New all-time high for gold as global stock markets slump, where next?
Posted on 03 August 2011 with 3 comments from readers
Maybe this time is going to be different for gold. In late 2008 gold and silver prices slumped along with global stockmarkets. Yesterday the yellow metal jumped to an all-time high of $1,661 as stock markets took a big hit.
Can gold keep this up? Hedge fund managers like John Paulson, who made the best-ever hedge fund bet against US subprime loans, have stocked up on gold. George Soros has been selling the metal but buying gold shares.
Olympian view
So is gold the going to be the ultimate hedge against economic armaggedon, or at least round two of the global financial crisis? Let us step back and take the view from Mount Olympus.
Since the global financial crisis of 2008 the global central banks have flooded the world with liquidity and kept interest rates artificially low. This money has found its way into financial markets and raised asset prices that have also discounted the lower cost of money.
But now this circus is coming to an end. Pumping money into the system causes inflation and inflation puts pressure on bond markets to raise interest rates. This is being felt in the euro zone periphery countries and now Italy as well as China and Australia.
How long before it happens in the US, Germany, Japan and the UK? Inflation is already way ahead of bond yields making them loss-makers in terms of income, quite apart from being an obvious set up for capital losses.
As bond markets become less attractive central banks are also acting rationally in buying gold as a hedge against the very inflation that they are causing. Global central banks bought more gold in the first half of 2011 than the whole of 2010. That’s good for the gold price.
The pressure of rising interest rates is also damaging to stock markets as it makes the dividend yields paid on stocks too low. Drop share prices and you raise dividend yields to compete with money markets.
Economic slowdown
And yet if stock markets fall as investors lose confidence in the global recovery as seems to be happening, with little on the horizon as a good argument for a reversal of this process, then investors will flee to the relative safe haven of bonds and push yields down. That certainly happened yesterday with the US dollar strengthening as well.
Strange then to have both the US dollar and gold strengthening at the same time but the inverse correlation is not absolute. It is perfectly possible for investors to seek out both precious metals and bonds as safe haven investment in a crisis.
But if you are looking into the crisis and beyond then it is precious metals that have the brighter future not bonds as risk premiums are rising globally and investors will want higher interest rates if governments want their money.
Marc Faber sees the US as Greece x1,000. Just look at Greek interest rates and the armageddon scenario that faces us is clear. You do not want to be left holding any assets dependent on US interest rates staying so low.
That eliminates bonds, stocks and real estate and leaves you with gold and silver. Only then can the cycle reverse. Gold superbug Jim Sinclair is right precious metals are the only hedge against a US treasury crash (click here).
3 Comments posted by readers:
When the Greek deal was agreed, Italy and Spain were/are part of the contributing team of countries supporting IMF, ECB etc. rescues of blighted countries such as Greece, Portugal and Ireland.
Should either or both Italy and/or Spain apply for rescue, then their respective contributions to the rescue funds etc. will not be available.
In the event either cannot contribute to such rescue funds and, indeed, need rescue funds themselves …. then what reliability can we place on ‘the greek deal’ being implemented … ?
In such a scenario, a heavier burden passes to those who remain in the game e.g. Germany & co. … what will the german taxpayers say to that?
The pot thins, the plot thickens …
I’ve just read on GoldMoney.com that the US Treasury owns more than 250 million ounces of gold, and that it is waiting for the price of gold to be significantly higher before selling it to pay off some or, possibly, all of the trillions of dollars of debt it has.
Therefore, there is going to be an almighty fall in the gold price somewhere down the line, perhaps measured in years rather than months.
Doesn’t this mean that silver is a much better buy now? It’s not only cheaper; it’s not only that its above ground supplies are dwindling compared to the steady levels of above ground supplies of gold; but that the US Treasury won’t reduce the silver price as it is bound to do with gold.
Ed Note: Yes silver is the better buy, you just have to live with the higher volatility.
@ Comment by John Mark – 03 August 2011
There is a lot of anti-gold and especially anti-silver propaganda out there. Try to look past it and see the bigger picture. The ’smart money’ has already moved, or is in the process of moving, into Gold and Silver. Even the central banks don’t think gold is going down any time soon as they are buying as much as they can (without panicing the markets and forcing gold even higher).
As for the US gold holdings, I understand that there has not been a reliable and fully independent audit of US gold reserves in decades. Many people strongly suspect that the US holds only a fraction of thier claimed reserves.
Gold and Silver are the best safe havens for anyones money at the moment. Don’t expect to get rich (although you may) but do expect to retain your wealth after the Fiat money devalution / collapse that is now begining in earnest.
I have advised my family to get thier cash out of the banking system (and out of paper promises) and into physical Gold and Silver as soon as they can.