Notes from a speech given to the Academe Finance Conference in Geneva and Zurich, Switzerland
June 4-6, 2008
by Kenneth J. Gerbino
Commodity Pendulum has just started. Normally 20-25 years. Uptrend started in 2001. Commodities adjusted for Inflation in real terms must increase 75% to just catch up with the 1960 prices. Much higher prices coming and will trend higher for the long term.
China and India: Obvious and Huge. Highest U.S. Steel consumption is from building industry. If a 75% downturn in the U.S. (worse than the great Depression of the 30’s) there would still be a shortfall of copper supply due to Chinese demand in 2008 and 2009. Massive demand for raw materials coming for decades from developing countries.
World Governments cannot fulfill the promises to their citizens. Only way out is printing more money. Very Inflationary. Gold will go much higher.
No Deflation: This is a PR Line from Central Banks as an excuse to print money. 1987 crash in the U.S stock market saw over $10 trillion in Stock and Bond market losses and there was no deflation or recession. Financial assets, money, and credit are distinct economic classes and should not be confused with each other, even if they are related.
Mining Analysts too conservative in metal price projections. 35 years in this business and I have never seen them get it right. This creates uncertainty in the market. Most are geologists or engineers and have little economic background to predict raw material prices. Since economists are also clueless – it makes for a volatile metals market. Key to the future will be the three “drivers” mentioned above. Metals are going much higher.
U.S. is a Welfare-Warfare State. 90% of our budget is spent on these two items. Both require printing massive amounts of money. Internationally the U.S. is the Good, Bad and the Ugly. Great nation for many things but foreign policy difficult since plenty of business is conducted in many countries that have horrible human rights records. We give more money to dictators than any country on earth. We are also the first country to send help for earthquakes and floods. We are the most generous nation.
U.S. had $21 trillion in direct and indirect obligations as of 2000. In 8 years this is now $53 trillion. A $32 trillion increase. Very inflationary. Bullish for all precious metals.
Highly Speculative world: J.P. Morgan with $1.2 billion in equity controlling $91 trillion in derivatives. Many foreign banks and investment groups will have problems as well in the future. Time to be conservative
Major stock market investments should wait until Interest rates are twice as high as today and then look to buy well known consumer brand large cap companies on world stock markets that will be much lower in price as inflation and interest rates head much higher and hit world stock markets hard. Precious metal stocks will be the strongest stock sector.
Gold should stay above $800 and if lower will only be temporary. Gold will trend higher for a decade. I see much higher prices.
Gold mining stocks are undervalued and weak holders are all out. As inflation numbers continue to be reported, these shares will be very strong. Inflation is from excess money creation not oil or commodities prices going up. Paper money is cause. Prices going up is the effect.
Credit and Monetary conditions are out of control and very dangerous. Our fund and client portfolios are basically in cash or precious metal stocks.
U.S. money supply is expanding but Monetary Base and M1 are now misleading as money is swept from checking accounts daily and placed in interest bearing money market accounts. M2 is now the only reliable money supply. Monetary Base and M1 numbers are misleading most commentators that are not sophisticated in Fed policies or new programs
G-8 countries cannot meet their financial promises and the political solution is to print money to make ends meet. This is now ingrained in their systems and with budget deficits mounting will become worse over time.
The world will not go into a depression like the 1930's which was a depression of productivity. The depression of the future will be one of purchasing power of the lower and middle class wage earners who will see their standard of living reduced because of the paper money system.
The world will not come to and end. The future will be like the past only everything will be more expensive.
Kenneth J. Gerbino
Kenneth J. Gerbino
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