Big Picture: Most Important
It's easy to get sidetracked with so much going on in the world and markets today. This often makes it hard to see the forest for the trees. That's why we feel strongly about keeping the big picture in perspective. While we certainly don't claim to have all the answers, after 30 years of following the markets every day we've learned the big picture is the most important when it comes to investing. But this also means patience is needed.
The big moves in any market are the most profitable but they also take time. If a market is in a multi-year long-term uptrend, for instance, it's not going to go straight up. There will always be downward corrections and volatility along the way. These are normal, but they don't change the major uptrend. And as long as a major uptrend stays intact, the price is headed higher.
So what's the big picture currently telling us? The bottom line is, we're living in fascinating times and everything changed in 2000. At that time, the biggest stock market bubble in U.S. history burst and less than three years later Nasdaq had plunged 78%. Deflation became a real possibility, so the Fed quickly dropped interest rates to 40 year lows and flooded money into the system to avoid deflation. The result was a huge housing boom and the biggest credit explosion in U.S. history. This is now beginning to fuel inflation, which is up the most in 14 years.
This backdrop has been good for gold since it's the ultimate inflation hedge. Gold is also a leader and its rise since 2001 has been telling us inflation was coming. Last December, gold hit a 16 year high and this four year rise has been the strongest since the 1970s, suggesting gold is going much higher (see Chart 1).
New Investment Era
Most important, a new investment era began in 2000. At that point, a mega shift occurred for the first time in 20 years from financial assets like stocks to tangible assets like gold. This is only the third time this has happened since 1919 and these mega shifts usually take a long time. The previous one lasted 14 years. In other words, gold is now stronger than stocks and bonds and the percentage gains will likely continue to be greater in gold in the years ahead.
At the same time, the war on terror began on 9/11/01. This, combined with tax cuts to help boost the economy during the nervous deflationary times, resulted in massive spending and the largest budget deficits in U.S. history. This in turn has led to even more liquidity, further fueling inflation pressures.
Reinforcing this, commodities also began a new mega rise a few years ago, which only happens about every 30 years and these also tend to last for years. As you know, oil is near a record high and commodities reached a 24 year high, but this new mega uptrend is signaling that commodities are going much higher in the upcoming years. This too suggests we'll likely see higher inflation in the years to come and both of these factors will keep upward pressure on gold.
Not coincidentally, this commodity boom has been, and will continue to coincide with China's growth and ongoing demand. This is one of the biggest factors driving these mega trends and there's no sign this is going to change.
On the contrary, China is booming, it's a huge exporter and it's becoming a major world player. As its citizens become more affluent, they'll need more oil for their cars, and natural resources and metals for their infrastructure. China's oil imports, for instance, have been moving hand in hand with the oil price and in five years China will depend on oil for half of its energy needs. This is going to keep upward pressure on oil, metals and other commodities in the years ahead, just as we've seen in recent years.
Meanwhile, China has become our second biggest lender. Remember, we've gone so far into debt that we need over $2 billion a day from foreigners to keep our game going. Not only are we the world's largest debtor nation with unprecedented budget deficits, but our trade deficit is also the largest in U.S. history. This is very dangerous, so it can't come as a surprise that many are questioning this situation and moving out of U.S. dollars, which has been driving the dollar lower.
Dollar Feels the Abuse
So far, 40 countries have indicated they're reducing their U.S. dollar reserves. This too is a dangerous situation, indicating the U.S. dollar is slowly losing its world reserve currency status.
There's little doubt in our minds, the U.S. dollar is headed lower and since gold and the dollar move in opposite directions, this will also keep upward pressure on gold. This doesn't mean it has to happen quickly. It could be gradual as we've seen happen to other currencies at other times throughout history. But the point is, it's happening.
Basically, we're living in amazing historical times. We're in a new investment era and we need to understand what's happening and protect ourselves. The best way to do that is by holding gold, other precious metals and foreign currencies, which will continue to rise as the dollar heads lower.
Sure, there will be ups and downs. In the past three months, for instance, the markets haven't done much but the long-term trends remain intact and that's what's most important.
As our long time subscribers know, we haven't always been so keen on gold, but we have been in recent years due to the mega investment shift that happened in 2000 and the events since then. Remember, gold is the ultimate currency and it always has been. Throughout history, paper currencies have come and gone but gold is real money and it's maintained its value over the centuries. It has a 5000 year track record, which no other investment can claim. If nothing else, think of gold as an insurance policy. During these volatile and uncertain times, we don't believe you'll regret it.