The Ultimate Reality Check for Gold and Silver
Any and all commodity investors will want to pay very close attention to this surprisingly quiet development from earlier this week:
"Importantly, China's response to a deteriorating outlook for the global economy may include a massive $1.7 trillion stimulus program to eclipse the scale of its game-changing 2008 intervention. I believe China's prior round of stimulus spending resulted in the most overlooked story for investors in 2009, drawing an impenetrable line of baseline demand beneath the outlooks for multiple key commodities from copper to metallurgical coal. If stimulus No. 1 sufficed to propel an incredible rally for the previously impaired stocks of commodity producers, I urge Fools to consider what a follow-up stimulus of more than twice its scale might achieve over its stated five-year timeframe. Don't let this become the most overlooked story of 2012! I'll look more closely at the implications of China's announcement for industrial commodities in a forthcoming article (bookmark this link), but for today I wish to highlight what I consider a remarkable opportunity to invest in precious metals in the wake of this week's selloff."
Here's the article, which I encourage you to read in full:
Here is one of the more unfortunate myths concerning gold that continues to keep may people away from the metals ... the notion that economic contraction will be bearish for gold and silver:
"Zooming out further to take in the whole of the Western financial system, one is confronted with the interconnected nature of counterparty risk, which connects major U.S. financial institutions to Europe's fate like so much trans-Atlantic telephone cable. I believe that counterparty exposure helps to explain the Federal Reserve's move to require another round of stress tests. Legislative reforms, in my view, have badly missed the mark, permitting U.S. financial institutions to continue carrying derivative exposures at fanciful model-derived valuations rather than market-based reality. Aside from renewed systemic risk that could be triggered by Europe's woes, the U.S. economy remains vulnerable to contraction as a likely European recession unfolds. While many mistakenly view such a threat as bearish for gold and silver, that is an incorrect perspective. U.S. policymakers have already made it perfectly clear, both through substantial precedent and explicit promises, that additional quantitative easing and other interventions will come into play to combat any threat of contraction. The playbook has been etched in stone."
My macroeconomic perspective, if it had to be condensed to fit inside a nutshell:
"In a nutshell, I have concluded that the financial crisis of 2008, the accelerating emergency in Europe, and the unrelenting threats to sustainable economic recovery in the United States are all interconnected chapters of one giant global financial crisis. They are not, as commonly perceived, an amalgamation of unrelated events. Attempts to bury an unimaginably massive mountain of toxic leveraged assets beneath a veil of debt creation are, in my opinion, misguided and destined to fail. Because I have no confidence that this global crisis will be sustainably resolved through intervention, I place my confidence in the continued price appreciation of gold and silver."