Here is an important article By John Ing
Gold: Be Careful What You Wish For
Rumblings of troubles at some of the biggest hedge funds raised fears of market contagion, particularly following the downgrades to junk status of former icons, General Motors and Ford Motor Co. Huge losses were linked to the liquidation of exotic credit derivatives or as Warren Buffett calls them, "weapons of financial destruction". In 1998, Long Term Capital Management was considered too big to fail, then as now, the hedge funds are over-leveraged. As overall returns from stocks and bonds dropped in recent years, the largely unregulated hedge funds have accumulated more than $1 trillion of assets promising above average returns. Many are forced to unwind their leveraged positions causing an uptick in the dollar to offset mammoth derivative losses and the dumping of oil, Canadian dollars, and gold. Alan Greenspan reinflated the credit balloon in everything from oil to real estate to hedge funds but now after eight successive interest-rate increases, $50 oil and the credit downgrades, the after shocks are being felt as the hedge funds unwind their big derivative bets.
Amidst contagion, gold historically has been a good thing to have. Let's look at the fundamentals.
The US economy averaged about 4 percent growth over the last three years and GDP growth this year is forecasted at 3.7 percent which is well within the norm despite a spike in the price of oil to $50 a barrel. However, this growth has come at the expense of unprecedented large deficits and a large drawdown of US savings, mortgaging America's future. The cumulative effect of these deficits is a large increase in indebtedness, to the point that the Americans have become the largest debtor in the world. The trade deficit alone requires nearly $2 billion of external funding a day. According to the US Treasury, net portfolio inflows in the US dropped to $45.7 billion in March from $84.1 billion in February which was not enough to cover March's $55 billion trade deficit. At the same time, the Asian economies are not only attracting direct foreign investment due to their more promising growth opportunities but are also accumulating large stocks of international reserves, principally in dollars. As a consequence they are running large account surpluses and in holding more than half of the American deficit, they are subsidizing America's lifestyle. This is clearly unsustainable.
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