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Gold Is A Hedge Against Many Things

Friday March 22, 2013 08:52

Editor's Note: Catch the latest addition to Kitco.com! Seasoned Metals Analyst, Kira McCaffrey Brecht will be sharing her extensive commodities knowledge on Kitco.com. Kira has been writing about the financial markets for over a decade -- posts during her career include Managing Editor at TraderPlanet, Chicago Bureau Chief at Futures World News, Market Analyst at Bridge News and Technical Analyst for MMS International and Managing Editor at SFO Magazine.

Gold is a multi-faceted hedge. It's a hedge against inflation. It's a hedge against devalued fiat currencies.

It's a hedge when central banks around the world continue policies of massive monetary accommodation and quantitative easing. It's a hedge against slower economic growth. It's a hedge against declining paper assets. It's a hedge against global uncertainty and political and military stress. It's a safe-haven.

More significantly as of late, it's a hedge against bank holidays when you can't get your cash. Can you imagine being turned away at your bank unable to get your money? This week's banking holiday in Cyprus was the first since the global financial crisis began in 2007.

During the previous 100 years, banking holidays have been relatively rare events. The fact that the recent crisis stretched to these extreme proposed measures reveals the on-going fragility and instability in the Euro zone.

"The fact that Cyprus now faces days of bank holidays shows the total lack of preparedness of euro area policy makers to unexpected developments, almost five years into the crisis and almost one year after the request for help from Cyprus," wrote Nomura economists this week.

The U.S. had a few banking holidays during the Great Depression—individual states in 1932 and a few scattered states in 1933. March 6, 1933, however, saw a banking holiday for four days across the entire country, according to data by Nomura and the IMF.

More recently, the smattering of banking holidays that have erupted over the last 25 years have been in Latin America. Argentina saw one in 1989 and again in 2001. Ecuador held a banking holiday in 1999 and Uruguay saw one in 2002. Finally, Brazil had one in 1990.

Banking holidays are very rare reactions to financial and banking crises.

Holding physical gold is a diversification strategy away from the paper assets that are so prevalent in our modern society. Gold is tangible and physical ownership means you can keep it close.

Shifting to current market action, the gold market has limped back in recent week towards higher levels scaling the $1600 per ounce level in recent days. Gold had been badly battered and bruised during the sell-off in recent months, but it fell to levels that long-term physical buyers saw as attractive. Gold on sale!

The $1550-1525 per ounce level remains a major long-term technical support zone on the charts, but the gold market is now climbing away from a test of that critical area.

The market is not out of the woods yet, from a technical perspective, but it is getting close. Gold bulls want to see the market rally and close strong above the late February swing high, see Figure 1 below, around $1,620 an ounce.  A solid weekly close above that level will "confirm" a minor bottom on the chart and open the door for an intermediate term (multi-week to multi-month rally).

Daily April Comex Gold Futures Chart


By Kira Brecht, Kitco.com, follow her on Twitter @KiraBrecht

Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in precious metal products, commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.

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