Here’s a surprise…
“We remain entirely prepared to take additional balance sheet actions as necessary to achieve our objectives.Those tools remained very much on the table and we would not hesitate to use them should the economy require that additional support.”
Those are the words from Dr. Ben S. Bernanke, Chairman of the U.S. Federal Reserve.
Of course, it’s not really a surprise.You’d have to be a certified idiot not to think the Fed and every other central bank is poised to pounce if their economies start to falter.
Here in Australia there are plenty of calls for the Reserve Bank of Australia (RBA) to drop interest rates to help the economy… even though Australia is supposedly the best economy in the world… ever!
But we try not to dwell too much on what the central bank clowns are doing.Because as we point out in this special presentation, “None of it matters.”
That said, you still need to take some notice. Because there are some markets where it does matter what the Fed does…
A Battle of Attrition
We’re talking about precious metals like gold.
After soaring from AUD$1,378 to AUD$1,806 an ounce last year, gold has moved into what we can only describe as a painfully boring sideways trading range.
You can see the proof on this chart:
Anyone who bought gold during the past 10 months is under water.
The gold market has moved into the phase that follows a boom and bust. It’s the battle of attrition.
You see it in all markets. It doesn’t matter if it’s stocks, bonds, property or anything else. The market follows the same pattern: boom, bust and then a grinding and painful sideways movement.
(By the way, that’s why we’re still calling for the Aussie housing market to fall further. Its had the boom, and contrary to what the spruikers claim, the market isn’t in the recovery phase yet… it’s still in the bust phase!)
What happens during this market phase is the part-time gold investors sell out. They never really believed in the real value of gold to begin with.
They only bought because like all booms, they feared missing out.
So with the gold price hitting the skids (it’s down 12% from the top), those part-timers begin wondering why they bought gold.
They see the price moving sideways and the words of billionaire investor, Warren Buffett start ringing in their ears.To paraphrase, “Gold does nothing and it earns nothing.It’s useless.”
So, they sell.
But it’s not just the part-timers.Even the gold bulls and gold bugs apply some selling pressure too. While they may be bullish on gold, even they start to wonder if the price was over-cooked.So they sell a bit of the shiny stuff too… or at the very least, they may hold off on buying more until they see the price fall further.
That said, what is the future for the gold price? And as an investor, what should you do about it?
Don’t Bank on a Gold Standard Just Yet
Well, while you need to keep a close eye on what the central bankers are up to, our “None of it matters” mantra also applies to gold.
Long term we know the current monetary system is unsustainable.That at some point (maybe sooner than we think), there will be a major change to the global banking system.
And that will have a huge effect on the gold price.
But that doesn’t mean central banks will turn to gold to back their currencies. Not yet anyway. More likely is an intermediate step that some are already talking about.
That is, replacing the U.S. dollar as global reserve currency with a basket of currencies. This – supposedly – will provide more stability to currency markets and reduce the impact of one country acting irresponsibly by racking up excessive debts and printing money.
Of course, that’s rubbish. If you peel back the layers you’ll see it’s not the U.S. dollar that’s the problem, it’s the faith in paper currencies.
So replacing one paper currency with many paper currencies isn’t a solution.
The impact on gold?
Will Aussie Dollars Exist in 2022?
What should soon become apparent to the mainstream is what they see as gold’s faults and limitations (it doesn’t do anything), is actually its virtue.
Gold doesn’t do anything.
It can’t do anything.
That while thousands of bureaucrats and bankers have spent years and millions of hours trying to prop up and manipulate the value of paper currencies, a bar of gold in the future is the same as a bar of gold today.
It won’t have changed.
But that realisation won’t happen overnight.It may take many years.That’s why you should almost ignore the daily price action for gold. As Greg Canavan points out in another of today’s articles, the market price for gold is heavily manipulated.
But even so, what doesn’t change is gold’s worth as a store of value.With everything that’s happening in global markets with the manipulation of national currencies, can you really be certain that Aussie dollars, euros, U.S. dollars and British pounds will still be around in 10 year?
Yet we’re 100% certain that gold will still be around in 10 years.And that, regardless of what has happened to the price over the past 10 months, still makes it the best “money” you can buy.
From the Archives…
Small Caps – A Way to Bet on Developing Markets…Without Investing Overseas
2012-04-013 – Kris Sayce
All Transactions to be Conducted in the Presence of a Tax Collector
2012-04-12 – Simon Black
How You Can Use Government Intervention to Profit on the Stock Market
2012-04-11 – Kris Sayce
Australia – The Pacific Pawn in USA Versus China
2012-04-10 – Dr. Alex Cowie
If Ron Paul Were US President…
2012-04-09 – Mark Tier
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Written by Kris Sayce
Kris Sayce is Editor in Chief of Australia’s biggest circulation daily financial email — Money Morning. (You can subscribe to Money Morning for free here).
Kris is also editor of Australian Small-Cap Investigator, his small-cap stock research service, where he provides detailed analysis on some the brightest, smallest listed companies on the ASX.
If you’re already a subscriber to these publications, or want to follow his financial world view more closely, then we recommend you join Kris on Google+. It’s where he shares investment insight, commentary and ideas that he can’t always fit into his regular Money Morning essays.