Wealth Building Lessons

I read two very interesting news reports today. One was about the spread of global inflation.

Last week came word that the Gulf States were piling up $1.5 billion net per day in oil revenues. In China, not an oil exporter, the rate of growth of foreign currency reserves has slowed down recently, but the country still nets about $1 billion per day. Overseas central banks accumulate Everests of these dollars, and lend many of them back to the United States – by buying U.S. Treasury bonds. To give you an idea of how fast this mountain of money is growing, foreign central bank holdings of U.S. treasury bonds, held in custody at the Fed, are increasing at a 37% annual rate.

But to buy these dollars, foreign central banks must increase their own currencies to pay for them. And so the global inflation contagion continues to function much as it did for the last five years – except that the flow of funds has shifted away from the finished product exporters in Asia in favor of the exporters of food and energy in the Gulf, Brazil and Russia. The world’s leading central bank is still over-doing it. Result: higher prices.

The second report was a news article on Bloomberg.com, stating that Gold prices could rise to as much as $5,000/Oz over the next several years.

Gold prices may rise to $5,000 an ounce as investors seek to protect themselves against accelerating inflation, said Schroder Investment Management Ltd., which oversees $277 billion of assets globally.

“You could easily see for the next several years that prices rise not to $1,000 an ounce, but prices rise to $5,000 an ounce or beyond as inflation psychology becomes more and more embedded and people become desperate to have a source of value,” said Christopher Wyke, London-based emerging market debt and commodities product manager at Schroder, which oversees about $10 billion of commodity assets.

Investors are turning to gold for protection as two-thirds of the world’s population cope with inflation rates that are climbing to more than 10 percent, Wyke said. Cash and inflation- linked bonds are poor substitutes as low interest rates, coupled with surging inflation, erode the real value of assets, he said.

It’s very interesting how there’s a spread in inflation and how many investment managers think that gold prices will benefit from this global uncertainity in the financial markets.

What’s in your portfolio?

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