The confidence game is so tough when the crowd becomes suspicious...
WILL GOLD RISE still when the next shock hits? Does liquidity mean confidence?
Smoke and mirrors, the confidence game is such a difficult one once the crowd is suspicious. Our generation trusts few figures in authority. It is a generation used to being taken for a ride, with the sin now in being gullible. And the beginning of the run-up in gold and silver testifies to market fears.
Suspicion is a knee-jerk reaction when looking at the chair of the US Federal Reserve, a chair where Ben Bernanke now sits. He has to convince the world – and not just the US – that we should trust him and the system, as he sits ready to pump in more money.
In an open letter sent by Fed Chairman Benanke to New York Senator Charles Schumer, he reiterated the Fed’s commitment to ensuring market liquidity. The world breathed a sigh of relief, knowing – or hoping? – that none of its highly sophisticated financial markets would freeze up again. Bernanke would print Dollars and chuck them from a helicopter at whoever wanted them.
Now movement has begun, albeit slowly. Oh, believe me – the market desperately wanted this response from the Fed chairman, particularly the vulnerable, desperate and fearful. But relief is not confidence, not as long as mere liquidity is being pumped into the market. Far more is needed.
So far, Ben Benanke has set as his No.1 objective the aim of "functioning markets". But the problem runs much deeper than that. Once the market was convinced it could trade without fear, players gingerly came out, one by one, to deal again. But confidence still isn’t there yet.
The market first saw it was stuck with the very stock that caused the mess. The good liquid investments were sold in forced sales to get at least some liquidity. So they will be wanted back. Sub-prime related stocks, on the other hand, are out.
So how can these markets continue to function? This is of major importance, because the sight of banks refusing to deal with one another hits at the heart of the entire system. Lots of soothing words are now flowing, hoping to re-establish a positive show. But as we saw to our horror, we have now moved from the spin games into a period of consequences. And they won’t go away!
Cold realities, where liquidity levels measure levels of investor confidence, are here to stay. Moreover, liquidity exists when investors are credit-worthy. Can we be certain that they all are?
The next few months will be a no-man’s land while this fact is tried and established. And there far more work needs to be done, because the structural cause of the problem remains. So the shocks, like after-shocks or worse, may still come. Just how deep do the problems reach? It appears no one knows.
Gold in the next strike
When the de-leveraging tsunami flows of capital roared through the system, gold was an initial casualty – as was any liquid investment in the forced-sale market that rattled them all. But these were not gold sales as in exiting the market; they were gold sales which, on the return of a healthy level of liquidity, will be brought back into the portfolios. We are seeing this now!
As a result, gold should be attractive in the event of another blow to the system, for as of right now portfolio managers have re-strategized, built buffers against the next shock, and targeted markets that can withstand future shocks.
In the next strike, gold and silver – as they are now – will outperform and be a point of retreat. More than that, risks usually associated with the precious metals will pale against those now being seen in ‘safer’ markets.
The very stability and now gains seen in the Gold Price supports this view. From the Middle East to Asia, confidence in gold has risen to a new high and these regions are now major players in setting the gold price. In turn the growth of long-term investor-held gold is at a high and moving higher.
The underlying drop in confidence, caused by the simple fact that this shock can happen, won’t go away. Superficially repairs have been made, so after thinking that the ship would sink, we are relieved that it’s still floating. But will it get to port?
Right now, in the emerging markets, in gold shares, and in similar investments, we are seeing almost a complete recovery to the pre-shock levels, so it's already happening.
Gold and silver are reflecting the decay of the Dollar, its global value dropping confidence in the monetary system, but at a gear-shift change of pace going forward. Those fortunate enough to have gold or silver will have an element of security that could take them through the dramas ahead. The need to fully understand this subject is now imperative.
Make sure you do!
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