Wednesday, October 6, 2010

Structured Devaluation and Rise in Gold prices------Shan Saeed

Competitive Devaluation and Gold outlook lights up the financial markets.....By Shan Saeed

The United States, the eurozone, the United Kingdom, Japan and other major economies may be heading into a period of competitive devaluations. Similarly, China and some of the other strong-currency countries are acting to slow revaluation of their own currencies to maintain a competitive edge in world markets. I foresee Currency manipulation and monetary dumping by different countries moving forward......

Each country is responding to domestic political pressure to promote domestic employment and income growth – believing that exchange-rate undervaluation will boost exports, restrain imports, and support its local economy.

This is the wrong medicine for what ails the world economy.

Rather than boost world trade and global business activity, these policies – like the trade barriers and protectionist mindset erected in the midst of the Great Depression – will retard economic expansion and hurt employment everywhere.

At the same time because of these myopic policies gold investors everywhere -- these policies will boost world commodity prices and domestic inflation in each of the countries pursuing these misguided policies.

What I foresee is an extended multi-year stagflation in the mature industrial nations punctuated with periods of actual recession, much like the decade of the 1970s. In fact, we are already there with years to go before a full restoration of economic health and rising prosperity.

In some ways, mirroring the experience of the 1970s, we are also in the midst of a great bull market for gold – with gold prices set to zoom in the years ahead as commodity prices rise and inflation accelerates.

US policymakers and many private-sector economists guide us that inflation is not and will not be a problem because of low capacity utilization and high unemployment – what they are calling economic "slack." But slack in the 1970s did not prevent a sharp rise in commodity prices and an acceleration of US consumer price inflation to double-digit rates late in the decade. It is conveniently forgotten that historical episodes of high inflation and hyperinflation have not been periods of robust business activity. Quite the contrary as demonstrated by Weimar Germany in the 1920s or Zimbabwe today.

What policymakers are forgetting is that inflation is, first and foremost, a monetary phenomenon – too many dollars and too much debt relative to the available supply of goods and services. It is only a matter of time before the past and continuing rise in money supply, what the Fed calls quantitative easing, and the continuing growth in outstanding debt arising from the US Federal budget deficit, result in an acceleration in US consumer-price inflation.

Quantitative easing is also the mechanism through which the Fed attempts to devalue the US dollar against other currencies. I call it monetary dumping.QE is not going to fix the economy..The phenomenon is going global..Japan is copy the idea with $60 billion debt and asset purchase to fight deflation in the country. In effect, the Fed purchases foreign currencies with newly created dollars. In turn, efforts by other countries to devalue their currencies or maintain relative undervaluation, as in the case of China, requires their central banks to purchase dollars with their own newly created money.

So, efforts by a number of countries to manage devaluations or under valuations of their currencies will boost money supply growth in the various countries playing the game – and will globalize the coming acceleration in inflation.

As investors around the world see rising commodity prices and accelerating consumer-price inflation – not just in the United States but also in their own countries – many will turn to gold to protect the real value of their savings and wealth. Gold is your wealth insurance in times of uncertainty and chaos.

This scenario of accelerating global inflation across many countries and currencies supports our long-term bullish outlook for gold – and our expectation that prices for the yellow metal will exceed $1500 an ounce in the next 1.5 years, then $2000 an ounce in the next 5 to 10 years time, and quite possibly much higher levels in the years ahead.

This is a research piece and not an investment advice..Investors are suggested to execute their own due diligence before making any investment strategy or decision.

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