American democracy failed to deliver the $700 billion bailout on Monday and many stock markets around the world had their worst crashes since 1987. The Dow fell seven per cent and the S&P index by nine per cent. In a flight to safe havens both the dollar and gold rose together as they only do in the most extreme financial chaos.
The Congress will convene again later in the week to attempt to legislate again. US presidential candidate Barrack Obama has assured the public that this time the bill will pass. But a lot of damage will be done to already weak financial markets in the meantime.
If nothing else this is a reminder of just how serious matters have become. It is not as if a $700 billion package is going to answer the problem and get us back to business as usual. Indeed, the Fed announced this week it had just injected $650 billion into markets for stabilization, so you have to wonder why $700 billion is such a big deal.
Compared with the size of the derivatives problem now facing the world this is indeed small change. Estimates for the total cost of this bailout range from $5-20 trillion.
As the true cost of the necessary bailout gradually becomes apparent then the market meltdown on Monday is going to be a walk in the park. There will be no alternative but to flood the system with dollars which will be inflationary and devalue the US dollar - bad news for those in the flight to quality today as there is no quality left in the US currency.
The big gainer in all this will be precious metals which advanced modestly on Black Monday against falls in every other asset class except treasury bonds. And who knows how long treasuries will hold up - the US government is heading for bankruptcy and it is very easy to obtain much better interest rates by putting your cash with a major financial institution.
On Black Monday even precious metal shares dropped but should bounce back quickly given the strength of precious metal prices. In the choppy waters of financial markets this week there may be a chance for late-comers to the precious metals ball to pick up some good precious metal shares at near bargain basement prices.
Or indeed, the really intelligent will buy the junior exploration stocks which just have to follow the gold price up, and if history is any guide then as gold prices take off there will be a near exponential gain in the value of precious metal claims. Junior explorers own the claims, so buy their stocks and you will achieve massive leverage to the soaring price of gold.
This argument is as old as the hills among gold bugs. The difference today is that it is happening right before your eyes. Any market meltdown brings some tremendous, once in a lifetime chances to make money. Buying precious metal juniors this week will be it. Or buy silver if you want another leveraged gold play, or better still pure silver producers to leverage both gold and silver prices. But the juniors will deliver the highest returns over the next few months and years.
KYOTO (Reuters) - Private banks could be the next big buyers in the global gold market, helping drive prices higher as they consider restocking bullion bars that were sold off in calmer times, the top HSBC gold trader said on Monday.
Jeremy Charles, chairman of the London Bullion Market Association and global head of precious metals trade at HSBC Bank, also said he expected central banks around the world to put the brakes on their plans to sell down gold reserves as they see other assets deteriorate, lending further support to prices.
“I think the institutional investors and private banks in particular will all be reconsidering their strategy. My belief is they are likely to want to own some gold again,”he told Reuters on the sidelines of the LBMA’s annual conference. The current generation of private bankers destocked their gold holdings in the 1980s and 1990s to pursue higher-return investments in recent years, but are now seeing the wisdom of the previous generation’s gold holdings, he said.
The deepening world financial crisis as the burden of toxic housing debt pushed U.S. and European banks to the brink of collapse has roiled investors globally, causing many to rethink their approaches and potentially putting a new shine on gold.
Comment by peterjcooper — September 30, 2008 @ 7:49 am
KYOTO, Japan, Sept 29 (Reuters) - A near “perfect storm” has reformed in the gold market that should drive bullion to new record highs within the next six months, fuelled by a mix of anxious uncertainty and a weaker dollar outlook, a Barclays Capital official said on Monday.
While gold prices may weaken briefly if other markets rally in relief once U.S. legislators gave the greenlight to a $700 billion bailout of the financial system, a reconsideration of gold’s merits should propel it beyond the March record of $1,030.80 an ounce, says Jonathan Spall, a director in BarCap’s commodities division.
“I think we should make new highs .. .within the next six months, I would’ve thought,” he told journalists at the London Bullion Market Association’s annual conference in Kyoto. “We should be in a perfect storm for gold.”
The U.S. and European governments have stepped in this month to bail out major banks and financial institutions whose near collapse under the weight of toxic debt triggered the worst crisis in decades and threatened to wreck the world economy. “I was always very sceptical of the argument of gold as a safe haven, but that has changed dramatically for me and for others — now it’s financial institutions themselves that are under threat,” he said.
Spall, who liaises with central banks and with hedge funds in both precious and base metals markets, also said he saw indications that hedge funds were increasingly interested in moving into the gold market.
Comment by peterjcooper — September 30, 2008 @ 8:51 am
From a small investor, thanks for your insight.
It seems that most investors prefer to invest in either the large gold producers (Barrick, Newmont, Ashanti, etc.) or junior explorers who have only recently become producers (Sino Gold, Jinshan, etc.)? The big boys offer safety, and the junior explorers offer potentially huge gains. But the small/new producers seem to be somewhat of an afterthought. Do you have attributes you look for in that group?
Comment by rogelio — September 30, 2008 @ 9:16 am
Sorry. Correction. It seems investors prefer either the large producers or the junior explorers, with the small/new producers being an afterthought. Do you have attributes you look or in the small/new producers?
Sorry for the typo. It’s late here in the states and it has been quite a remarkable day.
Comment by rogelio — September 30, 2008 @ 9:18 am
Well have a look at Citigroup in Australia (Dubai has just bought a stake) - this seems to have the right attributes, namely proven resources with reasonable extraction costs in a low-risk country. I think all gold and silver stocks have a great future as the metal prices take off - but some will perform very much better than others. Those that carry the highest risk should offer the best returns - but it is always best to balance your portfolio so that one mistake can not wipe you out (which would be a shame as it should be relatively easy to do very well in a bull market).
Comment by peterjcooper — September 30, 2008 @ 9:21 am
Remarkable times, to be sure. Peter, thank you for the comments here and in the Daily Telegraph for many months. Sometimes, you were derided; even scolded. All your words and generosity of spirit have been proven right.
20% of my investments are in gold and silver bullion in Zurich; physical metal. Some ‘advisors’ think I’m being wilfully eccentric. It’s my money, and my children’s future, and I’ve been more right than so called ‘experts’ in recent years.
Next? Producers with proven gold and silver mining capacity.
I cannot in all conscience stand by and see my children defrauded by mediocre politicians and some banksters. Not all politicians and bankers fall into this category. Too many of them do.
It’s a bad old world when mothers need fret over such things, fearing for their children’s future.
Best wishes to you and yours. Thank you for the timely guidance in recent times.
Comment by clr — October 1, 2008 @ 12:03 am
P.S.
I suspect that mothers in Asia, the Middle East, and Latin America will wake up to the new reality. Gold and silver prices may yet surprise even the most optimistic forecasters when that happens.
‘The hand that rocks the cradle, rules the world.’
Safety first. Only silly men imagine that they are under no influence from such a force of nature. A good husband or son responds accordingly to a good wife or mother’s main concern: the protection of the next generation.
Comment by clr — October 1, 2008 @ 12:12 am