Thursday, 17 September 2009

The gold/dollar tsunami

Outside the Box
John Mangun
Business Mirror

Undoubtedly you have seen some of the personal videos of the tsunami that hit Thailand and Indonesia in 2004.

A normal day on the beach with the waves gently slapping the shoreline, moving back and forth as the ocean always does. For some strange reason though, the next wave does not come up to shore and the water is seemingly being pulled back into the ocean. Then, without warning, the next wave rushing toward the shore keeps growing larger and higher until the people realize that this is not normal by any standard and begin to run for their lives.

For the last few months, events have been coming together, not unlike what transpires in the hours leading up to the last few minutes prior to the unleashing of one of the most destructive forces of nature, the tsunami. The tsunami is created by a massive release of energy, unseen and unnoticed hundreds of miles away.

It has been almost two years since the debt bubble first hit the housing market in the US and Europe. This collapse in market value triggered the further collapse of giant financial institutions that had built their own wealth on that debt bubble. The domino effect cascaded through the “money companies” upon which traditional businesses in the manufacturing and service sector relied for their financing lifeblood. And because of the interdependence of all nations’ economies, the effects rippled again and again around the globe.

As consumer spending in the West came to a grinding halt, literally thousands of factories on the other side of the world in China closed, displacing hundreds of thousands of workers. A man very familiar with San Miguel’s operations in China says business in the southern part of the country has come to a near-standstill with all the workers having gone back to the interior provinces without jobs.

And when the Chinese factories closed, the ships needed to carry those goods to the West also went out of business. A year ago, the cost of shipping a 40-foot container of merchandise from China to the UK was £850, plus fuel charges. In 2009 it is £180. An oil tanker capable of carrying 80,000 tons of cargo would charter for $50,000 a day in 2008. Now it is about $5,500.

The visible sign of this tsunami has been growing steadily all year. The US dollar index is a measure of the value of a dollar against a basket of currencies. In July 2008, at the height of oil prices, the index was 72. When oil fell as demand could not justify the price, the dollar rose to 89. Theoretically, the price of the dollar and the price of oil should move inversely, high dollar, low oil.

In March 2009 oil traded at $70 and the dollar index traded at 87. Oil is still the same price, but the dollar has fallen to 76. Oil should have increased in price, but demand, due to the global economic recession, has kept oil prices flat.

The dollar index at 76 is not even a recent low. In 2008 the low was 71. But the trend of the dollar is so poor and the fundamentals that will devalue the dollar are so strong, that dollar-holding nations and individuals are slowly but unquestionably looking for a wealth storage alternative. Gold quietly closed last week at the highest price in history.

Many people have lost fortunes underestimating the resiliency and power of the US economy. But as I have said before, this is not the same US economy of even a decade ago. Its debt bubble has exploded, perhaps never to reinflate. Its government financial structure is worst than most Third World countries. Its manufacturing capabilities that made it the only true superpower for a century have vanished. There is almost nothing left that can bring that economy quickly back to its former state.

The last “rich man” on the planet, China, is moving its wealth to the traditional storehouse of wealth, gold.

From Money Week: “Hong Kong announced it was pulling all its physical gold holdings from depositories in the UK and moving them home to newly built vaults near the city’s airport. It’s estimated that they own some $63 million worth of gold. That isn’t much. What is noteworthy is that Hong Kong is taking delivery of its metal”.

It has been more than 40 years since governments and individuals were concerned about physically holding gold. And today, the largest producer of gold in the world, as well as the largest foreign holder of physical dollars, wants its gold within arms reach.

The price of gold is virtually unstoppable as it moves to $1,110 and then to $1,250 as the dollar index moves first to 72 and then to 67.

As this happens over the next months and quarters, hard asset prices will continue to increase, including that of commodities, metals and stocks, perhaps especially stocks. And the true “risk aversion,” the new motto of financial journalists, will be against cash.

Major currency interest rates will remain near zero and dollar-denominated inflation will push the prices of almost anything you can store, keep in a vault, or use as a raw material, even in the future, more and more valuable.

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