Complex Made Simple

Why I am going for gold in 2004

Some people have become very enthusiastic about equity market prospects for 2004. Not so Phil Thompson who is a late but dedicated convert to gold. This is very much a personal view from our gloomiest correspondent.

With gold at $412 an ounce the venerable Financial Times’ Lex column last week dismissed the outlook for the yellow metal as fraught with risk and liable to a sudden large contraction in price.

The argument in a nutshell is that global financial markets are now back on track, have put three bear years behind them and that gold’s recent strength is just some sort of a flash in the pan aberration. Let me beg to differ.

I don’t see how anyone can argue that the sudden and ongoing devaluation of the world’s largest currency, the US dollar, is just a minor event that will correct itself given a little time. It seems to me that the complete collapse of the US dollar is an accident waiting to happen that will have dire consequences for investors.

This happened last in the mid-1980s. It was the collapse in the value of the US dollar then that caused investors to exit Wall Street in October 1987.

Investors are not such dumb folk. Why hold assets in a devaluing currency? You are just watching your money go down the drain. It does not matter if the Dow Jones gains 10% if the dollar declines 20%, you are a loser.

In my view the US dollar’s fate hangs like a sword of Damocles over the whole financial system this year. The post-war rally of 2003 could turn out to be a final bear market rally.

Now I must admit it is hard to imagine a stock market crash in a US Presidential Election year. The Washington Mafia will conspire to keep liquidity high and cheap money flowing. But investors always anticipate elections, and this year they will start to ask ‘what comes next?’ It is a fair enough question.

The US the winner of the Presidential Election will have to raise taxes and interest rates to defend the US dollar and rebalance the economy. It’s simple, and whoever wins will have no real choice.

It is this unavoidable scenario that makes me a gold bug. The way to insure your assets against rising US inflation and a falling dollar, and a possible financial crash is to buy gold, something that no central banker can print and distribute at whim.

When the inevitable happens and markets crash, gold will shoot up in value. That will be the time to be brave, sell up and buy equities. Not now when a US Presidential election will lead to the last rally of this bear market, or just remember to sell out in time.