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Good Day To Buy Gold Before Its Back On Track For Its Biggest DayBy
Here’s what you need to know right now about Gold & Silver being in the position of cause and effect:
Markets are reeling on the news that Japan is edging closer to a full-scale nuclear disaster. Its nuclear reactors at the Fukushima Daiichi plant that lead to four explosions, had given rise to fear over how much nuclear radiation have escaped. On Wednesday’s Today show, Lester Holt said that screeners found traces of radiation on him. Due to fear of such radioactive leak, gold prices in the international market have temporarily slipped. In the Mideast, while Kadafi is continuing his rampage in Libya, Saudi troops have rescued the Bahrain’s royal family from protesters as demonstrators pressure the nation’s Sunni rulers to offer reforms. But, because Bahrain is being home of the Fifth Fleet of the United States Navy, the US is closely watching the outcome under the adverse composition of nature which has temporarily slammed the global market. In the Eurozone, “bail-out” schemes, “the debt of countries like Greece and Ireland that will merely increase in a snowball effect as the interest rate on the government’s debt grows faster than the stagnating economies, those problems will only be compounded when the European Central Bank increases interest rates, as it has warned it will do. The result is that the faster and deeper these countries cut, the more slowly they will grow, with the perverse affect that their debt ending up increasing instead of decreasing. Thus, the effects will continue to parlay backing up the precious metals. Conclusively, with the activist GOP voters in Iowa seeing America as a nation in decline, it goes against all conventional wisdom for a gold dealer to caution investors on the price of gold and silver moving lower. Investors do sell gold to raise liquidity as markets slide and commodities tumble, “The markets were probably overly short on cash this Tuesday,” said Commerzbank analyst Eugen Weinberg. “High risk aversion is prompting the taking off of any risk. Even if it doesn’t seem logical to move away from gold in the current situation, risk aversion is telling many market participants that cash is king.”
But while gold may fall a bit further, there are literally trillions of reasons why the price of gold and silver will move higher in the months and years to come, including a multitude of unsustainable future government obligations. But from a short term perspective analysts said, that part of the pressure on gold stemmed from investors cashing in on the metal’s 8 percent rise in the last month on the back of escalating violence in the Middle East to cover losses or margin calls on their equity holdings. “We argue that it’s not unusual for gold to tumble during initial episodes of a severe broad asset sell-off,” said UBS strategist Edel Tully in a note. “Investors sometimes have little choice but to sell the yellow metal to cover margin calls and losses elsewhere.” Besides, Japan, the world’s third largest economy, faces a recovery and reconstruction bill of at least $180 billion — 3 percent of its annual economic output which has affected Gold’s move lower, “but the rising tensions in North Africa and the Middle East, where Libyan rebels continue to battle troops loyal to Muammar Gaddafi for control of key oil ports, which has pushed the metal to a record $1,444.40 last week, will continue to push it further up after short correction…
To brake it down, here are the money facts that bites Europe, Japan, US and Gold!
Over the weekend we saw 17 Eurozone heads agree to lending full capacity of the European financial stability facility with extra contributions from Germany and France. The facility will be able to buy bonds from struggling member states. However these purchases will be made on the primary market instead of the open market, as some had proposed. Governments will in return have to launch a range of austerity measures. The Euro, despite all of its problems with the PIIGS (Portugal, Ireland, Italy, Greece and Spain), has actually bounced off of its low of 1.18 to 1.39 (1 Euro = 1.39 U.S. Dollars) as of today. Does the actual admittance that the leaders of the Eurozone will use up to $698.5 billion to bailout the PIIGS make those in Germany and France feel good? What if they need more? The 17 leaders have an answer for that; they will ask the PIIGS to implement austerity measures. Why aren’t they asking these countries to implement austerity measures NOW? Does going into more debt for the Eurozone bode well for the future of the Euro? I think not. Keynesian fools are alive in well all over the world. Which brings us to Japan.
On Friday we saw a devastating earthquake and tsunami in Japan, which saw the Yen take a quick dive. Then all of a sudden it reversed course mid-day and ended the day positive. If one was able to call his or her broker in Japan and get out of the stock market, then he or she would have been saved from some massive losses with the Yen down Monday 6.2% alone. The Japanese government stepped in immediately with $183 billion of liquidity, adding to the world’s highest Debt to GDP ratio of over 220%. I doubt the Yen strength will last. The only reason Japan hasn’t imploded yet is because it has $750 billion of U.S. treasuries and are a net exporter. With the most recent tragedy in Japan, populations that will have to pay for the tragedy through higher taxes and higher inflation from government stimulus, the Yen’s days are numbered. So, now let’s look at the US dollar and gold.
Dollar vs. Gold in a dual inflation-deflation economy as the U.S. economy still has its own problems. Nothing will change with that scenario as congress can’t agree on anything (although, like the UK and Eurozone leaders, congress may “talk” a good story with its upcoming austerity measures to avoid increasing the budget. From a short term perspective analysis though, based on human action, what does one do if a part of the ship is closer to the water than the other part? One runs quickly to the part that is out of the water. This is what I see going on with the various currencies that have enjoyed the ride of late (Euro, Yen, Pound) at the expense of the U.S. dollar. There is a shift in this sentiment. The ship might be tilting the other way for awhile, doubting the U.S. dollar will recover; however, this is where precious metal comes in to save the investors. Any pullback in price should now be used to acquire gold and silver American Eagles or other bullion metals. Keep in mind, a holder of physical gold cares not that it falls 10% or 20% on the way to 100% or more in gains. The future is still and will continue to be bright for gold and silver. The U.S. government will see to it!
Eric Sprott concludes, “Based on fundamental evidence, technical evidence and other things going on in the markets, lots of things may influence or happen in the short term that have no bearing on the long term. For instance, silver trades at a price ratio of about 40:1 to gold. In other words, it takes 40 ounces of silver price to equal one ounce of gold. The historical ratio is more like 16:1. My view is that we will go back to 16:1 within two to five years. To put that in perspective, a $1,600 gold price would imply $100 for silver. I happen to believe that gold will go much higher than $1,600 as well; therefore, given time and letting this ratio play out, I think we’ll certainly see a three-digit price for silver and also a lot more for gold.” Regal Assets president Ron Fricke concurs, “The high of gold in the early 80’s was $850 per ounce while silver almost peaked out at $50 an ounce. Gold has almost doubled its high of the 80’s while silver has not even hit its high of the 80’s. Simple economics tell us that silver has a lot of correcting to do in price and will outperform every metal in 2011”.
Incredibly, in this time of historic revolutionary unrest, currency destruction, and unprecedented natural disasters, gold is viewed as an alternative currency; and a weaker economy, in Helicopter Ben’s regime, is a demand enhancer for gold and silver. Gold does not have a demand destruction ceiling blocking its way just 15 measly percentage points ahead. And for silver, 15% is one baby step. Also a big demand difference is the “tilt” factor. As the world’s total investment pool tilts away from stocks and other paper assets into either gold or oil, gold and silver have the tinier market cap bucket to catch the pour and move accordingly. The global asset allocation to gold stands at less than 1% as compared to the historical norm of 5% to 10% and the usual financial planner recommendation of 15%. It doesn’t take much of a tilt away from paper to hard assets to create a deluge when the global total market cap of stocks and bonds is about $140 trillion compared to the $5.2 trillion worth of all the gold that has ever been mined plus the market cap of the whole gold industry! As for all the silver that has ever been mined; well it’s essentially all gone now!
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