How the Obama Stimulus Package is Tied to Bullion Investment
When gold climbed above $900/ounce – another watershed moment on its rise from dropping below $750/ounce when the global financial markets all began imploding at once – many analysts said it was the result of hedge fund managers pouring money into buying gold bullion because they thought the inherent devaluation of the dollar that results in printing that much money would raise the price of gold to as high as $1,700/ounce in 2009.
In September, just as the markets were beginning to realize what a pickle they were in, the US Treasury already had $5.5 trillion in debt. Some of the largest estimates suggest that the cost of services, support, incentives and other types of spending that are part of the Obama Stimulus Package could eventually help that total (in addition to the Troubled Assets Relief Program [TARP] already passed in late 2008) double by 2012.
Even Standard and Poor’s issued a statement in late January 2009 that foretasted a weakening in the US financial portfolio. It is no wonder, given all the debt that has already been assumed by the Federal government under TARP. The spending in the Obama package may well top $1 trillion in 2009. All this new money flooding into the economy from the Feds is thought to be likely to trigger inflation as the value of the dollar shrinks.
Though just how much it will shrink in comparison to other currencies remains to be seen. Other countries, such as those in the European Union (EU) have or are set to unveil spending packages of their own to stimulate commerce in their own zones.
Some big investors have held off on buying gold bullion in large quantities because it didn’t perform as well as expected in 2008, only registering gains of a little over 5% during all the tumult. However, as markets and banks continue to look shaky, and interest rates remain historically low, gold is again looking promising as an investment vehicle for large funds.
The movement of these large players have a big impact on the price, therefore impacting the returns for smaller investors. While individuals are, and should be, cautious about buying gold bullion as it is making its ascent, it may be the last opportunity to get on board before things really heat up in the market and subsequent spot price of gold.
It’s not just the destabilizing effect of government stimulus packages on the currency markets that is fuelling the rush in gold investment in early 2009. Many fund managers are betting that additional actions by the US and other governments will be to try and “inflate their way out” of the financial crisis. Classically, this has always contributed to a rise in gold, as happened in the 1980s.
It is anticipated that the demand for gold bullion from individual consumers will continue up to at least $1,000/ounce, as stock portfolios continue to do poorly. Electronically traded gold funds (ETF) are poised to become one of the few safe havens for savings in 2009, though the collection of physical gold bullion coins and bars should also remain strong.
Arthur McGuire
February 9, 2009
