Gold: Fear and greed (IV)
Summary
Readers know of our fascination with this gold; recent newspaper reports have vindicated our view. We recently re-iterated it in the context of a looming war in Iran. Furthermore, we have warned many times about a U.S. federal debt crisis. and have discussed the yen and Australian dollar various times. Another influence on gold is a looming market crash and stagflation. Today we step back and look at this metal from various prisms, a key one being the where we are in the business cycle according to the Economic Clock®.Topics Covered
- Fear
- Greed
- How to make money off this
Background
1. Fear
There are a few "fear" factors driving the conquistadors back into gold. One is the continuing set of problems in the Muddle East and in North Korea. As an interesting aside, in yesterday's glittering Financial Times (FT) we read that the South Korean government values North Korea's mineral reserves at US$ 6 trillion. China wants to get her hands on these assets,but our Dear Leader fears for his own sovereignty, so he will reject China's overtures: "...military leaders in North Korea are perceived as hostile to the changes in society and infrastructure that foreign investment could bring." Iran and North Korea are "fear" factors in that people are scared of military tension/war and want to park their money in something that has been eternally safe. Step in, gold.
Another fear factor has to be that people are getting nervous about the parlous state of U.S. (federal) finance: the budget deficit, as we all know, keeps ballooning. So people might be scared of a Treasury blow-out, instead preferring to put their money into something safe: gold.
A third, albeit muted fear factor has to be that with governments now starting to clamp down on derivatives, a case could be made that people are going to hoard physical commodity assets, instead. Step in, physical gold.
A final fear factor has to b inflation. We maintain that the global Economic Time® is characterized by an excess supply of goods, implying that "demand-pull" inflation is going to remain low for a good, long time. However, a weaker dollar and falling productivity suggest that "cost push" inflation, along with asset price inflation, could lead to a perverted form of "stagflation", something which we have warned about far too long.
2. Greed
The overriding "greed" motor has to be that people want to exit the ever-weakening U.S. dollar, not least because of the debt matter that many of us have discussed forever. Then there is the fact that higher-yielding currencies such as the Australian and Canadian dollar, not to mention the Norwegian kronor Step in gold as an alternative investment that yields about as much as dollar deposits do, i.e. 0.00%. The point here is that buy buying gold, you are not losing out on dollar deposit interest, but you are investing in a metal with considerable upside.
Dollar weakness, as we all know, has another engine: the carry trade. In it, people borrow a low-yielding currency and then sell it in order to buy a more promising asset. So, the currency financing the carry trade goes down on account of it being sold. Obviously, when people buy gold, they are doing so in U.S. dollars. So the currency effects of the carry trade cannot be felt when people borrow dollars in order to buy gold. But, when people finance their purchases of higher-yielding currencies such as the A$ with borrowed dollars, this drives the dollar down. One way to mitigate this dollar forex risk is to buy gold.
3. How to Make Money Off This Idea
- Always consult your financial adviser first.
- Buy the world's largest gold ETF, GLD:US. For the sake of transparency, we own this.
- Buy an ETF through which you can short the U.S. Treasury 20 year bond, TBT:US. We own this.
