Sunday, March 20, 2011

Global Turmoil - Gold is a safe haven

Last week when I was writing my post on the potential of QE3 not immediately following QE2 the news from the Japanese earthquake was only just hitting the airwaves and it has been quite a week and a bit we've had since.

Equity markets were thrown into turmoil during the week as the risk of a nuclear meltdown plagued the Fukushima nuclear power plant. It certainly throws a spanner into the workings of a "global economic recovery", not that I thought this was likely beforehand, but it may open the eyes of some others.

A lot of uncertainty around what happens from here, there are rumours that Japan are not coming clean around the ongoing danger and radiation leaks from the Fukushima plant. I would say the crisis there is far from over.

Here are some headlines from the past couple of days:
- Coalition launches Libya attacks
- Gaza militants fire dozens of mortars into Israel
- Japan fights to stop meltdown
- Iran calls on Saudi Arabia, UAE to leave Bahrain "immediately"

Does this sound like a stable world where a return to normal is likely in the short term?

I took the opportunity during the week to reduce some positions in riskier junior Gold/Silver stocks and move some money into Gold via PMGOLD on the ASX. As I said last week I think AUD priced Gold has the potential to act as a hedge to protect against several scenarios:
If the AUD dropped sharply against the USD the AUD price of Gold may still rise even if the USD deominated price is falling, e.g. US$1250 Gold with AUD at 60c against USD would give us AUD$2100 Gold. This may make physical Gold in Australia a good buy/hedge regardless of the outcome. If we see the deflationary conditions then the falling AUD will hold up the local Gold price and if QE were to continue, fueling inflationary pressures, then Gold priced both in USD and AUD should continue to rise.
We've already seen the AUD drop below parity against the USD. In my opinion there is potential for further falls over the next 12 months. I don't think the Australian economy is as bullet proof as some local commentators would have you believe.

Even though I expect the AUD to drop against the USD later this year that doesn't mean the USDX is in for an easy ride over the next couple of months. I've been tracking the progress on this blog and noted as it looked imminent to fall below previous supports at 79 and 77. On Friday it broke below support at 76, where it's looking likely a fall to 74 and possibly lower is on the cards.

If we see the USDX fall below 74 it has the potential to create a panic out of the dollar and in the process may drive up Gold as the one true safe haven (see Silver in the last half of 2010 to see what sort of price appreciation is possible in the metals when a rush occurs).

I do think that Gold is a safe place to be right now (at least safer than just about any other asset out there), however there is still a risk that central banks pumping their printing presses won't be enough to stop a collapse if the markets were to roll over. This is why I've moved part of my portfolio out of riskier junior stocks and into the metal itself. Even if the metal does sell off with other assets it's likely to be a lot less severe than the Gold/Silver stocks themselves.


Disclosure: Positions held in Gold & Silver. Not investment advice. Do your own research.

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