Is Gold The Antidote to Economic Crisis Fallout?

by Elena Morozova
(UK)

The question often asked is whether investing in gold is an antidote to this mega economic crisis which is gripping the global economy.

In fact had you invested in gold in January 2000 and held onto the asset until now (roughly nine years) you would be sitting on a gain of over 90 per cent.

Contrast that with investing a similar amount of your capital in either stocks and shares or cash deposits.

While the Dow Jones Index lost around a third of its value over this period from January 2000, the S&P crashed by 48 per cent and the NASDAQ gave up a whooping 72 per cent.

Meanwhile, placing your capital in cash funds with interest accumulated would have returned just over 30 per cent.

But if you discount the 20 per cent fall in the value of the US dollar, the cash value comes out just shy of 10 per cent.

And so where is gold headed now?

Well, over one year short of a decade we see how gold has gained over 90 per cent but now going forward in the short term it is not exactly easy to predict where the yellow metal will go in these difficult economic times.

Will it surge beyond $900 from its current level of about $860 or will it trade in a sideways band between $750 and $930 or even correct back to support levels around $600 to $650.

There may be another political crisis in the Middle East or further significant deterioration in the US economy which would see more money seeking security in gold.

We should also note carefully how during a few weeks at the end of 2008 the market saw the unusual condition of gold in backwardation , which is when the cash price of gold for immediate delivery is higher than that for gold futures a few months out.

If the US Federal Reserve starts quantitative easing - or printing money by another term - then holding physical gold could be seen as a strong hedge against the inflation that follows such action.

Over the long term what is the outlook for gold?

Many observers point out that gold is the only real money on the planet, that it is the most solid, reliable currency to hold long term if you want to preserve your capital and purchasing power.

Gold is a liquid investment and yet it is in relatively short supply when compared to the unlimited supply of paper money, when the printing machines get going. A billion dollars can become a trillion and so on.

Does this really matter?

Well, across the world central banks are printing paper or fiat money as if there's no tomorrow. In reality, their hands are tied and so they have very little option but to continue to "oil the wheels" of the economy.

How many trillions of dollars do you think the Fed will print in 2009? And what about the European Central Bank, how many extra euros will it issue? And what of the Bank of Japan and of China?

This is a slow process and the impact will not be seen and felt tomorrow, nor next week or in six months. But some time later this process of increasing the volume of paper money in the system is creating a volcano of inflation.

Sure, for now deflation (falling prices) is on everyone's lips, and truly it is public enemy number 1, as businesses go bankrupt and jobs are lost.

But in time as the economy recovers from this deflationary hangover and banks start to lend again, there will be tonnes of paper money, lower in value, going in to feed the markets.

That is when real assets such as commodities and certainly gold will be in their element again. The period of inflation will be a boom for the now deflated commodity sector, and those holding gold should be rewarded further.

While much of the economic difficulty to date has been in the private sector, we will soon see how governments across the globe will be struggling. For sure, some such as Iceland have already been hit very strongly.

Just take the United States of America. There is the $10 trillion national debt, the $700 million TARP, President Obama's $1.2 trillion fiscal stimulus and trillions more in welfare and social security obligations.

How can the government meet these trillion dollar obligations?

One way is to promise to do so as it does on the actual dollar note.The second way is through taxation, by using future tax revenues to pay the debt.

But given the amounts involved, how realistic is this? The bond markets are signaling that they are not convinced that it is possible, as we see bond prices retreating over recent days.

It seems that maybe the only thing that can be done is for governments everywhere to allow the debts to be reduced by a surge in inflation, by printing more paper money.

And when this happens all those paper dollars or euros will lose their value, their purchasing power.

But in all this gold will keep its value while paper money everywhere devalues. These are the lessons of history over centuries, as gold has kept its value.

So as we enter the stormy waters ahead for the global economy, you could do a lot worse than taking a closer look at investing in gold.

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