Economic Outlook Supports Conservative Investment Strategy

Thursday, February 14, 2008

Lazy blogging can continue as the fundamentals have not changed since my last post as there are:
  • US deficits continue to explode
  • Banking woes mount
  • Coming deflation of paper debt
  • Consumers' excessive debt levels are nowhere near a change of trend
  • Real estate deflates on a global scale
  • Central banks create fiat money as never before and promise more of the same
  • Inflation in commodities and energy remains at record levels
  • After the housing bust the economy will slow further by the corporate credit crunch
  • Continuing growth in OTC derivatives which now amount to 13 times of global GDP of $50 trillion

Gold Feb 2003/2008

This blog has been favoriting gold and silver since 2005. Gold has climbed 112% or $476 and silver did even better, advancing 145% or $10 since the first post.  A good performance by simply investing in an inflation-proof currency that has never lost its value in 3,500 years.

Given the main fundamentals above I have no reason to change my view that all paper assets will continue to decline in value relative to gold, as it was always the case after periods of credit excesses. Silver may even perform better as it is one of the very few commodities that do not yet again trade at record levels. Silver had spiked to $50 in the short squeeze in 1980. This is a high that will certainly be taken out once gold/silver end their under performance relative to all other commodities in this millennium's first commodity boom.
Gold used to trade more or less in tandem with platinum till the mid-90s. Well, platinum currently scratches the $2,000 mark and where is gold? This under performance will not last forever and the longer it lasts, the stronger the following break out.
While there is always the possibility of a painful correction I forecast gold's trading range between $850 - the old high currently morphs into a massive support - on the downside and $1,500 on the upside for this year.
For silver I see a 2008 trading range between $15 and $25 with maybe even more room to the upside.
It will depend on the strength of the upmove and which new fundamental factors - like bankruptcies and defaults - will support the next long up-leg.Gold now also rises against the Euro. The formerly strong inverse correlation of FRN's and gold has become less reliable as investors begin to look for a way out of all unbacked fiat currencies. 3,500 years of history show it clearly. So far Western investors have shunned the physical market which is dominated by Asian savers. This will change too, giving rise to even more real demand as only bullion is not just another kind of obligation.
I notice one more change in attitude: These days all bad news correctly lead to precious metals strength. We will have no shortage in such.
Other than precious metals I have a growing interest in all other commodities, focusing on the food sector. Read some interesting insights from Deutsche Bank research on China's growing demand for higher quality nutrition here.

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