-- Posted Tuesday, 11 May 2010 | Digg This Article | | Source: GoldSeek.com

Not only has the gold price sailed past the volatility of the last week in global financial markets, gold has positively benefited from the chaos and today put on $15 and at the time of writing is less than $10 short of its $1,226 an ounce all-time high reached last December.

The question then is whether gold consolidates around the new $200 step-up at $1,200, when only recently passing the $1,000 goal-post was such a struggle and only achieved on the third heave, or heads much higher.

Parabolic price rise?

It maybe that this is the point at which gold price rises start to go parabolic. Much will clearly depend on how financial markets behave and that is really anybody’s guess right now.

The $1 trillion euro-bailout yesterday is a lot of money to throw at markets, although the doubts about the effectiveness of this initiative immediately surfaced today and caused stock markets and currencies to retreat from Monday’s gains. Things do not look that stabilized from this response.

A resumption of the wild volatility of last Thursday’s 1000-point plunge in the Dow Jones, still not fully explained as a computer glitch, should be good for gold as a diversifier of risk and safe haven. Bonds are the usual safe haven in a stock sell-off but also look pricey with interest rates so low.

ArabianMoney can see a new all-time high for gold as a done deal but a pretty big shoe will have to drop to send the yellow metal into the stratosphere. British politicians are doing their best but all eyes are still on the eurozone, and that has distracted attention from the UK political crisis.

Asia overheating

Then again Asia is also a bull story that is unraveling before us. China is clearly overheating and its stock market is now officially in bear market territory and thus predicting a crash.

There is plenty of instability and volatility out there to support a much higher gold price. But the real spike will only come in a sudden loss of confidence in the bond market and a rush into precious metals as the only money that cannot be printed.

The devil is that bond market crises generally come from nowhere. All the more reason therefore for buying some gold and silver before that happens.  

What does the euro-bailout achieve except raise gold prices?

Just over twenty-four hours after the near one trillion dollar eurozone bailout package and analysts are already starting to ask what has actually been achieved.

Certainly the immediate sovereign default risk is lifted from bank balance sheets and that has sent their shares skyward, which does help to recapitalize the banking sector. But essentially the super high public debt still exists and has been transferred from the banking sector to the tax payer.

Austerity follows

That means in order for the debt to come down there still has to be austerity, with budget cuts, higher unemployment, and logic implies lower or more likely negative economic growth.

Perhaps that is why it is more reasonable to see the jump in global stock markets yesterday as some sort of grand finale to the recent rally, rather than the dawning of a new age of ever-rising stock markets with European governments stumping up the cash.

European governments surely would have waved a $1 trillion wand months ago if putting things right was really this simple. The magic of reshuffling loan risk is a sleight of hand, and there really is no such thing as magic.

Sovereign risk has not gone away in the slightest. The medium to long term implications of high government debts are still there, and now have to be tackled.

And although the first impact of the bailout news was to inflate the value of stocks, the longer term implications seem profoundly deflationary. As governments spend less the response will be for economies to contract.

Lower interest rates

But where the measures are supportive to asset values is in keeping interest rates down. However, it is hard to see this doing anything more than lessening the pain of interest rates that will have to rise overtime.

As the value of stocks, real estate and bonds fall the asset class of choice will become precious metals as the last safe haven. Thus a great deal of money will be funneled into what is an asset class with a very tight supply, and the inflation of gold and silver prices will be enormous while other asset classes remain depressed.

So aside from averting an immediate sovereign debt crisis the euro-bailout is just another twist in the road to $5,000 gold.

-- Posted Tuesday, 11 May 2010 | 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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