With the United Nations military action during the week, while not a big surprise to the market place, add to the overall instability in the Middle East, it was bullish for the gold market. Reports say the military action has severely crippled Gadhaffi’s military. However, the market place is now asking, “What comes next?” That’s the uncertain part of the equation that has boosted the crude oil market and keeps gold a safe-haven demand asset. Between Australian floods, cyclones, bush fires, New Zealand earthquake, North African and Middle Eastern states erupting into civil disorder leading, in some cases, to government overthrows and now the Japanese mega-earthquake, tsunami and possible nuclear disaster and the attack on Libya, the whole global chaos is a bit like the term sometimes used as the Black Swan itself. (Not the Natalie Portman film.) In any case, hardly anyone used the expression (which describes a completely unforeseen circumstance or event) up until a few years ago, now everyone’s talking about them! Obviously a currently over-utilized expression so I’ll try not to mention Black Swans again.
”In some scenarios this succession of critical events would have gold escalating through the roof, followed, and probably being overtaken by, silver and why this has not happened, at least not yet, might bear some examination” stated Regal Assets president Ron Fricke this morning in response to raising silver prices. As Julian Phillips pointed out in a recent article that some factors which might be thought to move the price of gold had typically not as fast. Disasters on the Japanese scale have mixed effects with some seeing gold as a protection against such horrendous calamities, while others will need to sell to survive and rebuild. The net effect is that sales may serve to cancel out purchases just leading to a steady-state equilibrium which is what seems to be happening to the gold price at the moment. The main driver at the moment does seem to be the U.S. dollar – when the dollar falls gold picks up and vice versa and at times of immense disasters the dollar may be being seen as the more readily tradable safe haven in the short term. One interesting fact which seems to have emerged from the Japan situation is that in the West of the country – virtually untouched by the quake and far from the tsunami is that gold bars and coins are attracting premiums which were not there only a week or so ago, suggesting there is a demand for the yellow metal to help protect against, and alleviate, such horrific disasters.
Almost certainly the biggest recent driver in gold demand has been China, but with the authorities there tightening economic controls we could see some of this demand fall away – but then the biggest sellers have been the Americans of late, or so it would seem, and there are also indications that lower gold prices – and perhaps the realization by almost anyone living on the West Coast of the U.S.A. or Canada that they could be subject to an earthquake of similar magnitude and possible tsunamis – are bringing high-wealth individuals back into the gold market again. These rapid successions of events, hopefully not a precursor of Armageddon, are having a serious financial impact on an already shaky global economy. The real long term instability lies initially with the profligacy of the commercial banks and then with the even greater profligacy of Governments and Central Banks pumping out more and more fiat money in an attempt to restore even a smidgeon of growth to their domestic economies.
The gold price thus is being raised by the resultant devaluation of ALL the major global currencies in concert – notably the dollar, the Euro, the Pound and the Japanese yen – due to the release of huge un-backed volumes of new money into the global economy – a position which is now being exacerbated by the Japanese Central Bank having to release billions more yen into its own tsunami-stricken economy to try and shore it up. And not only is this Central Bank profligacy effectively devaluing these key currencies, but it is also stoking the fires of related inflation all around the world. gold remains the key protector against declining wealth caused by inflation. In many views, if not necessarily those of academic economists, gold is the constant in this process. It’s not that gold is actually rising in value; it is that everything else is falling against gold and the more these unpredictable events occur, the more the pressures on so-called global reserve currencies will escalate. The downwards spiral is hard to control once it starts to move in earnest – hence recent talk of hyperinflation, even if the actual point at which plain inflation becomes seen as hyperinflation remains obscure in the proponents’ prognostications.
Lessons can always be learned from history. It is an oft-spoken truism that history repeats itself – (or better yet, its man who repeats history,) however, even though it would seem that economic drivers nowadays are seemingly totally different from those which may have affected our forefathers, analysis of the patterns of the past shows that gold buying recurred over and over through time. It will similarly continue once again to retain gold’s position in people’s hearts and minds, as the best form of wealth protection. Thus as the major global currencies continue on their downwards value spiral, in terms of these currencies gold will continue to move upwards. The recent price correction should thus be seen as an opportunity rather than the beginning of a burst bubble. One thus sees the future path of the gold price as upwards – but not necessarily in any kind of smooth pattern. It will likely remain volatile in its continuing rise which has to carry on as long as currencies continue to be devalued by enormous increases in money supply, or until some new reserve currency system (which could even include gold as an important element of it) emerges from the current global economic mire.
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