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Why E.U. Greece Bailout Triggered Investors Rush to Buy Gold

Commodities / Gold and Silver 2010 May 13, 2010 - 06:01 AM GMT

By: Money_Morning

Commodities

Best Financial Markets Analysis ArticlePeter Krauth writes: With so much uncertainty in the U.S. stock market - not to mention the debt-contagion concerns emanating from Greece and other European Union (EU) countries - it's more important than ever for investors to hold "hard assets," such as gold and other commodities.


In my view, what's happening in Europe is particularly important for investors to be aware of and understand. The so-called "shock-and-awe" bailout strategy undertaken by the EU and the International Monetary Fund (IMF) - which establishes a $1 trillion rescue package for member-countries facing financial crisis - will not be the answer.

The Looming Inflation Contagion
When it comes to sovereign-default concerns, Greece has so far been the chief culprit. The rescue plan is meant to "scare off" would-be speculators looking to short the euro currency and the bonds of afflicted nations. That may work for a time, as some doubt has been removed by this backstop bailout.

The economies of the more fiscally responsible nations are themselves not back to full health: Many of these nations are also saddled with large debts and ballooning deficits. Economic growth is near - or at - zero. Unemployment is high. And the prospects for a major near-term improvement just aren't that strong.

The bailout plan may provide reassurance for now, but what will happen when the next euro-member country shows up - hat in hand - looking for a loan?

Any funds to be provided to cash-strapped nations unable to refinance their maturing sovereign bonds are likely to come from printing more currency, leading to rampant inflation. Even if governments find ways to underreport inflation, it will nevertheless show up in our outlays for rent, food, fuel, and other daily expenses. The typical consumer will come to doubt the very fiat money he uses daily, as well as the official inflation statistics reported by his government.

Economic weakness tempts nations to devalue their currencies in order to make their exports cheaper in the eyes of consumers in other countries, as well as to stimulate business. The problem is more and more nations have the same goal, simultaneously leading to a "competitive devaluation."

When fiat currencies lose value because there's more "paper" in circulation, that's always measured against something. If they're racing each other to the bottom, then it's the "tangibles" that gain in value, as it takes increasing amounts of paper currency to buy a unit of a given commodity. If you add to that a scenario of serious inflation or even hyperinflation, then hard assets could explode in price.

That brings us to gold.

Gold: Now a 'Must-Have' Investment
Gold is not consumed much by industry, but it's been revered since 5,000 years as a "go to" safe haven that stores - and thereby protects - financial wealth. So gold is a "must" as its investment demand keeps swelling.

And gold futures zoomed to a new record yesterday (Wednesday) as worries about the possible inadequacy of the EU bailout package continued to fester. Gold for June delivery - the most active of the futures contracts - jumped $22.80 reach, or 1.9%, to reach $1,243.10 an ounce on the Comex division of the New York Stock Exchange.

If you're worried about gold being too pricey, set that concern aside: On an inflation-adjusted basis, $1,200 gold is still priced at a mere 50% of its 1980 high.

Commodities as a whole have been in a secular bull market since 2000, one that's fueled by the modernization of Asia and other developing parts of the planet. While the pace may slow due to an economic crisis, this trend won't be reversed. That means that - from a fundamental-demand standpoint alone - natural resources will continue to be in a bull market for at least another 10 years.

Asian governments and corporations have been making serious inroads over the past five years to secure supplies of oil, natural gas, and a variety of base metals - including copper, nickel, zinc and molybdenum.

Demand for resources is heating up as these emerging global consumers, wanting to fuel their ongoing growth, compete for limited world supplies - a scenario Money Morning has labeled as the "Great Global Commodities Grab."

At the same time, these large-scale market players are wisely trading weakening fiat currencies for tangible resources, most of which are (for now, at least) still priced in the once-mighty U.S. dollar.

With all these catalysts in place, it's clear that commodity prices (including for gold) are headed higher - probably much higher. The bottom line is that allocating a meaningful portion of your investments to commodities will go a long way toward protecting and growing the value of your portfolio in the years to come.

Source : http://moneymorning.com/2010/05/13/gold-2/

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