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Derivatives Implosion Benefits Gold Bull Market

Commodities / Gold & Silver Oct 03, 2007 - 09:15 AM GMT

By: David_Vaughn


"Time to Trim The Wicks!”

Is not this gold bull simply amazing? Though I will share with you that there are a lot of gold investors waiting for gold to crash back down to 640. Sorry folks. Ain't going to happen.

What do I mean when I say its time to trim the wicks? Well, a lamp burns brightly with a good flame until the fire has carried the life of the wick lower and lower. At that point the lamp begins to smoke badly and the wick is turned with the hope there is more good wick available to produce clean light with no smoke.

Our economy has burned brightly now for 25 years. And whenever a problem cropped up to bring a little smoke the wick was trimmed and the bright flame continued to illuminate. For 25 years always there has been enough wick in the lamp to make everyone happy and to keep the flame of economic success and prosperity burning brightly.

“Panic has seized the minds of many as the shaking of a credit implosion rumbles through the marketplaces of today's moneychangers. The ground is giving way beneath them threatening to suck them into a financial hell of derivative defaults and dishonored debts.” Footnote

But today the wick needs trimming. Today that lamp is getting mighty smoky and many efforts are being made to trim the wick just as it has been done for 25 long years. But a problem is occurring. There doesn't seem to be much of that wick left. A real problem.

“Investors in stock and other markets began returning to gold on Friday looking for a haven as the dollar fell and the Federal Reserve moved to inject cash into liquidity-strapped credit markets…” Footnote

In the realm of economics Bernanke is torn between finding a new wick or letting the existing wick burn down and down. But as he turns to look for that miraculous new wick there are none. They all are used up. No wicks left in the drawer. Big problem.

“A flight to the age-old safe haven of gold in times of market turbulence is appearing not just in spot gold, where prices came within a whisker of $740 a troy ounce last week – its highest nominal level in almost 28 years – but is also spreading to exchange traded funds, where investors have been showing an extraordinary appetite in recent weeks.” Footnote

The world notices also that the US economy is beginning to smoke pretty badly but they have no wicks to share. The entire world has depended on the United States being a leader for a very long time. The world accepted our currency as the strong reserve currency of the world. But now Wall Street is burning and the confidence of the rest of the world is fading very quickly. The world is looking at their US assets shrinking rapidly lower and lower in value.

“The penalty is eternal death for hedge funds doomed never to rise again whilst for others they escape those searing flames by the skin of their solvent teeth.” Footnote

The sub prime problem is not going away but is predicted to continue growing into the next year. And it is being discovered that this sub prime crisis has infected the entire world as everyone wanted to share in its potential success. Well, it's no longer succeeding and slowly taking both the US and the world economy down a slow spiraling path straight down.

“Since July, gold has resumed its normal status as a safe haven, says Daniel Draper, head of Lyxor ETF for UK, Ireland and the Nordic region. “We have seen a real spike up in trading volumes and assets under management [in gold ETCs] since August 17 and again since the Fed cut its interest rate.” “Gold is exceptionally attractive in the US at the moment,” he adds.” Footnote

The world will feel the U.S. Sub Prime Mortgage Crisis. The business of creating new financial vehicles such as derivatives has exploded in recent years. The global financial turmoil has prompted a backlash in some quarters against such financial engineering. The sub prime crisis it can be felt all over the road unsettling hedge funds, banks and stock markets as far away as Asia and Europe.

“The markets have taken a few blows these weeks past but not strong enough for some to believe that government debt will totter and fall. We shall see but the economic and financial assaults of the past suggest that it is the Golden Tower that men will resort to when all else fails.” Footnote

Risk on a global scale has now increased. The market appears to be finding it harder to even understand what the real underlying risks really are involved. Countries over seas have been surprised to find that problems with United States homeowners could be felt so drastically in other foreign countries. Losses have often surprised overseas investors because they were just ignorantly unaware of the extent of their risks in US interests.

Homeowners that were once experiencing the “American Dream” are now seeing their home slipping away. Foreclosures are becoming more and more common and the worst has yet to come. And it seems there just is no end in sight.

“We're seeing a flight to quality in gold with US currency concerns, portfolio diversification and petrodollar recycling also playing their parts.” “People have watched volatility in the equity markets in the last couple of months and been concerned about quant models, now they are looking for a safe place to put their assets,” says Deborah Fuhr, a managing director at Morgan Stanley.” Footnote

Financial analysts are predicting that a historic number of home owners will lose their homes. It is estimated that 2 to 3 million additional homeowners could lose their homes. The vast majority of those losing their homes are the middle-class. The problems in the U.S. sub prime mortgage market could escalate out of control and turn into a full fledged global financial nightmare. Because of $1 trillion in delinquent mortgages, we could be just one hedge-fund collapse away from a global liquidity crisis. The risks of a global meltdown are growing. The problems are only beginning. The world is in major trouble as the liquidity crisis widens. Even with the US Fed pumping new vast dollars into the world banking system the fears of an imminent crisis are only growing. Only a flight to quality gold assets will save your sick portfolio. “The increased demand is also coming as knowledge about commodities investing grows.”

Gold and resource stocks, historically, have presented the highest rate of returns. Gold Letter, Inc. reviews gold and other resource stocks under valued and poised to rise in this time of increased demand. Natural resources and related contrarian stocks will only escalate in value as the world continues to experience unprecedented population growth. Gold Letter's 10 best performing stocks are up over 2,000% and GL's top 55 performing stocks are over 400%. Close to 90% of all Gold Letter's recommendations since inception in January, 2003 are close to 200%. GL charts are computer generated and updated every hour while markets are open.

Click here to order Gold Letter

Send me an email and your comments.

By David Vaughn
Gold Letter, Inc.

“The Worldwatch Institute, an organization that focuses on environmental, social and economic trends, says the current rate of global demand for resources is unsustainable.”  

The publisher and its affiliates, officers, directors and owner may actively trade in investments discussed in this newsletter. They may have positions in the securities recommended and may increase or decrease such positions without notice. The publisher is not a registered investment advisor. Subscribers should not view this publication as offering personalized legal, tax, accounting or investment-related advice. The news and editorial viewpoints, and other information on the investments discussed herein are obtained from sources deemed reliable, but their accuracy is not guaranteed. © Copyright 2007, Gold Letter Inc.

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