Gold as a Truly Last Resort


"Physical gold is a hedge against the coming financial Armageddon and belongs in every investor's portfolio."

For many investors, it was confusing not to see gold surge to multiples of its current price. Shouldn't gold have dramatically surged in this financial tsunami? Most investors forgot that gold was a playground to some deep-pocket investors from the hedge fund industry that got hit tremendously by redemptions and massive forced deleveraging because of a domino collapse of prime brokers, such as Lehman or Bear Stearns. The result was a fire sale in COMEX gold futures and paper products with gold as underlying.

The physical market was different, particularly in the third and fourth quarter of 2008. Even though physical demand was very strong and supply reached its upper limits, even the price of gold declined. This was only a short-lived market distortion triggered by the paper gold market. In the last couple of weeks, the market already rebalanced the price as gold went from sub $700/oz to roughly $900/oz. The pressure from forced sellers and fund liquidation sales is more or less over and this should pave the road for much higher gold prices in the future.

Is gold truly a reliable hedge against an asset meltdown as it was in the past? Yes, but we have to differentiate. Gold can only perform if the system itself is not under massive default pressure—at least in the first phase. So is the run now over? It is far from over. Technically, gold is moving up again and the move will very soon be supported by a crash in the currency and, particularly, bond markets.

The bond market (particularly government bonds) is the biggest bubble today and, once this bubble bursts, the only asset class that remains will be gold. At that point, gold will surge and investors will move huge amounts of money into physical gold and gold stocks because it is truly the last resort.

Gold is the true last resort, which is why the price of gold has not exploded in the past couple of months. The financial system has not yet reached the last-resort stage, but it will because the point of no return was passed. Governments and central banks around the globe decided to save the current financial system at all costs. Quantitative easing and aggressive fiscal stimulus will eventually create huge inflation and fundamental changes to our societies and economies. They can't go back but only forward with faked statistics and money printing to keep the system alive as long as possible to hope for a solution. There is a solution, but it is very unlikely to happen, unfortunately.

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