Gold – an investment for the long term. Ignore the bumps and peaks.

Historically gold is perhaps the only store of wealth that has stood the test of time. Politicians and bankers may manipulate the markets short term, but long term gold has always held it value.

Author: Lawrence Williams

Well, gold and silver didn’t manage to cling on to their gains made at the end of last week which, presumably, brings us back to square one.   The dollar is currently calling the tune as the Euro continues to sink on doubts about Greece and resultant contagion afflicting other Eurozone countries should Greece have to default, which currently looks inevitable (as indeed it has for the past couple of years).  We are already seeing serious runs on Greek banks, and Spanish ones are also beginning to see the seeds of doubt creeping in.  But are any European banks safe from such mass withdrawals of money? 
Given the interlinking of the global banking system it makes one wonder where on earth one can put one’s money safely.  U.S. treasuries appear to be the main beneficiary at the moment – hence in part the apparent strength of the dollar – but it can’t be too long before the traditional safe haven of gold also starts to benefit – and where gold goes silver tends to follow – in a much more exaggerated manner.
At the moment business confidence seems to be growing by the day in the U.S. – but one fears this too could be shortlived.  Just as the impact of the Lehman Brothers bank failure in 2008 triggered crises in the European banking sector, so could a Greek default, and other European sovereign debt problems being brought even more to the fore, impact drastically on the U.S. banks which will virtually all have serious exposure to European debt.  The JP Morgan trading losses, seen as being an initial $2 billion on a statement from the bank’s President – which will have been an attempt to put the least negative spin on it – and which some commentators feel will eventually prove to be far higher with a consensus of perhaps $5 billion, may well be an indicator of what is to come for the big investment banks.  Indeed we have seen one analysis suggesting the JP Morgan fiasco could cost the bank $100 billion if the market continues to move against it before it can unwind the positions fully!
But will gold move even lower still before it recovers – if it recovers?  Current levels can still certainly be written off as a typical correction in a major bull market and there are some perhaps looking for the price to fall to $1200 which would indeed put a major dampener on the already ailing gold junior sector.  Many projects would be uneconomic at this kind of price level.  Ironically, if gold should fall this far, mine output could actually rise as existing operations mine high grade to maintain profitability levels.
However, on balance, one feels that gold may well be oversold at these levels.  The fundamental drivers of the market remain in place – indeed could be considered stronger than they have ever been.  Eurozone sovereign debt problems are more severe than they have been seen to have been. Although that particular problem has been brewing for some years and mostly swept under the table by politicians and bankers.  The succession of temporary fixes seems to be foundering as Germany, the only European nation with a strong enough economy to bail out Greece and other waverers, refuses to do so as it would be political suicide for Angela Merkel to accede to pressures to support the ailing (feckless and profligate as seen by the German public) Mediterranean nation economies, and some others.  It has not been possible to convince the German populace that the main reason behind Germany’s huge manufactured goods export surplus is primarily down to Euro weakness because of these poorer economies, thus making them more competitive on world markets.
General informed economic opinion suggests that global economic turmoil is unlikely to be contained in the next few years at least and we will lurch from economic crisis to economic crisis.  But, for the moment, the Euro weakness makes the dollar look strong despite the ever growing amount of money being pumped into the U.S. system by the Fed, which should in reality mean the dollar’s purchasing power continues to diminish.  With gold generally priced in dollars a rising dollar in general means a perception of a weaker gold price, whereas for much of the world’s population the fall in value of gold is not nearly as severe in their local currency.
But, at some stage gold is likely to disconnect from dollar strength as reality takes hold.  Money will move from ever devaluing fiat currencies into history’s traditional wealth protector.  Asian buying in strength will likely continue too as more and more people move into the middle class.  China, for example,  can’t afford for its ongoing growth to falter seriously for fear of dissension within its huge population and as a managed economy, with an absolutely massive foreign exchange surplus, it has far more control over this than the typical Western economy.
The big question is not so much whether this will take place – it seems to this commentator to be inevitable – but how long it will take for reality to sink in.  Government these days is all about political spin and there is, and will continue to be, a barrage of statements from politicians and bankers to talk up their economies.  Perception is desperately important for maintaining political power and you can bet that the full force of the government machine will be devoted to trying to convince people that all is well, as indeed it has been doing in the past.  Statistics will be massaged and presented in the best possible light, economic recovery will be talked up at every possible instance – these days it is perhaps naive to give any credence to any government-inspired comment and data relating to the domestic or global economy unless the presenter feels there is some political capital to be made out of telling the truth, which seems to be increasingly infrequent.  Whistle-blowers like GATA and their ilk are derided as being on the lunatic fringe (and indeed there probably are some individuals who express their opinions on gold and silver who could justly be considered over the top).  But there is no smoke without fire.  The global economy IS in a mess and will remain so for a long time to come and gold is ultimately the obvious beneficiary.
So the feeling is that gold will rise – and potentially rise quite rapidly once it gains momentum, but that could yet be weeks, months – or even years – ahead.  Most of the big money invested in gold is there for the long term – not to make a quick turn.  It is primarily a medium to protect wealth rather than add to it as other forms of commerce decline around it.  Yes, short term gains can be made as in all markets by buying low and selling high, but that is not gold’s main purpose and as long as this realisation holds one should be able to invest in the yellow metal with confidence and ignore the short term bumps and peaks.

Categories: News mix

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