WHY GOLD DOES NOT NEED INFLATION TO GO UP, AND WHY THE DEFLATION OF THE REAL ESTATE BUBBLE MAY VERY WELL PROVIDE ALOT OF BUYING POWER FOR GOLD
I do not believe that the U.S. or Europe will go into a serious recession in 2006, although higher oil prices may cause U.S. and European corporate profits to rise very slowly, or even be flat in 2006. Retail sales will not collapse but they will definitely slow.
Higher oil prices will not rapidly give rise to a major recession and inflation like they did in the 1970’s for 4 reasons.
1. The U.S. and Europe are not as captive to energy as they were at that time. Manufacturing is a smaller part of the economy, while knowledge industries are a much bigger part.
2.The OPEC countries are twice as populous as they were in 1975, and they must spend more of their oil profits to help their people. They do not have as much surplus capital as they once did, and their resources are gradually diminishing.
3. OPEC’s political stability is also rapidly diminishing. Osama bin Laden has made it clear that his first priority is to create a theocracy in Saudi Arabia. Many other OPEC members also face problems.
4.Wages in the U.S. and Europe are being held down by low prices from China and outsourcing to India. Thus, the interest rate authorities do not have to worry as much about inflation as they did in the 1970’s.
GLOBAL LIQUIDITY EXISTS IN EXCESS, BUT INSTEAD OF FLOWING INTO HIGHER WAGES, IT IS FLOWING INTO ASSET BUBBLES
WHEN THE REAL ESTATE BUBBLE DEFLATES, ANOTHER BUBBLE WILL REPLACE —–THE BUBBLES WILL ROTATE FROM REAL ESTATE, TO COMMODITIES, TO STOCKS —UNTIL THE EXCESS LIQUIDITY THAT CAUSES THE BUBBLES IS DRAINED FROM THE SYSTEM
Global liquidity exists in excess because many countries are simultaneously creating liquidity by various means. This liquidity has flowed into real estate because of low interest rates and perceived tax advantages. The real estate bubble has run far enough that the governmental authorities in Europe and the U.S. are beginning a process of deflating the bubble with higher interest rates and by jawboning.
Where will the next bubble develop? It is too early to say, but I believe that global investors are becoming aware that the land grab for natural resources that is currently going on may turn into a dogfight. Resources could become the next bubble.
China, Europe, Japan and the U.S. may choose up teams and square off in a fight to acquire resources (copper, coal, oil, nickel, zinc, and most importantly, gold). These resources are necessary in order to allow the respective economies to grow for the next 50 years.
Gold is money that maintains its buying power over time. The new acquirers of assets know they must have gold in their reserves to maintain the buying power of their money. Currencies can rise and fall as governments make wise and unwise decisions. Gold maintains its buying over the long term. If the next bubble is in commodities, which remains to be seen, gold will go much higher.
This is why peoples with long memories, like the Chinese people and the Indian people, acquire gold, and why the Chinese government is currently acquiring gold. The academics and intellectuals in Europe and the U.S. may think it is smart to sell gold. The practical nation builders of China and other developing countries know that it is unwise, and even dangerous, to depend upon academic theorists to make practical decisions.