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Is the gold price going to fall to $1,500?

With the worsening Eurozone crisis and the failure of government to manage the U.S. debt responsibly, markets are fearful of a meltdown. Traders are driving prices down in the knowledge that many positions are geared [leveraged] and exposed to margin calls. Other positions are protected by ‘stop loss’ instructions, so can be triggered by prices moving down through support levels. Potential buyers are in no hurry to enter the market, either because they feel there is further to fall or because the volumes dictating price moves are too thin to get the sort of positions they want. Overall, the investment climate is very wintery from the bottom of the financial structures right up to the markets themselves.

In this investment climate, the market forces that should prevail are not doing so. The rational approach has been sidelined as markets are blown this way and that by emotions, fears, and knee-jerk reactions. This has always proved to be short-lived with investors kicking themselves afterwards because they did not act rationally. Falls become too extensive just as price ‘spikes’ do so too. Hindsight is an exact science but useless when looking forward. Now, we have to look forward. The way we do that is to look at the forces in play beneath the surface and see their direction. Take a point in the future and see what should happen if these forces keep going in that direction. What place are they taking us to?

The ‘Big’ Picture

The long, slow process of the globe’s wealth moving from the west to the east has been going on for years now. There is no sign that this will change in the next decade. China and India have low-paid, highly intelligent people who will continue to do the job cheaper than, and as well as, in the west. Capitalism, by its nature, takes work to the lowest cost place it can. So the west is directly helping this process along. The first to suffer from this process is the developed world workers who are seeing their jobs go east. The U.S. and European (with the exception of Germany, so far) unemployment figures testify to that.

With growth fading fast in the developed world, the days of live now, pay later have come to an end. Now it’s pay now and live later as the developed world looks at the debts it has incurred and the falling cash flow with which to repay them. As with individuals, when you have to repay debt, you don’t spend, so the economy must lower its performance levels until the process is over. It is naïve to think that you can have growth and repayments when economies rely so heavily on consumer spending. It’s with horror that the developed world sees just how much their borrowings have overshot acceptable levels.

Hence the traumatic situation the U.S. and the E.U. find themselves in. We may well be looking at a battle to save the euro itself as France as well as Greece, Spain, Portugal, Italy and Ireland see the yields on their government bonds shooting up to unacceptable and unsustainable levels. It’s a little better across the Atlantic where the U.S. has the advantage of fiscal union (which we do not believe the E.U. will be capable of achieving) and one overall government supposedly capable of correcting debt levels. The single government and federal financial structure was supposed to have relieved much of the trauma in the U.S., but the failure of the super-committee to lower debt voluntarily bespeaks a deeper malaise that goes to the heart of the mix of democracy and financial management. It’s becoming apparent that the U.S. government will not be able to function properly until the next election in a year’s time and then only if the elections produce a government with a dominant majority.

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Posted by on Nov 25 2011. Filed under Gold predictions. You can follow any responses to this entry through the RSS 2.0. You can leave a response or trackback to this entry

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