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IABFM Articles > > Economics > In Gold We Trust

In Gold We Trust

By Michael Preiss

22 February, 2009

On the back of the U.S. dollar it says:  “In God We Trust”.
For far-sighted and risk averse investors however, increasingly it is: “In Gold We Trust”.

Trust in U.S. banking system and Wall Street has evaporated, like the share price of many financial institutions, or an out of the money call option in a brutal bear market.
Too many banks and indeed clients were literally asset rich and cash poor. The credit crisis has shown that the world needed to de-leverage. Hence the un-winding of the JPY or Yen Carry (or better “scarry”) trade with a vengeance.

Long JPY and short almost everything was the trade in 2008 and so far this year. Cash is still King. But Gold shines all the more.

Paper money is being inflated away. Short-term there is a deflationary spiral in the global economy but due the unprecedented wealth destruction and the subsequent massive global central bank easing and government stimulus packages, inflation is expected to come back to haunt us.

Gold as an investment theme is what every investor should have in his or her portfolio. Traditionally, private banks and asset allocation models suggested to have about 5% of one’ wealth stored in Gold. This is in normal times, however, now the allocation might or should be much higher.

Gold in 2009 is perhaps more than a hedge on inflation, a hedge against mis-steps of global central banks and excessive billion dollar stimulus packages. Strangely, gold has risen sharply despite a stronger dollar, reversing  the previously classic inverse correlation with the greenback.

The year 2008  could well turn out to be the year of Gold.

When the global banking industry faces unprecedented systemic risk , gold is one of the best safe havens. The Obama White House and the new Secretary of the Treasury Geithner, have no choice but to inflate the debt pyramid.

Only by engineering massive future inflation can Uncle Sam’s defuse the debt time bomb.

So there is a high probability that negative real interest, will prevail in most to the developed world, and with that said, share prices will have to rise again.

As many as 1,000 banks in the U.S. may fail in the next 3 years as losses mount on commercial real estate loans. The stimulus package the U.S. Congress is completing could raise the government’s commitment to solving the crisis to $9.7 trillion.
To put this into perspective, the $9.7 trillion pledge would be enough to a $1,340 cheque to every man, woman and child alive in the world !

By hook or by crook, President Obama needs to avoid the experience of Japan.

Japan’s lost decade, with its zombie banks, inept regulators, phony accounting and crippled asset markets ,even after 20 years Tokyo stocks are still down about  -80% (8000 Nikkei two decades after Nikkei 40,000)  and a -95% fall in Japan Real Estate prices) is a scary but realistic template for the future for the USSA (United Socialist States of America), where top executive pay is now capped $500,000.

The U.S. housing market lost $3.3 trillion in value last year and almost one in six owners with mortgages owned more than their homes were worth as the economy went into recession.

About $6.1 trillion of value has been lost since the U.S. housing market peaked in the second quarter of 2007, and last year’s decline was almost triple the $1.3 trillion lost in 2007.

The Fed’s balance sheet has tripled and Obamanomics means the highest U.S. Treasury debt borrowing and budget deficits in American and indeed World History.

The U.S. has now a higher debt to GDP ratio than Sri Lanka. Sri Lanka paradoxically this year is the world’s best performing equity market, rising about +20% since the beginning of January. Rating agencies downgraded Sri Lanka’s debt and sovereign rating on the fear that the debt  burden is unsustainable. The now United Socialist States of America however is still rated a  AAA country. Could it be that America will go the way of Sri Lanka and impose capital controls on Americans to prevent capital flight ?

It is only a matter of time before the world re-learns that gold, not paper money, is the ultimate store of value. Expect to see gold at $1,500 per ounce in the next 6 to 9 months.

In Gold We Trust.


"Re-printed with the permission of Singapore Business Times"

About the Authors

Michael Preiss is Chief Investment Strategist with African Asset Management.

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