Cash or Gold?

From Eric Sprott:

For the above reasons, we believe the current flight to US dollars is a knee jerk reaction that won’t have staying power. When asset prices fall, people take comfort in the fact that one US dollar will always be worth one US dollar. But this stability is only illusory. The real question should be, what will one US dollar be able to buy in the future? Is a sub-4% yield sufficient to preserve wealth over the next 10 years? Much less, is a 2.7% yield likely to preserve wealth over the next five? We find it highly unlikely, especially in this environment where the Federal Reserve is throwing everything it’s got at the crisis. We believe the next leg of the crisis will see people becoming fearful of cash and bonds. Although, to date, the US dollar has fared relatively well versus other currencies, in the long run we believe it’ll fare relatively poorly versus gold.

In other countries, people would have done well, as this crisis was unfolding, to be fearful of cash. In Iceland for example, where the krona has been devalued by 80%, people are probably wishing they had owned gold. All over the world, countries are experiencing violent currency movements. The Brazilian real and the Mexican peso have lost a third of their value in the past three months. Even in relatively developed countries, like South Korea, the won has lost a third of its value. There is a currency crisis unfolding in Eastern Europe right now, with many currencies down 20% versus the Euro in a single month. This is causing considerable hardship in countries like Hungary, where people took out loans and mortgages in foreign currencies in
order to avoid high interest rates. 2 The cost of repaying those loans is now significantly higher than what they anticipated. There are huge swaths of the world where cash has proven to be anything but safe. They are all wishing they bought gold. We believe that holders of US dollars will soon be wishing the same thing.

With gold coins in a physical shortage and selling at a premium to spot, there is evidence that investors are starting to flock towards gold. It won’t take much buying to catalyze the price of gold. At today’s price, the total amount of gold ever produced is worth only $3.5 trillion, a mere drop in the bucket compared to the world’s financial assets which, financial crisis notwithstanding, still total somewhere in the neighbourhood of $100-$150 trillion. If some of these paper assets were to be redistributed to gold – nothing would be more prudent – then the recent drop in the price of gold presents a tremendous buying opportunity for the astute investor.

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