 Time
to Shine!
Puru Saxena
13 September 2007
Precious metals are on the
verge of a major rally within their ongoing bull-market. After
consolidating since May 2006, both gold and silver spent the
past 16 months building large bases and now it seems that the
much anticipated advance has arrived.
I started investing in precious
metals in 2001 when both gold and silver were significantly cheaper,
however even today they represent great stores of value for the
long-term investor. In a world of high monetary inflation and
elevated asset prices, precious metals are still relatively inexpensive
when compared to financial assets such as bonds, non-resource
related stocks and leveraged real-estate.
Figure 1 highlights that the
S&P500 outperformed gold throughout the 1980's and 1990's.
Back then, US financial assets witnessed their biggest bull-market
as the world of tangibles contracted. During that period, US
stocks rose 15-fold whilst gold's value declined by roughly 70%.
However, at the beginning of this decade, the mega trend reversed
in favour of gold. And since then, the yellow metal has appreciated
much more than the S&P 500.
Figure 1: Gold extremely
depressed compared to US stocks!
Source: Dr. Ed Yardeni
Now, in order to determine
what the future might bring, I would like to analyse the current
situation. Over the past few months, the media has bombarded
the public with the "Sub-prime Crisis" and the ongoing
credit crunch in some segments of the capital markets. All this
negative news has caused investors to panic and the "deflationary
bust" debate is back in fashion once again. Several analysts
have also started to lean over in the deflation camp and are
advising investors to liquidate en masse and raise cash. So,
should we also join the herd and panic? Or is this the time to
reflect and ascertain how the establishment will respond to the
ongoing crisis?
I am of the opinion that over
the weeks and months ahead, the US establishment and various
central banks will orchestrate a massive monetary and fiscal
bail-out. Remember, we are in the third year of the US Presidential
cycle and the people in power will do whatever they can in order
to inflate asset-prices heading into the election. In fact, Mr.
Bush's recent "aid program" to help low to middle-income
homeowners is a good indication of what lies ahead. If my assessment
is correct, another bout of widespread inflation (money-supply
and credit growth) will come to the "rescue" as the
central bankers open the monetary spigots and flood even more
liquidity into the ailing monetary-system.
It is worth noting that after
the technology bubble burst in March 2000, the Federal Reserve
created massive inflation through its ultra-loose monetary policy.
And this easily available credit found a home in real-estate
all over the world. After being burnt in the stock-market, the
investing public decided to direct their speculative juices towards
bricks and mortar. As easy money flowed thanks to record-low
interest-rates, home prices were bid up in the majority of countries.
There was a total disregard for risk as the "real-estate
never goes down" mantra replaced the "New Economy"
nonsense. This party continued for a while until the "bubble-blowers"
decided to remove the punch bowl by raising the cost of borrowing.
As the tide of liquidity went out, numerous people were found
swimming naked! The "Sub-prime Crisis" had arrived.
Now, given the fact that the
masses have lost a lot of money in technology and real-estate,
it is highly unlikely that the next bout of central bank sponsored
inflation will benefit these sectors of the economy. In other
words, the next bubble is not likely to form in these previously
"hot" markets. In fact, this time around, I suspect
the easy-monetary policy will create a gigantic bubble in precious
metals and other natural resources. Already, it seems as though
the market senses the next wave of inflation as the US Dollar
is declining and gold has broken above US$700 per ounce. In the
period ahead, I expect gold to appreciate significantly not only
against the US Dollar but also against the other currencies which
are being inflated at a ridiculous pace! Take a look at the annual
money-supply growth rates around the world -
| US |
+12% |
| Euro zone |
+13% |
| Britain |
+14% |
| China |
+20% |
| Russia |
+51% |
| India |
+23% |
| S. Africa |
+22% |
| Brazil |
+12% |
Now, you don't have to be a
NASA-scientist to figure out that as the quantity of money increases,
each unit of money will continue to lose its value or purchasing
power against assets whose supply cannot be increased at the
same pace. This confiscation of purchasing power has bullish
implications for precious metals.
Today, several highly-intelligent
economists and analysts are anxiously waiting for "The Crash"
which will wipe out the value of the Dow Jones by 50-60%, cut
the value of gold by half, cause an economic depression and create
a vicious bear-market in asset prices. In my humble opinion,
these people are going to be disappointed because "The Crash"
will be stealth and will take place via plummeting currencies
rather than an outright collapse in nominal asset-prices. Those
who are forecasting a significant decline in US asset prices
need to look no further than Zimbabwe where stocks have been
making record-highs, albeit in a collapsing currency! So, given
a choice between an outright deflationary bust and an inflationary
bail-out, I can assure you that every establishment will opt
for the latter outcome. In fact, central banks will continue
to print money until the world runs out of trees.
The truth is that most people
do not understand inflation and feel wealthy as long as their
asset-prices continue to rise (never mind the state of the currency).
So, the inflation-pill is a lot easier to swallow than an economic
depression. And this is exactly what we are going to witness.
The modern-day monetary system
is far from ideal, however we all have to live within the system
and try our best to protect our wealth from the ravages of inflation.
As a money-manager with the capability to invest in global assets,
I have invested our clients' capital in the world of tangibles.
Recently, we have added to our positions in precious metals on
the belief that we could witness an explosive run-up over the
coming months. Furthermore, from a sentiment perspective (with
the majority of investors fearful and bearish), the current conditions
seem ideal for the next advance in the ongoing secular bull-market
in precious metals.
Puru Saxena
 Saxena Archives
email: puru@purusaxena.com
website: www.purusaxena.com Puru Saxena publishes Money Matters, a monthly economic report, which highlights extraordinary investment opportunities in all major markets. In addition to the monthly report, subscribers also receive "Weekly Updates" covering the recent market action. Money Matters is available by subscription from www.purusaxena.com. Puru Saxena is the founder of Puru Saxena Wealth Management, his Hong Kong based firm which manages investment portfolios for individuals and corporate clients. He is a highly showcased investment manager and a regular guest on CNN, BBC World, CNBC, Bloomberg, NDTV and various radio programs. Copyright ©2005-2015 Puru Saxena Limited. All rights reserved.
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