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Safe Havens?
New York: December 19, 2011
By John Stephenson

t's been a tough week for gold investors, who watched with horror as gold tumbled more than eight percent, dipping to its lowest level since September. Gold wasn't the only thing making fresh lows. The euro fell to its lowest level since January, as concern mounted that Europe's leaders haven't moved quickly enough to restore confidence that the massive debt loads in Europe are manageable. Adding insult to injury, credit rating agency Fitch told the euro zone on Friday it thinks a comprehensive solution to the bloc's debt crisis is beyond reach, as it put a number of the bloc's economies including Italy on watch for potential downgrades.

Germany 's Angela Merkel, under pressure from the revered Bundesbank to force debt-saddled euro zone countries to reform, has led the charge for automatic sanctions for deficit “sinners.” But rather than comfort investors, this approach has fed concerns that excessive belt-tightening could send the economies of southern Europe into a belt-tightening negative spiral with zero prospect of growing out of the crisis.

At the heart of these crises are massive issues of competitiveness that have created huge imbalances within trading blocks around the world. Since 2000, Germany 's unit labor costs have risen 20-40%—less than those of other countries in the euro zone—creating a German export juggernaut, while the periphery's competitiveness has only slumped. If Europe had just a debt problem, that could be solved, but good luck trying to mandate competitiveness. The only thing surprising about the European experiment is that it took so long to hit a roadblock.

Sure, it would be possible for Greece , Portugal , Spain and Italy to engineer a productivity miracle of their own, but at what cost? They could slash the size of government, incentivize private investment, encourage foreign direct investment and restructure their labor markets all in an effort to be more competitive. It would work, but these kinds of massive changes take boatloads of political will and years to pull off. And while European politicians dither, proposing one half-baked solution after another, the market continues to fall as traders give the thumbs down to yet another euro zone interim fix.

Gold was hammered when Dennis Gartman, a respected newsletter writer, declared the bull market in gold over. Writing in the Gartman Letter , he said “We have the beginnings of a real bear market, and the death of a bull.” Gold fell last week to $1,560 a troy ounce, a three month low and breeched the 200-day moving average, an important technical indicator.

nstead of buying gold, as investors often have in recent years when the going gets tough, they have been buying U.S. dollars. In the most recent U.S. auction of 10-year Treasuries, the government had no trouble raising $21 billion with a healthy bid-to-cover ratio of 3.53:1 and ample evidence suggesting solid overseas demand.

Despite gold's reputation as a safe haven, investors lately have been just as apt to sell gold, along with other volatile assets, such as stocks. This is a sea change from last year, when Greece 's troubles sparked fresh concerns and investors drove gold prices to record inflation-adjusted highs in May and June.

Gold's decline has been driven by many factors such as a general souring on commodities by the investing public in the wake of the MF Global's bankruptcy. Some investors have chosen to lock in gold's gains, up some 11 percent this year, before year-end or to meet redemption requests. Physical gold buying has softened, as India, the largest physical buyer of bullion in the world, has seen its rupee weaken by more than 12 percent since August, making gold more expensive in rupees. As well, there was widespread disappointment that the FOMC did not announce an additional quantitative easing (QE) program to help stimulate the U.S. economy.

So far, retail buying has continued to be supportive for gold prices, but this may not last. As I mentioned last Friday on CNBC's Fast Money Halftime Report , gold is likely to dip lower, before it begins its move back higher. Many retail buyers have established their positions at the $1,500 to $1,535 per ounce level and with momentum and technical indicators suggesting lower gold prices, retail investors may finally capitulate, sending gold scurrying back down to the $1,200 per ounce level.

And if this happens, it might be an outstanding opportunity to put fresh money to work. Gold will likely take out its September high of more than $1,900 per ounce over the next six months as it becomes apparent that the European Central Bank (ECB) is monetizing the debts of the periphery in an attempt to defend the euro and the union that is under daily assault by the markets. Gold has been volatile, but its decade-long winning streak isn't over, at least not yet, as nothing fundamental has changed for gold and better days will await patient investors in the yellow metal.


Long-time readers will begin to notice a change in my newsletters and website over the next couple of months. In an effort to better brand myself, I am in the process of converting Money Focus to an E-Letter that will be called John Stephenson's Strategic Investor and will become to be consistent with my Facebook, Twitter and YouTube posts. I trust that you will bear with me during this change.

StephensonFiles is a division of Stephenson & Company Inc. an investment research and asset management firm which publishes research reports and commentary from time to time on securities and trends in the marketplace. The opinions and information contained herein are based upon sources which we believe to be reliable, but Stephenson & Company makes no representation as to their timeliness, accuracy or completeness. Mr. Stephenson writes a regular commentary on the markets and individual securities and the opinions expressed in this commentary are his own. This report is not an offer to sell or a solicitation of an offer to buy any security. Nothing in this article constitutes individual investment, legal or tax advice. Investments involve risk and an investor may incur profits and losses. We, our affiliates, and any officer, director or stockholder or any member of their families may have a position in and may from time to time purchase or sell any securities discussed in our articles. At the time of writing this article, Mr. Stephenson may or may not have had an investment position in the securities mentioned in this article
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