I must admit that I am a gold bug. I think that in the face of an economic crisis and/or high debt levels in an economy – governments solve their problems by printing more money, and encouraging inflation. As we’ve seen already, central banks have followed a zero-interest rate policy, embarked on two rounds of
shameless money printing Quantitative Easing, and have had little interest in targeting inflation (CPI inflation hasn’t been under the 2% target since 2009). This policy is understandable, many people would prefer monetary policy to try and encourage growth rather than keep a lid on inflation. However what this means in the long-term, is that the purchasing power of all fiat (paper) currencies is gradually being destroyed, and if you look over the course of history, this has happened before and the one asset which has held its value is gold.
I am not a big fan of technical analysis, but I think this weekly chart shows us a lot. Gold hit an all time high last summer of $1921 before it began to retreat again – as gold mania emerged. However since that point, it has dipped to the $1520-1530 mark twice before finding strong support. Now, I think by the end of the week we will have touched those levels, and it should rebound strongly off them.
Usually in times of crisis, such as these in Europe, you would expect the price of gold to be a lot higher than it is. Gold is traditionally seen as an Armageddon hedge – if the stock market collapses, the printers are on full blast in central banks, and commercial banks are in trouble – then surely you would keep your money in something that is an exceptional store of value. Interestingly the IMF is buying more gold, as Zerohedge wrote on Monday
When wonkish blogs suggest gold ownership as a hedge for the political idiocy of the world, it is mockingly shrugged off. When the BRICs add gold, it is eschewed in a ‘well, its diversification’ argument. But when the bankers’ bankers’ bank – The IMF – starts adding Gold to its reserves to cover higher expected credit risk losses (read major devaluations of fiat currency exposure), perhaps – just perhaps – the ‘rationality put‘ we noted earlier is becoming a little more expensive in the minds of Lagarde and her colleagues. As Bloomberg News reports, “The Fund is facing increased credit risk in light of a surge in program lending in the context of the global crisis,” the IMF staff wrote in a report released today, adding “there is a need to increase the Fund’s reserves in order to help mitigate the elevated credit risks,” and as CommodityOnline added: “The International Monetary Fund (IMF) is planning to purchase more than $2 billion worth of gold on account of rising global risks. The IMF currently holds around 2800 tonnes of gold at various depositories”.
If the Euro does fracture, as I have argued before, then everyone will suddenly become scared about the banks and the entire financial system. That is when gold will really show its true shining colours – and I think we could easily see $2000-$3000 an ounce, potentially even more. Therefore, when gold makes a dip over the next few days – I see it at as a perfect buying opportunity with a stop-loss at $1510, just in case it does fall further.
I know I have advocated buying gold before at higher levels, and that plan had gone awry, but I maintain my view and I believe there are a lot of gold bugs sitting on the sidelines, just waiting to crawl into the market again. Once this happens, gold will not look back.