I am thinking of making a move in my retirement portfolio to benefit from inflation over the long hall (from countires inflating their way out of debt, increase in global demand for products, etc), but also have some shorter term questions. I am thinking of buying one of the currency funds run by Axel Merk (probably MERKX - Merk Hard Currency Fund), and gaining more exposure to gold and silver (selling PRPFX and buying GLD and SLV with that money). A few questions for anyone interested:
1) If Israel and Iran do get into a serious confrontation, and create more instabilty regarding oil, what will happen with the relationship between certain commodity currencies, such as Norwegian Krone and Canadian Dollar (countries that export oil), the U.S. dollar, and gold? If oil prices rise, that should benefit the Krone and Canadian dollar. However, in such a confrontation, I am also thinking there could be a flight to safety into the US dollar, which could make the US dollar stronger in relation to the Krone and the Canadian dollar. Would holding currencies belonging to oil exporting countries be a good idea to benefit from what may be an increase in the price of oil, or would it be bad because there might be a flight to safety into the US dollar in such a situation?
2) In an Iranian-Israeli conflict (as well as other future conflicts), if there was a flight to safety into the dollar, would that be bad for gold and currencies of countries that produce gold such as the Australian dollar, as gold often increases when the U.S dollar is percieved to decrease in value, and in this case, if there was a flight to safety, the U.S. dollar would increase in value? Would this be bad for silver also? Or could there actually be a flight to safety into gold?
3) As far as a longer term play regarding inflation, would investing in foreign currencies not be a great idea because countries often seek to debase their currencies to increase their exports? In this case, foreign currencies may not rise, or not rise signifacantly against the U.S. dollar.
4) Should foreign bonds be considered to be as good as an investment against inflation compared to foreign currencies, gold, and silver? If so, should the investments be focused on bonds from countries that export commodities? From emerging markets?
5) Just a curiosity...why is there a strong correlation between silver and the euro? From that can I assume there is a correlation between gold and the Euro as well?
As far as funds that could potentially benefit from inflation, I currently have PAUIX, HDCCX (Highbridge dynamic commodity fund), and TTRZX (Templeton total return). Also have OSIYX in my 401 K (Oppenheimer global statgic income which might help to a lesser extent). Also have PRPFX, which I am thinking of selling and buying GLD and SLV as I mentioned. I'm just looking for a little more exposure and a little more diversification to the different types of inflation (different inflation type investments might respond differently depending on different types of inflation).
Thanks for any input or advice you might have.
Comments
5:) No idea, but interesting note.
4. I'm going to say no. I'm not particularly trusting of any foreign bonds. Foreign currency bonds are good to a varying degree as diversification, but they aren't something I would consider inflation protection. I think there are some strong currencies remaining, but overall, the whole currency game to me is a game of musical chairs and trying to hope that you get a chair when the music's over, only almost all of the chairs that are there are falling apart and are missing a leg. With some exceptions, I don't like bonds.
3. If you really have a "race to debase" currency war - and you've seen signs of that with what Brazil has said and some other countries have done, then I think most countries get dragged into it and it doesn't end well. I don't think the dollar index is a good indicator of what's really happening with currencies. Everyone can't try to debase to increase exports - I think there's less of a "world pie" now and countries are trying to debase to increase exports.Competitive devaluation will likely end quite badly.
Organic growth is not being encouraged in the world - good money papers over bad. It's that episode of "Seinfeld" - "Serenity now...insanity later." Are things looking and feeling better now? Sure, but what is the real, underlying cost and are returns on that cost diminishing? I've talked about the psychology of money before, and while "billions" was once stunning, trillions when talking about debt now seems commonplace. Many of the structural issues that got us to 2008 in the first place haven't really been fixed, just papered over - and even after all that money, we still have rapidly decaying infrastructure in this country. What would the bill be if we wanted to improve roadways, our energy grid or start high speed rail, and who would we borrow from? How many people have been living rent/mortgage free for the last few years, and how much has that contributed? What if that stopped?
As for housing, I think even that has stunned me. I think there is intrinsic value in a house. It can be rented, there is value in the materials (and speaking of inflation, I find it interesting that houses have cratered, but have the building materials gone down? I don't think so.) Yet, there's not enough buyers out there. I have friends who owned, then chose doing a short sale. They are able to get another house, but their credit is f'd. How many other people are in that position? Look at a real estate website in a major city and see how many short sales are listed.
What happens if rates were to "normalize?" (the FDIC calculated 40% of the U.S. households have insufficient income and credit to buy a home, http://www.zerohedge.com/news/guest-post-how-housing-affordability-can-falter-even-house-prices-decline) If you look at some major cities now, owning is clearly becoming cheaper than renting, but real estate is just not happening. Older people who are downsizing are going to find that there isn't enough of an audience in the younger generations to buy their bigger houses. Lastly, houses have done down dramatically, but in many places, property taxes have risen.
Before anyone gets bent out of shape, I don't mean this politically, it just is: Obama said he wanted to do something like double exports in five years. How do you do that? A large part of it is cheapening the currency. I guess the question becomes is how long do you get away with that, especially when input costs really ramp? It can be longer than one might think, but it's a short-term mentality that I think won't end well and requires more careful handling than what I believe our government is capable of.
It really becomes a question of: how does it end? Another financial crisis, or the value of the stock market much higher and the real value of the currency much lower? It won't be the Zimbabwe stock market - which I think was the best performing market in the world for a decade or so, but the problem was the winnings wouldn't buy 3 eggs - but a far lesser (although noticeable) version of that outcome.
This article goes into more detail and is an excellent read: "http://www.usnews.com/opinion/blogs/economic-intelligence/2012/02/13/the-silent-victims-of-the-us-chinese-currency-war"
2. I think the question in this case becomes who are the players. You have Russia and China and India (there are others, but those are the primaries) who are customers of Iran. They want that oil. They don't really appear to care a great deal about our issues. Iran has tried (I don't know if they have) to start an oil market of their own and have started dealing more in foreign currencies and gold and have stated their desire to move away from dealing in the dollar. Other countries have tried to move away from dealing in the dollar for oil, like Iraq. It has - previously - not ended well. It becomes a matter of how do things play out this time, and is the traditional "flight to safety" once again the same? I don't know. If Iran makes a move away from the dollar and we go after them like we have others, oil could go sky-high and that would be potentially a real disaster economically. If Iran moves away from the dollar in dealings with oil and we don't do anything, that could have consequences for the dollar. I don't know what the answer is.
I do believe there's a desire to move away from the dollar by foreign countries. That could take years, or it could take a shorter period. If multiple foreign countries moved away from our dollars, then I think the issue with that "extreme scenario" is that you'll never know until they've already made that move.
1. If Iran really becomes an issue and oil out of their is shut off to some degree and goes to previously unheard of numbers, then all bets are off and I would question whether or not the traditional "flights of safety" would be the same. I do think commodity currencies/commodities would do well. I do think oil companies with oil in the ground/oil in reserves would do well. I question whether commodity pipeline plays (such as some MLPs and Canadian royalty companies) would do well, but I do think commodity producers would do well. It also comes back to the whole alternative energy/nat gas discussion, which always seems to go away when oil goes back under $100. I've said that when this discussion actually is had, it is going to be had at the worst possible time. I don't know what kind of move to alternatives can be done if there was some kind of oil super-spike.
Added: If you really want to hold gold and silver beyond a "trade" (for example, longer-term, multi-year concerns regarding inflation), I wouldn't hold GLD or SLV. PRPFX is fine. I'd rather suggest buying physical (which is REALLY not a trade vehicle) or holding CEF or PHYS in terms of paper than SLV/GLD.
I do like hard assets - infrastructure plays, such as Brookfield Infrastructure (BIP). "Hard Assets" can be any number of things, such as prime real estate - I also own Brookfield Asset Management (BAM), the parent company of BIP. I also think agricultural plays are definitely worth exploring, such as the fertilizer companies (SOIL etf or something like POT.) Sprott Resource Corp (SCPZF.PK) is a speculative holding company play, which owns gold (physical), oil, farmland (leased) and a number of other companies under one roof. About $4 a share last I looked.
You noted: " As for housing, I think even that has stunned me. I think there is intrinsic value in a house. It can be rented, there is value in the materials (and speaking of inflation, I find it interesting that houses have cratered, but have the building materials gone down? I don't think so.) Yet, there's not enough buyers out there. I have friends who owned, then chose doing a short sale. They are able to get another house, but their credit is f'd. How many other people are in that position? Look at a real estate website in a major city and see how many short sales are listed.
What happens if rates were to "normalize?" (the FDIC calculated 40% of the U.S. households have insufficient income and credit to buy a home, http://www.zerohedge.com/news/guest-post-how-housing-affordability-can-falter-even-house-prices-decline) If you look at some major cities now, owning is clearly becoming cheaper than renting, but real estate is just not happening. Older people who are downsizing are going to find that there isn't enough of an audience in the younger generations to buy their bigger houses. Lastly, houses have done down dramatically, but in many places, property taxes have risen. "
>>>>> Though my note is not directly related to the original post/questions, but is related to your note.
I am reminded of a lyric section; of which, I attempt to use when guaging all areas of the global "big picture" to also attempt to envision of where monies may be placed for the best benefit to our portfolio and its risk/reward label.
The song from the hippie-dippie days by Kenny Rogers and The First Edition; and the lyric section: I just dropped in, to see what condition my condition is in...
Related to the buy or rent for one's housing. Knowing you view all of this area and others, too; I do believe or should I write "I am firmly in place on this thought" that what was and now is since the market melt and all of the ramifications continues to not be the money world I grew into, being a baby boomer. Through most of 2009 I would periodically talk back to the tv talking heads when too many of them would state that everything is going to be okay and this (market melt) won't be much different from the early 80's recession. I sure don't know what models or thinking that they were using; but I am fully aware of the early 80's recession with high inflation that was killed by Volker with Fed policy to drive interest rates to suck the life from high inflation. What I consider to be my non-formal economic education that allowed me to argue against their points of view is that 3 major areas of impact were in place in the early 80's that were mostly gone for the economic ramifications of the 2008 melt.
1. many boomers were in or approaching peak job earnings years
2. manufacturing facilites were in place in this country
3. very little foreign competition was in place against manufacturing
To the above: boomers had lots of money to do with whatever they chose; and was and still is a very large percentage of the population. Many of this group, being without more than a high school graduation and many without this level were able to obtain well paying work at the big 3 auto makers; along with great benefits. This is gone, eh?
As a side benefit to my living in MI and knowing its previous manufacturing base; and also knowing that many of the factories had literally been demolished long before the market melt; there was no longer any base to fall back upon, as was the case in the early 80's. The passage of NAFTA & GATT in the mid-90's had already begun to cause many U.S. firms to move to Mexico; and as the next 10 years passed, more of this area also moved to China and related areas.
The talking heads had somehow avoided or were unable to assemble anything but theories from text books, one must presume. Many of them surely did not have a real perspective of what was, but no longer existed; to attempt to assemble some wonderful and fanciful view of an "everything will be alright" theory.
As to the buy/rent crowd among the young. Heck we know many don't have enough money and/or will remain mobile in their search for work. No reason to have a fixed house in place with all of the hassles. I fully understand this and agree in full to this kind of thinking. A recent note on Bloomberg, related to another money area; is that someone's survey (for the auto industry) indicated that 46% of the under 30 age group would forgo the purchase of a new car; if it meant that they would have to give up their internet connection. This tells a lot, too.
Lastly; you and I have both mentioned the following:
The country has a large group of boomers retired and retiring (10,000/day) for the next 10 years or so. Many of them will never step back into a full blown equity position in the markets (may get burned some with bonds, too); but will attempt to remain conservative to retain exisiting capital. With a few reports I have read and/or viewed, there are also many young folks (even though they may have a decent job) who are also very skeptical about the benefit of investing risks. There is also a large group between the boomers and the young one's with decent jobs; who have work that only pays the bills and nothing left over to consider for an investment, let alone those who are not employed.
Our house attempts to filter what we hear/view, read and know for a fact to proceed with our investment areas.
Okay, enough of my jabber; as one could write many pages regarding the 3 above areas.
Take care,
Catch
Concerning #2, if Iran and some other countries are trying to move away from the dollar, which currencies do you see them gravitating toward? As for #1, that is one of the reaons why I am considering MERKX, as it contains the currencies of oil exporting countries of Norway and Canada. It also has New Zealand currency (export timber, meat and dairy), and Australian (gold). However, in a currency war (thanks for the currency war link, interesting read), I wonder if those countries might get hurt the most since they rely on exports. What is wrong with holding GLD or SLV? I was going to switch out or PRPFX as I thought it's allocation to dollar assets might hold it back. At some point I might consider buying silver bullion, unsure. I would be new at buying physical metals. Any opinion as to the best way to buy silver or gold bullion/coins?
When you say you like hard asets, do you like that for global growth, inflation, or both? What do you think about HAP? As for instructure, any thoughts on MEGAX (US Global Investors Global Megatrends fund)? It's main theme is infrastructure. I owned it years ago, it did not go anywhere so I dumped it. I'm just afraid that hard assets and infrastructure do not perform well during periods of slow growth.
Thanks again.
I think the issue with housing is that you have an asset whose replacement cost continues higher, but you don't have an audience that can buy it.
In terms of infrastructure, I find it rather interesting that a number of Chinese interests (either their SWF or companies) have started buying infrastructure in Europe and apparently intend do so here.
http://www.bbc.co.uk/news/business-15914102
http://www.chinadaily.com.cn/usa/weekly/2012-02/17/content_14629220.htm
http://www.guardian.co.uk/business/2012/jan/20/china-sovereign-wealth-fund-thames-water
http://www.startribune.com/business/134572378.html
http://oilprice.com/Energy/Energy-General/China-Buys-Into-Portuguese-National-Power-Company-Politicians-Aghast.html
http://www.telegraph.co.uk/finance/newsbysector/utilities/8629206/Northumbrian-Water-accepts-2.4bn-bid-from-Li-Ka-shings-Cheung-Kong-Infrastructure-Holdings.html
This one is of particular interest and is both an excellent example and an interesting read: http://oilprice.com/Energy/Energy-General/China-Buys-Into-Portuguese-National-Power-Company-Politicians-Aghast.html
And the list goes on.
"BEIJING - China's sovereign wealth fund wants to invest in improving neglected U.S. and European roads and other infrastructure to spur global growth, the fund's chairman said in comments published Monday.
The announcement reflects a shift in strategy for the $410 billion fund, which was created in 2007. Until now, it has limited its investments mostly to small stakes in publicly traded companies to avoid stirring political opposition overseas.
China Investment Corp. wants to begin in Britain by teaming up with fund managers or investing directly in infrastructure projects, Lou Jiwei said in a commentary in London's Financial Times newspaper.
"China is keen to get involved" in improving U.S. and European infrastructure, which "badly needs more investment," Lou wrote. He cited energy, water, transport, digital communications and waste disposal but gave no indication of possible projects or the size of Chinese investment."
http://www.startribune.com/business/134572378.html
Yep, they are buying infrastructure in Europe out of the goodness of their hearts to help spur growth. In the meantime, they also take stakes in things like power supply and water supply.
"Some commentators in both Europe and China have suggested Beijing might use its $3.2 trillion in foreign reserves to gain leverage on political or trade issues at a time when other governments urgently want investment."
Uh, yeah I think it may be used as leverage.
""There is a general thought that maybe China should not invest in U.S. Treasurys or European sovereign bonds. Instead, why can't we hold direct assets in the economy?" Shen said.
By investing in individual projects, he said, "you don't have to depend on government guarantees and it should be affected less by the sovereign debt crisis."
Um, if China stops buying bonds and starts buying hard assets instead, who is going to make up for them not buying so many bonds?
Overall, what China is doing can be said is in the interest of promoting global growth, but I don't think what they're doing is in the interest of anyone but China.
_____________________________________________________________________
I don't own HAP, but it looks like a nice option for a variety of commodities-related businesses.
______________________________________________
I think there are issues of transparency regarding some of the metals ETFs, such as GLD. http://www.zerohedge.com/news/some-observations-bob-pisanis-visit-glds-vault, although that's more of a mild example. There are issues with PHYS and CEF as well, although I find those more trustworthy than GLD and SLV. Still, there are no redemption rights for GLD or SLV (or CEF, I believe; GLD can be redeemed for physical by massive shareholders, the likes of Wall Street banks and hedge funds like Paulson), and costly/limited redemption rights for PHYS. There was this article, as well - http://www.forbes.com/sites/afontevecchia/2011/11/15/is-gld-really-as-good-as-gold/, which mentions the ZH article noting that the bar in question on the CNBC special was missing from the fund's list. I'd also be curious if/how much of GLD's gold is being leased, etc. The ETF is not liable for theft, damage, fraud, etc. You really have to read the prospectuses of these funds.
It boils down to this, I think - if you are having gold/silver as a trade you want to be able to easily get in/out of, then the traded funds are fine. If you are looking to be holding gold/silver for a longer period of time because you believe there is the possibility of severe inflation, then I think physical. There's something like 100 times more paper gold in the world than there is physical. If the day comes where there's a scramble for physical, then I have a feeling a number of these paper products that can't be redeemed (unless you have a gigantic amount of shares) aren't going to fare too well. Or, to boil it down further, the day may come where if you don't literally hold it, you don't own it.
As for physical, Rono can speak to that better than I can, but there are a number of large stores online, such as Gainesville Coins and Apmex that come recommended by many, or your local coin store. Do your own research.
You are going to pay a premium - how much depends on what and where. Coins generally have a higher premium than bars and sometimes much higher. Bars are available from Pamp Suisse and Perth Mint in many different sizes, down to tiny. The Pamp/Perth bars come in sealed packages with assay cards.
Finally, the other theme that I like - not really inflation-related, is what I call "the science of everyday life." This is a really more speculative, small category and includes Givaudan (flavors, consumer product fragrances and perfumes) and Novozymes (enzyme use for applications ranging from alternative fuel to laundry detergent to beer making and quite a few things in-between.) I find what both companies are doing fascinating and I think their innovations will be of greater use over the next decade on things from new fuels to allowing people to have less sugar while still maintaining sweet flavors in packaged products (or making good for you things that taste bitter less bitter, etc.) This is not a recommendation and definitely more of a personal category that I find interesting. Additionally, I particularly like the idea that the work of these companies is in common products and not really thought about by many. Novozymes is an alternative energy play too, but that is not their main business.
So, my themes are primarily emerging markets, commodity-related, hard assets and what I call "science of everyday life."
" A recent note on Bloomberg, related to another money area; is that someone's survey (for the auto industry) indicated that 46% of the under 30 age group would forgo the purchase of a new car; if it meant that they would have to give up their internet connection. This tells a lot, too. "
...Is particularly telling, both in terms of financial health and in terms of priorities.
"The country has a large group of boomers retired and retiring (10,000/day) for the next 10 years or so. Many of them will never step back into a full blown equity position in the markets (may get burned some with bonds, too); but will attempt to remain conservative to retain exisiting capital. With a few reports I have read and/or viewed, there are also many young folks (even though they may have a decent job) who are also very skeptical about the benefit of investing risks. There is also a large group between the boomers and the young one's with decent jobs; who have work that only pays the bills and nothing left over to consider for an investment, let alone those who are not employed. "
Exactly, and this is the Arnott article that speaks to this in stocks (and I think one can take the situation and apply it to houses)
http://online.wsj.com/article/SB10001424052970204795304577223632111866416.html#printMode
"but I am fully aware of the early 80's recession with high inflation that was killed by Volker with Fed policy to drive interest rates to suck the life from high inflation."
Yeah, and there is no Volcker to be found.
Finally, as for housing, I think student loans is going to be a major issue, too:
http://market-ticker.org/akcs-www?post=203759
"Total student debt outstanding appears to have surpassed $1 trillion late last year, said officials at the Consumer Financial Protection Bureau, a federal agency created in the wake of the financial crisis. That would be roughly 16% higher than an estimate earlier this year by the Federal Reserve Bank of New York."
And now we find that a large portion of that is 30 days+ overdue and things aren't good with the age group....
http://www.zerohedge.com/news/first-crack-270-billion-student-loans-are-least-30-days-delinquent
Futures, Precious Metals Soar As Bernanke Says More "Accommodative" Policies Needed, Hints At "The New QE"