 Inflation & Metals
Puru Saxena
24 April 2007
INFLATION/DEFLATION - Analysts and economists seem to be
divided over this issue. According to some market observers
(including me), we are living in a highly inflationary environment.
After all, money supply growth is extremely strong in most countries
(Figure 1) and this represents inflation.
Figure 1: Explosive inflation!
Source: The Economist
The other camp argues that
since prices of certain consumer goods are either stable or in
decline, we are indeed witnessing genuine deflation. In my view,
these "deflationists" seem to miss the point that falling
consumer prices (due to improvements in technology or the relocation
of manufacturing to relatively inexpensive developing nations)
have nothing to do with deflation and everything to do with economic
progress. In fact, I would argue that in the current economic
environment; due to technological advances, rising productivity,
free trade and cheap labour, prices SHOULD be declining. After
all, this is the whole point of genuine economic development!
In an ideal world with a stable
monetary base (zero monetary inflation), prices of almost everything
(with a few exceptions) would be in decline. That would be a
sign of real economic progress as people's savings would buy
them more goods with every passing year. In our far from ideal
world however, the factor preventing this from occurring IS monetary
inflation. Due to central-bank sponsored inflation, prices of
assets (whose supply is relatively limited when compared to money)
are going through the roof! As a result of the ongoing inflation,
even basic commodities which are critical for human survival
(land, energy and food) have become very expensive, hence scarce
for the average person. So, next time when someone tells you
that we are witnessing deflation, tell them to look no further
than the escalating cost of housing, energy, food, education
and medical care.
Finally, if we were indeed
witnessing genuine deflation (contraction in the money-supply),
all asset-prices would be declining rather than flirting with
multi-year highs!
PRECIOUS METALS - We are in a primary bull-market which
is currently undergoing a healthy medium-term correction - everything
else is "noise". Such corrections are normal and serve
the purpose of shaking out the latecomers and the "weak
hands". More importantly, such periods of weakness give
us the ideal opportunity to increase our positions. I am not
sure about you, but I always prefer to buy assets when the sentiment
is negative and there is widespread fear amongst the investing
public. Furthermore, I never purchase anything after a big rally.
This is the reason why despite the brutal sell-off in commodities
over the past several months, our managed accounts have held
up reasonably well.
I have no doubt in my mind
that both gold and silver will appreciate considerably over the
coming years. Here are the reasons why:
- Terminally-ill US Dollar
- Rampant monetary inflation
= debasement of currencies
- Record-high US trade and current-account
deficits
- Major top in the US bond-market
and rising interest-rates (which will hurt housing)
- Sky-high debt levels in developed
nations; only option is to inflate the currencies
- Rising geo-political tensions
and increasing resource wars
- A major bull-market in crude
oil due to rising demand and tight supplies
- Gold and silver are inexpensive
in real-terms (inflation-adjusted basis)
- Extremely cheap in comparison
to financial assets (stocks and bonds)
As I explained in my previous
reports, I do not expect gold and silver to surpass their May
2006 highs in the near future. I am of the opinion that both
gold and silver are likely to decline into the summer months
before embarking on a huge rally towards the end of this year.
This action will shake out more weak hands and set the stage
for a big advance.
However, if we do get a major
conflict in Iran, you will be really glad that you own precious
metals.
At present, Asian central banks
hold a miniscule 1.5% of their total reserves in gold (Figure
2). You can imagine what will happen to the price of gold when
Asian countries start diversifying into the yellow metal. Recently,
China announced that it plans to invest US$200 billion of its
US$ 1 trillion reserves in strategic assets. So, this move out
of "paper" is already underway.
Figure 2: Asian reserve
holdings
Since the commencement of this
bull-market, precious metals mining shares have provided a leverage
of 300% compared to physical bullion. However, over the past
few months, physical bullion has outperformed the mining shares.
These changes in relative strength are normal and I would advise
you to utilise any near-term weakness in mining stocks and invest
heavily.
The above is an excerpt
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Puru Saxena
 Saxena Archives
email: puru@purusaxena.com
website: www.purusaxena.com Puru Saxena publishes Money Matters, a monthly economic report, which highlights extraordinary investment opportunities in all major markets. In addition to the monthly report, subscribers also receive "Weekly Updates" covering the recent market action. Money Matters is available by subscription from www.purusaxena.com. Puru Saxena is the founder of Puru Saxena Wealth Management, his Hong Kong based firm which manages investment portfolios for individuals and corporate clients. He is a highly showcased investment manager and a regular guest on CNN, BBC World, CNBC, Bloomberg, NDTV and various radio programs. Copyright ©2005-2015 Puru Saxena Limited. All rights reserved.
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