Gold is the answer. Now what was the question?
The gold price looks set for a positive phase, but a rapid and strong
surge may still be an unlikely scenario.
Lawrence Williams
26 November 2008
Among the world's gold bulls, investment in the yellow metal seems to be the
answer to all evils and in times of financial and political crisis, as at
the present, they may well have a point. Whether it is protection of one's
wealth against inflation or against deflation - two diametrically opposed
potential consequences of the current global financial breakdown (and fears
of the former seem to be changing to perhaps the even more worrying latter
possibility) - both seem to be assessed to be positive for gold. Or at least
less negative for gold than for most other investments..
While gold has hardly been seen to be performing well in recent months, and
has failed to meet gold optimists' more extreme, or even more mild,
expectations, it has still performed less badly than most other sectors of
the market. As has been noted here on several occasions actual physical
demand has remained extremely strong, both in eastern and western markets.
Major gold suppliers have run out of inventory and seem to be having
difficulty replacing it, while ETF demand remains very positive.
The price overall though has not powered ahead as would seem the likely
result of this scenario. The gold bulls cry market manipulation by Central
Banks and their allies - and a huge gold price surge may well not be in
their perceived best interests in trying to keep world currency parities
under control - while others look to liquidity problems faced by other gold
holders faced with a collapse in markets in general as the reason for the
seemingly poor performance of the metal.
In his latest Gold Brief, Jeffrey Nichols of American Precious Metals
Advisors says "Gold bulls are separating into two camps - inflationists who
see gold as a hedge against future inflation and a decline in the U.S.
dollar's purchasing power . . . and deflationists who see gold as a
deflation hedge as money seeks safe harbor in cash and cash equivalents like
gold.
"I believe we will see a longer, deeper decline in business activity than
most, lasting into late 2009 or, more probably, 2010 - and likely to be
accompanied by some of deflation, particularly in commodities, food, autos,
and a variety of consumer goods. To be honest, deflation has been with us
for some time already, first in real estate markets, then on Wall Street,
more recently in oil and commodity markets, and, as anyone shopping for the
holidays will soon notice, in many retail stores.
"But as the economy revives - as it must with massive and unprecedented
Federal government stimulus - prices for many goods and services will shift
from reverse to forward . . . and inflation will replace deflation as all
those trillions of dollars come home to roost."
The recent mini-surge in the gold price seen just ahead of the weekend has
been taken as a sign of further US interest rate cuts ahead, but could also
suggest that the liquidity problems faced by investors in the metal are
gradually unwinding and forced sales may not continue at the same rates. But
the price seems to be drifting again and this could prove to be yet another
false dawn.
Once again there is talk of the Chinese Central Bank switching an important
proportion of its huge surplus into gold, but in terms of the volumes
suggested by those who promote this idea, this would be incredibly
destabilising with gold surging to huge levels and a collapse of confidence
in the dollar which is probably not in China's best interests anyway, and
the powers that be will be well aware of that.
However there could be a
gradual building of gold into Chinese reserves which would be positive for
the market.
Nichols points out again though that there is a gradual liberalisation under
way in China with regard to personal gold holdings which, with the eastern
propensity to hold gold, could also be beneficial to the market. But again a
huge surge in the gold price would be counter productive as demand would
probably dry up quickly to be replaced by profit taking.
So, it may well be a case of ‘steady as she goes' for the immediate future
of the gold price. Rises followed by drift and consolidation. The likely
overall trend is up, but perhaps not rapidly and yes, gold probably will
remain one of the better ways of preserving one's wealth, but the market
remains unpredictable so it is probably best considered one of several tools
which can aid financial survival over what are surely several difficult
years yet to come.
From www.mineweb.co.za