Gold finally bottoms! ~ Inflation spikes, gold falls?!
Gold: not just a commodity ~ Go for gold now!
By Craig R. Smith, CEO Swiss America
Sep 11, 2008
PREFACE: On this 7th anniversary of the 9-11 tragedy, what better way to support the ongoing war on terror than by making sure none of your investment dollars are supporting terror-sponsoring countries or corporations? Find out how!
Who says opportunity only knocks once? Today gold is banging on investor doors for an amazing sixth consecutive season, looking for more portfolios to protect … and grow!
Gold prices flirted with 1-year lows today as the dollar touched 1-year highs and oil dipped to $100. I view this as the final speculative sell-off before we enter the next stage of this bull market and an extreme buying opportunity.
Why? Because gold is the only viable antidote for rising inflation, given that housing, a traditional inflation hedge, is searching for a bottom which may take several years.
While savvy investors have diversified assets into commodities, insiders see the next big asset shift will be from oil into gold because; 1) Gold is a universal asset offering; liquidity, safety and growth. 2) Gold is a safe haven offering; financial insurance and savings rather than a typical "investment" risks. 3) Gold is very undervalued compared to oil.
Gold's next stage will likely take prices well above $1,150/oz., even if oil prices fall below $100/bbl., based on the historical oil-to-gold ratio of 15-to-1. Today that ratio is just 7-to-1. "Based on historical averages, if oil falls to $100, gold would go to $1,515 an ounce," reports Bloomberg.
There have been six major corrections in the current long-term bull market in gold:
1. 2003 - Gold at $382 dropped to $319 (-16%)
2. 2004 - Gold at $425 dropped to $375 (-13%)
3. 2005 - Gold at $536 dropped to $489 (-9%)
4. 2006 - Gold at $725 dropped to $560 (-22%)
5. 2007 - Gold at $841 dropped to $778 (-8%)
6. 2008 – Gold hit $1002 on Mar 17 then dropped to $786 on Aug 15 (-21.5%)
"Reports of my demise have been grossly exaggerated!"
Year-over-year perspective: One year ago gold traded at $700/oz. and the Dow traded at 13,000. Today gold is trading up 5% at $746/oz. while the Dow is trading down over 13% near 11,200. So, although gold has suffered over a 25% drop from the $1,002 high, the shiny yellow metal is still running circles around stock indexes year-over-year. Gold's average increase from August to the end of the year between 2003-2007 is 14.6%.
Demand for precious metals has not evaporated to the levels that should prompt a sell off of this magnitude. Given the violent moves in commodities you'd think demand was non-existent. Nothing could be further from the truth. In fact, demand is picking up worldwide.
India is buying gold not selling. The Middle East, flush with petrodollars, is buying not selling. The Japanese are buying platinum not selling. The Chinese will resume buying immediately following the Olympics, requiring massive amounts oil, cooper, steel, coal, etc. Many speculators are being run out of commodities, which is healthy for a market long-term. Future markets try to predict future trends in supply and demand. Futures generally over/under shoot but ultimately markets adjust and get it right.
So, with the fundamentals unchanged, healthy demand and military tensions with Russia and Iran, I see sub-$800 gold as a the greatest buying opportunity of 2008. I see $1,100 gold in near future on it's way to $1650, although the timing may be extended a bit given the recent action. Nothing has changed other than a move of money from one area to another. That could reverse at a moments notice.
Remember: gold's trend is your friend. Nevertheless after each correction the analysts on Wall Street claimed the bubble in gold had burst and lower prices would be seen in subsequent years. Obviously they have been wrong five times in a row so far and I firmly believe they will be proven wrong again this time.
Gold prices could fall below $800 temporarily before the speculators are finally out and the fundamentals kick back in. Oil prices could fall below $100 a barrel or rise to $150-$200 depending on geopolitics. If gold follows its past moves, the next up-move will start this fall, taking gold prices to $1,100 before the next major correction.
Secular bull markets in commodities tend to have a life of 15 to 20 years. I see the current gold market no differently. Even if gold simply adjusts for inflation we should see $2,156. While there may be more volatility and wider price swings in this market, it has been seven years in the making. It is very different from the rapid run up and run down we experienced in 1979-80. Therefore comparisons to 1980 are not valid.
Inflation spikes, gold falls?!
I received the following email on Aug 14th: "I am completely mystified about gold. Inflation at a 19-year high and the war continues in Georgia, and gold is down $20 from its overnight high; silver down 60 cents from its overnight high. My macro call has been perfect on inflation, the dollar, the economy (stagflation) and yet gold suffers. I am seriously thinking of throwing in the towel if we get a meaningful bounce. There is some element missing from my analysis. And it isn't only the central banks and the bullion dealers. Any words of wisdom? What am I missing?" -John
Here was my reply: Great question. All the fundamentals point to higher gold. Much higher. The only element that cannot be quantified with critical analysis is investor attitude. There appears to me a denial amongst many in the market about just how bad things really are in the debt and credit markets. We know there is more pain to come but no one wants to admit it or talk about. It's almost as if they don't it to go away. When the next shoe drops maybe then investors will run for cover and gold will be where they run.
The world is slowing and the only way to stimulate it again is to loosen credit markets making currencies cheaper and gold higher. The credit markets have in essence been frozen since March. The Bears Stearn bailout and the Fed window being opened help somewhat, but a lot more still has to be done to repair the financials. Recapitalization is under way which has to mean lower currency values. Gold is being treated like a commodity when in fact it is the ultimate currency. When investors finally accept that the rush to the door to buy gold will be overwhelming. I really believe currency failures are not only possible but probable. Then the dynamic changes. But I agree it is getting rather depressing watching a gold medal investment constantly standing on the bronze medal podium.
Gold: more than just another commodity
GOLD IS MORE THAN JUST A COMMODITY, IT IS A STABLE CURRENCY. If gold was simply a commodity, supply and demand would dictate price. Since 2001, gold investment has been transformed from primarily being seen as a commodity to now being seen for what it really is: the ultimate global currency. A currency that is inflation proof and immune from collapse.
America’s founding fathers said money must have four basic characteristics: 1) Scarcity 2) Portability 3) Divisibility, and 4) Dependability as a Store of Value. "The dollar is slowly becoming an I-O-U nothing," former Fed economist John Exter once said. Why? Because real money must be derived from a commodity or it will eventually become fraudulent money.
The dollar has been in a bear market for 36 years. Gold prices fell to 2008 lows today on recent dollar strength but that strength will be short-lived, just as it has been since 1972 when the long-term downtrend for the dollar began. Sure there are periods of recovery, but each rally has failed. All bear market sucker rallies do just that. They suck people in just before the next drop.
This week will be crucial in determining whether the dollar has broken free from its 36-year downward trend as we get the latest figures on the U.S. trade deficit and inflation. I expect both to expand faster, thus bringing the dollar rally to an end.
Time to Go for Gold!
Now is a time to focus on keeping your money safe by diversifying assets out of paper and into tangibles – including the world’s most stable currency – GOLD.
So if you are long gold stay long. If you haven't participated in the greatest gold bull ever, it is not too late. This recent pullback should be no different than any other and represents a great opportunity.
I see the greatest value in the gold market today in early American $20 gold coins and gold commemorative coins. This area of the gold market has incredible strength and is overdue for a big increase.