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The Bullion Report

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June 8, 2011 in 'The Bullion Report'

One Country's Crisis, Another's Gold BoomOne Country's Crisis, Another's Gold Boom

It seems that the economic troubles are not completely behind us. Various nations are grabbing headlines as their debt gets deeper, and it doesn’t look like there is any true relief on the horizon. Weakness is rippling through the global economy despite several attempts at stimulus. The situation seems to be escalating, poised for even greater troubles, and that is spinning into fears that are helping investors take a second, third, and fourth look at precious metals.

 

Past performance is not indicative of future results.

***chart courtesy of Gecko Software

News story headlines keep rolling in regarding the debt crisis in Greece. The trouble isn’t that Greece is at risk of an apparent default, it is the fact that they aren’t the only country in trouble. Portugal, Spain, Ireland – these are just a few of the nations that have seen an equally dismal outlook. Moody’s Investor Services, the company that provides ratings and risk management advisory services, has been eyeing several places for possible credit downgrades. Just this week, Moody’s dropped the bomb that debt in Catalonia will be credit negative for Spain, adding to the idea that financial fragility is rife across the Euro zone. Greece is currently looking to rollover its debt, a move that Moody’s says is akin to default. Fitch Ratings takes the same view, arguing that any arrangement in which the holders of Greece’s debt take voluntary losses or “less advantageous” terms is still default from their point of view.

Troubles with debt are not limited to countries across the pond. The US is struggling too - at least that’s what the hullabaloo about the debt ceiling has been. Standard & Poor’s already downgraded the outlook for US debt, arguing that it is unlikely lawmakers will be able to wrestle down the huge deficit. Last week Moody’s warned that they are about to do the same thing. They want to see Congress increase the debt limit in the “coming weeks” or they will pull the sterling credit rating. What does all of this really mean? If all the major economies in the world are fumbling towards default, then it is hard to make a case for any of them in terms of investment.

There used to be a strong tendency for investors to look for havens amid troubled times. The trick nowadays is determining what fits that bill. Low-interest currencies? The US dollar and yen appear too unstable nowadays for that kind of assessment. Real estate? It should go without saying that all the old rules of thumb for this one are out the door. Tried and tested names in stocks? A global recession, especially a potential double dip one, is likely to change the way we look at everything - including some of the “institutions” of investment. Precious metals? Absolutely. Finite and without links to government manipulation (not in terms of blatant policy settings, that is) precious metals like gold and silver are apparently offering the last port in the great financial storm of this century.

  

Past performance is not indicative of future results.
Chart courtesy of CBOE.com 

Investor fear has eased since the onset of the crisis, but there is reason to believe that it can climb again. Unemployment problems are not going away and even though jobs data is considered a lagging indicator, it is an important one. Without the support of consumers with jobs, there are many industries and sectors that could continue to get dragged under. Without paying jobs, consumers aren’t spending money and certainly aren’t adding to the GDP, a critical component when looking at the potential credit default for any nation. A sound base for any government to build on in the coming months will include productive workers and right now too many Americans are either still looking for jobs, or have stopped looking or are underemployed.  

Summary 

There is little reason to imagine that the world is on the road to fiscal recovery. There are more stop signs and warning flags than there have been since the onset of the crisis. The deeper and longer the credit crisis, the more likely I see a reason to park assets in precious metals. There doesn’t really seem to be a benchmark to help us navigate current events and that appears to have left investors more risk adverse. When there is that much fear and uncertainty along the horizon it is not unreasonable to aim for the perceived haven of precious metals - the devil you know - rather than risking things with shakier credit foundations. China and other foreign nations have already concluded the same thing as their gold demand reportedly continues to increase. Mexico, Russia, and other banks had the same thing in mind when they became bullion buyers despite the frequent view that other interest bearing investments are preferred for reserves. Another boon for precious metals: defaults and credit risks also have the chance to boost inflation, adding to the potential buying motivations.

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Disclaimer: The prices of precious metals and physical commodities are unpredictable and volatile. There is a substantial degree of a risk of loss in all trading. Past performance is not indicative of future results.