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Gold Investments Market Update − Financial Sage Roubini Warns of "Slow−Motion Run on US Retail Banks"

Tue, Sep 16 2008, 12:16 GMT
by Mark O'Byrne

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Gold

Gold and silver rallied Monday as the crisis on Wall Street worsened with gold up $21.70 to $782 and silver up 28 cents to $11.02. Gold fell slightly in Asian trading but has risen in early European trading to $780/oz.

Gold's resilience is impressive considering the bloodbath seen in the oil pits where oil has fallen another 4% to below $92 per barrel (Light Sweet Crude Oil Future - Combined - OCT08). Other non currency commodities have also fallen sharply.

After the sharp falls on seen Sunday night and Monday morning, currency markets remain volatile as ever but despite the plethora of negative financial news emanating from the US, the dollar has consolidated at the same level as yesterday (1.4250 to the euro).



Some continue to incorrectly forecast further falls in the gold price due to the erroneous belief that gold is just another commodity akin to pork bellies and will be subject to demand destruction as the global economy sharply slows. They fail to realize the continuing importance of gold as a global monetary reserve (graphically illustrated by the Bundesbank in their recent statement on gold reserves), as a finite currency and as a safe haven asset as witnessed in the last year.

A little knowledge is a dangerous thing and these commentators have little understanding of gold and the gold market and little understanding of monetary and economic history.

The dollar and other fiat currencies are set to come under significant pressure in the coming months as central banks attempt to stop a 1930's style wholesale liquidation and deflation. This will lead to huge safe haven demand for gold internationally and to higher gold prices as it did in the 1930's when gold was revalued from a fixed price of $22/oz to $35/oz. In 1933 gold was revalued by President Roosevelt from $22 to $35 or by some 60% overnight. Therefore even in a massive deflationary event gold massively outperformed all asset classes and performed its safe haven role.

Uninformed commentators also do not know the supply/demand fundamentals in the gold market. Gold demand remains very robust internationally with demand in the US, Europe, Asia and the Middle East continuing to surge (see News section). Meanwhile gold mining companies are struggling with much higher costs and some gold mines are being closed as they are no longer feasible at these low prices.

Gold remains undervalued from a historical and fundamental perspective and markedly higher prices will be seen in the coming years.

Financial Sage Roubini Warns of "Slow-Motion Run on US Retail Banks"

Nouriel Roubini, Chairman of Roubini Global Economics and professor of economics and international business at New York University's Stern School of Business has been the most insightful and perceptive writer on the current financial crisis and one of the very few to predict what is transpiring. He has been a voice in the wilderness ignored by much of the financial press despite accurately warning of the real risks facing the US financial system for many years.

Gold Investments have concurred with his research, made similar warnings and featured Roubini's sagacious work on numerous occasions. (see our Market Update in April 2005 'IMF, World Bank, New York Times, FT, Volker & Greenspan Warn of Systemic Threats' - http://www.safehaven.com/article-2881.htm).



He is one of the few commentators who really understands the real risks facing the US and global economy and realizes the importance in dealing in financial and economic reality rather than merely "hoping for the best". We all hope for the best but clearly it is prudent to be prepared for less benign outcomes.

Roubini said yesterday that "it's clear we're one step away from a financial meltdown."

He said the current problems could even spread to other big investment banks, Morgan Stanley and Goldman Sachs. Americans are justified to be worried who notes there is already a "slow-motion run on retail banks" occurring nationwide. That "run" could accelerate as people realize the FDIC fund has about $50 billion to "insure" about $1 trillion in assets at the nation's financial institutions, says Roubini. "They're going to run out of money" unless Congress acts soon to recapitalize the FDIC.

The usual suspects who have ignored and naysayed the huge macroeconomic and systemic risks in recent months will again warn us not to "shout fire in a crowded theatre". Unfortunately, they continue to miss the point. There clearly is a fire in the theatre and it is time that people orderly made their way to the exits and take precautions to protect themselves from the fire.

As Mohamed El-Erian of PIMCO Bond Fund has said "in today's highly disrupted financial markets, the unthinkable is thinkable."

Thus investors and savers should be spreading their savings amongst a few institutions and transfer their savings to institutions with higher credit ratings. Also they should diversify a portion of their portfolio into the safe haven asset that is gold. Failure to do this will result in further wealth destruction and significant losses to the uninformed and the sanguine.


http://www.golddrivers.com/alt/charts.asp

Gold and Silver

Gold is trading at $778.90/779.50 per ounce (1115 GMT).
Silver is trading at $10.89/10.95 per ounce (1115 GMT).

PGMs

Platinum is trading at $1094/1114 per ounce (1115 GMT).
Palladium is trading at $223/226 per ounce (1115 GMT).

Published on  Tue, Sep 16 2008, 12:21 GMT