-- Posted Tuesday, 30 September 2008 | Digg This Article
| Source: GoldSeek.com
By: Peter J. Cooper
American democracy failed to deliver the $700 billion bailout on Monday and many stock markets around the world had their worst crashes since 1987. The Dow fell seven per cent and the S&P index by nine per cent. In a flight to safe havens both the dollar and gold rose together as they only do in the most extreme financial chaos.
The Congress will convene again later in the week to attempt to legislate again. US presidential candidate Barrack Obama has assured the public that this time the bill will pass. But a lot of damage will be done to already weak financial markets in the meantime.
If nothing else this is a reminder of just how serious matters have become. It is not as if a $700 billion package is going to answer the problem and get us back to business as usual. Indeed, the Fed announced this week it had just injected $650 billion into markets for stabilization, so you have to wonder why $700 billion is such a big deal.
Compared with the size of the derivatives problem now facing the world this is indeed small change. Estimates for the total cost of this bailout range from $5-20 trillion.
As the true cost of the necessary bailout gradually becomes apparent then the market meltdown on Monday is going to be a walk in the park. There will be no alternative but to flood the system with dollars which will be inflationary and devalue the US dollar - bad news for those in the flight to quality today as there is no quality left in the US currency.
The big gainer in all this will be precious metals which advanced modestly on Black Monday against falls in every other asset class except treasury bonds. And who knows how long treasuries will hold up - the US government is heading for bankruptcy and it is very easy to obtain much better interest rates by putting your cash with a major financial institution.
On Black Monday even precious metal shares dropped but should bounce back quickly given the strength of precious metal prices. In the choppy waters of financial markets this week there may be a chance for late-comers to the precious metals ball to pick up some good precious metal shares at near bargain basement prices.
Or indeed, the really intelligent will buy the junior exploration stocks which just have to follow the gold price up, and if history is any guide then as gold prices take off there will be a near exponential gain in the value of precious metal claims. Junior explorers own the claims, so buy their stocks and you will achieve massive leverage to the soaring price of gold.
This argument is as old as the hills among gold bugs. The difference today is that it is happening right before your eyes. Any market meltdown brings some tremendous, once in a lifetime chances to make money. Buying precious metal juniors this week will be it. Or buy silver if you want another leveraged gold play, or better still pure silver producers to leverage both gold and silver prices. But the juniors will deliver the highest returns over the next few months and years.
Peter J. Cooper
http://arabianmoney.net/
-- Posted Tuesday, 30 September 2008 | Digg This Article | Source: GoldSeek.com
