Buy fertiliser, Not Gold To Profit From The China-Dollar Unwind

farming stimulus tbi

has some good thoughts today on gold, inflation and the future weakness of the US dollar.

Gold briefly traded over $1,000 an ounce, while CPI inflation as embedded in the spread between TIPS and Treasury coupons actually fell slightly. Why should there be a divergence between two measures that in one way or another reflect inflation expectations?

The answer is that gold and TIPS play very different functions. Gold is an end of the world hedge; as a portfolio asset it costs money to own (vault storage, insurance) and has no legal standing. It only comes into play as an asset in the still-unlikely event that the dollar breaks down as a reserve currency and no combination of other currencies can be found that can subsitute for the dollar. It’s peak in real terms came with the Soviet invasion Afghanistan over Christmas 1979, when the world considered the possibiity that American power would collapse and with it the reserve role of the dollar.

I just spent two weeks in the Far East talking to a variety of financial types (although the main purpose of my trip was unrelated to finance). Everyone is sick of the dollar as a reserve currency; everyone foresees a diminution of American power under the Obama administration; and no-one has a clue what alternative might present itself to the dollar.

Over time, China will attempt to trade $2 trillion worth of Treasury securities for $2 trillion of production inputs. In this order, China’s priorities are food, food, food, energy, food, iron ore, food, copper, food, and food again. As an Asian growth play I continue to look at production inputs into food. That probably explains why fertiliser companies are among the year’s best performers.

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