Wednesday, April 28, 2010

Debt Deflation in Europe Bullish for Gold, Less so for Treasuries

Spain has been in the doldrums economically since their property bubble burst a few years ago, followed by the Great Global Financial Crisis. Deflation has taken hold there, and the downgrade of the creditworthiness of the Spanish government will raise external borrowing costs and therefore help create more deflation. Meanwhile, the need for certain over-leveraged economies that in some cases have citizens who hate to pay taxes to increase taxes or cut benefits while in general consuming less will subtract from world growth. Remember that Western Europe is aging and thus intrinsically slow-growing.

The U. S. is not really a safe haven. It just is quiescent. And, one never knows about a true bombshell coming out of somewhere (such as SIGTARP's investigations) or nowhere. This blog last year darkly summoned up the ghost of Watergate, a low-level burglary. It left the newspapers for quite some time and then-- poof!-- revelations started appearing and a President was gone, and a stock market low was made. The current probes are not at the Presidential level, but an action against Mr. Geithner would be quite disconcerting.

Thinking truly safe haven, one has to think gold mining stocks, even though their difficulties in producing enough gold are helping to power the bullion bull. Barrick was ahead of the curve years ago in hedging its output. Though late to the party, it is now unhedged. Today it reported fine earnings and great control of costs. It won't take much for it to have a truly strong chart; right now it is not as strong as gold bullion's chart. For those who think through to a true U. S. train wreck and recall the 1930s, gold mining shares were not affected though bullion was confiscated. So the gold in the ground story may start working again.

Gold is playing its contrarian role again, as it did through most of the 2007-8 crisis. If we come to a climactic liquidation phase of assets as occurred in the fall of 2008, all financial assets including gold will be involved, and gold stocks will almost certainly fare worse than the metal, but the markets are not acting that way at all.

The gold bull market looks to be stronger than the aging Treasury bull market.

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