The reason that people think gold is a bubble, says Faber, is that its current price seems a lot higher than its 1999 price of $252. But despite the significant gains, gold is still not as widely owned as other assets were during past examples of bubbles.

“In 1989, everybody owned Japanese stocks. And in 2000, everybody owned tech stocks. That is the bubble, when the majority of market participants own an asset. I think there are more people that own Apple stock than gold.”

The increase in gold’s price is down to the huge increases in debt levels, not tech-boom-style irrational exuberance.

“We had an explosion of debt, not just government debt, but private sector debt, and an explosion of unfunded liabilities.”

This creates “a situation where maybe the price of gold should be much higher because the economic and financial conditions are worse than they were 12 years ago.” The hard times encourage indebted governments to print even more money, driving up the value of gold.

“Even a central banker, with his just-below-average intelligence, will one day notice that maybe it’s not that desirable to be in the US dollar or Treasury bills that have essentially no yield. In other words, you have a negative real interest rate on these dollars.

“So they move money into gold. They should have done it a long time ago. But don’t expect too much from a central banker.”

James McKeigue
Contributing Editor, MoneyWeek (UK)

Publisher’s Note: This is an edited version of an article that first appeared in MoneyWeek.

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But first, the crisis in Greece didn’t come to a head over night but it can’t be far away. Rival political parties have been unable to form a government. New elections are scheduled for the second week in June. The financial has definitely become political. The people have run out of patience with unsound money and the world built on it.

All that said, the Greeks managed to make a €430 million payment to hold-out creditors last night. Nearly 97% of Greek creditors agreed to the restructuring of the country’s debt in March. That wiped off over €100 billion in Greek debt and resulted in 70% losses for some of the bondholders who accepted the deal. Not all of them did.

Yesterday, the bondholders who didn’t accept the deal got paid in full. There is still about €6 billion worth of debt owed to creditors who refused to participate in the restructuring. You can imagine that the Greek decision to pay the holdouts would anger the creditors who agreed to the deal. They look like schmucks now. Schmucks.

For the Greek people, the most alarming aspect of what’s going on is that their life savings are at serious risk of a massive, overnight, non-voluntary devaluation. There are a lot of words for the magical process of turning one thing into something else: alchemy, transmutation, and transubstantiation come to mind. But to the Greeks it’s going to look a lot like highway robbery.

You’ll go to bed one night with your life savings denominated in euros. You’ll wake up the next day with them denominated in drachma. And your euro savings will be automatically converted to drachma at an exchange rate not of your choosing. For example, your 1,000 euros will become 100 drachma…or even 10,000 drachma. The nominal amount won’t matter. What matters is that the devaluation strips you of 70% or 80% of your purchasing power.

Most people would avoid that kind of value destruction if they could. Maybe that explains why €700 million was withdrawn from Greek banks on Monday, according to remarks made by Greek President Karolos Papoulias and reported in the Wall Street Journal. The Journal reports that between €2 and €3 billion in deposits have been withdrawn from the Greek banking system each month for the past two years. January was a high point, with €5 billion.

A bank run by any other name would look as desperate. And who wouldn’t be desperate now?

Leaving the euro, devaluing the drachma, and defaulting on debt owed to foreign creditors are Greece’s best long-term economic survival strategy. But the unavoidable side-effect is to destroy the savings of the people, not to mention usher in a period of lower standards of living.

That won’t win you many votes. It may start a revolution.

And how do you prevent the Greek precedent from being imitated by the Spanish and the Italians? To be candid, we don’t think it matters much now. Greece can’t afford to stay in the euro. The Spanish and the Italians can’t afford to leave it.

The economies and banking systems of Spain and Italy are indispensable to Europe. If they leave the euro, there is no euro. The Greeks can leave, devalue, default and use a weaker currency to claw their way back to economic competitiveness. If the Spanish and Italians leave, they lose access to private capital, they lose access to the ECB and they take down Europe’s banking system. They can’t leave. More importantly, they can’t be allowed to leave.

This makes the task of the European Central Bank (ECB) much easier. It simply has to guarantee Greek debt owed to all non-Greek creditors. Or, it could simply buy that debt. This would solve the problem of anyone outside Greece taking losses on Greek debt.

This is what corporatism looks like, when the Big State and Big Finance become the Big Power in the economy. Losses cannot be tolerated. Any loss results in lower equity capital at a financial firm would require selling assets. Since everyone owns a piece of everyone else, and owes to everyone else, any major loss in one place results in losses everywhere.

Of course it’s absurd that Europe is moving toward this kind of ‘extreme socialism’. The people most responsible for the crisis are not accountable and the people who have saved get punished. The elite are enriched and everyone else is enslaved.

This is why the financial crisis could so quickly become a political and social crisis. When people don’t think they can get justice from the courts or the cops, and when they think that cheating is the only way to get ahead in a system, the political and financial order is on borrowed time. The clock is ticking.

Dan Denning
Editor, The Daily Reckoning Australia

Publisher’s Note: This article originally appeared in The Daily Reckoning Australia

Ed Note: Dan Denning is the editor of The Daily Reckoning Australia and the Publisher of Port Phillip Publishing. He began his financial publishing career in 1997 and has covered financial markets form Baltimore, Paris, London and, beginning in 2005 Melbourne. If you like what you’ve read from Dan today, why not sign up to his free daily newsletter, The Daily Reckoning.

You’ll get an independent and critical perspective on the Australian and global markets. But it’s not the kind of stiff-necked analysis you read from most financial commentators, instead, the Daily Reckoning delivers you straight-forward, humorous and useful investment insights from Dan and a wide range of other Aussie and global analysts. To take out a free subscription to The Daily Reckoning, click here…

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When we showed it to our old pal, Sound Money. Sound Investments editor, Greg Canavan, he said, ‘That’s what outright deflation looks like. Savers’ purchasing power grows in terms of financial assets.’

In other words, the value of money rises as asset prices fall.

That’s deflation: The friend of prudent savers. The foe of over-leveraged borrowers…and banks.

In short, when deflation hits, make sure you’re a saver, not an over-leveraged borrower.

This chart is of the Athens Stock Exchange General Index. Based on yesterday’s close, the index is down 89.7% from the October 2007 peak.

It’s a clear warning sign of what can happen when investors lose faith in an economy. And when investors lose faith, they stop investing. When they stop investing, asset prices can take a big hit.

But what does this have to do with Australia and Aussie investors?

Well, perhaps investors have already stopped investing. Certainly Aussie mining giant, BHP Billiton [ASX: BHP] has had second thoughts. This from Bloomberg News:

‘BHP Billiton Ltd. (BHP), the world’s biggest mining company, will fall short of its $80 billion spending target for building mines and expanding assets over the next five years as it sees commodity prices declining.’

If BHP does ditch plans to spend $80 billion on new projects, it indicates investors were right to sell BHP.

So much for the resources boom that’s supposed to last another 50 years!

(By the way, although he’s too modest to say it, Slipstream Trader, Murray Dawes picked this market crash like a peach. For a flashback to see and hear why Murray saw this crash coming, check out the free weekly video update that was first broadcast last week. You can view the stock market update here…)

So if companies are cutting back on investments in their business, why should individual investors bother investing? Why wouldn’t they just keep most of their money in the bank?

That’s the problem. And so the deflationary cycle begins.

As we’ve said before, deflation isn’t a bad thing. It’s good for savers, and it’s good for wage earners. It’s just that in an over-leveraged economy that has gotten used to debt spurring growth, deflation can cause a whole bunch of problems…especially for banks.

But it’s not the Aussie banking sector that draws foreign investors. Australia is a very lopsided economy. Foreign investors come to Australia to invest in one thing…Aussie resources firms.

But they’ll only do that if they believe there’s a strong growth in demand for resources. So when the world’s biggest mining company says it won’t invest a planned $80 billion, investors take note and they withhold their dollars.

And without mining sector growth, that spells a lot of trouble for the entire Aussie economy. Especially those firms (and governments) that have banked on big spending from the miners and increased tax receipts.

Cheers,
Kris Sayce.

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The S&P/ASX 200 has dropped 6.2% in two weeks.

And yesterday the index had its first 100-point fall since 3 October last year.

The ASX Emerging Companies index has done even worse. It has dropped 17.1% in seven weeks.

You can make or lose a big chunk of your investment in a very short period of time.

In that case, you may wonder why you should invest in small-cap stocks at all, if the global economy is as bad as we say it is.

The answer is simple.

First, while we believe the global economy is going through a necessary bout of deleveraging that will ultimately lead to deflation. Central banks and governments will fight tooth and nail to prevent that.

They want inflation. And that likely means periods of rising asset prices…followed by periods of falling asset prices as the inflationary policies fail, and deflation takes hold again.

Second, despite market moves and the threat of recession (or depression) most firms carry on doing business. And most entrepreneurs carry on thinking of new ideas.

New ideas are what small-cap investing is all about.

It’s about entrepreneurs (and investors) seeing the chance to make a lot of money, regardless of what happens to the broader economy.

That’s why we say, if you’re after a punt, buy small-cap stocks now. You can take out a no-obligation trial to our small-cap newsletter, Australian Small-Cap Investigator now. Click here for details…

For some time we’ve told you to ditch your blue-chip growth stocks. Today the Aussie blue-chip index is at the same level as it was in July 2009. That’s almost three years with no growth.

And for long-term investors, we don’t see that changing.

But small-cap growth stocks are a different kettle of fish. Most of them don’t have any revenues and don’t earn a profit. These are the riskiest stocks on the market.

It means when trouble hits the economy, small-caps fall the most. But here’s the thing…if an oil stock finds oil, or a gas stock finds gas, or a technology stock develops a game-changing product, then these small-cap stocks can soar higher regardless of what happens in the market.

Bottom line, it could be that the world economy is entering the deflationary cycle that should have happened in 2009. Government stimulus programs and central bank money-printing only delayed the inevitable.

But don’t let that stop you investing in stocks, because you still need to grow your wealth. And when stocks are hit this hard and everyone is rushing to sell, this is often the best time to invest.

Just make sure you hold cash (plenty of it), reduce debt where you can, hold gold and silver for security, and stick with a few reliable dividend paying stocks for income.

What’s left over, use to snap up small-cap stocks panicking investors are selling at bargain-basement prices.

Cheers,
Kris Sayce.

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Listed below are a few ideas you might find invaluable in your future trading.

1. Adhere to your written down plan for buying and selling shares. I.e. The amount you are going to spend, the amount you can afford to lose if things go the wrong way (2 -5%% of the total value is a good guideline)

The % profit you want to make, after allowing for brokerage etc.

.The time frame you would like. (Not always possible) for the total transaction. Is it short, medium or long term?

The number of shares you want. (This depends also on your capital constraints)

 Diversify don’t invest just in one area. Spread your risk over different types of companies.

2. Plenty of liquidity meaning a good volume of shares has exchanged hands recently.

3. Buyers outnumber sellers. If the other way round, the share price will drop downwards for sure.

4 Recent news or rumours of news .i.e. Takeovers, profits etc. Only good news of course.

5. Directors buying shares {not selling} in the last 2 to 3 weeks.

6. The “Trend Lines” show a definite trend upwards. If in doubt don’t trade.

7. A visual look {the old “eye ball test”} at the most recent chart, preferably over the last month’s performance.

Again if in any doubt drop the share till next time; just add it to your watch list.

I have around 30 to 40 companies currently on my watch list. I whittle them down to around 3 -4 using those basic criteria above.

It is not a hard a fast criteria, make up some of your own preferences. Mine is just to give you a very basic idea to help you get started.

                                   The Law of Probabilities.

When it all boils down to it, there are no guarantees we are just working on the “Probability” of the share price going upwards.

NB If the share is going “Sideways” it is only 50- 50 probability .don’t bother this is a share going sideways and you might as well toss a coin because you are now gambling. Wait a few days and review it then.

If a share is going “Downwards” I use the probability of 70% of it continuing that way, 20 % chance of going sideways, 10% going upwards.

The next probability I use for an “Upwards” moving share price is 70% to continue upwards and 10% probability of going sideways and 20% probability of it downwards.

Remember these are only guidelines; if things don’t go to plan that is when you implement a “stop loss.”

I wish you profitable trading.

He routinely appropriates properties. If he doesn’t like the score on the dice, he simply changes them. He continually takes as much money from the bank as he likes. Whenever the rules don’t suit he arbitrarily alters them in his favour.

Oh, and he hates to lose. Rather than concede defeat, he is perfectly willing to set fire to the table.

Imagine no longer. This is the state of the financial markets. You are playing against the world’s central banks.

For some time now, the Financial Times has been running articles (under the inauspicious label of ‘Collateral Damage’) discussing the merits or demerits of central banking. Only one contributor, Ron Paul, has challenged the status quo:

“[W]hile socialism and centralised economic planning have largely been rejected by free–market economists, the myth persists that central banks are a necessary component of market economies.”

Every other contributor thus far has sought to defend central banking as a necessary part of the system… a view that seems categorically embraced by most people. In browsing through the comments of Dr. Paul’s FT article, for example, one reader posted:

“The problem with blindly accepting Dr Paul’s diagnosis is that he lacks the necessary qualifications to make a diagnosis. Would you trust a medical diagnosis made by Ben Bernanke, Mario Draghi or Mervyn King?”

No, I wouldn’t. But I wouldn’t trust an economic diagnosis from any of those individuals either. Given their track records, why would anyone?

First, it would require insolvent commercial or investment banks to fail properly, as opposed to feeding off the blood of taxpayers indefinitely.

As an example, lest anyone regard the $2 billion loss recently announced by JP Morgan as comparatively trivial, it should perhaps be seen in the context of the same bank’s overall derivatives exposure, which is shown graphically below.

JP Morgan’s total derivatives exposure stands at $70.1 trillion, or roughly the same size as the entire world economy. Each of the $1 trillion towers in the image is double–stacked to a height of 930 feet (283 meters).

Second, eliminating central banks would require governments to balance their books, no longer able to monetize the debt through its relations with the central banker.

Third, asset prices would revert to being determined by the market, and not by unelected economists serving the interests of bankers and politicians.

As this is clearly not going to happen anytime soon, most investment managers seem content to embrace the system and continue playing the cards they’ve been dealt.

To give you an example, the FT reported that, last year, US pension funds for the very first time put more of their assets into bonds as opposed to equities.

Like many investors, these fund managers fail to understand the risks they’re running and seem to have accepted the convention that nothing could possibly go wrong while central bankers are in charge.

Yet with Treasury yields as low as they are, this is unlikely to end well. The chart below shows the impact on investors who purchased British Gilts during the stagflation suffered in the UK during the 1970s.

Investors who bought conventional Gilts in 1973 had to wait for 12 years to earn a positive real return on their investment. And this is exactly the sort of financial repression we have to look forward to under the current system controlled by the political and central banking elite.

Tim Price
Contributing Editor, Money Morning

Publisher’s Note: This article originally appeared in Sovereign Man: Notes From the Field.

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And specifically, shale gas.

If you’re not familiar with it, shale gas is gas that’s trapped within deep shale rock formations. Until recently, it was almost impossible to recover this gas.

But technological advances mean natural gas companies can now access this gas. To the extent that it’s now revolutionizing the energy world right before your eyes.

Based on what I’ve heard this week at the ‘oil and gas show’, Australia has a chance to follow the same path. And that could be great news for you, if you get in early…

Shale gas already makes up 30% of the US gas supply. By the end of the decade, it could reach 50%.

The rapid success of shale gas exploration and production means cheap natural gas for the US. Really cheap!

Just four years ago, gas was USD$14 per million British thermal units (mmBtu). Last month, it fell below USD$2 mmBtu. This cheap energy can make life tough for the producers, but is a gift for the US economy.

The benefits go beyond affordable heating, transport, and more competitive manufacturing. It also creates jobs.

According to J. Michael Jaeger, the CEO of BHP Billiton Petroleum, ‘the unconventional energy sector has been responsible for 600,000 new jobs in recent years, and this is set to increase to 850,000.’

And by his estimates, the sector adds USD$100 billion to the US economy each year.

But this American energy revolution didn’t come easy.

In North America between 2008 and 2011, explorers drilled 15,000 shale gas wells. That takes a lot of investment, a lot of time and a lot of risk.

But in the time the North Americans drilled 15,000 wells and ensured cheap gas for decades to come, how much progress has the rest of the world made?

Less than 100 wells drilled.

So Australia has a lot of catching up to do. But it’s making tracks.

It’s an exciting start, but there’s still a long way to go for the Aussie shale industry.

And the best time to get in is before the industry becomes mainstream…before local explorers have drilled 15,000 wells.

My old pal, Australian Wealth Gameplan editor, Dan Denning knows this. Dan first wrote about shale gas in 2005.

This is what he wrote at the time:

‘If the U.S. government is eventually going to pump billions of dollars into the development of the shale industry, with the goal of national energy independence, I want to figure out who’s going to benefit the most…

‘…I’d rather be ahead than behind on the shale curve.’

He was ahead of the curve. Back then, the US produced less than two billion cubic feet (bcf) of shale gas per day.

This year the US is set to produce nearly 25 bcf of shale gas per day.

And last year he tipped a handful of Aussie stocks that he thought would benefit from the Aussie shale gas story.

But the real billion–dollar–question is, can we recreate North America’s success with shale gas, here in Australia?

We have the potential, but there are some big differences between Australia and the US.

The bad news is a number of stars need to align first.

First, explorers need to do much more drilling to see if the geology is right, and whether it’s possible to produce natural gas commercially.

Then there’s the issue of support services. It’s still a new game here, and, unlike in other resources sectors, we don’t have all the players, expertise and equipment to get the job done.

Remote locations, and the wet season, add an extra challenge.

We also need to ask the question — does Australia even need shale gas?

We have plenty of conventional natural gas already. Then we have the Coal Seam Gas industry, which is still growing, and now meets 40% of East Coast Australia’s natural gas needs. And, as I mentioned yesterday, the LNG industry is already set to triple production in the next six years.

So where does shale gas fit in to the Australian energy mix?

As with everything, it depends on the production cost. If it’s cheap enough, Australia can enjoy even more affordable natural gas, and could turn it into another export revenue stream.

But shale gas isn’t the only opportunity. The real money–spinner could be in ‘shale oil‘.

The biggest opportunities for shale oil are in the Canning, Cooper and Georgina basins. They each have ‘liquids’ potential, but so far no–one has struck shale oil yet, only shale gas.

There’s a lot of Australian shale exploration planned this year. Joint ventures between small Aussie companies and giant overseas firms are drilling the better–known ‘Canning basin’ in WA and ‘Cooper Basin’ in South East QLD.

Drilling and hydraulic fracturing (fracking) is also taking place in the Georgina Basin in the Northern Territory, Gippsland in Victoria, and Galilee Basin in Queensland.

Back when the US shale boom was at this early stage, land was cheap.

Today, US shale acreage valuations are through the roof. Early investors in the right projects scored big.

This is probably why you see big players like Mitsubishi (TYO: 8058), BG Group (LON: BG), ConocoPhillips (NYSE: COP) and Hess Corp. (NYSE: HES) moving in early on the Aussie shale gas story.

And ConocoPhillips for one says it wants more.

With big companies getting in at the ground floor — and with so much focus on the sector at Australia’s largest oil and gas conference — it already looks like the shale sector is set to be Australia’s next resources boom.

Dr. Alex Cowie
Editor, Diggers and Drillers.

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Dear member,

In this increasingly volatile market, our team continues to focus on companies with proven management, adequate capital, large resources and working in regions with majors and massive mines or deposits.

Our Featured Copper Company of 2012, Redhawk Resources (RDK:TSX), just came out with a 175% resource increase on its Copper Creek Project in Arizona on Thursday May 10, 2012. The title of the news release read: Redhawk Reports 175% Increase in Resources at Copper Creek to 7.75 Billion Pounds Copper and 150 Million Pounds Molybdenum.

Our team featured Redhawk Resources in late January of 2012 at $0.56. Its stock moved up to $0.79 in less than two months after our introduction (a 40% increase), but has since fallen back to $0.465 in this most recent market crash. While it’s disappointing to see RDK’s share price fall below our introduction price, the company has delivered significant news since late January.

Alexander Smith, Head of Market Research at Pinnacle Digest, had a chance to catch up with Joe Sandburg (Redhawk’s CEO) and Steve Barley (Redhawk’s Executive Chairman) immediately following the release of the company’s updated resource. In the interview, the details of the new resource update and Redhawk’s project development plan are discussed at length.

Click on the button below to listen to our exclusive interview with Redhawk Resources.

Press release excerpt below:

Redhawk Reports 175% Increase in Resources at Copper Creek to 7.75 Billion Pounds Copper and 150 Million Pounds Molybdenum

Redhawk Resources, Inc. (“Redhawk” or the “Company”) (TSX:RDK, OTCQX:RHWKF, FSE: QF7) has received the preliminary results of an updated independent NI 43-101 compliant mineral resource estimate for its Copper Creek property, located in Pinal County, Arizona. The new estimate at a 0.2% CuEq cutoff has increased the total pounds of copper to 4.45 billion pounds in the combined measured and indicated categories contained in 502 million tons grading 0.49 CuEq and 3.30 billion pounds in the inferred category, contained in 481 million tons grading 0.38% CuEq. This represents an increase of more than 175% from the September 2008 independent NI 43-101 resource estimates.

A NI 43-101 technical report will be completed within 45 days and filed with SEDAR. A summary breakdown of the resource estimate by category is tabulated below.

Click here to read the entire press release from Redhawk Resources (RDK:TSX).

————————————-

Last weekend our team introduced Comstock Metals (CSL:TSXV), our newest Featured Gold Company. Its shares closed at $0.15 prior to our introduction and after opening at $0.17 on Monday, CSL closed Friday at $0.23 per share.

Earlier this past week, Comstock announced the discovery of porphyry-style gold mineralization from its core drilling program at the Corona Gold Project in Mexico. At Corona, porphyry-style gold mineralization has been identified, and remains open to the north, east and at depth.

Given the complex nature of this discovery, we felt it prudent to interview Comstock’s CEO, Rasool Mohammad, to better understand the significance of this press release. In an exclusive interview conducted a day following the news release, Mr. Mohammad explains, in detail, the significance of his newly discovered porphyry-style gold mineralization-drill hole which ended in strong gold mineralization.

Click on the button below to listen to our exclusive interview with Comstock’s CEO.

All the best with your investments,

At the time it seemed like investors, traders and even the guy at the corner store were all buying, hoarding, and lusting for gold.

But the stellar gains were short lived, and by the end of the year gold prices had fallen by nearly 20%.

Part of the striking decline in gold was due to the fact that the “smart” money that had once been amongst gold’s biggest cheerleaders, sold it.

Some booked profits, some sold it to reflect gains in portfolios, others were forced to sell to meet margin requirements, and others wanted to start the New Year with a clean slate.

Gold Prices in 2012

Enter 2012, and gold prices enjoyed a lustrous January, rising some 10%, helped in particular by Chinese New Year celebrations.

Gold has since languished as investors became more willing to take on added risk, delving more into equities. While gold prices foundered, the Dow rose 8% in the first quarter, the S&P 500 gained 12%, and the Nasdaq enjoyed a nearly 19% gain.

And more recently, not even gold’s best friend, Federal Reserve Chairman Ben Bernanke, offered up much help.

Following the commencement of the two-day FOMC meeting, gold experienced a volatile day, but managed to end virtually flat from the previous trading session. The Fed left interest rates steady and extinguished hopes for immediate further monetary loosening measures.

Without a promise of more quantitative easing, long gold holders headed for the exits.

Nonetheless, many sophisticated gold traders are poised to pounce on gold with every dip.

Among them is the storied and accomplished commodities investor Jim Rogers.

Best known for calling the commodities rally in 1999, Rogers recently said, “If there is a shock to the system, such as a eurozone country like Spain going bankrupt, then everything will go down, and I hope I am smart or alert enough to buy more gold at that point.”

The renowned investor also added that if India, the world’s largest bullion buyer, implemented another tax increase on gold imports, it would pave the way for a smart entry point for investors, since it would limit the country’s input to the gold market. The Indian government hiked the tax level for gold bars, coins and platinum to 4% in March, up from 2% in January.

Meanwhile, Rogers is mildly bullish about economic conditions in the United States for 2012, noting that because we are in an election year, the government is pulling out all the stops to boost the U.S. economy for at least two years.

So, Rogers is positioning his portfolio by stocking up on commodities, including gold. He explains that if economies do recuperate and prosper, they are going to need more commodities.

Conversely, Rogers says that if growth wanes and a recession looms, he wants to have a stash of commodities because of the flood of money-printing that is bound to follow.

Either way, Rogers likes gold.

That is not to say that gold is bulletproof. In fact, Rogers says a gold price correction could happen sooner rather than later, and the downside is $1,200-$1,300 a troy ounce.

Investors may be wise to watch for and seize upon any sell-offs in gold.

The Power of Gold

Of course, there are myriad reasons to be enamored by the precious metal.

As the World Gold Council notes:

• Gold is one of the few financial assets that does not rely on an issuer’s promise to pay.
• It offers investors insurance against extreme movements in the value of other asset classes.
• It provides a portfolio with diversification, adding protection against fluctuations in the value of one single asset or group of assets.
• It acts as a hedge against inflation because it retains its purchasing power.
• It is held as a hedge against currency fluctuations.
• The demand for gold has shown sustained growth in recent years and the supply/demand ratio has positioned the yellow metal for its most positive outlook in over a quarter century.

And as more and more people become disenchanted with paper currency as a store of value, gold prices promise to rise.

Diane Alter
Contributing Writer, Money Morning (USA)

Publisher’s Note: This article originally appeared in Money Morning (USA)

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The aftermath of the Greek elections propelled the new radical left party SYRIZA into the limelight as the second strongest party in the country. Given the adamant refusal by SYRIZA leadership to accept bailout reforms, the party’s new brokering position means the crisis will continue.

Bitter austerity measures await the formation of a coalition government, since no party received a majority of the seats in parliament from the vote. The coalition is supported by both the New Democracy and socialist PASOK parties, which have taken turns ruling Greece for nearly four decades.

But the surprise showing of SYRIZA has thrown the possibility of an accord into disarray.

At best, this means a further delay and likely a new election.

On the other hand, Greece has little time left. Any further delay in forming a government, with no guarantee that a very angry population will vote any differently the next time around, puts the next tranche of the European Union bailout package in jeopardy.

It is now more likely that Greece will leave (or be pushed out of) the Eurozone, casting a greater uncertainty on both the currency and the southern tier of countries still in the zone.

What Then?

Spain is the current focus of concern, but Italy is also exhibiting renewed weakness.

Unlike Greece, Spain and Italy have debt problems that dwarf the ability of any Brussels-led support package. These economies are simply too large to be “rescued” from the outside.

The concerns over contagion, therefore, may actually expedite a Greek departure earlier than most thought possible.

Including me.

It is true that any members leaving the Eurozone will have a negative effect upon currency strength and economic prospects. It is also unclear how the Greek departure will aid in shoring up either Spain or Italy. The problems in each of these economies are endemic; they are not primarily a result of “spillovers” from the situation in Greece.

All of which means, to borrow a phrase from former U.S. Secretary of Defense Donald Rumsfeld, there are a series of “known unknowns” now facing the E.U. The credit and banking problems are essentially the “known” part of this equation. The extent of the fallout on the euro as a whole is the massive “unknown” flowing through the calculations.

This is accentuated by recent developments in the two major economies using the euro -Germany and France. No rescue package for any E.U. member is possible without the leadership of these two dominant European economies. To date, Paris has emphasized protecting its suspect banking sector, while Berlin has a strong political undercurrent demanding additional protection of German production and trade.

However, the recent French elections, in which a socialist has been elected president, and indications surfacing that the German economy may be facing a slowdown, will put continued support of a “bailout for austerity” approach to Greece in question.

Thus far, both major nations have led the E.U.-Greek approach, strongly arguing that the preservation of the euro demands it. The dramatic political events unfolding in Athens are rapidly undermining that support.

And this has impacted on the price of oil.

The Oil Market: Like 2008?

The only way oil prices are coming down is by the advance of pressures outside (exogenous to, as the analysts say) the oil market itself.

This is what happened in 2008. The rise in crude and the corresponding spike in the cost of oil products like gasoline, diesel, and heating oil retreated only when the full weight of the subprime mortgage-induced credit freeze hit.

Overall demand dried up as the ensuing recession hit.

We are seeing a similar short-term pullback in prices as concerns over falling demand levels parallel the European confusion.

Yet this time there are three important differences.

First, the American economy is largely insulating itself from what happens on the continent (assuming the JP Morgans of the world can oversee their traders).

Second, oil demand continues in those parts of the world that actually determine the pricing level. As I have said a number of times before, these are not North America, Western Europe or the developed (OECD) countries. This is based on developing and accelerating new economies elsewhere.

There is also a third factor of some importance.

The 2008 collapse and resulting worldwide recession centred on dollar-denominated assets, the assets basic to the global network of trade, cross-border capital flows, and wealth.

Not so this time around.

The current situation tends to benefit the value of the dollar against the euro. With virtually all international oil trades in dollars, that does mean prices may stabilize for a time. But it also means the concentrated asset wealth in those oil transactions will increase.

And despite the events in Europe, the ultimate value of oil contracts will increase as well – especially in a market where the essential rise in demand is occurring in those regions of the world not directly impacted by the euro zone problems.

So, farewell Greece, good luck, Spain.

Once the dust settles, oil holdings will continue to exhibit significant value gains moving forward.

Dr. Kent Moors
Contributing Editor, Money Morning.

Publisher’s Note: This article originally appeared in Energy & Oil Investor

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