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Gold soared to the long anticipated $1000 level in 2008.
The year offered the " perfect storm " of events to lift gold . Geological turmoil continued in the Middle East . Wars in Iraq and Afghanistan and terrorism in India were front page on an almost daily basis.. The economic crisis that began in Wall Street soon spread to every stock exchange and business media venue in the world.
Gold as a " safe haven " was the recipient of some of the flight on money out of equities but did not sustain itself at the $1000 level.
Why Did Gold Falter at $1000
The reasons for gold prices reversing after achieving the breakout over four digits is a summary of the financial turmoil of 2009. As investors suffered losses in a number of areas they were forced to sell anything and everything to meet the demands for bank and client repayments.
A ) Blame The Hedgies
The much castigated hedge funds were blamed for the run up in oil to a record and thought to have also been at the forefront of buying gold to benefit from its momentum. Apparently , the hedge fund managers , long regarded as the quickest and most savvy of investors forgot the advice of their fathers - that what goes up must come down. Momentum on the commodity sales - as all funds rushed for liquidity - had sellers competing for buyers , with the decline in the selling price as a result.
B ) Blame The Japanese Yen Carry Trade
Investors - including the institutions of finance on wall street were able to borrow massive sums in Tokyo - at the lowest interest rates - and invest in American securities .
The " spread " in the interest rates was such that the boom in American equities was fuelled by the low rates of a sluggish Japanese economy. This yen carry trade was carried o for the the lost decade of Japan's economic well being. The lessen of Japan not increasing liquidity
for a decade was not lost on Ben Bernanke.
When The U.S. began to push rates down to stimulate the U.S. economy the yen carry trade was no longer profitable. Both countries now have interest rates near zero.
Unwinding the carry trade meant selling U.S. assets - including gold and oil - to pay for the bank borrowings.
C) Blame flighty investors for a " Flight To Safety "
The plunge in the U.S. equity markets produced a self - fulfilling prophecy that the stock markets were going lower and investors " had to " sell before things got worse. So , they did sell and the selling made things worse. In a fall not seen since the inset of The Great Depression investors removed billions from equities and gold and moved the money into U.S. Treasuries. Investors preserved their capital and commodities and equities were sold off with abandon.
D ) De-leveraging
Prior to the collapse of Lehman Brothers and their brethern , institutions like Lehman, Goldman Sachs etc. could employ leverage ( borrowed funds ) of as much as 30 or 40 times their capital to purchase commodities . As the price of golds and silver rose it allowed them to increase their positions.
When the financial crisis of 2008 hit - the first victim was liquidity. Rates on borrowed money increased making trades less profitable. The cost of money for weak hands became exorbitant and for many - simply not available. This forced the sale of precious metals at a time when precious metals would normally be the beneficiaries of such distress .
The net result of all these selling pressures - repeated ad nauseum by the financial media which persuaded others investors to sell as well , was to have gold and silver move down substantially.
When your eyes and mind are turned to survival it is difficult to remember to focus on your long range plan. Investors who had sen gold and precious metals as an alternative asset class lumped all commodities together and sold whatever was at hand.
January 2009
The Only Question - Where are Gold and Silver Headed?
(or when everyone has sold - where will gold and silver go?)
The year ended with gold recovering - not to the $1000 level but back to where it started the year. According to Kitco gold closed at $ 881.10 on December 31, 2008. This equals a 5.5% increase for the year. Impressive considering major stock markets exited the year 30 - 60 % down.
2009 will have the benefit of the major liquidations have ended. When sellers are emptied of their gold and silver the momentum returns to favour buyers who are cognizant of the
threat of inflation as the world economic powers seek to save their economies from the threat of another depression. It is often repeated that the head of The Federal reserve Bank of the United States is a leading expert on The Great Depression. He and his colleagues have announced they will do whatever it takes to rescue the U.S financial system.
Trillions In Stimulus Means Inflation - Inflation Means Gold Will Rise
The Initial TARP ( Trouble Asset Relief Program )
TARP was to allow the U.S. Treasury to purchase up to $ 700 billion of non-liquid, difficult-to-value assets from banks and other financial. Those purchases it was hoped would allow banks to start lending money again - to revive the economy and return the financial markets to some pattern nearing normal. The targeted assets were securities backed by mortgages, Investment banks like Goldman Sachs created these securities by pooling mortgages, both prime and sub-prime, which were commingled and then securitized into tranches (slices) according to priority of repayment. The tranches were rated by rating agencies such as Moody's with the highest tranches receiving investment grade status.
Investors believed they were purchasing AAA rated securities and then found that the " investments " became worth much less than they has paid.In fact billions were frozen when the credit market it self froze up in 2008. When banks were frightened to lend to each other because of the fear that the receiving bank held billions in toxic assets the mortgage backed securities became an asset no one wanted to hold and no one could sell. For example in order to clean up its balance sheet prior to the sale to Bank of America Merrill Lynch sold its mortgage backed securities for 22 cents on the dollar.
As of December 2008 only half of the original money was advanced and although interest rates have been lowered and bank lending has resumed the full anticipated impact has not occurred as planned. It may be that such huge amounts of money take time to work through the system to achieve the desired results.
In January it is expected Congress will debate the need for the second half of the TARP package. Many are demanding some transparency in where the money is allocated and many want to be assured the money does not simply stay in the balance sheet of receiving banks - they want to see bank lending improve in the mortgage , business and consumer sectors.
ADD in The Obama Stimulus
In January 2009 President Obama will launch his presidency with a stimulus package designed to save or create millions of jobs in the faltering U.S. economy . The main thrust is likely to be infrastructure - roads, bridges , hospitals and schools. Tax cuts for the middle class and small businesses may also help to jump start the economy.
Billions in stimulus package have been announced by China and billions more by virtually every economic power.
Trillions in Spending Will Have Consequences for Gold and Precious Metals
The Apprentice Millionaire Program is forecasting a return to the long term decline in the U.S. dollar as the stimulus packages will mitigate but not reverse the immediate economic downturn. It will however, reverse the spectre of a Japanese style deflation. Inflation is the real result of a determination to do " whatever it takes " to bolster the economy. The threat of inflation will take a back seat to the stimulus plans and the line of industries seeking rescue. The Detroit bail-out is only the beginning of special interests petitioning willing politicians for a share of the taxpayer wallet.
The effect of the creation of make work programs, however laudable , will result in the long term upturn in gold and precious metals. The trillions of paper money on balance sheets, bank accounts and infrastructure assets will re-inflate the U.S. economy. This is especially important in the depressed housing and mortgage markets. Re-inflation will allow home owners and banks to lessen and reverse the downward cascade of foreclosures and falling home values.
The long term effect of inflation will negatively effect the value of the U.S. dollar and as it declines gold will soar.
What Gold Stocks Will Benefit
The Apprentice Millionaire Program has a watch list of senior , intermediate and junior precious metal stocks . (All prices are as at December 31, 2008) Please note that this listing is only a portion of the watch list in the new book The AMP Gold Portfolio .
Senior Producers
Barrick ( ABX) $ 36.77
Barrick is the world's largest gold producer
Goldcorp ( GG) $31.53
Intermediate
Yamana ( AUY) $ 7.72
Yamana will benefit from a large expansion in the next year.
Juniors
Sprott Resource Corp ( SCP on Toronto ) $2.80
Sprott owns physical gold and silver and provides financing to juniors in return for equity.
Western Goldfields ( WGI on Toronto ) $1.96
Western is a gold producer as of 2008 with production in Nevada. It is managed by former executives of Barrick.
The Apprentice Millionaire Program
[http://www.amprogram.com]
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