GOLD WILL GAIN FROM THE
"KEEP-GOING" STIMULUS PACKAGE
Excerpts from GLOBAL WATCH:
THE GOLD FORECASTER
by Julian D.W. Phillips
January 25, 2008

Volatile was the word this week in equity and currency markets across the world. The average investor—whether institutional or individual—does not like to feel uncertain. So we protect ourselves from it the best we can. The results were that global markets acted on the worst-possible scenario. At the beginning of the week there was recession with the potential to get worse. Then came the 0.75% cut in Fed Fund rates. Together with talk around the $150 billion tax breaks from the White House, this was expected to send the global economy back on the growth track—even though it would be at the expense of the USD. But hope wasn’t enough. But markets are not falling and have recovered to a large extent, so far. But investors are still jaundiced by the realities of the moves.

No cure

The moves we have seen and are expected to see are not curative; they are at best stabilizing and temporary. Bush himself wants a temporary set of measures [before applying more cures?], but the global economy needs more than stabilizing; it needs to regain confidence in a long-term growing global economy.

Perhaps the problem that will serve gold and silver the best is not stabilizing the U.S. economy at the expense of inflation and the USD; it is the fact that the global economy is made up of a host of nations all bent on looking after their own interests ahead of anyone else’s—and with no overall global government, aiming at some form of international financial regulation and harmony. So by its very nature the bleeding U.S. is and will affect all other nations to some extent.

Separate Trading Blocs

We expect a fragmentation of the global economy into focused trading blocks. Each of these will behave differently, with the U.S. woes affecting its major trading partners directly and others indirectly to some extent.

Europe’s trading partners will benefit so long as the decline of the $ does not inflict damage on the global trade of Europe.

China’s trading partners will continue to benefit from her growth, with the trade between its main trading partners continuing to grow.

The new wealthy of the growing parts of the world will see safety in gold in the face of the uncertainties facing paper currencies as investments, with the wealth-losing nations investors seeing protection in gold as doubts pervade their own paper investments (as we saw this week too). The combination of the two will keep gold and silver in the limelight.

Where the global trading blocs come together in international competition, anything short of a catastrophic collapse of currencies will fail to make Chinese goods more expensive than wealthy nation’s products. As a result, in a recession Chinese and other Asian imports will do well because they will remain cheaper than homegrown products. This will continue to drain wealth to the East, more so than in a vibrant economy.

Protectionism

The only actions that can stop such a powerful osmotic pressure will be legislated protectionism. [Even in a climate where Exchange or Capital Controls are imposed economies do flourish, especially as imported goods are replaced by homegrown ones]. Protectionism in some nations is moving from the probably toward the inevitable.

The stimuli being given now (and those contemplated) are forerunners of far more serious measures to come—because the stimuli are only ‘keep going’ measures. We have contemplated the alternative, curative options in front of the U.S. and European governments and they have to be dramatic, inflationary while gold and silver positive.

“If-Onlys”

Unless investors act in the near-term to protect themselves in the precious metals, they will join the ranks of the “if-onlys”. And there is already a great crowd already in gold and silver. Don’t misunderstand what we are saying though: we are not saying all is lost; we are saying things have changed dramatically and opportunities abound in a climate of growing desperation. Investors in all markets are having to go back to fundamental issues and examine which way their current investment positions are vulnerable and which will benefit from these changes. Gold and silver are investments that have been well demonstrated over the last few years to be excellent contra-performers to currencies and in many cases, equities as well. What’s more is that like good wine and beer, gold and silver will, from now on be great to enjoy in good times and to turn to in bad times.

Meanwhile we are still only at the stage of what ‘keep going’ measures are going to be put into the economy while looking at how they will ripple through the global economy. Right now the markets are telling us that they won’t fall further but are not convinced. Investors want curative solutions and they want them now. Until then the pernicious atmosphere of fear and doubt will make them ready to run for cover.

© 2008 Julian D. W. Phillips
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