By Lawrence Williams
MineWeb
In its latest statement on global markets Canada’s much respected Sprott Asset Management points to the ever increasing doubts on the status of the U.S. dollar as the world’s reserve currency and that it has positioned its hedge and mutual funds heavily in the precious metals sector. “At the end of the day” Sprott says, “when the world finally realises what the US has done to the world reserve currency, international investors will shift into an asset that no government can print. In our opinion the US dollar’s status as a ‘port’ in the financial storm has officially come to an end.”
Meanwhile Reuters reckons that markets are starting to think that a necessary rebalancing process of world currencies, as implied by President Obama in a statement that he will push world leaders for a new global “framework” in which the United States would cut its huge trade and budget deficits, may start as soon as this week’s Pittsburgh G20 summit.
Sprott feels that the U.S. has little scope for getting out of its current financial crisis other than by printing more money and thus effectively devaluing the dollar further. Other options, as listed by Sprott, are just not politically acceptable, or impossible to implement at the present. These are to:
- Default on Medicare promises. (Unlikely given the current debate in Washington to expand medical coverage.)
- Default on Social Security promises. (Unlikely given the increasing average age of the voting public.)
- Put forward a credible plan to balance the budget. (Unlikely given the most recent budget projections.)
- Default on outstanding debt. (Unthinkable).
Already there is much comment from nations with large dollar holdings over the status of their reserve holdings. China in particular has been particularly vociferous on this matter with calls for a new reserve currency made up of a currency basket, and ominously for the dollar it is a position taken up by a number of other nations already. Also positive for gold, are the implications that China may be looking to build its gold holdings to replace some of its reserve dollars. Indeed there are reports that China is trying to get out of dollars as fast as it can by using its huge dollar surpluses to invest in western concrete assets, and not least in securing commodity supplies for its burgeoning industrial growth – and some reports it is accelerating its investments to use up as many of its U.S. dollars as possible before it goes into freefall.
Now this view may well be an exaggeration, but there’s little doubt that the more money the U.S. prints under its quantitative easing programme, the more under pressure the dollar is likely to become in the long term, and the more this is likely to increase gold and silver prices – as well as other dollar-priced commodities – but while other commodities also need a continuing growth in industrial demand to maintain their global value – not just their dollar value – gold can be cushioned from this necessity and can grow in value in real terms if countries increase their gold holdings to support their own currencies. This would not be a return to a gold standard – we have probably gone way too far down the path of monetary excess to be able to do this without a huge gold price increase. The world is probably not ready for that – yet.
But also remember too that gold has been an excellent wealth protector over the past year. True many other commodities have outperformed gold in recent months, but still virtually none are back to their pre-crash levels, their prices having been decimated before making some kind of recovery. Gold is, of course, above its immediate pre-crash levels demonstrating its safe haven value through a major financial crisis.
And there is no guarantee that there isn’t another financial crisis yet waiting in the wings for us. The perceived recovery to date could yet be vulnerable if consumption does not pick up. A recovery built on perception and hype will not last, it needs some more concrete growth signs to be sustainable. There are signs that China, which almost singlehandedly supported global commodity demand, in the first half of the year may be flagging a little. While there are only small signs of any industrial recovery in the west. There are plenty of economists out there who feel that maybe the current market increase may last into next year – and then collapse again.
With the investment sector having been badly caught out in last fall’s meltdown, there are plenty out there sufficiently unsure of the future to retain substantial investment in gold and thus help underpin the price around current levels. If, indeed, China is also supporting the gold price as some affirm, then the only way is up, but perhaps not as fast as some might hope. Gold is still seen, therefore, as a positive insurance against another market crash.
So what are the pointers to look out for? Over this past weekend the confirmation that the Executive Committee of the IMF has, as expected, agreed the sale of 403.3 tonnes of gold – which could even start next week. What was the reaction of the gold price? It rose as the dollar fell – surely a signal that the bogeyman of Central Bank (or IMF) sales is now behind us. Rumours persist that China will soak up any gold that comes onto the market.
In terms of the gold price it has been up above the $1,000 an ounce mark for almost two weeks now. Any forays back below this level have been shortlived suggesting that the market is at least for the time being supporting the $1,000 level as a floor. The trend is looking to be upwards, but perhaps more cautiously than some observers would have predicted. Much will in the short term depend on the dollar, but this looks to be in a downtrend, which is again supportive of gold.
Overall the portents look good for gold . September is traditionally a strong month for gold , but October may bring nervousness. If gold survives this then last year’s record price level, at least in dollar terms, is vulnerable and may itself provide a new floor going into the tail end of the year.
SOURCE: http://www.mineweb.com/mineweb/view/mineweb/en/page33?oid=89649&sn=Detail