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Sub-Prime Crisis And Weaker Dollar Bodes Well For Gold?

Adrian Ash - Tue 25 Sep, 2007

Northern Rock seems to be the least of it for the Gold Market, however. "External news such as the sub-prime crisis as well as the banking sector have all had a positive impact on the yellow metal price," said Jessica Cross, CEO of the Virtual Metals consultancy, on South African radio last Thursday night. "The [upcoming] US elections are also playing a role. The Republicans are going for economic growth at all costs, even if it means a weaker dollar and that is obviously boding well for gold." Meantime in the Euro zone, money supply growth has been "steeply accelerated" by the European Central Bank's record cash injections to the credit markets since August...

“It couldn't happen here, could it? It just did."

So wrote Bill Jamieson this weekend in The Business. He points to the first genuine run-on-a-bank in Britain since 1878, and he calls the melodrama "five days that made British financial history."

In the crowded theatre of Northern Rock's spectacular demise, the Bank of England shouted "Fire!" when it offered support to NRK as lender of the last resort. Alistair Darling, the first chancellor to wear caterpillars for eyebrows since Denis Healey, then shouted "Don't panic!" in best Dad's Army fashion.

Last Monday morning, Radio Four asked the poor Darling why he wouldn't underwrite 100% of Northern Rock's liabilities. "If people want to get their money out of Northern Rock bank, they can do it," came the hairy one's faltering reply. "The money is there and it is backed by the Bank of England, so they can get it."

Northern Rock's savers took Darling at his word and continued to get their money out. Come Monday evening, as Jamieson's colleague at The Business, Fraser Nelson, notes, the extraordinary idea of underwriting Northern Rock's fast-vanishing deposit base becomes government policy.

A calm decision amid calm, untroubled times?

"Bank runs in the 19th century carried nothing like the implications for millions of savers, investors and borrowers as they do now," Jamison goes on. "All economists remain scared by the events of the 1930s in America, when mass bankruptcies led to a collapse in the supply of money and credit, turning a recession into a depression."

But of course, says Jamieson, "There is no chance of this happening in Britain today." Just as there was no chance of savers queuing up to empty Northern Rock branches from Belfast to Brighton. Not until it happened.

"Well, you see, I've made 10% on my gold since I bought it last month."

"And now you're wondering what comes next?"

"That's why I'm calling. See, I've just sold my house, actually, and I'm thinking of putting all the money in gold. What do you think?"

"I think you should take a cold bath, sir."

"A bit over-eager?"

"Look, I'm not in a position to advise you. If I thought I knew for sure where the gold price was heading, I'd be writing astrology columns in the tabloids. As it is, I've put my whole career into gold by moving to BullionVault. But it's an extreme position for me and my family...and sadly for me, my wife's far too worn-down by arguing with me to try and change my mind any more."

"And if you were me?"

"I'd start running that bath..."

Northern Rock seems to be the least of it for the Gold Market, however. "External news such as the sub-prime crisis as well as the banking sector have all had a positive impact on the yellow metal price," said Jessica Cross, CEO of the Virtual Metals consultancy, on South African radio last Thursday night. "The [upcoming] US elections are also playing a role. The Republicans are going for economic growth at all costs, even if it means a weaker dollar and that is obviously boding well for gold."

Meantime in the Euro zone, money supply growth has been "steeply accelerated" by the European Central Bank's record cash injections to the credit markets since August, taking the rate of expansion "most probably close to 14%" according to analysis by Paul Vreymans at the Work For All think tank. "That is three times the agreed and repeatedly confirmed target of 4.5% money-supply growth."

But is today, right at the top of the chart, the right time for you to buy gold? Six weeks ago would have been better; buying gold six years ago would have been better still.

Early gold buyers spotted trouble ahead, and they have been rewarded for taking a risk on this no-income asset. Since 2001 gold has very nearly doubled against the world's five major currencies. For Japanese gold buyers it's risen three-fold in terms of the Yen. But very few early investors appear to be selling just yet, and many respected analysts agree with their logic – that the real trouble in world finance has barely begun.

Think of the current "credit crunch" as a major sporting event, says Jon Markman for MSN Money. After speaking to Satyajit Das – "one of the world's leading experts on credit derivatives, author of a 4,200-page reference work on the subject, and developer and marketer of the exotic instruments himself over the past 30 years" – he now believes we're just hearing the national anthem played before the game really begins.

"It won't end well for the global economy," says Das, actually laughing! Buying gold, at least as far as the current market action suggests, could prove a wise decision if this crisis gets worse before the world's debt problem is cured.

But gold ownership does not come without risks. Accept them, and you're more likely to sleep well at night. Fail to research your decision and you'll toss and turn every time the price gets hit – which it surely will, even if this historic bull market in gold runs for the next six years.

Regards

Adrian Ash
For The Daily Reckoning

Adrian Ash is head of research at BullionVault.com the world's fastest-growing and best-value gold ownership service.

http://www.bullionvault.com/from/dailyreckon

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