Staying with Gold?

January 16, 2008 | By | Reply More

This is the conundrum – The US and European markets are getting more bearish by the day, investor confidence is, not before time, being eroded by a seemingly never ending barrage of bad economic news, not a bright spot to be seen.

At the same time the BRIC economies together with the principal oil producers, Kenya excepted, are bristling with optimistic activity. This is not the place to discuss Hugo Chavez and Venezuela!
 

The fiat currencies are rightly out of favour and that brings us to gold and the other precious metals.

Although gold has reached an all time high we know that, taking into account inflation since it last peaked, the corresponding price today should be about double, circa $2000 an oz.

Way back then the worldwide economic health revolved exclusively around the US, much the same problems were evident, oil soaring, dollar plunging, gold was the safe haven.

The difference is that the US and the West in general are no longer the sole drivers of economies. Its influence, although still the most important, is diminishing steadily and the new world economies are more and more looking as if they can grow and sustain themselves irrespective of the performance of the US and West.

But they have a problem, their economies are geared to the value of the dollar, the world reserve currency, and as the dollar looks less and less likely to recover in value so these new vibrant economies are unable to maximise their situation.

One significant step they have made is to introduce their various Sovereign Wealth Funds, the objective being to use their vast dollar reserves to gain footholds in the major industries and financial sectors of the US and Europe.

We are reluctant to comment on the virtues or otherwise of this move except to say that the door could open to some critical scenarios in future years.

Moves by the BRICS et al to disassociate from the dollar surface regularly in the news with the euro looking a favorite at the moment.

Curiously these economies do not seem to be filling their boots with gold even though it seems to be the only significant trading option that will retain its value against all other major currencies for the foreseeable future, given that the foreseeable future for the US and Europe is probably recession.

Then there are the rumors of the gold market being rigged. Could be just another conspiracy theory but in the current circumstances it is a sustainable estimate that gold should be near reflecting its value at its peak twenty years ago, instead of just half.

On a day-to-day basis there is another question mark. With stocks tanking, pressures on personal debt and fund managers under even more pressure to perform in the short term will the temptation, or could it be necessity, to take gold profits of the table push the price back to the mid $800s.

The alternative scenario is that with the deteriorating economic situation, gold will continue to steadily rise as the only realistic safe investment option.

Fascinating times ahead for our favorite metal. Our hope is that there will be a pullback as profits are taken and that the price will steady around $850-$875 an oz. Subject to an eye on the charts, we will be topping up our holdings in the expectation that the price will power to the upside of $1000 by the middle of the year or soon after.

 

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