Cash or Gold?

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The current flight to cash is a panic-driven reaction to a financial catastrophe that threatens the very foundations of capitalism according to Eric Sprott, chairman of Sprott Asset Management. Once markets realize the folly of trusting paper-based assets of any kind, gold will rise to assume its historic role as the one true safe-haven, the only asset with a zero-default risk.

Allow us to preface this article by saying that we’ll be making no mention of the ‘manipulation’ of the price of gold. Let’s put that issue aside for now because, in the long run, it just won’t matter. We are in the midst of a financial crisis – not just any financial crisis mind you, but arguably the worst and most pervasive the world has seen in almost a century (second only to the Great Depression... thus far). In the sea of financial assets and currencies that are being decimated the world over, the one true safe haven continues to be gold.

During these times, it is understandable that the prevailing investor sentiment is fear. People are fearful of their savings, fearful of their jobs, and especially fearful of risk, having just witnessed how quickly a bear market can decimate portfolios. The other major factor currently affecting markets is deleveraging. As we all know by now, the 2002-2007 credit bubble was all about leverage. Leverage in housing and real estate. Leverage in the banking system. Leveraged hedge funds. As long as all asset classes continued to go up, then leverage was the winning formula. Although such a myopic strategy paid handsomely in the short run, the premise of the preceding sentence is, of course, false over the longer term. Thus, the winning strategy of yesteryear is now a ruinous one, leading to a vicious circle of deleveraging that is gutting the value of almost all assets. In this respect, gold is proving to be no exception...

Mind you, gold isn’t performing badly by any means. In Canadian and Australian dollar terms the price of gold is at or near all-time highs. Such is the case in most of the world’s currencies...

we would not consider any paper-based asset as ‘safe’ right now. Especially not currencies, as we will explain shortly. When the markets realize this, the outcome should be highly bullish for gold... Read full article here.

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