 Boom
or Bust?
Puru Saxena
21 December 2007
The global economy seems to
be slowing down after the massive expansion which has taken place
since 2002. Moreover, the recent rout in the equity and credit
markets is yet again prompting several prominent analysts to
claim that a catastrophic depression lies somewhere ahead. The
doom-mongers are back in fashion again; pointing towards high
debt levels, US housing recession and the eventual failure of
the monetary system when making their dire economic forecasts.
According to this bearish camp,
American debt levels are unsustainable, foreigners are on the
verge of dumping their US Dollar assets and the world's reserve
currency is about to disappear from the face of this planet.
Furthermore, this gloomy bunch is expecting a gut-wrenching decline
in US equity and property prices.
So, are the pessimists correct
in their assessment or will the US economy continue to muddle
through over the coming months while nominal asset-prices move
sideways in a ranging pattern? In my view, given the high monetary
inflation taking place worldwide, the further scope for aggressive
rate cuts by the Federal Reserve and the gigantic pools of money
with the Sovereign Wealth Funds, the latter outcome looks more
likely. Whilst I am of the opinion that the ongoing credit crisis
and the housing recession will continue for the foreseeable future,
I expect central-bank sponsored reflation to work yet again.
In this modern era of endless money-creation, I anticipate that
asset-prices will bounce back sooner rather than later.
After parabolic upward moves
in the past few years, the majority of the base metals are currently
undergoing a medium-term correction as the market discounts a
growth slowdown in the US. With the exception of tin, all the
other metals (copper, zinc, nickel and lead) seem to be caught
in sharp medium-term pullbacks.
Recently, I have come across
a number of reports by various analysts who are claiming that
the bull-market in base-metals is now over. I beg to differ
with this opinion and feel that we are witnessing a classic and
violent correction within the ongoing bull-market rather than
a full-blown bear-market.
As far as I am aware, the demand
for base-metals will increase for several years as China followed
by India continue to improve their infrastructure and build massive
highways, airports, seaports, buildings and so forth. Moreover,
the Middle-East is also undergoing a boom due to record-high
oil and many oil-producing nations are also improving their infrastructure
whilst the going is still good. Under the scenario that the
price of oil stays high for many years, these nations in the
Middle-East will continue to consume more metals for the foreseeable
future.
On the supply side, escalating
costs and environmental issues are making it very hard for new
mining projects to come online and this should further eliminate
fresh supplies in the future. Whilst this development is a disaster
for the relevant mining companies (as gold company - Novagold
recently realised), it is great news for the base-metals bull-market.
The barometer of global economic
activity, Dr. Copper, has fallen sharply in the past month (Figure
1) and I suspect it may be about to commence a rally in anticipation
of further interest-rate cuts by the Federal Reserve. The recent
decline in the price of copper looks like an ongoing consolidation
during the long-term bull-market. Once the credit crisis subsides,
the price of copper is likely to stage an impressive rally.
Figure 1: Copper correction
almost complete?
Source: David Fuller,
Fullermoney
Finally, over in the precious
metals arena, both gold and silver are holding up reasonably
well after some impressive gains. In my view, precious metals
are simply consolidating before launching higher in the weeks
ahead. I have little doubt in my mind that the Federal Reserve
will slash its interest-rate in the next meeting and this should
act as a catalyst for yet another rally in gold and silver.
Both gold and silver have recently
broken out from large multi-month consolidations and this usually
marks the beginning of an explosive move. So, I would suggest
that you consider adding to your positions in this sector as
I anticipate a strong rally over the coming months. Personally,
I prefer to invest in precious metals via the producing-companies
as they provide better leverage than physical bullion. So far
in the bull-market, mining shares have outperformed bullion and
this should continue in the future. Therefore, depending on
your risk appetite, you can consider investing in top-quality
gold/silver producers or physical bullion or a combination of
both.
As long as the central banks
continue to destroy the purchasing power of their currencies
via inflation and as long as confidence in the financial system
remains low, both gold and silver are likely to provide a safe
haven for your hard earned capital.
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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