Given the sovereign debt problem in US and Europe, Martin Hennecke, associate director, Tyche Group believes that gold is safer haven than US dollar and Euro.
"If you listen to the former auditor of the US, the US Government's books has the same debt crisis as Greece. Greece is just two years ahead of them," he told CNBC-TV18.
Meanwhile, Hennecke has a negative outlook for Spain and Italy despite the successful bond auction that happened in Spain.
Below is the edited transcript of Hennecke’s interview with CNBC-TV18. Also watch the accompanying video.
Q: We had a successful debt auction from Spain just a little while back and there is one today also. What have you made of the situation in Spain and how might the European situation pan out?
A: We think the so called successful auction doesn’t mean anything and still more likely than not Spain is heading for national bankruptcy just like Greece did. Unless the ECB (European Central Bank) comes up with new and ever larger bailout measures which nobody really can afford, Germany can’t afford it.
So they either will have to come this time straight from the printing press which would put pressure on the Euro. So either you see a nightmare, a national bankruptcy scenario of larger countries like Spain, Italy or you see a massive weakening of the Euro against harder assets. Either way we don’t like Euro, we don’t like Spain or Italy at all.
Q: What is your view on the US markets? We have got mixed macro data recently. Some of them have been down, but the equities kind of maintaining their gains even after the recent selloff. Do you think that this is just consolidation and the US is in for some gains after this consolidation?
A: The sovereign debt problem in the US is still there and it’s worsening. We had the former comptroller of the United States David Walker, that’s the guy who is the director of the Accountability Office or basically the auditor of the US government’s books and he was saying the US is now where Greece was two years ago in terms of its debt crisis.
So that hasn’t gone away at all, but then some companies earnings may not be that bad, particularly those with a lot of sales in Asia and some companies also in some sectors, for example the agricultural sector has got quite good potential, also in a way related to growing exports to Asia. But overly as far as the US economy itself is concerned, no we don’t see much improvement as yet there.
Q: Considering the current scenario and what you are saying do you see a further shift towards perhaps safe haven assets like the dollar and your view on the Euro because that has been holding above that 1.30 mark at least?
A: I don’t think that dollar is any more safe heaven than the Euro because I just mentioned they have the same debt crisis essentially. If you listened to the former auditor of the US, the US Government's books has the same debt crisis as Greece. Greece is just two years ahead of them. Look at the budget deficit of the US, the debt ratios and the fisc figure is the most important number to look at in the United States, which is the total shortfall.
If you include the commitments, social security, medicare that they have made already but that they don’t have the money for honoring those obligations and that’s about USD 200 trillion. So, they can’t possibly get that money any other way than still very high inflation or escape the debt trap. If they don’t want to default on the debt they have to print. I don’t think the dollar is a better safe heaven than the Euro. I would think gold will be a much better safe heaven than both of those.
Q: Are you perhaps advocating a shift towards gold and any targets on that? Brent crude has been a little subdued of late. What would your view on crude be because that is very pertinent to India?
A: I would say that target on gold is not to lose your money and to keep your purchasing power, that’s what an investor’s target should be. In nominal terms where the price will head, it depends a lot on how much money their central bankers are going to print. If they print a lot, the sky is the limit.
Anyway we are very optimistic about the outlook, but I don’t think there is much of a point to give you a price target. If inflation goes up to 20-30% which is where possibly in 1980s it was 20% in the United States and now the debt problem is much worse then gold just keeps rising.
If you are looking at gold in rupee terms over the last 50 years if you had asked somebody 50 years ago how high is gold going to go in rupee terms and then they had given you today’s number you would have laughed about them. So, the sky is the limit if the currencies inflate a lot.
Oil is much trickier and the supply picture isn’t clear as in gold. Gold is really getting very scarce, harder and harder to dig up. In oil there are a lot of different theories. How much really is left? Some say it’s running out also, some say there is much more supply than people think. We are not that sure, but we will hold smaller positions on the long side if anything.