All the current chatter these days on whether or not to reduce a portfolio’s exposure to gold is, to put it bluntly, a short term trader's conversation. A crowded trade, whales exiting a crowded trade, is it deflation or inflation? Gold is the inferior commodity to soft commodities such as wheat; gold’s current price elasticity, and more, all sound reasonable.
However, if you are a trend position builder and/or a long term investor of gold, we shall now review other important long term considerations that transactional traders omit from discussions.
If credit rating agencies have become less duplicitous, since the last decade, when they were arguably complicit in financial high crimes and misdemeanors, the US government’s credit rating must appear on someone’s credit watch list, inside of two years, if not, altogether downgraded to less than AAA. This is a plus for gold.
Between now and 2015, the global economy, measured in regional or national terms, will experience a protracted slowdown. In reality, a truer 21st century metric, for the production and consumption of goods and services, is seven billion individual, micro-economies. Nevertheless, the US will fair far worse than several developed nations and most emerging countries. The US 20th century debt structure is unsustainable with 21st century cash flows.
The US is also the largest component of the current global economy. Since the signing of NAFTA in 1994, US taxpayers has underwritten emerging markets’ growth through free-market supply-side economic policies. This change in industrial policy has stunted our internal ability to robustly expand our GDP. America’s only way out is discovering a transformative “next new thing”.
Realistically, in 2010, the Chinese economy simply isn’t large enough to save the world from economic contraction and, subsequent, global political instability. Only the American economy, if it were still functioning properly, could do the job. But it does not and can not; another plus for gold.
Currently, wasteful spending on virtually every federal budget item, especially defense as reported by the Inspector General and Homeland Security‘s TSA - both scared cows, is criminal. Our $13 trillion economy is under taxed for the services and standard of living we once demanded for ourselves as Americans.
More than 40 out of 50 state budgets are upside down, regardless of their blue or red political hue. Education has been marked down from an investment to an expense. The privatization of public assets are sure to begin in 2011. This financial insolvency and economic uncertainty serves as a Petri dish for elevated gold prices, in the next five years.
Too many multinational and offshore corporations are allowed to skirt their legitimate financial obligations, while our military police the world, and our morbidly obese military budget consumes evermore anorexic tax receipts. The dollar and US debt will eventually be ostracized in the financial community by investors. Gold will be embraced.
Maximizing shareholder’s value is the petard we hoisted our middle class onto. The homicide of America’s 20th century economic miracle, will show, we participated as both perpetrator and victim. Leaving in place strategic assets - the building blocks for future generations, and their higher standard of living, is an anathema to short term maximization - and its cannibalistic fatal flaw. The dollar’s purchasing power will diminish relative to gold.
The references above indicts the value of the US dollar over the next five years. Already, waiting in the wings, are competitive conspirators such as China, Russia, France, and Brazil, orchestrating the dollar’s eventual replacement as the world’s currency. The de facto world reserve currency emerging today is gold bullion.
How high will the price of gold go? The inflation-adjusted price today for gold is more than $2,200 an oz. There are models with gold reaching $5,000, $6,000, and $8,500 dollars an oz. One outlier has gold pegged at $36,000 per oz. Pick a number. How much debasement will the dollar experience over the next five years; 5%, 10%, 25%? Will the dollar still exist in five years?
The global average annual income per person is rising. There are a billion people coming online in the 21st century who now can afford a second meal in their daily diet. Tens of millions of individuals with rising incomes can afford to save by investing in jewelry or ingots or coins that store value such as silver and gold.
These new participants in [supply] globalization economics and [demand] international consumption will, push precious metals’ supply/demand curve outward, thus, changing its price elasticity.
History has shown that economic catastrophes, from the Dutch tulip mania of the 1630’s, to England’s 1720 South Sea Bubble, and France’s 1720 Mississippi Bubble, are ultimately expressed much like three-act plays.
Returning to the present, Act I, for the sake of illustration, was the over leveraging of the US economy the previous three decades. The private sector, public sector, and the federal government all sinned. The spices of human greed and amorality, by way of packaging and repackaging asset-backed securities until synthetic derivatives were created from thin air, became essential to the final flavor of this recipe. This dish, then, served to investors worldwide induced the 2008 global financial meltdown.
Act II are the economic repercussions; business failures, personal bankruptcies, home foreclosures, new rules and regulations, the abortion of long standing public policies and programs, migration of populations, and the destruction of towns and neighborhoods.
Also, there is a desire for the criminal prosecutions of the apparatchiks supervising the economic meltdown (although, so far, they and their superiors seems immune from prosecution and jail time). In short, social progress based on past economic prosperity is thrown into reverse and anxiety, resentment, fear, and political anger swells. Gold becomes trustworthy.
Act III is just beginning; the comeuppance for disastrous political policies and financial ruin. Business and political leaders who were in charge will be accused of violating their respective trusts with constituents by failing to protect that which the masses worship and prize most - economic and national, identity and security, As sclerosis permanently invades once functioning markets, people will insist individuals be held accountable. Gold is the beneficiary in this environment.
If past is prologue, scapegoats will be created, politicians will be driven from office in disgrace, political parties and governments may collapse. History will turn another page, begin a new chapter, for better or for worse. Currencies will be debased, hollow sovereign debt and dubious private wealth will rot on the garbage heap of time.
The only constant now, as before, is change and gold, for the long term.
Disclosure: Long SGOL