Maximus

Gold's Finest Hour: How to Buy Now

This is much needed article and this issue needs to be addressed more by economists and analysts as it is the key issues for investors at the moment.

I agree that central banks the world over will inflate away the debt-finance spending binge in developed economies. It is too expedient for politicians to inflate economies and economists seem to agree that deflation is worse than inflation.

This is good for gold. Even though one cannot consume gold as critics point out, the yellow metal as historically served as a store of value.

I also believe that the euro is not sustainable and this is good for gold since it means that there is not alternative reserve currency. For example, I live in Spain and believe the country is heading toward a protracted recession that includes deflating asset prices (housing, stocks) and an inflationary consumer prices given rising energy and food prices. The country will be akin to Argentina of the late 1990s: too much spending by the public sector crowding out the private sector, and with a currency tied to a then stronger dollar that dampened export-led growth. Without a depreciating currency, Spain simply will not be able to keep the economic chugging (even if in reality it is only running in place) and I wouldn't be suprised to see a return to 20+ unemployment in the next few years.

I also believe however that the world economy is heading for a long recession and a period of deflation, especially in the aging US and Europe, since peak oil and energy inflation will eventually destroy demand and slow down growth.

I don't think that gold is necessarily an attractive asset in a deflationary environment and would prefer to own zero coupon bonds as well as real estate or land (assuming this is not Armageddon, then all bets are off).

The more I think about it, the less pessimistic I become. The US has survived periods of rampant inflation as during the civil war and the 1970s oil shocks and periods of deflation and high unemployment as during the great depression. On the political side, it defeated both fascism and ultimately communism albeit at a great loss of human life.

The challenges of the future are no different and the US can overcome them as well. There is no reason US-based energy companies cannot lead the transition to the US of alternative energies in the face of peak oil. There is no reason that Silicon Valley cannot continue to be at the forefront of new information technologies. There is no reason, American automobile manufactures cannot make attractive, efficient vehicles that consumers want to buy (they do so in all other parts of the world except North America).

At the moment I am not long the dollar but once the current dust settles I will be because I believe the American political system offers and will continue to offer the best environment for motivated economic agents.

I recently wondered why Warren Buffett traveled to Germany, Spain, and Italy of all places to look for new investments. What happened to Asia? I suspect that he is believes demonstrated democratic states are more friendly to long term investors and maybe yet dubious as to China's commitment to human and property rights.