Is
Gold a good investment today?
Gold is presently trading at just over $900 per troy ounce. Contrary
to popular opinion that as each new financial catastrophe unfolds
Gold may reach $3,000 or even $4,000 per troy ounce, we believe
that opinion to be unfounded, and predict Gold will remain in a
trading range of between $750 and possibly $1,200 per troy ounce
for the foreseeable future.
Historically, Gold has fluctuated between $35 per troy ounce and
recently just over $1,020 per troy ounce. The price of Gold reacts
to inflationary pressures and times of financial uncertainty as
it is a store of value. So why won’t the price of Gold explode
upward to over $4,000 per troy ounce as many experts predict?
In the early days, peoples, like the Assyrians, Babylonians, Greeks
and Romans subdued other peoples (like the Jews of Palestine) in
order to get them to pay taxes. (And then, like now, Gold was considered
the most trusted store of wealth).
The Mafia worked in a similar fashion, demanding protection money
from their victims, which in reality is a similar form of tax.
Today, Governments while much more civilized, work in a similar
manner.
Governments need tax revenues in order to survive. As a direct
consequence of the Depression that our world is now in, tax revenues
have dropped dramatically which in turn is applying a lot of financial
pressure on Governments.
What Governments are doing now in order to solve the world financial
crisis is predetermined by their desperate need to increase their
revenues which will allow them to stay in power. Witness the fact
that the unbelievable has happened in that they have pressured
Switzerland and similar world tax havens in order to get their
hands on every penny they can.
It is critical to keep this in mind when trying to
determine the price movement of Gold in the future.
We have to realize that most if not all the Banks in the world
today are bankrupt and Governments have the choice of either letting
them collapse and thus bringing on the collapse of their clients,
or supporting the Banks in order to save the world financial system.
This has required Governments to print massive amounts of money
which is lent to the Banks at ridiculously low rates of interest
in order to help them survive. This is normally considered highly
inflationary since by printing money, they are effectively reducing
the value of money. Gold is considered a hedge against inflation,
but although unprecedented amounts of money are being printed by
world governments today, we have no inflation; on the contrary,
we are in a deflationary cycle because of the massive slowdown
in our business activities so we can discard the inflation factor
for now.
But if Gold is also historically considered a safe haven in times
of financial turmoil and a store of wealth, then it should be rising
dramatically in price now, so why isn’t it?
The ultimate goal of the world Governments today is to get the
money through to the people and reflate economies in order to get
businesses moving again so that they can generate profits which
in turn will lead to taxes, both in the form of VAT and taxes from
profits.
They cannot allow people to invest in Gold instead
of in the market place,
so really world Governments are one of the main
forces acting against the increase in the price of Gold . If
need be, they will either intervene in the markets by selling
Gold in order to bring down the price, or by levying special
taxes on Gold transactions, or even by the unthinkable of making
it illegal to hold Gold as was in fact once the case in Israel.
They must channel the massive amounts of money they are printing
into the economy otherwise they face an even bigger catastrophe!
Another negative factor on the price of gold is that the world
depression has reduced industrial demand for the metal, and the
Far East, normally considered the largest domestic Gold market,
report that sales of Gold jewelry are down by over 50%
Given the financial hardship many people now find themselves in,
they may be actually selling their gold in order to help them survive.
You cannot eat Gold!
As stated above, we believe Gold will trade in a volatile range
of between $750 and $1200 per troy ounce, bouncing up whenever
we hear of another unpredicted financial catastrophe such as a
bankruptcy or Bank collapse, only to fall back shortly thereafter.
Volatility creates excellent trading opportunities which can
be optimized by using Gold option strategies.
Notwithstanding the above, don’t short Gold. Remember the first
Golden rule…the unexpected ALWAYS happens.
David Zwebner
The writer is the founder and C.E.O of CommStock Trading (1981)
Ltd, Commodities, Futures & Options Brokers.
They act as advisors to the Altshuler –Shaham Commstock Commodity
Leveraged Fund,
One of the best performing Funds in 2008 (21.45%) and up over 10%
in 2009.
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