Buying Gold Coins as Gold Falls

In spite of the news stories about the U.S. economy turning around it is time to be buying gold coins as we have only seen the tip of the derivatives iceberg.  Buying gold coins on this retreat in gold prices will lock in the lowest cost purchase that we will see for many years to come.

The news is rife with stories about the turnaround in the U.S. markets, proclaiming that the U.S. will lead the way out of the financial crisis and that is leading traders to reduce their need for the safe haven of gold and allowing them to move back into equities.  We will see how long this “Pollyanna” moment lasts, but first let’s see how the markets are taking the news at this moment.

The DOW is down 75 at 7,942, the NAS down as well, 32 at 1,589, the dollar is once again the place to be, up .44 (.58%) at 84.62 and gold has been taken to the woodshed, down $27.70 at $866.10.  Gold struggled to maintain $890 and then fell apart under the weight of the “good” news on the economy.   Apparently North Korea’s ability to hit Japan and the U.S. with a nuclear tipped rocket as demonstrated by their latest defiant missile launch this weekend did not even budge the fear meter in the least.  The global community now has to deal with Korea that has nuclear weapons and a delivery system and Iran that either has them or is about to shortly.

The Wall Street Journal is reporting a slightly different tune on the recovery of the U.S. economy which bears noting.

“Federal Reserve Vice Chairman Donald Kohn offered a sobering assessment of the economic landscape and warned in starker terms than he has before about the risk of deflation — a widespread drop in consumer prices that can sap the economy’s strength.

“Many financial markets remain under considerable stress,” Mr. Kohn said in comments at the College of Wooster in Ohio, his Alma Mater, noting that the value of assets — such as stocks and homes — has fallen and credit is still tight for firms and households. “These conditions are not conducive to a substantial and sustained economic rebound.”

The Fed has already lowered interest rates to near zero and in recent months has tried other approaches to repairing financial markets by aggressively expanding its lending and asset-purchase programs. Mr. Kohn expressed worry that with the Fed’s benchmark interest rate already about as low as it can go, further declines in inflation could push up the real cost of borrowing, which is borrowing adjusted for inflation. That, in turn, could further weaken the economy.

“If such a process continued for some time, we could fall into deflation, much as Japan did for a time in the 1990s and earlier this decade,” he warned. The Fed is combating that risk by ramping up its purchases of securities and loans to needy firms, an act that ultimately could have the opposite effect — causing inflation. Both Mr. Kohn and Fed Chairman Ben Bernanke, speaking separately in North Carolina, addressed the need for the Fed to pull back its special lending programs once the economy gets back on its feet. To finance its asset purchases, the Fed has effectively been printing money which shows up in the financial system as reserves that banks keep on deposit with the Fed.

“The large volume of reserve balances must be monitored carefully,” Mr. Bernanke said. If not carefully managed, he said, the cash sloshing around the financial system could make it harder for the Fed to raise interest rates down the road when the economy starts a convincing recovery.”

Sounds like a little bit of a mixed message being sent here.  Mr. Kohn is worried about deflation and “helicopter” Ben is worried about the ability to control inflation.  What should be noted here is that they both agree that either scenario is not conducive to an economic recovery.  The Fed is digging a hole that they will not be able to fill in fast enough when they get the signs that they have dug too deep.

How does this effect the average American household?  The answer is simple.  It provides a great opportunity to buy gold and silver coins at greatly reduced prices.  This pullback in gold will most likely stop between $820 and $850 and it could well be the lowest price in gold that we see for many years.  There is always the chance that gold could go lower, but it doesn’t look likely at this time.  The crowd mentality may make the swings more extreme on the downside, but conversely they will be just as extreme on the upside.

The Rainbow Is Coming To The Pot Of Gold!

The choice is simple, if you believe everything has been fixed in the economy by the Harvard eggheads, buy general equities.  If, on the other hand, you feel that we have only seen the tip of the derivatives iceberg, you should be buying gold coins and gold bullion on this leg down.  I want to wait and see a rebound in gold stocks before I start buying gold stocks.  I may miss a big up day by doing this, but I would rather see the trend in gold stocks start moving up before I get in aggressively.

This is clearly an opportunity to accumulate gold and silver coins while the price is being pushed down. It is going to get really interesting as we watch gold put in the next bottom.  Don’t get discouraged by this retreat, rather look at it in terms of the long term opportunity that is represents. There are already signs that interest is coming back in to the gold market in India.  Once gold broke through $890, buyers came back into the market and the selling of scrap gold slowed.

Till next time, good luck and good trading!

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• IMF Diversion Will Not Stop Gold Buying
• Fiat Currency Cycle
• Buy Gold Coins And Bullion on Dips Under $900!
• Gold as Currency