A look at the big picture

Sometimes it is good to lay off the day-to-day events and news dictating the high volatility existing on the markets today, and sit back and review the big picture. It is wise to understand why we are here and how we got here.

Bad times are always the best times for a bargain- Neville Curmi

As a result of World War II one can imagine the state of the markets and currencies, and the chaos that reigned even in the victory countries. Russia, of course, locked itself out behind the Iron Curtain; China was a poor non-starter.

The big western countries wanted a solid base to peg their currencies and to have some valued stability. So the gold standard was started and these countries pegged their currency values to gold. The US Dollar – the currency of the strongest among the victor countries and allies – became the world reserve currency and to create stability, payments inter country were also allowed to be made in gold.

This worked a treat at the start. But with the US’s increased spending for the Vietnam war effort and with people improving their way of life, spending started to increase. Countries then insisted on more US payments in gold, sharply reducing the US$ gold reserves. Until finally Nixon would have no more of this weakening. In 1971, he ordered the US off the gold standard. With the gold’s discipline gone, countries were free to spend, borrow and inflate; that freedom lasted until 2000 when a new era began. Bang went the tech bubble, recession took over and the war on terror began as did deficit financing in line with an ever increasing spending policy. Debt simply skyrocketed.

Today the western world countries are literally drowning in debt, money was created on a massive scale to pay for all the surging expenses. The extent of this monetary easing is frightening. Let us take the US as an example.

It took more than 200 years for the US to reach the $1 trillion in debt but over the past five years the debt has soared to over $5 trillion. How large is this figure? Imagine it would take over 30,000 years to spend $1 trillion at $1 per second! It can only get worse. Europe is better off, but not by very much.

So where to?

For the moment we are printing money to pay our expenses – quantitative easing. This will give us time but will time be sufficient to avoid a dramatic situation?

We are now seeing a world power shift happen in front of our eyes. This shift has happened many times before. The Egyptians, Greeks, Romans, Turks, Spanish, British all had their time at the top. It is the US which has taken the baton from the British. But now who is rising from poor obscurity, if it is not China? Remember it is usual for the top dog to also command the world’s reserve currency.

Yes it has got to be no one else but China, and it is the country with the most money at present, and by far. They have started to be concerned about their finances: simply they have too many US dollars (what a problem to have!) and have already placed too much money in US treasuries.

So they are also lending to Europe, becoming the creditor nation to the world. And what are they doing with their reserves? Buying gold, of course. China is the first country to officially ‘advise’ its citizens to purchase gold and they are obeying in their millions. China has also started making deals with other countries in their own currency, sidelining the US dollar: when you are a principal creditor of any country you must be in a very strong position.

Meanwhile gold is marking time. No crises. Just consolidating. It must be the ultimate store of value. In this scenario, are there opportunities to make money? Of course there are, with all this money being created, most is going to government bonds, but some is finding itself in the stock market. Bad times are always the best times for a bargain.

Curmi & Partners Ltd are members of the Malta Stock Exchange and licensed by the MFSA to conduct investment services business. This article is the objective and independent opinion of the author. It is based on public information and should not be viewed as investment advice in any manner. The value of investments may fall as well as rise and past performance is no guarantee of future performance.

www.curmiandpartners.com

Mr Curmi is a director at Curmi & Partners Ltd.