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The Bullion Report

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September 21, 2011 in 'The Bullion Report'

Weight of the WorldWeight of the World

The precious metals sector has not really dimmed this year as credit and debt issues linger on. The global recession is far from over, and the ripple effects from the troubles that began in 2008 are still hitting financial quarters. As another credit downgrade hits the headlines, consider the possibility that the volatility in major currencies might bring a fresh shine to gold, silver, and the rest of the metals sector. 

Italy, Spain, Portugal, Ireland, Greece, and the US - this is the current roster of global trouble spots where debt is weighing down potential recovery. In each of these areas, a major agency has downgraded the credit rating of the nation or at least cast a shadow of doubt by lowering the outlook for the same. These little checkmarks against a nation spell weakness and that has brought a slew of volatility to the markets once again.

The US dollar and Euro currency have shifted back and forth as investors try to gauge the severity, trying to find the best of the worst. One of the key weaknesses for the euro seems to lay in the potential for the whole of the euro zone to survive. The weakness in one economy, like Greece or Italy, could prove to be too much for stronger economies to remain resilient against. Places like Germany are leaned on for their apparent economic buoyancy. The dead weight of places that are getting weaker in the current poor economic environment could drag them under water. If it were limited to only one or two areas of weakness there might be a chance for things to work out well. Unfortunately, the more European nations make headlines with lowered credit statuses, the more investors will grow concerned. They will start to fear that the next headliner will become the proverbial straw to break the Euro's back.

The US dollar has also lost some of its luster as a reserve currency. The quantitative easing was a deliberate undermining of the currency that did not go unnoticed by central banks. In the latest GFMS Gold Survey paints an interesting picture of what I mean. In 2010 gold purchases by central banks were around 77 tons. This year they picked up over 200 tons so far and are forecast to add another 120 tons in the second half. The sales are to countries like Mexico, South Korea, and Russia, and seem to support a move away from the US dollar and other former "safe-haven" trades like US treasuries, German bunds, and the Japanese Yen. The Swiss Franc had seen a surge of haven interest, but their central bank has moved to intervene to keep the Franc down. That, and the potential for other banks to do the same, has kept gold on the radar for fresh acquisitions.

Unlike those interest bearing securities or national currencies, gold doesn't have to wait for a rating agency to potentially cut its outlook. Precious metals do not have to be weighed against bank interventions and changes in policy. Most of all, it currently enjoys a global appeal, especially in those centers of significant demand - China and India. In both Asian nations, gold investments have grown and enjoyed a certain level of additional buying support as each country struggles with inflation issues. Since gold is also able to serve as an inflation hedge, the perceived benefits in the midst of global uncertainty are two-fold. The US dollar and other foreign currencies just can't say the same thing right now.

 

Summary

The is likely no magic bullet to the debt problems facing developed nations. There are several areas of weakness that need to be addressed before any kind of real recovery will materialize. Depressing housing numbers and persistent unemployment are just the tip of the iceberg. The reduction in tax revenue at local, state and federal levels is probably keeping things it a tight spiral that will be tough to break out of. Both at home and abroad, there will still be tough times ahead. That is what keeps central banks and private investors looking for alternatives to major currencies. This is what will continue to drive support with every dip in gold and silver prices. There is not a quick fix for the global economy, but for those who are looking to diversify their reserves or try to engage in some level of potential asset preservation, there are precious metals. 

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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.