Gold, Dollar, China, Important 2010 Q&A
Stock-Markets / Financial Markets 2010 Jan 25, 2010 - 10:18 AM GMTBy: Larry_Edelson
Even though it’s very early in the new year, there are some wild market movements and lots of news out of China, which has prompted readers to ask me many questions. So, I’m dedicating today’s issue to those questions — and my answers …
Q: Larry, gold seems to be in trouble here, and to have topped out. Are you concerned?
A: No, not in the least! First, keep in mind that gold zoomed from $873 last April to a high of $1,227 in early December, a 40% move up in just eight months. That’s one heck of a move up in such a short period of time. So, a pullback is perfectly normal.
Second, the underlying fundamentals driving gold higher have not changed one iota. You have …
Central banks around the world, not just in the U.S., pumping liquidity into their economies. At any sign of weakness, they will put the pedal to the metal yet again printing fiat money.
The growing recognition that Washington itself is broke. Its unfunded liabilities now stand at almost $134 trillion.
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| Everybody knows the U.S. is bankrupt and won’t be able to deal with its debt without devaluing the dollar. |
The whole world knows the U.S. is bankrupt and it will not be able to ever get out from under its mountain of debts other than by devaluing the dollar, and defaulting on those debts on the sly, by paying them off with cheaper dollars.
Banks in the U.S. that are more indebted and leveraged up than even before this financial crisis hit. Goldman Sachs, JPMorgan, Citibank, and others are now playing with even more fire, with leverage of about 15-to-1 on their balance sheets, and much higher leverage off-balance sheet.
So the U.S. banking and financial system is not even close to being out of the woods and healthy. Indeed, I would not be surprised to see one of the big banks blow up yet again this year. Especially Goldman Sachs.
You also have …
Severe supply shortages developing in many commodities and natural resources, which will add to the inflationary fires down the road.
Record-high worldwide demand for gold at the same time the supply of the yellow metal, both above- and below-ground, continues to shrink.
Plus, gold’s long-term cycles still very much intact, pointing to a continued bull market into at least 2012, if not longer.
Bottom line: No way is the bull market in gold over. Not by a long shot. Hold all core positions and watch for my signals in Real Wealth Report on when to add to those holdings!
Q: Platinum, palladium and copper are soaring, but not gold. What’s your take on that, Larry?
A: First, platinum, palladium and copper are soaring because the Chinese economy is in lift-off mode again.
Fourth-quarter GDP came in at 10.7%, an amazingly strong figure. Exports jumped 17.7% and more importantly, imports soared 55.9%. China’s auto sales are on fire as well, adding to the demand for platinum and palladium, both used in catalytic converters and pollution control.
China’s housing sales and prices are also exploding higher, leading to massive Chinese demand for copper.
Second, the cycles are currently supportive of platinum, palladium and copper, whereas with gold, they show the potential for a pullback lasting a month or two.
Keep in mind that similar markets do not have to always move together. All markets have their unique cyclical rhythms. Sometimes they are synchronized and sometimes they are not.
Bottom line: Never assume because one market is moving up, a similar market must do the same. Likewise, never assume that if one market isn’t following the path of another similar asset, that something must be wrong with that particular market.
Right now, platinum, palladium and copper are strong. Down the road, they could be moving sideways or lower, while gold takes off again.
Going forward, I’ll be sure to include more cycles research in my Uncommon Wisdom columns so that you can get a better understanding of how cycles affect individual asset classes and the securities within those classes.
Q: All eyes have been on China, with most analysts claiming China’s now a bubble that’s about to burst. What do you say?
A: All eyes should be on China — but not because the pundits think it’s a bubble about to burst, but because China is going to be the largest economy in the world in ten years, or less.
I can’t tell you how many times the pundits have gotten China dead wrong. The primary reason: Cultural bias and a lack of on-the-ground research in China.
Don’t get me wrong: China will have its share of setbacks. But it is not Japan, there is no Japanese style bubble forming in China as some seem to claim. Nor is China like the decrepit former Soviet Union, a failed state about to collapse because of corruption and mismanagement.
China’s economic growth is very real, and backed by …
The driving ambitions of more than 1.3 billion people.
Money in the bank, with currently $2.4 trillion in reserves.
A banking system that’s now the strongest in the world, even if bad loans were to mount due to the lending spree that’s occurring there.
A very high personal savings rate of 35%.
Rapidly increasing domestic consumption.
Extremely high rates of nationalism.
A government — that despite all that’s wrong with it, and there’s plenty — is very savvy economically. Instead of fighting the trend towards a capitalist society, like the Soviet Union did, Beijing is moving along with the cycle, helping its people move into a new era.
Think of China as the U.S. was at the end of the 19th century, or the beginning of the 20th century. Loaded with potential. And naturally, with potholes to navigate along the way.
Even so, there was little in the way back then to stop the U.S. from rising to become the world’s number one superpower. And there is little in the way now that could prevent China from doing the same.
Q: The dollar is rallying, and at times strongly. Perhaps you’re too bearish on the buck?
A: I expected a bounce in the dollar, and have made that clear in my video updates and other publications. But that’s all it is — a bounce.
The dollar remains in a long-term downtrend that will not even begin to abate until at least 2012, and when it does, it will be because the world is moving towards a single world currency.
There’s no question in my mind that the dollar is headed much lower. How can the buck not fall in value long-term when …
A. Washington is in hock to the tune of nearly $134 trillion, and the only way out is to largely monetize those debts by effectively printing an unlimited supply of dollars?
B. The economy of our single largest creditor, China, is soaring and will likely displace the U.S. economy as the largest in the world?
C. The conditions surrounding the ongoing financial crisis are exactly opposite the conditions that surrounded the Great Depression?
In the early 1930s, the U.S. was the world’s largest creditor. Today it is the world’s largest debtor.
In the early 1930s, Europe was defaulting on debts. Today, it’s the U.S. that’s in the biggest debt quagmire, by far.
In the early 1930s, Washington had a budget surplus, and the monetary system was tied to the amount of gold the Treasury held.
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| The so-called “dollar rally” is nothing more than a bounce. |
Today, Washington has a massive budget deficit, and there is no gold standard to prevent politicians from spending money the country doesn’t have, or preventing the Federal Reserve from printing an unlimited amount of paper currency.
Sure, there will be short-term rallies in the dollar, like the one we’re seeing now. But don’t expect them to be anything but brief bounces.
Q: Larry, I know you’re expecting inflation to roar back at some point. But there certainly is no evidence of that in the government’s inflation data. What gives?
A: First, when I talk about inflation, keep in mind there are two kinds …
1. Asset inflation, or re-inflation, due to a depreciating currency. This is largely the kind of inflation I am referring to, and it’s already happening. In natural resource prices and in the stock markets.
There are plenty of historical examples of this, ranging from Brazil and Venezuela to Russia, India, and more.
Basically, when a currency is devalued, asset prices eventually make up for the difference by floating higher. Debts are reduced as a percentage of asset prices, thereby “inflating away” the debt.
Many say this is a fictitious form of wealth, and a strategy that is doomed to create another crisis down the road, namely hyperinflation.
I say, yes, there are risks to it. But for the most part I agree that it’s the only way out for the U.S. Inflate asset prices … create (or re-create) wealth via asset inflation … and then that wealth will go back into the economy, spurring entrepreneurship, new businesses, new technologies, and more.
Granted, this is not as ideal a strategy as creating wealth from scratch. But it’s better than the alternative, which would be a deflationary collapse that would ruin the lives of almost every citizen in the country.
2. The other type of inflation is the more traditional kind, increases in the price of food, energy, the basic necessities of life, and in wages. This inflation is not going to show up in the government’s CPI statistics for some time. Largely because those statistics are manipulated.
But make no mistake about it: “Traditional inflation” is not only coming, it’s already here. In fact, I can’t think of one item — be it household food and supplies, dining out, entertainment, college tuition, medical care, personal items — that has not gone up in price over the last two years, and quite dramatically.
I’d love to hear from you on your thoughts in this area. How many of you are experiencing inflation in the cost of daily living right now versus deflation?
Jump over to my blog at http://blogs.uncommonwisdomdaily.com/real-wealth to leave me your comments!
Best wishes,
Larry
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