Global Financial Crisis Driving Gold Higher in All Currencies

By: Christopher_Laird

In the latest manifestation of the world financial crisis, gold is rallying strongly now in all major currencies. Gold detached from the usual commodity drivers gradually over the period August 07 to the present, and closely reacted to any major new developments in the credit crisis. Gold now is almost totally dominated by ongoing credit crisis developments, and the massive attempts to bailout the financial system in every country. That is why gold and the USD are rallying together.

As we know, the $trillions the US, ECB, BOE, Japan, Russia and China have thrown at either bailouts or stimulus are causing gold now to rise relentlessly in the major currencies. Obviously, at some point, gold as a central bank reserve asset would reflect what I estimate to be going on $20 trillion worth of stimulus and financial bailouts by the world central banks since August 07. The US alone has now committed over $10 trillion fighting the world financial chaos.

Ironically, the USD rallies along with gold to date. Massive flight to ‘safety' is finding its way to the USD and gold both. The Yen is also strengthening a lot too, but much of that is from Yen carry trade deleveraging, where people sell the stocks and financial assets and then buy Yen and pay off their hundreds of $billions worth of Yen they borrowed in the carry trade.

But, gold rallying in the face of a very large rise in the USD for the last few months clearly indicates the strength in gold's rally so far.  We suspect gold will soon hit a new high in 2009, and gold stocks can too hit new highs as well, when people realize gold continues to rally.

Obviously, gold stock volatility (Silver too) is vexing. But the time is clearly approaching where a long term view on gold and such will be the surest way to protect your wealth. Every other typical investment is taking a hit, and with the continuing economic crash (yes it's a crash it's not a slowdown) worldwide, every country will make every attempt to stop the collapsing world economy, and thusly run huge fiscal deficits. The only weapon they can use here is to basically print money to finance these, as the world bond markets are already clearly showing signs of fatigue (Examples – US treasury Yields starting to rise, and EU nations' bonds having some fits in auctions, even Germany experiencing some ‘failed' auctions – all of the bonds offered not being sold at the given rate).

In case you doubt the ‘crash' characterization for the world economy, consider that Japanese exports fell an astounding 35% in 2008, a figure I keep having to remind myself is not a typo, since a 3.5% fall in any GDP statistic used to be considered a catastrophe in recent decades.

And as another example, Mish (Mike Shedlock) posted a nice chart indicating that US sales tax receipts fell over 10% in recent months (at -10% now). Now considering that even a 1or 2% drop in consumer spending was considered a disaster in the US, you get the idea. The US is experiencing nothing less than collapsing consumer spending. And that is likely to increase too.

And of course, this US/Western consumer collapse is hammering Asia generally. I had a subscriber send me some amazing photos he took of empty idled ships in a huge harbor in Singapore:

Empty idle ships in Asia's biggest harbor in Singapore

And, as another example of many I could offer, the biggest Chinese export mall where manufactures display their products to buyers, which is 2 miles in length and 3 levels, has seen a dramatic drop in buyer traffic and orders. They represent over 60,000 factories. Chinese exports and imports have fallen anywhere from 10 to 30% depending on the stats you look at. In the interview accompanying the China mall article, the one manufacturer interviewed said they had no orders for the last two months.

The EU is experiencing GDP declines at an annual rate anywhere from 5, 8, and over 10% depending on the country. Add this to the world banking crisis, and the fact that the EU banks are in even worse shape than the US by some measures, the prospects for the EU economy are even bleaker than the US, which is rapidly revealing depression level economic statistics.

And, the critical situation of the East European economies and their huge debts to the EU banks added fuel to the gold fire in all currencies this week. The Euro has suffered accordingly, something we have predicted for over a year, the Euro has major problems with a fractious EU. Germany, however, finally stated they may have to do some kind of bailout of the EU nations having fiscal emergencies, like Ireland and who knows else, not to mention Eastern Europe.

In any case, gold and the USD have been beneficiaries of flight to safety. A big question will be, soon, when gold exceeds record prices in the USD this time, will the flight to safety then move relentlessly to gold then? I think so.

Of course, people need to keep in mind that the decline of the USD with all these new $trillions in bailouts and stimulus and ever growing US fiscal deficits will not be uniformly down, and remember what former US Treasury Secty Volcker stated when he was asked if he would have done anything different when he combated US inflation in 1980. He stopped inflation by raising US interest rates to over 20%. But, he also stated in an interview decades later that the thing he would have done differently would be to cap the gold price….and of course this is done now. But, for how long? That cannot go on forever.

In any case, gold's rise this time will not be uniform, and likely after it reaches a new high over $1100 this time, will again drop for a spell, as any normal market does. But, over a period of years now, gold will relentlessly rise to new highs and stay up. And, I expect gold stocks to reach new highs too along the way, although they are lagging gold now.

Gold stocks in my view are second best to actual bullion, and ETFs are a distant third, but big money can move more easily into gold stocks than into bullion directly. And gold stocks do actually represent physical gold, with mine reserves…whereas I think ETFs are a bit hazy on a connection to physical gold. So, gold stocks, anyway, will ultimately reach new highs too.

Nov 21. 2008 we alerted subscribers that gold appeared to be turning back up, and would continue that in 2009, due to the ongoing credit/financial crisis.

By Christopher Laird
PrudentSquirrel.com

Copyright © 2009 Christopher Laird

Chris Laird has been an Oracle systems engineer, database administrator, and math teacher. He has a BS in mathematics from UCLA and is a certified Oracle database administrator. He has been an avid follower of financial news since childhood. His father is Jere Laird, former business editor of KNX news AM 1070, Los Angeles (ret). He has grown up immersed in financial news. His Grandmother was Alice Widener, publisher of USA magazine in the 60's to 80's, a newsletter that covered many of the topics you find today at the preeminent gold sites. Chris is the publisher of the Prudent Squirrel newsletter, an economic and gold commentary.

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