The shifting of world power will be the main investment focus of this decade. In order to understand which asset classes will benefit from this power shift, we need to look at the underlying trends.
There is a lot of talk nowadays about the distractive power of hedge funds, with their change of market mood and mystical PPT (Plunge Protection Team) helping to save the market from volatile swings. This grip of artificial influence on the "effective" market is weakening; markets cannot be manipulated forever and structural changes are getting worse when cosmetics are applied.
The main idea is that the US is no longer a superpower in its own chosen role of "the world's policemen." It costs too much and it is not respected any more. We now have an Empire of Debt. Read the book. It could be your best investment this year. The chosen reserve currency of choice, the US dollar, is no good anymore. Local elites have grown up and would like their cut; they do not like to do what they are told. Power is shifting from the overburdened with debt to the new and young players. While the US was shifting into the abyss of the financial economy, new tigers were building factories. The western consumer is so tired of consuming the unnecessary that you have to produce it in China, bring it back, give them money to buy it and then let them switch to another credit card in order to not pay the interest for a while.
The housing bubble has helped a lot. The "Home ATM" kept the juice flowing all these years, but not any more. We are now in a recession. The yield curve has been inverted for months now (.pdf) and the housing bubble is bursting. The web 2.0 bubble is next.
What should we do? First kill gold: it is important that the USD will still be considered a "safe haven" and that money will flow into the bond market to finance credit account deficit. Otherwise gold will be at 1000, meaning death to the USD by a thousand cuts. Second, we must make the plunge into orderly decline, not into a devastating snowball effect.
What will happen next? The truth is that orderly decline in the USD is in the interest of the US; it is the only way to inflate the debts out. I think it would be too imaginative to expect any interest rise; some more "orderly decline" in the market and they will need to be cut just to keep things together. Consumers can not help any more: the housing bubble has killed its ability to spend. More and more people are moving into the negative equity and negative savings territory. I do not believe its is well contained - do you remember Alan Greenspan and his "fragmented housing market subject to local valuations"? To answer why the Subprime mortgage market is bursting he starts to use sacred word - "Recession". (Possible, probable - respect the confused gentleman and tell him someone that it has already happen). How far the pain must has spread if "Goldman, Merrill Almost `Junk,' Their Own Traders Say".
With nominal rates moving down and real rates moving up (because of inflation and your need to finance current account deficit you have to give a discount on your IOU - higher rates) we will be back in negative rate territory like in 2002, and gold and silver will blossom again. That is why sold is "the Enemy of the State": one look at the price and you can understand inflation, real economy and political health. You can try manipulate it but you cannot outlaw it: Russians are buying it, Chinese are buying it, even Arab friends are counting their oil beans separately. We can expect to be in deep if gold dies, as has already happened in the general market . A powerful move up from an oversold condition and it could happen at any time.
What about commodities? We are fortunate enough that the Earth will not stop spinning around with the US in recession. I do not believe that that we will enter into a World War for resources, but there is some risk. Check out the number of people on our planet: from 1960 to 1999 the earth's population doubled (.pdf)! Most of these people are living in emerging markets and are still struggling to satisfy their basic needs. Do you remember Law of Diminishing Marginal Utility? It is when your satisfaction of changing to an 8 mega pixels camera to a 9 mega pixels camera cannot even come close to the excitement of the sound of the first flushed toilet a Chinese man has ever heard in his life.
If you are building hundreds of airports across the country, moving people from the coast into 40 newly-built, 10 million-people-each cities, you do not need first credit cards, SEO marketing games or search - you need copper for your wires, oil for your engines and uranium for your electricity needs. And you need to diversify your 1 Trillion reserve from an orderly falling USD. IT IS NOT A FREE market at all! Do not get me wrong - China is great, but markets are still better regulated here. That is why I do not invest in the dragon but in its food which is made by western standards (for example Tenke Mining).
Here is the advantage: if communist China decided to build 40 cities and hundreds of airports, they will be built. Punishment is not a bonus taken back, but a life spent in prison. Fear is a much stronger motivation than greed. That is why sell-offs are sharper and and more sudden than the moves up. Gold, silver and commodities have grown up and they will live their own bullish lives in the coming US recession.
Disclosure: Author holds a long position in AUY and GLD.