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business newsWhy Gold Is Going to $2,000 Per Ounce by the End of August
In a crisis of confidence, investors see gold as the only safe option.
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There is a crisis of confidence around the world, and when there is a crisis of confidence, people freak out. When people freak out, everything is sold, whether it deserves to be sold or not. Rock-solid names like Apple (AAPL), Microsoft (MSFT), Intel (INTC) and others are being sold with companies that will not be around in three years. No one knows for sure what the earnings will be on these companies, whereas just a few short weeks ago, confidence was not fleeting.
As such, when you get a crisis of confidence, money all piles into one place: precious metals -- particularly gold. Gold has soared over $300 in almost a month's time. That used to be a year's move, and not all in one direction, either. After S&P downgraded the U.S. debt, the fear level was set to "Extreme," and panic started around the world. For those who are saying this is not like 2008, you are right and wrong.
You are right in the sense that corporations are in much better places than they were just three short years ago. Corporate balance sheets are spectacular. However, consumer, investor, and business confidence is where it was in 2008. You need confidence for markets to function properly. Good news, bad news, or no news, markets can handle that and function properly, most of the time. When you sap confidence, it is a very different story.
Nobody believes the government anymore, and no one believes the banks. Just this morning, rumor mongers were saying that the Societe Generale could be on the verge of bankruptcy. Obviously this did not happen, but we are seeing this happen in Italy, starting to see it in France, and every so often, we hear German banks being caught up in the rumor mill.
With S&P downgrading the U.S. debt, it sapped confidence across the world, and markets across the world fell sharply. Besides this, we have a weakening economy, Congress has shown no inclination to act and provide fiscal stimulus, and Japan is still rebounding from the devastation seen in March.
There are still worries about Europe and Greece in particular, according to Joe Foster, portfolio manager for the Van Eck Global International Investors Gold Fund. "Greece is sort of on the verge of default and they're still trying to figure out how to engineer a recovery for Greece without inflicting a default on the country [and] the markets are sensing that's almost impossible," he said. "Until the situation is resolved in these peripheral countries, it's going to drive gold."
Italy, with its over $2 trillion in debt, is going to be a problem for a very long time. It will be until either the European Financial Stability Fund is operational, or it is allowed to restructure its debt, and bond holders take a hair cut. There is no magic solution for a country as large as Italy, whether you want to believe it or not.
When you have a crisis of confidence, everyone heads for the exit. The only door that is open? Gold.
Just don't be surprised when you get to the door, and Ron Paul is the one opening it for you.
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Bullish: Traders who believe that confidence will continue to be fleeting in the short term might want to consider the following trades:
- Buying gold miners such as Barrick Gold (ABX), Hecla Mining (HL) or Yamana Gold (AUY) could prove to be profitable as gold soars to new highs.
- If traders do not want single equity exposure, they may want to consider ETFs, such as SPDR Gold Trust ETF (GLD), which tracks the price of gold. Other ETFs to consider are Market Vectors Gold ETF Trust (GDX) or Market Vectors Junior Gold Miners ETF (GDXJ).
- If confidence comes back from some outside force, equities could soar. Baidu (BIDU), Amazon (AMZN), Apple etc. all could soar from these levels.
Below, find some more great ETF and market content from Benzinga:
Does Anyone have an Actual Plan for America’s Middle Class?
By John Thorpe
Jim Rogers Betting Against Stocks, Treasuries; Long Commodities
By Scott Rubin
Silver Wheaton’s Smallwood “Would Bet on $50 Silver” in 2011
By Paul Quintaro
Twitter: @Benzinga
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