2004 may also become a "golden" year

Axel Merk, December 23rd 2003
This article was written by Merk Investments before the Merk Hard Currency Fund was launched.

	Merk Insights provide the Merk Perspective on currencies, global imbalances, the trade deficit, the socio-economic impact of the U.S. administration's policies and more. Read past Merk Insights

On the surface, 2003 has been a very positive year in the financial markets. Underneath the surface, seismic changes take place as the world is dependent on keeping the US consumer spending. Looking at consumers worldwide, there are major differences:

· The US consumer is akin to an ageing racehorse kept running with antibiotics. Consumer spending thrives when consumers take more equity out of their homes: one the one hand, George W Bush is giving away $5000 to low-income families to encourage home ownership. On the other hand, baby boomers are encouraged to finance their retirement through reverse mortgages (the consumer receives a steady stream of cash from the bank in return for an ever increasing mortgage).

· The Chinese consumer is akin to a teenager as a rapidly developing middle class is learning how to spend. China’s recipe to create the middle class is to sell goods cheaply to the world in return for investments. The trade imbalances cause Asia to purchase hundreds of billions worth of US Treasuries, cushioning the fall of the Dollar, but importing inflation.

· The German consumer is akin to “Sleeping Beauty”. She should have been woken up by a kiss, but the German tax reforms passed are only a haphazard kiss, so this romance will take a little while to evolve.

The US has jump-started its economy through massive fiscal and monetary stimuli. There has been a price to pay: a lower dollar, higher import prices, yet no pricing power. To retain margins, corporations continue to export jobs.

Asia and the US are planting the seeds of inflation. Gold and other commodities should continue to do well in this environment. On the stock side, innovative companies and companies not too dependent on the US consumer should do well.