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I could not agree more with Roach's view of what lies ahead: "It's going to be a very painful process to break the addiction to asset-led behavior. No one wants recessions, asset deflation and rising unemployment. But this has always been the potential endgame of a bubble prone U.S. economy."
We have experienced a wild, drunken binge, and we are going to have a hangover. But the best policy for the country would be to accept the hangover, head to the gym, start working out, and get stronger and healthier for the next go-round.
Yellow dog takes a bowwow
Now, a look at gold, an asset I have been bullish on for many years:On Jan. 7, gold was the subject of a rather remarkable Financial Times editorial titled "Gold is the new global currency." "In today's uncertain world," it notes, "the yellow metal is back in fashion."
I might point out that gold has always been a store of value, aka money, though gold hasn't always been recognized as such.
That the editorial writers agree is the takeaway from this quote: "A better way to think of gold may be as central bankers used to before America dropped the gold standard: not as a commodity, but as another currency."
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(It's worth noting that when gold was at its lows, the Financial Times opined that no one needed it. Gold was just deemed to be another commodity. Obviously, that view has changed.)
Back to the editorial, which makes a fine point: "As long as the dollar stays weak, gold's bull run will last. . . . The U.S. Federal Reserve's aggressive rate-cutting response to the credit squeeze has created a risk of a sharp rise in American inflation. That in turn creates the risk of a precipitous fall in the dollar and so makes gold more attractive as a hedge."
Why gold is going higher
Additionally, notes the editorial, "the arguments for further gains in gold are compelling. It looks cheap, despite climbing from a low of $250 a troy ounce in 1999, when central banks were selling reserves."As for the United Kingdom's recent decision to sell 60% of its gold holdings, the editorial describes the move as "particularly poor." I would certainly agree.
Finally, a word to contrarians who feel they need to fade this gold-as-currency movement due to the belief that the trade has become too crowded:
Staying with a bull market is often a hard problem to finesse, especially with something like gold, which has so few tangible fundamentals. (It's understandably unnerving to see lots of people picking a top, as though gold at $880 is radically different from gold at $850 -- or $900, for that matter.)
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Perhaps gold will see a correction. But it's also worth noting that folks who don't like company often leave the train far too soon. In fact, for a bull market to blossom, the asset class in question has to become more popular. As for the public, thus far it seems not to be involved -- though I expect that before this is through, that will change in a meaningful way.
I have no idea how high gold will go, and I'm sure the ride will continue to be bumpy. But I think that if the Financial Times is declaring that gold should once again take its rightful place as the currency it always has been, the price of gold is headed much higher.
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