March 26, 2009 – Gold Investment

The US probably has the most ability to pull out of the recession the earliest for a lot of reasons. One of those reasons is the fact it can print money at the Treasury while also raising global financing of the massive debt. The stimulus packages that have been instituted so far have already injected trillions of dollars into the economy in an effort to jolt it back into a semblance of normality.

The US scenario is being repeated around the world. Governments are scratching their proverbial heads trying to figure out what will work, because so far there is little indication the past cash injections are doing much good. Instead of solving the problem, the US and other governments are talking about instituting policies of quantitative easing. Quantitative easing is a strategy that basically involves printing money as fast as the printing presses will work and implies you can worry about inflation later.

A Flood of Cash

But what happens when you flood a market with anything? Think about flooding a market with a new electronic gadget. It initially sells at a high price and then rapidly falls as more and more are sold. The US dollar and other currencies are no different. If the economy is flooded with cash the value of the US currency will drop. Unless you are a savvy and lucky forex trader, your currency will buy less and less. Another way to look at this situation is the fact your savings and retirement accounts will also have less spending power, but it takes more currency to buy everything from food to houses.

Quantitative easing was developed by the Japanese in the early 2000s in response to a recession much less severe than the one faced now. It worked then but will it work now? Who knows? No one knows! The fact is that the fiscal policies being implemented right now are intended to add liquidity to the consumer and financial markets. What has been the response? People are saving again! They aren’t spending….they are saving! There is more cash stored on bank balance sheets and in mutual fund accounts than has been seen in years!

Between Now and Eventually

The recession will work itself out…eventually. But between now and then there are a lot of losses yet to be realized. And there is a lot of proof that governments really are not sure what the right answer is when it comes to reversing the recessionary trend.

You can almost see the government analysts wringing their hands in frustration. Australia and Canada are working on giant stimulus packages. Japan is wondering if it needs to begin a policy of quantitative easing again. Germany is not happy with the ECB because of the interest rate issues. Currency values around the world remain volatile as exports continue to drop. China’s industrial production is declining at an alarming rate. Russia’s ruble has been devalued multiple times over the last 3 months. Oil prices for a barrel of crude don’t know whether to go up or down.

Gold is the Real Bargain

This is really not meant to be seen as a doom and gloom scenario. It is just a snapshot of the volatility that remains in the financial markets. You could put your money into a stock right now that is called "undervalued" and a "real bargain" on strong fundamentals and find yourself holding worthless equity when the company goes bankrupt.

In 2009 the prediction is that bankruptcies and insolvencies are just beginning to gather steam. They began with the bankruptcy of Lehman Brothers Holdings, Inc. and haven’t stopped yet. Giant retailers like Circuit City in the US and UK Woolworths have gone broke and they are just two out of hundreds of large and small companies not expected to make it through the recession intact.

Inflation is the next major concern facing consumers and businesses. The government balance sheets are growing by leaps and bounds. By the end of 2009, the US government is going to have to borrow almost $2 trillion dollars to pay for all of these stimulus packages. Security yields are sitting at or near zero so who is going to want to loan money to any government trying to sell bonds with such low returns? It would have to be the Armageddon of recessions before investors would loan money at the end of 2009 expecting to make almost no return. The bond yields today are at the lowest level they have been since World War II. It was after WWII that government spending and debt began the first cycle of growing faster than the Gross Domestic Product.

So is history repeating itself? If so…it’s time to invest in gold bullion or gold coins or to make some other form of gold investment. Gold has been, and probably always be, the most solid and reliable financial investment. It has consistently risen in price over the years and is one of the few investments that is at its most attractive when times are uncertain and difficult like now. When banks and businesses are failing and inflation looms and interest rates are so low, gold takes on prominence as the best alternative investment. As people invested in equity markets continue to lose money, gold has risen in price for a solid month with February delivery futures currently sitting at $855 an ounce. The more aggressive believers in gold are predicting it could reach $1,200 to $1,500 a troy ounce within the next year.

Billions of Ounces

You may want to debate what the price of gold may be in 12 months, but you don’t have to question the fact that all the money printing going on right now is going to lead to inflationary pressures and a declining US dollar. In fact, every country following similar bailout programs involving quantitative easing policies, government loans, and near-zero interest rates are going to face the same problems over the next year.

Last year there was US$20.2 trillion of gold traded in 2009. This was the equivalent of 23.2 billion troy ounces. In 2008 there was 19.3 billion troy ounces traded. Notice the increase? Smart investors know buying gold during uncertain financial times is the smart strategy for protecting portfolio value.

Gold is a solid safe-haven investment all the time, but especially during declining economic conditions.

Arthur McGuire

March 26, 2009

 

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