Investing In Gold - Why has gold gone off a cliff?

"Who cares about gold? It is the epitome of human stupidity. A metal that is dug out of the ground at great cost to be reinterred in bank vaults as a protection against the same stupidity as caused it to be dug up in the first place."

For a supposedly steady, boring investment, gold has a remarkable power to divide opinion.

Gold fans — such as our very own Bill Bonner, who has made gold his Daily Reckoning ‘Trade of the Decade’ — admire its status as ‘real money’. Gold’s value can’t be inflated away at the printing press.

Then there are gold’s detractors, like the Telegraph reader quoted above. They dislike the fact that gold doesn’t pay them money to hold it. It doesn’t earn anything. There’s no dividend. They dislike also that defies any real notion of fundamental value. Jewellery makers buy gold because they need it. But investors buy it because they think, at some point in the future, other investors will buy it.

Neither camp is wrong — not in their logic at any rate. But what makes an investor "right" is what happens in the market. Earlier this year — when gold bust through $1,000, the bulls looked like they had it licked. Now it’s the bears’ turn to crow.

At the start of this month you’d have paid over $900 for an ounce of the stuff. The price was down below $780 this morning. What’s going on?

My simple, broad strokes view is that gold has fallen because the dollar has rallied. But — unlike many commentators — I don’t think that will continue (I’ll be saying more on this in future editions of FSD).

So, personally, I don’t see a reason to panic about gold’s long-term future. The dollar’s mini Lazarus act is not a reason to offload gold.

But another perspective is never a bad thing...

Today, contributor Erin Hamilton — who has spent the past week avoiding Russian tanks in Georgia — tells us why gold investors should expect further volatility ahead.

Eurozone posts negative growth. What now for the euro?

The aggregate growth of all the economies that use the euro is negative. Figures out yesterday show that the eurozone contracted by 0.2% in the second quarter.

The European Central Bank (ECB) kept rates on hold last week, at 4.25%. But the suspicion is that, sooner or later, it will be forced to cut them. Europe, like Britain, is edging ever closer to recession. As inflation peaks — which I believe it will, in Europe as well as Britain — the ECB’s attention will be focused more sharply on growth.

As someone who has recommended being exposed to the euro as a hedge against sterling, I have more than a casual interest in this. And I’m taking the long view...

As the subprime crisis got into gear last year, all eyes were on America. Optimists hoped that the credit crunch would end where it started — in the US. For a while it seemed like they might get their wish. Bad news poured eastwards across the Atlantic. Wall Street write-downs. Bear Stearns. Fannie and Freddie.

Selective media reporting also played a part. "America is doomed" was the story of the moment. Any news supporting that line was given pride of place. Contradictory evidence tended to be screened out.

But the US hasn’t imploded — at least, not yet. And the big thing now is how bad things are in continental Europe. Spain has a housing headache. Germany’s exports are down. Everyone hates the ECB. We’ll be getting more of these stories. More examples of European hand-wringing.

Here’s the reality: Europe does have problems. So does the US. And so does Britain.

All of which makes knowing what the currency market will do... well, about as tricky as it always is. You’ve got three dodgy economies racing towards recession. It can feel a bit like betting on a horse...

But it doesn’t have to!

Why pick just one horse when there’s nothing compelling you to do so?

As Britons, most or all of our wealth is tied up with the value of the pound. It’s the currency we use, so we can’t exactly avoid it. But we can, if we can afford it, take some of our money and put it into something else.

That way if the worst happens, and Britain ‘wins’ the Who Can Be The Biggest Basket Case? competition, your entire wealth isn’t tied into this country’s fortunes.

It’s for these reasons that I’m telling Fleet Street Letter readers to hedge against a fall in sterling. As I explain to them in our most recent issue, there is a very real risk that that will happen. It simply doesn’t make sense to have all your assets in the firing line when you really don’t have to.

Visit our information page to find out more.

Until next time

Ben Traynor

Editor

PS I’m on holiday on Monday. But Fleet Street Daily isn’t — I’ve put Frank Hemsley in the hot seat!

Selected articles today:

Erin Hamilton on the gold price volatility

The Daily Reckoning — Perps, Pimps and Pushy Panhandlers

It’s "an empire ending problem," says Robert Zubrin.

He’s referring to the outflow of capital from the United States of America to the oil exporting countries. OPEC now takes in more cash than the US government.

Oil fell a dollar yesterday — bringing the price per barrel down to $114. It’s sold as low as $112 this week. We expected it to sink below $100. So far, it hasn’t happened. But this correction could last much longer and take the price down a bit more.

Americans are responding. The latest numbers show them driving nearly 5% fewer miles this year. And the Arizona Republic opines that the price of gasoline is not likely to fall much further.

OPEC’s revenues add up to more than a $1.1 trillion per year — more than the US government gets in tax receipts. If OPEC were to save its money, in just three years it could buy nearly the entire Dow — taking control of America’s most important industries.

You can read the Daily Reckoning in full here. P.S. If you enjoyed this article then we encourage you to sign up for the free Fleet Street Daily eletter. Learn what you can expect from today's markets -- and how to prosper in the face of uncertainty. You won't find more thought provoking writing anywhere on the Internet.

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Investing In Gold - Why has gold gone off a cliff?

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Why Has Gold Gone Off A Cliff?