- Gold is the ultimate currency. It is an asset that has no liabilities attached to it, unlike fiat currencies. Fiat currencies are essentially debt instruments of governments. You can continue holding USD and risk a sharp devaluation when the sovereign debt crisis hits America or you can flee to gold.
Storms ahead for the stock markets and perhaps it is only gold which may provide some respite against major prospective wealth decline.
Forty-eight U.S. states will be in deficit this year and the combined shortfall will probably exceed $300 billion. That puts Greece’s expected 2010 budget shortfall of around $28 billion into perspective. Indeed Greece’s shortfall is put at around 13.6% of GDP, whereas there are a good number of U.S. states anticipating deficits of more than 20% this year – including some, like California, New York, Florida and Illinois, with far bigger economies than Greece. Indeed there are around a dozen U.S. states with bigger economies than Greece and most of these anticipate 2010 deficits at this kind of level! And look what news of the Greek deficit, once it was generally publicised, did to the markets!
So far the U.S. press seems to have been remarkably effective in playing down – or just not reporting – the dire situation of the U.S. state-by-state economies. Indeed there are only two U.S. states – Montana and North Dakota not anticipating deficits this year and they have two of the smallest economies of all the states. The result is going to have to be massive Federal Government bailouts – or, horror of horrors, defaults. Indeed the economies of the much reviled European PIIGS countries (Portugal, Ireland, Italy, Greece and Spain) look positively healthy in comparison with those of many U.S. states.
Add to this some of the other financial shocks likely to be highlighted in the second half of the year – bank credit card deficits, commercial property defaults, etc. and it is little wonder that the smart money has been pouring into assets which are perceived to offer protection against a market collapse – like gold and silver. Maybe we “ain’t seen nothing yet” and there could be worse ahead for us than we saw in the latter part of 2008 – a true debt hurricane may be about to emerge. If sentiment turns down the fallout could be dramatic.
But even gold and silver may not be immune from a major market fallout – the latter in particular – but their recoveries may also be far quicker. If the overall economy is not seen as turning better by the time the state-by-state and bank problems come home to roost, then one has to consider that a double dip in the markets is more likely than not – and it could be an even steeper fall than we saw in October 2008. One doubts that even China, and other emerging growth economies, could come out of such an economic collapse unscathed. The second Great Depression would be with us – globally.
This may seem to be a Doomsday scenario, but it does look increasingly likely as the year progresses. It’s scary and there is the prospect of people’s wealth – particularly that invested in the stock market – being decimated. Cash savings are paying negative returns and assuming the same remedies are applied by Western governments as in 2008/9 – i.e. printing money – then inflation – maybe even hyperinflation – would seem to be an inevitable result. But perhaps for the savers among us, the saving grace could be an initial deflation phase which would enable regrouping and reallocation, as after this initial phase, as inflation starts to come into play, the markets should then offer some protection against wealth erosion providing one selects companies which can survive the then-prevailing economic crisis.
Gold should also survive the deflation phase as an appreciating asset, but whether it would then survive the inflationary phase may run counter to many economic theories that gold is good inflation protector. Research does not necessarily back this position up, although over a long time period it has proved to be a good wealth store. It’s probably the safest place to be for the time being though. Maybe some of the wild price appreciation scenarios may not happen, but in a deflationary environment even a maintenance of current price levels is a major bonus.