Watch out for Sterling

June 30, 2009 · Posted in Weekly Posts · Comment

The news today is that the fiscal situation in Britain is deteriorating rapidly. So much so that a crisis in the British national finances and a potential run on the currency is regarded as a “looming” possibility. “Well of course it is” you may say. Britain is in as bad or worse shape than the US financially. Doesn’t a currency crisis in Britain dovetail nicely with everything we have been saying here in Murdock Global Insight for some time now? Yes it does. However, when we get down to detailed investments a Sterling crisis could be bad news for commodities and precious metals in the short term. Here’s why…

If Sterling suffers a run then money will flow out of Sterling into something else. Some component of that will likely be US Treasuries and the US dollar as the tired old “safe haven” play gets trotted out again (we expect though that a good deal will head towards the Euro). That money flow will cause the US dollar to spike up damaging precious metal, commodity, and commodity producing stocks in the process. Further, such a crisis will lead to the expectation of reduced British economic activity which will feed the view of reduced commodity demand due to reduced global growth. It is true that a currency crisis could spark a rash of additional gold buying but that is far from certain and it is far from certain that any increase on the gold buy side would offset the rising dollar impact.

In a nut shell then, if the British beat the US to a currency crisis it may well damage, in the short term, many of the very investment plays that US investors have in-place to protect them from…a currency crisis. You have to love macro economics!

So, what to do? As our members know we have shifted largely towards cash and the short side of commodities and their producers in the near term as the recent run seems to have exhausted itself. Consequently, a Sterling crisis near term would actually benefit our portfolio positioning if it occurs in a timely manner. As always it is all about timing. For the present keep a close watch on Sterling and the emerging British story and watch carefully how your investment plays are impacted. If you find yourself screaming as your favorite media outlet describes how your investments are getting killed due to British fiscal imprudence then we would gently suggest lightening up on positions.

Seriously, it is not clear cut how this will play out. This could present an exceptional buy opportunity if a Sterling crisis coupled with a market correction drives commodities and precious metals to a near term low.

For those interested in the Bloomberg news article here it is:

Sterling Crisis Looms

Readers should take a look at our post The Most Important Question Facing Investors to understand the risks we are currently facing.

We wrote recently in “The Character of the Dollar Collapse” on the risks to investors in any asset of a dollar collapse.

Gold and its relationship near term with the dollar are discussed HERE

Murdock Global Insight began discussing the dollar’s impending demise in January when the dollar was still generally strengthening How the US Dollar Will Lose Reserve Status. Now, in June, the idea that the dollar is destined for significantly lower levels at some point has entered the mainstream. The US fiscal position is increasingly being seen as untenable. Interest rates are surging for a variety of reasons but he massive debt issuance by the US is one primary cause. We have established the Murdock Strategic Portfolio for the purpose of growing our wealth in the face of a dollar collapse/surging China scenario The Strategic Portfolioand we have written about the risks that a free fall in the dollar could cause to those investments The Most Important Question Facing Investors.

To find out the details look at our strategic portfolio scorecard. The Strategic Portfolio is how we are investing in the global trend of dollar depreciation and Asian recovery and trading around that trend to ensure we stay profitable. Take advantage of the Free Two Week Trial and read it. We have also update the scorecard for today’s action.

The Strategic Portfolio

Portfolio Scorecard 06/30/2009

In addition, we strongly recommend reading The Most Important Question Facing Investors as recent action illustrates directly what we are faced with if the dollar decline turns into a free-fall.

To view previous Members Only posts simply follow the instructions under the “Become a Member” tab and select the “One Month Free Membership” when you get to the Products page. You must complete the checkout process in order for the Membership to complete. Registration is not sufficient. You are under no obligation to continue beyond the One Month Free Trial and your e-mail and address will not be shared with third parties.

The following additional posts are highly relevant:

The Strategic Portfolio

The Most Important Question Facing Investors

How the US Dollar Will Lose Reserve Status

Chinese Gold British Debt

Brazil

China Part 4 - Playing the Dragon

China Part 3 Global Hard Assets

China: Part 2 - Bonds, Dollars, and Inflation”.

“The Fed and The Bond Market - Will Intervention be Effective?”

“The Coming Bond Debacle”

Fundamental Trends