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Market
Trends
MyCoinBroker The past fortnight has been tumultuous in the financial markets and the world economy with two vitally important commodities setting new records (or close to it) and the U.S. dollar—the world’s reserve currency falling to unprecedented levels. Gold has once again returned to the vicinity of its 1981 record all-time high of over $800 an ounce. In fact, the yellow metal has been on a tear since the summer, rising over 22% in the past two months. At the same time that gold returned to the $800 range, oil is nearing the once unthinkable $100 per barrel level. Perhaps the most promising aspect of the run in gold prices is the fact that it has occurred in an environment of record volume on the NYMEX trading in gold. This suggests broad investment demand, as opposed to just speculation by a few players. The ascendancy of gold and oil have, unsurprisingly, been accompanied by a precipitous fall in the dollar. The stage is now set for gold to continue a long-term upward trend due to a near-perfect storm in the economic environment, the financial markets and the geopolitical scene. Far from being at a peak, most analysts—even those who believe that gold will correct in the near-term—think gold will surpass $1,000 per ounce and maybe go much higher. One of the chief factors driving gold’s climb has been the fall in the dollar, which has been brought on by a variety of factors, but especially the rapid Fed interest rate cuts as of late combined with the persistent U.S. trade deficit (which is in turn aggravated by a rising oil price, since the U.S. is a major oil importer). Because gold is priced in dollars, as the value of the dollar declines, the price of gold will tend to increase. More recently, as the value of the dollar has declined, foreign investment in U.S. stocks has slowed, providing negative momentum recently in the U.S. stock market. Much of the money that is no longer headed into U.S. stocks is now headed into gold, further buoying the yellow metal. Despite the fact that the dollar has already fallen substantially, most market observers believe that it is not through with its downtrend and do not foresee an uptrend in the dollar at all going forward. Interest rates are very low, but with the subprime mortgage crisis becoming more and more serious every day, it is doubtful that we will see any increase in interest rates in the next year. With interest rates low and declining, there is very little incentive to park money in money market funds and cash equivalents. This indirectly makes gold investments even more attractive as a safe haven. It is important to point out that the drop in the dollar is definitely not the only factor supportive of higher gold prices. In fact, even if the dollar steadied, there are several other significant factors that would be likely to keep investment demand for gold alive and prices higher. The world seems to be entering a period of economic and political uncertainty, just the type of environment in which people have always turned to gold. Gold has been regarded for thousands of years as the safe haven from turbulent economic, political and financial market developments. The future is clouded by higher energy prices, perhaps even energy shortages, unusual and volatile interest rate patterns, the possibility of declines in world stock markets and the prospect of both higher inflation and recession in the months and years ahead. The speed with which the economic, financial market and geopolitical landscape is shifting is dizzying. Inflation fears have been rekindled by skyrocketing oil prices. At the same time, the Fed chairman is warning us about a slowdown in the economy. How high gold prices will rise and when will depend on many factors, including the degree to which conditions develop. But we can identify 5 reasons exclusive of the dollar crisis, why you should buy and own gold investments today: 1. The Subprime Mortgage Crisis: America’s largest bank, Citigroup, has lost nearly $33 billion in market value due to its exposure to the market for risky, subprime mortgages. But Citigroup is just one of many household names impacted by this crisis so far; Merrill Lynch, Lehman Brothers, Bear Stearns, Goldman Sachs and Morgan Stanley are all believed to be heavily exposed. This developing crisis will erode a tremendous amount of market value and shake confidence in the financial markets, prompting more and more investors to seek the safe haven of gold investments. 2. Higher Oil Prices: Oil prices are now in the $100 range, a price level that was unthinkable just a few years ago. Now economists are resigned to the likelihood that due to massive demand from India and China and stagnant world production that such price levels are either here to stay or may seem low in a few years time. Higher oil prices result in inflation fears and, at the same time, have the same impact as a massive tax increase on other sectors of the economy. The resulting combination of higher price levels and economic decline is known as stagflation, a term invented back in the mid-1970s, when gold went on a bull market run. 3. Negative Real Interest Rates: Interest rates are back on the decline and could decline even further. Soon, rates will be so low that, after inflation and taxes, investors will be losing money on most short-term interest-bearing instruments. That means that one reason not to invest in gold has been removed. 4. Gold Market Supply/Demand Fundamentals: Investment demand for gold is skyrocketing. At the same time, despite near-record prices, demand for gold for jewelry, especially from India and the Orient, remains robust and is forecast to increase. Meanwhile, all of the world’s major gold producing nations, save China, reported lower gold production this year as compared to last year. South Africa, the U.S., Australia, Peru, Russia and Canada are all reporting declining gold output, despite rising prices for gold over the past two years. 5. Geopolitical Tensions: Adding to the investment demand for gold recently were worries over Iran and Pakistan. In Iran, President Ahmedinijad announced that Iran now had 3,000 centrifuges operating to enrich uranium. Nuclear experts believe that such an array is capable of producing enough highly enriched uranium to manufacture an atomic bomb within about a year. It is not possible to determine what impact the developments in Iran could have on financial markets going forward, but rest assured that gold investments will have a prominent role in providing a safe haven to investors around the globe. Meanwhile, a state of emergency has been declared in Pakistan—another country infiltrated by Jihadist extremist terrorist groups, the difference being that Pakistan already has an arsenal of some 50 nuclear warheads. More and more independent observers worry about nuclear material or a nuclear bomb ending up in the hands of Jihadists as a result of the crisis in Pakistan, a scenario that Wall Street and the rest of the financial world can scarcely comprehend. Gold has re-emerged as a vital investment asset. It is no longer tied to just one or two narrow market factors. Savvy investors once again understand that gold has a vital role to play in the properly diversified investment portfolio. We should point out that there are many ways in which investors can take advantage of rising gold prices. One particularly attractive gold investment is gold coinage, ranging from gold bullion coins such as the American Eagle and the Krugerrand to rare gold coins, which have the added benefit of increased privacy and extreme scarcity. There has never been a bull market in gold without and accompanying bull market in rare coins, but there have been many instances of bull markets in rare coins absent a bull market in gold. That fact alone makes rare gold coins an extremely advantageous gold investment vehicle. The rare coin market has been doing quite well lately, as illustrated by a new record set at auction on October 17th, when the ultra-rare 1894-S Barber Dime auctioned for $1,552,500,
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