Who is going to buy all that debt?

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Published : January 05th, 2012
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Category : Opinions and Analysis

 

 

 

 

The price of gold started the year on a positive note, rebounding from support at $1,550 per troy ounce back towards $1,600 and extending its decade long bull market. The future looks just as bright for the yellow metal, as real interest rates remain negative around the world and, as Bloomberg reports the world’s largest governments are facing the daunting task of refinancing over 7 trillion dollars in 2012. As the markets’ appetite for sovereign bonds dries up and the perception of fixed income as “riskless assets” goes the way of the dodo, the easiest way out for the debtors will be to print and inflate.

Improving macroeconomic numbers from the US are being seen by some economists as the first signs of accelerating inflation, especially given the rise in key energy and agricultural commodities, while others are playing the “green shoots” song again. Meanwhile the Chinese slowdown, exemplified by the Hang Seng Index’s 9 month and 25% drop, has sparked increasing concern over whether the Asian giant will see a soft or hard landing, and how that will affect the world economy. Both Japan and China will be less enthusiastic buyers of US sovereign debt, unless of course it is done with newly printed money and for currency manipulation purposes.

The demoralizing end of year drop in the price of gold spooked many gold bugs, however, “If you can keep your head when all about you, are losing theirs…” and take a few minutes to look at the fundamentals, you will see the wisdom of holding onto your gold, and perhaps even deciding to buy some silver, which at under $30 per troy ounce is looking like a real bargain. As long as the long term bullish trend is undisturbed and the fundamentals remain in place, the best plan is quiet, steady and methodical accumulation. Emotions are always the enemy of prudent investment and saving.

Spain’s announcement today that the budget deficit will overshoot 8% (when the official target was under 5% just a few months ago), casts a long shadow over the euro. We are well past the point where the euro-periphery trembled but could hope to be bailed out by the euro-core.

In the US the primaries, starting with the Iowa caucuses today, will see foreign policy compete with the fiscal crisis for the spotlight. Whatever the outcome, precious metals will remain the only store of value that do not depend on someone else’s promise and that cannot default.

 

 

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