LIVING OFF DIVIDENDS & PASSIVE INCOME

is he a gold bug?

peter schiff is great and only one of the few people on tv who actully has a clue with whats happening

Hi Gavin…I always enjoy a factual response to any of my posts. You are correct, Japan is not the exporter that most of us imagine. Your figure of 16% is probably correct. I have not found an exact figure for 2008, but it is in the historical ballpark:

http://www.photius.com/countries/japan/economy/japan_economy_exports.html

But my point is that Japan and China do not seem to have what the world wants from a country with a reserve currency AS OF TODAY. Japan will probably never have it. It is too small a country geographically with almost no natural resources. It is my theory that reserve currencies must be backed by physical assets (whether gold, real estate or raw materials). Japan has little.

Consider the era when Spain was the global power. This was the time when they were plundering South and Central America for gold and silver. Why? To make nice crowns? No. Because the backing of those hard assets allowed the Spanish currency to become the global reserve currency which enhanced the wealth and power of Spain. This continued until the Spanish Armada was sunk by the British under Sir Francis Drake in 1588. At that time, Spain lost its world leading power since it has few of its own natural resources to fall back upon, but continues to do okay as a nation, almost 500 year later.

This is a lesson for us: not that we will cease to exist as a nation the day we lose reserve currency status, but that life will change a little. Still, I don’t see this happening in my lifetime because I think the torch will eventually pass to China and they won’t be ready until they complete their “industrial revolution” (ala America in the early 1900s).

All this said, I really don’t have any problem with the idea of a 1:1 relationship between the stock market and gold, as the product of a speculative bubble in gold. I even expect it to happen the next 2-5 years (once the economy gets rolling again). But as in 1980, it will be very short-lived and many will get caught thinking gold is a new paradigm. And as in 1980, the popping of the gold bubble will result in economic distress as the market tries to find its way (we had a severe recession between 1980 and 1982 which was precipitated by the popping of the precious metals and oil bubbles).

Hey MoneyPost…great post (because you agree with me ;o)

Yes, you are right. It is ironic that Canada (you must be Canadian?) is more fiscally conservative and your dollar goes down against ours. But I really admire the Canadian economy and value system. It is like the best of America, but avoids most of our pitfalls (I think coalition driven Parliamentary systems, with the option of “confidence votes”, may have an advantage over our two party winner-takes-all system that inherently polarizes politics).

Because, I feel as you do, that the Canadian economy is more stable than the American, I have almost half my investments in Canada, mostly in the Canroys (Canadian Royalty Trusts, as you know). The decline in the loonie versus the USD has hurt me the past few months. The reason for this is the decline in commodity prices (Canada is a net exporter of commodities and energy, so the strength of those markets affects Canadian balance of trade, which affects relative currency values). Also, the USD is the world reserve currency and the loonie is not. No justification is necessary. It is what it is.

But longer term, I like the prospects for the Canadian dollar and the energy and commodity plays in Canada. Once there is global economic recovery, the monetary expansion to get out of the crisis MUST be inflationary which ALWAYS benefits hard assets, by definition.

I have investments in Australia. It is a lot like Canada. It is natural resource driven with a solid democratic (parliamentary) government, hard working and individualistic people. The currency does well when commodities do well. BHP is based there and FCX has a lot of operations there. Australia is a commodity source for Asia, so is in the right place for the next few decades.

In November & December 2007, I cashed in my stocks and transferred some into silver bullion held in a retirement. It was one of the better financial moves I’ve made. We’ll see how everything plays out.

In reply to Brian’s comments: May I ask you – what you really believe will happen with the dollar? Would it stay on its current position of 1.30 to the Euro, or it will gradually fall or rise? What I mean, is would you rather think that these statements about the collapse of the dollar are being made, because economists really believe it will, or because Wall Street’s finest want people to believe it to make a nice profit. It’s just like the other time, when Citigroup predicted gold would hit $2000 per ounce by the end of 2009. Maybe they have a lot of gold, that want to dump at high prices? (I don’t want to look like a controversy theory believer though))

LivingoffDividends,

I don’t know much about the Australian dollar except that its economy is similar to Canada’s, and that the AUS seems to fare worse against the USD than the loonie does. These past few months the AUS has always dropped more than the loonie, don’t know why. Of course, Canada is a seriously major exporter of oil to the US (another fact not mentioned often in the media, which puts all the attention on Venezuela and the middle east). I don’t think Australia exports oil, or at least not much.

Interesting that other than a veiled reference to “fiscally conservative” EU countries, no one here is talking about a very key component of what makes for a reserve currency: the country involved has to live within its means. What China and Japan have in common is that they consume less than they produce; and the EU, though it isn’t quite there comes a lot closer than the US does. And all three represent huge populations, and in the case of Japan and the EU, relatively wealthy populations.

And even aside from the issue of which currency will be the “reserve” currency, the USD certainly can, in theory, decline against other currencies even if they are from economies too small to qualify them as a “reserve” currency. There is no inherent reason that over the next 10 years the USD can’t decline against the Australian dollar, the Canadian dollar, the Swiss Franc, the Won, and (if HK changes its peg) the HK dollar, even though none of these will become the reserve currency. And if the USD does decline against these currencies, then obviously an American would be better off holding these currencies than holding the USD.