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New all-time high for gold as global stock markets slump, where next?

By: Peter Cooper, Arabian Money


-- Posted Wednesday, 3 August 2011 | | Disqus

Maybe this time is going to be different for gold. In late 2008 gold and silver prices slumped along with global stockmarkets. Yesterday the yellow metal jumped to an all-time high of $1,661 as stock markets took a big hit.

Can gold keep this up? Hedge fund managers like John Paulson, who made the best-ever hedge fund bet against US subprime loans, have stocked up on gold. George Soros has been selling the metal but buying gold shares.

Olympian view

So is gold the going to be the ultimate hedge against economic armaggedon, or at least round two of the global financial crisis? Let us step back and take the view from Mount Olympus.

Since the global financial crisis of 2008 the global central banks have flooded the world with liquidity and kept interest rates artificially low. This money has found its way into financial markets and raised asset prices that have also discounted the lower cost of money.

But now this circus is coming to an end. Pumping money into the system causes inflation and inflation puts pressure on bond markets to raise interest rates. This is being felt in the euro zone periphery countries and now Italy as well as China and Australia.

How long before it happens in the US, Germany, Japan and the UK? Inflation is already way ahead of bond yields making them loss-makers in terms of income, quite apart from being an obvious set up for capital losses.

As bond markets become less attractive central banks are also acting rationally in buying gold as a hedge against the very inflation that they are causing. Global central banks bought more gold in the first half of 2011 than the whole of 2010. That’s good for the gold price.

The pressure of rising interest rates is also damaging to stock markets as it makes the dividend yields paid on stocks too low. Drop share prices and you raise dividend yields to compete with money markets.

Economic slowdown

And yet if stock markets fall as investors lose confidence in the global recovery as seems to be happening, with little on the horizon as a good argument for a reversal of this process, then investors will flee to the relative safe haven of bonds and push yields down. That certainly happened yesterday with the US dollar strengthening as well.

Strange then to have both the US dollar and gold strengthening at the same time but the inverse correlation is not absolute. It is perfectly possible for investors to seek out both precious metals and bonds as safe haven investment in a crisis.

But if you are looking into the crisis and beyond then it is precious metals that have the brighter future not bonds as risk premiums are rising globally and investors will want higher interest rates if governments want their money.

Marc Faber sees the US as Greece x1,000. Just look at Greek interest rates and the armageddon scenario that faces us is clear. You do not want to be left holding any assets dependent on US interest rates staying so low.

That eliminates bonds, stocks and real estate and leaves you with gold and silver. Only then can the cycle reverse. Gold superbug Jim Sinclair is right precious metals are the only hedge against a US treasury crash (click here).


-- Posted Wednesday, 3 August 2011 | Digg This Article | Source: GoldSeek.com

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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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