Ashpal - Alternative Investments

To lay the foundation for my explorations and eminent advocacy of alternative investments, I would firstly like to address the situation of the US dollar. In my opinion, and as expressed by numerous people in a host of positions, we should see a decline in the US dollar. The questions to be addressed will be why and over what time scale will this occur.

On the international scale, the US dollar has been the world’s reserve currency of choice for much of the period after WW2. However, some significant changes have taken place that make the US dollar unsuitable to continue in this role.

A recent report on governmental spending showed that the US would need to “create” in access of 500 billion dollars annually. (That is effectively printing money) This is aside from the money it receives from American savings and from foreign purchases of treasuries. In basic macroeconomic theory, this is going to lead to inflation and a corresponding devaluation of the currency.

This view was recently echoed by a Chinese official, Cheng Siwei, at a conference in Lake Como, Italy. Criticizing the monetary policy in the US he said: “If they keep printing money to buy bonds it will lead to inflation … and after a year or two the dollar will fall hard.” Cheng went on to say that China was diversifying its roughly $700 billion of U.S. foreign-exchange reserves into gold.(http://www.cnbc.com/id/32739769)

Another important factor is that the US has a major trade deficit. Its net imports, even adjusted for the relatively high price of oil imports last year, far exceed its exports. This again puts downward pressure on the currency. The US trade deficit with China and Japan, its 2^nd and 3^rd largest trading partner, is over 300 billion dollars. As governments grow weary of buying US dollar denominated assets like treasuries to balance the flows, we are likely to see an added strain on the continued strength of the US dollar.

Hopefully, this is sufficient to convince any reader that with over 10 trillion in debt, and a record budget deficit for the current year, the US cannot repay its debtors anytime soon. There are two points to take away from the extract in particular. With a decline in the US dollar imminent, US dollar denominated commodities will likely increase in absolute value. Gold seems to be a pretty solid bet, especially if China is considering converting its vast US dollar holdings into physical gold reserves. (Now in excess of 1000 tons) The downward risk seems insignificant

However, before jumping into an investment in gold, especially as the price of gold has crossed the thousand-dollar mark, I think some cautious background analysis may offer greater insight into the topic. Firstly, a foray or rush into gold will not be in favor of the Chinese, as they would have to pay increasing amounts for their purchases of the metal. Therefore, although the downward pressure on gold might be limited, we might see a relative stagnation in the price of gold. Gold has no intrinsic value in terms of industrial use. Its value is entirely perceived. There are however, other commodities that have vast industrial uses and hence a base demand, that are also denominated in US dollars. For this reason, I believe that it will be useful to explore commodities such agriculture and metals, copper and lead in particular.

Copper has widespread uses in industry, ranging in nature from electronic to creating pipes for air-conditioning. The relative importance of copper is also highlighted in its listing under precious metals, right alongside gold and silver. Hence, if it has a standing as a precious metal and an underlying value from the burgeoning industries in places like China, I think it has better security and bullish prospects then gold.

Lead, again is linked to industrial demand, this time from the alternative energy sectors. The large hike in oil prices has jolted the demand an interest in nuclear power plants, with a record number of applications reaching the US authorities last year. Lead is a major component of the nuclear containment construction. Furthermore, Mr X brought to my attention the potential use of lead in fuel cells of the next generation trucks and possible cars. Looking good?

The inherent demand for agriculture is self-evident. With an ever-increasing number of people and food crops being affected by adverse weather, agriculture appears to be a solid bet.

However, as the naysayers of the Malthusian argument will rightly point out, the predicted disaster never materialized, largely due to improvements in farming. Therefore, I think there is great potential not in the crops themselves, but in companies that help to ensure that the price of agricultural produce stays low. (We can also continue to count on the European and Americans to subsidize our wheat instead of solving their fiscal problems)

A prime candidate for this category would be Monsanto. Thursday’s issue of the NY Times (8^th October) carried a full-page advertisement for the company that read: 9 Billion People to feed. Climate Change. Now What? Recognizing this problem, Monsanto has already started to address green initiatives to create advances, yet affordable seeds for farmers. Its foresight into this field has enabled it to become the market leader. Despite the recent anti-trust filing against the company for a possible abuse of its monopoly power (which itself reflects the importance of this company), the company looks in fantastic shape and is situated in an industry that is guaranteed to see a 50% increase in business, save World War 3.

Since flurries of people have been recommending gold, it might be pertinent to keep in mind that (paraphrasing deliberately) none of us are as dumb as all of us. There are other possibilities out there that may offer greater potential.