What is your Prediction for Gold in 2010 and 2011
Many are projecting gold to perhaps double in the span of one to two years. I think this would only be the case under one or two very severe circumstances. The most prominent threats are that the euro is abandoned or substantially restructured or there are a series of prominent downgrades amongst the major economies. These events would undermine confidence in government debt and currencies, and bolster demand for an alternative safe haven (ie gold). Yet, this precious metal is illiquid (at least compared to its fiat counterparts) and is already extraordinarily expensive. We wouldn't buy a currency or treasuries so willingly if they were at record highs. I believe gold will see a controlled advance with periods of retracement for the next three to six months as uncertainties persist. Then, we will see a significant depreciation in the commodity as market wide risk levels off and investment into speculative assets finds slower build than in 2009.
And what is your Prediction for the EUR/USD in 2010 and 2011
EURUSD follows many of the same themes as gold. The dollar is the market's primary safe haven and the euro is currently the source of broader market uncertainty. The European Union's troubles will persist for some time whereby member economies will suffer economically and either the group will have to alter its rules to allow for bigger deficits or a member or two will have withdrawal from the Union. This, along with the knowledge that growth and interest rate forecasts support the dollar over the euro, will keep EURUSD moving lower for much of 2010. However, sentiment will begin to level off and conditions will improve around the turn of the year. This will allow EURUSD to recover some of its quickly lost ground for approximately three months. But from there, the dollar is perhaps better positioned currency as few will really trust in the fundamental and financial stability of the regional economy nor will they look to the euro as an alternative reserve currency.
If you compare the economy of the US and Europe where do you see differences in the current situation?
The US and European economies are only as strong as their weakest performers (states and countries). The US is coming off a strong recovery pace; but it will certainly slow its pace. For sustainable and meaningful growth, the US needs its consumers to start to take the wheel. That will not occur for some time. In Europe, the those member economies that are already struggling to revive growth and now have to cut spending to comply with deficit/GDP ratios will find themselves on the verge of (if not in) a new recession. Cuts in government spending aimed at supporting growth will further curb expansion and thereby cut tax revenue - inconveniently extending the effort to balance growth and deficits. The larger economies will also struggle as exports to these neighbors will slow and these governments head on their own path of financial restraint as a show of will to the smaller members and in an effort to prevent sovereign credit risk fears. With the ability to control monetary and financial policy for a single economy rather than force it on very different members, the US will outperform the European Union.
Paul Krugman said last week, that low interest rates helped the economy to avoid a crisis like in the 1930. He also said, that that more inflation will be helpful to overcome the crisis. He thinks that the ECB's inflation goal should be raised from 0 - 1 % to 3 - 4 %. What do you think about that?
Raising the inflation target it a risky proposition. The thing you have to remember is that this is an inflation target that refers to the overall region. So while large members may be seeing low inflation and could benefit from the subsequently low rates, other individual members could be experiencing excessively high levels of inflation. Unable to do much about it, economies in these situation could run into real troubles. The opposite is also true. Perhaps inflation in the broader region is high but low with individual members, you run the risks of destabilizing certain members.
How do you think about Interest rates increased in Canada?
Canada's markets have been surprisingly resilient over the past few years and the economic recovery has proven itself to be robust. This gives the Bank of Canada significant room to target inflation. Most of the G7 central banks target price stability as their primary concern; but facilitating growth (in the name of full employment) and promoting financial stability have sidetracked that concern. Not so for the BoC. Therefore, they can look out to the medium term and see the economy running a little hot should rates be too low. They will continue to lift their benchmark but at a controlled pace. One every two or three meetings.
How do you think about Sovereign Defaults? Will we see some?
Sovereign defaults are not as much of a concern as downgrades. Considering the sheer level of capital behind government debt and assets, a mere downgrade could increase costs significantly and substantially reduce confidence. That would be bad enough for a market already preoccupied with bad news. For an actual default, some of the European nations are at most risk of this. Periphery economies like Hungary and Austria are high risks; but so too are Greece, Portugal and Ireland. Don't expect a default from the US, Germany, the UK, Japan or China.