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Although I believe gold still faces a very rosy future,
an agreement in Washington that avoids default and growing concerns of a global
economic slowdown could create significant near-term headwinds for gold
investors.
While the dysfunction of the US government is on stark
display over the debt ceiling negotiations, other areas of the world show
similar policy confusion. In the European Union, great doubts exist as to how
the leaders will be able to stem the tide of serious sovereign debt contagion
without inviting recession and an uptick in inflation. In China, commentators
seem to lack confidence that the economy can maintain its impressive growth
rate if its major trading bloc partners fall back into recession. This
uncertainty has created a level of financial fear that has contributed to
gold's run up to more than $1,600 per ounce. However, this also means that
any weakening of these fears could lead to a pull back
in gold. An agreement in Washington, however meaningless, may be such a
trigger.
Evidence has grown that the United States government
has no real intention of curbing its spendthrift ways. By next Tuesday,
Congress will likely reach some sort of pallid agreement that will involve a
short-term agreement to raise the debt ceiling just enough to postpone an
imminent fiscal crisis until after the 2012 election. This will, of course,
be another case of kicking the can down the road - and will only further
compound the very problems that have helped send gold soaring. Still, any
agreement that prevents an immediate default on Treasury debt will be greeted
with great relief in the markets. The good feelings may spark a short-lived
rally in stocks and sell-off in gold.
Another near-term hurdle for gold will be the dawning
realization that recession may take hold once again in many regions around
the globe, most notably in the US and eurozone. To
the extent that these recessions are deflationary, they could drag on the
gold price.
Despite the agitation of the freshman Tea Party members
of the US House of Representatives, there appears little or no serious
discussion about curbing the rise of runaway government spending that is
acting as a crippling parasite on the US economy. Similarly, the punitive
nature of the present so-called sovereign debt rescue packages in the eurozone likely will fan the flames of recession in
Europe. To the extent that these downturns are not met with new money-printing,
they could hypothetically hurt the gold price.
This is especially true if the implosions among Western
economies impede the growth of China. For now, it appears China's breakneck
growth is indeed slowing, but it is neither clear what role their export
markets play in this nor how quickly they will be able to shift to a
domestic-consumption model.
In normal times, these deflationary forces could
present long-term problems for the gold price; however, these are not normal
times. Rather, we believe the stage is being set for the currency catastrophe
we have long forecast. In our calculation, the sovereign debt problem likely
will increase. Eventually, even suddenly perhaps, it will lead to a currency
crisis. This may cause a temporary capital shift from the euro into the US
dollar, temporarily correcting the current dollar slide. But very quickly, I
expect investors would realize that the US dollar itself is most vulnerable.
As it is the international reserve currency, this might very well threaten a
currency collapse and a surge in the price of gold.
In summary, gold appears set on a very strong upward
path. However, in the short term, if global recessionary forces re-emerge
and/or investors become euphoric over the US dodging a debt default, gold could
face a significant price correction. If governments inflate wildly in a
futile attempt to avert a pending depression, leading to stagflation, as we
expect, then gold should rebound in price.
This should not be construed as an appeal for investors
to sell their gold and try to time their way back into the market. Rather, I
would suggest that there may be some discounted opportunities in the coming
months. Hold on tight for turbulence ahead, and keep your bearings fixed on
your intended destination.
John Browne
Senior Market Strategist
Euro Pacific Capital, Inc.
20271 Acacia Street, #200 Newport Beach, CA 92660
Toll-free: 888-377-3722 / Direct: 203-972-9300 Fax:
949-863-7100
www.europac.net
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