The U.S. manufacturing base has been shipped overseas. The few jobs being created are in the service industry or government sector. The official unemployment rate hovers near 10%, and 1 out of every 8 Americans is on food stamps. The 2008 economic implosion destroyed the real estate market, sent foreclosures skyrocketing, and swallowed up a nearly $1 trillion bailout… and yet, most experts predict the worst is still to come.
The sovereign debt crisis threatens to spread across the globe. Fearful investors are shifting assets from the euro and other weakening currencies into gold. The stock market rebounded from its 2008-09 depths, but some analysts say it’s overbought and due for painful correction. Meanwhile, turmoil across the Middle East, Asia, and elsewhere is exacting huge costs in American blood and treasure.
The Federal Reserve has kept U.S. interest rates at virtually zero with no sign of a hike on the horizon, thereby lowering the opportunity cost of buying gold. And investors have responded with astonishing eagerness — even forcing the U.S. Mint to ration popular bullion products in order to meet overwhelming demand. Expect central banks in China, India, and Russia to fuel demand for gold.
Of the major assets, only Treasuries and gold have escaped the selling panic that has gripped the markets. Rushes on gold have caused mints around the world to run out of popular gold coins. Because of the inflationary impact of government bailouts, $2,000 could be the floor, not the ceiling.
5) The Dollar
Dollar weakness, plentiful liquidity, and policy reflation will be persistent themes in the future. Massive fiscal and monetary stimulus have weakened the dollar, whose current resurgence stems mainly from the European debt crisis. Once that crisis reaches the debt-burdened United States, the dollar’s weakness as a currency will be evident to all — and its role as the world’s reserve currency will be in jeopardy. As always, gold will be the first and most universal remedy.
Finally, with gold supported by multiple fundamental forces, one of our pre-conditions for a bubble is the asset has to be “over-owned.” All the gold produced around the world over the past 110 years (which accounts for more than 80% of all gold ever mined) at today’s prices is equivalent to only about 3.9% of the combined total value of stocks, bonds and cash around the world. While up from the 1.3% in 2000 when gold prices were depressed, it is similar to the 3.5% in 1990 and well below the whopping 12.1% in 1980 when gold traded near its last peak. While gold’s popularity is returning, it does not seem “over-owned.”