Ever since the bursting of the global credit bubble in 2007-08 western governments have been fighting the natural process of deflation. In a post-bubble contraction businesses and consumers cut back spending and begin paying back debt. However policymakers have taken unprecedented steps in order to counter this process and prevent a deflationary recession taking place.
As a result, these economies have experienced extended periods of stagflation punctuated by periods of disinflation, and we now live in an era characterised by sub-par economic growth, high unemployment and below-average investment returns.
As we have long argued, fighting the natural corrective process is ultimately far more damaging than allowing it to run its course. A new period of sustainable prosperity cannot begin until the vast quantities of debt have been repaid and the imbalances in the economy have been properly addressed.
However politicians, central bankers and others of a neo-Keynesian/ interventionist persuasion seem to believe that the pain associated with a recession can be avoided. Their plan is to avoid outright default and instead inflate away as much of the debt as they can via a policy of financial repression – a form of tacit default.
Of course the pursuit of currency debasement and negative real interest rates also has serious implications for savers and investors and many are asking how they can protect their wealth.
How can savers and investors protect their wealth from inflation?
During a secular period of currency debasement investors need to consider seeking refuge in tangible assets such as precious metals, real estate (though not UK property, which is in a bubble) and stocks, and avoiding paper assets such as cash and bonds.
But as Martin Armstrong, world renowned economist and founder of Princeton Economics, pointed out in a recent interview, many investors have been doing the exact opposite and have been moving huge amounts of money into government bonds.
“What I’ve been warning people is that in the real cycle you have such a tremendous amount of money in bonds, in government debt – not just in the United States but globally – and that money is going to evaporate”. He goes on to point out that some investors, the so-called “smart money”, are shifting into tangible assets.
He also notes that pension funds hold a large amount of government debt and that they have traditionally been seen as safe investments. However as Armstrong points out, “if governments are in serious trouble and are not going to be able to pay off their debts, I don’t think your pension is going to survive”.
Mr Armstrong (who has spent much of his life studying economic history and market cycles), stated that “we are going down the inflationary route right now, which means that tangible assets will rise. That is why gold and the stock market have gone up”. He sees the next up-cycle in the stock market beginning by summer 2013, with the Dow reaching 20,000 later next year.
Not only is he bullish on stocks, but Armstrong is also bullish on gold which he believes will begin heading higher next year, with the strongest up-cycle for the yellow metal in 2016-2020, when he sees gold prices going parabolic.
The bottom line
If our forecast for 2013 is correct, then the primary macro trend of currency debasement will once again come to the fore. In an environment in which governments are hellbent on devaluing their way to prosperity, investors will once again turn their focus to wealth preservation.
Among the investments we like are gold mining companies such as Yamana Gold, Exxon Mobil, and Silver Wheaton.
In the coming weeks we will feature other investment ideas that assist with wealth preservation, such as those in agriculture and farm land.