Gold Price Blog Posts
Gold Price Blog: August 24, 2009
As an investor, it is usually interesting, and sometimes worthwhile, to pay close attention to the messages coming out of the Federal government. Government policies frequently influence not only stocks, but also bonds, currencies, and commodities such as the gold price and silver price. Based on the significant, unusual, and quite eventful economic developments of the past few years, the government has taken on the role of reassuring the American public that things will be ok and ultimately return to “normal.”
However, there is a relatively substantial and growing contingent of market participants and economists who believe that the economy has entered a “new normal”, which involves considerably less debt and leverage in the system. That goes for both corporations and consumers. These people cite low interest rates and encouragement of homeownership for all by our government as some of the main causes for the blowup of the debt bubble in 2007 and 2008. And they go on to say that this type of debt fueled economy is not coming back for a long time because of the destruction caused in 2008 with the threat of the financial system unraveling. Instead, a new normal has arrived, consisting of more government intervention in and regulation of the financial markets, coupled with a scared and cautious consumer. They say this because the psychology of the average person on Main Street has changed, after seeing his/her investment portfolio cut in half for the second time in less than a decade, the value of his/her home decline dramatically, and perhaps even his/her job disappear.
Against this dichotomy, financial markets (and the stock market in particular) play a large role in validating or falsifying the claims of these competing groups because the markets have a large influence on the collective psyche of the nation. Currently the stock market is making new highs for 2009, several pieces of economic data have improved, and consumer confidence is back to levels last seen just prior to the start of the recession. Obama also just reappointed Bernanke as Fed Chairman, a few days after a recent financial headline stated “Bernanke Saved the World”, and the President claimed that Bernanke’s “creativity” helped him to prevent another Great Depression.
But the American people have seen this movie before. Back in 2006 and 2007 Bernanke claimed that the problems in the housing and subprime markets were “contained.” Everyone saw how that claim turned out. Then in the summer of 2008, Henry Paulson claimed the financial system was “sound.” The American people again saw how accurate that statement was. So it appears that those officials responsible for overseeing the largest economy in the world were either not able to properly assess the dangers in the system, or they were not telling the American public the truth. Whatever the case may be, given these missteps, people should turn to history before merely taking the government at its word. One only need look back to the famous 1930 quote by Herbert Hoover in which he assured everyone that things would return to normal, only to see the country subsequently suffer an entire decade of economic depression. It therefore seems that, less than a year after the most recent crisis, a bit more time must pass before announcing that everything is back to normal.
What does this all mean for the average investor? It means that the potential exists for more pain ahead, especially after a 55% rise off the March 2009 lows (which at the time was a 58% decline from the October 2007 high). It also means that investors should seek out asset classes that will benefit from the government’s ever-increasing role in the financial markets and economy. Accordingly, based on the most recent Federal Reserve meeting, the Fed provided little indication that it was ready to withdraw the easy monetary policies it has used to combat deflation. This type of language suggests that the Fed will continue to keep interest rates low and expand the money supply whenever it feels necessary to improve liquidity. These types of measures will continue to put pressure on the US dollar and benefit the dollar denominated gold price, the ultimate benefactor of money printing. In fact, gold and mining companies leveraged to the gold price stand to perform particularly well in this type of environment, as investors seek out a safe haven from the fiat currencies created out of thin air. So the next time one hears the government claim that the coast is clear, he/she should remain skeptical and consider those areas that will benefit from a rising gold price.
Gold Price Blog: August 20, 2009
Many investors look at currencies as instruments for the economy. So the question that we pose today is: Euro, U.S. dollar, or gold? As one can guess, our pick is gold for very good reasons. To begin, the Euro has many faults. It is a very young currency that has no proven track record; gold has been around for centuries. The Euro has underperformed compared to many other currencies in the recent past; the gold price has not. In general, the EU is viewed as relatively ineffective and this certainly reflects on the currency of the government. Europe’s banking system is in crisis and controls the Euro; no one controls gold as it is held across the world.
The dollar is also in a horrible position in this economic crisis. The U.S. government has massive budget deficits and a huge amount of debt. Legendary investor Buffett recently stated concern regarding the extraordinarily large deficit. This is not a fear for the gold price as it has no sole owner/issuer. The other main problem with the dollar is its focus and connection to the quantitative easing practices used by the Federal Reserve. As of now, the relationship between gold and the dollar is linear; quite troubling for the dollar. Also, the U.S. dollar is hosted by a country with jobless consumers; once again, the gold price does not rely on a single government or institutional body. Since the dollar is backed by the U.S. government, all of the faults with the U.S. are passed on to the currency itself.
Overall, the dollar is definitely the weakest of the three. The reason has to do with risk and the position of the U.S. government in the global economic crisis. Many economists have quietly suggested that the U.S. will no longer set the standard by which the world lives by in terms of economic prosperity. By no means will the dollar ever be replaced by gold, but it will be weak compared to gold. The gold price will most likely gain as investors turn bullish (contrarian standpoint). By all means, the outcome for the gold price appears to be quite strong.
Gold Price Blog: August 19, 2009
This article details some solutions for the troubled U.S. economy. The gold price can be used as a possible investment tool. Investors must realize that the best method for exiting the crisis is to understand it. Without a solid understanding, mapping the path out of the disaster will be nearly impossible. U.S. government officials also need to understand the necessity of these actions as the government is acting as a puppeteer with the economy for the time being; however, the bar stool is shaky. At anytime the whole production can come crashing down. This is what must be averted by the average U.S. citizen: total financial collapse.
This article explains and gives insight into how the financial credit crunch began. By first identifying the causes of the near depression, we can best find viable solutions for the future. Investors and legislators must work together in order to discover the path of least resistance on both sides. Wall Street will have to adapt to some of the many changes that forced them to close down multiple firms. These are not only recommendations for the present, but also standards that must be concrete in the future. The U.S. cannot afford another economic crisis in the near future.
By now everyone knows that the global financial system and economy are in a precarious position. The entire Wall Street landscape has changed, and economies all over the world are suffering from the worst recessions since the 1930s. Governments and central banks have taken on a very large role in trying to dampen the effects of the recession through massive Keynesian stimulus programs, record low interest rates, quantitative easing, and even accounting changes which allow banks more freedom to value illiquid assets in ways to preserve much needed cash.
While many might cheer and credit these efforts for the performance of global equity markets over the past five months, others are more concerned with the long term effects and consequences of such monumental actions. The National Debt is now approximately $11.6 trillion and growing every second due to interest on this ever growing mountain of debt. The US dollar index is down roughly 33% over the past ten years and given recent money printing efforts, this trend looks to continue.
Accordingly, it behooves any and all investors to consider going forward to try to determine which, if any, asset classes can provide sustainable growth over the long term. If history is any guide, it has shown that those areas formerly in a bubble rarely, if ever, recover to their bubble levels. Examples of this include tulips during the Tulip bubble, the Japanese stock market in the late 1980s, and the NASDAQ during the tech bubble. And now we have real estate and global equity markets during the credit bubble of 2003-2007.
As such, it appears that a new asset class with a strong fundamental story behind it would be a better candidate. Fortunately, gold satisfies these criteria. The gold price has proven over time to perform well in periods of high inflation (1970s) and high deflation (1930s).
Currently, the Federal Reserve is doing everything in its power to prevent a deflationary credit collapse by engaging in highly inflationary measures. If these measures are effective in stimulating lending, halting the rise in unemployment, and restoring consumer confidence, it will be the results of massive deficits and currency debasement, which will further devalue the US dollar and consequently send the dollar denominated gold price higher.
But a failure in these efforts will lead to a very challenging economic environment marked by fear and greater uncertainty. The situation could also become so challenging that people begin to question the soundness of the currency. In this case the value of most asset classes will decline and cause investors to seek out the one asset class that has stood the test of time as a currency: gold. The gold price and gold mining companies therefore look to be the main beneficiaries in either scenario.
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