Gold News

Safe-Haven Investing in Gold

Why the ongoing credit crunch and banking collapse points to Gold as the ultimate safe-haven investment...

EVERY DAY WE HEAR a new piece of bad news from the banking sector, writes Julian Phillips of the

   First it was called the sub-prime crisis, then it was the credit crunch; what we have in reality is a full blown banking crisis.

   In the recent past, credit was easily given, full-blown consumer spending was encouraged and then – when it went too far – bankers saw asset values dropping below loan valuations and started to go bust. We are therefore seeing banks being sued by the New York Attorney General.

   Hardly an environment in which confidence in the banking and financial systems can be retained?

   The banks are now retreating to the old-fashioned credit criteria, issuing loans in the hope that they will recover the massive losses of the last 12 months by being more cautious from here. This is shrinking credit far faster than the US administration can pump new money into the system through spending incentives. And so all of this has to led to such a degree of credit deflation that it's causing a shrinkage of money supplies overall.

   The entire exercise is a statement of just how much banks have become part of everyday life. The time when one used banks simply for loans went long ago. Today banks take a small slice out of every single transaction we make. Exchanging cash hand-to-hand is now expensive and abhorred by banks, because it cuts them out. After a generation of inserting itself into every aspect of our financial lives and vigorously promoting the "live now, pay later" culture in Western society, the tribulations of easy money are eating into all our lives, as the banks beat a retreat into conservative lending, taking growth with them.

   Is it any wonder that investors are searching for a place far away from this shrinking money environment...a place where precious metals and hard commodities sit out of the reach of debt obligations?

   The joy of precious metals is they cannot be printed; they are nobody's promise of payment. A glance at a banknote, on the other hand, shows that the note is simply a piece of paper, entirely dependent on the banking system that issued it. And if the issuer's promises become suspect, then a move has to be made away from them.

   But as we have all been drawn into them, where does one go? The precious metals market cannot surely replace the banking system's paper money? Of course it cannot. But for those decisive enough it already has created – and will continue to prove – a "safe haven" for those seeking shelter in these extreme times.

   In 2004 gold was at $300. Now it is trading more than twice that price after spiking above $1,000 on the day Bear Stearns collapsed into the warm, welcoming arms of J.P.Morgan. So is Gold's rise over? Ask instead if the problems of the financial system have yet ended.

   Banks are such a fundamental part of our lives because they have become the very heart of the modern commercial system. The sight of the Bush Administration and the Federal Reserve frantically trying to support confidence in this system is frightening, as we see fear sap confidence persistently. And confidence once it starts to decay is a delicate commodity.

   Henry Paulson, the US Treasury secretary, is leading the Bush administration's struggle to contain the economic contagion leaching out of the disintegrating housing sector, volatile financial markets and frozen credit, skyrocketing energy and food prices, widening job losses, and a steadily falling Dollar. What a burden to fall on him and Ben Bernake at the Federal Reserve!

   Paulson, who stood against "excessive regulation" of the financial sector, is being forced to oversee sweeping government intervention in the economy from now on, in attempts to contain the gaping holes through which asset values are draining away. To counter this the printing presses of money are being used as never before to replace the loss of credit the broader collapse is creating, simply in an attempt to keep money supply flowing through the economy like blood in the veins. Banks are struggling to recover multibillion losses on real estate by curtailing loans to American businesses, depriving even healthy companies of money for expansion and hiring.

   The credit crunch has moved away from simply a housing problem to every aspect of the commercial world, including basic commercial and industrial loans from banks, and short-term "commercial paper" not backed by collateral. These types of financing have already dropped almost 3% over last year, to $3.27 trillion from $3.36 trillion. The scarcity of credit is infecting growth whittling away what remains of the healthy economy by withholding capital from many sound companies, aiding the growing loss of jobs and decimating consumer spending – the foundation of the growth of the last five years in the US.

   Real growth turns to the development of productive assets for sustainability, but this is now seeing the delay of cancellation of expansion plans as finance for these dries up. By mid-June, bank credit was declining at an annualized pace of more than 6%. That is a drop of nearly $150 billion, an amount much larger than the value of the tax rebates the government has sent to households this year in an effort to spur economic activity.

   So forget the boost from that quarter and the big fuss that was made when it was pushed through, this crisis has already overwhelmed such stimuli. And the decay is becoming global, not just limited to the States.

   Britain's Bank of England is party to a rescue of the housing sector and is soon to issue billions of pounds to that end. Over in Europe, in Spain in particular, the housing crisis is frightening given how dependent that economy has become on retirees coming to the "Florida Keys of Europe" for their golden years.

   The atrophy of money is crossing the globe. Until last summer, banks lent freely, because they sold most of the loans they issued, making them less concerned about whether the customer could handle repayment. Not so, anymore.

   Now add to the decay of money the decreasing value it is facing as inflation rises. Caught between two destructive forces, money as we know it is not providing the hope and security it was intended to. That is why Gold was used in the past, as money.

   The huge gap between the value of Gold and the value of what now passes for money must narrow. Whether it is through the rise in the value of Gold and silver or through the fall of the value of money dictates the future of the financial system. Either way, gold and silver will prove to be the safe-haven they have been since money was part of man's world. And the second half of this year is likely to be as dramatic as the first half, but with a golden or silver sheen to it.

JULIAN PHILLIPS – one half of the highly respected team at – began his career in the financial markets back in 1970, when he left the British Army after serving as an Officer in the Light Infantry in Malaya, Mauritius, and Belfast.

First he worked in Timber Management and then joined the London Stock Exchange, qualifying as a member and specializing from the beginning in currencies, gold and the "Dollar Premium". On moving to South Africa, Julian was appointed a macro-economist for the Electricity Supply Commission – guiding currency decisions on the multi-billion foreign Loan Portfolio – before joining Chase Manhattan and the UK Merchant Bank, Hill Samuel, in Johannesburg.

There he specialized in gold, before moving to Capetown, where he established the Fund Management department of the Board of Executors. Julian returned to the "Gold World" over two years ago, contributing his exceptional experience and insights to Global Watch: The Gold Forecaster.

Legal Notice/Disclaimer: This document is not and should not be construed as an offer to sell or the solicitation of an offer to purchase or subscribe for any investment. Gold Forecaster/Julian D.W. Phillips have based this document on information obtained from sources they believe to be reliable but which it has not independently verified; they make no guarantee, representation or warranty and accepts no responsibility or liability as to its accuracy or completeness. Expressions of opinion are those of Gold Forecaster/Julian D.W. Phillips only and are subject to change without notice. They assume no warranty, liability or guarantee for the current relevance, correctness or completeness of any information provided within this report and will not be held liable for the consequence of reliance upon any opinion or statement contained herein or any omission. Furthermore, they assume no liability for any direct or indirect loss or damage or, in particular, for lost profit, which you may incur as a result of the use and existence of the information, provided within this report.

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