The historic credit crisis the world is facing has halved the value of equities around the world, sliced commodities more than 60% from of their highs, and cut real estate values by more than 40%. However, gold is nearing all-time highs. The relative strength of gold has been attributed to it historic “flight to safety” aspect, but in a financial environment characterized by deleveraging, defaults, price deflation, and commodity collapse, precious metals seem on the surface to be inferior to the premier reserve currency, the US Dollar. As explained in my article, “Profiting from Bernanke's Super-Fed & Obama's Newer Deal,” however, the United States government and Federal Reserve, in coordination with the rest of the world's central banks and governments, are taking a highly interventionist approach to the crisis, which will lead to rampant inflation and currency debasement in coming years.
The Fed has printed and temporarily sequestered trillions of dollars to debt inflate and to use inflation-usurped taxpayer and foreign lender wealth to bail out financials and appropriate economic stimuli. The rest of the world, tied to the $13 trillion Ponzi scheme known as the United States Treasury, is unable to engage in an exodus from its massive dollar and treasury holdings, which funnels much of its wealth to the United States government through debt inflation. Foreign creditor nations must also engage in quantitative easing to spark their domestic economies. China, for example, announced a $586 billion economic stimulus last year, but only a quarter of it is to be financed by government expenditures. Much of the rest will occur through printing, as it cannot finance it entirely by selling its huge treasury holdings without collapsing its own economy.
Eurozone nations face domestic crisis, as well as massive exposure to Eastern European sovereign defaults, and the traditionally socialist nations of Western Europe will be busy devaluing the Euro to finance all of the government spending needed to deal with the dual crises. Japan's economy contracted more than 30% in the past year, and with exports down more than 20%, it too will have to resort to quantitative easing (with which it is all too familiar) to get “growing again.” It has shown recent strength in currency markets due to the unwinding of massive carry trades that suppressed the ZIRP Yen against higher yielding currencies like the Euro and Pound, but it too will eventually feel the effects of expansionary monetary policy. The Fed is in fact busy buying its own nation's government debt with printed money to keep rates low and a complete, sudden collapse of the US treasury bubble.
All of this suggests a massive devaluation of fiat currency against hard assets, with the Euro and Pound leading the initial downward pressures. The Dollar and Yen will follow, after their respective deleveraging and carry trade unwinds finish. On top of that, the Fed's and ECB's suppression of gold prices through leasing to support naked COMEX shorts will end, if it hasn't already, as allowing currency devaluation against gold is the only way to balance central bank balance sheets.
Technically, gold is looking greater than ever. It broke out of its deflationary correction in early February and is now set to continue its bull market. I expect a sharp pullback into mid-March, but from there it should really take off on inflationary concerns and as its “safe haven” rival, long-term US treasuries, face rising yields and falling prices. Massive volume is entering gold ETFs, such as the SPDR Streettracks Gold ETF (NYSEARCA:GLD), suggesting institutional sponsorship for the yellow metal is quickly and strongly developing. This is highly bullish and also suggests the excess Fed-synthesized liquidity that will eventually enter the system will be funneled into precious metals and miner equities.
Moral hazards and threats of totalitarianism aside, the coordinated expansionary monetary policies of the world's central banks will cause historic currency depreciations, as the financial crisis turns into a monetary crisis. Hard assets will fare best, and precious metals are the best among them, as they have relatively little industrial use (thus highly price inelastic and immune from global demand destruction) and are historic wealth preservation media. I expect gold to break $2000/oz by the end of the year and breach $10,000/oz by 2012, judging by the Federal Reserve's balance sheet and debt monetization policy. The most leveraged exposure to a rise in precious metals prices is on the supply side of metals, the miners. Goldcorp (NYSE:GG), Royal Gold (NASDAQ:RGLD), El Dorado Gold (NYSE:EGO), Randgold (NASDAQ:GOLD), Buenaventure (NYSE:BVN), Iamgold (NYSE:IAG), Jaguar Mining (NYSE:JAG), Anglogold Ashanti (NYSE:AU), and Barricks Mining (NYSE:ABX) are among my favorite mining equities. A large position in gold bullion and/or coins is essential to any portfolio and I suggest against holding any wealth in CDs, IRAs, government bonds, savings accounts, and any other illiquid dollar-denominated holdings.