Archive for May, 2010

Fears that American, British and other governments intend to inflate their way off the rocks of excessive debt prompted record inflows into gold this week.

Now some fund managers claim the price could more than double to $3,000 (£2,080) per ounce within five years.

Heavily indebted governments throughout the developed world are struggling to fill deficits of black-hole dimensions in public finances by imposing spending cuts and tax rises. Both are expected in Britain’s emergency Budget on June 22 and neither will be popular.

But keeping interest rates lower than inflation and letting the currency take the strain is another way to reduce the real value of debt. You can see why politicians may feel that is the ”least worst” option.

Stealthily robbing savers by eroding the purchasing power of money is less likely to cause riots in the streets than spending cuts, because inflation tends to hit older people hardest while unemployment hits the young.

Governments can devalue their own currencies, but it is harder for them to make more gold. That fact helped prompt record inflows of $484m (£336m) into gold exchange-traded commodities this week, while gold trading volumes peaked at $2.1bn (£1.45bn).

However, the precious metal is not a one-way bet and it slipped back below $1,200 (£830) on Thursday as some investors took profits amid anxiety about an unsustainable bubble in the gold price.

Graham French, manager of the M & G Global Basics Fund, was undeterred. He said: “In a scenario of rising sovereign risk, where government finances are hugely overstretched and central banks have been systematically devaluing paper money, gold’s value as a safe haven and a stable physical currency can only increase over the medium term.

“Against this backdrop, the gold price could go much higher than these already elevated levels. It wouldn’t be too far fetched to see it rising above $2,000, or even up to $3,000.”

Mr French’s strategy is based on the belief that things that emerging markets sell will fall in price over the next five years, while things that emerging markets buy will rise in price.

The explanation is that demand from the heavily indebted developed world may remain subdued, while demand from largely debt-free consumers in emerging markets will rise.

Rupert Robinson, chief executive of Schroders Private Bank, said: “Gold is setting record highs in almost every currency, despite headwinds including a strong dollar and monetary tightening in India and China, the main end markets for gold. Today’s economic environment makes gold a must in any client portfolio.

“Interest rates are at historically low levels; central banks are bailing out the system; we have seen a huge amount of quantitative easing; currencies being debased and governments around the world are short of money.

Nothing goes up in a straight line, indeed there are signs that gold may be becoming over-owned and too fashionable in the short term, but I think that over the long term gold is a good asset to hang on to. It could easily reach $2,000 per ounce within the next five years,” Mr Robinson said.

Richard Davis, of BlackRock’s Natural Resources team, added: “Gold always does well in times of uncertainty, and this week is no exception. Lingering concerns over the Greek bail-out, uncertainty over global economic growth, and an inconclusive election result in Britain have all created nervousness in stock markets, and risk-averse investors are looking to gold as a store of value.

The fact that gold bullion is a real asset, which does not depend for its value on any company or government, makes it compelling as a ‘safe haven’ investment. Gold bullion is particularly popular in Asia and the Middle East and investors in these regions have continued to pile money into the asset class.

“It is worth noting that, adjusted for inflation, gold is still some way off its all-time high of $850 per ounce in 1980, equivalent to more than $2,200 in today’s terms.”

Adrian Ash, of BullionVault.com, said: “Inflation alone is not the driver. It’s real interest rates that matter, because if cash is beating inflation, no one needs gold. Whereas when cash loses value, year after year – and if the major productive alternatives, such as bonds, shares and property, also fail investors as well – then gold really comes into its own.

“Cash is being actively devalued – and not just in Britain; the Eurozone crisis is only the latest prime mover. Underlying the decade-long upturn in gold is a repeated attack on the virtue of savings,” Mr Ash said.

Gold’s fundamental appeal remains that it is a store of value that is largely immune to government intervention.

Mr French observed: “The great Irish dramatist George Bernard Shaw said: ‘You have to choose between trusting the natural stability of gold or the natural stability and intelligence of members of the government. And with due respect to these gentlemen, I advise you, as long as the capitalist system lasts, to vote for gold.’ I have to say, I’m with Bernard Shaw on this.”


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Why Does the Price of Gold Go Up?

Traditionally, there are many variables that have affected the price of gold in the market place. Here are some fundamental guidelines:

-When the US Dollar goes up, Gold goes up
-When stocks go down, Gold goes up
-When oil goes up, Gold goes up

Because there is so much volatility in the market place today and signs show we are in an inflationary period, the rules above no longer seem to really apply and the gold market has now taken on a life of its own.

There are other things that affect the price of Gold like knee-jerk reaction buying and selling based on fear and greed. Collapsing currencies, countries going bankrupt, rumors of war and war, etc. have always affected the price of Gold. People flock to gold as a safe haven during these times.

Of course, there is also the long-term manipulation of the price of gold. The spot price of gold and silver have been manipulated and suppressed for many decades by the central banks, governments and JP Morgan. This was something that was dismissed as conspiracy theory bunk only a year ago and now that the Andrew McGuire story broke through to the international main stream media, thanks to Bill Murphy of GATA, it is being accepted more and more as fact throughout the world.

Recent comments by the media and people such as George Soros that gold is the ultimate bubble seem asinine to me when you consider the following:
– Federal Reserve and other central banks printing money (out of control) causing inflation.
– Gold for millennia has been a safe storage of value – Historically, all civilizations and cultures go back to gold after they debase their currencies. Washington is allowing the Federal Reserve to print money into existence and there are no signs on the horizon that this will end or slow down.
– If you look at any historical gold chart, gold has risen with small corrections and pull-backs along the way and in the big picture, steadily climbed. This is a classic sign that gold has been chronically bullish with no bubble in sight.
– Basic Supply and Demand Fundamentals: There is less than 1/2 an ounce of gold above the ground per person alive on the planet right now. What does that mean when failing currencies prompt everyone at once to turn to something more sound?
– Jim Rogers was quoted that he is not selling any of his gold. If gold goes down, he’ll buy more. If it goes up, he’ll still get more. He is certain that due to the imbalances in the world economy and financial system right now, we are heading towards a currency crisis in the next year. Does this sound like the actions of someone who has heavily invested in a commodity that is in a bubble status?
– China has already said that their demand for gold will double in the next 10 years. Is this bubble talk?
– Looming currency crises globally – You cannot open a newspaper or turn on your TV today without being told about the declining Euro and other failing currencies. This will become more prevalent in the media in the coming months.

Finally, because we know gold is inflation-proof, we know that the price of gold isn’t actually going up or increasing in value, it is the value of the dollar that is decreasing. An ounce of gold purchases the same today as what it did 2000 years ago. It is the purchasing power of the dollar that is decreasing.

As Simon Heapes said “You cannot study the subject of Gold and Silver without studying its counterfeit, that being the world’s paper currencies.” Simon also recently reminded us that “Taking time to study history gives you the “jump on the crowd.” History repeats. Consider King Solomon who said, “There is nothing new under the sun, that that is, is that that will be again.” This is particularly true with markets and the emotional reactions of the crowd”.

In history, we have learned that in times of economic hardship and despair, there is also great opportunity. Ask me how you can participate and position yourself for the “Great Wealth Transfer”, which will accompany the looming financial crash.

By Kirsty Hogg

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