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« Important Lessons From Todays Market Action | Main | Kinross Gold Corporation: Call Options Update »
Monday
Sep292008

Gold Proving Safe Haven Amongst Bailout Bombs

In the midst of this present financial crisis, gold is doing exactly as it should do in such times, rising tremendously as it fulfils its historical role as a safe haven in tough times.

Having been sold down severely by many hedge funds that were scrabbling for cash, gold has bounced back terrifically as the rest of the worlds markets, particularly the financial sector, were falling apart.

Gold Proving Safe Haven Amongst Bailout Bombs
(Click Image To Enlarge)

Having been heavy buyers in August of last year, we took profits on our gold positions in February and have now we re-invested this cash in a variety of gold stocks and call options, with the majority of our buying taking place when gold was trading at $800. We have taken 100% profits on some of our option positions in a matter of days and we intend to hold the remainder as gold prices continue to head north.

In the very short term however, we see some consolidation ahead for gold prices around $850-$800. Regardless of the extremely strong fundamentals driving gold higher, technically the yellow metal is approaching overbought levels as signalled by the RSI and MACD, and the Full STO is already in overbought territory. Therefore we see a consolidation ahead for gold, before it challenges its old four figure highs come the year end.

Be prepared for extreme volatility on the way though, as signalled by the Bollinger Band movements. The BB bands have moved sharply apart to record highs for the USD and gold, signalling that this is historically a time of extreme volatility, so be prepared to hold tight through these big swings.

However, in this volatile market, it is important to keep the big picture in mind. Now here we are not talking about what many mainstream analysts harp on about; that the stock markets will eventually turnaround sometime in the future so if you hold for the next decade or so you should make money. We are talking about the big picture as in the picture now, and for at least the next year or so.

Gold and the USD: The Big Picture
(Click image to englarge)

So in this situation one should be short on the USD and long on gold (which is effectively a leveraged short on the USD, since gold has doubled in the last three years, whilst the greenback has lost 20%).

We are long on gold, big time, and would suggest that if you are not long on gold at present, buy a position. This coming consolidation could prove to be a good buying opportunity since its likely that the bailout package from Congress will give the markets a short term boost, which may have a dampening effect on gold.

However in the longer term, these bailouts will have seriously negative effect on the US economy, which will send gold through the roof.

The “Emergency Economic Stabilization Act 2008” is in fact a $700billion bomb that Congress is going to drop on the American economy, destroying the world’s reverse currency.

The US Government has injected $1.8 trillion into the financial system, so far, in an attempt to stave of a recession and a freefall in the markets. This massive increase in the money supply is going to lead to massive inflation to match, and therefore a massive increase in the best inflation hedge, gold.

We have said from the day the “credit crunch” poked its head above the surface, this is not an issue of liquidity, it is one of solvency, and one cannot solve insolvency with added liquidity. If an entity is insolvent, then they should go bankrupt. If Congress actually wanted some “Economic Stabilization” then they would let the enormous credit boom of recent years be stabilized by a bust to balance the scales. That means no bailouts, no rescues, nothing but market forces. Market forces will of course balance the scales eventually, no matter how many trillion reckless politicians and civil servants throw at the problem, by serious inflation.

This inflation will continue to destroy the US dollar, but perhaps more importantly these bailout bombs are destroying the capitalist system.

The architects of these bailouts openly admit that they are doing it do save and create jobs. (By jobs, they mean votes.) This is a socialist concept and defies the concepts of freedom and capitalism that America is supposed to stands for. In fact, China is probably a more capitalist market at present, at least their government is letting the market fall apart as it should.

What the US is doing now is reminiscent of Soviet policies. Bailing out companies in return for a stake, which is in effect a partial nationalisation, in order to save jobs which was a communist practice. So if finance companies are going bankrupt, the government takes over to save jobs. What happens if the motor industry, or construction sector or anything else begins to fail and threaten jobs? Will the government just take them over too?

If the markets are to stabilize, the ban on short selling should be reversed and the market should be allowed to fall, and bankrupt companies should be allowed to fail.

Otherwise the markets will stabilize by a severe inflation, which could be a much worse alternative, especially if hyperinflation becomes a threat.

This crisis has sent a shiver through Congress, a shiver that is looking for a spine. We doubt that Congress and the US government has enough spine to let market forces solve the problem for them, therefore expect serious inflation in the coming months. To best way to protect yourself and even profit from this is to invest in gold and gold stocks, and more knowledgeable investors may whish to trade in call options on gold and gold stocks. We are currently doing all of the above and details of our current portfolio as well as trading signals and market commentary are available on our website www.gold-prices.biz and in our newsletter completely free of charge. Sign up now to stay updated on what you should be doing in this crisis and for ideas on gold investment and trading.



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Reader Comments (13)

You haven't really read your own article, have you. But then again, who needs a "reverse" currency anyway?

September 29, 2008 | Unregistered CommenterLester

Well said. Our government is falling for a con game and it is anybody's guess who are the perpetrators. We would rather not believe that it is anyone who we voted in.

Some of these mega corporations will have to restructure and reorganize on their own. Many will be hurt which is the aftershock of neglecting the warning signs of impending financial dangers. However, they will rise again if left to their own devices, but it is much easier and less painful to have taxpayer dollars offered by our government to bail out these scoundrels.

Hopefully, and end will be put in place to eliminate the exorbitant compensations: salaries, bonuses, stock option plans, special inflated perks well hidden.

Thanks for listening.

John

September 29, 2008 | Unregistered CommenterJohn Ell

Short after January 21th. Gold will have a orgiastic party.

September 29, 2008 | Unregistered CommenterThe Devil

Lester,

Can you please explain what you mean by that?

John,

Thanks for your comment, we would rather that politicians would leave the markets to their own devices!

"The Devil",

What do you intend to short after January 21st?

September 29, 2008 | Unregistered CommenterGold Prices

Nice piece of thought!. The best part I like is the correlation between socialism and the bailout. Man I think you are right. I admitted the bailout was right, I confess. Although, I saw something wrong in it because Cristina Fernandez, Argentina´s half-president (the other half is her husband), said that this measure was a proof that the capitalism was wrong and has come the time to accept that government intervention was necessary for keeping things in balance. As you all may know these people are pseudo-leftists, so it fitted well in their ideology but not mine. However, as the measure was coming from someones supposed to be capitalists, one cannot think of it differently. So, thanks for clearing this to my mind. Let´s do market forces correct things, and let us make money. How about that?
regards

September 29, 2008 | Unregistered CommenterToni

I would like to see all shorting forbidden by law.

September 29, 2008 | Unregistered CommenterNeil Bishop

Toni,

We are agreed with you, allow the free market to reign with minimal state intervention!

Neil,

We would disagree with you on that point. We are in favour of shorting being allowed in the the markets and we disagree with recent actions by the SEC in America and the FSA in England to ban the short selling of banking stocks.
Why would you like to see shorting forbidden by law?

Thanks to all who have commented!

September 30, 2008 | Unregistered CommenterGold Prices

I see that the "bail out" plan is to save main street and not just Wall Street.

Excerpt from http://ac360.blogs.cnn.com/2008/09/29/financial-light-at-the-end-of-the-tunnel-could-be-2015/

Suze Orman said:

"You have to be a sophisticated investor to know what’s going on. That’s why you have to have a little trust here right now that if we do this investment plan and they have to stop calling it a bailout plan, if they are allowed to do this plan, eventually you’re going to see the mortgages will get paid off. You’ll have some ownership in it.

The taxpayers will be paid back and in the long run, we should be okay. If we continue to let the markets freeze, these credit markets it is possible one day you go to your ATM, and nothing’s going to come out. You can use your credit card and not going to be able to use it."

September 30, 2008 | Unregistered CommenterJJ

JJ,

If the bailout plan is to be called an "investment plan" then we would conclude that it is, at the very most, an extremely poor investment.
Congress, How about investing in some gold bullion to back up the US dollar on a new gold standard instead of purchasing toxic debt from reckless financial institutions?!

October 1, 2008 | Unregistered CommenterGold Prices

If there is a fire in the house, do we have to put out the fire first before we start talking about renovation? Are you suggesting that we should let the house burn to ashes? I think it all depends on whether there are still people in the house.

Does Congress have a choice? Must they buy toxic debt to save lives or whatever?

This is too complicated. I rest my case.

October 2, 2008 | Unregistered CommenterJJ

Also, the fire must be contained if there are neighbors/houses nearby.

October 2, 2008 | Unregistered CommenterJJ

Of course Congress has a choice. Sometimes a forest fire is needed so that the forest can regenerate, trying to prop up rotting institutions is a waste of time and money.

October 3, 2008 | Unregistered CommenterGold Prices

For the record, I am not for or against the bailout plan. I just feel that it stabilizes the market for the short term. I know many people think that it is too little too late.

Talking about choices, I read the following and would like to share.

"We now know that it was French finance minister Christine Lagarde who begged Mr Paulson to save the US insurer AIG last week. AIG had written $300 billion in credit protection for European banks, admitting that it was for "regulatory capital relief rather than risk mitigation". In other words, it was underpinning a disguised extension of credit leverage. Its collapse would have set off a lending crunch across Europe as banking capital sank below water level."

Source:
http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/3118994/Financial-Crisis-So-much-for-tirades-against-American-greed.html

I am bullish on gold. It is not so much a result of inflation but the debasing of the US$. Gold made an all time high in the British Pounds a few days ago.

Bob, you mentioned that gold would be up year-end. Is this based on seasonality or something else?

October 4, 2008 | Unregistered CommenterJJ

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