Alan"s Money Blog

Aug 25, 2007

Gold and the sub-prime mortgage problem

Hi everyone. Here is a letter I've received from Paul Tustain, the founder of BullionVault. Like Mr. Tustain, I too am very bullish on gold and I believe that due to this whole sub-prime mortgage issue an increasing amount of investors will flee to what has always been a "safe-haven" in times of great financial turmoil - gold. As I mentioned previously, I keep 25% of my wealth stored in gold bullion and light of recent events I was thinking it might be a wise decision to "stock up" on some more bullion. Ok, so without further ado, here is the article:

Dear BullionVault user,

Once everyone gets back from vacation and starts to focus on
what's really going on, we may be in for a torrid few months in
the financial markets.

I believe the current lull in gold prices could offer a good opportunity
to defend yourself before the real trouble begins.

Since the end of June there has been huge damage done to the finances
of hundreds of organizations worldwide. But much of this pain is
still hidden inside investment funds holding obscure financial
instruments which are now unmarketable.

Too many investment professionals have been backing the same
short-odds gamble - residential housing - and the aggressive
financial arrangements they set up are unravelling a little more
every day.

The underlying problem of non-paying U.S. mortgage debt is getting
worse, not better, but this fact is being forgotten in the current
rate-cut induced rally in shares and bonds. Short of organized
double-digit inflation I don't believe there is a force capable of
halting the slide in subprime U.S. property prices.

On top of that, we still have the extended pain of increasing
rates hitting more U.S. home-buyers as their "teaser" deals end.
The Financial Times says this trend has barely begun.
It won't peak until the end of summer next year.

The world's largest financial organizations have already taken
big hits - quietly, for the moment - but it really is hurting, and
we are seeing things that just shouldn't happen in a well-ordered
financial world.

** Fund managers are not producing credible fund valuations; they
have frozen values using old prices, and are forbidding the normal
result, which is investors exiting.

** No-one can price mortgage-backed derivatives at the moment,
and no-one really knows how the underwriters of credit default
swaps are pricing the insurance time-bomb they're sitting on.
These horrible investments are in many cases worth nothing, and in
the case of credit-default swaps, less than nothing.

The current lull might prove an opportunity for the prospective
gold buyer. Gold has not yet moved up - in fact, it has dipped a
little as stretched investment funds have sold whatever they can
to raise cash and reduce their margin calls.

I cannot sign off without remarking on the apparent "flight to
quality" which on Monday this week saw U.S. Treasuries put in their
strongest day since Black Monday 1987.

U.S. Treasury bonds are part of the fast-growing and utterly
irredeemable $9 trillion public debt now outstanding in the
United States. The U.S. trade deficit was also on record-breaking
form again last month. Only a few short weeks ago these dreadful
statistics drove the U.S. Dollar to record lows against a basket
of major world currencies.

Only a lack of imagination would allow investors to think suddenly
of the U.S. Dollar as today's "quality" refuge. Any respite for
the Dollar will surely be temporary; indeed, the bounce we saw
during the sharpest stock-market losses so far may have simply
been short-covering by Dollar bears (of which there are plenty)
rather than fresh buying of “quality”.

Everything that has just happened in fact makes things worse for
the U.S. currency. At the heart of this current crisis lies the
bubble in poor-quality U.S. home loans. It is U.S. consumers who
are being pinched; it is the return on invested U.S. Dollars which
is now being cut.

Lower U.S. rates on the back of America's weakening domestic economy
will re-kindle a Dollar slide in due course. So the current lull
may offer only a brief window, in which fewer, stronger Dollars
buy more gold than they soon will.

Kind regards,
Paul Tustain
Director, BullionVault

Well said Mr Tustain! Thanks for your attention.


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Alan V said...

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Thanks "support" for offering to share links and hopefully we will both benefit from this co-operation.

Take care.