Gold may hit $3,000 if US devalues dollar
Gold prices are heading to $3,000 an ounce according to Cross Border Capital’s Michael Howell.
In a presentation at the Citywire Cabinet event, held last week at the Merchant Taylor’s Hall in London, he said that the US Federal Reserve has embarked on a policy of inflating the US economy out of debt by devaluing the dollar against gold.
Quantitative easing and expanding government balance sheets will lead to late-1930’s style asset boom followed by recession and another banking crisis by 2016, he predicted.
A traditional portfolio allocation of around 52% in equities, 20% in fixed income and rest in hedge funds and real assets would perform well in the short-term stimulus fuelled boom, Howell said.
But he suggested that a ‘new normal’ has emerged mirroring the recession-prone Japanese economy requiring a fundamental re-appraisal of long-term risks, and beyond the immediate horizon investors would have to adapt to a post growth environment.
Research by Cross Border Capital showed an eerie parallel between the S&P 500 and the Japanese Topix of 10 years ago.
‘The current average portfolio assumes that there will be an overwhelming calm risk regime, but we believe you must diversify across risk areas not asset classes. This would mean a radical shift from equities into fixed income and commodities,’ said Howell.
The ideal asset mix for a risk regime based on the performance of the Topix over the last decade would be 32.5% in bonds, 25% in equities, 25% in hedge funds and 17.5% in real assets, according to Cross Border Capital’s analysis.
Howell said that ‘the current policy of central banks is to get rid of debt by devaluing their currency against gold. To get down to the long-term average, then the gold price would be $3,000 dollars per ounce. That is where we are heading.’
A speech by Fed Chairman Ben Bernanke from 2002, titled ‘Deflation: Making Sure “It” Doesn’t Happen Here’, explains the reasoning:
‘A striking example from U.S. history is Franklin Roosevelt’s 40% devaluation of the dollar against gold in 1933-34, enforced by a program of gold purchases and domestic money creation. The devaluation and the rapid increase in money supply it permitted ended the U.S. deflation remarkably quickly…The economy grew strongly and 1934 was one of the best years of the century for the stock market.’
While the newly appointed chairman then said that such a policy is ‘nowhere on the horizon today’, his speech marked the beginning of a sustained period of monetary inflation fuelled by structurally low real interest rates.
Commodity price inflation was also a feature of the recovery, with gold doubling, the price of oil rose by 50%, copper by 93% and steel by 132%. The responses then are the same we face today, low high street (CPI) inflation, an economic rebound and volatile paper currencies. The current average asset allocation is completely wrong for this market environment,’ he said.