Gold moves in a mysterious way - well perhaps not!
People trust gold more than governments and the political establishment. That is gold's inherent strength that makes it a good investment throughout difficult economic times.
Posted: Monday , 27 Jul 2009
Fundamentals are not good, the season is not one where gold is known to perform well, the top gold ETF seems to be losing a bit of its allure - and its volume - buying from the jewellery sector remains very depressed, general stock markets appear to be strengthening, some feel the financial crisis is behind us reducing the safe haven perception of gold, yet the gold market continues to show strength. True it is off its peaks, but every time it seems to be slipping back toward $900, so far this summer doldrum season it has picked up again to settle around the $950 level. Why?
That might be a question asked by a number of market commentators out there, but one suspects that the truth behind all of this is that the savvy investor, and those with huge amounts of wealth to protect, are still exceedingly nervous about the pace of the recovery of the global economy going forwards and are still looking to gold as an insurance policy, while there are still a minority of investors out there, some with substantial investments, who believe strongly that the current financial crisis has a way to go yet and the recovery that has been seen so far is fickle and could turn around at any time and bring markets crashing down again.
In particular, the world's biggest economy is not out of the mire yet and much of gold's recent price maintenance is due to dollar weakness. The U.S. has an enormous deficit to negotiate over the next few years, and while quantitative easing - the new buzz phrase used by all those world governments trying to buy their way out of recession - may be having some effect in reflating depressed economies, those countries printing and distributing vast sums of money to achieve this must find themselves paying the price sooner or later.
Some sectors are justifiably doing better than others - notably commodities - and those which support commodity development, but countries like the U.S.A. have more limited benefits from this sector as mining activity has been more and more forced overseas. But it is China, and perhaps to a lesser extent India, which have been driving the commodity markets. As long as China can sustain its internal infrastructure development programme global commodity markets can remain healthy and at least one sector of the economy may remain relatively healthy.
For general industry, though, one cannot be so sure. Unemployment continues to rise which has to mean consumer purchasing is going to become ever more restricted until this particular downward path is reversed. If consumer spending is restricted then the economy will suffer. If the economy suffers the rising trend in markets will surely reverse. If the markets reverse then confidence will suffer and this will result in yet another downward spiral.
Now falls may not be as severe as were seen in the second half of last year. It is now obvious that the crash may well have been overdone in some sectors - in which commodities stands out as the leading example. And the clever investor will always benefit. It is in recessions where the roots of serious wealth creation are formed. Those who invested in selected commodities back in October and November last year will have seen their wealth increasing by several hundreds of percent in a few short months. When does one find that kind of opportunity in the markets except in a major market crash?
But the flipside of this is that recoveries in other sectors may be little more than mirages. Western economies are weak, and remain so, with little end in sight, particularly in comparison with the new world economic superpower of China. With the U.S.A . in continuing decline, the dollar has to continue weakening and one should continue to follow the mantra - 'dollar weak, gold strong'. Yes the dollar will stage occasional recoveries but it seems the trend is inexorably downwards so gold in dollar terms is almost certain to rise.
And then there is inflation. Sooner or later there will be serious inflation in Western economies. The amount of fiat money available will see to that. At the moment though this isn't filtering down to the general public. It is the banks which caused the crisis in the first place which are benefiting. The taxpayer, in terms of increased taxes to pay off government debts, will be paying for the banks' profligacy for years to come - and who is receiving this money - and reporting enormous profits again and paying obscene bonuses - but the banks themselves. First they drive the taxpayer into the dirt, and then have to get bailed out by the struggling taxpayer so they can continue in business in much the same way as before. There's something desperately unfair about this solution. Unfairness breeds discontent within the electorate. In more volatile nations it breeds revolution . Lets hope and pray this does not happen in our society!
But back to gold. From time immemorial gold has proven itself as a store of wealth and likely will continue to do so, barbarous relic or not. Many economists do not understand it and cannot relate to its price movements and overall investment strength. As Mr Spock might have said - "its not logical". But its all down to trust. People trust gold more than they trust governments and the political establishment. Gold's overall strength throughout the financial crisis, despite its dubious fundamentals, bears this out. It may not see the huge falls and rises seen in other sectors in which the real fortunes are made, but as a wealth preserver over the years it remains among the best.
To keep up with the dollar decline gold will have to breach the $1,000 psychological barrier which seems to have been beyond it so far. This will happen - probably sooner rather than later, and once the breach is made and maintained there should be some good upward strength following. Perhaps not to the mega levels predicted by some, but enough to tide one through the recessionary period which may have some time yet to run.