Gold Is a Relic?
By Staff News & Analysis - December 29, 2010

Forget the dollar and gold, here are the real safe havens … Contemplating eurozone disintegration, renewed hostilities in Korea and an anti-inflationary clampdown in China, investors' default reaction has been a time-honoured retreat into the perceived safe havens of the dollar, Treasuries and gold. I'm not sure this makes much sense. Increasing exposure to the liabilities and currency of a debt-burdened economy flirting with deflation and a metal with little utility and less yield seems like an odd response to extreme market stress. Faced with the probability of heightened volatility, I would rather protect myself with the factor that all real investments have in common – a reliable income. Over the long haul, the most important element of an investor's total return is the re-investment of this income. – UK Telegraph

Dominant Social Theme: Investing is a complicated task… better leave it to the professionals.

Free-Market Analysis: Tom Stevenson is an investment director at Fidelity Investment Managers, and the point of view he takes is a traditional one in this article, excerpted above. The argument that Stevenson makes is certainly what might be considered a normal or "20th century approach" to asset diversification.

He has three suggestions that run counter to current investment themes as explored by many alternative new sites on the ‘Net. He explains that with gold at upwards of US$1,400 and the dollar on the way down, shares of blue-chip companies provide an attractive alternative to "safe-haven" investing. He also likes commercial real estate and emerging market debt. These may well turn out to be the real safe havens, he writes.

When it comes to blue chip investing, companies like Telefonica, National Grid, Total, GlaxoSmithkline and the telecommunications company KPN "all yield considerably more than the medium-term debt of their respective governments." And he adds that there has "never been a better time" to invest in high-yielding equities; in a low interest-rate environment, there are not many opportunities to receive significant returns on capital. Ironically, he points out, the "top fifth of high-dividend payers" is out-performing the larger market.

The second area that he recommends is commercial property. He believes that commercial property provides investors protection against inflation – though what he is suggesting is protection against PRICE inflation. Three of the four property bull markets since the Second World War have been driven by such concerns, he explains. Thus if investors – institutional or individual – are concerned about price-inflation, they ought to look at protecting themselves by making a commercial property play.

The third area he recommends is "the most interesting of all" – emerging market government debt. We are not sure why he finds developing markets more convincing from an investment perspective than developed ones, however. It seems to us that if the West's markets are troubled then the rest of the world should be suffering also. Perhaps he is referring to the BRICS – Brazil, Russia, India and China, but some would argue that their futures may be no brighter, for the moment, than developed economies.

Stevenson points out that for investors faced with a market that does not provide easy appreciation, "the steady compounding of dividends, coupons and rental income is what really makes the difference." This compounding, he suggests, is "arguably" the difference between real investment and speculation. Even with interest rates around the world at record lows, there is no shortage of income if you know where to look for it.

Each of these three suggestions makes sense if one takes a traditional approach to investing. Where it breaks down has to do with the idea that maybe 20th century rules do not apply to the 21st century. The perspective in this article makes certain important assumptions. Chief among these assumptions is the fundamental one – that the current, fiat-money system with its depreciating currencies and high-tax rates is stable and will continue to operate within certain normative standards established during the past 100 years.

This is certainly a logical assumption, but to test it we suggest one ought to reexamine the 1970s and the difficulties that Western economies faced during that challenging decade. Then, as now, precious metals drove upwards energetically; inflation and joblessness combined in a toxic brew called stagflation and the larger markets were roiled.

Western economies were finally "saved" when "Tall Paul" Volcker took over as Federal Reserve chairman and savagely contracted money supply. Rates traveled to nearly 20 percent and the American economy almost tumbled into a depression. But in 1982, the economy turned a corner, the stock market began to fire on all cylinders and a terrific American equity rally took place that sparked markets around the world. The system – as it existed – had been salvaged and Volcker retired eventually with a good deal of praise for his courage in the face of monetary problems that had seemed intractable.

Looking back, one can be pardoned for observing that such times seem more innocent. During the Reagan years that followed the challenges of the 1970s, free-market thinking seemed to surge. Tax cuts were widely held to stimulate Western economies and the power of ideas that animated Western democracies eventually overcame the totalitarian natures of the communist world. The Berlin Wall tumbled, China adopted capitalist practices and the whole world seemed on the way to realizing a good deal more freedom in an era that offered an unprecedented opportunity for human growth, self-expression and professional and personal satisfaction.

And yet … it was not to be. Today, Western economies have been revealed as spendthrifts – ones even verging on bankruptcy. America, once the bastion of economic growth and consumer power, has seemingly slipped back into the "slough of despond" that was the 1970s. The past 10 years have been a virtual repeat of that terrible decade, but even worse.

From the standpoint of free-market analysis, the problems that the US (and the Western world) faced in the 1970s were not resolved by "Tall Paul" Volcker but merely in a sense swept under the rug. Western economies seemed healthy when the boom of the 1980s started, but in a sense the problems remained in force, only minimized for the time being.

While the Bell has made the case regularly that the real reasons for the current terrible economic climate has to do with the world's basic building blocks – central banks – one can also trace the the problems to 1971. That's when President Richard Nixon took the dollar (and thus the world) off a commodity standard (gold) and initiated an era when paper currencies were to trade freely against one another using a dollar peg. The dollar retained its reserve status because American leaders made arrangements with Saudi Arabia that ensured oil would be priced in dollars, thus forcing the rest of the world to continue to hold US currency for purposes of purchasing Middle Eastern energy.

The current troubles began after 9/11 when President George Bush came to power and, confronted by an almost existential threat, declared an open-ended "war on terror" on various Middle Eastern states. Bush spent trillions prosecuting wars in Afghanistan and Iraq without trimming the tremendous amount of money that America was spending on social programs at federal, state and local levels. President Barack Obama has unfortunately outdone Bush, spending further trillions (at a faster rate) to try to prop up the economy.

America's profligacy and the mechanics of its indebtedness are far more serious now than even in the 1970s. The country's total indebtedness may be north of US$200 trillion, a sum that is beyond the power of the US to salvage. European PIGS – such as Ireland, Portugal and Spain – have similar problems and have responded with programs of "austerity" that America, too, will have to put into place if it hopes to even begin to tackle its structural deficits. However, this may be a faint hope indeed.

The underlying problem is that the West's economic model imploded in 2008 and was only salvaged by emergency injections of paper money that propped up the current system without rectifying its excesses. The result is that the entire top sector of American and European financial firms all remain suspect. Sensing the growing skepticism and anger (fueled in fact by the truth-telling of the Internet) Western economic leaders and the shadowy, intergenerational power elite that stands behind them have launched an unprecedented campaign of authoritarianism.

Using the war on terror as a rationale, the norms of Western civilization have been put under attack. Free speech in the mainstream media is significantly diminished; wire-tapping and other forms of intrusive intelligence gathering have been aimed at entire populations; domestic spying of all sorts is increasingly turned inward by paranoid governments; civilian-military activities are on the rise while justice itself is increasingly pre-emptive and authoritarian.

Here at the Bell, we propose regularly that the 21st century is unlike the 20th century in most of its fundamental aspects. Chiefly, we suggest that people have to consider whether the fear-based promotions of the Anglo-American elite are effective anymore in the Internet era. In the 20th century, the powers-that-be used fear-based themes to push Western middle classes toward surrendering power and wealth to a variety of global instructions. The idea was to build a kind of New World Order. But at the same time, many of the scarcity-memes of the elites are foundering, thanks to Internet exposure. Civil unrest is growing generally; it is within this context that investing-as-usual needs to be examined.

We would argue – and do on a regular basis – that it is not enough anymore to apply the standard overlays propounded by Wall Street investment managers. We believe there is a larger paradigm to keep in mind: Whether or not the power elite itself is going to be able to retain the current economic system or whether something else is the offing, something that even the elite will not be able to control.

The Fidelity manager quoted at the beginning of this article is providing "out of the box" thinking that nonetheless depends on certain assumptions about the Way the World Works. He is assuming that 20th century model will continue without cessation in the 21st century. It may well do so. Or it may not. This provides investors new concerns.

After Thoughts

Investors aware of these issues thus have to consider not only how to diversify and retain wealth within the current system, they may also in our opinion have to consider whether the current system will continue to exist at all – and what may eventually replace it. Thus diversifying in the 21st century has as much to do with SYSTEMIC diversification as asset-class considerations. Seen from this perspective, it is indeed a brave new world.

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