Chuck's Commodities Blog | Tuesday May 11, 2010
Gold prices would normally retreat after the financial markets stabilize from a recent financial crisis, but not this time. Gold prices plowed ahead to close at a record high and the market continues to move higher in after hours trading. June gold futures are trading at $1,233 an ounce as I am writing.
The U.S. stock market returned to business as usual this week after a major bailout in Europe. This stock market loves it when problems are set aside to worry about in the future. The gold market is really loving this situation as gold investors know the problem down the road is just going to get bigger and that spells higher prices for gold.
Debt problems are rampant in Europe and it very questionable whether many countries can reign in spending to control the debt from spiraling out of control. Our deficits are at the same dangerous levels as many of the European countries, but luckily we are able to finance the deficits through issuing an increasing level of debt. In fact, we are also financing the bailout in Europe since a good chunk of the funds are coming from the IMF.
China is also a focal point for gold investors. Their economy grew at an annual rate of 12 percent last quarter, which is off the charts. This will inevitably lead to higher inflation or they will slow their economy. Both scenarios could be positive for gold investors. Gold would flourish in a high inflation environment, while a slowdown in China's economy would likely lead to a slowdown in the U.S. economy. We would have to issue even more debt and deficits could jump above 100 percent of GDP.
In essence, the deck is stacked for gold. Now, if you believe that the US, China and Europe will handle all their issues just right, then you might believe this is a good place to sell gold. However, I see so many IOUs floating all over the world, it almost seems like insanity. Bailout countries are bailing out other countries. It sure cheapens the value of paper money in the eyes of many investors and it is no wonder they are attracted to gold.