-- Posted Sunday, 4 October 2009 | Digg This Article | | Source: GoldSeek.com

The summer of 2008 and into the autumn was a bad time for investors in gold and silver with prices falling, and heavily so in the case of silver. This summer has been much better with gold emerging to break the $1,000 an ounce barrier and silver to poke above $17.

What potential investors now want to know is whether precious metals has topped out or whether further upside exists.

Beijing Put

On the second point the future outlook is much clearer than for a longtime. China’s recent statements on precious metals amount to a ‘Beijing put’ and there is nothing better than having a big buyer on any weakness to underpin an asset valuation.

Then we also have the ‘Washington put’ as well as the US will not want a strong dollar in its present economic circumstances, whatever it says about a strong dollar, and that means higher precious metal prices.

So with limited downside, what upside do precious metals enjoy? Looking at the chart of the last decade the gold price appears to move upwards in $200 steps every two years. Gold has been moving sideways, albeit with dips like last autumn, for two years. Another step up is due about now.

However, life is never that simple. Global stock markets presently look well overdue for a correction after a rally of historic proportions despite a recession of historic proportions. When stocks crash this means a flight to the dollar and a higher dollar generally depresses the gold price which would also be impacted by gold sales to meet stock market margin calls.

Sell or buy?

Thus one more dip in the price of gold and silver can be expected, and silver’s leverage to the gold price means it will always come off worst, although the Chinese have been encouraging their masses to buy this poor man’s gold, and the leverage should soon start to work to silver’s advantage again.

Given that higher gold and silver prices have been sustained over the summer and with more buyers now clearly in the marketplace that probably means any downside will be considerably less than last year. Indeed, the chance to buy at cheaper prices may be so widely anticipated that it passes very quickly or does actually not arise.

For looming on the horizon is surely the mother of all currency crises for the US dollar with the government printing money and buying its own bonds. And then you will really want your money in hard assets like gold and silver and not depreciating greenbacks.

Currency of choice

Precious metals will surely become the currency of choice. Governments all over the world are pumping money into their financial systems and boosting liquidity which even the former Fed chairman Alan Greenspan last week said he thought would end in inflation.

Having inflated asset prices around the world with excess liquidity for more than a decade Mr. Greenspan ought to know. But the question is still asked against which currency will the US dollar devalue? There are huge debt piles all over the world and the Japanese economy, for example, seems in a far bigger hole than the United States.

Perhaps then they will all devalue against gold and silver which can not be printed or quantitatively eased. And actually we could well have falling asset prices and an even faster devaluation of currencies, or debt deflation. That is what happened in the 1930s in a similar contraction of global credit and trade, and the gold price soared.

Mr. Greenspan was wrong in the past about inflation why should he be right now? Asset prices are falling almost everywhere, except on stock markets and that can be quickly corrected. Similarly currencies like the pound are competing with the dollar to devalue.

Even the Chinese yuan might take a hit if China has to continue with stimulus packages equivalent to half of GDP. No wonder the Chinese are buying gold and silver with its government creating money like there is no tomorrow. But tomorrow always comes.

Bubble Trouble in Emerging Market Stocks

Beware financial advisors trying to lure investors into emerging markets. They make a convincing case. It is not hard when emerging markets have delivered such outstanding performance. But beware. You should always buy at the start of a bubble, not after it.

Unscrupulous investment advisers do not worry about such trifles. Their only concern is to get a fat commission on your investment.

China crisis

It is not as if the warning signs are not obvious. The boom in Chinese stocks has been breaking down since mid-August when astrologers had pointed to a coming crash, and there was indeed a major correction in China. Is that the start of a downtrend? Well, what has gone up usually comes down in stock markets.

But stepping back a little what is really worrying about the 62 per cent surge in emerging market stocks since the beginning of the year, a 94 per cent recovery from the lows of the crisis last year, is the extent of this upswing.

It is so strong and so quick that the only word to describe it is a bubble. In China a stimulus package equal to half of GDP was injected into the economy in the first half of 2009 and this liquidity has been the main cause of the stock market rise.

Trade collapse

The fundamentals of a 20-25 per cent collapse in Chinese exports this year are clearly not the market driver. India has seen an even bigger collapse in trade. Russia is suffering from lower hydrocarbon prices. Winning the Olympics is likely a market top for Brazil.

Now liquidity driven stock market rallies are particularly prone to sudden and dramatic corrections without any warning. Basically somebody calls fire and everybody dashes for the exit. In the Middle East things look a little different.

For once the Gulf States are taking a more sober tack. Stock markets are way off their bubble peaks of 2006 and real estate prices have crashed over the past year.

But is this not actually a fairer reflection of the economic outlook and trade flows than the inflated financial markets of the BRIC countries? For the BRIC markets to keep going up they require the developed economies to recover back to their old boom levels, and this is just not likely to happen anytime soon.

No US recovery

Just look at the 263,000 extra jobless in the US for September, worse than forecast, or the 23 per cent fall in US car sales that month as the government’s ‘cash for clunkers’ program came to an end.

Clearly the fall in global trade is not going to be a passing phenomenon but a new economic reality for the emerging markets. In the Gulf States the financial and real estate markets are already beginning to reflect this vision of the future, but are probably still someway from bottoming out.

So would it not be foolish to invest in emerging markets at this point? The volatility of emerging market economies is notorious, and you should wait for the right moment which will only come when today’s investors have lost a great deal of money.

-- Posted Sunday, 4 October 2009 | Digg This Article

About Peter Cooper:
Oxford University educated financial journalist Peter Cooper found himself made redundant by Emap plc in London in the mid-1990s and decided to rebuild his career in Dubai as launch editor of the pioneering magazine Gulf Business. He returned briefly to London in 1999 to complete his first book, a history of the Bovis construction group.

Then in 2000 he went back to Dubai to become an Internet entrepreneur, just as the dot-com market crashed. But he stumbled across the opportunity to become a partner in www.ameinfo.com, which later became the Middle East's leading English language business news website.

Over the course of the next seven years he had a ringside seat as editor-in-chief writing about the remarkable transformation of Dubai into a global business and financial hub city. At the same time www.ameinfo.com prospered and was sold in 2006 to Emap plc for $27 million, completing the career circle back to where it began a decade earlier.

He remains a lively commentator and columnist as a freelance journalist based in Dubai and travels extensively each summer with his wife Svetlana. His financial blog www.arabianmoney.net is attracting increasing attention with its focus on investment in gold and silver as a means of prospering during a time of great consumer price inflation and asset price deflation.

Order my book online from this link

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