Best of the Week
Most Popular
1. Ray Dalio: This Debt Cycle Will End Soon - John_Mauldin
2.Stock Market Dow Plunge Following Fake US - China Trade War Truce - Nadeem_Walayat
3.UK House Prices 2019 No Deal BrExit 30% Crash Warning! - Nadeem_Walayat
4.What the Oil Short-sellers and OPEC Don’t Know about Peak Shale - Andrew_Butter
5.Stock Market Crashed While the Yield Curve Inverted - Troy_Bombardia
6.More Late-cycle Signs for the Stock Market and What’s Next - Troy_Bombardia
7.US Economy Will Deteriorate Over Next Half Year. What this Means for Stocks - Troy_Bombardia
8.TICK TOCK, Counting Down to the Next Recession - James_Quinn
9.How Theresa May Put Britain on the Path Towards BrExit Civil War - Nadeem_Walayat
10.This Is the End of Trump’s Economic Sugar High - Patrick_Watson
Last 7 days
Gold Stocks Triple Breakout - 15th Dec 18
The stock market fails to rally each day. What’s next for stocks - 14th Dec 18
How Low Could the S&P 500 Go? - 14th Dec 18
An Industrial to Stock Trade: Is Boeing a BUY Here? - 14th Dec 18
Will the Arrest of Huawei Executive Derail Trade War Truce? - 14th Dec 18
Trump vs the Fed: Who Wins? - 13th Dec 18
Expect Gold & Silver to Pullback Before the Next Move Higher - 13th Dec 18
Dollar Index Trends, USDJPY Setting Up - 13th Dec 18
While The Stocks Bulls Fiddle With The 'Fundamentals,' Rome Burns - 13th Dec 18
The Historic Role of Silver - 13th Dec 18
Natural Gas Price Setup for a Big Move Lower - 13th Dec 18
How to Get 20% Off Morrisons Weekly Supermarket Shopping - 13th Dec 18
Gold Price Analysis: Closer To A Significant Monetary Event - 13th Dec 18
Where is the Stock Market Santa Claus Rally? - 12th Dec 18
Politics and Economics in Times of Crisis - 12th Dec 18
Owning Precious Metals in an IRA - 12th Dec 18
Ways to Improve the Value of Your Home - 12th Dec 18
Theresa May No Confidence Vote, Next Tory Leader Betting Market Analysis and Forecasts - 12th Dec 18
Gold & Global Financial Crisis Redux - 12th Dec 18
Wow Your Neighbours With the Best Christmas Projector Lights for Holidays 2018! - 12th Dec 18
Stock Market Topping Formation as Risks Rise Around the World - 11th Dec 18
The Amazing Story of Gold to Gold Stocks Ratios - 11th Dec 18
Stock Market Medium term Bullish, But Long Term Risk:Reward is Bearish - 11th Dec 18
Is a Deleveraging Event about to Unfold in the Stock Market? - 11th Dec 18
Making Money through Property Investment - 11th Dec 18
Brexit: What Will it Mean for Exchange Rates? - 11th Dec 18
United States Facing Climate Change Severe Water Stress - 10th Dec 18
Waiting for Gold Price to Erupt - 10th Dec 18
Stock Market Key Support Being Re-Tested - 10th Dec 18
May BrExit Deal Tory MP Votes Forecast, Betting Market Analysis - 10th Dec 18
Listen to What Gold is Telling You - 10th Dec 18
The Stock Market’s Long Term Outlook is Changing - 10th Dec 18
Palladium Shortages Expose Broken Futures Markets for Precious Metals - 9th Dec 18
Is an Inverted Yield Curve Bullish for Gold? - 9th Dec 18
Rising US Home Prices and Falling Sales - 8th Dec 18
Choosing Who the Autonomous Car Should Kill - 8th Dec 18
Stocks Selloff Boosting Gold - 8th Dec 18

Market Oracle FREE Newsletter

How You Could Make £2,850 Per Month

Gold Glitters

Commodities / Gold and Silver 2012 Sep 28, 2012 - 10:27 AM GMT

By: John_Browne

Commodities

Just a few weeks ago, Mario Draghi, President of the European Central Bank (ECB), announced that he would do anything required to bailout the weakest members of the Eurozone and in so doing prevent the euro currency from dissolution. Investors who may have been previously positioning themselves to withstand a euro crisis seem to be anxious to believe that such bold actions will prevent the worst. Consequently, many unwound positions in U.S. dollars and bought back euros. In the wake of the announcement, the euro rose from $1.22 to $1.30.


Two weeks ago, as signs of recession increased, Fed Chairman Bernanke announced he would do anything required to stimulate the U.S. economy, real estate, and the financial markets. Investors, who may have been previously concerned that the U.S. stock market was set for a correction (having risen approximately 20% over the past year), took heart and sent stocks up once again.

But the biggest winners thus far that may have resulted from these newly communicated intentions are not the euro or the broad stock markets but rather gold and gold-related investments. In fact, in the month of September, gold approached its highest price for this calendar year and came within five or six percentage points of its all time nominal high. The GDX Index of gold miners increased nearly 12% and hit a six month high.

From my perspective, there are five main reasons that help explain the current attraction to gold.

First, is the perception that central bank activism will spark inflation. Although inflation still is 'officially' low, the size and scope of the printing campaigns just announced is creating an increasingly strong conviction that inflation soon will break out.

Second, with tensions finally ebbing in Europe and with the Federal Reserve now so plainly committed to a policy of quantitative easing, there is an increasing concern that the dollar could trend lower. A weaker dollar would help push up the price for all internationally traded commodities, including gold.

Third, the American government appears to have lost some of its influence on the perceived escalation in Israeli-Iranian tensions. War risk, particularly in the Middle East is rising. In the Pacific, tensions continue to rise dramatically between China and Japan over disputed islands. Gold has traditionally risen during periods of geopolitical uncertainty.

Fourth, central banks that were once huge sellers of gold, such as those of India and Russia, are now accumulating it, together with China. Savvy investors pay close attention to central bank actions.

On the other side of the ledger, there are two important items that normally would indicate a falling gold price. First, the EU, with the second largest economy, and the U.S., with the second economy, together with that of Japan, appear headed for recession. Even the Chinese economy is slowing. The possibility is rising of a worldwide recession, which normally tends to push down asset prices, particularly for stocks dependent on corporate earnings. As stocks fall, margin calls and other demands for cash result in gold holders liquidating portions of their portfolios. Also in recessions, cash becomes increasingly scarce and real assets, including commodities, fall in price. As a commodity, gold should fall in price as recession becomes manifest.

However, some investors may have overlooked an important consideration. Despite falsely low interest rates, most of the trillions of dollars created by the Federal Reserve are sitting in bank deposits or in the bond portfolios of banks. As such, these synthetic funds have not been the cause of significant increases in consumer prices. It is not until the banks start lending on the basis of these vast deposits of funds, will they become an inflationaryfactor.

If recession were to take hold more broadly, those who bought gold as a near-term inflation hedge may become significant sellers as inflation fears take a back seat to margin calls. At some point, if debt problems re-emerge in Europe, the euro's basic viability may be threatened. Simultaneously, continuous action from the Federal Reserve may finally, and justifiably, bring the U.S. dollar under heavier scrutiny. Under such conditions gold may be looked upon as a more reliable store of value than discredited and devalued currencies.

Subscribe to Euro Pacific's Weekly Digest: Receive all commentaries by Peter Schiff, John Browne, and other Euro Pacific commentators delivered to your inbox every Monday!

By John Browne

Euro Pacific Capital
http://www.europac.net/

John Browne is the Senior Market Strategist for Euro Pacific Capital, Inc.  Mr. Brown is a distinguished former member of Britain's Parliament who served on the Treasury Select Committee, as Chairman of the Conservative Small Business Committee, and as a close associate of then-Prime Minister Margaret Thatcher. Among his many notable assignments, John served as a principal advisor to Mrs. Thatcher's government on issues related to the Soviet Union, and was the first to convince Thatcher of the growing stature of then Agriculture Minister Mikhail Gorbachev. As a partial result of Brown's advocacy, Thatcher famously pronounced that Gorbachev was a man the West "could do business with."  A graduate of the Royal Military Academy Sandhurst, Britain's version of West Point and retired British army major, John served as a pilot, parachutist, and communications specialist in the elite Grenadiers of the Royal Guard.

More importantly make sure to protect your wealth and preserve your purchasing power before it's too late. Discover the best way to buy gold at www.goldyoucanfold.com , download my free research report on the powerful case for investing in foreign equities available at www.researchreportone.com , and subscribe to my free, on-line investment newsletter at http://www.europac.net/newsletter/newsletter.asp

John_Browne Archive

© 2005-2018 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