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Has Gold Had Its Day?

Commodities / Gold and Silver 2010 Jul 20, 2010 - 03:39 AM GMT

By: Julian_DW_Phillips


Best Financial Markets Analysis ArticleAgain this week, the minutes of the Fed's meeting gave cause for concern as they stated that the risks to the U.S. economy had moved to the downside. While this cannot be read as a forecast of the 'double-dip' recession, it moves it from possible to probable in our eyes. With the U.S. and developed world [excluding Asia] supposedly on the path to recovery, it has been very "L" shaped. It is at that sensitive stage where it needs people to believe that it will get better and become supportive through spending and buying again.

If the consumer, businesses and banks believe that may be postponed or even return to recession we are likely to see spending and buying slow quickly, so bringing on the recession. On the other side of the coin, what if the recovery does gain traction and the U.S. economy booms again, will that be bad for gold and silver?

Is a Recovery Bad for Gold?

There appears to be a misconception that a recovery will be bad for gold. Indeed Goldman Sachs indicated gold will continue to rise, but should the recovery gain momentum, it will be bad for gold. We could not disagree more strongly. To add substance to this statement, we ask you to look back to pre-credit crunch days and the seven years that preceded that. In these boom years did gold fall or even hold steady at a range-bound price? No. These were the years when it rose five fold. These were the years when the U.S. economy boomed and ran a persistent Trade deficit that saw the U.S. $ weaken from $1: €1 to $1: €1.5. These were the years that saw oil peak at $145 a barrel and the years that saw China climb onto the world stage.

Is a Recession Bad for Gold?

After August 2007, gold and silver pulled back as investors de-leveraged. Once these over-geared investors had left the market the gold price recovered from $960 to the present levels and held there while the developed world economy stabilized.

And now?

What is the scene now? If the U.S. and European economies recover, will less oil be used? Will less Dollars flow out of the States in the Trade deficit [that is already climbing]. Will China shrink? Will the memory of all that took place in 2007 go away and leave consumers again blissfully spending as though there is no tomorrow and credit is endless?

A New Reality

Since 2007, many, many structural faults were exposed in the global economy and have sensitized everybody to the dangers we face on so many fronts, such as exchange rates, relying on consumers for growth, insufficient oil to supply a far larger and still burgeoning China alongside a growing, developed world. Add to that, key exchange rates that are so volatile they can move several percent within a week. Add to that, the possibility that quantitative easing may need to be turned on again to increase much further the quantity of money out there. Worse still, the banking crisis that started the crisis has morphed into a Sovereign Debt crisis that has put the lender's of last resort in a confidence crisis and along with that fears for the survival of the Euro.

A new recession on top of all of that together with more quantitative easing is unlikely to spawn the hope that it did first time round. The crisis to date has vastly altered all of our perceptions, adding a good degree of skepticism to the repeat of the past rescue measures. We have to ask, would they be reinforcing failure?

The Economic Future

So what lies ahead now? A boom or a bust! Either way our fears remain. The future points to more crises and those on an already weakened world. In fact the 'bust' we are still experiencing has probably saved the developed world from a bigger one. The time it has taken, to date, should have been used to: -

  • Vastly extend oil resources to accommodate a recovered developed world alongside a developed China.
  • It should have introduced the Yuan to global trade next to the U.S. $ so as to produce a stabilized currency scene.
  • It should have reformed to allow the ground level businesses of the developed world to thrive, so lifting the major institution and governments back to health.
  • As the developed world returned to profitability from top to bottom [not just at the top] tax revenues would have swollen to cope with budget deficits.
  • In turn it should have seen a start to debt reduction, so that budget deficits did not pose major threats to the monetary system.

Structural Repairs

Has this happened? Instead the aim of central banks and government appears to be to get back to where we were in August 2007, when the crisis first struck. To blame the banks for it all is unreasonable. Maybe they do deserve to be accused, but to turn them into the only scapegoats is not fair. Consumerism was out of hand, house prices were way over the top, the developed world lived with the attitude, "Live now, pay later". Everybody was to 'blame'. Has the time passed been used to change attitudes? Look at China and ask why they are developing so strongly from the ground up?

The point we are making here is that recovery is only a small part of the solution. The other steps to developed world economic health have not been taken. Structural faults are now, not only exposed, but threatening new fractures. With China's power and wealth increasing, in part, at the expense of the developed world new pressures are being added to the developed world all the time.

Structural repairs are not fully on the agenda of developed world authorities, so we must experience more fractures as a result.

Threats to the U.S. Dollar as the Sole Reserve currency

What if Chinese goods were priced only in the Yuan? What if they only accepted the U.S. Dollar for U.S. trade? What if the oil price were priced in the main currencies of the world, not just the U.S. Dollar? This has to happen in time, should China continue to develop at the present rate.

Against the backdrop we have just described, does it seem likely that we are near the peak of the gold price? Gold is the thermometer of the monetary world. Would you say the temperature is still rising? Do you see a, "and they lived happily ever after" picture in two years time? So what does lie ahead for gold and by extension silver? How long will the bull market run for still? Is it simply a 'bull market? We talk of that in our newsletter, at length.

Will Gold and Silver fall in a recovery and recession?

Gold Forecaster regularly covers all fundamental and Technical aspects of the gold price in the weekly newsletter. To subscribe, please visit

By Julian D. W. Phillips
Gold-Authentic Money

Copyright 2009 Authentic Money. All Rights Reserved.
Julian Phillips - was receiving his qualifications to join the London Stock Exchange. He was already deeply immersed in the currency turmoil engulfing world in 1970 and the Institutional Gold Markets, and writing for magazines such as "Accountancy" and the "International Currency Review" He still writes for the ICR.

What is Gold-Authentic Money all about ? Our business is GOLD! Whether it be trends, charts, reports or other factors that have bearing on the price of gold, our aim is to enable you to understand and profit from the Gold Market.

Disclaimer - This document is not and should not be construed as an offer to sell or the solicitation of an offer to purchase or subscribe for any investment. Gold-Authentic Money / Julian D. W. Phillips, have based this document on information obtained from sources it believes to be reliable but which it has not independently verified; Gold-Authentic Money / Julian D. W. Phillips make no guarantee, representation or warranty and accepts no responsibility or liability as to its accuracy or completeness. Expressions of opinion are those of Gold-Authentic Money / Julian D. W. Phillips only and are subject to change without notice.

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