The gold price is a remarkably accurate indicator of the state of the world economy.
GOLD doesn’t speak, it yells, and when it passed the $US1,500 an ounce mark last week it was loudly proclaiming that the world financial system is far from fixed after the 2008 global financial crisis.
The grossly excess level of debt in the private sector, which caused the worst economic crisis since the Great Depression of 80 years ago, remains the core problem; only this time the debt-bomb is inside government.
Greece is the current flashpoint as it stumbles towards some form of national insolvency, burdened by borrowings that its work-shy population can never repay, forcing the rest of Europe to pay Greece the equivalent of an invalid pension.
The real problem, however, is that Greece is not the first European country to go broke, nor will it be the last. Iceland went broke in 2009 and is refusing to repay its debts. Ireland went broke last year and might, or might not, repay its debts. Portugal is teetering, and Spain is approaching the edge of the insolvency cliff.
Much of this is known to anyone who keeps abreast of international events. What’s not known is whether there is a solution to the spectacular debts being carried by governments, or whether the only solution is to not even bother to repay what’s been borrowed.
There’s a fear more countries may adopt the Icelandic approach – a complete abrogation of debts and a dare to creditors such as Britain to do something, with that something seemingly a declaration of war and a threat to invade.
Or there is the US ‘solution’, which is to continue stoking the fires under the printing presses, flooding the world with trillions of excess dollars, which has the effect of debasing America’s debts via inflation.
Enter gold. It is behaving like the canary in a coal mine, sniffing poisonous gas long before the miners, and alerting them to danger by dying.
But in this case the ‘golden canary’ is doing the opposite – springing to life, breaking all price records and becoming the only currency that many investors trust – because it is global and debt-laden governments cannot easily manipulate it.
Understanding the process through which the world is passing is not that hard.
Knowing how the world extricates itself from a crisis is the real concern, because whichever way the problem of debt is tackled, the reaction will bring even more bad news.
Governments that cut public spending too hard to reduce debts can expect to be dumped (Iceland and Ireland), or face street riots, or worse (Greece). Governments that do not cut public spending can expect ever-rising debt levels (the US and Australia).
It is a classic choice between the devil and the deep blue sea because government debts, often incurred to win votes, are not going to go away without pain in some form – sooner or later.
That’s why investors should be watching gold as closely as miners used to watch the canary because the higher gold goes the more likely the chance of a dramatic outbreak of global inflation, which benefits no-one.
IF watching the gold price rise as inflation fears grow is not your cup of tea there is another useful measuring device in your pocket – the Australian dollar.
Over the past year, the dollar has risen from around US90 cents to around $US1.06, an increase of close to 18 per cent, or 1.5 per cent a month – perhaps one of the fastest currency appreciations ever.
As interesting as that rise has been is the way the $A has followed the gold price, and other physical commodities, which have become de-facto inflation hedges as investors rush to put their money into anything other than the $US.
As good as a high dollar is for Australians going on an overseas holiday, the currency is also starting to play the role of a canary for the country’s manufacturing industry, with a slight twist. In this case the canary lives and the manufacturers die.
Nowhere can the death of Australian manufacturing be more clearly seen than the uncompetitive bids being lodged for work on resources projects.
Despite packages of basic metal-bashing work being tailor-made for Australian industry, many bids are reported to have come in at double the price of foreign bids.
In some cases, local bids have been higher by a factor of five. Or, put another way, some Australian companies are 500 per cent more expensive than overseas competitors.
No mining or oil company can possibly accept bids that are so far out of the ballpark.
Not even the threat of union-led industrial action will win the day for over-priced contractors who are being killed by the dollar.
Fat cats back
AS a final thought on this complex cocktail of rapidly changing currency values, it’s worth looking at the latest fad among fat cat investors who are returning for a second serve of pain.
Funds managed by global hedge funds, the vehicles run by risk-happy managers who lost billions of dollars in the 2008 meltdown, have risen above their pre-crash highs.
Last week, as gold soared and Europe and the US stumbled deeper into debt, private investors boosted their deposits in hedge funds past the $US2,000 billion mark, overtaking the previous peak of $US1,930 billion set in June 2008.
Why so much money has returned to an investment sector so heavily loaded with risk is a fascinating question. Either investors believe good times are just around the corner, or they can’t see that the world’s debt problems have not gone away, just moved from private to public hands.
‘NO comment’ is the standard reply from politicians faced with a difficult question, but it sounds far worse coming from a company in the media business.
That’s why the response from the Rupert Murdoch-led News Corporation about reports of it possibly acquiring control of the Formula One car racing competition was so laughable.
When asked about the F1 story, a News spokesman said the firm: “Does not comment on market speculation”. Quite right. News doesn’t comment about speculation, it’s in the business of publishing speculation.
“It is remarkable to what lengths people will go to avoid thought.”