Gold Price Blog Post Archive
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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