There are several trends that will have a huge impact on markets in 2011. Most of them will have a damaging effect on cash when such cash is EUR or USD.
Why is it so?
First of all, the US is printing money and buying back debt with it, basically printing out its way out of debt. Through QE and QE2, the US devalued the purchasing power of the dollar. The USD is still the reserve currency of the world, but trusting the US is really not a good idea in my view. So, moving away from the dollar is a winning strategy for 2011.
Next, looking at the Eurozone side of the equation, the approach of no default preferred by it is not helping the Eurozone debt at all. What happens is that perfectly good economies are hurt by periphery countries that succumbed to bubbles. Instead of letting investors take a haircut on such economies, bailouts were the choice taken. And now, the EURO pluges vs the dollar.
All in all, this means that the EUR and the USD are spiraling down towards the ground and run a huge risk of losing a hell of a lot of their purchasing power. Governments have no issue with that since it will reduce the burden of their debt, but at the expense of the standard of living of their populations.
Investors also do not see this very positively since the returns they expected become meaningless since the monetary basis is massively expanded, lowering the true value of their positions.
And a quick look at commodities show us that oil, gold, silver, palm oil, and so on are on a bullish trend in a lot of currencies. When commodities are up in a lot of currencies, this is an important sign: the sign that fiat currencies are worth less than they used to be.
What to do then?
For the beginning of 2011, commodities will be a great hedge against inflation. Even if interest rates are going up to “fight inflation”, the mere fact of printing more money at central banks (Fed or ECB) defies the intent.
Also, taking positions in the forex by being long on the AUS$ will pay off. At least in the first months.
There is also a significant move out of Gold ETFs towards physical bullion. That’s a trend that indicates that there is trouble coming. So, getting some gold or silver bullion is definitely looking like a good idea.
What’s the horizon looking like?
In a word, it will look like very unstable. The financial crisis is not over at all. It just morphed into a sovereign debt problem. The issue is that sovereign debt is never paid off. Corporations that do not pay their debts are going under. Not so with sovereign countries. Their citizens end up broke, but the country stays there. So, investing in assets that do not depend on governments is the best bet in my view.