Best of the Week
Most Popular
1. Market Decline Will Lead To Pension Collapse, USD Devaluation, And NWO - Raymond_Matison
2.Uber’s Nightmare Has Just Started - Stephen_McBride
3.Stock Market Crash Black Swan Event Set Up Sept 12th? - Brad_Gudgeon
4.GDow Stock Market Trend Forecast Update - Nadeem_Walayat
5.Gold Significant Correction Has Started - Clive_Maund
6.British Pound GBP vs Brexit Chaos Timeline - Nadeem_Walayat
7.Cameco Crash, Uranium Sector Won’t Catch a break - Richard_Mills
8.Recession 2020 Forecast : The New Risks & New Profits Of A Grand Experiment - Dan_Amerman
9.Gold When Global Insanity Prevails - Michael Ballanger
10.UK General Election Forecast 2019 - Betting Market Odds - Nadeem_Walayat
Last 7 days
US Treasury Bonds Pause Near Resistance Before The Next Rally - 18th Oct 19
The Biggest Housing Boom in US History Has Just Begun - 18th Oct 19
British Pound Brexit Chaos GBP Trend Forecast - 18th Oct 19
Stocks Don’t Care About Trump Impeachment - 17th Oct 19
Currencies Show A Shift to Safety And Maturity – What Does It Mean? - 17th Oct 19
Stock Market Future Projected Cycles - 17th Oct 19
Weekly SPX & Gold Price Cycle Report - 17th Oct 19
What Makes United Markets Capital Different From Other Online Brokers? - 17th Oct 19
Stock Market Dow Long-term Trend Analysis - 16th Oct 19
This Is Not a Money Printing Press - 16th Oct 19
Online Casino Operator LeoVegas is Optimistic about the Future - 16th Oct 19
Stock Market Dow Elliott Wave Analysis Forecast - Video - 16th Oct 19
$100 Silver Has Come And Gone - 16th Oct 19
Stock Market Roll Over Risk to New highs in S&P 500 - 16th Oct 19
10 Best Trading Schools and Courses for Students - 16th Oct 19
Dow Stock Market Short-term Trend Analysis - 15th Oct 19
The Many Aligning Signals in Gold - 15th Oct 19
Market Action Suggests Downside in Precious Metals - 15th Oct 19
US Major Stock Market Indexes Retest Critical Price Channel Resistance - 15th Oct 19
“Baghad Jerome” Powell Denies the Fed Is Using Financial Crisis Tools - 15th Oct 19
British Pound GBP Trend Analysis - 14th Oct 19
A Guide to Financing Your Next Car - 14th Oct 19
America's Ruling Class - Underestimating Them & Overestimating Us - 14th Oct 19
Stock Market Range Bound - 14th Oct 19
Gold, Silver Bonds - Inflation in the Offing? - 14th Oct 19
East-West Trade War: Never Take a Knife to a Gunfight - 14th Oct 19
Consider Precious Metals for Insurance First, Profit Second... - 14th Oct 19
Stock Market Dow Elliott Wave Analysis Forecast - 13th Oct 19
The Most Successful IPOs Have This One Thing in Common - 13th Oct 19
Precious Metals & Stock Market VIX Are Set To Launch Dramatically Higher - 13th Oct 19
Discovery Sport EGR Valve Gasket Problems - Land Rover Dealer Fix - 13th Oct 19
Stock Market US Presidential Cycle - Video - 12th Oct 19
Social Security Is Screwing Millennials - 12th Oct 19
Gold Gifts Traders With Another Rotation Below $1500 - 12th Oct 19
US Dollar Index Trend Analysis - 11th Oct 19
China Golden Week Sales Exceed Expectations - 11th Oct 19
Stock Market Short-term Consolidation Does Not change Secular Bullish Trend - 11th Oct 19
The Allure of Upswings in Silver Mining Stocks - 11th Oct 19
US Housing Market 2018-2019 and 2006-2007: Similarities & Differences - 11th Oct 19
Now Is the Time to Load Up on 5G Stocks - 11th Oct 19
Why the Law Can’t Protect Your Money - 11th Oct 19
Will Miami be the First U.S. Real Estate Bubble to Burst? - 11th Oct 19
How Online Casinos Maximise Profits - 11th Oct 19
3 Tips for Picking Junior Gold Stocks - 10th Oct 19
How Does Inflation Affect Exchange Rates? - 10th Oct 19
This Is the Best Time to Load Up on These 3 Value Stocks - 10th Oct 19
What Makes this Gold Market Rally Different From All Others - 10th Oct 19
Stock Market US Presidential Cycle - 9th Oct 19

Market Oracle FREE Newsletter

Stock Market Trend Forecast Oct - Dec 2019 by Nadeem Walayat

Gold is Set to Soar... Here's the One Way to Profit

Commodities / Gold and Silver 2010 May 14, 2010 - 05:29 AM GMT

By: Money_Morning

Commodities

Best Financial Markets Analysis ArticleMartin Hutchinson writes: Gold prices have been on a tear of late and gold futures briefly touched yet another record yesterday (Thursday) at more than $1,240 an ounce - a level that would have seemed a distant prospect only a year ago.


Yet there is no sign of resurgent consumer price inflation in the U.S. economy, or in the economies of most other countries.

This time around, therefore, gold is not serving as a protection against inflation, as it did in the 1970s. But an increase in gold prices that's so sustained has to mean something. Divining that meaning will tell us what we can expect from the global economy and markets in the years to come.

The Global Money Spigot

While we have not seen consumer price inflation, in the last 15 years we have seen an unprecedented expansion in the U.S. and global money supplies. From 1995 to 2008, the U.S. broad money supply expanded 40% faster than the country's gross domestic product (GDP).

Then, in late 2008, the U.S. Federal Reserve fully opened the monetary spigots doubling the monetary base in a matter of weeks. Internationally, almost all countries embarked on monetary expansion around 2000, and opened the spigots still further in late 2008.

You can see the result in world central bank reserves: They've expanded at a rate of more than 16% per annum since 1998, and stood at an aggregate $8.09 trillion at the end of last year.

Just think about those central banks for one moment. They control an unprecedented amount of money, almost all of which is deployed in short-term foreign currency assets.
That leaves the central bankers with an unenviable choice:

  • They can put their money in U.S. dollars, which are subject to a record budget deficit that is showing no sign of being brought under control.
  • They can put their money in euros - and watch the European governments and the European Central Bank (ECB) organize a bailout totaling $1 trillion for a country - Greece - whose GDP is only one third of that amount.
  • They can put their money in Japan, a country whose public debt exceeds 200% of GDP, that's also running huge budget deficits and that's blessed with a government who wants to run even larger deficits and isn't satisfied with interest rates around zero.
  • Or they can put their money in China, a country whose currency is not freely traded and where inflation is becoming a real problem.
Of course, there are a couple of well-run countries like Canada and Australia, but between them they are far too small to provide a home for anything close to $8 trillion.

Alternatively, central bankers can put their money in gold - an asset that has increased in value by more than 20% annually since 2000, and that shows no signs of ceasing to do so.

A Glittering Dilemma

Rationally speaking, those central bankers will put at least part of their reserves in gold.

The problem is that - even at these exalted prices - the annual output of gold is only $120 billion and the total world stock of gold is worth only $6 trillion. So with the world's central banks stepping up buying, mostly clandestinely, you can see that the gold price is likely to go much, much higher.

The dangers of investment in gold or mining stocks have however increased in the last few months. The Greek crisis and the European Union bailout have pumped even more money into the system, which is why gold - despite yesterday's profit-taking - has been given a further boost over the last week.

However, the uncertain reaction of the markets to the EU bailout of Greece has increased the chance of a liquidity crisis such as we suffered in 2008, in which risk premiums rise sharply. While gold can in general be expected to benefit from a rise in risk premiums, its price would drop back as it did in 2008 if there was a liquidity crisis caused by a major insolvency of a bank or country.

How to Play Gold - So Gold Doesn't Play You

For the moment, therefore, gold has become a speculative plaything - rather than a safe store of value. Investors should not have more than 15% to 20% of their net worth in gold or gold-related assets, in case it all goes wrong.

Conversely, since there is a chance of a sharp "spike" in the price of gold, the current opportunity is probably one that shouldn't be missed: Out-of-the-money gold options traded on the Chicago Mercantile Exchange (Nasdaq: CME) would seem worth a speculative "flutter" for 1% to 2% of an investor's assets.

If you decide to pursue this strategy, you should go for options with more than a year to run, in case there are delays in the scenario playing out, and far out of the money, to maximize leverage on a small investment. The December 2011 call options - with a strike price of $2,000, and currently trading at $35 - would seem worth a small investment wager.

One contract, representing 100 ounces, costing $3,500 is the minimum investment, but for those whom that represents only a small fraction of the portfolio, it may be worth a small flier. After all, if gold really takes off, it's a thin-enough market that the gold price could easily reach $3,000 or even $5,000 an ounce.

In closing, it bears repeating: Gold-option purchases should only be undertaken with a tiny fraction of your portfolio - the payoff, if it works, will still be worthwhile enough to boost your wealth; and the loss, if it doesn't work, won't be painful. In high-risk investments -which is what gold is quickly turning into - caution is the watchword.

Source : http://moneymorning.com/2010/05/14/gold-3/

Money Morning/The Money Map Report

©2010 Monument Street Publishing. All Rights Reserved. Protected by copyright laws of the United States and international treaties. Any reproduction, copying, or redistribution (electronic or otherwise, including on the world wide web), of content from this website, in whole or in part, is strictly prohibited without the express written permission of Monument Street Publishing. 105 West Monument Street, Baltimore MD 21201, Email: customerservice@moneymorning.com

Disclaimer: Nothing published by Money Morning should be considered personalized investment advice. Although our employees may answer your general customer service questions, they are not licensed under securities laws to address your particular investment situation. No communication by our employees to you should be deemed as personalized investent advice. We expressly forbid our writers from having a financial interest in any security recommended to our readers. All of our employees and agents must wait 24 hours after on-line publication, or 72 hours after the mailing of printed-only publication prior to following an initial recommendation. Any investments recommended by Money Morning should be made only after consulting with your investment advisor and only after reviewing the prospectus or financial statements of the company.

Money Morning Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules