Gold Reaches $1,000 and Falls

The Acamar Journal began publishing in April 2004, when gold was $ 400. It has reached a historic milestone, exceeding $ 1,000 per ounce.

The best part is still to come.

CLSA, a Hong Kong based investment bank owned by Credit Agricole (the seventh largest bank in the world), is projecting $ 3,400 within 3 years.

But markets have a way of teaching investors a bit of humility every now and then. Gold reached a high of $ 1,033 and then fell last week by over $ 100 in two trading sessions (about 10%) as the US dollar rallied and speculative funds cashed out.

This is to be expected periodically. The precious metals sector, in terms of value, is small relative to global stock and bonds markets so when money flows in and out, it creates significant volatility.

The sell-off in gold and silver was part of a broader commodities sell-off as speculators, who had driven most commodities to record highs in recent months, fled as the US dollar rallied.

It is important to remember why investors should be invested in gold, despite the volatility. There is a real crisis out there, and gold provides a long term protection against the future threats of inflation, recession, the falling dollar and geopolitical uncertainty.

Look at what Joseph Stiglitz, a Nobel prize-winning economist in 2001 and former chief of the World Bank said last week. He said the current financial crisis was the worst since the Great Depression and the Fed's action will not make much difference.

"It will have some impact - it will do a little bit to stem the blood - but it's not addressing the fundamental problems underlying the collapse of the financial sector," Stiglitz said.

He said the Federal Reserve's move to cut its funds rate by three-quarters of a percentage point was "just trying to ease the economy down rather than try to address the underlying problems."

Stiglitz said the main problem was the fact that an estimated 2 million Americans were going to lose their homes because they could not repay mortgages which exceed the value of their property as house prices fell dramatically.

"As people walk away from their mortgages there will be more and more defaults - that undermines the whole financial system," he said.

In August, when the crisis hit, gold fell initially and then rallied to record highs as global stocks and real estate markets kept falling. It will keep bouncing back from its inevitable corrections and keep climbing over the coming months and years to unprecedented levels.

All significant corrections represent buying opportunities!

Jewelers in Asia have begun buying gold aggressively again as they do not believe these prices will last.

My brother in San Francisco tells me that he got an email from his gold bullion dealer that they have disabled their online ordering system on Wed March 20 (after gold has fallen to $ 920) as they cannot keep up with customer demand! Here is what their website says:

I expect to see more and more mainstream institutional investors and new retail investors pile into gold and silver in the coming months.

Remember to visit:

Hard Times Ahead

With the venerable Bear Stearns having effectively gone under and other banks such as Lehman Brothers the next potential victims, how bad can things get?

Robert Reich was Labour Secretary under President Clinton, and is a graduate of Harvard, Oxford and Yale. He believes that the Fed's rescue plan will not work, because the average consumer is too heavily indebted to increase, or even sustain, spending in this recessionary environment, regardless of the easing of monetary policy.

In inflation adjusted terms, the median wage today is below what it was in 1999. A man in his 30s earns 12% less than someone his age did 35 years ago.

He believes that American consumers are deeply in debt, their homes are losing value and their paycheques are shrinking.

According to Reich: "These bailouts won't work because the Street's big banks are still sitting on what may be another three to four hundred billion dollars of bad debt. The rest of the world economy, through the magic of securitization, may be sitting on another few hundred billion. And because no one knows precisely how much or where this bad debt is, the risk premium is even higher, which is why credit markets will remain more or less frozen.

We won't be out of this mess until the speculative bubble that was created when the Fed cut slashed interest rates six years ago fully pops. For that to happen, Wall Street will have to face its real losses and write off another several hundred billion. And home owners across America will have to face their losses and watch the value of their houses drop another 10 percent, about to where they were before the bubble.

The Fed bailing out the big banks is like someone with a helium tank blowing more air into a leaky balloon. It only postpones the inevitable, which is that the balloon will lose its air and float back to earth. For markets to work again, speculative bubbles have to burst, one way or another."

Reich believes that there is a 20% chance of a Depression.

Now the Acamar Journal is a pretty serious affair normally, and is sometimes a touch intense. So, given the depressing thought above, I think a touch of humour here would not be amiss. Here are comedians John Bird and John Fortune taking the mickey out of Wall Street and City of London financiers: