On Friday, gold prices began a well deserved pause as employment figures came out better than expected and the dollar posted one of its best gains this year versus the euro. Gold dropped 3.74%, one of its biggest one-day losses of the past 12 months, rounding out a generally poor week for commodity players.
Most commentators have been quick to view the change in gold prices as strictly the result of the dollar's move. In the short term, gold and the dollar may exhibit this inverse relationship, with gold suffering from a rebound in the dollar, which has clearly become oversold. We would not be surprised to see gold retreat as low as $1040 or $1050.
Long-term however, it will take more than a recovering dollar to keep gold prices down.
Hard Currencies for a Softened World Economy
If we look at how various currencies have performed this year, we note that the best performers have been the Brazilian real, the Australian dollar, the Chilean peso, the South African rand, and the Canadian dollar. All of them gained significantly against the U.S. dollar.
By contrast, the Indian rupee was flat, even though India has enjoyed much stronger growth than the U.S. And there were many currencies that underperformed our dollar.
Currency movements are influenced by many factors. However, the predominant pattern that seems to be emerging is that, among the stronger currencies, the nations with the greatest resource bases have done the best. Brazil and Australia, we can argue, have the two largest resource bases in the world. Canada is resource-rich too, and its currency may have lost the bid for the top spot only because its economy is so closely intertwined with the U.S. We therefore conclude that resource independence has become the driving force among the world's currencies.
Not surprisingly, gold has performed very much in line with the Brazilian and Australian currencies. In fact, it seems to have been behaving very like a currency itself, not just in 2009 but for most of this decade.
As a commodity, gold has a few industrial uses. However, it is most often used as a store of value – one of the main functions of currencies in general. Therefore, its value rises as commodities become more scarce and more expensive.
Gold prices could enter a long-term retreat only if commodities became abundant (and therefore cheap). In that case, the nations with the strongest currencies will be those like the U.S. which have large service-oriented economies. However, that's not very likely.
By now, you know the story of Chinese growth and how it is forcing demand for commodities ever higher. This past weekend, the Chinese news reported that China aims to be meeting as much as 15 to 20% of its primary energy needs through alternative sources by 2020. That's not much time to make the conversion.
The three leading alternative sources are solar, wind, and hydro. Regarding hydro, China has already developed much of its available capacity. So that implies a massive build-out of wind and solar in just a few short years.
The infrastructure for solar and wind energy won't come cheap. By our calculations, China could easily spend $3-4 trillion over the next few years putting it in place. (And that allocates very little to transmission issues, which could easily add another couple of trillion.) On a yearly basis these expenditures alone would dramatically exceed the sum spent on China's stimulus program for the past two years.
And that's just for internal consumption. By next year China will become the largest producer of wind and solar energy. China is well positioned to become the largest exporter of alternative energies.
Such a program will be great for any resource currency, including gold.
If we had to pick 3 commodities that will be in short supply within the next few years, they are:
- Copper. This red metal is essential to any electrical infrastructure project and any expansion of the grid in China or other nations. What's more, it will be increasingly used in cars as we switch to hybrids and electric vehicles – both of which use twice the amount of copper as gas-driven models.
- Silver (see recent past updates for more information on this white metal).
- Zinc, which is primarily used in batteries and galvanized metals.
As for how to profit from rising demand for these metals, it couldn't be easier.
A simple portfolio for a resource-scarce world
The nations that will thrive in the coming commodity squeeze will be the BRACC nations: Brazil, Russia, Australia, Canada, and China. The first four are resource-rich. China is using its cheap labor and huge currency reserves to secure resources around the world.
Indeed, both the stock markets and currencies of the BRACC nations (with a small question mark next to Russia) should be the strong performers from now on.
The easiest way to invest in them is through ETFs. We've recommended country-specific ETFs for each of them in TCI. These five ETFs, plus gold, would make a sensible, low-risk portfolio for even conservative investors.
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