Gold Will be Driven to Dizzying Heights by Green Energy and Healthcare Reform
Commodities / Gold & Silver 2009 Oct 16, 2009 - 11:35 AM GMTBy: Q1_Publishing
Warren Buffett calls it “a drug.”
Ireland’s finance minister calls it “a weapon.”
It’s one of the ultimate temptations for politicians.
And, quite frankly, we’re about to see a lot more of it.
Best of all though, the market is rewarding investors who have taken steps to protect themselves and profit from it.
I’m talking about currency devaluation. But this time around though, we’re not looking at your average currency devaluation though. We’re looking at a much slipperier slope that is more dangerous, more costly (if you’re not prepared), and that will only get worse in the months and years ahead – competitive devaluation.
And if you’re not prepared, get prepared now.
Get a Little Now, Pay a Lot Later
Currency devaluation is pretty simple. It’s when a country’s government or central bank intentionally cuts the value of its own currency. The goal of devaluation is to make exports cheaper.
For instance, Japan let the value of the yen drop precipitously during the 2002 recession. In one period, the yen fell 7% (that’s a huge move in currencies) relative to the US dollar. The move made exports 7% cheaper and was a clear example of how Japan’s leaders were hoping consumers elsewhere would be able to jumpstart its economy.
The benefits of currency devaluation include temporary increases in manufacturing activity and employment. They are loved by politicians who are often looking towards the next election, not the long-run health of the economy.
The costs of currency devaluation are many. Basically, if your currency is worth less, you can buy less stuff. For instance, the immediate impact of devaluation can be seen in commodity prices. When commodity prices go up they make the price of the inputs of manufactured goods like copper for refrigerators, steel for buildings, etc. more expensive. Also, devaluing your own currency is a direct way of subsidizing another country’s consumption.
Basically, currency devaluation is a zero-sum game - you don’t get something for nothing. And the short-term benefits don’t really outweigh the long-term costs.
The Race to the Bottom
What we’re on the potential verge of here is competitive devaluation. That’s when every country (or economic area like the Eurozone) looks to devalue their own currencies. The thing is though, not every central bank can devalue their currencies at the same time. So there has to be some other alternative.
Lately, that alternative has been commodities. That’s why gold has been setting new highs. Silver has been rising even faster than gold.
And currencies from countries which produce a lot of commodities like Canadian and Australian dollars and the Brazilian real have been jumping higher against the U.S. dollar too.
Regretfully, it’s only going to get worse from here.
You see, the most politically appetizing benefit of currency devaluation is the initial jolt of employment. A sharp upturn in exports means more people will be working to produce those exports. And with official unemployment in the U.S. nearing 10% we’re witnessing the politically-welcomed devaluation of the dollar right now. Economist Simon Johnson has gone as far as calling the devaluation “Obama’s secret jobs plan.”
Worst of all, the political will to devalue the US dollar is only going to get stronger from here because unemployment will continue to be a problem thanks in large part to healthcare reform and the goal of green job creation.
The Biggest Losers in Healthcare “Reform”
All of the healthcare bills on the table have apply fees, penalties, mandates, and/or taxes. Some tax medical device companies, others go after insurance companies, and others hit employers with mandates and/or penalties.
As a result, all the bills will do one thing: increase the cost of employment.
That will lead to higher structural unemployment. It’s simple supply and demand. If the price of something goes up, quantity demanded will decline. It’s true for guns, butter, and labor.
Some opponents have called the bills “job killers” (or worse), but it will be more like job preventers. And with unemployment already high, the quick and politically painless solution will be to devalue the currency.
The Other Side of “Green Jobs”
It doesn’t stop there. The other major legislation staring the economy down is the cap-and-trade scheme. Again, we’re not here to debate the scientific or political merits of global warming climate change. We’re here to look at the impact of the plan on business, the economy, and our investments.
If cap-and-trade is eventually passed, it will have the same effect as healthcare reform: increase the cost of employment.
Those increased employment costs will inevitably lead to - wait for it - even higher structural unemployment.
This is not a theory though. Spain has already been down the “cap-and-trade” road and they don’t like where it has taken them.
Back in March the King Juan Carlos University published a study on the country’s cap-and-trade system and job creation. The study found 2.2 jobs were lost for every one green job created.
Sure, you will have a few thousand folks who work in windmill and solar panel factories (and they’ll make great backdrops for presidential speeches). And the lack of tangibility of jobs lost make green jobs very politically favorable. But the transfer of wealth from some businesses to other less-efficient ones will just add to unemployment rolls here just like it has in Spain and everywhere else.
In the end, the net effect will be higher unemployment. And the politically favorable “quick fix” will be - you guessed it – more currency devaluation.
Run for Cover and Profit
That’s why we should expect more devaluation of the US dollar in the future.
This is a sharp contrast to the past. Over the last few decades, a lot of countries have gone down the devaluation road for the sake of higher employment. Meanwhile, the U.S. gladly maintained its “strong dollar policy” which allowed the central banks to essentially subsidize U.S. consumption.
The U.S. has tried devaluation in the past. For instance, when President Nixon removed the U.S. from the gold standard and openly devalued the dollar, the greenback went on to lose 75% of its value in the next decade.
Right now, all signs point to us heading down a similar 70’s-style stagflationary path. And although the politicians and pundits may say “it’s different this time,” there’s no reason to expect it to be any different.
It’s already started to happen. The US dollar index is down 16% from its March highs and the Fed has not come out and said it’s going to defend the dollar. Also, Britain’s central banker has deemed any further devaluation of the pound to be “helpful.”That’s why gold and silver have done so well lately. And the future is looking even brighter. They were, are, and will likely continue to be a few of the best places to protect yourself from the long-run impacts of dollar devaluation ($200 oil and GDP growth of 1% anyone?).
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Good investing,
Andrew Mickey
Chief Investment Strategist, Q1 Publishing
Disclosure: Author currently holds a long position in Silvercorp Metals (SVM), physical silver, and no position in any of the other companies mentioned.
Q1 Publishing is committed to providing investors with well-researched, level-headed, no-nonsense, analysis and investment advice that will allow you to secure enduring wealth and independence.
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Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.
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