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Gold, Silver and the "Double-Dip" Recession

What might a double-dip recession mean for gold and Silver Prices...?

BEN BERNANKE and his close allies at the Fed in Washington are worried by signs that the US recovery is running out of steam, writes Julian Phillips at the

The ECRI leading indicator published by the Economic Cycle Research Institute has collapsed to a 45-week low of minus 5.7 following the most precipitous slide for half a century. Such a reading typically portends contraction within three months or so. This week we then saw sad employment and housing figures appearing to add to this picture.

The Eurozone is meantime making a temporary renewal of the €442 billion of Quantitative Easing issued a year ago, and now being replaced with similar, but shorter-term and temporary financing for the region's banks. Such policies need more time to work, worldwide. But the Eurozone is placing regulation over growth. We believe this is a serious mistake that will certainly make Mr. Bernanke's fear realized. The markets, by falling as they have this week, are confirming this is their fear too.

We now live in a post-information revolutionary world. This means that policies or announcement of policy intentions rapidly affect consumers, banks, markets and business. Most importantly, it affects confidence from top to bottom. Government actions of late have damaged confidence and by extension the robustness of developed world economies. While there has been a pick-up in business in the last year it lacks the robust quality that comes with future confidence. But governments have to battle between financial correctness and good practical sense.

A man may have over-borrowed and then agreed to a repayment plan, but he may not be able to stick to it because the expected increase in cash flow has been delayed for reasons out of his control. Therefore two choices lie ahead: to bankrupt him or to give him more time to recover so he can stick to his obligations.

Bankrupt him and you have the danger of having to compromise the debt (default and negotiate it down to a repayable level) or destroy his cooperation and turn the debt bad. At international level such consequences are far more complex and potentially damaging. That's where the world's rich nations are now. They want to cut spending and raise taxes before anyone is certain that the recovery is robust enough to cope. This was tried in the 1930's but under circumstances where economies could cope. Bear in mind, this is not just the US but the entire developed world. Eurozone problems have knocked the stuffing out of its economies as all nations, from Germany down have over-borrowed and now need to cut back spending.

At this stage, after the world saw the market shrink, primarily through investor de-leveraging and investor implosion, so is better prepared for anything like that now. De-leveraging will be less, as will investor implosions. But the effect on global confidence will be much harder than in 2007 as people realize that they have to pay the costs of government failures and thus will protect themselves more solidly now. Faith that governments will resolve such problems has been damaged badly. Businesses will be much more cautious about exposing themselves to similar dangers in the future and banks will make sure they are not hurt, even if it means curtailing loans and profits in favor of a sound balance sheet.

Since 2007 what has happened to the perception surrounding gold and to a far lesser extent silver? After a relatively brief dip in the Gold Price, gold recovered and moved to new highs. At that time it was still tarred with the "barbarous relic" image and considered of less quality than global currencies. Since then the broad public perception has noted how gold has provided an ability to hold its price and to rise in the face of currency's inherent weaknesses. Gold is rising in the face of stagnating and weakening stock exchanges, in the face of fears of recession, in the face of sovereign debt crises and a general sagging of confidence in the financial system.

Gold is not simply a safe-haven. The sight of central banks turning from sellers of gold to overall buyers and at worst firm holders of gold has been a step back towards gold in the monetary system. It is now moving back to the position it once held, the underlying touchstone of value.

For years now we have highlighted the reality that there will come a time when markets and their investors will not check the Gold Price in the US Dollar but conversely will measure the value of the US Dollar will measure gold. In many minor currencies this is already an investor perception.

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JULIAN PHILLIPS – one half of the highly respected team at – began his career in the financial markets back in 1970, when he left the British Army after serving as an Officer in the Light Infantry in Malaya, Mauritius, and Belfast.

First he worked in Timber Management and then joined the London Stock Exchange, qualifying as a member and specializing from the beginning in currencies, gold and the "Dollar Premium". On moving to South Africa, Julian was appointed a macro-economist for the Electricity Supply Commission – guiding currency decisions on the multi-billion foreign Loan Portfolio – before joining Chase Manhattan and the UK Merchant Bank, Hill Samuel, in Johannesburg.

There he specialized in gold, before moving to Capetown, where he established the Fund Management department of the Board of Executors. Julian returned to the "Gold World" over two years ago, contributing his exceptional experience and insights to Global Watch: The Gold Forecaster.

Legal Notice/Disclaimer: This document is not and should not be construed as an offer to sell or the solicitation of an offer to purchase or subscribe for any investment. Gold Forecaster/Julian D.W. Phillips have based this document on information obtained from sources they believe to be reliable but which it has not independently verified; they make no guarantee, representation or warranty and accepts no responsibility or liability as to its accuracy or completeness. Expressions of opinion are those of Gold Forecaster/Julian D.W. Phillips only and are subject to change without notice. They assume no warranty, liability or guarantee for the current relevance, correctness or completeness of any information provided within this report and will not be held liable for the consequence of reliance upon any opinion or statement contained herein or any omission. Furthermore, they assume no liability for any direct or indirect loss or damage or, in particular, for lost profit, which you may incur as a result of the use and existence of the information, provided within this report.

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