Markets Of The World Collapse

by: Mark Thomas

It was a nasty day for pretty much any investment except bonds Thursday. European stocks fell 5% and US stocks fell 3.2%-3.5% across the board. Most commodities got slammed with copper down over 7% and oil down 6.54%. Gold finally broke down and fell 3.78% with Silver tumbling 9.24%. Obviously as we are 150% invested in gold, we at got walloped today along with all other investors. There is nothing you can say positive about Thursday’s market trading but we thought we would give you some glimmers of hope.

When we went more bullish and started to use some leverage we were concerned that gold had stopped having an inverse correlation with stocks. About three days prior to today, gold was down even when stocks were down. We chalked that up to the fact that last move from $1500 to $1921 was just so extreme it was just pulling back naturally. However it was actually foreshadowing an entire financial market meltdown that began to smolder yesterday and erupted like a wildfire sweeping through all markets Thursday. It is a paradox that we expected everyone else to finally wake up and realize that not only were the US, European and even Asian economies all slowing. We thought it would be a shock to the system out of Europe that caused others to wake up and smell the coffee. Instead it was earnings warnings from US multi-nationals like FedEx (NYSE:FDX) lowering earnings estimates and the Caterpillar of Asia (Komatsu) saying it was having a hard time getting paid from Chinese real estate developers.

This made the last holdouts that were still in denial about a double dip recession and still suggesting buying stocks because their dividend yield was twice the 10-year US Treasury note realize the error of their ways. All of the pundits that came on air for the last two months have lost their clients big money now and they will now go to an extreme the other way and the liquidation will continue for a while. We will see more downside in stocks and even gold. We made a good call getting out of silver because while a precious metal, we said that short-term silver will fall if the economy is slowing. However we never sold any gold at higher levels to go to cash, so we’ve made mistakes, too.

We knew the new found enthusiasm for mining stocks probably wouldn’t last because when they were stocks making new highs and institutions were finally significantly acquiring them, which meant they were vulnerable for a correction. We have always said that if you own miners, you always have to remember in the end they are stocks and in a bear market for stocks, they all will go down! Getting back to gold itself, we now have had a 9.56% correction form the $1921 high of a few weeks ago. Gold will probably go down to at least $1702, which would be an 11.4% correction. We wouldn’t be surprised if it even went down to $1643, which would be a 15% correction. That is where we think there will be some heavy central bank and Asian buying that will support the price.

Ironically the news out of China that the economy is slowing and the possibility of its massive real estate bubble beginning to deflate long-term will be a good thing for gold. In China there are only really four possible investments; stocks, real estate, bank accounts and gold. The Chinese have been burned on stocks twice and with the economy slowing, that isn’t really an option. Like in the US when our real estate topped out, money will flow out and naturally go into gold. They can put money in the bank that yields 3.5% but inflation in China currently is running at 6.5% so that is an automatic losing investment. So eventually more and more Chinese investors will seek out gold and there are a lot of Chinese looking to protect their savings. They save 20% of their income as opposed to 5% for Americans so that is a lot of money to continue to be invested in gold.

The other good news is that as the economy worsens and the world economies slow, eventually Bernanke and other Central Banks will resort to the only thing they know, printing more money. We’re in luck because we own the one monetary asset they can counterfeit. If you understand that currency and credit outstanding is the ever expanding numerator and a finite fixed amount of gold (only increases about 2%-3% from mining each year) is the denominator, every time the Fed increases money supply, bails out failing banks, guarantees debts of financial institutions and racks up more and more national debts, it is increasing the eventual value of your gold holdings by increasing the numerator. It might not be today or immediately but it eventually always will occur (Golden Mean Theory). So all the fundamental reasons to own gold right now are still in place and the worse things get for economies and governments of the world, the better it will get for gold eventually. So if you own gold, you can relax and know your insurance policy against the destruction of your wealth is still in effect even if the day-to-day price quote will vary wildly. If you don’t own gold, you should strongly consider it.

Disclosure: I am long GLD, IAU, SGOL, CEF, PHYS, GTU, NEM, ABX, GFI, HMY.