Saturday, November 17, 2007


Gold is MONEY, and not just an investment or an asset. Invest in gold to preserve the purchasing power of your money. As I said in recent posts, Gold has been rising in all currencies.


Rising inflation: Inflation is always higher than government published estimates. Inflation can also be defined as "too much money chasing too few goods". Gold is a classic inflation hedge.

A Falling US DOLLAR: This is the most important factor responsible for the current rally in GOLD. A USDX index that is below the ‘80’ level is extremely positive for gold.

The first net capital outflow for 9 yrs, in the month of August 2007:
US Treasury data showed a net long-term capital outflow of US$69.3bn for August while there was a total outflow of US$163bn(now revised to $150bn). Central Banks selling US Treasury Bonds is extremely USD negative.

Financial Market turmoil or crises: Valuations across asset classes are no longer cheap, but remain fairly valued or expensive. While economic growth has been strong in developing and emerging economies, developed economies (especially the USA), have witnessed growing debt levels and slowing economic growth.
Given the dependence of the emerging Asian economies on the US, they stand to be major losers in the event of a US recession.

Global Imbalances: resulting from large trade deficits in the US and growing trade surpluses in emerging economies, threaten to derail the global growth story.

As foreign fund flows enter emerging economies, local Central Banks try to control sharp appreciation in their local currencies, and large forex reserves are created. Large Foreign inflows impact the monetary base and consequently the money supply.
The rate of Money supply growth around the world has been increasing. An increase in money relative to a fixed number of consumable goods and services, results in rising prices. This is inflationary and gold positive.

CENTRAL BANKS bailing out Wall Street
The current crisis was caused by speculative leverage & excessive greed on the part of investment banks that created this maze of financial products & investors in their funds looking for returns not commensurate to their risk taking ability (all high net worth hedge fund investors are not as misinformed as they now claim to be). Bailouts would only encourage a repetition of such speculation & greed.

No end to Credit crisis!
On the 15th of November, 2007 the US Federal Reserve pumped $47.25 billion in temporary reserves into the U.S. banking system, its biggest since just after the Sept. 11, 2001 attacks, to calm a rising Fed Funds Rate. The LIBOR in the UK, also continues to rise.
Meanwhile, the U.S. asset-backed commercial paper market continues to shrink.

Gold miners have accelerated their de-hedging programs:
Anticipating higher gold prices in the future, large gold miners have begun to dehedge. No large gold miner is looking to place price-protection hedges.

Middle East Oil producers revaluing their currencies/ dropping the USD peg:
In May 2007, Kuwait dropped its USD peg, in favour of a basket of currencies. Rising local inflation in the region has made it difficult for Middle eastern Central Banks to follow the interest rate policy of the US Fed. For exporters whose oil revenues are USD denominated, a falling USD will certainly be a matter of great concern.


So is this the right time to buy gold?

I am extremely positive on the prospects of Gold over the long term. However after the sharp surge in prices recently, a correction was bound to occur. The rise from the $ 740- $ 840 level has been steep, so a further retracement to the $ 740 level in the short term is possible if world markets and crude oil prices were to correct again.

Heres a few points worth considering before investing in gold.

Hot money and speculative leverage that exists in Crude Oil contracts, base metal contracts and in the Real estate market, also exists in the Gold Bullion market, and has contributed to the recent gold price surge.

When markets crash or correct sharply, gold is liquidated to meet margin calls. Speculators close positions as stop losses are triggered. As a result, gold prices fall along with the rest of the market. Such moments are opportunities to buy gold, which then recovers faster than the market, as investors soon flee for safety.
Market sell offs and Carry Trade unwinding result in a strengthening Japanese yen.
Those looking to buy Gold should look out for spikes in the Japanese Yen, to time their gold purchases.

Trading in gold (especially on margin) to generate short term returns is both risky and dangerous, given the volatility in Gold prices and markets in general. A long term buy and hold strategy is best advised.

Beware advice in the financial news media, reports from investment banks, and targets set by short term technical chartists/traders/speculators, instead invest in gold on declines with a view to hold it over the long term.

Stocks of gold mining companies offer greater leverage to the gold price. Investors need to take into account of factors such as current production, valuation of gold reserves, gold hedges and risks of small/junior mining companies with no track record, when considering investments in gold stocks.

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