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.

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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.

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