May 6, 2010
If you’ll kindly indulge me, I will jump right into this week’s questions.
First, Jeff writes, “Simon- you really called the gold/euro short (XAUEUR), I’m up 25% since you mentioned it. Where do you see it going now?”
The European-induced panic is causing a rush to ‘quality’ once again. The dollar has surged, Treasuries rallied, and just about everything else fallen, including oil, silver, and that third-world peso we call the euro.
One of the lone standouts, though, has been gold. Once again, I find the market’s rush into Treasuries coupled with the simultaneous rise in gold prices to be an incredibly bullish sign for gold.
I’m far from a gold bug, but I cannot ignore facts and simple analysis. In good times, investors frequently use the bond market to park large swaths of cash. These days, though, institutions are increasingly skeptical about lending money to corrupt, fiscally irresponsible politicians, especially at low interest rates.
One of the most obvious alternatives for institutional investors is gold… so instead of gold falling during the panicked sell-off, many investors are rushing into gold faster than US Treasuries.
Not only has this been excellent for our gold/euro trade, it suggests that investors are now starting to view gold as a ‘less risky’ asset than government securities. In the longer-term, this will be tremendously bullish for gold as more investors shun sovereign debt for the metal.
In the medium-term, I think the next move will be a rise in the gold/silver ratio; it tends to rise during times of tension and high risk perception. I also think that the Swiss National Bank is finally going to intervene in the euro/franc cross, but I’ll save that for another time.
Next, Dieter writes, “Simon- you mentioned that in the event of a dollar crash, Panama would be OK in the long run. I disagree; Panama does not produce anything, and the income from the Canal is not enough to sustain itself. Comments?”
Correct. Panama does not produce anything to speak of. Neither does Hong Kong.
Yet, the two are able to attract significant foreign investment because of relatively business-friendly environments, as well as large pools of capital from neighboring countries that fund robust financial sectors.
(Chinese money goes to Hong Kong, Colombian/Venezuelan money to Panama)
The pools of capital and foreign investment have built diversified economies in both locations, including strong domestic consumption markets. Coupled with Panama’s Canal revenue, I believe that the country will be much better positioned than most of its neighbors in the event of a dollar crisis. I’ll discuss this more next week.
Next, Don from Thailand cautions us all: “Simon, I brought my gold to Thailand with me and it was forcibly confiscated upon entry. They said that I should have declared it at Customs and paid a VAT fee of several thousand dollars.”
Ouch. I’m not sure how much gold Don had on him, but these days, it’s just not a good idea to be carrying more money in your briefcase than the annual salary of the guy inspecting it.
In most countries, gold is not considered money, at least officially. All across Asia, though, gold has significant cultural importance. In many poor countries, if officials spot your gold and can take advantage of you, then they absolutely will. After all, they’re the ones wearing the guns.
The thing is, no one should be thinking about storing gold in poor, underdeveloped countries anyhow– stick to Austria, Switzerland, Hong Kong, etc. These are countries of negligible corruption risk and a well-defined rule of law. And make sure you check customs rules before you go.
For large amounts, use a secure transportation service like Viamat; they’ll ensure the integrity of your shipment from door-to-door, and even store it for you if necessary.
Next, Paul writes, “Simon, great article about Greece. Although the US is not dealing with a 900% debt to GDP ratio, we are heading down a road that sure feels the same. Increased taxes, VAT, and massive entitlements will surely bring us to a critical tipping point soon. Ecuador keeps looking better all the time.”
Agreed. Look, these problems aren’t going away. There is no chance that Greece can possibly be bailed out, and there is no chance that Spain, Portugal, and Italy won’t follow. Then Japan. Then the UK. Then finally the United States.
These countries absolutely have to implode. As Bill Bonner astutely remarked last weekend in Las Vegas, “when things get out of whack, they tend to get back into whack.”
Well… 900% of GDP worth of government debt and obligations is out of whack. Trillions upon trillions of dollars in unfunded and growing entitlement programs is out of whack. Borrowing and spending your way out of debt is out of whack.
Getting back into whack requires a system reset.
Here’s the good news: this is nothing to be afraid of. We can all see this coming from miles away despite the governments’ lies and the blinders on the mainstream media.
We can prepare, today, by planting multiple flags to safeguard ourselves, our families, and our assets… and then focus on thriving from all the opportunity being created.
Remember– the sky is not falling. Now is the time to be calm, confident, and measured. Panic is for the unprepared, and fear is for the uninformed.