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Despite G20 weasel words gold should stay in the driving seat

However much politicians try to talk it up, the global economy still looks to be in a parlous state and the dollar is likely to return to weakness, with both elements positive for gold

Author: Lawrence Williams
Posted: Sunday , 27 Sep 2009

LONDON -

Dollar strength and a boost in profit taking saw gold close below $1,000 this past weekend after a couple of weeks where it has spent most of the time above the magic figure. But, has anything really changed? In essence one suspects that, given the amount of time spent above the level, $1000 may no longer be seen as the psychological barrier it had proved to be, but just another point on a continuing upward path in the gold price. When it breaks back up through this level, which it surely will, may mostly depend on the strength or otherwise of the dollar in the short term.

The dollar strength coinciding with the G20 meeting in Philadelphia will have been helped by U.S. Treasury Secretary, Timothy Geitner's continuing affirmation of a strong dollar policy, although how he can reconcile this aim with the Administration's quantitative easing policy is a little hard to understand as the two would seem to be mutually incompatible. But then with most other economies in a similarly parlous state, perhaps the dollar does look stronger against many of its peer currencies - although certainly not against the yuan.

Perhaps, though, what is most worrying for the markets in general is a sudden flood of news that suggests that the perceived recovery, even referred to by such august bodies as the IMF - you can expect politicians to spout this kind of claptrap so their views should be discounted anyway - is but perhaps a mirage brought about by the gullible media and the public beginning to believe what it is fed. It is in government interest to try to talk us out of a recession, but there still seem few concrete facts to support this position yet - indeed the opposite may well be the case.

Worryingly for the global economy is that China, which had almost singlehandedly relieved the situation, particularly in the commodities sector, with its 8%+ growth and its stockpiling policies, seems to be beginning to stutter, while its metals stockpiling programmes also seems to be ending - or may even have ended. If this support fades there seems little left to build a recovery on. For continued growth China's export markets need to pick up - it is doubtful if it can continue to forge ahead on domestic stimuli alone.

U.S. housing figures appear to be slipping again too after what may yet prove to be a false dawn. As ‘cash for clunkers' auto trade-in programmes end, car sales are already falling heavily in those countries where they had been introduced, while industrial sales in general still seem to be in decline too. Bank loans to businesses do not seem to be increasing. Unemployment is still rising, and without a turnaround here retail sales won't pick up - indeed any sales increases which may be seen are in volume, not in value as heavy discounting seems to be needed to bring in customers.

What does this all mean for the economy in general and commodities in particular? It would seem logical that if the now frequently quoted ‘fact' that the recession is virtually over is just all hype then the stock market and the industrial metals bubbles may yet burst again - there certainly seems little to really justify the big price rises seen in most markets and for most metals since the beginning of the year.

Gold, on the other hand, should still be seen as an investment insurance policy - although if there is another economic meltdown it too could suffer as it did last October when many institutions had to sell gold holdings to meet other commitments. But an ever rising percentage of the smart money may well continue to be invested in the yellow metal - something which has already been largely responsible for the gold's steady price increase over the past few months when fundamentals, as noted by those who keep the statistics, would seem to suggest the opposite should be happening.

But coming back to Geitner's supposed ‘strong dollar' scenario. This was surely just a sop to the Chinese and others who are calling for the dollar's role as a reserve currency to be diminished. Surely he can't really believe what he was saying?

With British Prime Minister Gordon Brown claiming the summit's proposals to be a victory for British thinking and persistence this has to be yet another disturbing fact for the global economy. The British economy has to be one of the most vulnerable around with the pound sterling dropping heavily against even the dollar and facing parity with the Euro. Talk about the blind leading the blind!

Maybe I'm beginning to sound like a gold bug, but logic suggests that investment in gold may provide the only kind of security there is against a possible new meltdown - which could occur perhaps as soon as next month. October has been a dangerous month for equities in the past and it could prove to be so yet again. And, if the dollar continues to be seen as weak then this could give gold the boost it may need to see it through another global financial horror story.

Let's hope it doesn't come to all that - but in this context I am indebted to Rod Blake of Canaccord Capital for pointing to the following quotes in a weekly letter to his clients commenting on the state of the western world's key economy:

Moody's Economy - "The U.S. dollar is expected to trend generally lower over the next several years as it is currently overvalued by an estimated 25% against the Chinese Yuan."

Sprott Securities - "If the U.S. were a stock, most investors wouldn't give it the time of day and, in fact, might short it."

Both these suggest continuing dollar weakness over the years ahead and dollar weakness generally suggests gold strength.

But then there is perhaps the most accurate of all of Yogi Berra's many mangled quotations to consider: "It's tough to make predictions, especially about the future."

The future looks dangerous to this non-economist commentator. After all what does a mining engineer know about economics? Plenty of far cleverer people than I say the recession is almost over. But even so I think I might feel more comfortable with at least a good proportion of my pension fund in gold - just in case!