Asset Protection Strategies, STAFF NEWS & ANALYSIS
The Better Safe Haven: Oil, Gold or Dollars?
By Daily Bell Staff - October 28, 2015

Oil is a better bet than Treasuries as the Federal Reserve contemplates raising interest rates, according to Park Sungjin, an investor in Seoul … U.S. interest rates may head higher in the coming months, said Park, the head of investment management at Meritz Securities Co., which has $7 billion in assets. – Bloomberg

Dominant Social Theme: The economy is recovering. Is a safe haven even necessary?

Free-Market Analysis: Probably so, unless one wants to take Janet Yellen's word for it. And thus Park Sungjin may have a point. He believes that commodities could be the best safe haven at this point in the business cycle.

His argument is a simple one. Sungjin points out: "The Fed is ready to raise rates, [but] the commodity market has corrected already: I'm buying. We have a long position on commodities … You have to use energy."

Park's opinion is shared by a Bloomberg survey of analysts. The reasoning is that "full faith and credit" of the US will not protect the bond market from a decline, especially if rates go up. Bloomberg estimates that benchmark 10-year Treasury notes might lose around three percent.

The article also quotes hard-money investor Jim Rogers who expresses uncertainty about the oil market but adds, "I'm watching this very closely,"

Interestingly, in a recent interview with the Midas Newsletter, Rogers claimed he held "a lot of cash." Rogers could mean he was actually holding cash or perhaps short-term government debt or a foreign exchange position.

He went on to explain he was not "keen on US dollars or anything; US dollars are terribly, terribly small currency. We're the largest debtor nation in the history of the world."

Jim Rogers offered a position that contradicts the idea that oil is a safe haven of choice. He pointed out that when there is "turmoil" in the world, people still believe the US dollar is a safe haven and that they buy dollars because they don't know what else to do.

The interviewer asked him about gold as a safe haven and he indicated that while he held more gold than dollars, he was not buying more at the moment.

This confirms a position he took in a December 2014 interview with The Daily Bell. At the time, Jim Rogers said: "As far as gold and silver, I own gold and silver. I haven't bought gold and silver for some time. There will be another opportunity to buy gold and silver some time in the next couple of years. I hope I'm smart enough to act if and when it happens."

In his Midas interview, Rogers admitted to being "confused" and there is no shame to that in these confusing times. Ideally (within a Keynesian context) the Fed should be hiking, but there are many who believe the Fed is so hamstrung by a lagging economy that it may not raise rates again for a very long time.

In fact, the Fed is playing a dangerous game, according to Thorsten Polleit whose article entitled "The Fed Can't Raise Rates, But Must Pretend It Will" was recently published at Mises.org. Polleit is chief economist of the precious-metals firm Degussa Goldhandel GmbH.

Thorsten Polleit explains that the Fed is well aware of the fragile nature of the economic "recovery" and that "raising short-term rates would be like taking away the punch bowl just as the party gets going."

The Fed, he says, wants to keep rates suppressed, but it has a delicate "balancing act" to perform because savers and investors would become increasingly less enthusiastic about the US credit markets, a state of affairs that would be detrimental to the fiat money system generally.

To prevent this from happening, the Fed must achieve two things. First, it needs to uphold the expectation in financial markets that current low interest rates will be increased again at some point in the future.

If savers and investors buy this story, they will hold onto their bank deposits, money market funds, bonds, and other fixed income products despite minuscule yields. Second, the Fed must succeed in continuing to postpone rate hikes into the future without breaking peoples' expectation that rates will rise at some point.

He calls this the "Waiting for Godot" strategy and seems skeptical that it can be maintained forever. Nonetheless, he concludes that central banks are determined to print in endless amounts to keep economies running even at less than optimal levels. Even negative interest rates are a possibility, he surmises.

We tend to agree with Polleit that the Fed will not raise, or if it does, the hike will be an insignificant one. The same goes for other major central banks and thus the world will continue to be flooded with cheap money.

This situation may be supportive of oil prices but certainly such a scenario would be beneficial to precious metals and even to mining stocks that have yet to see an appreciable cash inflow in the early 2000s.

Of course, as Daily Bell chief editor Anthony Wile has pointed out, the best mining stocks to own are the ones that retain rather than sell the gold they mine. In any case, a prolonged, continual low rate (or no rate) environment certainly makes the possibility of a gold breakout more feasible.

After Thoughts

When considering oil, dollars or gold as the most appropriate safe haven, economic fragility portends a continued cheap money flood. And we'll bet on precious metals, long-term, as a significant safe haven in that context.

Posted in Asset Protection Strategies, STAFF NEWS & ANALYSIS
  • Injun Holbrook

    I am not sure except for marketing purposes why the DB keeps expanding on this subject. Most people are ill defined to invest in other markets excluding the dollar. The reason I know this? Because I manage funds and as long as the accredited investor label sticks around. most people do not qualify to invest in new start-ups, new discoveries and new speculations.. The general public is used, simply to wash out debt and to repay the initial investors thus leaving them very suspect to fraud and deception.

    I don’t like the accredited investor rule and think buyer beware is more appropriate and useful as it forces the investor to do his/her homework before the leap. However back to your article, most people do not understand how money (dollars), minerals and oil move around the world and the cause and effect. Most investments except for hard jewlery, stored minerals and real estate is nothing but paper. Anything else is simply leveraged investing that is most likely not available to the unaccredited investor. The speculator will always be the one who makes the money, all others get what is left over and it doesn’t matter if it’s a paper asset or not. I suppose the unaccredited question may be asked………Do you want paper money, paper gold or paper oil?

    • It’s our brief to discuss these sorts of things. And many viewers may come here to learn about them and get a different point of view …

  • Praetor

    China has nowhere to store the oil they are buying. How many oil tanker are there. Negative interest rates is more like it, savers are a dying breed, we live in debtors economy, say, good by to your savings. Land and the PM’s are the only savings account you need in todays upside down world, thanks to the schizophrenic sociopaths!!!

  • Danny B

    There is no such thing as a recovery in America. NONE. http://www.zerohedge.com/news/2015-10-25/us-economic-data-has-never-been-weak-long

    The oil glut is at an 85 year high. http://www.bloomberg.com/news/articles/2015-04-05/record-gasoline-output-to-curb-biggest-u-s-oil-glut-in-85-years FED GOV is planning to sell oil (15%) from the SPR.

    Silver, on the other hand is very hard to find. Gold is good BUT, when the credit crash comes, gold will be one of the few things that can be sold. This will drive the price down temporarily.

    “When the equity in a brokerage
    account falls below the maintenance margin, the brokerage issues a margin call that forces the investor to either pony up more cash, or have his portfolio sold off to make up the loss. This may come as an unwelcome and badly-timed shock, but there’s worse to come. The greater downside is that the broker is not obliged to contact the investor prior to the sell-off. The broker may choose to sell any of the stocks he chooses in order to save himself, so, not surprisingly, he may well choose to sell those stocks that are not headed south, as it will be easier to find buyers.
    Plan on a drop in the Gold Price
    Many investors maintain in their portfolio a percentage of precious metals stocks “just in case.” This, they consider to be a diversification; an insurance policy. If the stock market heads south in a significant way, there’s every likelihood that this will drive up the price of precious metals. But, of course, in a crash, even a moderate one, this position will be the easiest one for the broker to sell. The investor may discover that, overnight, both his more conventional stocks and his insurance policy have diminished or disappeared.”
    https://www.sprottmoney.com/blog/deflation-on-the-horizon-jeff-thomas.html

    In the kind of crash that Armstrong envisions, FRNs will be very hard to come by. They are instantly recognizable, more than gold. Hold FRNs.
    The illusion of control is slipping away, http://charleshughsmith.blogspot.ca/2015/10/the-federal-reserve-illusion-of.html

    We’re going into the holiday season but, nobody is buying. International trade has crashed by 15%. International lending has crashed. Trucking has just crashed.
    The whole system is centered on fraud; http://wallstreetexaminer.com/2015/10/bernanke-obama-ended-rule-law-made-fraud-centerpiece-us-finance/

    Corporate profits have crashed; http://www.economist.com/news/business/21676803-big-listed-firms-earnings-have-hit-wall-deflation-and-stagnation-age-torporation

    Container shipping rates, “They are hovering around $300 a container on the main Asia-to-Europe
    trade loop, well below the $1,300-a-container average that ship operators say they need to break even in the long term.” EVERYTHING positive is in contraction. Everything negative is in expansion. Hold FRNs, junk silver, lead and food.

  • Danny B

    Thoughts on the petro-dollar. Oil consumption is WAY down. The price reflects that; http://www.elliottwave.com/freeupdates/archives/2015/10/21/Great-Scott!-Will-Crude-Oil-Prices-Ever-Rise-Again.aspx#axzz3q0uOCsF6
    The petro-dollar is connected to the price of oil; http://www.elliottwave.com/affiliates_pr/archives/2015/10/27/Dispatch-US-On-the-Precipice-of-Deflation-aa.aspx#axzz3q0uOCsF6
    Renewables have exploded higher, http://www.telegraph.co.uk/finance/economics/11958916/Paris-climate-deal-to-ignite-a-90-trillion-energy-revolution.html

    We have an enormous glut of oil and drop in price. Russia is now the biggest supplier to China, not Saudi. Russia desperately needs to get rid of any external investments that America can freeze. The petro dollar fades with the drop in consumption. Wait and see.

  • Danny B

    Oh Great Bell, the stage seems to be pretty barren. There is a very important subject that has caught my attention of late. China is crashing fast. China has rescinded the one-child policy. Japan will NEVER escape. The core population of Japan will never grow again. Italy is crashing fast. Italy has a very low replacement of population. In Russia, they will give you a medal if you have 6 kids. They give you mortgage assistance if you have 3 or more.
    Seeking Alpha shows good reason the believe that the FED funds rate is tied to the core population. http://seekingalpha.com/article/3556596-forget-peak-oil-its-all-about-peak-population-growth
    This longish article makes very well founded claims that core population is crashing. The birth control pill may finally put a stake in the heart of Keynes.
    http://econimica.blogspot.com/2015/10/economicsart-of-deception-vs_20.html
    Consumption is crashing. This is incompatible with Keynesian policy. I seriously doubt that Armstrong’s models have enough weight on birth control.

    FED GOV is trying to make up for all the missing consumption from the absent babies. Shumpeter would be proud.
    50% of the non-european immigrants are on the dole in Sweden. Decades ago, Sweden had 120,000 hospital beds. It has fallen to 20,000. Bringing in the hairy, unwashed may increase consumption but, it doesn’t do anything for productivity.

loading
Sign up now and join our exclusive international network for free-market thinkers
Privacy Assured: We will NEVER share your personal information.