Best of the Week
Most Popular
1. Investing in a Bubble Mania Stock Market Trending Towards Financial Crisis 2.0 CRASH! - 9th Sep 21
2.Tech Stocks Bubble Valuations 2000 vs 2021 - 25th Sep 21
3.Stock Market FOMO Going into Crash Season - 8th Oct 21
4.Stock Market FOMO Hits September Brick Wall - Evergrande China's Lehman's Moment - 22nd Sep 21
5.Crypto Bubble BURSTS! BTC, ETH, XRP CRASH! NiceHash Seizes Funds on Account Halting ALL Withdrawals! - 19th May 21
6.How to Protect Your Self From a Stock Market CRASH / Bear Market? - 14th Oct 21
7.AI Stocks Portfolio Buying and Selling Levels Going Into Market Correction - 11th Oct 21
8.Why Silver Price Could Crash by 20%! - 5th Oct 21
9.Powell: Inflation Might Not Be Transitory, After All - 3rd Oct 21
10.Global Stock Markets Topped 60 Days Before the US Stocks Peaked - 23rd Sep 21
Last 7 days
Why Most Investors LOST Money by Investing in ARK FUNDS - 27th Jan 22
The “play-to-earn” trend taking the crypto world by storm - 27th Jan 22
Quantum AI Stocks Investing Priority - 26th Jan 22
Is Everyone Going To Be Right About This Stocks Bear Market?- 26th Jan 22
Stock Market Glass Half Empty or Half Full? - 26th Jan 22
Stock Market Quoted As Saying 'The Reports Of My Demise Are Greatly Exaggerated' - 26th Jan 22
The Synthetic Dividend Option To Generate Profits - 26th Jan 22
The Beginner's Guide to Credit Repair - 26th Jan 22
AI Tech Stocks State Going into the CRASH and Capitalising on the Metaverse - 25th Jan 22
Stock Market Relief Rally, Maybe? - 25th Jan 22
Why Gold’s Latest Rally Is Nothing to Get Excited About - 25th Jan 22
Gold Slides and Rebounds in 2022 - 25th Jan 22
Gold; a stellar picture - 25th Jan 22
CATHY WOOD ARK GARBAGE ARK Funds Heading for 90% STOCK CRASH! - 22nd Jan 22
Gold Is the Belle of the Ball. Will Its Dance Turn Bearish? - 22nd Jan 22
Best Neighborhoods to Buy Real Estate in San Diego - 22nd Jan 22
Stock Market January PANIC AI Tech Stocks Buying Opp - Trend Forecast 2022 - 21st Jan 21
How to Get Rich in the MetaVerse - 20th Jan 21
Should you Buy Payment Disruptor Stocks in 2022? - 20th Jan 21
2022 the Year of Smart devices, Electric Vehicles, and AI Startups - 20th Jan 21
Oil Markets More Animated by Geopolitics, Supply, and Demand - 20th Jan 21
WARNING - AI STOCK MARKET CRASH / BEAR SWITCH TRIGGERED! - 19th Jan 22
Fake It Till You Make It: Will Silver’s Motto Work on Gold? - 19th Jan 22
Crude Oil Smashing Stocks - 19th Jan 22
US Stagflation: The Global Risk of 2022 - 19th Jan 22
Stock Market Trend Forecast Early 2022 - Tech Growth Value Stocks Rotation - 18th Jan 22
Stock Market Sentiment Speaks: Are We Setting Up For A 'Mini-Crash'? - 18th Jan 22
Mobile Sports Betting is on a rise: Here’s why - 18th Jan 22
Exponential AI Stocks Mega-trend - 17th Jan 22
THE NEXT BITCOIN - 17th Jan 22
Gold Price Predictions for 2022 - 17th Jan 22
How Do Debt Relief Services Work To Reduce The Amount You Owe? - 17th Jan 22
RIVIAN IPO Illustrates We are in the Mother of all Stock Market Bubbles - 16th Jan 22
All Market Eyes on Copper - 16th Jan 22
The US Dollar Had a Slip-Up, but Gold Turned a Blind Eye to It - 16th Jan 22
A Stock Market Top for the Ages - 16th Jan 22
FREETRADE - Stock Investing Platform, the Good, Bad and Ugly Review, Free Shares, Cancelled Orders - 15th Jan 22
WD 14tb My Book External Drive Unboxing, Testing and Benchmark Performance Amazon Buy Review - 15th Jan 22
Toyland Ferris Wheel Birthday Fun at Gulliver's Rother Valley UK Theme Park 2022 - 15th Jan 22
What You Should Know About a TailoredPay High Risk Merchant Account - 15th Jan 22

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Is This How the Gold Bull Market Ends?

Commodities / Gold and Silver 2011 Sep 23, 2011 - 02:27 AM GMT

By: Adrian_Ash

Commodities

Best Financial Markets Analysis ArticleRemember Lehmans? Even the smart people get whacked in a financial crash...

PEOPLE THINK the gold price always goes up in a crisis, right until they find out it doesn't. And the reason that this now feels so much like the Lehmans collapse of three years ago is that, looking at the numbers alone, you'd think it was autumn 2008.


Put silver to one side. Because with 60% of annual demand going to industry, the restless metal remains very exposed to the global economic downturn. Whereas gold, long term, tends to rise when other investments – shares, bonds, cash, real estate – fail to deliver.

Look at the grinding losses of Treasury-bond or equity holders in the late 1970s, or the Tech Stock slump of 10 years ago, or the sub-zero real returns paid to cash savers – across the world, after inflation – over the last half-decade.

By the same token, gold tends to fall when investors can see better opportunities elsewhere. Short-term US deposit rates of 19%, for instance, paid above-inflation returns of nearly 10% in 1980. Little wonder the gold price sank from its then-record peak of $850 an ounce, and kept sinking as US bonds paid an average 4% real interest rate for the next 20 years.

Whereas today? Thanks to Operation Twist already snarling everything up, 30-year US Treasury bonds now offer just 2.79% to hungry new buyers. By the time they mature in 2041, Washington's debt-to-GDP ratio will stand around 400% according to one credible estimate – a mere 2.5 times the burden about to force Greece's default – with debt-interest alone eating more than $1 in every $4 generated by what is very unlikely to remain the world's single largest economy.

In return for taking that risk, 30-year bondholders will meantime earn one full percentage point less than inflation this year. Gotta get some for your portfolio, right?

Or take the Japanese Yen – the world's other ugliest currency. Like the Dollar, it's managed by central bankers so bent on printing money to "fix" every problem they spy, capital markets now have a nervous breakdown each time they don't. Nor do the Dollar or Yen pay their domestic cash savers anything, while foreign investors have seized the chance to borrow both at next-to-nothing, using the money to buy more exciting assets, such as slow-drying paint (and non-rusting gold) through to Brazilian Reals (down 11% so far this week vs. the Yen) or wheat (down 5% against the Dollar on Thursday alone).

The financial world cannot bear it when the Dollar or Yen go up. Which is just what they're doing, thanks to the interbank lending crisis – otherwise known as the latest credit crunch – forcing Dollar and Yen debtors to pay back all those "free" Dollars and Yen used to finance investments in stocks, bonds, and commodities.

The "liquidity line" pumped into Europe by the Federal Reserve last week proves just how desperate Eurozone banks have become. So too does the rise of the gold offer rate – the rate of interest offered by bullion owners, through London's wholesale market, who want to borrow cash and put up their gold as collateral. Yes, holding gold is great, but holding cash is better still – short term – when your institution can't otherwise raise a loan in the market, or needs to pay back its Dollar or Yen financing.

Those two currencies, source of so much free investment cash over the last decade, really are at the heart of this current slump. This week so far, for instance...

  • Japanese Yen price of gold: down 5.1% from the weekend
  • US Dollar gold price: down 4.5%
  • Euro (and Swiss Franc) price: down 2.2%
  • Pound Sterling price: down 1.9%
  • Canadian Dollar price: up 1.4%
  • Aussie gold price: up 2.2%

See what's happened to gold vs. the commodity currencies? Issued by resource-rich states, the money of Australia or Canada look a no-brainer when base metals and energy prices rise. But when copper drops 30% in a month? Or crude oil sinks so fast that the Opec cartel threatens to tighten supply for the first time since – oh! – crude oil last sank this fast?

Just as no one cared when commodities rose that the Canadian Dollar paid way less than Canadian inflation, so no one cares today that the Aussie currently pays 4.5% more per year than it should cost to borrow and sell US Dollars. Because no one can borrow Dollars, not in Europe especially. The warning was there, however, just as it was in mid-2008 when the first slug of the crisis neared its peak. The gold price in terms of both Australian and Canadian Dollars rose to new record highs as the US gold price sank in late 2008. It hit new record highs again in August and Sept. this year against both commodity currencies – a signal that gold's new high in the US Dollar was flashing "credit deflation!" instead of the consumer-price inflation most economists still think gold requires to go higher.

Yes, today is just as much about investors selling gold to cover losses elsewhere as it is about the liquidity crisis forcing Dollars and Yen higher. But again, that's just like Lehmans' collapse. And just like that slump, it's hard to see today's drop as the end of gold's multi-year bull market. Because everything else looks just as bad as it did yesterday. Only worse.

Can't speak for silver, though. Yes, it typically moves in the same direction as gold day to day. Yes, a bull market in one is inconceivable without a rise in the other. But over the last 43 years, silver has moved 1.7% for every 1% move in gold on average, both up and down. Whereas the huge run-up this spring, plus the dramatic pull-back since then, mean silver has so far in 2011 moved 2.9% for every 1% move in gold, magnifying the yellow metal's rate of change almost 3-fold.

So far this week, silver has lost 10.1% vs. the Dollar and more than 11% vs. the Yen. It's even lost ground to the Aussie and Canadian Dollars. But that's the trouble with a financial crash. Even the smart people – the people who saw it coming, and might even be right in the long run – get whacked just like everyone else.

By Adrian Ash
BullionVault.com

Gold price chart, no delay   |   Buy gold online at live prices

Formerly City correspondent for The Daily Reckoning in London and a regular contributor to MoneyWeek magazine, Adrian Ash is the editor of Gold News and head of research at www.BullionVault.com , giving you direct access to investment gold, vaulted in Zurich , on $3 spreads and 0.8% dealing fees.

(c) BullionVault 2011

Please Note: This article is to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it.


© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in