 | | The Daily Reckoning | Wednesday, January 5, 2011 |
- The leading currencies of 2010...and what they have in common,
- Buying gold on dips, all the way to $5,000 per ounce and beyond,
- Plus, Bill Bonner on what you should believe, even if it turns out to be wrong...
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|  | | | | The Best Currency You've Never Heard Of | | And why It Still Doesn't Hold a Candle to Gold | | |  | | Joel Bowman | Reporting from Buenos Aires, Argentina...
We begin today's reckoning with a trivia question: how many möngös are there in a tugrik?
If you guessed 100, congratulations! If you didn't know, don't worry. The Mongolians probably don't care either way. The tugrik, their national currency, may not be much discussed outside the world's strangest-sounding capital city, Ulaanbaatar, but it was still the world's best performing currency of 2010. Well, the best paper currency, anyway.
The tugrik rallied 15% against the greenback between New Year's Days, narrowly pipping the Aussie dollar, which advanced a none-too-shabby 13% on the world's "preferred" currency, for top spot. The Japanese yen came in at number three.
So what do 2010's two leading coinages have in common that lends them such purchasing power gusto? Well, for one, they are both not the US dollar. Neither are they the euro, widely considered to have turned in the worst performance of the major currencies for the last year, having lost considerable ground against all its fiat contemporaries - the USD, JPY, GBP, CHF, AUD, and CAD.
So that's what they are not. What these two currencies are, however, is perhaps more interesting. Both mediums of exchange are, ipso facto, resource-backed currencies. That is, they derive a good deal of their oomph from the underlying value of the vast endowments of natural resources so abundant in both countries.
It is not surprising that other resource "backed" currencies also faired strongly against Bernanke's faith "backed" helicopter money. The Canadian loonie, for example, closed out 2010 at a 30-month high against the greenback. Even more impressive was Brazil's real, which, after having surged a whopping 37% in 2009, added another 4.4% last year.
Of course, that's not to say that these particular fiat monies are impervious to central banker enthusiasm. Indeed, the pages of monetary history are littered with the charred remains of would-be gold replacements. Even during the Roman Empire, when gold and silver were used for money, coin-clipping meddlers couldn't keep their shears in their tunics.
Not content with burning down his own capital city, Nero lit the tinder under his empire's currency back in 58 A.D., setting the tone for a litany of pyromaniac emperors to follow. By the time Claudius II Gothicus had ascended to the throne (268-270 A.D.) the amount of silver in a (supposedly 100%) silver denarius had wasted to just .02%.
Central bankers, determined to avoid learning the lessons of history, went out of their way to repeat the mistakes of the past throughout much of the 20th century. No doubt the introduction of more combustible paper money aided their cause. From Angola's novo kwanza (AON) to Zimbabwe's doomed dollar (ZWD), more than two-dozen fiat currencies perished amid the fiery lashes of hyperinflation during that period.
In 1923, Germany's Wiemar Republic suffered under inflation that saw prices double every two days. But central bankers were just beginning to sharpen their skills. By 1946, prices of goods denominated in Hungarian Pengos doubled in that country every 15 hours. Then, by 2008, the inflation rate had soared to such troubling levels in Zimbabwe that economists were having trouble just figuring out how to measure it. Finally, after wearing out a few calculators, no doubt, Prof. Steve H. Hanke managed to come up with a figure. Prof. Hanke's HHIZ measure indicated that inflation had peaked at an annual rate of 89.7 sextillion percent (89,700,000,000,000,000,000,000%) in mid-November 2008. Gideon Gono, the Governor of the Reserve Bank of Zimbabwe, had achieved a feat that Nero himself could not have imagined possible.
During this time, gold sat more or less on the sidelines. Nobody's liability, Mr. Midas watched as currencies rose and fell, ebbed and flowed. Some grew stronger, more tended weaker. Indeed, the one thing all fiat currencies have in common, both the weak and the strong, is that they are not gold. They are a liability, an act of faith, a commitment to that peculiar, enduring characteristic of the human spirit that refuses to listen to history or to learn her lessons.
The tugrik and the Aussie are strong for now. But they win by default. Gold, on the other hand, rallied almost 30% in dollar terms last year, handily beating out both of these paper money "winners." In other words, even the strongest paper fell against the precious metal. It might be fairer to say, then, that the Aussie and tugrik were simply the smallest losers.
In today's guest column, Rob Marstrand, Chief Investment Strategist of Bonner Partners Family Office, shares some thoughts on old yella'. Please enjoy...
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| | The Daily Reckoning Presents | | Why Gold Still Has a Long Way to Run | | |  | | Rob Marstrand | The supply of paper currencies is infinite; the supply of gold is finite. This striking contrast provides an excellent reason to exchange the former for the latter.
The gold supply is limited...very limited. According to one estimate, all the above-ground gold in the world totals between 120,000 and 140,000 metric tons. Let's split the difference and call it 130,000 metric tons (about 4.2 billion troy ounces). If you brought it all together and made it into a gigantic cube, it would measure about 19 meters along each side - about three meters short of the length of a tennis court.
Furthermore, about 20% to 25% of all the gold is stored in the world's central banks as country reserves. So the total amount of gold in private hands is enough for just 14 grams for each living person - that's less than half the quantity of a standard one-ounce coin like a US Gold Eagle or a South African Krugerrand.
At present, only about 2.25% of the world's total wealth - or 4.5% of world's financial wealth - is allocated to gold, including jewelry. But resurgent inflation could raise that percentage dramatically, while raising the gold price dramatically in the process.
To gain perspective, let's examine a brief history of the gold price relative to US inflation. The gold price peaked in January 1980 at $850/oz. But this peak was very brief. Gold jumped 29% alone in the run towards $660. Probably a better reference point for the market top is the average price during 1980 as a whole. This was $615/oz. Since then, the gold price has increased only 125%.
Over the same timespan, however, the government's most widely quoted inflation gauge, the Consumer Price Index (CPI), has increased 185%. Therefore, if the gold price had increased as much as the CPI, it would be selling for $1,753/oz today, not $1,390/oz. But the official inflation figures might not be the real story. Using alternative inflation figures calculated by ShadowStats.com, consumer prices have soared an astounding 789% since 1980, which means that the inflation- adjusted gold price would be $5,467/oz.
Interestingly, if we look at the market bottoms for gold - 1970 and 2001 - instead of the market tops, the ShadowStats data seem to provide a much more accurate inflation gauge than the CPI. For example, in January 1970 - before gold's 10-year bull run - the price of gold was just $35/oz. Thirty-one years later - after soaring to more than $800 an ounce in 1980 - the big bear market in gold bottomed out at $256/oz. And the average price for 2001 was $271/oz.
Therefore, during this 31-year period - through gold's full bull and bear market cycle - the gold price advanced 674%. Over the same timeframe, the ShadowStats inflation measure advanced a nearly identical 688%. By contrast, the CPI increased only 370% during this period. In other words, the cumulative CPI readings from 1970 to 2001 failed to account for all the inflation indicated by the rising gold price. The ShadowStats figures, on the other hand, were pretty much bang on target.
I'm staying conservative, and there's nothing to suggest that just because using the ShadowStats inflation worked for the bear market lows it will work for the bull market highs. But if the ShadowStats figures above are a guide, then maybe they point to a price north of $5,000/oz for gold - or even $7,000 for a short time.
I've just thrown a lot of numbers at you. But the point is this: gold looks like it has plenty of upside. But let's be really clear about one thing. I'm not making a hard prediction or setting a price target here. These figures just provide reference points. We also need to watch out for gold "going mainstream" - when references make their way into TV programs, when taxi drivers start talking to you about gold and when your mother calls to ask how to buy an ounce of the stuff.
I can easily see gold getting into the $2,000/oz to $3,000/oz range in the next few years - maybe higher. And there's a very real possibility that we'll have a short-term spike - a genuine investment bubble - that takes us into the $5,000/oz to $8,000/oz.
None of this is certain. And it most likely won't happen smoothly. There could even be big corrections along the way - like between December 1974 and August 1976 when gold fell 47% before powering ahead again. But I hope I've shown you that there are good reasons to think that gold still has plenty of room on the upside.
Conclusion: If you own plenty of gold already, then hang on for the ride. If not, buy more on the dips.
Regards,
Rob Marstrand,
for The Daily Reckoning
Joel's Note: As the chief investment strategist for the Bonner Partners Family Office, Rob Marstrand - working alongside Bill Bonner - seeks out lasting investment opportunities for a select group of elite investors.
If you want to learn more about what Rob and Bill are doing to ensure and protect their partners' wealth, check out this invitation, penned by Bill's own son, Will Bonner. You'll find all the details you need to become a member, in addition to a bit of background about the Bonner family and their philosophy towards building and preserving wealth. Click here to read on.
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| | | | | | Bill Bonner | | What to Believe About Gold, Stocks and Bonds in 2011 | | |  | | Bill Bonner | Reckoning from Brooklyn, New York...
We've come up to Brooklyn to help our son, Jules, move into his new digs. (More below...)
Yesterday, we promised to give you a "Prediction-Plus" about the stock market. You remember what a "Prediction-Plus" is, don't you? It's better than a prediction. It's what you should believe...even if it turns out to be wrong.
What should you believe about bonds? They're going down. They're a "suicidal" investment, says our old friend, Marc Faber.
What should you believe about gold? It's going up. Yes, we know...it might go down. Yesterday, gold dropped $44 dollars. Whee! We've been warning you for months that gold could correct. No bull market goes up in a straight line. And gold has already attracted too many speculators who don't really know what they are doing.
Remember what happened during the last big gold bull market in the '70s? Gold lost 50% (from memory) of its value, in '74, before finally hitting its high in '80. Gold could drop down below $1,000.
We wish it would. So we could buy more!
But what about stocks? What should you believe about the stock market?
You should think they're going down.
Why?
Because there's more downside than upside. Because stocks are good things to buy during an expansion, but not during a contraction. Because the bear market that began in 2000, or in 2007, has never fully expressed itself; it has a rendezvous with the bottom...which should be at less than half today's levels. Because stocks normally rise when interest rates go down; today, we're probably facing rising yields for the next 5 or 10 years.
And because there are potential crises coming up in 2011 - which could trigger a big sell-off in stocks.
Because...because...because...
You have to play the odds. The last big run-up in stocks began in 1982. At that time the Dow was barely over 1,000, the yield on a 10-year US Treasury note was around 15%, and the US was just arriving at its Reagan-era peak.
Today, the world is practically the inverse of '82. The Dow is over 14,000 and yields are close to zero. And the US is tired, slipping down like a used-up empire. Yields have nowhere to go but up. The Dow will probably go down.
And even if it doesn't, you should think it will. Because investors are overwhelmingly bullish. They've plumped their money down on stocks. The smart money is taking the other side of that bet. You should too.
And more thoughts...
Europe has its deadbeat debtors. America has its own. Bloomberg reports:
Illinois lawmakers will try this week to accomplish in a few days what they have been unable to do in the past two years - resolve the state's worst financial crisis.
The legislative session that began today as the House convened will take aim at a budget deficit of at least $13 billion, including a backlog of more than $6 billion in unpaid bills and almost $4 billion in missed payments to underfunded state pensions.
The fiscal mess is largely of the lawmakers' own making, and failure to address the shortages threatens public schools, local governments and other public services, said Dan Hynes, the state's outgoing comptroller.
"Illinois's deficit, about half its $26 billion general-fund budget, puts it among the US states confronting $140 billion in shortfalls in the coming fiscal year after closing $160 billion in gaps this year, according to the Center on Budget and Policy Priorities, a Washington research group.
"The state has been spending $3 for every $2 it takes in, and borrowing to cover its current operating expenses," said [Miles] White, chairman of the Civic Committee of the Commercial Club of Chicago. Wait. That's about the same as the US government. The feds spend about $3 for every $2 they take in too. How come they're not in a financial crisis?
Oh...we forget. They can print money!
*** Jules is a musician. And Brooklyn...or to be more precise, Williamsburg...is the place for up and coming musicians to be.
Or, so he tells us.
Brooklyn - at least this part of it - is an ugly place. Almost all the old apartment buildings have been defaced with rusty fire-escapes put right on the front. Trash is heaped up on the street. Doors are dingy. Floors are worn and dirty. Metal is corroded and twisted. The town looks like it has been in a slump for the last 50 years.
Still, prices are high. Jules pays $1,200 per month for a room in an apartment that we wouldn't live in even if someone paid us. Pipes are jury-rigged and exposed. The "hardwood floors" are made of plywood. Bricks are missing from the walls and the bathroom fixtures are so old they could be the first ones installed in North America.
Still, it looks like it would be fun to live in Brooklyn...if you were 21 years old. Almost everyone we saw was under 30. Most were dressed like "hipsters" - cool, casual, and cheap. The restaurants were funky. We went to one across the street from Jules' apartment. It had been furnished in chairs and tables that must have been bought at the Goodwill or found on the street. Nothing matched. But the walls were painted in bright colors and the waitresses were young and pretty.
Well, maybe we wouldn't mind living in Jules' apartment...if we could be 21 again too.
*** A Dear Reader writes:
My family sounds a lot like yours.
They are "getting tired" of hearing my "gloom and doom" analysis of the US's financial situation.
Unfortunately I have direct experience of hyperinflation, circa 1960's Fidel Castro's Cuba.
My family lost 99% of our assets there. I remember my dad exchanging pesos for dollars at 10 to 1, when a year earlier he could have changed them at about 1 peso for 1 dollar.
I feel the same way now changing dollars for gold and silver - except that I am, relatively, way ahead of what he did.
I love this country and it's so hard for me to see what is happening. I believe that 99% of those that I know are either clueless or in denial. Regards,
Bill Bonner for The Daily Reckoning
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Here at The Daily Reckoning, we value your questions and comments. If you would like to send us a few thoughts of your own, please address them to your managing editor at joel@dailyreckoning.com
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