Gold......safe or sorry?

[wattie]

Posted this under "Greek tragedy" but you may miss it if you ain't been reading.


Thought I’d share this with you.

I’ve been invested in Gold for over a year now (bought at $1250- at the time, a high) and furthermore I believe that Gold will rise even further than its $1700+ levels now. I believe it could broach $2500 and head way beyond this level for the following reasons.

Why will gold rise further?

1. Longer-term, Gold is likely to be supported by uncertainty in the U.S. fiscal plan and the problems that brings regarding the US debt situation. America owes 16 trillion dollars and its rising....there are estimated to only be 3.5 trillion fish in the ocean to put this into perspective! (Americas off balance sheet liabilities. Ie future pension liabilities exceed 31 trillion!) Current debt equates to $500,000 per American household!

Because of this rising debt, The USA’s credit rating was downgraded recently to AA+ (with a negative outlook!) This means that the $ is no longer the bastion of reliability it once was. The Us Federal reserve is once again considering printing money (QE3) to stimulate its faltering economy and Gold is a hedge against this. There is little evidence QE1 and 2 helped.

2. The Debt crisis in the euro zone was marked by the widening spreads on peripheral bonds,ie Italy and Spains borrowing costs have reached unsustainable levels. The situation was so bad that the European Central Bank was forced to step in to buy the debt from both countries last week. Whilst this has provided countries with the flow of capital they require at this time it does not solve their problems and the bank cannot do this indefinately! It’s like putting a plaster on a bullet wound…the bloodflow is stemmed but the underlying issue is not dealt with!

3. Because of 1 and 2, No-one knows the future of the $ or Euro and as a result Gold is resuming it’s currency status. It cannot be politically manipulated unlike a currency! There is evidence that a currency war is developing….if a currency is strong it can affect a countries ability to export as it’s good are expensive to others.

4. Over the last week the world seems to have finally woken up to the slowing global economic growth and the serious risk of a global double dip recession- stock markets have fallen dramatically as a result.
In one week, European Stocks have fallen to 2 year lows, Uk stocks to 13 month lows and the USA Dow Jones has lost over 10%!!! (at one stage 16%)

5. Gold loves uncertainty and as you can see above, we’ve got it in spades! None of the economic problems highlighted in this email will be resolved quickly.

So where does this leave us?

When I first purchased Gold I was concerened about the worlds economic situation. I believe a year later the position is infinately worse!

A)We are on the verge of another global financial crisis of a magnitude that dwarfs the previous Financial crisis of 2008.

There are already indicators in place in the market that demonstrate this;

Extreme stock market volatility- Even if markets recover some of their recent losses, the underlying economic/debt problems still exist.

Banks are beginning not to lend to each other once again as they do not know who is exposed to sovereign (country) debt ...the start of a credit crunch.

Rising borrowing costs for those countries who are deemed to be high risk of default on their debt repayments.These countires need to borrow more money- if they can't they will default!

Global interest rates are at or around all time lows which mean that Central Banks have less options available to them to tackle the economic problems that arise.

Short selling of stocks has been banned (as it was in 2008/9) This is not the problem…debt and lack of economic growth is!

We have moved from 2008 where banks were going bust to it now being countries. IN 2008 WE WERE TOLD THAT THE BANKING SYSTEM COULD COLLAPSE AS HALF A DOZEN BANKS GOT THEMESELVES INTO DIFFICUTIES. THIS IS NOW A SOVEREIGN PROBLEM AND THE MAGNITUDE IS OFF THE SCALE.

The immediate danger is in Europe.
Following the double bail out of Greece (proof that the bail outs don't work in my opinion) , Ireland and Portugal, Italy is the next stumbling block! Italy's national debts are €1.8trillion, the third largest debt market in the world behind the US and Japan. If Italy defaults on its debt, the effects would be globally catastrophic. Other countries are being asked to help Italy ie Germany, France etc but they do not have the financial means (and doing so would weaken their balance sheets) to bail them out as their own economies are slowing down as their own cost cutting measures bite.

Even if a plan is put in place, Spain is waiting in the wings as the next default problem.....AND ITS BIGGER THAN ITALY!

B) Politicians on both sides of the Atlantic have proved inept at dealing with the matter of debt. Every month, economic data from a country is released. It is then invariably amended downwards at a later date. How can politicians hope to deal with another countries problems if they cannot accurately asses their own economic situation?

I'm pretty certain that economic data is being manipulated it's happening that often.....at the very least it's being miscalculated! http://www.telegraph.co.uk/finance/newsbysector/constructionandproperty/8698951/ONS-construction-error-moves-markets.html

Standard & Poors accused of a 2 trillion miscalculation after the US downgrade http://www.telegraph.co.uk/finance/financialcrisis/8699245/SandP-faces-inquiry-over-US-downgrade.html

The Bank of England has cut the UK's Growth forecast figure downwards for each of the last 6 months....how can they get it so wrong!

I believe that the Euro will not survive this crisis in it’s current form. Whether the likes of Greece etc are forced out…..or indeed the stronger countries leave ie Germany I do not know, but everything I read suggests it’s disintigration due to the economic differences of each component country is virtually inevitable. Either way, this will be painful for everyone as it will more than likely involve default.

The enormity of the sums of money involved with the European Debt situation alone are almost too great to comprehend and I don’t think politicians really know how bad things are....or how to solve matters. This is undoubtably a global problem as banks worldwide have traded the debt with each other.....for this reason alone there is no simple solution. NO ONE KNOWS EXACTLY WHO OWES HOW MUCH TO WHOM ANYMORE!

Since 2008, politicians have basically bought time by kicking the "debt can" further down the road.........it's nearing crunch time!

C) As cost cutting (Austerity) measures bite in each individual country, the world will slip back into recession and possibly depression. It is virtually impossible to grow your economy, whilst cutting back on spending in a global economy that is slowing.....you are trying to buck the trend! The economies of Germany, France, Uk, USA and China are slowing down (Japan is already in recession)....not good when Growth is a key part of the recovery from debt equation!

For all of the above I expect Gold to rise

A) I’m switching my Euros to dollars and buying more Gold as i believe that in any crisis the USD$ will appreciate against other currencies as despite it's shortcomings it is regarded as the worlds reserve currency and therefore a safe haven!

It appreciated in value against other currencies during the last crisis in 2008/2009. If the world economy deteriorates this gives me growth potential via currency gain as well as Gold price gain.

I have no faith in politicians implementing a detailed, comprehensive rescue package for countries in need, quickly, and see no immediate turnaround in the global economy for as long as this situation exits. Gold will increase on this uncertainty.

Cash sat in the bank in these market conditions is a waste of time. Interest rates are historically low, inflation is eroding the value and the entire banking system via it's exposure to global debt is prone to failure. In VERY simple terms,$ cash left in the bank will accrue interest of circa 0.25% over the next year. Given the current global situation, I cannot see Gold failing to beat that...and even ignoring all the other reasons stated above, that makes it a good buy now!

Cheers Wattie

[payne]

Good read, thanks for passing on.  I got a few friends in at $850/oz, they owe me a few nice dinners now.

Wattie-  I'm a bit out of the loop on the European situation.  What happens if one of the at risk countries defaults?  What happens if the Euro dissolves?

[wattie]

They certainly do!

The situation is scary.Greece was a gun to the head, bail us out or we bring you all down,....despite a new deal nothing has been ratified.... And more importantly the Greek situation is deteriorating. No growth.
Italy is Greece, Portugal and Ireland added together and then multiplied!....spain is waiting in the wings to follow suit with 20% plus unemployment. Oh, by the way...Cyprus will probably need a bailout too!

From what I can tell...the only solution is some sort of eurobond....Germany etc paying more to borrow (cos they'll effectively be downgraded as their debt rating will be downgraded for all the crap) via a common euro bond....Try getting that past German voters.

If a country defaults, it triggers insurance payouts ( credit default swaps) and bond holders take a loss, country takes a downgrade, banks take losses, and given the amount of money
involved...domino effect , no joke...financial system collapse cos the amounts involved are off the scale!
No one knows who owes what to anyone anymore thanks to the banks. It's a lot worse than politicians may paint, let's face it...they can't come out and say we don't know what to do
Cheers Wattie

[maverick1]

Wattie, you are so right.
With the value of the US dollar and other western currencies falling consistently due to the governments printing huge sums of money out of thin air without it being backed by anything you are going to get high or even hyper inflation.
The result of hyper inflation is the dramatic fall in the value of the currencies, and that's why you should not be in cash, but in hard assets like gold, silver, oil, and  cash flowing real estate etc.
Personally I've bought lots of silver since it's at a much lower price than gold, but either is a far better bet than staying in cash and watching inflation erode your wealth.
Obama does not get it that you cannot spend your way out of this mess, you are just digging the hole deeper.
The only way to get out of this mess is to come up with a new currency that is backed by something of intrinsic value like gold or oil.
All western currencies are really only Monopoly money because they are not backed by anything other than the word of the governments, which today is not much.
I predict that gold and silver will skyrocket in the next few years.
 

[wattie]

[quote="maverick1"]

The only way to get out of this mess is to come up with a new currency that is backed by something of intrinsic value like gold or oil.
All western currencies are really only Monopoly money because they are not backed by anything other than the word of the governments, which today is not much.
[/quote]

Well funnily enough we used to have something like that.........but politicians with their superior knowledge did away with it!

http://www.telegraph.co.uk/finance/comment/edmundconway/8699815/Abandoning-the-gold-standard-was-a-seminal-moment-and-one-were-now-all-paying-for.html

Cheers Wattie

[wattie]

Good to see that Merkel and Sarkozy have got their heads around just how badly in trouble the Euro is!

http://www.telegraph.co.uk/finance/financialcrisis/8702009/Merkel-and-Sarkozy-rule-out-talks-on-eurobonds.html

To be fair to them, Germany and France are in catch 22....with a loaded gun at their heads.....dammed if they do, dammed if they don't! Lets face it both countries must have bailout fatigue........why should they pay for the reckless overspending, undertaxing and inefficiency of other nations.....apart from the fact that if they don't discuss it the situation gets worse 

If a Eurobond aint on the agenda the only thing that I can see saving the situation for us all is some type of "Global Emergency fund" contributed to by all nations cos we're all in the mire if the Euro fails. Seems a small price to pay by each country considering life as we know it is on the line.

Cheers Wattie

[Steve]

Gold is the most classic of speculative bubbles. Like tulips it has little intrinsic value (it certainly won't put food on your family's table as it doesn't generate any cashflow), and completely relies on the 'greater fool theory' to maintain its illusion as a store of wealth.  Trying to convinve other people to get swept up in a gold bug mania strikes me as little more than 'bolier room' tactics.  If you really want to wear a tin hat, you'd be better off buying farmland or some such.

[benyeats]

[quote="Steve"]
Gold is the most classic of speculative bubbles. Like tulips it has little intrinsic value (it certainly won't put food on your family's table as it doesn't generate any cashflow), and completely relies on the 'greater fool theory' to maintain its illusion as a store of wealth.  Trying to convinve other people to get swept up in a gold bug mania strikes me as little more than 'bolier room' tactics.  If you really want to wear a tin hat, you'd be better off buying farmland or some such.
[/quote]

I tend to agree with this.  Farmland or tinned food are better bets, you can't eat gold and unless I have misunderstood you won't physically hold the gold that you invest in which means it will be as much use as paper money when civilisation as we know it ends;)

[wattie]

[quote="Steve"]
Trying to convinve other people to get swept up in a gold bug mania strikes me as little more than 'bolier room' tactics.  [/quote]

No-ones trying to convince anyone to do anything. Unlike "boiler rooms' who ask for cash to be sent for something completely dodgy...all i've done is publish a personal view of the global economic situation, issue some facts to back it up and try to give my perspective on where we're headed and what can be done about it.

Gold isn't the only option but there's a fundamental reason why it's price is on the up......Global uncertainty.

You either have some as part of your portfolio or you don't. Doesn't bother me if you do or don't.....unfortunately i'm not mining it!
As the saying goes " You pays your money........."

Cheers Wattie

[Steve]

[quote="wattie"]
Gold isn't the only option but there's a fundamental reason which it's price is on the up......Global uncertainty.
[/quote]

There's a reason, and you can use the word 'fundamental', but the whole investment hypothesis relies upon selling it to someone else at a higher price when you want to exit.  Personally prefer to invest in asset classes that aren't caught up in a feverish mania.

Gold bugs today have as much credibility as TMT analysts during that bubble.  They all know what's going on, they've all been proved right and have made lots of money......

You'll have more success buying low and selling high rather than jumping on the back of a bandwagon and doing the reverse.

[wattie]

[quote="Steve"]
[quote="wattie"]
Gold isn't the only option but there's a fundamental reason which it's price is on the up......Global uncertainty.
[/quote]

You'll have more success buying low and selling high rather than jumping on the back of a bandwagon and doing the reverse.
[/quote]
it was at a high when i purchased a year ago.......you're assuming it won't go higher...........we'll see
Cheers Wattie

[Steve Gibson]

When I first saw your post on this Wattie it did strike me as a classic share tip. 'Get into this, I'm in, it's gonna fly'.

Not being able to hear your tone of voice, I'm not sure if you're seriously giving people friendly advice or trying to spread the 'fever' as Steve put it, to drive up your own investment.

Admittedly, the AAOC forum isn't exactly stuffed with investors in large numbers, but the fever model works like a virus. If you're not bothered (as you said above) whether any of us hold it in our portfolios, why did you originally post?

[Steve]

Unfortunately for Platinum it has an industrial use (catalytic convertors) and is hence languishing below Gold currently.

[wattie]

[quote="Steve Gibson"]
When I first saw your post on this Wattie it did strike me as a classic share tip. 'Get into this, I'm in, it's gonna fly'.

Not being able to hear your tone of voice, I'm not sure if you're seriously giving people friendly advice or trying to spread the 'fever' as Steve put it, to drive up your own investment.

Admittedly, the AAOC forum isn't exactly stuffed with investors in large numbers, but the fever model works like a virus. If you're not bothered (as you said above) whether any of us hold it in our portfolios, why did you originally post?


[/quote]
Simple, Steve I think it's a matter everyone should be aware of ie Global economy problems and if you're not,  something like this may draw attantion to it. Like everything else on this forum , you can choose to read it or not.
A few members from the Atom Club aint gonna influence the gold price....re Platinum, agreed, price probably to fall as global demand due to economic slowdown reduces!
Cheers Wattie

[Steve]

[quote="wattie"]
re Platinum, agreed, price probably to fall as global demand due to economic slowdown reduces!
Cheers Wattie
[/quote]

Lot of complex interaction, but Platinum mining is being scaled back because the cost of extraction has become prohibitive.  South African Rand is very high on the back of the high gold price making labour (to extract Platinum) too expensive.

On the other side, exhausted Spanish gold mines from Roman times are being reopened given the current high price.