3 March 2007
The broad market sell-off this week actually hit precious metals and precious metal stocks harder than the general market.
We may not be done with this reversal yet, although those who have a big stake in market stability will be pulling out the stops to restore confidence to the global marketplace.
What is going on?
Well, we've discussed excess liquidity before. By definition, excess liquidity (too much money being created as opposed to the value of all goods and services being created) creates the conditions for capital misallocation. In short, all this extra money will get invested in locations that are not fundamentally productive.
Why is that?
If economic growth were attributable to rising productivity, then capital would be invested in productive assets. But our recent period of economic growth is not about productivity, it is about liquidity.
Government creation of excess money supply makes people feel richer – for a while. But a vastly increased sum of money chasing only marginally increased quantities of goods and services simply drives up the cost of goods and services, through the operation of the law of supply and demand.
Essentially, every major government in the world is doing this right now, so what we are presently witnessing is the creation of a breeding ground for a liquidity crisis of global proportions. (Click here to see how the US Federal Reserve Bank rationalizes its commitment to excess liquidity.)
While governments can increase the amount of money in circulation – and they have been doing so at a stunning pace – the quantity of US Dollars in circulation alone is now increasing on the order of one trillion dollars per year – democratic governments have only limited means of controlling where the money flows once it is in others’ pockets.
This is capital misallocation.
Basically, well-positioned international investors are redirecting these excess funds for quick gains, and only rarely for increased (and rationally considered) long-term productivity.
Some of the more obvious manifestations are: (1) burgeoning Asian and Middle Eastern economic growth and infrastructure spending (this is potentially productive, but is excessive and unbalanced, driven by transient market forces – such imbalances are presently driving a global glut of memory capacity in the information technology field, for example, and this is rapidly driving down prices and undermining the value of the infrastructure investment in memory technology); (2) an until recently rapidly inflating – and now rapidly deflating – US real estate market; (3) the now well-discussed Yen carry trade – which involves borrowing Japanese Yen at low interest rates and investing these cheaply obtained funds in any asset that is appreciating in value more rapidly than the interest due on the Yen loans; and (4) what will soon be extensively discussed – the proclivity of global hedge funds (usually private funds which use leverage of up to 10-20 times to invest long and short in a wide variety of usually short-term speculative investments).to move opportunistically in and out of various investments on a very short-term basis.
What is driving the liquidity?
Virtually every government in the world is guilty of printing money at an excessive clip.
But one government is in big trouble, and that is our neighbour to the south.
The United States is now running deficits in global trade and federal government spending on the order of one trillion dollars per year, and that deficit closely matches the one trillion dollar per year rate of growth of the United States money supply.
That is, the United States is not utilizing an increase in productive assets to meet its global and domestic debt obligations, but is simply creating the money out of thin air to make these payments. The newly created dollars are then sold in the international bond market, and this is the point where their ownership rapidly passes out of US hands.
The global investors who are acquiring US Dollars have a spectrum of interests, some but not all of which are aligned with the interests of the United States. For the most part, international investors who are in receipt of US Dollars through the massive US current account and trade deficit – particularly the Chinese, the Japanese and the Middle Eastern oil producers – have been buying back United States assets. While this is comforting to the powers that be in Washington, D.C., it does indicate that ownership of US assets is rapidly slipping out of US hands.
In brief, to use an analogy, the homeowner is selling the kitchen sink and the living room carpet to pay the mortgage – and the equity interest in the home is declining against ever-rising debt claims.
Countering this trend, however, has been a gradual and so far gentle shift of global investment positions out of US assets and into alternative assets, including Asian and Middle Eastern infrastructure and business development, commodities generally, alternative currencies – particularly the Euro, and precious metals.
This accounts for the 30% decline in the international exchange value of the US Dollar over the past 5 years, and plays a role in the topping out of the US stock market (which has been declining relative to gold since 1999).
The point I wish to emphasize today is that the excess money supply has clearly been misallocated. At the most basic level, monetary inflation is a tax on citizens that punishes those with stable incomes and rewards those who can exploit liquidity flows to leverage their gains.
Thus, salaried wage earners are seeing their purchasing power slip while CEOs and hedge fund investors (not to mention precious metal investors – and this can be anyone, including you or me) are able to multiply their assets in this ebullient and highly liquid, but precariously unbalanced, global economic environment.
Precious metals, as I have discussed previously, are a hedge against global monetary insanity, and this is why they are a superior investment vehicle now.
Mainstream investors, perhaps unaware of the global imbalances which are destabilizing the global economy, continue to invest in assets that are perceived to be stable and productive – most often real estate, government and corporate bonds and general stocks.
Unfortunately, while this would be a wise choice in “normal” economic times, we are no longer in normal times, and all of the above-noted mainstream investment vehicles have actually become risky due to the game of international monetary manipulation, which is now nearing a century-long crescendo.
That is, the real estate market has become a bubble, and severe declines are probable in the hottest markets, with stagnation most probable for mainstream markets (in which most Canadian real estate investments are included).
The bond market has become imbalanced by the so far almost imperceptible drift of global interest away from US assets, and this is pushing up long-term interest rates – and undercutting the value of bonds. Bonds, therefore, are unlikely to be a remunerative long-term investment.
The current global economic boom, due to its being driven by massive debt accumulation, particularly in the United States, will not be able to sustain corporate profits, and this accounts for the already-cited 7-year decline of general equities against gold.
Last, and unfortunately least, cash is literally being “trashed” by the central banks of virtually every major global power. Thus, holding cash has become a certain prescription for future poverty.
I began today’s entry by noting that precious metals have declined more than global equities in this past week’s sell-off. This would seem to contradict my assertion that precious metals are in fact the most secure and rational defensive investment against the global debt and liquidity boom.
Not at all. Closer examination shows that precious metals are being sold off because they have been an effective store of value to hedge risky investments in highly leveraged short-term speculations in such areas as the Yen carry trade, currency swaps, booming Asian and previously booming Middle Eastern markets, etc. Leveraged investors need to sell their productive assets in order to cover their losses when their speculations fail. This appears to account for gold and silver’s decline this past week.
That is, the present sell-off in gold is clearly a transient phenomenon, though it may take some further weeks to unwind, while the destabilization of international markets is a growing and dangerous trend which in the very near future will drive global investors back to gold as a safe haven against gold’s much riskier alternatives. (Every alternative class of investments is riskier than precious metals in the present global marketplace.)
A look at sentiment indicators indicates that gold market sentiment is nowhere near as bullish (70%) as it was near its most recent May 2006 peak (90%). That is, there are investors presently outside the gold market who will soon be moving in, some of them for the first time, due to global financial instability, and this is a stronger long-term trend than the recent short-term move out of gold by speculators who are covering their losses in high-risk and unsound investments.
As I have stated previously, the gold bull market offers a vigorous and jolting ride, with many sharp pullbacks as well as powerful surges. It is not by any means a comfortable ride, nor is it for the faint-hearted. But the global financial marketplace itself is anything but a safe and comfortable environment at present.
That is, there is no place of peace and security anywhere in the global investment world at this time. Even the safest of seats – and that is in gold’s section for certain – will inevitably be buffeted by the crosscurrents of excess liquidity, capital misallocation and global rebalancing.
A worldwide storm is coming, and it is time to make proper preparations. The hour is drawing near. In fact, it is already with us.
What would you prefer? To be bucked about by the gold bull (hang on, don't let go) – or to be boiled slowly with the lobsters in the pot of the global cash, equity and bond markets?
While many commodities will also prove to be outstanding long-term investments in the present environment – and some may fare better than gold and silver – if you are seeking a safe haven against the coming storm, gold and silver remain the place to be. Come on in – there will be good and more company in the house of gold before this multi-decade bull market has run its course. Source URL: http://idontwanttobeanythingotherthanme.blogspot.com/2007/03/safe-haven-in-global-storm.html
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The broad market sell-off this week actually hit precious metals and precious metal stocks harder than the general market.
We may not be done with this reversal yet, although those who have a big stake in market stability will be pulling out the stops to restore confidence to the global marketplace.
What is going on?
Well, we've discussed excess liquidity before. By definition, excess liquidity (too much money being created as opposed to the value of all goods and services being created) creates the conditions for capital misallocation. In short, all this extra money will get invested in locations that are not fundamentally productive.
Why is that?
If economic growth were attributable to rising productivity, then capital would be invested in productive assets. But our recent period of economic growth is not about productivity, it is about liquidity.
Government creation of excess money supply makes people feel richer – for a while. But a vastly increased sum of money chasing only marginally increased quantities of goods and services simply drives up the cost of goods and services, through the operation of the law of supply and demand.
Essentially, every major government in the world is doing this right now, so what we are presently witnessing is the creation of a breeding ground for a liquidity crisis of global proportions. (Click here to see how the US Federal Reserve Bank rationalizes its commitment to excess liquidity.)
While governments can increase the amount of money in circulation – and they have been doing so at a stunning pace – the quantity of US Dollars in circulation alone is now increasing on the order of one trillion dollars per year – democratic governments have only limited means of controlling where the money flows once it is in others’ pockets.
This is capital misallocation.
Basically, well-positioned international investors are redirecting these excess funds for quick gains, and only rarely for increased (and rationally considered) long-term productivity.
Some of the more obvious manifestations are: (1) burgeoning Asian and Middle Eastern economic growth and infrastructure spending (this is potentially productive, but is excessive and unbalanced, driven by transient market forces – such imbalances are presently driving a global glut of memory capacity in the information technology field, for example, and this is rapidly driving down prices and undermining the value of the infrastructure investment in memory technology); (2) an until recently rapidly inflating – and now rapidly deflating – US real estate market; (3) the now well-discussed Yen carry trade – which involves borrowing Japanese Yen at low interest rates and investing these cheaply obtained funds in any asset that is appreciating in value more rapidly than the interest due on the Yen loans; and (4) what will soon be extensively discussed – the proclivity of global hedge funds (usually private funds which use leverage of up to 10-20 times to invest long and short in a wide variety of usually short-term speculative investments).to move opportunistically in and out of various investments on a very short-term basis.
What is driving the liquidity?
Virtually every government in the world is guilty of printing money at an excessive clip.
But one government is in big trouble, and that is our neighbour to the south.
The United States is now running deficits in global trade and federal government spending on the order of one trillion dollars per year, and that deficit closely matches the one trillion dollar per year rate of growth of the United States money supply.
That is, the United States is not utilizing an increase in productive assets to meet its global and domestic debt obligations, but is simply creating the money out of thin air to make these payments. The newly created dollars are then sold in the international bond market, and this is the point where their ownership rapidly passes out of US hands.
The global investors who are acquiring US Dollars have a spectrum of interests, some but not all of which are aligned with the interests of the United States. For the most part, international investors who are in receipt of US Dollars through the massive US current account and trade deficit – particularly the Chinese, the Japanese and the Middle Eastern oil producers – have been buying back United States assets. While this is comforting to the powers that be in Washington, D.C., it does indicate that ownership of US assets is rapidly slipping out of US hands.
In brief, to use an analogy, the homeowner is selling the kitchen sink and the living room carpet to pay the mortgage – and the equity interest in the home is declining against ever-rising debt claims.
Countering this trend, however, has been a gradual and so far gentle shift of global investment positions out of US assets and into alternative assets, including Asian and Middle Eastern infrastructure and business development, commodities generally, alternative currencies – particularly the Euro, and precious metals.
This accounts for the 30% decline in the international exchange value of the US Dollar over the past 5 years, and plays a role in the topping out of the US stock market (which has been declining relative to gold since 1999).
The point I wish to emphasize today is that the excess money supply has clearly been misallocated. At the most basic level, monetary inflation is a tax on citizens that punishes those with stable incomes and rewards those who can exploit liquidity flows to leverage their gains.
Thus, salaried wage earners are seeing their purchasing power slip while CEOs and hedge fund investors (not to mention precious metal investors – and this can be anyone, including you or me) are able to multiply their assets in this ebullient and highly liquid, but precariously unbalanced, global economic environment.
Precious metals, as I have discussed previously, are a hedge against global monetary insanity, and this is why they are a superior investment vehicle now.
Mainstream investors, perhaps unaware of the global imbalances which are destabilizing the global economy, continue to invest in assets that are perceived to be stable and productive – most often real estate, government and corporate bonds and general stocks.
Unfortunately, while this would be a wise choice in “normal” economic times, we are no longer in normal times, and all of the above-noted mainstream investment vehicles have actually become risky due to the game of international monetary manipulation, which is now nearing a century-long crescendo.
That is, the real estate market has become a bubble, and severe declines are probable in the hottest markets, with stagnation most probable for mainstream markets (in which most Canadian real estate investments are included).
The bond market has become imbalanced by the so far almost imperceptible drift of global interest away from US assets, and this is pushing up long-term interest rates – and undercutting the value of bonds. Bonds, therefore, are unlikely to be a remunerative long-term investment.
The current global economic boom, due to its being driven by massive debt accumulation, particularly in the United States, will not be able to sustain corporate profits, and this accounts for the already-cited 7-year decline of general equities against gold.
Last, and unfortunately least, cash is literally being “trashed” by the central banks of virtually every major global power. Thus, holding cash has become a certain prescription for future poverty.
I began today’s entry by noting that precious metals have declined more than global equities in this past week’s sell-off. This would seem to contradict my assertion that precious metals are in fact the most secure and rational defensive investment against the global debt and liquidity boom.
Not at all. Closer examination shows that precious metals are being sold off because they have been an effective store of value to hedge risky investments in highly leveraged short-term speculations in such areas as the Yen carry trade, currency swaps, booming Asian and previously booming Middle Eastern markets, etc. Leveraged investors need to sell their productive assets in order to cover their losses when their speculations fail. This appears to account for gold and silver’s decline this past week.
That is, the present sell-off in gold is clearly a transient phenomenon, though it may take some further weeks to unwind, while the destabilization of international markets is a growing and dangerous trend which in the very near future will drive global investors back to gold as a safe haven against gold’s much riskier alternatives. (Every alternative class of investments is riskier than precious metals in the present global marketplace.)
A look at sentiment indicators indicates that gold market sentiment is nowhere near as bullish (70%) as it was near its most recent May 2006 peak (90%). That is, there are investors presently outside the gold market who will soon be moving in, some of them for the first time, due to global financial instability, and this is a stronger long-term trend than the recent short-term move out of gold by speculators who are covering their losses in high-risk and unsound investments.
As I have stated previously, the gold bull market offers a vigorous and jolting ride, with many sharp pullbacks as well as powerful surges. It is not by any means a comfortable ride, nor is it for the faint-hearted. But the global financial marketplace itself is anything but a safe and comfortable environment at present.
That is, there is no place of peace and security anywhere in the global investment world at this time. Even the safest of seats – and that is in gold’s section for certain – will inevitably be buffeted by the crosscurrents of excess liquidity, capital misallocation and global rebalancing.
A worldwide storm is coming, and it is time to make proper preparations. The hour is drawing near. In fact, it is already with us.
What would you prefer? To be bucked about by the gold bull (hang on, don't let go) – or to be boiled slowly with the lobsters in the pot of the global cash, equity and bond markets?
While many commodities will also prove to be outstanding long-term investments in the present environment – and some may fare better than gold and silver – if you are seeking a safe haven against the coming storm, gold and silver remain the place to be. Come on in – there will be good and more company in the house of gold before this multi-decade bull market has run its course. Source URL: http://idontwanttobeanythingotherthanme.blogspot.com/2007/03/safe-haven-in-global-storm.html
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