With yesterday’s election results flooding the market it looks like nothing has changed, which is scary. That said, let’s take a refreshing break from the action and see what’s happening in the real, ‘money and energy’ world.
We’ll start with my two all-purpose investment barometers, gold and oil.
The price of each is among the first things I check every day (even today!) As far as I’m concerned, gold and oil are the embodiment of money and energy…
’Money makes the world go around,’ sang Liza Minnelli and Joel Grey in the movie and Broadway show Cabaret. Truer words have not been spoken. And I like the lyrics about energy later in that song:
‘When you haven’t any coal in the stove
And you freeze in the winter
And you curse to the wind at your fate…’
Yes indeed, the songwriters nailed the idea of money and energy.
We live in a world where it’s good to have money and it’s good to have energy. If you don’t believe it, just watch scenes of people scrambling and waiting in lines for gasoline in New York and New Jersey. Really, are you sure that you want to live that ‘low carbon’ footprint? Be careful about how you get there.
Prices for gold and oil have drifted down in the last two weeks. After yesterday’s ‘pre-election’ rally, gold is trading above US$1,700, while U.S. oil prices rallied around US$88 per barrel. Part of the short-term price decline involves a general strengthening in value of the [US] dollar, which pushes down the nominal price for yellow metal and black crude.
Another angle – more pertinent to the oil price slide – is ongoing weakness in foreign economies. Indeed, even with the hoopla around yesterday’s election, there’s a bigger, global picture with which to be concerned.
Oil demand is weak. It has certainly slacked off in Europe, Japan, China and many other developing nations. No, it’s not a world of “zombie” economies, let alone anything like The Walking Dead. But across the globe, the economic pulse in many nations remains weak.
Why can’t economies across the globe get moving? There are many reasons – monetary, fiscal, and structural.
In my view, the biggest, most widespread issue is debt levels. Everywhere you look, national, regional and local governments are overly indebted. Businesses and households are also, in many cases, too deep in debt. There’s so much debt that the business cycle is having difficulty gaining traction.
So how do you get rid of debt? Well, you can pay it, if you have the money – which most debtors don’t. Or the debtor can go to the creditor and compromise obligations, by paying part and convincing the creditor to forgive the balance – which sometimes happens, but not often enough.
A debtor can discharge debt through legal process, such as bankruptcy – which, surprisingly, is NOT happening nearly as frequently as one might think. The worldwide trend toward long-term low interest rates has permitted borrowers to wallpaper over the problems of old debt. People roll up old debt into new debt and pretend that there’s a businesslike process of repayment at work.
Rolling over debt is usually just a shell game. How long can it last? And what happens when interest rates go up? Stand by for a tsunami of bankruptcy actions, eventually.
In some places, people still come right out and just repudiate debt. They simply say, ‘Too bad, but I’m not paying this.’ At some points in history, we’ve called those people Argentineans. But we may also hear something like that ‘I’m not paying’ line from Greece, Italy, Spain and Portugal, as well.
This last point is another way of saying that the eurozone has profound problems. It’s still problematic whether or not the “One Big Europe” crowd in Brussels can keep everything together, despite the centripetal forces that are acting to tear the economic union apart.
Looking ahead, the euro could continue to weaken, as the southern countries simply cannot get their economies into gear. With a weaker euro, the dollar should strengthen. If the dollar strengthens, gold prices could come downsome more.
Of course, the Germans could also decide to bite the strategic monetary bullet and revert to a much more Germanic form of euro. I believe that the new product would resemble an ancient currency called the deutsche mark.
Note too that the Germans are making noises like they want their gold back from the Federal Reserve bank vault in New York – rehypothecation. When the formal request hits the wires, gold prices will rise. If the gold isn’t there, deep inside the Fed vault, gold prices will explode upward.
Long term, I foresee a very strong “Northern European” currency – deutsche mark redux – backed at least in part by a fortress full of gold. Come to think of it, that’s sort of how Germany looked 100 years ago, just before World War I.
Back then, the Germans had a fortress full of gold at Spandau, near Berlin. The gold was literally their “war chest”, accumulated over time to pay the costs of any conflict. The Germans quickly burned through the Spandau gold in the first months of World War I.
Much later, after World War II, Spandau became the Allied prison for German war criminals, including Karl Donitz, Albert Speer and Rudolf Hess.
Let’s visit some more history. This past Monday, Nov. 5, was Guy Fawkes Day, celebrated mostly in Great Britain (or not-so-great Britain, depending on your perspective). Guy Fawkes plotted to blow up the House of Lords in 1605, a mere 407 years ago.
Objecting to the established order, a group of conspirators planted barrels of gunpowder beneath the legislative chamber in London. Guy Fawkes was guarding the barrels when authorities arrested him. He was promptly tried and executed, because we can’t go around blowing up legislators, right?
Despite the treasonous angle of the underlying event, the British still commemorate Guy Fawkes and his ‘Gunpowder Plot’. The day holds different significance to different groups, of course, in our very confused modern era. That is, any number of organized groups work to hijack almost any event for their own purposes.
I don’t endorse blowing up Parliament. But in an abstract way, recalling Guy Fawkes serves to remind the political class that life isn’t all about them, their whims, desires and fads. Guy Fawkes Day signifies to political authorities that their power comes from the people.
Time will tell when the next revolution will strike. But in the meantime, keep your eyes on gold and oil….you should do just fine.
Byron King
Contributing Editor, Money Morning
From the Archives…
More Bad News for the Asian Century
2-11-2012 – Kris Sayce
Is the Asian Century Already Kaput?
1-11-2012 – Kris Sayce
Has the Australian Dollar’s Luck Just Run Out?
31-10-2012 – Murray Dawes
How the Aussie Dollar is Caught Up in Big Bankers’ Games
30-10-2012 – Callum Newman
Does Excessive Government Spending Make You the World’s Best Treasurer?
29-10-2012 – Kris Sayce