Going for gold in 2005

You have to admire the bulls of Wall Street. Even in the holiday period between Christmas and New Year and they are out spreading universal optimism.

But their arguments have worn very thin. These days US bullishness boils down to this: oil prices are down a little, consumers are still buying, and we think that recent growth will carry us forward. No mention of the huge trade and budget deficits, declining corporate profits and the collapsing US dollar.

Surely the collapsing US dollar is the Achilles heel. Chinese investors are apparently starting to stock up on gold because of the declining value of the greenback. Just how long will it be before every investor in the entire world gets tired of seeing the value of their US investments falling every day?

Just how big do the losses have to be? Euro investors took an 8% hit in 2004. Do they want to loose another similar amount in 2005? Or perhaps they will switch to a more solid alternative?

The inflation outlook in the US also gives huge cause for concern. Why would anyone hold an asset with negative real interest rates? i.e. a US dollar deposit account?

The danger is that the so-far orderly exit from the US dollar becomes a stampede to get out of all dollar-denominated assets. That would mean a crash on Wall Street and an implosion of the bond market; 10-year US treasuries yield around 4% at the moment, how can that be an attractive investment with inflation rising?

Now if Wall Street goes into correction-mode there are very few places to hide. Even the very high Middle East stock markets will not be immune from this tidal wave sweeping through the global financial community, and if US interest rates shot up to defend the US dollar then all countries with dollar-linked currencies would suffer.

No in such an environment gold and precious metals would be the only safe haven which is probably the best reason for predicting an inevitable price surge; for demand would suddenly widely outstrip the fixed supply of these commodities.