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The Next Financial Crisis and Gold Savehaven

Commodities / Gold and Silver 2010 Apr 23, 2010 - 03:21 AM GMT

By: Christopher_Laird

Commodities

Best Financial Markets Analysis ArticleWith the Asian stock markets stalling, and the US markets insisting on rallying a suspicious 25 points a day with nary a correction in over a year, something is definitely wrong out there. What gives? I cannot believe the US economic prospects are that good right now.

But then again, with the EU markets and the EU itself looking like it’s about to disintegrate, with a new bailout story on Greece that never pans out, and what a failure to bail out Greece will do to the Euro – a Euro crisis alone can tank all markets and cause massive social unrest in the EU with nations starting to bolt as they find staying with the huge budget cuts are politically impossible.


But there are many developing crises right now. What then is the next crisis that will lead to panicky markets again? Surely one is due again. The VIX is at low levels similar to just before the Bear crisis in 2007 and Lehman mega crisis in Fall 2008.

Gold-

The relentless rise in the US stock market is either a head in the sand routine by Funds who have nowhere else to put money, or the central banks are unilaterally supporting the markets with these rather suspicious 25 point rises in the Dow day after day for a year…(a bit of exaggeration but you get the idea). It’s as if some great power has made an edict to relentlessly make the Dow (or your favorite index) rise no matter what to scare financial bears out of the market.

There is a much larger issue here

But there is something much bigger out there driving all this, and unfolding right in front of our eyes – the deconstruction of the entire world economy from its post WW2 US centric consumer model – combined with relentless employment shrinkage and labor arbitrage with Asia. That combination is leaving the Western economies and their accustomed standard of living in tatters, with a very bleak outlook henceforth. Europe especially is vulnerable to depression level forces with youth unemployment age 16 to 24 in Spain for example at 42%! In short, meaningful austerity measures are impossible for the weaker EU countries.

The only outcome must be chaos in the West – economically and socially. That chaos is going to begin soon. It is already showing a few stirs.

Serial crises unavoidable

What the world is presently going through are serial crises each year, roughly two a year since 2007, which rocks currency markets and ultimately rallies gold, which is the one market that seems to prosper in these uncertain times. The commodity markets are more like speculator zones, and I don’t feel these are very good havens because of that.

We did some brief price studies on prices back in 1908 to the present. Even with the gold ‘Manipulation story’ (which is true) gold actually does reflect the price changes of real goods since 1980 and even all the way back to 1908. I picked 1908 because I have data from then on prices and its pre US Federal Reserve. (Example a loaf of bread was 10 cents in 1908-1930 roughly and now is $3. That is 30 times higher. Gold is also roughly 30 times higher).

So even with manipulation, gold is still reflecting the price changes of real goods in the economy pretty accurately. Now of course if gold were to spike it would then start reflecting the massive world central bank public bailouts of all and sundry markets which are on the verge of total collapse (banking, sovereign bonds, and so on). That phase will yet appear when it’s ready.

But getting back to the theme – that of serial crises on the horizon as far as the eye can see…

China has a major problem ahead

And then there is China – and its gigantic construction bubble which is alive and well (way too well) and – is going to be popped by a determined Chinese government. And Even so China certainly is well aware that 60% of their economic growth in recent years is construction related. Did you know that? If China is popping a huge construction bubble that is 60% of their economy then why is everyone talking about using basic commodities as an investment haven? There is a difference between a haven and a speculation. Commodity markets are speculation markets right now. That makes them subject to wild price swings.

All this crisis list is because of one major theme

Everything that is happening in the world – market dangers, sovereign debt crises, labor arbitrage of West to East, government budget overruns of a huge magnitude, currency instability (Euro situation as one example), pressure on China to let the Yuan rise, looming trade wars, and especially social chaos in the West if austerity measures are implemented, falling tax revenues on a nothing less than disastrous scale worldwide (except in China for the moment but that is going to change rapidly) – are all derivatives of the changing of the economic guard from West to East.

So, all the crises we are facing also represent this larger picture – of a changing economic world order from West to East – Asia is rising.

The problems are all compounded in the West and Asia by an age gap (aging gap) of huge magnitude. This age gap is all the baby boomers retiring not only in the West but in Asia too – especially Japan which is on deflationary legs and needs government stimulus – again- to try and replace what all the aging boomers earned and bought. Which isn’t going to work; it hasn’t worked for the last 20 years even when things were pretty good for Japan since 1990…

We can list more looming crises but I think you get the idea.

How do we get from here to there?

Now, the world will transition to some state where Asia takes over the economic engine, and if labor arbitrage keeps up, the West is going to be left out cold in any economic rebound.

If that is so, how do we get from here to there? I certainly have doubts that the commodity sector is not vulnerable for the second coming economic downleg, particularly when China is trying to pop their construction boom/bubble. Which is probably going to happen later this year.

In order to safely navigate through your retirement years, you are going to have to find ways to protect your savings – and that will probably involve not only gold and silver stocks for example to hedge against a falling USD, but also some mix of currencies during the turmoil that is to come for liquid assets like cash.

The recent favorite havens do not have a good track record except gold

6 years ago the Euro was bandied about as being the solution to the USD. Now the Euro appears fatally flawed. I also get concerned that commodities are constantly being promoted as the safe haven, especially after witnessing the horrendous commodity crash in Summer 2008. We warned subscribers of that pending crash two months ahead of time that the USD was due to rally.

In any case, the only way to safely preserve your savings will involve closely tracking developments in sovereign bond markets and careful choices of a batch of currencies, gold stocks (or coins) and possible well chosen commodities, but not ones being turned into speculation markets, which many are now.

By Christopher Laird
PrudentSquirrel.com

Copyright © 2010 Christopher Laird

Chris Laird has been an Oracle systems engineer, database administrator, and math teacher. He has a BS in mathematics from UCLA and is a certified Oracle database administrator. He has been an avid follower of financial news since childhood. His father is Jere Laird, former business editor of KNX news AM 1070, Los Angeles (ret). He has grown up immersed in financial news. His Grandmother was Alice Widener, publisher of USA magazine in the 60's to 80's, a newsletter that covered many of the topics you find today at the preeminent gold sites. Chris is the publisher of the Prudent Squirrel newsletter, an economic and gold commentary.

Christopher Laird Archive

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