Financial Crises Factors

September 16, 2008 | By | 1 Reply More

Please bear in mind that we have open positions in physical gold, gold and silver ETFs and precious metal miners so however hard we try to remain objective an element of bias may be present in our article.

Just to kick off we are showing losses on some of our miners, our ETFs are holding their own and our gold bullion is slightly down. 

The Outlook for Gold is Hazy

 

Factors not encountered in previous financial crises are present today. By far the most significant has been the out of control growth in credit fostered by greed and encouraged by incompetent politicians who were happy to bask in reflected glory when property prices escalated, retailing boomed and Joe Public enjoyed his best ever lifestyle on easy credit.

The realization that the USA is no longer the overwhelmingly dominant economic heavyweight that it has been for the better part of a century is becoming more evident as each weekly financial problem raises its ugly head, continuing to erode confidence in the ability of the dollar to retain some value and continue as the worlds leading trading currency.

These and the many other problematic economic circumstances that have had extensive coverage in the media would historically have led to a flight into gold, the safe haven preserver of wealth.

To some extent this has happened as more and more observers recognized the writing on the wall even four or more years ago.  What has thrown gold off course in the last few months is that it is payback time.

Credit has dried up, over leveraged market players from hedge funds thru to small investors, traders of every speculative hue, have been called on to ante up their leveraged losses. As a result positions have been closed whatever their merits.

For example, we have investments in companies with strong balance sheets, that predominantly earn their money outside the US and Eurozone and have good growth records and prospects in the BRIC nations (China’s growth may have halved but it is still forecast at over 6%!).

Nevertheless they all, without exception, have experienced a significant and ongoing fall in their share prices in the last six weeks.

The only logical explanation that seems to fit with the current criteria is lack of liquidity affecting the majority of market players, and even some pension and municipal funds seem to have caught the speculative bug during the easy, greedy years.

Now we see panic setting in, with shorters enjoying some great profit opportunities but exacerbating the market slide. Significantly gold has resisted this scenario and although still way down from over a $1000 an ounce earlier, appears to have steadied around the $780 price level since the carnage began.

We see this as a bullish sign, particularly as its connection to oil seems to have reversed, but at the same time the dollar is giving back much of its advance last week against the Euro.

Pressure is mounting in Euroland to lower interest rates, as it is in the basket case UK, where inflation is booming.

However inept politicians, as ever, put their own interests first so it is likely that Gordon Brown, the British Prime Cretin, will attempt to gain a little short term popularity to head off the growing demands for his resignation.

Hopefully the last throes of the Bush administration will gain some resolve and introduce measures, however unpopular, to help alleviate the deteriorating US economy.

On an optimistic note we read that the CEO of Barrick Gold, the worlds largest gold miner, is confident enough to unwind all their hedging positions as he sees the price moving strongly upward before the years end.

The demand factor continues in play with falling output failing to meet demand and the Indian gold buying season is getting into full swing.

We will continue to hold our gold positions and expect the market to break out to the upside when some stability returns to the US stock markets and particularly to the banking and financial sector. In the unlikely – in our opinion – event that gold drops down to $650 an ounce we will close out all our positions and take the hit.

 

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Category: Review

Comments (1)

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  1. David says:

    I think you have summarised the position pretty well John.

    I am long gold for the first time since the high was made back in March but I am treating the position with a scalp mentality for the time being. My technical pattern work suggests there may be one more pop down to make a significant low of some degree but I am hoping it is wrong :)

    Due credit to your stance throughout this year on gold. Its been very difficult for longer term gold investors.

    David.

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