Best of the Week
Most Popular
1. Stock Markets and the History Chart of the End of the World (With Presidential Cycles) - 28th Aug 20
2.Google, Apple, Amazon, Facebook... AI Tech Stocks Buying Levels and Valuations Q3 2020 - 31st Aug 20
3.The Inflation Mega-trend is Going Hyper! - 11th Sep 20
4.Is this the End of Capitalism? - 13th Sep 20
5.What's Driving Gold, Silver and What's Next? - 3rd Sep 20
6.QE4EVER! - 9th Sep 20
7.Gold Price Trend Forecast Analysis - Part1 - 7th Sep 20
8.The Fed May “Cause” The Next Stock Market Crash - 3rd Sep 20
9.Bitcoin Price Crash - You Will be Suprised What Happens Next - 7th Sep 20
10.NVIDIA Stock Price Soars on RTX 3000 Cornering the GPU Market for next 2 years! - 3rd Sep 20
Last 7 days
Dow Stock Market Trend Analysis - 25th Nov 20
Amazon Black Friday Dell 32 Inch S3220DGF VA Curved Screen Gaming Monitor Bargain Deal! - 25th Nov 20
Biden the Silver Bull - 25th Nov 20
Inflation Warning to the Fed: Be Careful What You Wish For - 25th Nov 20
Financial Stocks Sector ETF Shows Unique Island Setup – What Next? - 25th Nov 20
Herd Immunity or Herd Insolvency: Which Will Affect Gold More? - 25th Nov 20
Stock Market SEASONAL TREND and ELECTION CYCLE - 24th Nov 20
Amazon Black Friday - Karcher K7 FC Pressure Washer Assembly and 1st Use - Is it Any Good? - 24th Nov 20
I Dislike Shallow People And Shallow Market Pullbacks - 24th Nov 20
Small Traders vs. Large Traders vs. Commercials: Who Is Right Most Often? - 24th Nov 20
10 Reasons You Should Trade With a Regulated Broker In UK - 24th Nov 20
Stock Market Elliott Wave Analysis - 23rd Nov 20
Evolution of the Fed - 23rd Nov 20
Gold and Silver Now and Then - A Comparison - 23rd Nov 20
Nasdaq NQ Has Stalled Above a 1.382 Fibonacci Expansion Range Three Times - 23rd Nov 20
Learn How To Trade Forex Successfully - 23rd Nov 20
Market 2020 vs 2016 and 2012 - 22nd Nov 20
Gold & Silver - Adapting Dynamic Learning Shows Possible Upside Price Rally - 22nd Nov 20
Stock Market Short-term Correction - 22nd Nov 20
Stock Market SPY/SPX Island Setups Warn Of A Potential Reversal In This Uptrend - 21st Nov 20
Why Budgies Make Great Pets for Kids - 21st Nov 20
How To Find The Best Dry Dog Food For Your Furry Best Friend?  - 21st Nov 20
The Key to a Successful LGBT Relationship is Matching by Preferences - 21st Nov 20
Stock Market Dow Long-term Trend Analysis - 20th Nov 20
Margin: How Stock Market Investors Are "Reaching for the Stars" - 20th Nov 20
World’s Largest Free-Trade Pact Inspiration for Global Economic Recovery - 20th Nov 20
Dating Sites Break all the Stereotypes About Distance - 20th Nov 20
THE STOCK MARKET BIG PICTURE - Video - 19th Nov 20
Reasons why Bitcoin is Treading at it's Highest Level Since 2017 and a Warning - 19th Nov 20
Media Celebrates after Trump’s Pro-Gold Fed Nominee Gets Blocked - 19th Nov 20
DJIA Short-term Stock Market Technical Trend Analysis - 19th Nov 20
Demoncracy Ushers in the Flu World Order How to Survive and Profit From What Is Coming - 19th Nov 20
US Bond Market: "When Investors Should Worry" - 18th Nov 20
Gold Remains the Best Pandemic Insurance - 18th Nov 20
GPU Fan Not Spinning FIX - How to Easily Extend the Life of Your Gaming PC System - 18th Nov 20
Dow Jones E-Mini Futures Tag 30k Twice – Setting Up Stock Market Double Top - 18th Nov 20
Edge Computing Is Leading the Next Great Tech Revolution - 18th Nov 20
This Chart Signals When Gold Stocks Will Explode - 17th Nov 20
Gold Price Momentous ally From 2000 Compared To SPY Stock Market and Nasdaq - 17th Nov 20
Creating Marketing Campaigns Using the Freedom of Information Act - 17th Nov 20
ILLEGITIMATE PRESIDENT - 17th Nov 20
Stock Market Uptrend in Process - 17th Nov 20
How My Friend Made $128,000 Investing in Stocks Without Knowing It - 16th Nov 20
Free-spending Biden and/or continued Fed stimulus will hike Gold prices - 16th Nov 20
Top Cheap Budgie Toys - Every Budgie Owner Should Have These Safe Bird Toys! - 16th Nov 20
Line Up For Your Jab to get your Covaids Freedom Pass and a 5% Work From Home Tax - 16th Nov 20
You May Have Overlooked These “Sleeper” Precious Metals - 16th Nov 20
Demystifying interesting facts about online Casinos - 16th Nov 20
What's Ahead for the Gold Market? - 15th Nov 20
Gold’s Momentous Rally From 2000 Compared To Stock Market SPY & QQQ - 15th Nov 20
Overclockers UK Quality of Custom Gaming System Build - OEM Windows Sticker? - 15th Nov 20
UK GCSE Exams 2021 CANCELLED! Grades Based on Mock Exams and Teacher Assessments - 15th Nov 20

Market Oracle FREE Newsletter

How to Get Rich Investing in Stocks by Riding the Electron Wave

Will Gold Price Fall in a Real Economic Recovery?

Commodities / Gold and Silver 2010 Dec 24, 2010 - 08:02 AM GMT

By: Julian_DW_Phillips

Commodities

Best Financial Markets Analysis ArticleWe have heard many commentators implying that a U.S. economic recovery that leads to the sort of growth that was seen before 2008 will give investors reasons to divest from gold. As the year end approaches and another year is on us, it seems wise to us to look at this carefully. All of us would dearly love to see a real recovery, with rising housing prices moving back to levels seen in 2008, strong employment data and consumers with plenty of disposable income to make life stress free again. In such a climate, one can understand that these desires would be accompanied by a fall in the gold price, which to many is a thermometer measuring the ailments of the developed world economies. But is that the reason that gold is at current levels?


The developed world economy grows as the gold price rose

Let's take a look back to the year when the gold price started to rise, back in 2,000. What was the economic climate of the developed world like then? When the Volker hiked interest rates in the early eighties,, confidence in the dollar grew and world growth took off. As the turn of the century approached, developed world economies looked good. The euro made its entrance onto the world monetary stage and the Eurozone grew steadily. By 2008, life was even better. The bulk of the world's executives had only seen these good times. There appeared no unmanageable reason for not expecting the future to be more of the same. During the days from 1999 to 2008, the gold price rose nearly five times. Could we relate this to the economic state of the developed world? No, of course not! In fact it would almost be wrong to say that the gold price rose. At $275, it was very undervalued.

Why was it at $275 and rose from 2,000 onwards?

The $275 price of gold was a result of the long-term central bank campaign to 'discredit' gold in favor of the dollar then the euro. Britain sold half of its gold in 1999 at that price. The fact that European central banks decided to limit their sales of gold to amounts that the gold market could handle without taking the gold price down was the key factor.

The arrival of the gold Exchange Traded Funds unleashed pent-up U.S. institutional demand and brought gold back to the investment world.

The realization by gold mining companies that the profits from hedge positions in a gold market, where the price was persistently falling were disappearing caused them to re-think their policies. The profitable hedge positions, which so many of them had, could limit their income to prices lower than the rising gold price. These positions had to be closed to increase profits. Shareholders demanded that they were. Around 400 tonnes of these hedge positions were bought back annually. A combination of the above factors ensured that the gold price would drift upwards towards a level it should have been in 1985.

The came the 'credit crunch'

When the growth of the east met growth in the West, the oil price took off and nearly doubled in price. This was the pinnacle of world growth. It was a time when the worry was, could the resources of the world accommodate global growth? It was also the zenith of U.S. economic power. Then came the unexpected credit crunch as the property bubble burst. All markets fell, including the gold and silver markets, but for different reasons.

Why did they fall when the hope in the future was so strong? We would favor calling this an investor meltdown. There appeared every reason to expect companies to continue to perform well in the future, when the investment was looked at, but the change had hit investor's capacities to invest. Too many investors has leveraged their positions so that when house prices fell then equity and other markets fell, there was a need to liquidate holdings and find cash to cover the margin and other calls. So markets, such as gold and silver, which should have risen in that economic climate, fell as investor investment capacities shrank.

History shows that when such breakdowns in prices happens, gold and silver act as 'safe havens', but they weren't between mid-2008 and most of 2009. Right now, U.S. investor capacities remain well below what they were before then. Markets in general have stabilized, but not grown, in an investment climate that has been marked by falling confidence in the monetary system and the rising fear of instability and uncertainty.

The gold and silver markets also stabilized. With the Fed's policy of QE, the developed world's economies have not spiraled down into deflation nor have they promised a real recovery. What has happened is that in this fearful financial climate, business goes on as usual, but with little hope of seeing the pre-credit crunch days.

As the credit crunch crossed the Atlantic and morphed into the sovereign debt crisis fears of a systemic collapse have heightened. The attention has swung to a falling confidence in the currency system itself as far too much debt is being carried by nations responsible for confidence in the paper currency systems. The expectation is for the sovereign debt crisis to worsen in the future.

The Gold market changes structure

The change in the gold and silver markets has been structural. It has become global and embraced peoples from diverse cultures, nations and stations in life.

  • From the limitation of gold sales by European central banks, to the cessation of those sales, to central banks becoming buyers of gold the 'official' gold market has changed direction completely.

  • U.S. institutional investors have joined the line of investors holding for the long-term [not trading for profits], a change from past attitudes. The advent of the gold E.T.F.'s have drawn new large investors to the gold market [the same has happened in silver].

  • As Europe's sovereign debt crisis brings the Euro into question, Europeans, who have experienced many currency collapses in the last hundred years are turning to physical gold held out of reach [they hope] of their governments.

  • In India as that country's middle classes go global and enlarge locally, gold demand is overcoming rising prices in line with growing disposable income. This year should see them buy close to record levels of bullion. As always they do not buy for profit, but because they see gold as money and to ensure financial security.

  • In China the last decade has seen that country turn into the world's second largest economy and headed to be the largest, with more than four times as many people as the U.S. From a tiny gold market at the turn of the century, it is growing phenomenally with the support of its government. With its people new to wealth, their propensity to save is unwavering [saving around 40% of income]. The Chinese, from the government down, favors gold as both money and a means of saving. With inflation running ahead of interest rates there, gold is proving itself a leading investment medium. The potential gold demand from China is many times the level it is and was in the developed world.

Will gold fall in a real recovery?

Against the background painted above, it is clear that the gold price is independent of the state of the U.S. economy. Mr Ravi Kumar in Mumbai does not understand the implications of U.S. house prices rising or falling. Mr. Wang Ho of Shanghai is not overly worried about U.S. Treasury Yields. They are driven to buy gold by completely different forces, as old as man himself. He wants to protect himself and his future with it. This won't change if U.S. growth were to jump to 10%, let alone 3%.

The reasons why gold rose [pre-2008] had very little to do with U.S. economic growth. Those reasons will continue to take gold higher in 2011 and onwards, because they have to do with the monetary system not economic growth or the lack thereof. Where U.S. economic growth will affect the gold price in a recovering investment climate, is that U.S. investors will be financially more able to invest in gold and silver. The rise of gold is about the state of the developed world's money is!

But far more importantly the gold market has moved primarily out of the developed world and India to encompass the entire global economy. As money, as a reserve asset and as an international measure of value there are considerably more ramifications of far greater importance to gold investors than a recovering U.S. economy. What are they?

Gold Forecaster regularly covers all fundamental and Technical aspects of the gold price in the weekly newsletter. To subscribe, please visit www.GoldForecaster.com

By Julian D. W. Phillips
Gold-Authentic Money

Copyright 2009 Authentic Money. All Rights Reserved.
Julian Phillips - was receiving his qualifications to join the London Stock Exchange. He was already deeply immersed in the currency turmoil engulfing world in 1970 and the Institutional Gold Markets, and writing for magazines such as "Accountancy" and the "International Currency Review" He still writes for the ICR.

What is Gold-Authentic Money all about ? Our business is GOLD! Whether it be trends, charts, reports or other factors that have bearing on the price of gold, our aim is to enable you to understand and profit from the Gold Market.

Disclaimer - This document is not and should not be construed as an offer to sell or the solicitation of an offer to purchase or subscribe for any investment. Gold-Authentic Money / Julian D. W. Phillips, have based this document on information obtained from sources it believes to be reliable but which it has not independently verified; Gold-Authentic Money / Julian D. W. Phillips make no guarantee, representation or warranty and accepts no responsibility or liability as to its accuracy or completeness. Expressions of opinion are those of Gold-Authentic Money / Julian D. W. Phillips only and are subject to change without notice.

Julian DW Phillips 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