Important Lessons From Todays Market Action
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| Topic: Gold — September 29th, 2008
Today the $700 billion bailout bill failed to be passed.
This caused massive swings in every market across the world, but what does this mean for gold investors?
In our opinion today investors dumped stocks heavily and this created a run into the US dollar, causing it to make some gains. This dampened the gains that gold would have made, but the crucial thing is that gold was making gains as the US dollar was rising too. Since they usually move in opposite directions, this is a sign of the tremendous strength building behind the yellow metal.
The real rally in gold is yet to come, and will probably occur when the investors that sold American stocks for US dollars today, switch from those rapidly devaluing dollars into gold as a safe haven. We are beginning to see this now in after hours trading as gold rises to $918.
We expect gold to challenge its old highs of $1000 be the end of the year. We are long on gold, big time, and would suggest that anyone who is not long on gold at present, buy a position to protect your portfolio from this financial turmoil, which is going to get a lot worse before it gets better.
Even if the bill is approved, it will have the effect of giving a short term boost to the US stock markets, and hence a dampening effect on gold, but in the long term gold would rise dramatically because of the $700billion cash injection. This is a dramatic increase in the money supply and therefore would create serious inflationary pressures, steering investor funds to the best inflation hedge, gold.
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Yamana seems to drift down steadily no matter what gold does. Are they stlll struggling with their earnings short fall? Also, wondering if you have thought anymore on FRG and HRG. HRG did have a bounce from…30 to 60 cents. Which was good. However these stocks still concern me. I feel good about Kinross. However AUY-HRG=FRG still concern me…Thanks Gary
Comment by GAry — September 30, 2008 @ 3:55 pm
Dear Sir,
I would like you to review this arguments about why gold prices will be crushed (in a word: because deflation). The basic argument is: nevertheless money supply increase, the money velocity is decreasing dramatically, which turn to deflation instead of inflation. What do you think?
check it out here: http://benbittrolff.blogspot.com/2008/09/inflation-deflation-money-velocity-and.html
Comment by The Devil — September 30, 2008 @ 4:30 pm
The Devil,
Interesting argument. However the main aim of all the central bank bailouts and cash injections is to get money flowing around the system, increasing the velocity and the supply of money.
For things to becoming deflationary, the velocity would have to decrease by proportionally more than the money supply, keeping the quantity of output constant, due to the quantitive theory of money:
MV = PQ
If the money supply, which is currently increasing dramatically, increases proportionally more than the velocity decrease, we will see inflation.
If M increases by an amount proportionally equal to the amount that V decreases by, we will still see inflation as Q (output), will be decreasing in this recession, pushing P (prices) higher.
With regard to the statement; “There has never been in the history of the world an inflationary run while land prices were declining.” This may be true, but were the houses declining in real value? Its quite possible that all prices rise during inflationary times, but that does not mean their values are rising.
However we do agree that the broader range of commodities have had their run for the moment. Gold however is a currency and will continue to rise in our opinion, as central banks in particular the Bernanke led Fed, will do everything in their power to avoid deflation, even if that means letting inflation run rampant.
Comment by Gold Prices — October 2, 2008 @ 2:57 am