-- Posted Friday, 5 September 2008 | Digg This Article
| Source: GoldSeek.com
By: Peter J. Cooper
Gold had its worst month for 25 years in August with prices correcting by more than 20 per cent from the all-time high of $1,030 an ounce seen this March. But there are many good reasons to believe that gold will bounce back in September, both as a hedge against surging inflation and a currency which no central bank can control at a time of a global financial crisis.
Arabian investors have already sensed a buying opportunity, and as Emirates Business reported last week gold sales in Abu Dhabi were up by 300 per cent in August. Nobody here believes gold prices will stay down for long, and experts are forecasting that prices are set to rise by 25 per cent during Ramadan, particularly towards the end of the Holy Month.
The Indian religious festivals always favour a pick up in the gold price in the autumn, and indeed this is the usual trading pattern for the yellow metal, with a strong upturn after a low in the summer. Buying of gold as a gifts or Christmas and New Year then follows.
In fact, figures from the Dubai Multi Commodities Centre showed a huge increase in the gold trade in Dubai in the first half of 2008 with a 48 per cent surge to $13 billion. And the DMCC reports that physical shortages of the precious metal have been annoying dealers with gold increasingly being treated as a hard currency.
South Africa ran out of gold krugerands last week when a Swiss buyer bought 5,000 coins, and the US Mint has just suspended sales of its popular Golden Eagle coins as it can not keep up with demand. The retail public is discovering gold, and also silver, and the premiums paid above the gold spot price for coins is growing.
In the Vatican in Italy last week this correspondent noted that silver coins sold for $50 each, a hefty mark up on the $13 an ounce silver price, and perhaps a truer reflection of the value of the metal, at least to retail consumers.
It seems Arabian buyers are not alone in spotting a bargain in current gold and silver prices. This column argued earlier in the year that this summer would be the time to invest in the precious metals and that has proven to be correct, although I did not anticipate the battering prices took in August, which was largely down to a huge intervention in the global currency markets to support the dollar.
However, the important thing to note is that otherwise nothing has changed. Indeed, even what I think is just a temporary respite for the US dollar is bound to end in tears, and higher gold and silver prices. It is surely a fact that the only reason that the US has not gone into a technical recession thus far is its export performance.
What happens now as the dollar strengthens and export earnings start to falter, and they were already looking threatened by the clouds gathering over the European and Asian economies? The US economy is about to take a hit from falling export earnings, before its domestic economy – particularly the housing market – shows any sign of recovery.
Any euphoria that follows the US presidential election is likely to be very short lived indeed, and the outlook for the US economy in 2009 just has to be significantly worse than 2008. At the same time America must start to pay the huge cost of bailing out its banking system from the sub-prime loan disaster and the subsequent collapse in business. Professor Nouriel Roubini who spoke at the DIFC Week thinks this will cost $1.5 trillion.
You need no other reason than this to be confident about the gold price. The US is going to have to borrow enormous sums to bail out its financial system, and Europe and Japan will have to do something similar, and this creation of money will be highly inflationary and devalue currencies against gold and silver. It has to be really, the alternative route of deflation is too horrible to contemplate.
No central bank can print gold or silver. The supply is fixed against annual production levels. And it is not hard to see that as paper currencies are destroyed by unavoidable and necessary new government borrowing then gold and silver will rise in value.
Of course, when people really understand what is going on there will be a rush into precious metals, and gold and silver will hit the roof. This last happened in the late 1970s and followed a similar cycle of a tripling of the oil price, money supply growth, inflation, a housing bust and financial collapse. History does not always repeat itself but it looks like Arabian investors have got the message right this time.
Peter J. Cooper
http://arabianmoney.net/
-- Posted Friday, 5 September 2008 | Digg This Article | Source: GoldSeek.com
