23 April 2009

Energy, agriculture and metals moving to center stage

"The years ahead can be best described by the two Chinese symbols which when used together make the word danger; crisis and opportunity. Three trends will greatly influence investment considerations during the next decade; the current financial mess, agriculture, and energy. It is essential to understand how they are interconnected in order to position your portfolios to benefit. I must also note that of these three themes only the current financial mess has an immediate solution, and that solution is inflation.

Financial crisis.

The policy response of Central Banks to the current financial crisis has been money creation in order to generate inflation. Calls for deflation are abating as some begin to realize that these reflationary policies (inflation) are working. We don't even talk in terms of billions anymore, everything is in trillions. Germany understands the inflationary consequences of this policy, having suffered from hyperinflation twice in the last hundred years. Germany's response, which has been to begin to restrain both it's bail outs and money creation, is been followed by an increasing number of G20 nations also questioning the rational of current US policy. The US's biggest European supporter, the UK, is also being criticized in the European Parliament. Look up Daniel Hannan on You Tube and watch the "Devalued Prime Minister" to see how some European politicians feel about Gordon Brown's fiscal policy. At the same time we are starting to hear more chatter about the need for a lower $US; even the IMF has called for the consideration of a new basket of currencies to include gold for global trade. To top it off the US needs to borrow at least $US 5 Trillion this year, and this is highly unlikely without the printing press. The devaluation of the $US is inevitable as the US needs to inflate to keep up. Up to now the pundits on Wall Street and the media do not talk about the recent rise in hard assets because they are looking at the relative values of their own currencies, not noticing that all hard assets are rising in tandem against all currencies. Yes the $US might be high right now but they are all sinking in tandem; this just what I expected as we begin to witness the transfer from paper assets to hard assets, an exact replay of what has historically taken place. Like the lack of movement noticed when all vehicles move forward at the same time, the rise of hard assets since October has been almost unnoticed; gold is up 32% since it's October lows of $681, WTI is up 41% from it's December low of $35.13, and it's the same story with the grains. Going forward I expect that this rise will become more noticeable as currency values start to diverge between the fiscally prudent, hard asset based, and economically viable ones. This is just being witnessed by the resent rise in the $Cdn, $Aus, Brazilian Real, and others."


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