If you have to pick one investment class that will shine in 2009, then choose gold, and probably silver. My prediction is that this will be the year when the Dow Jones to gold ratio goes to one.
That is to say the Dow Jones Index will plunge again, way beyond the 7,000 limit target I suggested long ago for 2008, and head to 4-5,000, while at the same time the price per ounce of the yellow metal will tip the $4-5,000 an ounce level, way above the $2,000 now predicted by Citigroup.
US economic implosion
Obviously only a terrible implosion of the US and global economy could produce such a massive shift in asset values. But I fear that is what is coming in 2009 and the moment to prepare for it is now before it is too late.
Just look at those US auto figures for November, down 37 per cent, and that is the figure across the board. The Japanese and Korean manufacturers also got their sales walloped, albeit Chrysler took the biggest hit of 47 per cent.
No manufacturer on earth has profit margins big enough to absorb that sort of a sales collapse. That it is the largest consumer goods section of the world’s largest economy just sets the whole US economy up for a collapse. The only historical parallel is 1930.
Now the Federal Reserve and US Treasury have been on to this case for some while, pumping money into the US economy - around $8 trillion on the last count, or more than half the annual GDP. That must have some countering effect to this collapse in the real economy.
Any observer can see that money produced and spent this fast is not being invested wisely. Trillions to support banks on the brink of collapse can surely only put off the evil day, while running up bigger debts that have to be repaid in devalued dollars - or defaulted on - later.
What we have in motion is a downward spiral of mounting debts and falling production in the US economy. You really have to be hopelessly blind not to see it when you think about it. And spirals continue down until they reach a bottom. We are not there yet.
If the US was a Third World country, the IMF would be called in to run the economy. Debts would go into default, uneconomic companies and projects would be allowed to fail, putting people out of work and interest rates would shoot up.
The US authorities have been acting as though they could spend their way out of this fate. It might work to some extent, but all logic suggests this will not be enough to prevent an economic implosion. For 2009 that looks far too close to the Third World model for comfort.
Buy precious metals
What are investors to do in such circumstances? Personally I would avoid US treasury bonds which look like the next asset bubble about to burst, and go for gold and silver which will be the next bubble to form as the world struggles to dig itself out of this very big hole.
Eventually the world will emerge from this crisis, just as it emerged from the Great Depression of the 30s, but we have not even seen the bottom yet, let alone begun the recovery phase.