Gold vs Economic Slowdown

November 20, 2008 Inflation, Physical Gold, Predictions No Comments

The Dow is currently down 64 at 7,932, the NAS down 2 at 1,384 and gold is up $15.00 at $749.90. The trading range is solidly in place and the the general markets look poised to stay under 8,000. On the bright side, gold is holding it’s own, but the gold stocks continue to be beaten up. Once again, this is a great opportunity to pick up well managed quality gold stocks. Their day is coming and it may be nearer than most expect.

The world’s economy is grinding relentlessly down, slowing at an ever increasing rate. Credit remains tight and that effects businesses across the globe. The Chinese face factory shutdowns because no one is buying their goods. Toyota’s sit in Long Beach with no dealerships willing to take them. This slowdown is accelerating. Soon the more and more layoffs will occur, which will slow the economy down even more. We are in a recession and the only question now is will it be a short one or a severe one or possibly a world wide depression. We will have to wait and see how this recession/depression proceeds, but I for one would rather be prepared for the worst and be happy if it doesn’t occur.

Scenario Number 1

As things worsen and layoffs climb, there will be more fore closers, bank failures and plant closings. The dollar will seek it’s true level as the economy weakens. The current rush to the “quality” of the dollar is a temporary step as nations seek to liquefy their obligations. The Chinese may already be buying gold and the Saudis definitely are. In this case gold will rise as people realize the the only true protector of wealth is gold.

Scenario Number 2

In the case where the current global reflation plan succeeds, the costs will be steep. The economy stabilizes and fewer and fewer companies go belly up for a while. And then the inflation will start to rise. The government trys to eliminate any indicators that point to inflation, but the increase in the money supply cannot be withdrawn and it steamrolls out of control.

In this example gold rises because it is, in and of it’s nature, the best hedge against inflation. In either scenario gold will rise. The outcome is not in doubt, it’s simply a matter of time before we find which path it will take.

Till next time, good luck and good trading.