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February 02, 2009 |
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This January was one of the worst on record for financial markets. US Treasuries crashed after enjoying a recession-beating run in 2008. Gold and silver were the only major asset class to end the month higher.
Hedge funds that previously ignored precious metals have become converts, with hedge fund star Greenlight Capital buying the yellow metal for the first time.
Another money manager, Osmium Capital Management, is offering a hedge fund priced in ounces of gold to protect it from exchange rate fluctuations. Subscriptions are in dollars, euros or pounds and then converted into gold.
Bonds slump
The conversion of the hedge funds to gold comes as they appear to be exiting US Treasuries. In January the Barclay’s Capital treasury index fell 2.8 per cent compared with a gain of 13.7 per cent in 2008.
There is a growing fear among hedge fund managers that treasury bonds will be the next shoe to drop in the global financial crisis. Government stimulus packages are going to massively increase the supply of bonds and the market has every sign of being in a bubble phase.
Hedge funds are therefore quietly heading for the side door before the mass panic to exit the bond market starts. Then, almost by default, the only safe haven remaining will be precious metals.
Prices of gold and silver will rocket to unheard of levels under such a scenario, predict gold experts. They point to the fixed and relatively small supply of gold, and especially silver, relative to the probable demand.
Inflation packages
In a world where multi-billion dollar stimulus packages are announced on an almost daily basis, this prediction has an air of inevitability about it.
Governments have seemingly lost all concern for monetary prudence in the face of a financial system in crisis, and inflation is the only logical outcome, although it is probably going to fire up gold and silver prices far more quickly than the global economy.
That might be part of the price the world will have to pay for its financial failure, and the investment implications for anybody still solvent are equally obvious.
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