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Gold Consolidates as January Portends for Bearish Year for Stock Markets

Commodities / Investing 2009 Feb 03, 2009 - 05:54 AM GMT

By: Mark_OByrne

Commodities Best Financial Markets Analysis ArticleGold continues to consolidate near recent highs despite profit taking falls. It remains near record highs in British pounds, Euros (03-Feb-09 London AM Fix: $902.00, £636.02, €702.93 ) and many other currencies internationally as fiat currencies internationally come under pressure due to the unprecedented zero percent interest rates, quantitative easing, bailouts and stimulus packages.


Increasing fears of protectionism from the Obama White House may lead to the dollar coming under renewed pressure and see gold prices rise above $1,000/oz early in 2009.

The EU, Canada and others have warned that the "Buy American" clause in the US economic recovery package could promote protectionism. This will not be liked by the U.S.’ many very large creditors – especially the Chinese. They currently only have 1% of their currency reserves in gold and are on record saying they are going to diversify into gold. It is likely they have been nibbling in the gold market for some months but their buying may become more robust in the coming months as they are understandably concerned about the value of their dollar denominated government debt.

The old market adage as January goes so goes the year bodes ill for stock markets this year. Stock markets in the U.S. had the worst January ever with the Dow Jones and the S&P 500 down by some 8%. After falling in the first few days of January gold then rallied from $806/oz to over $900/oz and ended the month of January up by 2%. Silver surged by over 8.6% in January ($11.38/oz $12.36/oz) – See Performance Table.

The US bond market began to come under serious pressure in January and this does not augur well for US bond markets and the dollar in the coming months. The US 10 year bond fell sharply in price and saw yields rise sharply from 2.087% at the end of December to over 2.84% on January 30th. It could be that the so called bond vigilantes are finally waking up to the fact that government bonds and currencies are being debased as never before. Bonds remain near all time record yields and remain one of the largest bubbles in the world. Especially with Bernanke saying that they will monetize the debt and print money to buy their own bonds. This will not please creditors of the world’s largest debtor nation.

Non Inflation Adjusted Gold Chart 1971-2009

It is important to remember that gold is correlated with US interest rates (see strong correlation since 1971 in charts below) meaning that when interest rates are very low for a period this tends to create inflationary pressures necessitating higher interest rates as was seen in the 1970’s. As interest rates move up (and bonds fall in value), gold moves up as well as it takes many months for interest rate changes to have the desired effect and wrong inflation out of the system. Thus in the 1970’s, interest rates had to rise to 14% in early 1980 before investors and savers were incentivized to start holding US government bonds and deposits again.

This is likely to happen again and the gold bull market is only likely to end when deposits and bond markets offer an attractive yield in order to incentivize savers and investors to hold these assets again. Especially in the light of the unprecedented counter party and systemic risk confronting us today.

By Mark O'Byrne, Executive Director

Gold Investments
63 Fitzwilliam Square
Dublin 2
Ireland
Ph +353 1 6325010
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Email info@gold.ie
Web www.gold.ie
Gold and Silver Investments Limited
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London,
EC3V 3ND
United Kingdom
Ph +44 (0) 207 0604653
Fax +44 (0) 207 8770708
Email info@www.goldassets.co.uk
Web www.goldassets.co.uk

Gold and Silver Investments Ltd. have been awarded the MoneyMate and Investor Magazine Financial Analyst of 2006.

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Gold and Silver Investments Limited hope to inform our clientele of important financial and economic developments and thus help our clientele and prospective clientele understand our rapidly changing global economy and the implications for their livelihoods and wealth.
We focus on the medium and long term global macroeconomic trends and how they pertain to the precious metal markets and our clienteles savings, investments and livelihoods. We emphasise prudence, safety and security as they are of paramount importance in the preservation of wealth.

Financial Regulation: Gold & Silver Investments Limited trading as Gold Investments is regulated by the Financial Regulator as a multi-agency intermediary. Our Financial Regulator Reference Number is 39656. Gold Investments is registered in the Companies Registration Office under Company number 377252 . Registered for VAT under number 6397252A . Codes of Conduct are imposed by the Financial Regulator and can be accessed at www.financialregulator.ie or from the Financial Regulator at PO Box 9138, College Green, Dublin 2, Ireland. Property, Commodities and Precious Metals are not regulated by the Financial Regulator

Disclaimer: The information in this document has been obtained from sources, which we believe to be reliable. We cannot guarantee its accuracy or completeness. It does not constitute a solicitation for the purchase or sale of any investment. Any person acting on the information contained in this document does so at their own risk. Recommendations in this document may not be suitable for all investors. Individual circumstances should be considered before a decision to invest is taken. Investors should note the following: The value of investments may fall or rise against investors' interests. Income levels from investments may fluctuate. Changes in exchange rates may have an adverse effect on the value of, or income from, investments denominated in foreign currencies. Past experience is not necessarily a guide to future performance.

All the opinions expressed herein are solely those of Gold & Silver Investments Limited and not those of the Perth Mint. They do not reflect the views of the Perth Mint and the Perth Mint accepts no legal liability or responsibility for any claims made or opinions expressed herein.

Mark O'Byrne Archive

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