The secret to investing in gold is to know what makes it go up. Most people think it’s many things. It’s not. It’s just one thing. And it’s incredibly easy to track. But few people even know about it. Instead, some invest in gold when they see inflation rising or the economy doing poorly. Others invest when political tensions mount in some “hot spot” in the world. Still others invest when they see the value of the dollar declining.
These are all good reasons to buy gold for safety ... as a store of value that won’t let your savings dissolve into worthless paper. But none of them have anything to do with what makes gold go up in the short term.
To see where gold is headed right now, all you have to do is look up the Fed Funds Rate. You can easily find it on the bankrate.com site under “Mortgage.” The target rate is now 0-0.25.
Good News for Gold, Bad News for the Economy
The Fed is keeping the Fund Rate down to ease credit. The lower the rate, the more people and businesses can afford loans. The more they borrow, the more they have to spend. And spending is what keeps the economy humming.
But, as I’ve said before, the economy is not so much recovering as stabilizing at a very low level of performance. The last thing the Fed wants to do is hinder spending by raising interest rates. Practically everybody agrees that rates will remain low for at least another year. But I think it will be several years longer than that.
That may be bad news for the economy. But it’s good news for gold holders. The price of gold will be going up for at least another year. Unless the U.S. economy discovers a miracle cure, it could be as many as 5-7 years.
The taxi driver in Singapore told me, “I want to visit my niece in America.”
The schoolteacher in Surabaya, Indonesia told me, “I want to visit my brother-in-law in America.”
The engineer’s mother in Taiwan told me, “I want to visit my son in America.”
I’ve been to Asia dozens of times. (In a previous life, my trading company had an office in Jakarta.) And wherever I went, I heard the same thing ... from business colleagues to hotel clerks: “I want to go to America.”
For them, America symbolized the future.
But now it’s clear that, for many Westerners, Asia has taken over that role.
Who Has the Baton?
If Asia is leading the rest of the world out of the global recession (like Wall Street says it is), we’re in trouble.
Asia has big problems. I saw some of them first-hand: overcrowded cities, pollution, and way too much poverty. As a businessman closing deals over there, I also got a close-up view of the corruption in the government and bloated state-owned enterprises.
Asian countries are trying hard to grow their middle classes and, thus, the spending power of their populations. But they have a long way to go. Their economies still live and die by how well their exports do. And to keep their exports going, all of them – led by China – are rigging their currencies. They’re about 30-40 percent undervalued against the dollar.
But Asia’s biggest problem is its demographics. The older generation in Asia is failing to replace itself. The birth rate in the U.S. is 2.12 per woman. In Taiwan? 1.13. In Korea? 1.2. In Japan? 1.22. In China? 1.77.
An aging population puts undue strain on a country’s social programs. But the problem goes deeper than that. It’s the younger generations that drive change and technological innovation. An aging population becomes a little more set in its ways. Think of the mostly young online media versus the older established print media. Who’s winning that battle?
Asia will have its day. However, I’m not quite ready to hand off the baton to my counterpart in Kuala Lumpur.
But there’s one Asian country that isn’t following the example of its Asian neighbors. For example, its birth rate is 2.34 per woman.
The Biggest Asian Country You’ve Never Invested In
The biggest Asian country you’ve never invested in (I’m betting) has gone up 120 percent in the last year. A clue: It’s not China.
Unlike China, this country doesn’t have to worry about bubbles forming or the economy cooling off.
Its biggest telecommunications company has handed shareholders an 80 percent profit over the last 12 months. Compare that to Verizon and AT&T. They went up only a few percentage points during the same period.
So, besides China, which country has the most impressive growth in Asia? It’s Indonesia. Its economy grew 4 percent in the second quarter of this year, 4.4 percent in the first quarter.
Indonesia has gone down a different path from its neighbors. Much of its growth is fueled by domestic demand. And that has shielded it from the worst of the global recession. Car sales have risen 10 percent in the past three months. Consumption is buoyant. And its companies’ shares are relatively cheap.
In addition, Indonesia has a good man at the top: President Susilo Bambang Yudhhoyono. He’s honest. He’s pro-business. And he’s a reformist. I hear good things about him from my old colleagues in Indonesia. And he was just re-elected to another term in office.
Yes, this is the same country where suicide bombers blew up two upscale hotels (in Jakarta) earlier in the year. I’ve stayed at both hotels. They were good at making their mostly Western guests feel at home. I guess the terrorists didn’t like that.
Bombings like these kill and injure far more Indonesians than Westerners. And that’s raised the hackles of the local population. The vast majority of Indonesians oppose such terrorist tactics. As a matter of fact, they’re very pro-Western. And the government has done a good job of rooting out many of the culprits.
The Dumbest Thing We’ve Heard All Week ...
When the U.S. injected $80 billion into AIG last year, it gained 77.9 percent ownership and effective control. That’s when the fun began.
AIG had sold billions of dollars worth of “financial insurance policies” to banks. When the banks’ financial assets (they were debt instruments) soured, AIG owed them more money than they had. So AIG began negotiating a settlement to pay off their insurance obligations at 60 cents on the dollar. Then the New York Fed, led by its president, Timothy Geithner, took over AIG.
After less than a week of back and forth, Geithner’s team issued new terms. As a result, instead of paying the banks 60 cents on the dollar, or $19.5 billion, AIG paid the full amount: $32.5 billion. A difference of $13 billion!
“There’s no way they should have paid at par,” said Janet Tavakoli, head of Tavakoli Structured Finance. Another Wall Street researcher said, “In cases like this, the outcome is always along the lines of 50, 60, or 70 cents on the dollar.”
So how did the banks avoid getting a haircut from a basically bankrupt AIG?
Dumb, of course, is the benign interpretation of AIG’s actions. Believe it if you want. I believe in a much darker interpretation. I think the Geithner-led New York Fed knew exactly what it was doing...
It was giving banks a big wet kiss and American taxpayers the finger.