Third time lucky for gold - the ultimate money?
Gold was, at the time of writing, close to $1,000 again. It would seem this level is inevitable sooner rather than later and this time the yellow metal may spend rather more time in the four figure area.
Posted: Friday , 20 Feb 2009
As this article was commenced, the gold price was at $997 and seemingly inexorably headed towards breaching the US$1,000 level once again. Indeed by the time you read this it may well already have done so. April futures had already marginally gone through the $1,000 level.
The big question is, assuming spot gold does push through $1,000, will this be third time lucky for the gold bugs? Gold has breached $1,000 twice beforehand and on each occasion its climb into the four figure level was shortlived. This time it may well be a different situation with the likelihood that the price is poised to go higher still - and maintain its position above $1,000 for some little time to come.
Gold's dollar high of $1,033.90 was achieved seemingly a very long eleven months ago but only remained at this exalted level for a day, before crashing back. Indeed as stock markets began to collapse and then plunged in the second half of the year, much confidence was lost in gold as an ‘insurance policy' as it fell back to the high $600s at one stage, but the realisation came about that the main reason for the price decline was that funds and institutions were having to liquidate any tradable assets to meet their commitments, and gold is nothing if not tradable at any price.
Gold soon recovered and started a steady run back up to current levels despite rising markets and a strong dollar - usually both signs of a likely weakness in the gold price. Indeed gold broke new price records in virtually all currencies other than the US dollar and now it looks highly likely to do so in terms of the now not-so-mighty greenback itself. Meanwhile stock markets in general have started to fall back again as the world realises that the various stimulus packages worked out by clutching-at-straw governments are unlikely to improve matters drastically in the short term and much of the world heads for depression - or something approaching one. There is no doubt we are already in recession in the West and depression is just the next, and infinitely more dangerous, phase of the current reality.
Gordon Brown has certainly not saved the world, and Barack Obama's deification status is already tarnished after only a few days in office. It is becoming apparent that what the politicians and economists with clout feel could be remedies to what is facing us ahead are nothing but untried and unproven stopgaps which patently are not working - or not at least yet.
Meanwhile banks are digging themselves further and further into the mire with more collapses and nationalisations likely, countries will default on their commitments and matters will continue to deteriorate unless some financial miracle happens.
Indeed the only world saviour may yet be China, but at what cost? There are indications that the Chinese may have been in part responsible for the depth of the fall in commodity prices by halting industrial plants and infrastructure spending ahead of the Olympic Games and not resurrecting it afterwards as it could see an advantage in keeping prices down. But the Chinese did not foresee the collapse in the western financial system exacerbating the situation dramatically and the global downturn came back to bite the Chinese in the bum as its exports crashed and huge numbers of people were thrown out of work - a potential cause of serious unrest.
Beijing has since taken steps to resurrect its infrastructure programmes. Projects which were lying idle are at full swing again, but this is too little too late for much of the rest of the world. It may serve to keep China itself out of recession - and perhaps throw a lifeline to commodity producers to help them maintain output and support prices, but it's definitely too late for much of the rest of the global economy which is in a frightening downward spiral.
But - with regards to securing commodity supplies and controlling future markets we are seeing China, with its huge funding capabilities, tieing up supplies, making major strategic investments in mining and metallurgical companies - and also in some other important western entities - and also providing loans to enable what they see as potential strategic partners stay in business. But again, as we saw in yesterday's European Nickel announcement on finance, there are China-benefiting clauses in most of these ‘strategic' agreements.
It was Alfred Lord Tennyson in one of his Arthurian epic poems who used the phrase "The old order changeth, yielding place to new" and that is extremely apposite phraseology for what is happening now. US and European economic imperialism has started to be replaced by a Chinese version.
But what has this to do with the gold price? Because the Chinese were perhaps too late in re-implementing their own stimulus, which could have mitigated the global downturn at an earlier stage and possibly eased its speed, depth and perception, the realisation that gold could actually be the best way of protecting one's assets began to filter through to previous unbelievers in the yellow metal.
This has shown itself in the unprecedented inflow into metal purchases and ETF holdings which seem to be accelerating as the crisis deepens. Never mind the fall-off in Eastern investment grade jewellery demand and the big rise in gold scrap sales. ETFs are picking all this up (and global gold production is falling anyway). But no matter, investment strength is always driven perhaps more by perception than by fundamentals (at least in full-scale bull or bear markets) and the current thought seems to be gaining more and more ground that gold is about the only serious safe haven out there. The dollar may have proved to be a good bet of late, but everyone knows that pumping out money will ultimately be inflationary - and gold is traditionally a great inflation hedge too.
Indeed what gold is doing now is demonstrating that all western currencies are weak, rather perhaps than that gold fundamentals are strong, and the currencies are all devaluing against gold which is regaining its position as ultimate money - a position which believers say has never gone away!
So what of the performance of gold while this article was being written. Well the price pulled back a little after bursting briefly up through the $1,000 level and is, at the time of writing, sitting at $994 again, but the overall upwards drive for the moment seems unstoppable as financial news elsewhere continues to deteriorate. Once gold properly breaches $1,000 this time it is not unreasonable to suggest it should perhaps stay there for a lot longer than last time - and maybe there is the prospect of a far higher peak. Gold metal, ETFs, stocks and funds could have a way to run yet.