Wednesday, July 25, 2007

Gold as a hedge

U.S. Trade Deficit With China Signals ‘Buy Gold’

“Should the financial markets lose confidence in the U.S. dollar, huge capital outflows from the U.S. could lead to a rapid depreciation of the U.S. dollar, and thus dramatic appreciation of other currencies.”

The whole matter of trade deficits is, unfortunately for investors not paying attention, just one of far too many aerosol cans now roasting in the fire. When they start exploding, you’ll want to be safely hiding behind a wall of gold and silver.

In the final analysis, every day gold goes up and gold goes down, with the movements based on any number of inputs. To avoid being panicked one way or the other, a long-term perspective is required to see these fluctuations in their proper perspective. And, despite all the jagged fits and starts these
past few years, and all the nay saying along the way, three years ago, gold was trading for $393 an ounce… 40% lower than it is today.

And the better gold shares have offered exponentially higher returns than that.

While now is the time to begin accumulating your gold and gold share positions - if you have not already started doing so - how will you know when things are about to get really “interesting”? My partner Doug Casey recently made the observation that it is not when the trade deficit is rising that you should be concerned, but when it starts to contract... because that is a sign that the flood of greenbacks is starting to return home.

Currently China holds over $1 trillion in U.S. currency and growing. That’s a lot of paper.

Also Norway, as a result of vast oil wealth, holds an estimated equivalent of $1.9 trillion U.S., held in U.S. currencies and other foreign investments. If China makes a move to dump dollars, Norway will have to move assets as well. Where they would put them is a question I can not answer. A flight out of the dollar however is looking quite possible now and with that kind of money flowing out of the U.S. it could spark a panic bringing Japan and Latin America along on a dollar dumping ride.

This would surely cause a short term collapse of the U.S. dollar, perhaps holding it down for three to five years. Other currencies will skyrocket as a result of flight to safe havens, but only temporarily as they are as intangible as the dollar and will surely suffer the same fate as soon as people begin to question their underlying values.

I personally don’t see a permanent $ decline, as no other country is as yet ready to step up to the plate and fill America’s shoes. Sooner or later foreign countries will clamor for a safe currency to hedge against their own and demand support the Green Back. I don’t see any other alternative.

In the mean time, gold seems a safe bet to me.


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