GOLD - THE INVESTMENT CLIMATE CHANGES
Excerpts from GLOBAL WATCH:
THE GOLD FORECASTER
by Julian D.W. Phillips
September 14, 2007

Think back to two months ago. Now think back to today. There have been some big changes in confidence levels, not only in global growth, but the financial structures of the world. Lots of reassuring words are flying around, but few are convinced that all is well. This would not matter so much but some of the statements of concern have come from the leading figures in the globe’s main financial institutions. Mr. Ben Benanke has warned that the U.S. Trade deficit is unsustainable, he also warned of a potential waning of foreigner’s appetite for U.S. Treasury securities. These warnings did not come with solutions, but were simply warnings. The O.E.C.D. ’s has warned that financial market turmoil may reduce global growth. The O.E.C.D. chief economist said the credit markets had serious imperfections and called for more supervision of the U.S. mortgage market. In summary, the current global situations facing Central Banks is as follows: -

“The major central banks generally face an economic outlook characterized by scant spare capacity and unemployment rates close to or below their structural levels, as well as high energy prices and rapidly rising food prices. Outside Japan inflation rates – despite recent easing in some cases – are still at the high end of what is consistent with price stability. At the same time, they are confronting risks to financial stability, which have prompted them to step in with large and [hopefully] temporary injections of liquidity. Consequently, central banks may have little choice but to cut interest rates to safeguard financial market stability, including the Fed.” - But it is going to take far more than a rate cut to resolve the problems of the global financial systems. 

Who can resolve these problems and who has the will to solve them – nobody it seems. Other warnings have come from the I.M.F., from European bankers and no doubt we will hear many more warnings as emerging nations expand to stretch an already overstretched global financial as well as resource capacity to accommodate their growth on top of global problems in the banking system. With confidence already buckling world wide we have to ask ourselves, are we listening? More importantly are those in a position to correct the situation, listening?

Gold is listening, as are gold investors and they will listen still more as they protect themselves against the future as well as against today’s concerns. More and more people will become gold investors. The price of gold today isn’t being driven by the simple demand and supply formulae of the typical commodity markets, it’s being driven by concerns over the present and future state of the global financial and monetary system. It will rise in direct proportion to further drops in confidence, rises in uncertainty and the growing need for a sound financial and monetary system that can accommodate the emergence of nearly half of the globe’s population. Gold is being elevated to the status of a sound investment in these extreme times [which it always was before 1980].

How do we get a true sense of proportion in such a climate? Platitudes, reassurances, the “so far, so good” attitudes, tend to pull us away from sound judgment, so we have to protect ourselves as best we can. The first question we try to ask is, “when will these warnings mature?” How can one put a time scale on oncoming disasters? You can’t, so you have to prepare well in advance. Oh, be certain of one thing, when they come into view, you will be part of the madding crowd, if you haven’t.

Take a look at the U.S.$ Index that Peter Spina [of the Gold & Silver Forecaster] has highlighted for so long now. He’s pointed out in the Technical’s below [U.S.$] the critical support level on the $ chart is at 80. There he states: -

‘Note: I keep returning to the long-term US Dollar Chart to stress the significance of the 80-area support. Long-term support is very significant around 78-80, which we expect to see retested once the 82 area supports fall – see short-term commentary above. A bounce is expected but we believe in an eventual breakdown of the massive 80 (78-80) supports.” 

We are currently at 79.456 on this index and support is in the process of being battered.

This has a deep significance for our future that goes beyond the $. It is now clear that below this level we could see a fracturing of confidence in the $ as the sole global reserve currency. A breach of such support will herald not only a fall in the exchange rate value of the $ but will spawn of a whole host of consequential tensions and crises related to the $, the global monetary system spreading into the global political arena. The sub-prime crisis will pale into insignificance against these approaching dramas. 

As we have seen for some time now, such weight rests on the $, that the major holders of surplus $’s, the major traders in the $ and the dealers in the $, all want the $ to hold up and will do all in their power to support the $. 

But it seems inevitable that the weight of downward pressure on the $ will prove overwhelming. It is only a matter of time before it falls. Don’t expect for a moment that the $ is going to fully collapse, though. It will continue to be the globe’s most important currency, because it’s needed and is the only one around right now. Any replacement will have to grow into that role, not be thrust there.

Having said that, such a breach of support will bring about a sea-change in all markets around the globe, making the traditional risks that have been associated with gold seem minor. Gold is already starting to appear as an investment stabilizer and a contra investment to other investments and, over time from now on, will find growing recognition as such. This will take gold to a new level in terms of price.

Overall, Central Bankers have recognized that the globe faces a serious problem that will not fade away and threatens growth and stability. Unless solid action is taken soon both to prevent further loss of confidence and to restore past levels of confidence the global economy could take a dip alongside further destabilizing of U.S. & global markets, including global foreign exchanges. Individuals and institutions will increase their gold holdings and Central Banks will become hesitant to sell any more gold.

© 2007 Julian D. W. Phillips
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