 Inflation-Deflation
Tug
Mary Anne & Pamela Aden
The Aden Sisters
February 18, 2005
Courtesy
of www.adenforecast.com
The inflation-deflation debate
has been raging lately, yet no one really knows how it's going
to unfold. The reason for this is because we're seeing signs
of both inflation and deflation in the world, and in the markets
today.
Why is this so important? It's important for a number of reasons
like your lifestyle, job, savings, retirement, world politics,
crime, social unrest and especially investments.
That's why we feel it's important to keep the big picture in
mind at all times. So if we stand back and look at the biggest
forces that are shaping, and will continue to shape our world,
along with the effects these forces will have, we'd have to say
it's China, terrorism and changing weather patterns. Let's start
with China...
CHINA POWER
After years of slumber, the world's oldest civilization is now
on its way to superpower status. In less than 20 years, China
has transformed itself from a basically agricultural economy
to the second largest economy in the world and the fastest growing
one. It's become manufacturer to the world and by exporting these
goods, China is building up huge surpluses which it's using to
invest in countries worldwide. China is our second biggest lender
and thanks in large part to China, the U.S. has been living beyond
its means and going deeper into debt. In essence, this has amounted
to a massive transfer of wealth.
Meanwhile, China's economy is growing at an annual pace of about
9% and this has been going on for many years. In contrast, the
U.S. economy slowed to 3.1%, hindered by its record trade deficit,
primarily with China. And there's no sign this will end soon.
With a population four times larger than the U.S., China needs
to create more jobs and it'll likely keep doing this because
textile restrictions were lifted last month. Since Chinese wages
are so low compared to other countries, it's estimated that about
30 million jobs will be transferred to China from other countries
and this mega trend is going to continue.
How will this affect us? Aside from job losses and ongoing deficits,
there's much more involved. A major world economic shift is taking
place and if we go back in history as Marc Faber does so well
by saying that China compared to the U.S. is very similar to
the position of the U.S. compared to Great Britain at the end
of the 19th century.
At that time, the entry of the U.S. into the global economy badly
disrupted the economies of Western Europe as the U.S. was rising
and Britain was slowly loosing its superpower status. The same
thing is happening today. The entrance of China into the global
economy will have a negative impact on the standard of living
in the West, as we're seeing with employment, as China's standard
of living continues to improve.
In addition, China needs everything to continue building its
infrastructure. This has been one of the big factors keeping
upward pressure on the oil price, commodities and metals. And
it looks like this demand will keep pushing prices higher.
COMMODITIES MEGA TREND: Has turned up
Looking at the truly big 200
year picture of commodity prices from 1804 to 2004, you can see
that all commodities generally move together (see Chart 1,
above). There have been five major upmoves since
1804 and we're just beginning the sixth. This strongly suggests
commodity prices will be rising for years to come, which would
coincide with China's growth and ongoing demand.
But it's not only China. There are now three billion people in
the world economy who weren't there before when we consider the
emergence of India and the former communist countries, in addition
to China. As these people become more affluent they'll be buying
more oil for their cars, metals for their industries and infrastructure,
and food, which will keep upward pressure on commodity prices.
So looking out to the years ahead, this is going to be inflationary.
Also interesting, these big commodity price rises have always
coincided with major wars throughout history. And the current
rise will probably coincide with the war on terror. In other
words, wars and/or geopolitical tensions will likely increase
in the years ahead.
DELICATE WORLD OF OIL
This shouldn't really come as a surprise. Despite the successful
election in Iraq, Bin Laden has stated many times he's out to
destroy the U.S. economically. He wants the U.S. and royal family
out of Saudi Arabia and he's been telling his followers, which
are growing in numbers, to attack oil fields and halt supplies,
which are essential to Western economies.
U.S oil imports are at record levels and the U.S. uses more oil
than Germany, Russia, China, Japan and India combined. Saudi
Arabia is one of our biggest oil suppliers and this alone makes
the entire oil picture vulnerable. Even though it's hard to imagine
because we tend to take oil for granted, it's a threat that could
not only cripple our economy but intensify the war on terror
if anything were to happen to disrupt our oil supplies. It would
also drive the oil price up to unprecedented levels, which would
tie in with this new mega rise in commodity prices. For now,
we don't know what's going to happen, but somehow rising oil
seems like it'll be part of the equation.
CHANGING WEATHER
At the same time, modern society and our dependence on oil has
led to the worst weather disruptions in 1,000 years. This is
resulting in more disasters like floods, hurricanes and droughts.
Here again, as this continues in the years ahead, crops will
be damaged and in more demand, which will also drive commodity
prices higher.
That's the way we currently see it. This could change but until
we see evidence to the contrary, we feel there's a greater likelihood
inflation is in our future rather than deflation and that should
prove to be good for the metals and commodities prices.
Interestingly, this commodity mega trend is coinciding with the
new investment era that began in the late 1990s with a shift
out of financial assets like stocks, into tangible assets like
gold (see Chart 2 below).
STOCKS TOO HIGH VERSUS GOLD
This chart compares the Dow Industrials to gold. You can see
that since 1919 there have been two major cycles and we're currently
into the third. When this ratio rises, the percentage gains are
better in stocks compared to gold and when it declines, gold
is the winning investment.
Note, for instance, stocks were better in the 1920s, 1950s-1960s
and 1980s-1990s. Gold was better in the early 1930s, 1970s and
now. This mega trend is telling us gold is where our investment
focus should be, not stocks at this time.
Also interesting, the lows in the ratio have occurred below 2.
This also indicates stocks are still expensive and gold is cheap
with the ratio now near 25. This means that somewhere ahead,
and it'll likely take years, this ratio will probably again get
to near 2, which will happen as gold rises and stocks fall. But
either way, the ratio suggests the rises and declines are going
to be dramatic.
Coming back to what's happening now, gold's intermediate decline
that started in December is coming to an end. And if gold can
now stay above $421, a renewed rise will be underway. This is
now providing a good opportunity to buy new positions looking
out to the months ahead and to the long-term.
Mary Anne & Pamela Aden
info@adenforecast.com
The Aden Forecast
Mary Anne
& Pamela Aden are internationally known analysts and editors
of The Aden Forecast, a market newsletter providing specific
forecasts on gold, gold shares and the other major markets.
For more information,
go to http://www.adenforecast.com/
321gold Inc Miami
USA
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