Good News For Gold: Too Bearish Is Bullish

This article is an excerpt from the Mountain Vision newsletter. We encourage readers to subscribe to this high quality  service, influenced by the Austrian view.

As of late, the news on gold and silver has been more than bearish. The extensive mainstream gold obituary by the likes of Credit Suisse and Goldman Sachs has been highly exaggerated and has resulted in extreme bearishness. The good news for seasoned contrarians: Too bearish is bullish!

The following chart, courtesy of BIL Research, may be a good indicator that markets are currently too bearish on Gold. That is often a good entry point.

gold_bullls_vs_bears_2009-2013

Since last October, at BFI, we have hedged our clients’ core holdings in gold. We are now watching gold and silver prices closely, as we get closer to the end of the correction. We expect to lift our hedge very soon.

Currency Wars Are Not a Myth

In my view, it is highly questionable how so-called experts can call for the end of the gold bull market at a time when currency wars have just reached their next level. We are observing negative real interest rates in most OECD economies. And, in the global race of currency devaluation, Japan has dashed ahead of the pack, with the British Pound trying to keep up.

The recent changes in monetary policy in Japan will not stay unnoticed elsewhere. It is reasonable to expect other Asian currencies to weaken soon in their endeavor to not be squeezed out of export markets by the Japanese. Equally, as currencies in Asia start deteriorating – possibly in China too – Europe’s exporters will feel the impact. Europe’s fledgling economy will then certainly crave more ECB quantitative easing.

And so the continual devaluation merry-go-round will continue. In this global currency race to the bottom, it is interesting to see that the biggest loser appears to be considered the winner in financial markets. Stock markets, as of late, have been quick to reward weakening currencies. However, in the end, the real winners will be real assets and gold in particular. Safety in fiat currencies is being undermined bit-by-bit. Purchasing power will need to be protected. And, gold is certainly to be considered one of the most prominent “insurance policies”.

Yen Hara-Kiri May Go Far and Long

The implication of Japan’s stated goal to pursue “Depression-Era policies” has considerable implications. The ripple effect will be felt in the coming months and years.

In today’s analysis of work economies and financial markets, currencies have truly taken the center stage. Don’t let anyone tell you otherwise. Closely observing and analyzing the dynamics of competitive currency devaluations as we move forward should be at the core of your thinking and investment decisions.

Currently, the spotlight is on Japan. Japanese Finance Minister Taro Aso has stated that in order to escape deflation, Japan will adopt policies applied during the Great Depression. At that time, Finance Minister Korekiyo Takahashi, who held the post from 1927-1936, implemented a highly aggressive fiscal stimulus package. Bond issuance was doubled and the Bank of Japan was ordered to underwrite government debt. Japan departed from the gold standard in December 1931 and the yen depreciated starkly against the dollar. Within two years, it went from 2 yen per dollar to 4.8 yen per dollar.

major_currencies_vs_gold_2012-2013

Source: VWD Group, BFI Wealth Management

It is not irrational to expect a similar outcome in Japan’s current crisis. Today, Japan’s debt-to-GDP ratio stands at over 210%. If Japan’s debt continues growing on its current trajectory, we can very well expect the Japanese to continue their course of devaluation in its attempt to dampen, or possibly even avert, the country’s growing debt servicing costs amidst growing deflationary pressures.

Investor Implications

The race to the bottom has gone into its next phase. In fact, Japan’s course of stark devaluation in some ways may become a bit of a game-changer. While the focus over the past few years in regards to “currency wars” had been very much set on the euro and the dollar, Japan’s new policies have rapidly and forcefully pulled Asia into the mix.

Here at BFI, we are watching these developments with great interest. They afford investors some very interesting investment opportunities. The “Great Rotation” is, so far, reaping good profits for those brave enough to participate. However, the Yen Hara-Kiri, or ritual suicide, also bears considerable risk. The effects will be felt in other economies and will support the political will for further currency devaluations elsewhere.

Global Gold, part of the BFI group, offers is a Swiss-based service that offers physically allocated gold as protection against the ongoing worldwide currency devaluations. Download the free report Physical Gold – Antidote against the ongoing global debt crisis.

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