Dark Times are a Good Omen for Gold

Joanne Nova
GoldNerds
Sep 3, 2008

Vietnam bans gold imports. Banks are in trouble. Inflation takes off.

Gold stocks and futures have been hammered. It's depressing, but the big picture could hardly get better for gold investors. Let's not forget that in the last few months, financial lines-in-the-sand have been crossed that are only breached once every few decades. Inflation figures are breaking out, reaching as high as 25% in Vietnam. Large multinational banks like Barclays and Morgan Stanley are tripping over themselves to forecast 'financial storms' and daring to use words like 'catastrophe'. Other banks are collapsing. Share markets are down everywhere and across all sectors.

These are exactly the rare times when gold transforms into an investment class of its own.

In an extraordinary move in June, Vietnam banned all gold imports. While it's not good for gold miners or Vietnamese citizens, it's a sign of how important gold is - can anyone imagine Vietnam banning nickel imports in order to save the dong? Gold is money after all, not just 'another commodity'.

Vietnam had been increasing its money supply by a ludicrous 50% pa, which drove its inflation up. No wonder the Vietnamese were buying gold. After citizens turn away from the dong and the US dollar, what else is there? In Vietnam, gold imports had almost doubled from the year before. The government doubled import duties on gold, but it made little dent on the demand, so a month later in late June, all imports of gold were banned completely. It had reached the point where some houses were advertised with prices in both dong and gold ounces. [traditionally Vietnamese use gold for savings, jewellery and real estate transactions].

Gold's role as the only alternative to fiat currencies has barely started to resurface. Fiat currencies can be 'created from thin-air', but not gold, and it's not just Vietnam that has ramped up the supply of paper money. The growth in the Australian money supply (or M3) hit 23% per annum, in January this year. Meanwhile total world gold supply has increased at less than 2% per annum every year for the last 40 years. For people who want a currency that can't be diluted by the 'good intentions' of government bureaucracies, gold is it.

Because this is a currency crisis, banks are suffering. Now, for the first time in years, banks are breaking rank, and crossing unspoken boundaries. Previously they would smooth things over, tow [toe] the line, and repeat the doctrine, 'this is a minor correction'. Now The Great Depression is suddenly being talked about. People have stopped pretending that this might be 'the bottom'. Usually banks don't want to rock the boat, but suddenly they're abandoning a sinking ship with a scramble to predict bad news. It's coming from the biggest banks, and the language they use shows none of their usual calm restrain. Instead of slowdowns, and plateaus, they're talking of 'storms', 'shocks', and 'crashes'. Headlines around the world demonstrate how much has changed.

Barclay's openly said, "Inflation is coming, batten down the hatches..." They accused the US central bank of "unleashing an inflation shock that will rock financial markets."

The Bank of International Settlements (THE central bank for central bankers) is very concerned, "BIS slams central banks, warns of worse crunch to come." Meanwhile Morgan Stanley warned of a "catastrophic event," and The Royal Bank of Scotland issued a "Global Crash Alert." This is not just a western financial phenomenon. Chinese stocks have now slumped by almost 50pc. India's have dropped 27%. Russia's inflation hit 15%.

The upside for gold has barely begun. As yet, barely one or two funds are recommending gold, but it's becoming popular to say "cash is king". The problem with that is that paper money 'cash' is guaranteed to lose purchasing power as money supply increases. In the end cash may be king, but the 'king of cash' is gold.

At the moment the entire market capitalisation of the shares in the gold sector is about the same value as the market capitalisation of MacDonalds. There will come a time when gold shares separate themselves from the rest of the market.

Joanne Nova
email: info@goldnerds.com.au
website: www.goldnerds.com.au

Joanne Nova is from GoldNerds, a service for investors to compare the fundamentals of all 300 ASX precious metals stocks. Joanne is science based, a trader, and a Professional Speaker on radio, TV and conferences. www.goldnerds.com.au. Feedback is welcome, info@goldnerds.com.au.

This is not investment advice. It does not represent a recommendation to buy, sell or hold any security.

321gold Ltd