Will Gold Rise Still, When the Next Shock Hits? Does Liquidity Mean Confidence?


By Julian D.W. Phillips

Sep 7 2007 10:50AM


Smoke and mirrors, the confidence game is such a difficult one, once the crowd is suspicious. Our generation trusts few figures in authority.  It is a generation used to being taken for a ride, with the sin now in being gullible. And the beginning of the run up in gold and silver testifies to market fears.

And B. Benanke of the Federal Reserve is sitting in a chair where onlooker’s suspicions are a knee jerk reaction. He now has to convince the world [not just the U.S.] that they should trust him and the system, as he sits ready to pump in the money.   In an open letter sent by Fed Chairman Benanke to New York Senator Charles Schumer, he reiterated the Fed’s commitment to ensuring market liquidity. The market breathed a sigh of relief knowing [?] that none of the highly sophisticated financial markets would freeze up again, because he would print dollars and chuck them from a helicopter at whoever wanted them. Movement  has begun, albeit slowly. Oh, believe me; the market desperately wanted this response from him, particularly the vulnerable, desperate and fearful.   But that may give relief, but not confidence, at least so far as more liquidity is being pumped in this week. Far more is needed to do that. So far B.Benanke has as his number one objective, functioning markets, but the problem is far deeper than that.

Once the market is convinced it can trade without fear, players gingerly came out, one by one, to deal again. But confidence isn’t there yet. The market first saw they were stuck with the stock that caused the mess. The good liquid investments sold to get at least some liquidity were forced sales, so will be wanted back. Sub-prime related stocks are out. So how can these markets continue to function?   This is of major importance because the sight of banks refusing to deal with one another hits at the heart of the entire system. Lots of soothing words are now flowing hoping to re-establish a positive show. But as we saw to our horror, we have now moved from the spin games into a period of consequences. And they won’t go away!

Cold realities where liquidity levels measure levels of investor confidence are here to stay.   Moreover, liquidity exists when investors are credit-worthy.  Can we be certain that all are? The next few months will be a no-man’s land while that is established. And there, far more work needs to be done, because the structural cause of the problem remains. So the shocks, like after-shocks or worse, may still come. Just how deep do the problems reach – it appears no one knows?  

Gold in the next strike.

When the de-leveraging tsunami flows of capital roared through the system gold was an initial casualty as was any liquid investment in the forced sale markets that rattles them all. But these were not sales as in exiting the market, they were sales made, which, on the return of a healthy level of liquidity, will be brought back into the portfolios. We are seeing this now!

As a result, gold will be attractive in the event of another blow to the system, for as of right now portfolio managers have re-strategized, built buffers against the next shock and targeted markets that can withstand future shocks. In the next strike gold and silver, as they are now will outperform and be a point of retreat. More than that, risks usually associated with the precious metals, will pale against those now being seen in ‘safer’ markets.

The very stability and now rise in the gold price supports this view. From the Middle East to Asia, confidence in gold has risen to a new high and they are major players in setting the gold price. In turn the growth of long-term Investor-held gold is at a high and moving higher.  

The underlying drop in confidence, caused by the simple fact that this shock can happen, won’t go away. Superficially repairs have been made, so after thinking that the ship would sink, we are relieved that it’s still floating. But will it get to port?

Right now, in the emerging markets, gold shares and similar investments we are seeing almost a complete recovery to the pre-shock levels, so its already happening.  

Gold and silver are reflecting the decay of the $, its global value, dropping confidence in the monetary system, but at a gear-shift change of pace going forward.   Those fortunate enough to have gold or silver will have an element of security that will take them through the dramas ahead.    The need to fully understand this subject is now imperative.   Make sure you do!

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