Lawrence Williams: What Gold’s Break Through $1,200 Could Mean This Time

WASHINGTON, DC – I suppose it depends who you listen to whether you believe that gold is going to move on and on to new heights – and maybe test $1500 or higher this year, or whether the recent sharp rise back above $1200, like the even sharper fall in stock markets, is just a blip and it will return to lower levels. The latest European moves to stabilise the Euro and prop up the PIIG economies may temporarily impact the gold priceand bring it back a little. Indeed there are some who believe the combined forces of the U.S and Eurozone will be mobilised against gold to bring it crashing down as they feel that an ever-stronger gold price brings home the global weakness in the major western currencies and the central bankers will be trying to disguise quite how weak these currencies really are.

Ultimately, one suspects, gold will triumph – at least until a new order emerges. It seems inevitable that given the amount of new money in circulation (in financial circles speak quantitative easing) – and continuing to be unleashed in the aim of stimulating global economies – currencies have to have been devalued in terms of anything seen to be relatively stable and perhaps gold offers the only real perception of stability out there.

It does also seem that the feeling that the bullion banks – and even reserves held by central banks – may not be all they are held out to be is gaining credence. While some of the wilder theories are almost certainly wide of the mark, suggesting the banks are trading far more gold than they hold title to may well be correct. Banks have nearly always operated in this manner with cash. While they probably feel they have the collateral to cover their potential commitments at current gold prices, it may not be quickly available. Thus a run on physical gold would leave them very exposed indeed and likely unable to meet the demand – or so the theory goes! A run would also inevitably drive the yellow metal to huge heights as the banks struggle to cover – indeed perhaps to the extent that even the best financed institutions would be bankrupted. The financial turmoil which would accompany such a run could be bloody indeed so one has to hope that it never happens.

Even the slightest prospect that such a circumstance could materialise might lead again to political confiscation of gold similar to that instituted by Roosevelt in an attempt to pre-empt the turmoil which would ensue.

But the very thought that such a gold run scenario could happen is helping drive the sale of physical gold – small bars and coins are in great demand. However should economies collapse to the extent some doomsayers suggest it is a moot point as to what value one could achieve for one’s physical gold holdings. Whether one could trade a gold buffalo coin for general provisions at your local supermarket has to be open to question. Sure there would probably be people out there prepared to trade for hyperinflated currency notes, but whether this would constitute fair value has to be questionable – and in the state of lawlessness which might exist under such circumstances the knowledge that you possessed even a tiny hoard of gold coins might bring you some very unwelcome visitors. Gold bugs be careful what you might wish for!

Hopefully such a scenario remains unlikely, but the devaluation of major currencies vis-a-vis gold would seem inevitable and sooner or later the gold price will likely reflect this. The degree to, and speed at, which this may occur though is the great unknown. A further sharp rise will bring the ‘gold bubble’ scenario proponents back into play and scare off nervous investors, thus limiting price increases and maybe precipitate a setback. But as we have said before we are not believers in a gold bubble – at least not yet.

The likely path, at least while global economic turmoil persists, would seem to be that gold follows an overall upwards path, but with various falterings along the way as external factors impact and spook cautious investors, or upturns in the general stock market convince them that there may be greater gains to be made in equities. But more and more, as overall nervousness in financial markets persists, the numbers of those switching to gold as an insurance policy and wealth protector will continue to increase thus helping underpin the price. But should the global economy look to be back on track – which may yet be some time away – only then would there likely be a sharp and steep, and long term, fallback in the gold price as insurance policy gold holders unwind from their positions.

So overall the immediate outlook looks to be favourable for gold. It may well hit new highs, fall back in the quieter northern summer months and then continue again on an upwards path in the fall. But with gold nothing is certain. External factors and events will almost certainly affect the timing of such a scenario – but it would seem that there are more likely events ahead to drive the price upwards than down. We shall see.