How gold will respond as government's 'keep going' policies destroy the Dollar and Euro...
VOLATILE IS THE WORD to describe both equity and currency markets across the world right now.
Gold has also been hit by volatility, but it's managed to record a series of new all-time highs. And the average investor – whether institutional or individual – does not like the uncertainty of falling equity prices.
So we protect ourselves from it the best we can. And the results so far in 2008 have been that global markets acted on the worst-possible scenario.
At the beginning of last week there were fears of recession with the potential to get worse. Then came the 0.75% cut in Fed Fund rates. Together with talk about $150 billion in tax breaks from the White House, this was expected to send the global economy back on the growth track – even though it would be at the expense of the world's primary currency, the US Dollar itself.
But hope wasn't enough. Investors are in fact jaundiced by the enormity of the authorities' moves.
The moves we have seen and still expect to see are not curative; they are at best stabilizing and temporary. Bush himself wants a temporary set of measures (before applying more cures?), but the global economy needs more than stabilizing. It needs to regain confidence in a long-term growing global economy.
Perhaps the problem that will serve Gold Prices, along with silver, the best, is not stabilizing the US economy at the expense of inflation. It is the fact that the global economy is made up of a host of nations all bent on looking after their own interests ahead of anyone else's – and with no overall global government, aiming at some form of international financial regulation and harmony.
So by its very nature, the bleeding US is and will affect all other nations to some extent. Hence the surging Gold Market when measured in any major currency.
Longer-term, we expect a fragmentation of the global economy into focused trading blocks. Each of these will behave differently, with the US woes affecting its major trading partners directly and others indirectly to some extent.
Europe's trading partners will benefit so long as the decline of the Dollar does not inflict damage on the global trade of Europe. China's trading partners will continue to benefit from her growth, with the trade between its main trading partners continuing to grow.
The new wealthy of the growing parts of the world will see safety in Gold in the face of the uncertainties facing paper currencies as investments. In the wealth-losing nations, too, investors are seeing protection in gold as doubts pervade their own paper investments. The combination of the two will keep gold and silver in the limelight.
Where the global trading blocs come together in international competition, anything short of a catastrophic collapse of currencies will fail to make Chinese goods more expensive than wealthy nation's products. As a result, in a recession, Chinese and other Asian imports will do well because they will remain cheaper than homegrown products. This will continue to drain wealth to the East, even more so than in a vibrant economy.
The only actions that can stop such a powerful outflow of wealth will be legislated protectionism. Even in a climate where Exchange or Capital Controls are imposed, economies do flourish, especially as imported goods are replaced by homegrown ones. Protectionism in some nations is moving from a probability towards the inevitable.
The stimuli now being given – as well as those moves being contemplated – are forerunners of far more serious measures to come. The stimuli are only "keep going" measures, they are not "fix its". We have contemplated the alternative, curative options put in front of the US and European governments today, and they have to be dramatic, inflationary, and money destructive.
That makes all likely government "solutions" very positive for Gold Investment.
Unless investors act in the near-term to protect themselves using precious metals, they will join the ranks of the "if-onlys". And there is already a great crowd already in gold and silver. Don't misunderstand what we are saying though: we are not saying all is lost; we are saying things have changed dramatically and opportunities abound in a climate of growing desperation.
Investors in all markets are having to go back to fundamental issues and examine which way their current investment positions are vulnerable and which will benefit from these changes. Gold and silver are investments that have well demonstrated over the last few years their excellent contra-performance to currencies and – in many cases – equities as well.
What's more, like any good wine or beer, gold and silver will from now on be great to enjoy in good times and to turn to in bad times.
Meanwhile, we are still only at the stage of guessing which "keep going" measures are going to be put into the economy. Then we will see how they will ripple through the global markets. Investors want curative solutions and they want them now. Until then the pernicious atmosphere of fear and doubt will make them ready to run for cover.
This is a snippet from the recent issue of the weekly newsletter from the GoldForecaster.com. For the entire report, please visit the website now...