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Gold Outperformed
Most Assets in 2008 - Gold Up 3.9% in USD; Up 5.3% in EUR and Up 34.4% in GBP
Today’s London AM fix (23/12/08) was $844.01 (USD), £570.85 (GBP) and €603.72 (EUR). At
the start of 2008 ( January 2nd 2008), gold’s London AM Fix was at
$840.75 (USD), £424.81 (GBP) and €573.34 (EUR).
Thus, in 2008 gold is up by 3.9% against the dollar, up 5.3% against the euro
and up 34.4% against the pound. The London AM Fix is a widely followed
benchmark for physical gold and silver prices and is reported in major
newspapers and at many gold-related websites.
23-Dec-08
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Last
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1 Month
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YTD
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1 Year
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5 Year
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Gold $
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845.15
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5.77%
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1.42%
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4.16%
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105.83%
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Silver
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10.80
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12.07%
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-26.85%
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-24.60%
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89.21%
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Oil
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39.82
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-20.93%
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-59.84%
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-57.45%
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24.63%
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FTSE
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4,283
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13.27%
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-33.66%
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-33.43%
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-3.55%
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Nikkei
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8,724
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10.27%
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-42.85%
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-42.82%
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-15.89%
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S&P 500
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|
872
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8.95%
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-40.64%
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-41.28%
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-20.25%
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ISEQ
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2,384
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2.72%
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-65.62%
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-65.57%
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-51.03%
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EUR/USD
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1.3990
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11.15%
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-4.08%
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-2.71%
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12.85%
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© 2008 Goldassets.co.uk
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This has led to a
sharp outperformance of gold vis-à-vis every major equity indices and
commodity in the word, not to mention most property markets (see Chart and
Performance table).
In March, gold fell from a record nominal high of just over $1,000/oz but it
is important to remember that gold is only down some 15% from that record
nominal high and this is after surging nearly 60% in the previous 7 months. In
the seven months from the start of the credit crunch and the collapse of Bear
Stearns, gold had surged by nearly 60% - from $640 in August 2007 to over
$1,000 in March 2008.
Thus after a 60% surge in just 7 months, gold had become overvalued and was
due a correction. This is exactly what has happened and despite carnage in
equity, commodity and property markets internationally gold remains higher in
2008 in all major currencies including one of the strongest currencies in the
world during the second half of 2008 – the US dollar.
Considering that gold had already outperformed all other asset classes in the
last 7 years (a roughly 20% return per annum), this is quite an achievement. Especially
given the extraordinary and unprecedented financial and economic times that
have confronted us in 2008.
Gold and silver may rise or fall a small number of percent between here and
actual year end. Should gold close down on the year, it will be only very
marginally and will be the first annual fall in gold prices in dollar terms
since 2000. Even were gold to end up being down some 5% in dollar terms in
the year – that would be quite an achievement considering how badly
property markets and major equity indices such as the FTSE (-33.4%), S&P
500 (-41%) and Nikkei (-43%) have performed in 2008.
Equity indices are down by even larger amounts from peak to trough or from
their recent record highs.
Gold has done exactly what it should do in a financial and economic crisis
– it has outperformed other asset classes and preserved the wealth of
those who have prudently diversified.
Silver Outperformed Most Assets in
2008
Silver fell some 50%
from recent multiyear record highs this year but will still outperform all
major equity indices in 2008. This is quite an achievement especially given
the fact that silver has surged in value in recent years and particularly in
late 2007 and the start of the financial and economic crisis.
Silver is down 24.6% in USD terms, 22.5% in EUR terms but is up 1.46% in
sterling terms (see Performance tables), clearly showing it’s safe
haven credentials.
A Euro perspective of the
world markets
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23-Dec-08
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Last
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1 Month
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YTD
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1 Year
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5 Year
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Gold €
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602.92
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-5.30%
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5.52%
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6.84%
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82.03%
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Silver €
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7.72
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0.82%
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-23.74%
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-22.50%
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67.67%
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Oil €
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28.55
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-40.16%
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-58.01%
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-56.15%
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10.76%
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FTSE €
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4,039
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21.01%
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-14.87%
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-13.44%
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29.33%
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Nikkei €
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|
69
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5.35%
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-26.10%
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-25.58%
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-11.08%
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S&P 500
€
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|
623
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-2.03%
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-38.12%
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-39.65%
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-29.34%
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ISEQ €
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|
2,372
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|
2.21%
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-65.79%
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-65.74%
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-51.27%
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EUR/USD
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1.399
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11.16%
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-4.07%
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-2.70%
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12.86%
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EUR/JPY
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126.0
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4.37%
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-22.67%
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-23.17%
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-5.41%
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EUR/GBP
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|
1.0566
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-10.85%
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-22.37%
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-23.37%
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-25.70%
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© 2008 Goldassets.co.uk
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This is a sterling
performance, pun intended, especially considering the carnage in equity,
commodity and property markets internationally. Silver, like gold, has
outperformed nearly all commodities, all indices and most asset classes in 2008 in all major currencies including one of the strongest currencies in the world last year –
the US dollar.
Silver did fall from a record nominal high of $20.86/oz, but it is important
to remember that it is down some 50% after surging 83% in the previous 7
months. In the seven months from the start of the credit crunch and the
collapse of Bear Stearns, silver had surged by 83%. Indeed, silver has risen
sharply in recent years and had risen from some $6.70 in August 2005 to a
nominal high of $20.86 in August 2007 or over 200% in just 2 years. Clearly
despite very strong fundamentals, some irrational exuberance had entered the
silver market and a sharp correction and consolidation has been taking place.
Today silver looks extremely good both from a fundamental and technical
perspective.
A GBP Perspective of the world
markets
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23-Dec-08
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Last
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1 Month
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YTD
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1 Year
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5 Year
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Gold £
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570.63
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6.55%
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35.99%
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39.48%
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145.06%
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Silver £
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7.33
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13.44%
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-1.42%
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1.46%
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126.38%
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Oil £
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26.97
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-20.09%
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-45.97%
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-42.84%
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48.88%
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FTSE
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|
4264
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12.78%
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-33.96%
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-33.72%
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-3.98%
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Nikkei £
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66
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21.29%
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10.03%
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-2.87%
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36.61%
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S&P 500
£
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589
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11.25%
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-23.25%
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-21.24%
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0.30%
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ISEQ £
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2245
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14.63%
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-55.94%
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-55.29%
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33.90%
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GBP/USD
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1.479
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-0.88%
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-25.54%
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-25.44%
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-16.14%
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GBP/EUR
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|
1.057
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-10.85%
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-22.37%
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-23.37%
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-25.70%
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GBP/JPY
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|
133.13
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-7.02%
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-39.98%
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-41.13%
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-29.71%
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© 2008 Goldassets.co.uk
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Outlook for 2009
Never
in modern history has the outlook for global financial markets and economies
been so uncertain.
The financial markets and global economy remain in a state of heightened
flux. Deflation is clearly winning the early to middle rounds of the titanic
“flation” battle. But the concern is that inflation and
stagflation will come out swinging in the following rounds. The taboo word of
‘hyperinflation’ may soon become a topic of debate in the coming
months as stagflation and deflation have done in recent months.
Bernanke’s academic knowledge of the Great Depression and Japan’s ‘Lost decade’ while useful is quite obsessive and myopic . He
would do well to also study Weimar Germany as there are parallels with America’s massive fiscal deficits and world’s largest debtor status with those of Germany after World War I that are increasing by the day.
There are real concerns of a disorderly run on the dollar as the creditors of
the world’s largest debtor nation get worried about their US dollar
denominated assets and need their own currency reserves to help protect and
stimulate their own struggling economies.
A prime distinction between the 1930’s deflation and Great Depression
and today is that then the US was the world’s largest creditor nation
and the dollar was backed by gold. Thus the US dollar strengthened in value
as everything deflated in value versus it (stocks and property fell by some
80%). Gold was even stronger as Roosevelt devalued the dollar by 60% and
revalued gold by 60% from $22/oz to $35/oz in 1933.
Today, the US is the largest debtor nation the world has ever seen and the
levels of debt are increasing dramatically. And the US dollar is now a fiat
paper currency, only backed by the “good faith and credit” of the
US government.
It would not require significant selling by the Chinese, Japanese, Russian or
OPEC nations to create a run on the dollar and sharp move upwards in long
term interest rates (as US government bonds are sold) rather only a sharp
reduction in their purchases of US debt instruments. This possibility is
looking more probable and could see President elect Obama facing a monetary
crisis in his first term.
Especially as the economic meltdown is leading to the US’ creditor nations having their own domestic financial and economic crisis to deal
with. A sharp decline in the dollar will likely see other nations devaluing
their currencies in competitive currency devaluations which would see the
value of all currencies decline relative to gold. Competitive currency devaluations
are already taking place in many countries internationally including in Japan (just last week Japanese Finance Minister Shoichi Nakagawa signaled Japan is ready to sell yen
in order to artificially manipulate a weaker currency), Russia and China.
Massive and Deepening Macroeconomic
Risk in the form of Deflation now and likely
Stagflation or Hyperinflation in
the Medium to Long Term
Deflation Now
Vicious deflation (particularly in asset markets that were based on
massive amounts of debt and leverage) looks set to be the prevailing theme of
2009 or at least most of 2009. However, in the medium to long term we are
likely to get a sharp bout of stagflation which, if not tendered to carefully
or should there be a run on the dollar, could lead to a more serious bout of
hyperinflation in the US and in other debtor nations.
Contrary to misinformed commentators and “expert” claims that
gold does not perform well in deflation, it is worth noting that gold
outperforms other asset classes not just in periods of inflation or
stagflation. Gold also outperforms in deflationary depressions as it did in
the 1930s when the dollar (which was backed by gold unlike today in our
modern floating fiat currency monetary system) was sharply devalued overnight
by Roosevelt from $22/oz to $35/oz. Thus overnight in January 1934, gold was
revalued by 59%.
It is worth remembering that the Dow Jones fell by 90% during the period and
property prices fell by more than 50%.
Stagflation and potentially
Hyperinflation
President Obama must be careful that his fiscal stimulus and efforts to
reflate the rapidly deflating economy do not result in deepening inflation
and stagflation. As this would then necessitate a Paul Volker style Federal
Reserve Chairman who would hawkishly increase interest rates in order to tame
inflation and encourage Americans to forego consumption and rebuild a culture
of prudent saving, manufacturing and exports which will be necessary if America wishes to regain its economic health again.
With central bankers, President Obama and politicians internationally
desperately trying to inflate their way out of the current deflationary
spiral, the concern is that while they may succeed in vanquishing the Charybdis of deflation they are
eventually slaughtered by the Scylla
of inflation, stagflation and potentially even hyperinflation.
Investors and savers should be cognoscente of the big picture historical
trends and prepare, invest and save accordingly.
Solvency of the U.S. government
America is the largest debtor nation the world has ever seen and its global
ascendancy is now threatened by this staggering debt and by the emergence of
new powers and a new multipolar world.
American consumers have $14 trillion worth of personal debt and the national
debt has risen sharply to some $11 trillion ($5.7 Trillion when President
Bush came to power) and projections that this debt could surge to as high as
$20 trillion in the coming years. And this does not count the staggering
unfunded liabilities of either Social Security, Medicaid and Medicare. The
head of the Federal Reserve Bank of Dallas, Richard W. Fisher has said that
the unfunded liabilities from Medicare and Social Security adds up to $99.2
trillion.
There is absolutely no way that the American people can fund these Social
Security and Medicare obligations. The United States has been living way
beyond its means and will become a third world country unless something is
immediately done to drastically cut humongous military expenditures and
government spending.
The demographic time bomb facing the US as 78 million baby-boomers begin to
retire in the coming years may make the current financial crisis look like
child's play.
Mr. David Walker, the US Comptroller General, chief accountability officer
and head of the US Government Accountability Office (GAO) has drawn parallels
between the US today and the end of the Roman Empire, warning there are
"striking similarities" between America's current situation and the
factors that brought down Rome, including "declining moral values and
political civility at home, an over-confident and over-extended military in
foreign lands and fiscal irresponsibility by the central government"
(see David Walker's recent article in CNN via Fortune magazine in the
COMMENTARY section today).
The US government fiscal position increasingly resembles that of a Latin
American ‘Banana Republic’. While levels of corruption are not on
a par with these Banana Republics, corruption is rife and it increasingly
looks like the lower and middle classes of America have been pillaged by the
Wall Street moneyed elite and their appointed lackeys in the higher echelons
of the US government.
This is not "anti American" as "pro American" liberals
and conservatives alike have echoed these warnings in recent years. The
Government Accountability Office (GAO) has rightly earned a reputation for
professional, objective, fact-based, nonpartisan, non ideological, fair and
balanced reviews of government programs and operations.
Walker has said that fiscal responsibility must be a top priority and if
this is done the problems challenging the US can be overcome but "if
they don't, I think the risk of a serious crisis rises considerably". This
crisis would almost certainly be monetary in nature with a possible collapse
in the dollar and the dollar losing its privileged status as the global
reserve currency.
The new President will face a herculean task if he is to succeed in
preventing America from becoming a second tier power as happened to Great Britain at the turn of the last century. This has obvious ramifications for investors
who should focus on wealth preservation in the coming years.
Even the most sanguine, tunnel-visioned bull would have to admit that the
fundamentals of the US economy are bad and deteriorating.
Solvency of UK and of many other debtor nations
Sterling has fallen precipitously in recent weeks leading to fears of a
currency crisis. The Bank of England resisted cutting interest rates by more
than 1 per cent earlier this month amid fears that the economy and sterling
would collapse. The bank revealed yesterday that its Monetary Policy
Committee had "considered cutting rates further", but it feared
that "there was a risk that going further could cause an excessive fall
in the exchange rate" causing inflation in the long term.
Ben Read, managing economist at Centre for Economics and Business Research,
told the Telegraph: that “with the credibility of UK fiscal and monetary policy now under serious scrutiny across the international markets,
each policy option comes with potentially serious consequences for the credit
worthiness of UK plc."
As governments and central banks internationally engage in a global
currency debasement those who think that printing money is a risk free
panacea to our deflationary woes will be found wrong once again. The UK is now in the midst of a sterling crisis and the risk is that given the scale of debt
internationally, the scale of the global imbalances (huge US trade, current account and now budget deficits) and the scale of currency debasement that a
global monetary crisis could be the ultimate unfortunate outcome.
Competitive Currency
Devaluations
Competitive
currency devaluations on an international scale are a recipe for wealth
destruction on a massive scale. Devaluation is a short term panacea which
fails to address underlying uncompetitive challenges facing economies. Countries
that devalue their currencies tend not to do well over the long term as seen
in many emerging markets and South American economies in modern history.
Countries that have strong currencies in modern history (such as Germany and Switzerland) tend to move up the value chain in terms of exports and prosper in
the long term. A sound currency is a prerequisite for a sound economy and
alas the UK ,US (after years of profligacy ) and many other nations face
major challenges on both fronts.
Gold is a finite currency will be the default currency of choice and a
monetary safety valve where large sums of capital will flow - thus resulting
in sharply higher prices.
Supply/ Demand Situation in Gold
and Silver Remains Very Bullish
Global gold production is now estimated at some 2,500 tonnes per annum
and demand is around 4,000 tonnes. The
supply demand deficit has been made up for many years by sales by certain
imprudent central banks (such as Gordon Brown’s Bank of England) and
these central banks are now greatly reducing their sales and many central
banks internationally, especially large creditor nations with huge US dollar
reserves, are now diversifying their currency reserves with gold.
Gold ETFs have created hundreds of tonnes (the world's largest ETF, the SPDR
Gold Trust, said its bullion holdings rose 6.1 tonnes, or almost 1 percent,
on Dec. 17 to a record high of 775.33 tonnes of bullion) and billions of
dollars worth of extra demand for gold in recent years. As have the creation
of many other gold storage and ownership programmes such as digital gold and
Perth Mint Certificates (the Perth Mint refines and produces some 10% of the
world’s bullion, doubled output in the past six months).
Meanwhile, global gold production has not increased despite the increase
in demand and increase in gold prices in recent years. Gold is a precious,
finite metal and gold production only increases at a rate of some 2 to
2.5% per annum and falling.
Of the world’s three biggest gold producers (China, South Africa and
Australia), only China has managed to increase gold production in recent
years and their increase in production has been met with a corresponding
sharp increase in Chinese demand meaning that Chinese gold does not add to
supply in the international marketplace as it is all consumed in China which
is a net importer and increasingly so.
South African gold output has been falling since 1970 when annual production
was over 1,000 tonnes. Last year South Africa produced 272 tonnes of gold.
South African gold output fell to its lowest level in 84 years in 2006
because of declining mining grades. The last time South Africa produced less
than 260 tonnes of gold was in 1920.
This means that the supply/demand balance in gold is becoming increasingly
tight and likely to lead to markedly higher prices in the coming years.
Massive Systemic Risk
The risk posed to the entire global financial system has never been as
high and counter party risk has never been as high. In a world where huge
banks such as Bear Stearns and Lehman Brothers can collapse and behemoths such
as Fannie Mae, Freddie Mac, General Motors and a long list of others need to
be bailed out, investors need to again consider systemic risk and counter
party risk. Systemic risk hasn’t gone away, and it’s entirely
possible that the risk may re-elevate in the next six months.
Stockbrokers, pension providers and many other financial intermediaries
will be at risk of failure in the coming months and investors need to be
aware of counter party risk and intermediation. They should only deal with
financial entities and investment providers who they have done much due
diligence on and who they are reassured regarding the solvency. Credit
ratings of providers should again be evaluated and scrutinized.
http://www.research.gold.org/prices/daily/
Conclusion
As
long as the markets continue to be volatile and uncertain which unfortunately
seems very likely - demand for physical gold and silver bullion will likely
stay very strong and should result in higher prices.
Thus, the confluence of decreasing supply (as outlined above) and increasing
demand due to strong international geopolitical, systemic and macroeconomic
factors is leading to extremely bullish conditions for the gold and silver
markets. Probably even more bullish than in the 1970s when silver rose from
$1.39/oz to over $50/oz or 3,600% and gold rose some 2,400% from $35 to over
$850 in just 9 years.
Taken individually, any one of these factors would be bullish for gold
but in unison, these combination of factors will likely lead to gold prices
surging in 2009. The inflation adjusted high of $2,400/oz in 1980 remains a
conservative estimate for gold to reach in the next 2 to 5 years. Similarly,
the inflation adjusted high for silver in 1980 of some $120/oz remains a
conservative price target that will very likely be reached within to 2 to 5
years.
Gold Investments
63 Fitzwilliam Square
Dublin 2
Ireland
Ph +353 1 6325010
Fax +353 1 6619664
Email info@gold.ie
Web www.gold.ie
Gold Investments
No. 1 Cornhill
London
EC3V 3ND
United Kingdom
Ph +44 (0) 207 060 4653
Fax +44 (0) 207 8770708
Email info@goldassets.co.uk
Web www.goldassets.co.uk
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Mission
Statement
Gold and Silver Investments
Limited hope to inform our clientele of important financial and economic
developments and thus help our clientele and prospective clientele
understand our rapidly changing global economy and the implications for
their livelihoods and wealth.
We focus on the
medium and long term global macroeconomic trends and how they pertain to
the precious metal markets and our clienteles savings, investments and
livelihoods. We emphasise prudence, safety and security as they are of
paramount importance in the preservation of wealth.
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Gold and Silver
Investments Ltd. have been awarded the MoneyMate and Investor Magazine
Financial Analyst of 2006.
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