Gold & the Money Migration

The Money Migration from West to East is turning into a Money Stampede...

THE MONEY MIGRATION that's pushing wealth from the Western world to East Asia is fast turning into a stampede. How can you avoid getting trampled?

   There is a simple way to explain this movement in global currency and commodity markets, and a number of smart investors – including Jim Rogers, Marc Faber and several others – hit on it a few years ago.

   In short, the US Dollar had become a dangerously flawed currency, the unbacked liability of a vastly over-extended empire. The days of everyone everywhere doing the world's business in America's currency were numbered.

   Well, it all looks too true now. Gold Prices just keep recording new 27-year highs. Oil – riding a massive geopolitical premium and nearly unanimous bullish sentiment – trades at all-time record highs. Both are measured in US Dollars. So both reflect the Dollar's dramatic loss of value, right?

   But here's a question: are these two commodities exhibiting honest-to-goodness strength...or are they merely symptoms of the Dollar's steady march to intrinsic value (i.e. zero)? The trouble in a world of managed exchanged rates – a "dirty float" rather than a "free float" – is that all currency values are relative.

   The US Dollar is weak against everything. The Aussie Dollar is strong against most other currencies. But some currencies like the Japanese Yen are strong against one currency and not as strong against others.

   And then there's China's currency – whose strength is shackled by a managed-floating-exchange rate which caps how much the currency can appreciate against the US Dollar. The only currency that's not managed by central bankers is gold – and there are some people who tell you the Gold Market is managed (or manipulated) from showing its real strength.

   But Gold Prices keep flexing their muscle...and telling us that the whole post-war era of the Dollar Standard is racing to the terminus.

   Still, looking at the markets today, we get the feeling a pullback in all the major trends is probably in order. The Aussie Dollar has climbed to 92 cents on the dual rate prospects (a rise in Australia and a cut in America). The expanding yield spread favors the Aussie, and currency traders seem to have priced in both moves before the fact.

   We always think of the old phrase, "Buy the rumor, sell the news", at times like this. Parity might be the ultimate destination for the Aussie. But in the short-term, the rate differential seems to be fully priced in to the market.

   And oil? Even the oil insiders are scratching their heads. Shell's Peter Voser told analysts in London, "To be honest, we find it hard to explain the oil price...We find it hard to explain oil at US$100 a barrel. I don't see anyone queuing for fuel and nor are there any physical shortages...The price seems to be driven by some speculation and also has a political premium in it, rather than actually some of the fundamental drivers."

   Don't get us wrong. We're long-term bulls on energy. But we hate it when everyone joins us on the same side of the trade. It makes us nervous. Oil – in real terms – is not nearly as expensive as it was at the height of the Arab oil embargo. That is partly explained by the fact that Opec has less sway over global oil prices than in the 1970s, thanks to increased production from the likes of Russia, Norway, and Mexico.

   But even with the non-Opec producers adding to global production figures, there's a wall coming. The world is barely producing enough oil to match consumption rates. Either production will have to increase – a challenging proposition – or consumption will have to decrease. Let's call that recession in America. Or a bubble in China.

   A third way is for oil substitutes to replace crude as the fuels of the future. But progress with alternatives and renewables is slow and lacking any real urgency. You look around you and people seem to be motoring along to the future, clueless that the tank is running on empty.

   The modern state of mind is a combination of laziness and obliviousness, topped with a healthy layering of "I-don't-care-as-long-as-it-doesn't-interrupt-my-plans."