BY JEFF CLARK
Originally Published 03/23/2011
What will happen to the U.S. economy and the dollar in the near term? Will inflation increase dramatically? What is the outlook for gold, and where should you put your money? BIG GOLD asked a world-class panel of economists, authors, and investment advisors what they expect for the future. Caution: strong opinions ahead…
Jim Rogers is a self-made billionaire, author of the best-sellers Adventure Capitalist and Investment Biker, and a sought-after financial commentator. He was a co-founder of the Quantum Fund, a successful hedge fund, and creator of the Rogers International Commodities Index (RICI).
Bill Bonner is the president and founder of Agora, Inc., a worldwide publisher of financial advice and opinions. He is also the author of the Internet-based Daily Reckoning and a regular columnist in MoneyWeek magazine.
Peter Schiff is CEO of Euro Pacific Precious Metals (www.europacmetals.com) and host of the daily radio show The Peter Schiff Show (www.schiffradio.com). He is the author of the economic parable How an Economy Grows and Why It Crashes and the recent financial bestseller The Little Book of Bull Moves: Updated and Expanded. He’s a frequent guest on CNBC, Fox Business, and is quoted often in print media.
Jeffrey Christian is managing director of CPM Group (www.cpmgroup.com) and a prominent analyst on precious metals and commodities markets. CPM Group produces comprehensive yearbooks on gold, silver, and platinum group metals, and provides a wide range of consulting services. Jeffrey published Commodities Rising, an investors’ guide to commodities, in 2006.
Walter J. “John” Williams, private consulting economist and “economic whistleblower,” has been working with Fortune 500 companies for 30 years. His newsletter Shadow Government Statistics (shadowstats.com) provides in-depth analysis of the government’s “creative” economic reporting practices.
Steve Henningsen is chief investment strategist and partner at The Wealth Conservancy in Boulder, CO, assisting clients interested in wealth preservation. Current assets under management exceed $200 million.
Frank Trotter is an executive vice president of EverBank and a founding partner of EverBank.com, a national branchless bank that was acquired by the current EverBank in 2002. He received an M.B.A. from Washington University and has over 30 years experience in the banking industry.
Dr. Krassimir Petrov is an Austrian economist and holds a Ph.D. in economics from Ohio State University. He was assistant professor in economics at the American University in Bulgaria, then an associate professor in finance at Prince Sultan University in Riyadh, Saudi Arabia. He is currently an associate professor at Ahlia University in Manama, Bahrain. He’s been a contributing editor for Agora Financial and Casey Research.
Bob Hoye is chief financial strategist of Institutional Advisors and writes Pivotal Events, a weekly market overview. His articles have been published by Barron’s, Financial Post, Financial Times, and National Post.
BIG GOLD: A lot of economists, including the government, believe the worst is behind us economically. Do you agree? If not, what should we be on the lookout for in 2011?
Jim Rogers: It is better for those getting all the government largesse, but the overall situation is worse. More currency turmoil. State and local problems, plus pension problems.
Bill Bonner: None of the problems that caused the crises in Europe and America have been resolved. They have been delayed and expanded by more debt and more money printing and will lead to more and worse crises. Deleveraging takes time. 2011 will, most likely, be a transition year… not unlike 2010. But the risk is that one of these latent crises will become an active crisis.
Peter Schiff: To me, it’s like watching someone walk into the same sliding glass door again and again. Wall Street must know by now that large infusions of liquidity from the Fed spur present consumption at the expense of investment for the future. We are an indebted family going out for an expensive meal to celebrate getting approved for a new credit card. It might feel good (at the time), but we’re still simply delaying the inevitable.
Jeffrey Christian: We believe the worst is behind us economically, in the short term. The recession ended in late 2009, and 2010 saw U.S. economic growth in line with what CPM had expected, but higher than the more pessimistic consensus had been. In 2011 we expect continued expansion. We think some economists and observers are too enthusiastic about economic prospects right now.
For the U.S. in 2011, we are looking for real GDP of 2.5% – 2.8%, inflation to remain low, and for the economy to avoid deflation. Interest rates are expected to start rising, perhaps significantly in the second half of 2011. The dollar is expected to be volatile, rising somewhat against the euro but continuing to weaken against the Canadian and Australian dollars, the rupee, yuan, rand, and other currencies.
European sovereign debt issues will continue to plague financial markets, but market reactions will be less severe than they were regarding Greece in April 2010.
John Williams: An intensifying economic downturn – what formally will be viewed as the second dip of a double-dip depression – already has started to unfold. The problem with the economy remains structural, where household income is not growing fast enough to beat inflation, and where debt expansion – encouraged for many years by the Fed as a way to get around the economic growth problems inherent from a lack of income growth – generally is not available, as a result of the systemic solvency crisis. Accordingly, individual consumers, who account for more than 70% GDP, do not have the ability, and increasingly lack the willingness, to fuel the needed growth in consumption on which the U.S. economy is so dependent.
Steve Henningsen: The governments worldwide (I don’t pay much attention to economists) want us to believe that the worst is behind us because the financial system is built upon the foundation of trust and confidence. Both of these were battered badly when it was shown that much of the world’s prosperity over the past few decades was simply a mirage that, once dispersed, left behind only debt with no means of future production. Now they want us to believe that they fixed the problem via more debt.
What I will be watching for this year is sovereign and U.S. municipal debt corpses floating to the surface sometime in the months ahead.
Frank Trotter: Right now I have a somewhat dark but not dismal outlook. I think that over 2011, we will continue to experience a Jimmy Carter-style malaise that combines continuing high unemployment, tentative business investment, rising prices, low housing numbers when looked at on an absolute basis, and creeping interest rates.
As a very large mortgage servicer, we are not seeing significant improvements in payment patterns that would indicate the worst is fully behind us, and with mortgage rates moving upward, we see less ability for current mortgage holders to refinance and reduce payments.
Krassimir Petrov: No, the worst is yet to come. No structural changes have been made, no problems have been fixed. Printing money, a.k.a. Quantitative Easing, is a quick fix that has postponed the problem, yet also made it a lot worse. I would say that we are still in the early stages of the crisis and have another 4-8 years to go.
Bob Hoye: The worst of the post-bubble economic adversity is not behind us.
BG: Price inflation is creeping up, but the enormous amount of money printing hasn’t really hit the system yet. Does that happen in 2011, further down the road, or not at all?
Jim Rogers: It is happening. The U.S. and CNBC lie about it. Most other countries do not lie and acknowledge it is worsening.
Bill Bonner: Most likely, substantial consumer price inflation will not show up in 2011. The explosion of money printing is being contained by the bomb squad of deleveraging. That will probably continue in 2011. But not forever.
Peter Schiff: 2010 was the year that China began cutting back its Treasury purchases in favor of gold, hard assets, and emerging market currencies. The Fed has stepped in as a major purchaser of Treasuries. This represents a new phase on the path to dollar collapse, and it will manifest in 2011 in the form of more “unexplainable” inflation – as we are now seeing in the prices of everything from corn to gasoline.
Jeffrey Christian: We are now beginning to see some increases in monetary aggregates, suggesting that some of the monetary accommodations are beginning to filter into the economy. We expect this trend to accelerate over the course of 2011. This will bring some increase in inflation, but we expect the major manifestation will be through higher U.S. Treasury interest rates as the Fed and Treasury seek to sell bonds to sterilize the inflationary implications of the monetary easing and to finance ongoing massive federal deficits.
John Williams: The problems of the money creation will become increasingly obvious in exchange-rate weakness of the U.S. dollar. Related upside pricing pressure already is being seen on dollar-denominated commodities such as oil. There is high risk of consumer prices rising rapidly before year-end 2011, setting the stage for a hyperinflation. The outside date for the onset of a U.S. hyperinflation is 2014.
Steve Henningsen: My guess is further down the road, as the deleveraging cycle continues with deflationary-housing winds in our face and the banks still hoarding money like my 9-year-old daughter stockpiles American Girl doll paraphernalia. I still expect inflation to continue in areas such as energy, bread, circuses, and whatever else provides sustenance to the Romans – I mean people.
Frank Trotter: Most research has shown that over time the increase in money supply is not a short-term economic stimulus, but rather has a moderate effect in the 18- to 36-month range. In addition, this theory contends that a growth in the monetary base – which is what has happened so far – only increases economic activity when accompanied by a decent multiplier; this is not occurring. The real risk is that with rising rates and continued soft economy, the Fed will feel obliged to continue to QE3, QE4, and so on, all of which may have a significant inflationary impact.
I am more concerned about general price inflation here in the U.S. and the potential it has to reduce global growth.
Krassimir Petrov: This is a tough one. I would have thought that price inflation would have been raging by now, but this is obviously not the case. I have the feeling that 2011 will be a repeat of early 2008, with commodity prices (CRB) making new all-time highs. A falling dollar will trigger a rush into commodities as a hedge against inflation. I am really tempted to make a totally outrageous forecast that oil could make a run for $200 as QE3 unleashes another dollar scare, or maybe even a dollar crisis.
Bob Hoye: Massive “printing” has been widely publicized and is “in the market.”
BG: The U.S. dollar ended 2010 about where it started; does it resume its downtrend in 2011, or are fears about its demise overblown?
Jim Rogers: No, but further down the road.
Bill Bonner: No opinion. But there is more risk in the dollar than potential reward.
Peter Schiff: It’s hard to pinpoint exactly when the dollar will collapse, but it will take a miracle to avoid that outcome in the near term. It really depends on when the creditors of the United States realize that they are not going to get their principal returned to them in real terms, but rather in grossly devalued dollars. We have already seen the average duration of U.S. Treasury debt drop below that of Greece. No one wants to buy a 30-year bond with negative real interest rates as far as the eye can see.
Jeffrey Christian: We expect the dollar to be volatile against most currencies in 2011, but that its demise has been prematurely predicted. The dollar may move sideways to slightly higher against the euro, yen, and pound, while continuing to deteriorate against the Canadian and Australian dollars, the rupee, yuan, rand, and other emerging economy currencies.
John Williams: There remains high risk of a dollar selling panic unfolding in the year ahead, as the U.S. economy tanks anew, as the Fed continuously expands its easing, and as dollar holders dump the U.S. currency and dollar-denominated paper assets. Such would be a precursor to the inflation problem.
Steve Henningsen: Similar to my thoughts last year, I still believe the dollar is headed down long-term, but it could bounce around over the next year. If sovereign debts become a problem again, like I think they will later this year, then everyone will go running back to “Mother Dollar” once again for one last hug before she lies back down on her sickbed.
Frank Trotter: As the economy waffles and the global investing community’s attention is drawn from one crisis to the next, I expect the U.S. dollar to bounce up and down in the current range. After that, however, my analysis suggests that measured by the key factors of fiscal and monetary policy, combined with a significant trade deficit, the U.S. does not look as good as our major trading partners, and I thus expect the dollar to decline, perhaps significantly, in the intermediate term. Big geopolitical events may accelerate this or create a flight to U.S. dollar quality, so hold on to your hats.
Krassimir Petrov: I think the dollar resumes lower. I expect QE3 and QE4 – a dollar-printing fest that will eventually sink the dollar. Sure, all fiat currencies are in deep trouble and prone to overprinting, but the reserve status of the dollar actually makes it more vulnerable now. Whether the dollar sinks against other currencies is a fool’s game not worth playing. It is like being in the hospital, where all patients are suffering from cancer, and trying to guess who will feel best at the end of next year, or trying to guess who will succumb first. That’s why it is so much safer to play the dollar against gold.
Bob Hoye: Fears of the dollar’s demise have been widely discussed and are “in the market.” The dollar, itself, will not be repudiated – just the mavens that have been “managing” it.
BG: Gold has risen 10 years in a row, so some are calling it a bubble, yet it’s roughly $1,000 below its inflation-adjusted high. What’s your outlook for the metal in 2011?
Jim Rogers: It is hardly a “bubble” when very few own it still. Who knows? Overdue for a correction, but who knows?
Bill Bonner: The smart money is in gold. It will stay in gold until the bull market that began 10 years ago finally reaches its peak. It is extremely unlikely that the top will come in 2011; it’s probably years in the future. In the meantime, gold is bound to have a losing year or two. Don’t worry about it. Buy gold. Be happy.
Peter Schiff: The funny thing about a bubble is that when it’s real, no one can see it. The same commentators who were blind to the tech bubble, the housing bubble, and now the Treasury bubble are quick to call gold a bubble. The truth is that many of them have a personal aversion to gold because they directly benefit from our fiat money system. Goldman Sachs was paid 100 cents on the dollar in the AIG bailout, which never would have happened in a gold-based system. It’s a lot easier to print a billion paper dollars than dig up a million ounces of gold.
Gold will continue to climb in 2011 as the currency war continues and investors continue to seek stability. Unless there is a major sea change in the way the U.S. does business, I think the gold trade is a safe one.
Jeffrey Christian: A price of $1,550 is possible, although given the enormous investor buying pressure, prices could spike to almost anywhere. After that, we expect prices to fall back, initially to around $1,340 or $1,380. We expect gold prices to stay above $1,280 or so for most of 2011, and to average around $1,369 for the full year.
John Williams: As the U.S. dollar increasingly is debased, and where gold tends to preserve the purchasing power of the dollars invested in it, the upside to gold in the year ahead is open-ended, restricted only by any limits to the massive downside potential for the U.S. dollar. Any intermittent gold price volatility, extreme or otherwise, will be short-lived. There is no bubble – only increasing weakness in the U.S. dollar – with the gold price fundamentally headed much higher in the years ahead.
Steve Henningsen: I believe gold will once again prove the bubble-boys wrong and end the year positive (I have no idea by how much and don’t really care). However, I think this year will be more volatile and that Gold Bugs better remain seated on the precious metals express or they might get squished.
Frank Trotter: I still think that with price inflation on the rise and big political events occurring, there may be room to continue to rise. If stock markets take off, then there will be a reduction in appreciation or even a significant decline, but based on the factors I mentioned above, I don’t see that as highly likely.
Krassimir Petrov: Gold still has outstanding fundamentals. I believe that over the course of 2010, the fundamentals have strengthened significantly: (1) “No Exit [Strategy] for Ben” as he unleashed QE2, and will likely unleash QE3, QE4, etc., (2) no more central bank selling of gold, (3) more central banks become buyers of gold, and (4) trial balloons for a global gold-backed currency.
I have no idea how people could even claim that gold is in a bubble – barely 1 out of 100 people have any idea about investing in gold. During the real estate bubble, every second person was involved in it. Maria “Money Honey” Bartiromo has yet to report from the COMEX gold pits; gold fund managers and analysts have yet to obtain rock-star status; and glamorous models are not yet dating the gold guys. Who is the Henry Blodget [co-host ofTech Ticker] of the gold sector, do we have one yet?
Yes, gold will eventually become a bubble, but that feels 5-8 years away.
Bob Hoye: In 2011, gold’s real price will resume its uptrend.
BG: What’s your best investment advice for 2011?
Jim Rogers: Buy the rmb [renminbi, the Chinese currency].
Bill Bonner: We are in a period much like the period following WWI, in which the great debts and losses of the war had to be reckoned with. It is an era of great risk. The U.S. faces many of the same challenges faced by Germany and England after WWI. Like England, it has huge debts. It is a waning imperial power. And it has the world’s reserve currency. And like Germany, it is attempting to fix its problems by printing more money. This is not a good time to be long either U.S. stocks or U.S. bonds.
Peter Schiff: Don’t be suckered into the idea that recovery is just around the corner. The current climate is like living in a hurricane or earthquake zone; it’s important to stay vigilant because you never know when disaster will strike. Physical gold is the financial equivalent of a flashlight, first-aid kit, and store of canned goods. It’s a basic way to protect yourself from any eventuality. From there, if you’re looking for returns, there are plenty of foreign markets with strong fundamentals, as well as commodities that feed those markets.
Investing in the U.S. is now driven largely by force of habit. It’s a habit you should resolve to break.
Jeffrey Christian:Do not invest based on what you believe, but on what you know. Gold is a market, like other markets. It rises and falls. You probably want to stay long gold on a long-term basis, but may want to cull the weaker gold assets from your portfolio in the first quarter, and put some hedges in place to protect a long-term core long gold position against the potential of significant price weakness over the next two years or so. Such a period of weakness would be an excellent time to add to one’s gold assets.
John Williams: As an economist, I look for the U.S. dollar ultimately to lose virtually all of its current purchasing power. Accordingly, for those living in a U.S. dollar-denominated world, it would make sense to move to preserve wealth and assets over the long-term. Physical gold is a primary hedge (as is silver). Holding some stronger currencies outside the U.S. dollar, as well as having some assets outside the United States, also may make sense.
Steve Henningsen: Dramamine (for volatile markets), a stash of cash (for potential investment opportunities), and move some of your assets offshore if you haven’t already.
Frank Trotter: My advice is first to look at the other side of your balance sheet – the liability and risk equation – before seeking out absolute gains. What are your goals, what resources do you already have to meet those goals, and what events (health, income stream, upheavals) might impact these risks? Place some assets to hedge these risks directly, then look to diversify globally into markets with higher growth potential than we see here at home, and that may balance your global purchasing power risk. Almost like a religion, we have had the phrase “Stocks are the only legitimate hedge against inflation” beaten into our heads. I say, look at assets that define inflation like commodities and currencies and evaluate where these fit into your risk portfolio.
Krassimir Petrov: Last year I recommended silver, and I would stick to silver again, despite the phenomenal run in 2010. Then it gets tricky. I usually don’t recommend diversification, but now I would again recommend a broad portfolio of commodities. Investing in 2011 should be easy: stay out of real estate, out of bonds, out of fiat currencies, and out of stocks; stay fully invested in commodities, overweight gold and silver.
What to watch in 2011: stay focused on the sovereign debt crisis and bond yields. Spiking yields will trigger the next stage of the crisis.
Bob Hoye: Once past the early part of 2011, the best returns are likely to be obtained from the junior gold exploration sector.
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