The economic and financial outlook for 2009 make Gold Investment appealing...
MONETARY AUTHORITIES around the world will not refrain from stimulating their economies, writes Julian Phillips of the GoldForecaster.com, printing money and doing whatever it takes until growth and confidence are restored to the bright days prior to July 2007.
And this will be done even if the cost is high inflation, for better inflation – in the policy-makers' minds – than savage deflation!
Gold in 2009: Investment Outlook
How to return to the good old days? The last long economic global boom relied on the average US consumer. A brief glance at him now tells us he needs to know that he can pay off his mortgage, and that his house is a reliable asset, that he can repay his debts from the income he receives, pay his taxes, educate his children, pay their hospital bills (if needs be) and provide for his family without the threat of losing home, income and savings.
But the last 18 months has shown him the risks to this lifestyle. More than that, the very values he depended on – the benefits of hard work, the certainty of savings, the support of credit – have been threatened or worse.
The US economy, and by extension the global economy. has for many years now relied on him, the consumer, for economic growth, encouraging him to borrow as much as he wants, while the value of his home and assets just grew. Then it all fell apart. And now, the only way the global economy can be resuscitated is if this consumer keeps on doing what he's been doing in the past. Or so everyone imagines.
On this Thanksgiving weekend, both you and this consumer sit with his family and look ahead to a dark 2009. He sits in the firing line of financial insecurity. With his 401k retirement plan and other investments decimated by falling asset values, many are even postponing retirement.
Gold in 2009: Deflation Threat
The leaders of the richest countries in the world agree that deflation is a pernicious economic condition, one far worse than inflation. So they are making hurriedly making every effort to combat it as the real and present threat that it is.
As Gordon Brown of Britain – who famously sold Half the UK's Gold Reserves in 1999 – recently put it, "The slower we are to act, the deeper the downturn will be and the longer it will take to correct".
The very blood of all economies – the free availability of credit, of liquidity – must be made to flow again, and then the rest of the body revitalized. The bailout of the banks was the first step, but with them still loath to lend, more is needed.
Now the government is trying to get easily available, cheap money back into the hands of the consumer directly in the hope that confidence is sustainable. But the consumer, the very backbone of the economy needs to see his house price rise again, because its rising value got him spending last time.
Gold in 2009: Expect the Year of Reflation!
Over $7 trillion of freshly issued US Dollars are now involved in saving the global financial system. Another $800 billion aimed at saving consumers mortgages, making it attractive to buy cars again and to spend money you don't have on that neat little plastic card, was promised last week.
What's another trillion or two? But are governments succeeding? Not yet; so they keep and will keep doing more and more until all appears well again. The 'repayment of debt' psychosis must be stopped from taking too strong a hold. Or else, we must expect a major depression of the kind not seen since early the last century.
Governments must make the consumer feel financially safe enough to spend again. Without this change of attitude, there will be no recovery for a long, long time! These central bank and government actions are desperate measures and not part of a vast, global, carefully laid plan. They are simply a reaction to a major disaster. Governments are focused on immediate solutions, which then may need yet another immediate solution, to fix things. But these moves are frighteningly inflationary with the hope that rising deflation will soften any inflation that is spawned.
Any inflation left over can then be fought once confidence is re-established. That is the thinking. But right now, most fear a very bleak future of deflation and depression instead.
Gold in 2009: Inflation Made User Friendly
But, you may well say, that means more mountains of easily destabilized debt? That's right, but so what? There's nothing like a surge in inflation to take away debt's sting. In the times to come, you can be sure that repayments will become easier as money loses value. All governments must do is to make inflation 'manageable' as it rides alongside growth, eroding money value as time goes by.
Here at GoldForecaster.com, we fully expect inflation to be treated as 'consumer friendly' and a counter to deflation, in the days ahead. And is inflation such a dark beast? In the Seventies and early Eighties, then-Fed chairman Paul Volcker tamed inflation with interest rates in the United States at 26%, so there are the means to do it again!
But whatever happens, central bankers must keep growth on track. Who cares for 'price stability' in which growth flourishes? The purpose of price stability is to keep growth alive, but the emphasis must be on growth, not price stability itself.
Gold in 2009: Forex Markets
We live in a global economy, call it a global village even. And one of the most dangerous consequences of the disaster of 2008 will soon be seen in the global foreign exchange market.
Dollar profligacy, alongside the shift of wealth and economic power from the West to the East cannot be avoided. The world's money system is already stressed under this burden. Now add the lost markets, falling prices, dropping growth and unforecastable Balance of Payments of the different nations in this global market, and we have to expect more systemic financial disasters.
Few will believe that the Dollar, its buying power or its exchange rate, can be held up long-term. While there is no alternative to the Dollar, expect a broad cheapening of the value of all the world's paper money, over time, accompanied by repeated turmoil in foreign exchanges from time to time.
How to smooth out these violent corrections in your own life and investments? A recent look at falling exchange rates in countries with weakening currencies has shown that investors in those countries who held Gold Bullion have done well.
And from so many angles, in this financial climate, in 2009 and beyond, Gold Prices will rise against most currencies.
As the credit crunch rolls on through the world with its collateral damage, one becomes keenly aware of the potential cost to the social and financial systems, both local and global. Society is based on the family. Financial systems rely on solid family values that lead to solid society values and norms. A solid society leads to a solid financial system. Price stability is one outcome; taking credit and repaying debt is another. Savings and the accumulation of wealth offers the clearest benefit.
Mess with these values and outcomes, however, and you make society unstable and bring out its worst facets. Make the financial system deviate from its basic norms, and you will also have major social as well as financial consequences. This is what August 2007 onwards has taught us; we have already watched many middle and upper class elements of US society see their wealth savaged or destroyed, often after a lifetime of hard endeavor. And this through no fault of their own!
Anger against banks is high at the moment and is likely to remain so. No public relations campaign will change this either. Trust in financial security has been badly eroded, with investors blaming the institutions that offered to guide them.
The foundations of both society and finance have thus been shaken and now exude an air of desperation as we look ahead to 2009. Banker's greed and loss of confidence in government's handling of financial failure have soiled the rosy future that seemed to lie ahead in July 2007. More will be required than simply putting matters right to restore that confidence. And until the future looks bright again, Buying Gold will remain a bright light in the investment world, taking it on a new leg of a strongly rising, long-term uptrend.
It is a sad reality that gold prospers when money systems don't. But attitudes to financial security will change and dramatically so, with 2009 seeing government desperate to shore up confidence. Unless financial values and institutions are structurally changed to repair these institutions, there will be severe social consequences.
Until that time, you will see a widening and a deepening of markets that do not rely on human endeavor for future financial security. Among those will be silver, Gold Coins and Allocated Gold, markets which carry no promise, nor nationality, but are at their best when the world is at its darkest.