Gold $931 and solid, green shoots fading fast
Posted on 16 May 2009 with no comments from readers
Gold closed the week at $931 and silver held steady at $14 an ounce. Investors did not know which way to jump this week, although equities closed lower for the first time in 10 weeks.
That probably marks the top of the bear market rally. Markets generally soften and show a little volatility before turning down. There are, on balance, still far more reasons to be negative than positive about the outlook.
Euro disaster
Take the 3.8 per cent fall in first quarter German GDP, the worst slump since 1990, or the 4.4 per cent year-on-year contraction for the whole European Union. Nominal GDP in the US has fallen for two consecutive quarters for the first time in over 50 years. Russian Q1 GDP crashed 23 per cent, the worst figure for 15 years.
Banking spreads like three-month Libor have come down from five per cent last autumn to one per cent. But there is the considerable risk of a European banking crisis brewing up which could easily reverse this expensively won progress.
The stock market rally has been a self-generating piece of good news with little real substance. Banking profit recoveries in particular are a nonsense of accounting, while the outlook for bank profits going forward looks very grim.
It would indeed be surprising if the massive government spending programs, lower oil prices and lower interest rates had not managed to produce some kind of break in the fall.
But having dropped off the edge of a cliff last autumn global economies are clinging to a ledge, and most probably still have further to fall. Just because that fall will be somewhat less than the fall last autumn is not really much cause for celebration.
An Abraaj Capital executive has commented that long-term investors might find value towards the end of 2009. That sounds realistic without being too definitive.
Cash alternative
In the meantime, there is a good argument for switching some cash holdings into precious metals while prices are at levels that can not hold for much longer. For investors who prefer to deal in certainties than hunting for green shoots of recovery, this is a solid choice.
What we do have as a known-known is that governments are effectively printing money for the first time in decades, and we know that when this has happened in the past inflation has always followed. Gold is a currency with a fixed supply, and will appreciate, and silver prices generally follow at twice the rate of increase.
This explains why precious metal prices are rising and should continue to do so as these hopeful green shoots turn out to be misplaced optimism.
no Comments posted by readers:
Why do you think that the ETF’s are safe? I have been doing a high amount of research on the best way to own gold. What I have seen of GLD is that they changed their prospectus recently and they may not hold physical gold. I have bought CEF and GTU who have segregated, allocated, and audited gold / silver bars. IF the shit really hits the fan and comex fails, ETF’s are just paper right?
The Gold ETF holds more gold than China, that is not just paper right!
I don’t know” “If GLD declared its asset to be “Gold”, the fund’s auditor would have to substantiate that the gold really exists, which GLD of course cannot do because of the inability to audit or even inspect gold stored in subcustodians and sub-subcustodians, which is a risk noted in the prospectus.”
With all the scandals recently, I would want 1-ounce or smaller gold coins in my hand, rather than trust any system. Even if the government tries to seize all gold, if you purchase it in small amounts, using cash, you will be hard to discover during a meltdown. Eventually, order will be established and your wealth will have survived. Of course, at this time, inflation is a far greater threat than societal disintegration. Gold can protect your wealth should hyperinflation occur. Although the value of paper money can go to near zero, that cannot happen with gold due to its beauty, indestructibility & scarcity. People will always covet it. Real estate will also always have some value, but living on an ostentatious estate during a revolution can be hazardous to your health. And remember, they don’t call oil “black gold” for nothing. It also has a significant profit potential when the world economy again starts to expand in 2011 or 2012. We are entering a new era of debt unlike anything that has ever occurred. Things that seemed inconceivable three years ago have already happened! How can anyone predict what will happen next? Oh, I don’t own any gold, but do own energy stocks, and can only wish that I had a huge mansion somewhere cooler than southern Louisiana.