As the U.S. Dollar and Japanese Yen fall in value, many U.S. and Japanese citizens are feeling relatively wealthy and prosperous.
I suggest a reality check is needed to open their eyes about the buying power of their debased currencies. A reality check can often be provided by doing some foreign travel, especially to Europe, but also to the Middle East or developed Asia. The reality is that the buying power of these two groups outside of the U.S. or Japan has fallen by over 25% in the last few years.
THE RISING COSTS OF LIVING
Food, shelter and the basic necessities of life have gotten very expensive. While they have not been noticing, the U.S. and Japanese citizen’s buying power has eroded on a global basis over the last four years. During those four years, the Yen and U.S. dollar have been about flat in value versus one another. Over the same period the Euro, British Pound, Swedish Krona, Swiss Franc, and during the last year or two, even the Indian Rupee and Chinese Yuan, have risen substantially versus the Dollar and Yen. U.S. dollar-based investors and Yen-based investors need to expose their portfolios to assets where the prices are rising, or to stocks in those geographies where the standard of living is rising. This simple theme is behind most of our investment opinions. Our strategy simply put, is to invest in the countries and industries which are growing.
GOLD AND BASE METALS ARE OBVIOUS EXAMPLES
Gold is in demand as a hedge against devaluing currencies, and it is in demand for hoarding and protecting wealth, and as a store of value. As nations and individuals become wealthier, they hold more gold. This is especially true in India, China and East Asia, where gold has long held a position as a safe and secure alternative to paper currencies.
Base metals are in demand due to the infrastructure building that is taking place in the developing countries around the globe. Economic growth is the model that these countries are following, and sustainable economic growth is based on a stable and growing infrastructure including physical, economic, educational, legal, financial and social infrastructure.
Because this global trend towards infrastructure building is not likely to abate in the near future, prices of materials will stay high, and the buying power of the citizens in the slow-growth countries will continue to erode.