In parts I & II of this blog, we discussed the debt crisis in Europe, the historical effect of similar crises in the past, and the probable effect this time.
In this final installment, we look at other obvious disturbing signs that are being ignored in the discussions, and we arrive at our conclusion.
Looking at the Price of Gold From Other Vantage Points
We all spend much of our time considering current news and the effect on the price of gold. If however, you are a believer in the sanctity of the markets, and if you believe that the markets are proper fore-tellers of all, then you have to take a larger view of matters and wonder about current variances between the price of gold, and the effects of this higher price of gold. Something seems askew.
We are not believers that the market properly values anything, but the discrepancies today are so large, that they are hard to ignore.
Are There Danger Signals in Abundance?
Several matters are out of whack currently. The price of the shares of gold mining and producing companies are falling, which is completely illogical. These shares are at historical lows. Doesn’t make sense. If the markets are accurate fore-tellers of the future, maybe the price of gold will go back to $500 per ounce.
Any company that owns gold in the ground, should have its shares priced at a premium. Today’s average cost of producing an ounce of gold from a mine, is around $600-700 US. The gold market is robust, and gold produced can be sold immediately for at least $1,600 per ounce. This is a no-brainer. The value of these producers or owners of gold, should be jumping higher.
If you believe that the price of gold is going higher, then those shares of gold companies should also be going up in value. BUT THEY ARE NOT. Those shares keep falling in price. So does this foretell what will happen to to gold? Or is gold be a contrarian investment as it seems to have been.
Will the European Union Fear the Unknown and Come to the Rescue of Greece?
If so, fear will diminish and the price of gold will likely stabilize or fall. Thia is quite possible. It is also possible, that the European Union will not throw good money after bad.
Another scenario is that there is talk in Germany and in the rest of Europe of using their newly created loans equity fund which was just approved by a German vote (and which stills needs a number of nations to agree to it) to protect other countries from Greek default contagion, rather than loan the new money directly to Greece.
The effect would be to attempt to place an economic wall around Greece, let Greece default, and protect other more economically important countries from having similar problems. A reason for this, is a common belief that Greece must default to solve its problem.
The Probability of Greek Default
The yield on Greece Bonds continues to rise and is now about 21%. This can be interpreted in any way you wish, except it is wildly out of sync with all other bonds.
I personally believe that the danger of bailing out Greece, is how much money is needed to bail out Italy, Spain, and so on. It would take more money than can possibly be agreed upon, so Greece has to be allowed to default in an orderly fashion, which is exactly what is happening.
The Chinese Factor
I have often written about Chinese business ethics and standards as being on a different basis than ours. They are less regulated, more of an open free-for-all basis, with few rules and boundaries. The TSX has seen a number of problems with Chinese controlled companies listed on North American markets this year and last. Major scandals have been unearthed and major losses incurred (ie Sino Forest).
Today, there comes news of numerous new scandals on Chinese Stock Markets and rampant manipulation on Chinese Stock Markets. Think about what a dramatic fall in those markets would cause – cash demands, liquidity issues, government action and so on.
If the scandals grow in size and severity, Chinese demand for gold, which is a large part of the rise in the price of gold could collapse.
The Conclusion
It seems that we are at some sort of divide here. I have listed a number of probabilities that could turn either way, and affect quite dramatically the price of gold in a positive or negative fashion. No one knows the outcome and it is impossible to predict.
There are many more affecting factors that I have not mentioned due to space limitations.
The bottom line, is that when there is so much risk that matters could turn in either direction, one has to keep in mind the over-riding principle. Protect Your Capital at all Times. Wild bets on something should only be done for fun and enjoyment in Las Vegas, and not in investing.
Finally, our prediction, but not a reason to invest.
We believe that Greece will default partially, that lenders will take haircuts, and that European governments will cushion the blow.
We believe it will not be such a major event, and the economic world will continue, as it always does.
We believe it is far too dangerous to invest in gold just now.
We believe that shares of junior gold minors and producers are a bargain right now.
The views expressed in this blog are opinions only and are not investment advice. Persons investing should seek the advice of a licensed professional to guide them and should not rely on the opinions expressed herein. This blog is not a solicitation for investment and we do not accept unsolicited investment funds.
