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Gold climbs to new record as double dip recession talk grows

Lawrence Williams
June 8, 2010

For some time now we’ve been saying that the global financial turmoil had a way to run yet, but markets, which were then rising, and soaring commodity prices, looked to be belying our forecasts.  But, the past few weeks has seen a complete turnaround.  Firstly metals commodities prices slumped – initially on fears that Chinese demand had been falling as the government tried to rein back on unbridled growth – then came the Greek debt crisis and the pressure on the Euro, and stock indices around the world plunged, with the only real benefactors being short sellers and gold holders.

Now, talk of a double dip recession is rife.  Today, for example, Mineweb reports on several pundits all mentioning a double dip in the markets.  Yet a month or so ago, most – apart from the out and out gold bugs – were predicting great things ahead as the world was pulling out of recession.  Sentiment then turned around rapidly.  Now the Dow is comfortably below 10,000 again, the FTSE 100 getting close to breaking back down through 5,000 and the S&P perilously close to testing the 1,000 level too.  Indeed by the time this article is read the latter two levels may well have been breached on the downturn.  Some pundits now suggest sharp falls well below the current levels as the dip takes effect.  But we will see.

Truth is that the investment sector is mostly optimistic on the surface – particularly those who make their money out of persuading people to invest – supported by the politicians who have a vested interest in trying to persuade people things are indeed getting better and uplifting confidence.  If people have confidence in the growth story, so the theory goes, momentum will indeed lead to growth.  People will buy goods and manufacturing will benefit.  Indeed prudent savers are being encouraged to spend, spend, spend.

This is all very well, but at the same time the public begins to notice that unemployment remains at a high level, major global economies are in trouble leading, inevitably to government spending curbs, in Europe at least, as far as services are concerned – although ironically they may well be, at the same time, printing more and more money and effectively giving it to the banks in the hope that this might stimulate the general economy.  Taxation rises are on the cards too as nations try to bring huge deficits under control – well that is everywhere except perhaps in what may be the most profligate spender of all – the U.S.A.

While confidence in the markets is everything, a realisation amongst the investment fraternity that all, in reality, is not set for burgeoning growth after all, will fuel a further dip in markets and the double dip scenario will be well and truly in place.

The gold bugs say put your faith in gold – and that may well be the answer – for now.  Others will promote silver and other precious metals, but as industrial demand growth remains a significant part of their market, their time may not quite be here yet, although they likely could be dragged up in value should gold continue to advance.

What we do have with gold, though, are some mixed messages.  Its rise, in reality, suggests true weakness in the dollar – not against the basket of currencies by which its index is traditionally calculated; they are all equally weak too, or even weaker – but against its overall future purchasing power.  This is hidden to an extent by the fact that the current economic environment is more deflationary than inflationary, but eventually this will turn.  The amount of money being printed by governments makes this virtually inevitable.

But a rising gold price also engenders purchasing resistance from some important significant markets – notably India and the Middle East where there is a reluctance to chase prices up.  The current price rises are being fuelled by investment demand – safe haven buying if you will – and as long as markets remain as shaky as they are at the moment, this is likely to continue.  If indeed a severe double dip appears, liquidity factors may initially drive the gold price down a little, as happened in October and November of 2008, but any fall will likely be less severe than for other commodities, and a recovery far quicker  – note also the above warning on the more industrial precious metals, none of which got back anywhere near their 2007/early 2008 peaks even with the big price rises seen earlier this year.

Ultimately, of course, the huge gold investment overhang may well come back to bite long term gold holders if, and when, the markets truly do come out of their recessionary downturns and the kind of nervousness that is besetting the markets now diminishes.  But this may well be some time away yet – even years away – although consistent signs suggesting a global industrial recovery will then reward a sharp change in investment strategy.

So, for the time being gold, which hit a new record in this morning’s European trading as this article was being written, may remain the place to be invested.  Forget the nonsense talked about bubbles, at least for the moment.  But probably hope that the price does not take off to the kinds of levels some of the gold lobby are predicting, because these represent the ultimate doomsday scenario.  A $10,000 gold price in the next couple of years, which we noted in a recent prediction, would only result from a total breakdown in the U.S. dollar, hyperinflation and a society probably not worth living in.

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