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Gold Breakdown Below $800 - What is Happening?

Commodities / Gold & Silver Nov 14, 2007 - 11:44 AM GMT

By: David_Vaughn

Commodities

Well, gold has broken through the 800 barrier and climbed as high as 845. What gives? Why is gold moving on like this? I can say it a hundred times but never enough times really. This is not about gold. Gold is merely a barometer.

True, the gold barometer has been broken for a long time due to intervention by others. But I believe that barometer is back together again and in working order. As always gold merely reflects the circumstances around it. By the way. It looks like 800 just may become the new floor price for gold and not its ceiling.


“As returns on gold investments have increased by 34% this year, demand for gold has also surged. It has increased by 25% in 2007 compared to last year.” “With higher prices, the demand rises too. And industry estimates say, gold supply is half the demand. That demand supply imbalance is expected to continue and would further increase its value.” Moneycontrol.com

Higher oil, a subprime explosion and a US dollar dying on the vine. If just one of these factors were in play gold would have cause to be strong. But with the volume of all these disastrous components in the mix today nothing can really hold gold back. Oh, as a side note it looks like Pakistan is losing its democracy. Guess the US marines will be there soon. And Iran forever awaits the inevitable attack on its nuclear facilities.

What threatens and challenges the US the most though is what the Chinese eventually do with the US dollars they are holding. China is threatening that it no longer wishes to see the US Dollar as the world's reserve currency. And they have the means to bring the dollar down. And the declining US dollar will go on record as the greatest economic disaster of this generation.

“The Chinese government has begun a concerted campaign of economic threats against the United States, hinting that it may liquidate its vast holding of US treasuries if Washington imposes trade sanctions to force a yuan revaluation.” telegraph.co.uk

Remember the story of KKR? Kohlberg, Kravis Roberts & Company, the audacious firm that dominated Wallstreet in the 1980s. I always felt that in this era began the downfall of America 's industrial and financial might. For the first time manufacturing and production were considered no longer the cornerstone of wealth in America . We became a “service” economy. Basically servicing the needs of every other country.

Buying existing working companies and dismantling them for a few extra dollars became the preferred way corporate America prospered. And in much the same way the dependence on China as a bank for easy money became the second nail in America 's coffin. No, gold moving higher is really only a reaction to what is happening today around us. Our financial and economic system is unraveling. The 1980s led the way with the Leveraged Buyout. Companies producing nothing but debt and a sell off of their present assets.

“Virtually any retrenchment- including shutting down factories, firing workers, or sell off of subsidiaries en masse- was hailed as good if it made more money for a company's new owners.” “Far outside this luck ownership circle, production workers and low level managers watched in dismay as the buyout scythe cut through their lives.” George Anders, Merchants of Debt

Refinancing became the road to wealth during the 1980s and witnessed the dismantling of corporate America . Likewise, the road to easy refinancing became the road to riches for the average consumer these past five years or so. During the era of the 1980s we began to witness production and manufacturing begin in earnest to shift out of this country.

“The efficiency of acquired companies became legendary, but so did stories of human anguish.” George Anders, Merchants of Debt

What followed the 1980s was the 1990s. In the 1990s derivatives came into their own. This was just another way to create wealth via complicated debt bypassing the old standards of production and hard work.

And following the 1990s came 2,000 and a crash from all this excess. But don't worry as the Federal Reserve was there to pump massive amounts of liquidity into the system to keep the party going. And now we have the subprime mess which was built on a mountain of easy money and no rules. What's happening today? Let's look again at what began in the early 1980s.

“Swamping a company with debt stopped being seen as crazy. A “credit culture” sprang up, in which borrowing heavily became a way of life.” George Anders, Merchants of Debt

Why are all our manufacturing, production and technical oriented jobs now in Asia ? Why do we find ourselves indebted to a foreign country to the tune of 1.4 trillion dollars?

“I cannot condone activities that divert so much time and energy from investments that create new jobs and opportunities,” New York City comptroller Harrison Godlin…” “…a financial activity that simply served to “reshuffle Chairs.” George Anders, Merchants of Debt

What we are witnessing today are the fruits of all of these activities coming to a completion. Pay day you could say. And humble gold simply remains just that simple barometer gauging this era.

And these attitudes of free and easier obtained credit applied both to big business and the small every day consumer. What's happening now? We are witnessing the catastrophic effects of all the consequences of these actions coming to a conclusion. Gold is doing nothing special now. For those who understand this long cycle of excess they realize gold represents a flight to quality for financial institutions and professional money managers.

Gold stocks continue to be an excellent investment in a rising gold price environment.

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“The Worldwatch Institute, an organization that focuses on environmental, social and economic trends, says the current rate of global demand for resources is unsustainable.”  

Email me if you have the time.

By David Vaughn
Gold Letter, Inc.
David4054@charter.net

© Copyright 2007, Gold Letter Inc.

“The Worldwatch Institute, an organization that focuses on environmental, social and economic trends, says the current rate of global demand for resources is unsustainable.”  

The publisher and its affiliates, officers, directors and owner may actively trade in investments discussed in this newsletter. They may have positions in the securities recommended and may increase or decrease such positions without notice. The publisher is not a registered investment advisor. Subscribers should not view this publication as offering personalized legal, tax, accounting or investment-related advice. The news and editorial viewpoints, and other information on the investments discussed herein are obtained from sources deemed reliable, but their accuracy is not guaranteed. © Copyright 2007, Gold Letter Inc.

David Vaughn Archive

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