By Paul Mylchreest (12 Nov 07)
THESIS: The biggest credit bubble in modern history is showing signs of unraveling in the US. Debt/credit expansion brings forward consumption—it must either be purged in a deflationary recession, or inflated away through currency debasement. Gold wins in either scenario and is the “go to” asset along with basic commodities, like food and energy.
Gold price will reach at least US$1,500/oz: we are raising our long-term gold price estimate to US$1,500/oz (from US$900/oz) with the possibility of a spike to
US$4,000-5,000/oz. We see gold acting as a ‘Giffen good’ for a period – a rising price leading to accelerating demand as its investment profile sees a resurgence.
Rising gold price is a warning signal: it casts doubt on the US economy. We believe inflation is far higher than reported, money supply growth is running at 14%, debt/GDP is nearly 350% (vs the 270% peak in the Depression) and the ‘fiscal gap’ faced by the Federal Government is US$50-70trn. The Federal Government’s accounts have not been signed off by its auditors for ten years.
The US faces rapidly rising inflation or deflationary recession: credit cycles (and this one is extreme) always end in a deflationary bust – this is the lesson of the Kondratieff Cycle. The Fed will most likely try to defy economic gravity using increasingly inflationary means. Gold is the only asset to outperform in periods of either uncontrollable inflation or deflation: the US economy is on a knife-edge between the two.