Your Best Defense Against Inflation and a Falling Dollar
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Ben Bernanke has the world’s worst job right now. The Chairman of the U.S. Federal Reserve has been busy dodging all sorts of financial blow-ups since this sub-prime crisis first exploded onto the investment scene last July.
Now the Fed chief faces the greatest battle of his career. He’s struggling to thwart a toxic combination of rapidly accelerating deflation AND soaring inflation all at the same time.
But if you’re a commodity bull like me, you’re cheering Ben on…
Policy Headaches of Unimaginable Proportions
Coined “inverse stagflation,” this decade presents a formidable policy challenge to central bankers.
On the one hand, commodities prices have been skyrocketing while the U.S. dollar has been hitting new lows. The dollar has plummeted as supplies for most foodstuffs, refined oil products, precious metals and several base metals hit chronically low levels.
Yet simultaneously, deflation has re-emerged for the first time since the 2001 recession. And it’s slashing housing values, pummeling stock markets around the world and smashing bond markets (excluding T-bonds) to the basement. Plus, all risk-based securities are falling sharply amid a lingering credit squeeze.
Over the last six months, the U.S., Canadian and European financial services sectors have virtually imploded. Stock-market capitalizations have crashed. Analysts estimate that this sub-prime crisis will cost the world at least US$500 billion before this mess is over.
It’s Literally Print or Die for the Fed
The only way for the United States and other economies to salvage their financial systems is to print credit, or aggressively grow their money-supply. Over the next 12 months, I have no doubt that the Fed, ECB and other central banks will print credit like there’s no tomorrow. Money-supply must boom and inflation must prevail over deflation.
The central bankers talk a tough game on inflation, yet history shows they have a pathetic scorecard. Fiat money has severely crimped our purchasing power since the demise of the gold standard under Nixon in 1971.
Commodities, including gold, have led the charge protecting your hard-earned paper money. That’s especially the case as inflation grows to average about 8%-10% unofficially, per annum, since the early 1970s - and not the official 4.6% over the same period. Money-supply growth is a far more accurate measure of inflation acceleration than the government’s skewed version, which is highly subjective and flawed.
Phony Inflation
We all know we’re paying more than 4% more for goods and services each year. I’m not sure what planet the Fed lives on, but I promise you I’m paying at least double for most daily goods compared to just 12 months ago, including gasoline, bread, milk and other raw materials.
If inflation is growing at a more realistic 8% per annum, then the value of money erodes by approximately 90% every 30 years. That means what you’re earning today with likely purchase a small fraction of whatever you consume by 2038. If you subscribe to this view, then the only solution to grow your assets is to diversify across several asset classes, including stocks, currencies and commodities.
Commodities Are Your First and Best Defense
With the United States fighting two wars and deficits expanding as far as the eye can see, the case for hard assets like gold and other commodities is a no-brainer. Combined with “easy money” courtesy of Helicopter Ben, inflation will make a comeback.
As the Fed continues to cut rates, open the spigots and print money like mad to arrest deflation, I expect inflation to overwhelm falling prices by 2010 or sooner.
The government wants inflation. And that means investors must own a basket of commodities as all paper money joins the buck in the basement over the next three to six months to battle its deflationary nemesis.
Owning Just the Euro Won’t Save You!
What investors fail to appreciate is that since 2005, the price of most commodities, including gold, has far and away smashed the euro, yen, Canadian dollar - you name it.
Since January 2005, spot gold prices have gained a cumulative 117% in dollars. Over the same period, the euro has rallied 19%. In other words, measured in euro, gold prices have surged 98% since 2005. That means owning JUST the euro has been a poor hedge against inflation, yet most investors remain glued to the euro-dollar exchange rate! True, the euro has rallied an accumulative 65% against the beleaguered dollar. But gold has blown away the euro over this period rising 237%.
Other commodities have fared even better compared to gold over the last seven years as raw materials formed a secular bottom in October 2001. Nickel, lead, tin, zinc, steel-scrap, soybeans, wheat, rice, bran, cocoa, coffee, milk, silver, platinum - all these things have more than tripled or quadrupled off their lows.
Which currency or store of value has protected your purchasing power amid inflation and deflation this decade? It’s gold.
Jim Rogers, a mentor of mine and a legendary global investor, told me in 1993 that “all currencies are like a bunch of drunks at a bar. Once they’re done drinking, it’s simply a question of which one is relatively more sober.”
Central banks and currencies are the same. They revalue and devalue against each other continuously, eroding our purchasing power and growing inflation in the process.
Bull Market Correction: Time to Buy Now!
Commodities are now suffering another in a long series of bull market corrections. In fact, it’s the first significant decline since June-July 2006 and marks yet another buying opportunity for shrewd investors in the precious metals, agricultural commodities and eventually, the distressed livestock sector.
My Commodity Trend Alert signature investment service has produced some big gains over the last six years riding commodities - and we’re still bullish. I’m loading up on the precious metals and agricultural commodities as this correction bottoms. And, I’ve been betting against oil over the last several months as prices sailed off the charts.
No bull market heads straight through the roof. Commodities are incessantly volatile by nature and investors should embrace periodic declines or sharp corrections as an opportunity to boost positions.
As the Fed and other central banks let the floodgates open and print an enormous amount of money in 2008, gold and many other commodities will continue to protect your purchasing power. Use this correction as a buying opportunity.
ERIC ROSEMAN, Investment Director
P.S. There’s still time to listen in to my special teleconference, to hear my #1 way to play this boom in commodities - and fight the falling dollar. Click here to listen in.
Source: Your Best Defense Against Inflation and a Falling Dollar
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Tags: agricultural commodities, Ben Bernanke, dollar, economics, euro, fed, Financial Blow, gold, inflation, politics, stagflation, yenAbout the Author
Eric serves as an editor and Investment Director for The Sovereign Society's Commodity Trend Alert. Eric's talents include blending a dozen or more alternative investment funds to produce consistent returns to traditional asset classes and making commodity based recommendations with huge upside and limited downside.
The Offshore A-Letter specializes is an elite global investment opportunities, asset protection strategies, tax management solutions, second citizenship and residency programs and offshore structures.
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