Thursday, Oct 16, 2008
Gold has remained resilient despite stock markets collapsing again internationally. Asian stock markets have fallen sharply with the Nikkei collapsing by more than 11%. European markets are down between 2% and 5.5% in early trading after recovering from steeper losses at the open.
The dawning realization that the US is set to fall into a deep recession (and possibly the worst recession since the Great Depression) which will likely cause a global recession is not being taken kindly by equity markets.
While COMEX futures gold prices remain lacklustre, the real price for actual physical bullion continues to surge as there are little or no sellers and nearly all are buyers. Shortages of small and midsized bullion coins and bars appear to be spreading into the large bar market with reports of London Good Delivery Bars becoming harder and harder to buy, get hold of and take delivery of (especially in New York).
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No Mass Mania for Gold Yet – Less than 1% of Public in Western World Have Invested in Gold
The notion that gold is in a bubble and soon to fall is entirely bogus and peddled by many of the same suspects who have gotten us into this mess with their “don’t worry, be happy” brand of economics and personal finance advice. It is likely that less than 1% of the public in the western world (probably as low as 0.5%) has invested in gold and/or silver and we are a long way from mass mania and the mass participation associated with market tops (as seen in stock and property markets in recent months).
When gold is featured on a daily and even weekly basis in the newspapers and there are supplements dedicated to investing in gold and precious metals then it will be time to sell or at least go underweight gold and silver.=
Massive Deleveraging of Western and Global Financial System
Gold has continued to tread water and not made expected gains as the process of massive deleveraging of the entire international financial system is resulting in unprecedented selling in nearly all markets including the huge commodity index funds. These index funds such as the Goldman Sachs Commodities Index, Reuters/Jefferies CRB index, the Dow Jones Commodity Index and the Dow Jones-AIG Commodity Index have been the recipients of billions of dollars of funds in recent months – often from massive corporate, state and national pension funds (such as the Irish National Pension Reserve Fund which invested in the Goldman Sachs Commodities Index).
Now fears of a global recession and demand destruction for soft commodities and hard commodities such as the base metals and energies is seeing wholesale liquidation in many of these funds. They had passively invested their funds to a fixed percentage of each commodity – say for example 4% in gold, 4% in silver, 4% cotton, 4% in pork bellies, 4% in zinc and now massive liquidation and redemptions from these commodity indices is seeing gold and particularly silver being affected – silver remains a tiny market relative to other commodity markets; to the gold market and to the currency, bond, stock and derivative markets.
Thus futures commodities contracts are being sold by speculators, hedge funds and pension funds while physical gold and silver bullion has some of the most bullish supply/demand fundamentals of the precious metals ever.
Fundamentals of Gold and Particularly Silver Remain as Sound as Ever
Very little has changed regarding the fundamentals of gold and silver (see http://www.gold.ie/documents/articles_of_interest/AOI_08-05-07_Why_the_Silver_Price_Is_Set_to_Soar.htm ) and indeed it is arguable that their fundamental positions are actually stronger now than they were in 2000 when the bull markets commenced.
Especially as we have had an extended period of consolidation in gold and a sharp correction in silver to levels last seen in March 2000.
Massive systemic risk and massive digital money creation and money printing on a scale never seen in the western world before is extremely bullish for both gold and silver.
With increasing calls for an overhaul and reform of the world’s financial, economic and monetary system and the Bretton Woods monetary system, the dollar’s, the reserve currency of much of the 20th century, preeminent position looks precarious. The sheer scale of the financial, economic and monetary risk facing the world means that gold is likely to surge in the coming weeks as physical demand is unprecedented and will grow while supply remains lacklustre at best.
While western jewellery demand is sure to be affected, investment demand will far outweigh this decline as it did in the 1970s. Central banks, institutions and the investment and saving public internationally are likely to look to gold’s safe haven and wealth preservation qualities increasingly in the coming months and years resulting in a price in the thousands of dollars.
It is important to reiterate that the fundamentals of both gold and silver remain as sound as ever, if not more so.
Gold and silver remain the investment and wealth preservation opportunities of a lifetime and all individuals, companies, institutions and pension funds should have an allocation to gold bullion – not derivatives, gold or silver futures, CFDs or ETFs, but real fully owned physical gold bullion. The major central banks of the world retain the majority of their gold bullion as monetary reserves in order to protect against macroeconomic, systemic and monetary risk and so should you.