Gold in 2008, in 2009 and beyond.

In 2008, the gold market began the year with a normal bull market pullback from its highs of $1,035 to $690.   Jewelry recovered as the gold price dropped, but then the impact of the "investor meltdown", in virtually all markets, through forced selling by investors, hit gold too.   To make matters worse, in the U.S.A. so many investors had paid, from only a 10% deposit up to a 50% deposit, on the shares they owned.   So when these share prices dropped more than 10% to 50% investors lost 100% of their capital.   This type of selling sent prices lower, in the course of which more selling was triggered by the system of "stop losses", which automatically send out an order to close the position, without needing to contact the investor.   Consequently, although the gold market fundamentals look excellent, the investor’s struggle for survival, made them sell even their gold and silver positions.   

 

The rise from $690 to the present level of $878 in early 2009 took place in two stages, as bad news for the global economy brought gold investors back to the market place.   In 2009 there is a total change of mood in the gold market. The trauma of 2008 with its systemic failures and disillusion is turning into a recovery with a quickening pace.   But there is still the fear of staring into the abyss as the problems that were created in 2007 -2008 will come to full maturity  by the end of 2009 and into 2010.   

 

So 2008 was to us the year of "Investor Meltdown" and a reshaping of both investor competence and appetite.   The main feature of the year was something we have been forecasting for years that is the system of "Live now, pay later" just could not go on and had to collapse.  2008 through to today saw governments facing systemic failures in the banking system, spreading out to capture all financial markets.   Confidence and trust in the banking system eroded almost completely, not only between customer and bank, but also between bankers themselves.   Like slowing blood in the human body the whole economy was threatened.   As a result the global economy nose-dived into a deep recession.   

Please note that Gold did and does do well in deflation as cash grows in value as asset values drop, through fear and distrust in the system.    

 

But then after touching $690 in 2008, street-smart investors started to pick up gold "on-the-dips".   All investors felt the effects of the damming of liquidity in the banking system.  

 

The $, which had in the last couple of years moved in the opposite direction to gold, began to strengthen in the year as the "carry trade" [borrowing cheaply in the U.S. or Japan and lending overseas into high interest paying nations] found itself squeezed badly as the process of "de-leveraging” [the selling of assets and repaying loans] began in earnest across the board.   This caused the $ to rise from a low of $1.60 to the Euro to around $1.23 to the Euro.   The reality was that the rise of the $ was a defensive action and not based on anything that should have given a good cause for the $ to rise.   All in the markets are fully aware that the "reflationary" acts by central banks and governments in the developed world give a very good cause for a weakening of the $.   As 2008 was ending the $ weakened sharply and fell from $1.26 to $1.41 by Christmas, an extremely dramatic decline in so short a period.   It has now broken down through support with it presently clinging to a level just above $1.47  as we write.   Gold, in turn, has shrugged off its downward path turned around completely and hit $898 by the end of 2008.  

 

Under the sage eye of Mr. Ben Bernanke, the battle against deflation has taken the form of resuscitating the blood flow of the economy through saving the banks, then through a more direct approach, he is flooding the system with money through "Quantitative Easing".   These reflationary policies could still have an explosive effect of inflation once the recovery is in full swing.   Clearly he hopes to suck out that excess liquidity by selling the very instruments he bought with newly printed money.   But will the markets then buy them? Remember confidence was shattered in 2008.  All know that if this is damaged, it is a short path back to recession!

 

Central banks across the world acted in concert to lower interest rates to similar levels to each other taking them down to such low levels that in themselves they are stimulating their economies.   In 2009, the global economy and the nations that make it up have all stimulated their economies.   The Swedish central bank, Bank of England, and the European Central Bank cut short-term interest rates by 1.75% to 2%, 1% to 2%, and 0.75% to 2.5%, respectively of late, with Japan and the States just about at zero.   Add to this the monetary stimulation, through direct injections into the money system, alongside “quantitative easing” [flooding the system with liquidity directly] that we are now seeing across the developed world, and you end up with a tidal wave of reflation that hopefully has effectively tackled deflation.   On the dark side, this wind of reflation is still likely to become a global whirlwind of inflation.   Of course as deflation turns to inflation the speed with which money is spent increases rapidly assisting inflation to rise higher.   Money cheapens and assets rise in price.   As this is now beginning to take place we ask, "Will all be well again now?".   Unfortunately, the answer is no and we firmly believe that the Central Bankers are fully aware of this.   

 

What is rapidly becoming an investor belief is that gold is an answer in all the scenes that could unfold in 2009. As if to confirm the safe-haven nature of gold the volatility seen in 2008 will grow without restraint in 2009.   This is just how loss of confidence and its replacement by uncertainty and fear, expresses itself.

 

We have seen success attend Mr. Geithner and Mr. Bernanke's flood of newly issued dollars and a global economic recovery set of a nd is now moving from a walk to a trot!   But, reflationary policies are only a lifeboat in the stormy seas, not a real calming of the storm.   Until monetary reformation becomes a reality worldwide and we have a financial system on which all can firmly rely, we face the risk of repeating history and either a Depression or runaway inflation lies ahead..   So brace yourselves for more of what we’ve seen already in different places and in different guises in different markets.   This can only benefit the gold markets as more and more investors realize just why it has had such an important place in the history of money.  

 

Inflation will be with us and accelerate until it has conquered deflation and restored economic confidence to former levels.   We cannot see that happening with the people, tools, and plans being used to patch up the global economy, so far.  In 2009 to date investment demand for gold has grown substantially.

 

Central Banks have slowed and China and Russia are heavy buyers of gold for their reserves.   But imperceptibly and certainly not for publication, central bankers are weighing up the benefits of their present policy of building confidence in currencies through gold sales.   In fact currencies have not and will not benefit from such sales any longer.   As Prime Minister of Britain, Gordon Brown has and is experiencing, sales and talk of future sales of gold simply undermine the credibility of politicians and central bankers in the face of the growing popularity of gold and falling confidence in currencies.   But most important of all is the clear signal now being seen that the prospects of stability, of effective monetary reform or of systemic health is fast disappearing, leaving us with volatility, fear and doubt, in the future.   The attraction of the obligation-free, nationality-free and global acceptability of gold is creating a vibrant  market for gold and with it, following behind, gold shares.

 

Gold shares are tied to the uncertainties of corporate risk, but gain in profitability far more than the gold price in percentage terms when the gold price rises.   They have lost attraction over the last two years as investors favored the gold Exchange Traded Funds where there is only a risk on the gold price.   However, the returns on some gold shares are now extremely attractive because their prices have fallen so far.  

 

All in all, we are seeing that 2009 is one of the most exciting years for gold that we will ever see!   So far it has broken through a 30 year high of $850 and gone beyond.   The currency world in its entirety has lost a great deal of its credibility.   Even China is now publicly objecting to the behavior of the $.   With some myopic politicians in the States saying that 'the $ is the U.S. and globe's prime currency, it is the rest of the world's problem', it seems as if the rest of the world is beginning to find a solution to the problem through new proposals for a global reserve currency based on the Special Drawing Rights of the I.M.F. [this does not stand for the Impossible Mission Force, but the International Monetary Fund despite it being possibly a more accurate reflection of their objectives].  

In case they don't succeed, China and others are spending their U.S. $ reserves as fast as they can on assets, particularly those that provide for their futures.   We expect the globalization of the Yuan quickly and at some point China' prices quoted in the Yuan for international trade transactions, as it moves to center stage in the currency world.   Such a flood of Yuan should considerably slow its rise against the U.S.$,. but it will leave the currency world without a dominant reserve currency.   This benefits the gold world.  

In China the government has directly encouraged its citizens to buy gold too, as well as buying gold for its own reserves.   Russia is also buying gold for its reserves.   So, right now, gold is sitting back above $1,000 and the $ faces a dark future.   Global currency disunity will be the worst event for currency stability and economic uncertainty.   This seems to be our future in 2010 and beyond?

In conclusion, we have the opinion of the one man who respected gold yet worked so hard to sideline it in favor of $ hegemony.   On May 20, 1999, Alan Greenspan testified before Congress, “Gold is always accepted and is the ultimate means of payment and is perceived to be an element of stability in the currency and in the ultimate value of the currency and that historically has always been the reason why governments hold gold.”