Three Possible Outcomes To Gold Scenario

April 6, 2009 | By | Reply More

Stock markets in Asia and Europe continued last week’s show of strength in trading sessions this Monday morning with indications that New York will follow suit.

Base metals and miners were among the leaders but last weeks fall in gold and silver gathered pace hitting $874 an ounce before staging a slight recovery to $880 an ounce possibly only due to short covering.

Rebounding equity markets, an improvement in sentiment in the belief that government bail outs are showing signs of working, increased investor risk appetite and the IMF’s impending sale of 403 tonnes of gold are taking their toll on precious metal prices.

Many are now saying with confidence that the recovery will begin later this year or early next, and, as we gurus are supposed to know, the stock market looks six months ahead, or at least it used to!

On this premise the outlook for gold and silver, the so called safe haven assets, is not encouraging as the politicians efforts bear fruit and economies revert back to the good old days of borrow and spend pushing stocks, real estate and other asset classes back to and above their 2008 highs.

Who knows, even those toxic mortgages might come good as borrowers find the wherewithal to restart their payments.

We conclude that there are three possible broad outcomes to the present day scenario and all three will have one single dominant factor in common.

The dollar, the Euro, the British Pound and many other currencies will lose a stunning amount of their purchasing power whichever scenario plays out.

This is what ‘Joe the plumber’ calls inflation otherwise known as inflating the money supply – printing presses and all that!

First of all what we are currently experiencing may turn out to be a false dawn. In a few days or weeks the current rally may prove to be a ‘dead cat bounce’ and stocks will drop even lower than they already have.

Risk appetite will disappear and gold and silver should benefit as stocks wither and the future for other assets look as bleak as they did two weeks ago. The result will be more bail out money being thrown at undeserving causes and their executive beneficiaries.

Secondly, this may turn out to be the turning point and it will be all plain sailing for six months, maybe a year or three.

We all get back to filling our shopping bags, crowding into the ‘out of town’ malls, burning gas and eating out several times a week as our credit cards return to normal use.

Everybody who wants one will get a job and expect their wages to keep pace with the spiralling cost of living. The cost of houses and apartments will return and even exceed their past highs.

The US Government, who is the major provider of mortgages, will fuel this return and more than likely make a major contribution to cheap low/no deposit auto loans and other sops to the electorate.

Whether the politicians can sustain this feel good factor until the next election remains in the balance but you can be very sure of two things, inflation and an eventual collapse that will put this current depression into the shade. Then the only resources that will retain any value is gold and probably silver.

Thirdly, the alternative and, as cynics, we believe to be the least likely to occur is that governments will wake up to the fact that their current policies of printing money and then throwing it at every bank, financial institution and industry and then any left over at ‘make work’ schemes is flawed and fraud!

To cleanse the system market forces should be allowed to work without government intervention. Overpaid executives should pay much higher rate of tax on their pay and their other privileges, government expenditure cut to the bone, personal credit facilities limited – you get the picture!

Whichever of our three scenarios comes to pass there will be pain and suffering, bankruptcies, unemployment, many homeless and without hope. Lets face it, this is already becoming a fact in Western democracies so rather than delay the evil day surely it would be better to get it over and done with as quickly as possible, learn from past mistakes, bring some moral rectitude back to politics and make a fresh start.

In the meantime we have the spectre of 403.3 tonnes of gold overhanging the market. Lets just put that in context, this represents 14,215,422 ounces at say $900 an ounce.

A total of US$ 1,279,387,900 sounds a lot but the average daily turnover on the London Bullion Market last year was in the region of 18,300,000 ounces, 4 million ounces more traded every day!

Think about the size of the US deficit and then consider how far the IMF can go in helping out busted countries with the money raised by the sale.

Our conclusion is that there are a lot of short term traders out there who have climbed in on the ‘gold rush’ for some quick profits without doing their homework, probably solely relying on their charts and the IMF’s announcement.

At the same time the US government is happy to see gold fall as it makes the dollar look relatively stronger so we would not rule out a little help from the authorities.

It may be a long hard ride with many a fall on the way, but we believe that eventually gold will prove itself as the only safe haven asset, hedge against the inflation to come and remaining store of value.

It is a market we have been tempted time and again to play the short term game, at times we despair that our reasoning is wrong, that we are out of whack with market events, that bias has clouded our judgement, but our constant reality checks keep coming up with the same answer – stick with gold and a little silver.

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