04 June 2010

Gold Daily Chart Bounces Back on a Flight to Safety

Gold often functions as a safe haven because it is a remarkably universal currency, both temporally and geographically, that is not subject to the liabilities of other parties or even national balance sheets, except potentially to the upside because of fractional reserve holdings and leveraged selling. The most significant downside to gold is the animosity that is felt by those that perceive it as a threat to the status quo, in this case the US dollar as the global reserve currency.

Silver is less constructive because it acts as both an industrial metal and a currency but with a high beta. Longer term is has significant potential, but in a crisis it will not perform as well as gold.

A reader informs us that 'investment gold' is exempt from the 15 to 20% VAT in Europe, whereas silver is not. This represents the thinking in Europe that gold is money, an alternative form of money or currency. So therefore as the Europeans seek safe havens in the event of a euro decline or devaluation, they are flocking primarily into gold and dollars, for which there is no VAT, and secondarily into other investments like silver, diamonds, etc.

The miners are a stockpicker's vehicle even in good times, but especially so in a bear market, since they are correlated to the SP 500 as well as the metal, often with significant leverage correlated to their cash flow and financing requirements.