The Case for Gold

Surprisingly, I will probably not mention gold until the last paragraph of this piece, but by then, hopefully the message will be apparent. I might have mentioned (in the strongest possible terms) that the two macroeconomic drivers for 2015 and possibly for the next few years will be GLOBAL CURRENCY WARS and a BULL MARKET IN THE US DOLLAR.

The global currency wars are being waged via devaluations and interest rate manipulations as competition in a slowing world global village heats up. Falling commodity prices are changing geopolitical trends and the seeds of new partnerships are being fertilized. Somebody recently said that "James Bond has a license to kill and central bankers have a license to lie." The myth that central bankers work together and in tandem is exactly that...a myth. A perfect example of this is the Swiss National Bank decoupling the Swiss franc from the Euro a day after previously denying that such a move was being considered. The Franc jumped 15%-20% against all currencies in one day and now the cat is really amongst the pigeons.

Swiss denominated debt jumped placing countries like Hungary and Poland up a creek. About 60% of Hungarian mortgages and 40% of Polish mortgages are denominated in Swiss francs. The quote "all hell breaks loose" is an understatement regarding the Swiss move. And despite negative interest rates of -0.75% in Swiss francs, the money is still pouring into Switzerland and one may well ask "why Switzerland?" Safe haven is the short answer. Think Russia (50% devaluation) and all her Allies that have linked their currencies to the Rouble. Think Middle East, North Africa, South America (to name just a few) blundering from crisis to crisis.

Charles Gave with tongue in cheek says:"But the Swiss, not being as smart as the Italians, do not believe in devaluations. You see, in Switzerland they have never believed in the Keynesian multiplier of government spending, nor have they accepted that the permanent growth of government spending as a proportion of gross domestic product is a social necessity. Strange as it may seem, they still believe in such queer, outdated notions as sound money, balanced budgets, local democracy, and the need for savings to finance investments. How quaint!" Switzerland runs a current account surplus, a balanced budget, and suffers almost no unemployment, all despite the fact that nobody knows the name of a single Swiss politician or central banker. "The last time I looked, the Swiss population had the highest standard of living in the world – another disastrous long-term consequence of not having properly trained economists of the true faith."

John Mauldin, who in my opinion truly gets it says: "Japan is not going to cater to Korea with its monetary policy; neither is Indonesia really interested in helping Singapore or Malaysia; and countries like Switzerland and Sweden carve out their own paths on the flanks of the Eurozone. The US Federal Reserve has made clear on many occasions that it is not responsible for the policy decisions and outcomes of any other country. The simple fact is that Europe and the Eurozone just don’t make sense; nor, given the recent Swiss action, do they seem to be pursuing the sorts of policies that would improve their condition".

Hey, and we haven't even discussed the roaring bull market in USD. While nearly all economies are considering devaluation as a way out of their economic malaise, the USD continues on its merry way upwards. The majority of World international debt is denominated in USD. Every time the USD strengthens, the credit markets groan and the central bankers rush for their anxiety medication. The US carry trade is estimated at anything from $6 trillion to $11 trillion. If the dollar continues to strengthen the violent unwinding of this US Carry Trade market will make the potentially slow demise of Europe look like childs play.

So, why wouldn't I want to hold a small percentage of my portfolio in gold? Not because the USD is in trouble...but because most other economies and currencies are about to experience change..by the ballot or by the bullet. Did I mention emerging markets, Japanese Yen or falling bond yields?

Rule Number One: Never lose money. Rule Number Two: Never forget Rule Number One - Warren Buffet

The truth does not change according to our ability to stomach it - Flannery O'Connor