The Global Economy

The rise of Asia and globalisation is creating massive change within the global economy. There has been a tremendous rise in asset prices in real estate and stock markets globally, spurred by low interest rates. Commodities have seen multi-year highs.

But now the global economy hangs in a very delicate balance. And that has the potential to affect all of us, perhaps dramatically.

The broad theme for the global economy is the fate of the US$ and the massive debt built up by the US government. US debt is stated at $ 8 trillion but future unfunded liabilities (including Medicare and Social Security) means the debt is actually $ 44 trillion or $ 147,000 for each man, woman and child in the US.

With its record trade deficits, the US $ should fall as part of a self-correcting economic mechanism. But Europe and Asia want their exports to remain competitive, and are artificially supporting the US$.

This appears to have now changed. The Treasurer of the Australian Government has asked the Asian Central Banks to ensure an orderly withdrawal from the US dollar as he believes China’s strategy for supporting the US dollar has changed. China has over a trillion dollars in official reserves. Australia, Japan, South Africa, Argentina, the United Arab Emirates, Russia, South Korea and other countries have all indicated a desire to reduce US dollars in their official reserves and/or increase their holdings of gold.

As the world’s reserve currency, the attractiveness of the US dollar is as a store of value. But it has declined by 7% in the last year and by about 30% since 2002!

As the gold price and the US$ have historically moved in opposite directions, gold will be benefit tremendously from what Acamar believes is the inevitable decline in the US dollar.

The danger to the global economy also is the overdependence on the US consumer, who drives a large part of global demand and accounts for 70% of US GDP. The average US consumer is heavily in debt and his main asset, his personal home, is seeing value erosion as US housing prices have now fallen by over 1.7% this year, the worst decline in 70 years.

Hermes Capital, UK's largest pension fund manager with over £95 billion, has just invested 3% of its funds into commodities for thee first time, and intends to increase that. CALPERS, the $ 213 billion pension fund for California public employees now intends to invest in commodities. These are the most conservative investors, looking to invest in a non-traditional asset category. Why?

Because commodity prices are not related to changes in the price of stocks and bonds and act as a hedge against a decline in the value of such investments. Commodities offer diversification against mainstream asset categories.

We are in a commodities (oil and gas, copper, gold and silver, uranium, etc.) boom, driven by Asian infrastructure growth. Historically, these commodity cycles last 15-17 years and this one began in 2001.

Investing in precious metals acts as both a hedge against uncertain economic times and a decline in the US $.

next page: Silver and Gold

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