Gold has been on fire as of late, hitting new highs on fears that the U.S. dollar is doomed.
Gold is up 54% this year. That’s a great return, regardless of how you slice it. But it’s down today, which sets up a good opportunity to buy.
Only 11,000 Jobs Lost
The jobs report out this morning backs up the idea that the worst is over. The economy only shed 11,000 jobs in November, much lower than an expected 125,000. This pushed gold down below $1,190 an ounce.
Wall Street believes that the stabilization of jobs adds more evidence to the idea that we will see a solid recovery in 2010.
And they may be correct. But an increase in jobs on the back of a massive global debt load doesn’t mean we are out of the woods just yet…
A Flock of Black Swans
Black Swans are high-impact, hard-to-predict events that lay waste to well-honed Wall Street theories.
There are still traders at work who remember September 16, 1992, which is known in Britain as "Black Wednesday." That’s the day when George Soros broke the Bank of England by shorting the pound and pocketed a billion dollars in the process.
Just this week, the world was hit by the news that Dubai wouldn’t be able to pay $59 billion in loans. Speculation quickly followed that other countries were in danger of defaulting. Most of these were small countries like Greece, Latvia, and the Ukraine.
But Could a G10 Country Default?
What you may not know is that of the $80 billion or so of Dubai debt at risk of default, some $50 billion of that money is with UK banks.
Just yesterday, Morgan Stanley put out a warning on the UK in a report:
… There is a danger Britain’s toxic mix of problems will come to a head as soon as next year, triggered by fears that Westminster may prove unable to restore fiscal credibility.
Growing fears over a hung parliament would represent something of a leap into the unknown, and would increase the probability that some of the rating agencies remove the U K’s AAA status.
In an extreme situation a fiscal crisis could lead to some domestic capital flight, severe pound weakness and a sell-off in UK government bonds. The Bank of England may feel forced to hike rates to shore up confidence in monetary policy and stabilize the currency, threatening the fragile economic recovery.
A Country of Bankers
England has been hit harder than most during this global crisis because it is a nation of bankers. Financial services provided 27 percent of revenue during the good years. Which is why England is the only G20 country to remain in a recession…
The Pound Is Pounded
Britain is printing money just like the U.S. And just like the U.S., The Labor Party (Democrats) is in full control, simply lacking the political ability to reign in debt. Projected tax liabilities for the UK tax payer are estimated to hit 350% by 2010. That’s a lot of debt.
A falling currency is the same thing as inflation. At some point, the UK must hike rates to defend its currency when prices of all goods start to move up. This will set off an inflationary debt spiral in which higher payments compounded by new government debt, a maximized printing press, increased interest payments, and a lower tax base will conspire to send England back to the days before Thatcher.
Black and Blue Swan
Morgan Stanley believes that such a scenario is likely unless the government acts to rein in debt. And the UK — much like the United States — is saying they will do it next year. Time will tell if "next year" is too late.
All I know is that if a G10 country loses its AAA status, or its currency sustains a sudden 10 to 30 percent drop, gold will surge.
It’s a great hedge against the next black swan. You could buy physical gold and you’d do fine.
Heck, I think gold will climb over $2,000 an ounce before all this is over.
But there is a better way to maximize your gains… My colleague Greg McCoach recently uncovered another — and much more profitable — way to come out ahead during this crisis. It’s a very unique sort of investment, backed by gold… yet this gem pays you double the gains gold makes!
Have a good weekend,
Editor, Energy and Capital
(and soon-to-be-launched Crisis and Opportunity)