-- Posted Wednesday, 17 May 2006 | Digg This Article

I’ve been out of town.

I travel fairly often between Australia and the USA and it never ceases to amaze me that you can sit on a plane for 20 hours (that’s right!) and arrive in an ALTERNATIVE REALITY.

To say that Australia is far from the US is a MAJOR understatement. However the differences don’t stop at Geography. The US is a nation of consumers. The public is focused on Property, Gas Prices and War. The US never ever sleeps!

Australia on the other hand is about lifestyle. The beach, leisure and spending time with family comes first. Australia is also at War but it doesn’t seem to affect the psyche as much. Property prices are no longer the talk they used to be – it’s now the stock market. Gas prices though are also a worry.

ATLANTA INVESTMENT EXPO

As far as expos go the Atlanta Investment Expo was very small. That was great for me because it allowed me to have one-on-one discussions with some Heavy Weights in the Resource Industry and Stock Market Bears.

I was lucky enough to have a close friend accompany me to the expo. It would be fair to say that his attitude and focus towards Commodities changed quite a bit as a result.
I consider my friend a ‘Thinking Mainstream Investor’ so I felt I could extrapolate his views to those of the Investing Public at large. Here’s what I came away with:

• For all the Noise and Chatter about metals and oil making decade highs, we are still very early in this Commodity Bull Market. I’d say we’ve got at least 10 years to go but probably more. It’s going to be a long game so pace yourself for a marathon and not a sprint.
  
  
• The public is still shocked when a speaker talks about the Demise of the American Empire and the "Death of the Dollar". 5 years ago such talk would have been nothing short of treasonous. You gotta love America for Free Speech!
  
  
• Energy is the pivotal factor affecting prosperity. Gold and Inflation are a complete unknown.
  
  
• The American Investor better realize there is a World outside the USA - especially when it comes to money matters. Americans should travel more and consider implementing what James Turk calls the Last Plane Ticket (LPT). The LPT is a plan to have some assets outside of the USA in case of Government confiscation or exchange controls. The LPT can be used to live off if you have to leave the country. To even contemplate such a thing comes as an UNBELIEVABLE shock.
  
  
• The internet is the main source of information for Resource Based investors. The mainstream media have failed miserably in reporting the TRUE story.
  

My personal view is that in 2 to 5 years time these kinds of expos are going to be Full Houses. You won’t even get close to any of the guest speakers.

THE MAIN STORY

The talk right now is about Gold pushing through the $700 line.
Consider that it took Gold rising to $850 before Paul Volcker was able to break the back of inflation in the early 80’s. Now we're at $700 and nobody even acknowledges that there is inflation! Therefore Gold is going to go a LOT higher before the dust settles. In fact adjusted for inflation Gold will have to exceed $2,000 just to match its peak of $850 in 80’s!

Long time readers know that I’ve been reluctant to call this current Monetary phenomenon by name. Is it Inflation, Deflation, Stagflation or what? The reason being, a convincing case could be made for investing in Gold and Energy in almost any monetary climate.
However, I now feal reasonably comfortable in calling this Beast.
For the foreseeable future I believe we are looking directly at Stagflation.
Stagflation is an Inflationary environment coupled with very low rates of growth.

Here’s why I believe we are facing Stagflation:

The US economy is a paper tiger. Almost everyone I know in the US is involved someway or another in Real Estate. And that means Debt!
Now Debt is ok provided the assets behind the debt don’t Fall in price and precipitate a massive Liquidation.
So the Fed’s job is easy. Print money ‘til the Cows come Home but don’t ever allow asset prices to drop.

There’s one problem ofcourse - Gold.
That pesky metal is so sensitive to an increase in the money supply. Whenever it rises it scares the Dickens out of the public into believing that Price inflation will break out any moment.
To maintain credibility the Fed bangs its fist on the table and says they’ll raise interest rates to snuff out any sign of inflation.

Aaah therein lies the Catch. How to keep the Ocean of liquidity flowing (and asset prices rising) whilst keeping a lid on the Gold Price (by raising interest rates)?

The answer the Fed has come up with is to Raise Short Term interest rates very very slowly. Much slower than the rate of inflation but enough to convince the public that they are Fighting the menace tooth and nail.

But alas inflation is here and must emerge under that situation and it does so in the form of rising Long Term Interest Rates and a steepening yield curve.


Chart 1 - Gold Stocks are hypersensitive to an increase in liquidity

Well ok Greg, that’s the inflation side but what about the growth? I mean where I’m at the economy is booming!

Is it?

I submit to you that what you see as growth is merely the result of too much Monetary Printing. If we accept the fact that Gold is the Ultimate store of Value then Real growth is a measure of how an item performs against Gold. In the case of economic growth, the best barometer is the stock market. A cursory look at Chart 2 below shows that the Dow Jones Industrial Average is still firmly entrenched in a Bear Market in Gold terms.


Chart 2 - Economic Growth is a Paper Mirage

From the Fed’s perspective this is the best approach because it is all but invisible to the public.
The problem arises when the public increases it’s inflation expectations (because of rising gas and gold prices). Then the Fed’s machinations become less effective. As the ‘medicine’ wears off Real Estate and Stocks will undergo WILD and FRIGHTENING corrections. I think we are close to that now. Then the ancient King of Metals will emerge as the ultimate Victor. Make sure you’ve got GOLD!

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-- Posted Wednesday, 17 May 2006 | Digg This Article

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