Wednesday, July 9, 2008

EMOTIONAL GOLD

The headline grabber of the last several months has, of course, been gold. There is not much about gold that hasn't already been said or blogged and yet, it has risen 55% over the past year. Gold has reached the highest price ever of over $1000 per troy ounce before it settled at, a still more than respectable, $900. The gold bugs - the "end of the Worlders" are happy but are their doom and gloom predictions justified?

Bob McKee, chief economist at Independent Strategy, doesn't think so. He started getting long gold between $330 and $350 in 2003, citing three drivers that are clear to all: the current account deficit's pressure on the dollar, growing political uncertainty and an impending reversal of the liquidity boom.

"Some people argued then that money flowing into Asian economies would be recycled into dollars," McKee says. "There's some truth to this, but there is also a growing pressure to diversify." "Up until three or four years ago, that was a real concern because the central banks still saw gold as a dead thing," he says. "But they have done their dumping, and have no more left to sell."

The other drivers have only gotten stronger, and the question now is whether they have become so strong that the market has already discounted them. McKee doesn't think so.

"We still have some room to go in all three drivers," he says. "Assuming that the U.S. economy went into recession this last quarter, and knowing that recessions tend to last nine to 12 months, we can expect dollar weakness to continue for at least the next two quarters."

Then, he says, just when the United States begins to pick up steam, the other OECD countries could be slipping into recession with low interest rates sparking fears of inflation.

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