan
does not necessarily reflect any technical infeasibility of achieving that
goal," announced Ben Bernanke in a speech of
Nov. 2002.
Blaming instead a "structural" need to restore Japanese banks and
corporations to solvency – an eerie forecast, perhaps, of the huge
short-term liquidity injections co-ordinated by the Fed, ECB, Bank of Canada
and Bank of England right now – the current chairman of the Federal
Reserve added that:
"I do not view the Japanese experience as evidence against the general
conclusion that US policymakers have the tools they need to prevent, and, if
necessary, to cure a deflationary recession in the United States."
Put that another way, as Bernanke himself did in
2004, and "excessively cautious
monetary policy did play a role in [Japan's] lost decade...because it did not do all that it could have done to
arrest and reverse the deflation."
Excessively cautious monetary
policy? The Bank of Japan took interest rates for cash savers below
0.2%...and it's left them there for the last 13 years. The only Japanese
citizens to benefit so far have been investors choosing to Buy Gold.
Nearly two decades after the Japanese offered the world a lesson in what can
happen when excess credit and financial innovation turn first to bubble and
then bust, average wages are still falling, down another 2.1% in November. Household
spending fell 0.6%, whilst industrial production dropped by 1.6%...and the
cost of living rose by 0.4%.
All this in a currency that stubbornly refuses to sink, meantime, despite the
Bank of Japan's best efforts to destroy the very money that it prints. Proof
positive, in fact, that a falling currency isn't necessary for Gold Prices to
rise. Need more? Gold gained 31% last year for British investors – its
eighth annual gain on the run – even as the Pound itself hit a two-decade
top versus the Dollar. The European single currency gained nearly one-fifth
versus the US
currency last year, but the Gold Price in Euros also rose, gaining more than
21%. (That also disproves the common belief that gold and the Euro move in
sync.)
Indeed, the price of gold measured against the world's five most important
currencies – the US Dollar, Euros, Yen, Pound Sterling and Canadian
Dollar – has now gained more than 150% since the start of this decade. Real
rates of interest, on the other hand, have trended sharply lower, falling
across the world even as oil-driven inflation – itself stoked by
excessively easy money policy – has begun to roar.
"Japanese equities are out of favor and so, as
a contrarian play for 2008, are among my top picks," says Marc Faber in
the Gloom, Boom & Doom report. Funnily enough, "aside from Japanese
equities, a contrarian play would be to buy the US Dollar," he goes on.
"Sentiment and headlines are so universally negative that at least a
short-term rally should get underway shortly. The only problem I have with
being positive about the Dollar is that, whereas people are universally
bearish about the Dollar, they are also universally still long a gargantuan
quantity of dollars!"
As for Dollar alternatives, on the other hand, "among commodities and
currencies my preferred asset remains physical gold held outside the United States,
for the simple reason that – depression or inflation – it is very
likely to outperform financial assets.
"For gold, I believe the best is yet to come!" concludes Faber. Whereas
Dollar rally or not, we believe here at BullionVault, the currency markets will prove just
a suck of ever-shrinking real worth in 2008.
By : Adrian Ash
Head of Research
Bullionvault.com
City
correspondent for The Daily Reckoning in London,
Adrian Ash
is head of research at www.BullionVault.com
– giving you direct access to investment gold, vaulted
in Zurich, on
$3 spreads and 0.8% dealing fees.
Current gold price, no delay | FAQ | Detailed outlook for 2007
Please
Note: This article
is to inform your thinking, not lead it. Only you can decide the best place
for your money, and any decision you make will put your money at risk.
Information or data included here may have already been overtaken by events
– and must be verified elsewhere – should you choose to act on
it.
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