Looking Forward To Profit Taking In 2009

December 30, 2008 | By | Reply More

Gold has proved to be the least volatile of investments since the global economic meltdown became an obvious reality in the second half of 2008.

Pessimists can justifiably argue that since gold peaked at over $1000 an ounce back in March and then dropped back more than 25% by November, it has not lived up to its reputation as a store of value of the last resort.

Looking forward to 2009 we should start by considering its behaviour during the last six weeks of 2008.

By the middle of November it seemed that the flight of redemptions from hedge funds through to the smallest investors in mutual funds and every other stock market sector had slowed.

The resulting liquidity showed up in the rush for US government bonds, even those offering zero yield. As repatriated dollars joined in the bond scramble with deflation becoming the “ in word” amongst the financial pundits and the media, so those investors with an discerning eye to the future turned to gold.

It had become apparent that the sharp fall in gold was part triggered by the necessity for liquidity. As the pressures mounted, profitable gold positions were cashed in to meet growing obligations, not least of which were hedge fund redemptions.

This undermined the confidence of both investors and potential investors in gold. In six months gold fell $250 as the world entered recession.  The expectation of a surge through the $1000 an ounce barrier by the end of 2008 was not to be, despite the many fundamental factors that indicated a strong bounce.

In the last week of 2008, an ‘annus horribilis’ as Queen Elizabeth of Britain might say, has seen gold beginning to realise its potential as it approaches $880 an ounce.

Of course this could be because the US central bankers are enjoying their ‘fat cat’ Xmas and are giving a rest to their attempts to manipulate the market in gold, that is if you give credence to the conspiracy theory that some gold buffs believe is conspiring against the normal forces in the gold market.

Gold has successfully fought back as the exception to falling markets elsewhere, and unless you are a believer that throwing freshly printed money at every industry that might have political influence is not a recipe for eventual run away inflation, then we can see no alternative to gold as the safest investment to preserve real wealth.

We believe our view is shared by the citizens of many other countries. It should not be overlooked that the emerging nations of China and India not only have a combined population that dwarves Americans and Europeans but that they are expected to have economies that will continue to grow whilst recession deepens in the West.

One final indicator that we believe should be taken into account is oil. Even if it drops to below $30 a barrel, a possibility in the very short term, does anybody seriously think that the oil producers, including Russia, are going to allow a surplus of oil to be pumped at a loss-making price in perpetuity?

This is a finite commodity of the utmost importance to every developed and emerging economy on the globe. You can bet that sooner rather than later the oil producers will close ranks and hold the rest of the world to ransom

Even those that break the agreement by pumping more than they should for political reasons, Venezuela is a prime example. Eventually it will be brought to heel by the external pressures that can be exerted by Russia and the OPEC nations, that is if Chavez does not first bankrupt the country by continuing to sell its oil at under $55, reckoned to be the break even price.

China is the only country that can rock the oil cartels’ boat and she is a gold loving nation.

These arguments lead us to believe that gold in 2009 is going to move onto the $1500-$2000 an ounce level with the usual see-sawing on its way up but there is the odd cloud on this promising horizon that should not be ignored.

The nature of politically motivated power hungry short-term opportunists. Sorry about that mouthful but few would deny that in the West, particularly in the US and in the UK, domestic and foreign policy has been decided by their morally by-passed and often intellectually challenged leaders and placemen who put their own personal ambitions and prejudices first, rather than decide policy in the best interests of their countrymen.

Briefly we refer to President Bush attempting to atone to his father’s mistake in not finishing off Saddam Hussein despite the advice of Margaret Thatcher before she was deposed by a conspiracy of Tory weaklings.

The personal aggrandisement of Blair by becoming committed to war in Iraq and Afghanistan, that the UK, as a much diminished economic and military power could not afford and has gained absolutely no benefit from and, to top it all, contrary to all the evidence and advice available.

Succeeded by an intellectually challenged successor in Brown, who brought Britain to its financial knees as Chancellor of the Exchequer and is now compounding its woes by throwing away the remnants of the countries prosperity.

There is a new president about to take power in the US. It is our sincere hope that this man is more than a deliverer of rousing speeches and a crowd pleaser but will be a great leader. In that capacity he will have to exert his authority over those donors to his nomination and success and act solely in the best interests of all Americans, unlike so many of his predecessors in recent years.

Should he allow the US to sell off its gold reserves to gain a short term respite from a falling dollar and in an attempt to shorten the recession and artificially inflate the economy before it has run its natural course then expect gold to fall back to anywhere between $500 and $700 an ounce.

If the US follows this course then expect other weaker western economies to follow suit. The UK doesn’t matter, Brown sold off the better part of the countries gold reserves at rock bottom prices ten years ago, but others may be tempted.

The consequences will be more stutters in the price of gold but the long term upward trend that got into its stride in mid 2005 will continue, where it will peak we have no idea.

Once stability is restored to global economies, we will see very different values between currencies, then gold in dollar terms will be particularly high along with the GBP (if it has not become the euro) and the currencies of other developed nations to a varying extent. Gold priced in the Yuan or Rupee for example is likely to be a very different ball game.

As we write tensions are flaring up in the Middle East, oil has recovered to near $40 a barrel and gold is steady about $775 in thin markets.

When traders return to their desks after the festivities, the grim realities will set in. Sure markets will continue to be distorted by shorting, option activity, derivatives et al., but the extent of the speculative frenzy that so many from top management to ‘Joe the Plumber’ indulged in that is now causing so much havoc in the markets as it all unwinds will not be repeated for a long, long time.

As things slowly return to normal, speculative activity will tend to balance out excessive market movements as it always has done until the recent past. The downward cycle is likely to remain in place throughout 2009, after that who knows when the trough has been reached and optimism will replace pessimism.

Until that turning point when economic activity can be seen to be thriving once again expect gold to continue to its upward path as the hedge against impending hyperinflation and a falling dollar. 2009 will be a very good year for gold!

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