Long term effects on the gold price could be spectacular

Long term effects on the gold price could be spectacular - Lawrence Williams - Mineweb

Some existing housing sales seem to be picking up in the U.S., some U.S job statistics suggest the rate of employment fall-off could be declining, Portugal managed to find buyers for its recent bond sale - are these all signals that the U.S. in particular, and the world in general are coming slowly but surely out of recession? The public, clutching at straws regains a little confidence. Markets rise, industrial metals surge in price and gold stutters and falls back. But maybe this is yet another false dawn and will lead to weeping and gnashing of teeth by the fall.

The structural problems underlying the West are still virtually all with us. Maybe they have eased a little, but we are still swimming in a sea of debt and, nastily, as if yet another fury is waiting in the wings to strike, the first signs of potentially high inflation to come are appearing after what has, in reality, to be described as a deflationary period. The banks hold vast mortgage related debt which is far less secure than it might appear in their books, and no-one ever seems to raise the spectre of possibly uncollectable credit card debt!

Printing money on the scale the U.S. and the Europeans have been doing HAS to lead to serious inflation - otherwise all economic theory (and logic) is bunk! But it isn't just inflation in the countries which are printing the money. The huge increases in the world's principal reserve currencies, the dollar, the euro and to a far lesser extent these days the pound sterling, is effectively exporting even greater inflationary pressures into the rapidly expanding third world economies. To a large extent that is why the Chinese are so unhappy with the U.S. Quantitative Easing programme and why it is leading to serious argumentative rhetoric between the two superpowers.

China, for example, is already seeing serious inflation developing and is slowly, but surely, tightening its internal finances in an effort to nip this in the bud - and that is partly why metals prices are in such a volatile stage at the moment with so much depending on ever-increasing Chinese demand to keep them rising - or at the least where they already are. Rapidly rising inflation in a country with 1.3 billion people is a major worry for a government intent on keeping the lid on any signs of potential unrest and tightening could lead to a slowdown.

And, as pointed out above, national and local debt problems and potential restructurings and defaults are not going to go away. For many the costs of servicing the huge debt build alone are close to, or greater than, their revenue-raising capabilities, let alone repaying the principal. Some defaults would seem inevitable. Governments, where they can, are just printing money to alleviate their own problems and are thus building up even greater problems ahead. Already the pressures to replace the dollar as the global reserve currency are beginning to build as it effectively devalues itself. Arguably the rise in the price of gold, in dollars, over the past 10 years, is in reality only a reflection of the fall in value of the greenback on the global front.

Interestingly many commentators who are now writing off gold are doing so on the basis that improving stock markets mean that investors are now taking their money out of gold and putting it into the general markets where they feel the returns may be better. The continuing ‘gold is in a bubble' brigade are also contributing to nervousness among the speculative element within the investment community - but they would do well to remember October 2008. It could happen again - this year even - with stocks decimated, fortunes lost, and even gold suffered as holders needed to sell anything that was liquid to cover their losses elsewhere. But gold regained its levels within a couple of months while many stocks are still not back up to their pre-crash levels over two years later. The smart investor will still continue to keep gold in the portfolio as insurance against any similar market crash.

But why sell gold because markets are improving anyway? Gold has been advancing for the past ten or eleven years regardless of whether the markets were rising or falling. Maybe the correlation between gold and inflation protection is not quite what some pundits make out, but overall it is probably a safer place to put one's money than stocks or banks.

And perhaps the best reason to hold gold is that that is what the Chinese and Indians do. Not that they are necessarily smarter individually than the Caucasians, but they have longer collective memories and know that gold has stood the test of time as a protector of wealth - and with their rapidly growing economies and huge growth of individual incomes as a result, more and more are buying gold. Between them, in the next five years or so, gold imports into India and China alone could account for 75% or even more of global mined gold production, let alone that into other Eastern and Middle Eastern nations with a propensity to hold gold against a rainy day. They are turning traditional gold supply/demand statistics on their head and on this point alone, the long term effect on the gold price could be spectacular even regardless of the structural horrors inherent in Western World economies. Take the two together and maybe some of the seemingly huge over the top predictions for the gold price may not seem quite so ridiculous after all.

Source: http://www.mineweb.com/mineweb/view/mineweb/en/page33?oid=119002&sn=Detail&pid=102055