Tuesday, April 1, 2008

GOLD & The Patient Investor

The recent correction in commodity markets has seen GOLD correct sharply back to the early 900's in USD terms. After its recent surge, a correction was to be expected.
Food Grains, Oil, and Precious metal prices have all pulled back sharply.

The US Treasury is now looking to expand the role of the US Fed, ensuring that it provides stability to a 'shaky US Stock Market', after the recent collapse at Bear Stearns.

The US Fed will continue to lend against 'questionable'/ 'worthless' mortgage backed paper, as its strives to avert a major collapse on Wall Street. The ECB and the BOE may have to follow the FED, if the credit markets dont ease up soon..

Coming back to the Patient Long term Gold Bullion Investor:

As was the case with the May 2006 correction, declines are pretty rapid, as leveraged speculators and short term traders who enter at peak prices get caught out.

Gold is headed for new highs for reasons listed below; the intelligent and patient gold investor, must just hang in there and enjoy the ride.

INFLATION : Gold - The Inflation Hedge

Countries around the world are struggling with rising inflation, mainly led by the surging cost of food and energy.

Central Banks are losing the fight against inflation, as they look to cut rates to combat slowing growth and continue to pump money into the markets.

India's annual inflation rate accelerated to a 13 month high of 6.68 % last friday, having doubled in just a few months.

The Chinese Consumer Price Index showed prices rising at 8.7 %yoy in February, the sharpest acceleration in almost 12 years.

Eurozone consumer price inflation rose to a new peak of 3.5 % in March.

Inflation in Saudi Arabia surged to a 27-year high of 8.7% in February.


Even as the Fed cuts rates, Mortgage rates remain high, as banks hoard cash.

The US Housing market Crisis continues....and consumer confidence is at new lows.

The ECB may have to cut rates if growth slows, even though inflation is at new highs. This action could lend support to the USD, and would as a result drag down the gold price.: This would be a good time to add to gold positions. Meanwhile the USD is headed for its biggest quarterly Loss Against Euro since 2004.

Counterparty risk is a risk no one seems to be willing to take.

Overexposed and Undercapitalized => Current state at most Investment banks with leveraged Balance Sheets.

In all the commotion, everyone seems to have forgotten about the Bond Insurers, who were the centre of attention only last month.

Bringing in more regulation now, will not make the outstanding Toxic OTC Derivative positions disappear overnight. Possibly more questions may be asked, additional paper work will add to costs and further casualties may arise.

This is a problem of Solvency, which cannot be solved by Cheap Money: The very culprit of the current crisis.

This is a time for preservation of capital rather than chasing yield.

Buy gold on declines, keeping its long term outlook in mind.

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