The Goldwatcher

In an  interview with The Gold Report yesterday Frank Holmes, co-author of The Goldwatcher,  addressed key factors behind the financial crisis. He expects ’short term hesitancy in the upwatrd movement of the gold price until liquidity returns to the markets’ and  predicted gold will go up to $1000  or even $2000 over the next two years. The expected catalyst for the rise is a growing money supply following a change in Government policies.

Abuse of leverage was identified as the biggest culprit behind the market rout and the scale of the global financial crisis. In March this year The Goldwatcher blogged on the leverage disaster unfolding and hedge funds facing margin calls. 

These extracts from Frank Holmes’s Gold Rep0rt  interview are revealing:

‘… The combined impact of Sarbanes-Oxley, FAS 157 (mark-to-market regulations) and leverage abuse has cost New York its position as the world’s financial capital. No one expected this escalation of write-downs… Mike Milken spoke at a conference I attended last week in Hong Kong. He said that at the height of his career he was leveraged 4-to-1. Goldman Sachs now is leveraged 20 times, so a 5% mistake would wipe them out.  If you make a 2% mistake in the $500 trillion derivative market, that’s $10 trillion. What’s $10 trillion? Well, the world’s total GDP is $50 trillion. The total amount of U. S. dollars in circulation is roughly $15 trillion. A 2% mistake wipes out 20% of the world’s GDP…

..The dollar’s not going to collapse due to loss of Asian support. All countries will support the dollar. The reason is that they can’t afford for it to fall too far because then suddenly the U.S would be exporting products and not importing.

..All the currencies will slowly debase themselves against gold and keep the dollar as the currency for global trade…The number-one Asian analyst, Chris Wood, is advocating a 30% gold exposure to institutions. Now, this is the number-one brokerage firm in Asia and their research is excellent…It recommends a portfolio allocation of 30% gold:15% gold bullion and 15% unhedged gold stocks. When an analyst of his stature advises putting 30% of your portfolio into gold, you have to take note. We tell our clients to put a maximum of 5% into bullion and no more than 5% toward gold equities…

Last week the markets hammered every stock with liquidity. Many funds have been hit by this problem. Margin calls are driving this. It has nothing to do with the demand for gold or the supply and discoveries…Whether you have big deflation or big inflation driving the bear market, gold does well. If it’s just a normal cyclical inventory recession or whenever interest rates are above the CPI rate, gold doesn’t do well. Today, the Fed’s funds are below the CPI rate and the printing presses are busy….’

Extracts from an interview never tell the whole story. The Gold Report interview gives a better picture and is well worth reading.