Gold at $1,200—Why and Will It Hold and Rise?
Source: Julian D. W. Phillips, GoldForecaster (5/7/10)
Fears that Greece just does not have the competence or capacity to rectify its debt position are gaining ground.
That's what we, at the Gold Forecaster, are doing. After alerting our subscribers at $1,050, and $1,150 with another in between, that gold was turning up while others were pointing to a downturn we feel it is deserved.
But far more importantly is the 'why' of the matter.
After all, the Greek problem has been around for a while now. So has the potential drama from east European countries, so has the poor quality pace of the Greek bailout, so has the sovereign debt problem, so has the fact that the U.S. could be right in there too. Then, there are the worries over the global economy. Is it going to be a double-dip recession, or has growth really found traction? Uncertainty and falling confidence is now the norm!
Why Did the Crisis Hit Now?
So, why now? Call it 'realization', call it 'coming out of denial', the impact of the sum total of the problems is summed up in that old saying, "He who sows the wind, reaps the whirlwind." It is being called the "contagion" danger, but it is simpler than that. In the markets, when a pennant formation builds up around a narrowing trading range, buyers and sellers move to a point where they are equally balanced, then like a see-saw, the slightest additional weight either side tips the balance, one way or the other. That's what these crises are like. But on top of that, once it tips say to the buying side, the sellers become buyers then momentum builds up. So does panic and fear. You can smell it. That's what we're seeing right now.
Sovereign Debt Fears to Last a Long Time
Fears that Greece just does not have the competence or capacity to rectify its debt position are gaining ground. They have addressed the smaller but similar problem of austerity before, but to no avail. Spain, even though it is no longer in recession, just does not have the economic structure to repay the debt timeously [sic]. Ireland, Italy the UK and the U.S. could fall into the same category. It's becoming a world-wide problem with China and Germany and other surplus countries the only ones able to supply the funds [unless more debt is issued?] So it's a structural problem. It's rather like a bank creditor not having the ability to increase cash flow, while cutting costs. He can promise anything he likes and raise interest levels as high as he likes, but all he does is send out distress signals.
In our pages we warned that such problems would bring social consequences and here we are. Debt financing, without a convincing way to repay that debt never ends happily. All the promises do is to confirm desperation. Certainly, that's what the markets are telling us right now.
The Gold Price Decouples
We have warned of the decoupling of the gold price from the euro:USD exchange rate for months now are seeing it now, with gold over $1,200 and the USD strong at $1.262:€1. The reason is not USD strength but euro weakness. The panic in the markets is because of fear and uncertainty for the entire global currency system, added to the sovereign debt problems. With the UK now saddled with a 'hung' parliament, sterling is in the firing line. It's possible that there, with a currency of its own, outside the Eurozone, that sterling will fall heavily. A reintroduction of the "dollar premium" is possible [Capital Controls].
That's why we are now seeing reports that gold is at record levels in all currencies.
Why and Will the Gold Price Hold and Rise?
Investment demand from central banks, to funds, to institutions, to wealthy individuals, is driving the gold price, as fear and uncertainty mounts. One commentator said that "when the fear subsides the gold price will fall." Fear, when it runs deep, scars the fearful. It takes a long time to lose that fear. Sometimes it takes years. That's the investor.
On the other side, fear only subsides if there's good cause for it to do so. In this case, the sovereign debt problems have to go away first. What will this take? First, debt levels have to be reduced and economies restructured so that this can happen. Then, the currency markets have to be reformed, so that exchange rates don't move as wildly as they are now. If successful, calm will return, but even then, it'll take years for confidence levels to recover to what they were.
From now on we believe that a growing number of weekly investment strategy meetings will recommend that a percentage of funds be held in gold for the long term. This will ensure that the gold price will hold $1,200. Why, central bank demand alone is capable of ensuring that the gold price is underpinned. New buyers will have to pay a rising price.
Where Will the Gold Price Go to in the Short-, Medium- and Long-Term?
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