Many commentators have over the past few days churned out lists of 2010 predictions. Although never one to produce best and worst lists at the turn of the year, Richard Russell, 85-year-old doyen of newsletter writers and author of the Dow Theory Letters, did express a major concern, as quoted below:
I’m thinking that we’re on the path for fireworks in 2010. The reason I say that is because the federal deficits are running into the trillions of dollars. The roll-over of debt coming up in the next two years defies comprehension. For instance, in the next two years the U.S. must roll over $2.5 trillion. Worldwide, banks during the coming two years will have to roll over $7 trillion. On top of that commercial real estate in the U.S. has $750 billion to roll over.
Whether all this debt can be successfully rolled over is doubtful, but one thing is clear - interest rates will go up. This will have an immediate impact on housing. Nobody can negotiate a mortgage now - and worse, nobody has the money to buy a house for cash.
In the face of the deflationary events described above, the Fed will have to create a massive torrent of money. This should be highly inflationary - on top of the forces of deflation and semi-depression. Thus the base will be set for an inflationary depression, during which time the very viability of the dollar will come under suspicion.
Since the dollar makes up a part of almost every nation’s reserves, the worth of every fiat currency will come into question. There will be a frantic search for a currency that will preserve the purchasing power of one’s wealth and assets. The money that can do that is gold. Consequently we may see a total panic for physical gold. Secondary beneficiaries will be silver and platinum, which may be ‘reclassified’ as monetary metals.
Asia’s central banks seem have taken this message to heart and have started to diversify their foreign-exchange reserves by buying gold. In the video clip below, Wall Street Journal economics reporter Alex Frangos speaks to the Heard on the Street Asia editor Mohammed Hadi about the potential demand for the yellow metal.
Source: The Wall Street Journal, December 28, 2009.