Wednesday, October 08, 2008

Is this it?

Jimmy boy has shouted 'this is it' so many times that the warning has lost the impact and the urgency. Still it is time we took stock of the current market situation especially regarding gold, the king of commodities.

"There is only a relatively small group of investors who very seriously believe that there is a high level of risk that the (financial) system could break down. You only need a relatively small group to believe this to move the price of gold. In other words, the metal's price behavior reflects the trivial obsessions of a discredited fraction of investment opinion."  -Alan Greenspan

And just what is happening out there? Rumours are flying around that Comex might default on Gold contracts and settle in cash instead of physical delievery.  Further weakness being signalled around the world financial markets and rumours of a bank holiday to give the markets some breathing space. Bernanke signalling rate cuts in an effort to calm down US markets and yet they tumble. The UK pumping 50 billion pounds into its fiscal system to shore it up and Hong Kong and Australia slashing rates to increase liquidity.

'Extaordinary' and 'Historic' are the words being used by Gordon Brown and Ben Bernanke in describing the current state of the financial system.

In the gold market if the buyer is paying the effective interest rate for committing the trade, the market is said to be in 'contango'. The 'basis' is the effective interest rate being paid. The shrinking contango and the persistent fall in the gold basis is a measure of the vanishing of gold into private hoardings according to Fekete. Well, the bad news is that the basis has taken a beating in the last few days. His arguement is that when the basis approaches zero, it is goodbye time for the world's fiat currency system.

Gold could see an exponential rise in price in case of an actual meltdown in the financial markets, due to a flight to safety by panicky participants in the world's exchanges. Because, after all, gold is the world's ultimate reserve currency.


Vinod_Sharma said...

Sagarone, you obviously have a very good understanding of the subject. I would recommend to those reading this post that they should park at least some money in gold....for genuinely golden returns.

Anrosh said...

on a lighter note..Nature always rules.

people who made money (owns his own Successful company) believedin investing in GOLD even when the the dot com and the real estate graph was climbing. he used to tell us-
save and buy it in gold. one that is the SOLE means of investment (proven for many decades now).