ArabianMoney.Net

After the brutal corrections of August and now October holders of precious metal assets are in need of some good news. Is the election of a US President committed to higher public spending and larger US deficits the answer to their prayers?

President Barack Obama will have the majorities in the new congress necessary to carry out his plans for increased spending on national infrastructure and a massive fiscal stimulus package. This will complement the multi-trillion dollar bank bailout program now in progress.

But this is all far too late to prevent the US recession deepening and the whole world falling into a recession in 2009. It is going to be a horrible start to a new presidency. Unemployment is rising, bankruptcies will soar and home prices continue to fall. The best hope is that rock bottom is touched some time later next year.

Another crash

Indian astrologers predict a stock market crash in the final days of 2008. I am skeptical about reading too much into the stars. But it makes sense to predict a short-term, post-election rally in stocks after the horror of this October.

The problem is that once you get to the end of the year and think about 2009 everybody will press the ‘sell’ button. That would further weaken the global economy even before President Obama steps into the Oval Office.

In October the strength of the US dollar was a surprise, and in another sell-off the dollar could rally further, if only because investors decide that this is the asset class that they wish to hold in a financial crisis.

But with massive budget deficits looming for 2009 the dollar rally is going to be another trap for investors. The federal budget deficit is going to balloon next year and require funding. The trade deficit is also going to balloon – ironically because the strong dollar means weak exports.

Will foreign countries be keen to buy low-earning US treasury bonds to finance these deficits? Will they not be concerned that the dollar is going to collapse with the money supply being expanded? Will they not switch to assets likely to earn higher returns?

Gold and silver

But which asset class could you possibly buy for safe returns in a collapsing global economy? Which asset class will protect you as the deflation of the recession turns into the higher inflation of the government printing press and the slow recovery?

This just has to be precious metals, just like in the late 1970s. Cash and precious metals beat bonds, equities and real estate in that troubled time. It is happening all over again – the 2008 crash is very much like 1974 and sadly so will be the outcome in terms of stagflation.

For President Obama the classic dilemma of an elected politician is presented: he had to raise enormous hopes for change to get elected; and now he will find it hugely difficult to deliver on his promises. That could mean he faces a short presidency like Jimmy Carter in the late 70s rather than becoming another FDR from the 30s but he might surprise us all.
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