Fear Factor Sends Gold Into Free-fall

November 22, 2011 | By | Reply More

The deepening crises and lack of action in Europe has led to a strengthening of the dollar despite the failure in Washington of the so called super committee” made up of both democrats and republicans, to come up with any measures to address the ever increasing US deficit.

Investors in the US and Europe are deserting stocks and precious metals to put their cash into the dollar, for the time being considered as a readily accessible safe haven.
The fear factor is shaking the weak hands out of gold.
Technically the next level of support for spot gold lies at $1700 an oz. Breach that and we are looking at $1605 as the next stop. Even as we write gold has fallen through the $1700 barrier, but may correct back above before the NY close today. How much of this action is due to short sellers and/or government intervention we cannot guess but a strong dollar, with the odd recent exception has signalled a slowing down in gold.

For us gold bugs, optimists by definition, this present scenario represents an opportunity to buy, even if it means averaging down until confidence in the metal returns. Our inclination is to look at longer term options in SPDR Gold Trust (GLD-NYSE) in order to maximise our leverage in the context of our limited availability to investment dollars.

For those wary of the option market iShares Silver Trust (SLV-NYSE) should share in any recovery seen by gold.

Last week we bought the Jan. 2013 SLV $35 call @ $4.75 , this now seems to be a little premature but with many of the major banks analysts promoting $2000 plus gold by early 2012 we can afford to be patient even if they are a year out!

Lest we forget, the fundamentals governing gold and silver as wealth preservers get stronger as each day brings on more of the US and Euroland unresolved problems.

  • Will they bring in more austerity measures leading to further slowing down or even negative growth ?
  • Or will they lower taxes, enforce the banks to lend to encourage the housing market and small and medium businesses by letting the printing presses work even harder and so making hyper inflation even more of a certainty?

As far as Europe is concerned we think that the least pain free option for Spain is to leave the Euro and bring back the peseta. The country is to a large extent self supporting in basic needs with the exception of oil and gas, has a modern communications infrastructure, innovative and dynamic engineering and commercial industries, comparatively low public debt as a percentage of GDP, less than Germany, France or Britain, but an horrendous budget deficit-to-GDP sovereign debt) and bank exposure to the busted housing market. It has the worst unemployment in the western world, currently running at over twenty percent, the consequences of which may well give rise to very serious civil unrest.

A devalued peseta would lead to a return of affluent northern and eastern Europeans buying up the vast surplus of holiday villas, or retiring to the sun just as in the days before Spain joined the Euro. The subsequent lower labour costs and devalued peseta would make their industrial and agricultural products highly competitive in export markets leading to improved employment.

They could impose their own interest rates, employment legislation, etc., to suit their own unique circumstances, and above all, start from scratch by following in the footsteps of their Latin cousins in South America by defaulting on their debts, leaving the greedy international bankers that have underwritten them to deservedly suffer.

It only requires the new incoming right wing government to pluck up the courage to ignore the siren songs of a cushy overpaid non – job in Brussels when they leave office to put Spain back on the path to the prosperity. At the same time they should put paid once and for all to the graft at the lower levels of local government and banking that has led, amongst other things, to the excessive stock of housing that has brought the building industry, its employees and its ancillaries to its knees.

In case you are asking, Greece and Portugal, unlike Spain, are not major industrial nations within Europe and as such beg a whole heap of other questions.

As for Italy, whose newly appointed premier is a dyed in the wool acolyte of the New York banking mafia, a bailout of some sort is the likeliest solution to enable the tottering Euro to survive for a little longer while saving the bankers from honouring their exposure any debt default.

If Spain prepared to leave the Euro, and by definition the throttling legislation of the EEC, Germany, and to a much lesser extent, its junior partner France, would be forced to address the rottenness at the heart of the EEC. If it then failed in that, the break up of this flawed community of disparate nations would be unavoidable.

Whichever way these events unfold, currencies like the US dollar, the Euro and GB pound will continue to decline in real value, those who have diversified their assets into gold, silver and to a lesser extent platinum will avoid over time, the worst of the gathering clouds that threaten the western way of life that we are fighting a losing battle to avoid.

What wouldn’t we give for a world respected politician with the courage of a Winston Churchill, the tenacity of a Margaret Thatcher, the wisdom of an Abraham Lincoln or incorruptibility of a Mahatma Ghandi !

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