FALSE GREEN SHOOTS?

Be wary of the markets - gold still offers the best insurance

Past major bear markets have seen false new dawns which have tended to be short lived and the recent big uptick in stock markets could be another of these, so don't disinvest from gold yet.

Author: Lawrence Williams
Posted:  Monday , 11 May 2009 

NEW YORK  - 

In a week that has seen global stock markets continuing to perform positively, gold has done remarkably well given that many experts are predicting the start of a new bull market. There has been little, if any, disinvestment from gold over the period, which suggests there are many out there continuing to hedge their bets.

And indeed they may well be wise to do so. Major bear markets of the past have seen big upswings during their progress, sucking investors back in, only for the upturns to end dramatically as some further major financial collapse spooks the markets again and prices tumble.

The global economy remains unstable enough for there still to be some nasty events out there which could do this. The duration of these upswings in past major bear markets has tended to be for periods of between five and seven weeks, which suggests we could be near another major downturn if history repeats itself - as it frequently does.

The global debt position is still an enormous cause for concern and many of the noises coming from politicians talking of "green shoots" and "safety nets" seem to be little more than hot air designed purely to try and build general confidence. In itself this is perhaps a justifiable position, but the whole deck of cards can equally come crashing down when a single significant event occurs belying the political rhetoric.

So gold, which thrives on economic uncertainty, should continue to play a major part in wealth preservation. It thus makes sense for at least a significant portion of one's wealth to be invested in gold and gold stocks - and maybe also in silver which tends to follow gold, but in a more volatile pattern.

Remember silver came back a huge amount more than gold as both fell back from their peaks, and it could thus increase in value faster than gold. (But also bear in mind that silver investment tends to be riskier than gold because there is a much greater industrial element in silver demand and usage than for gold and industrial growth is currently flat to negative in most parts of the world.)

At the moment the US dollar is holding up reasonably well in relation to other currencies, and inflation is proving to be minimal, but the whole system of pumping money into the economy at unprecedented rates developed to shore up world economies has to be inflationary sooner or later - and may even become hyperinflationary in some countries. Should the dollar start to fall back and inflation pick up, this would be a double whammy in terms of boosting the gold price and this could soar while the purchasing value of other investments, of salaries - and of pensions in particular - could dive dramatically. This may be almost a doomsday scenario, but one does need to protect oneself against such an eventuality.

There has also been some talk of revaluing gold as a neat way of boosting global monetary reserves and stabilising the global economy, but this may be politically a nightmare and probably won't come about. But again, if more and more people turn to gold amidst continuing economic shock and uncertainty the markets alone could make this revaluation fact and save the politicians from having to try and push through what could be a perhaps unacceptable move.

Overall, therefore, gold looks to have more of an upside potential than a downside. Maybe one should sell one's stock market investments in May and go away as the old adage advises, but it may be foolish to sell your gold!

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