Editor’s note: The following is a guest commentary from one of WND’s sponsors, Kevin DeMeritt, president of Lear Financial. If you would like to learn more about investing in precious metals, take advantage of the free information Lear Financial is making available to WND readers.
When looking for positive news on gold, your first impulse might not be to check with the major stock brokerages.
The reasons are obvious. Traditionally, stocks and gold have been oil and water. Although both can boast a strong track record of diversifying each other, a natural rivalry exists between these camps. Open hostility is often more like it. You seldom see stock people touting gold – or conditions favorable to gold – and, truth be told, vice-versa.
But these are not traditional times. And now, for a number of fascinating reasons, staid financial institutions such as Goldman Sachs and Morgan Stanley are starting to say things only gold lovers might say.
Goldman … now a gold man?
Reuters recently reported, “Global stock markets are set to remain flat into next year or beyond, but commodities such as metals and energy may prove a better bet for investors, investment bank Goldman Sachs says.”
Yup, Goldman appears now to be favoring commodities over stocks. The reason for stocks being “flat” is, according to Peter Oppenheimer, head of Goldman’s portfolio strategy in Europe, pretty straightforward. “The best times to be in equities is when you get rapid acceleration in leading indicators; and that was true for 2003, but now our leading indicators have peaked,” he said.
And “peaked” may be kind. Here’s the problem: Our economy is struggling to digest both $50 oil and deficits now exceeding 24 percent of our Gross Domestic Product. Higher 2005 inflation, interest rates and declining world confidence in the U.S. will likely result … and the consequences could mean a rapid deceleration of leading indicators. By calling stocks “flat” in the upcoming months, Goldman Sachs may prove an optimist.
It’s no secret that the last time the price of oil jumped this dramatically, the ensuing inflation drove gold and other commodities to record levels. Maybe that’s what Goldman has in mind here. “Commodities is a very interesting asset class we are looking at,” Oppenheimer admitted.
JP Morgan seems to agree. The firm has just switched its view on gold from “cautious” to “upbeat,” for many of the same reasons Goldman cites.
Then there’s Morgan Stanley’s Stephen Roach
It seems contradictory for a major purveyor of stocks to have, as its chief economist, a man with an extremely pessimistic outlook. After all, stocks are not exactly a rainy day investment. Certainly nothing like gold is, anyway.
But Stephen Roach fills just such a paradoxical role for Morgan Stanley. This popular chief economist has become known for both his criticism of America’s mounting deficits along with his warnings of the consequences.
In his recent article “Collision Course” (on Morgan Stanley’s website), Roach details how the U.S. is “… currently absorbing about 80 percent of the world’s surplus saving in order to finance government budget deficits and the excess spending of American consumers.”
This is a scary turn of events. Before now, the chief economist observed, we were using foreign surplus savings to support “good growth.” And now we’re using it just to run in place.
Showdown with the world’s leading debtor nation
How we became the nation owing the most is simply an old story of unconscionable spending.
“In 1980, America’s net international investment position … stood at a surplus of $360 billion. By the end of 2003, that surplus had morphed into a deficit of -$2.4 trillion, or 24 percent of U.S. GDP. This transformation from the world’s largest creditor to the world’s largest debtor is, of course, a direct outgrowth of year after year of ever widening current-account deficits. ” Roach wrote.
Even scarier, Roach sides with a recent Oxford study that puts “America’s net indebtedness in a range of 40-50 percent of GDP by 2008,” unless drastic changes are quickly made. Needless to say, that’s an incomprehensible percentage. As incomprehensible as saddling our kids with a debt they couldn’t possibly pay.
Something has to give. And something will. The Oxford study Roach cites points out that “U.S. international indebtedness could be closing in on 300 percent of exports by the end of 2004. By way of comparison, pre-crisis debt-to-export ratios hit about 400 percent in Argentina and Brazil. Of course, America is far from a ‘banana republic’ – or is it?”
Again, seemingly at odds with his brokerage employer’s best interests, Mr. Roach notes that, as a result of weakening confidence in the U.S., “… foreign buying of U.S. equities has also dried up. During the first seven months of 2004, foreigners bought an average of just $0.6 billion of U.S. equities – well short of the bubble-driven peak of $14.6 billion but also a significant shortfall from the post-bubble period 2001-2003, when foreign equity inflows averaged $5.7 billion per month.”
It was this generous foreign investing that helped inflate the great stock market bubble. Now, with those funds drying up, with baby boomers staring at the investment sidelines with the approach of retirement, and with the U.S. seemingly uninterested in addressing its monumental deficit problem, stocks are facing a real dilemma.
Which gets us back to that gold diversification thing. Of all the financial problems our country faces, of all the dire scenarios Stephen Roach and others can paint, gold is the one asset that could actually prosper the worse things got, making it the ideal diversification for our times.
Says venerable Richard Russell, editor of The Dow Theory Letters, “In an all-out inflationary environment, gold will tend to keep up with inflation. On the other hand, in a deflationary credit collapse, gold stands as intrinsic money that will defy bankruptcy. Should there be a panic out of all paper currency in a world deflationary collapse, there could be a panic to own the only money that is pure intrinsic value … gold.”
Whether things ever get quite that dire may be a matter of debate. What isn’t is the prudent principle of diversification for safety and profitability. Given that, why not consider diversifying your exclusively paper portfolio with a modest gold investment before we head into the uncertainty of 2005?
After all, for once, both stock and gold people seem to agree on the course of the precious metal. And that alone should tell you all you need to know.
Special for WND readers, Lear Financial is making available free information on investing in precious metals.
With more than 20 years of industry experience, Kevin DeMeritt is president of Lear Financial, one of today’s fastest growing and most successful precious metals investment firms.
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WND Staff