Profiting from a currency collapse risk

A paragraph from The Economist has been etched in my mind over the past few days. It was incorporated in an article entitled 'Worse than Japan?'. It read: 'In some ways America's macroeconomic environment is even trickier than Japan's.

America may have a current-account deficit, but the dollar has strengthened in recent months. America's reliance on foreign funding means the risk of a currency crash cannot be ruled out, however. That, in turn, places constraints on the pace at which policymakers can pile up public debt and even if the dollar were to tumble the global nature of the recession might mean it could yield few benefits'.

In other words, the new economic phenomenon of globalisation is working in reverse. It helped to make the world exceedingly prosperous for a few years, and now it is threatening to empower an extraordinary downward multiplier of misery. Barack Obama and Gordon Brown have not learnt the lessons stemming from the 1930s depression, which was the major cause of World War II.

It is obvious that the money printing process of the Federal Reserve is only in its early stages. Economist Nouriel Roubini has surmised that the present crisis is only a third of the way through.

So the dreadful word 'budget deficit' comes up with a vengeance. In the American context, this cannot mean less than the risk of currency collapse. These developments have made central banks the world over change their tune on the price of gold bullion.

Martin Wolf, the Financial Times' top economist has stated unambiguously: "We are in the grip of the most significant global financial crisis for the last seven decades" and that choices made in 2009 will shape the globe's destiny.

One choice which central banks are currently making is to underpin their security by more purchases of gold bullion. Our Central Bank has had to increase mandatorily its gold reserves on joining the European Central Bank.

Investors have been these days making choices on how to best profit from this economic blizzard.

They have sought 'haven' shares like pharmaceuticals, but financial happenings on the gold and silver markets completely overshadow any other development: 54 per cent of the world gold declining production is going into jewellery and 23 per cent into bullion investment.

The price of gold is going up not because of an increase in the demand for jewellery, as this is evidenced by the 33 per cent decline in the exports of polished diamonds from Belgium to America.

There is much money to be made by those who can predict even minimally currency movements, especially those of gold, which is a currency. Gold is currently one of the few major asset classes where a case could be made for it to raise in parabolic fashion.

Gold bullion does not have counterparty risk because there is no person or thing closely resembling its extraordinary characteristics. The dollar and the Fed which issues it are dancing on thin ice.

The quantitative easing policy of the American central bank on Friday morning sent it tumbling down against all the major currencies, whether pound, euro, and yen, which are following a more conservative monetary policy than the Fed.

Investors are making money on Norway's krone, which has found favour after Swiss intervention, and pushed the franc lower. Norway has a hefty current account surplus standing at five per cent of GDP, the biggest in the industrialised West.

Gold's money-making potential has been highlighted this week by Paulson & Co, the hedge fund which sold short HBOS and US subprime bank loans.

Paulson has this past week taken a massive $1.28 billion stake in gold miner Anglo Gold Ashanti.

He is obviously betting that as the dollar continues to face the chronic balance of payments imbalances its successive crisis are likely to be increasingly destabilising.

During these last 77 years, America has done its best to keep down the price of gold, so that it could trade with an undervalued dollar.

Currency trading and gold trading are now competitively possible in Malta.

Mr Azzopardi Vella, economic consultant with DBR Investments Ltd, has promoted the Malta Development Fund and advised S & P.

johnazzopardivella@hotmail.com