A Whiff Of Optimism

Posted: May 29, 2012 12:01 AM

Markets in the U.S. were  closed yesterday but rallied in overseas trading on news that the pro-bailout parties are gaining ground in Greek political polls.  Markets in Asia rallied on the news and commodities, including gold and crude oil, were higher on the advancing euro. 

In overseas trading gold is up $3.78 to $1,577.95 and silver is off $0.06 to $28.55, raising the unofficial silver/gold ratio to 55.2.  The price of gold is tracking right along with the euro, so it appears today’s price movement is strictly technical. 

While the situation in Greece is interesting, it remains to be seen whether even a pro-bailout government can move the country far enough to keep them in the union.  Probably, but either way it goes the European Central Bank is going to be forced to print a metric boatload of euros and that’s what’s relevant for gold and silver investors. 

In the old days, before computers that never forget anything, we had debt forgiveness days.  Every so often the king would wipe out all private debts and all the marauding gangs in the hills could come back to live in the city without fear of being sent to debtor’s prison.

Today the world lacks any mechanism for debt forgiveness short of default.  So countries lumber along with a load of debt on their books that goes on seemingly forever.  For some countries, like Japan, the massive load of debt has become a lifestyle; a new reality.  Analysts now talk about levels of debt that are “manageable”. 

In the new economic order, debt itself becomes a type of currency.  To sustain that debt load countries are forced to print money to dilute their debt and pay it back with inflated currency.  No matter what happens to Greece or the European Union, the principles underlying the global economy are not going to change. 

That’s why gold and silver should be a part of everyone’s investment portfolio.  Those are solid things that have held some relative value, regardless of what happened to paper money, as long as human beings have been writing things down. 

That doesn’t mean you should have all your wealth in precious metals; they are still commodities that trade electronically and are subject to huge price swings tied to trades that are settled in cash.  Even these days, 10 to 15 percent in physical gold and silver is a prudent allotment, maybe as high as 20 percent if you have adequate cash reserves and plan to hold metals for a very long period of time. 

Chris Poindexter, Senior Writer, National Gold Group, Inc