Consider the following …
Two Possible Macroeconomic Background Scenarios for Gold
Scenario #1: The Fed's efforts to save the U.S. economy and financial system succeed … the credit crisis eases.
The Fed is GOOD for Gold
Figure 1: If the Fed floods the system with trillions of paper dollars, global demand for gold will soar.
Look at it this way: Even with the U.S. economy in a bad funk — gold demand hit a record $79 billion in 2007 … and another record $102 billion in 2008. Most of the increased demand — no surprise here — came from Asia and the Middle East. In 2008, China's gold demand jumped a healthy 21 percent, Vietnam — up a whopping 49 percent … Indonesia — up 6 percent … Egypt — up 12 percent … Russia — up 12 percent (a new annual record). So if the Fed's actions work … the U.S. economy rebounds riding a new wave of inflation … demand for gold will fly off the charts, sending the yellow metal's price skyward. In other words, as a long-term investor, you would want to buy the dips in gold.
Now let's take a look at the second scenario …
Scenario #2: Fed's rescue efforts (continue to) fail … credit crisis worsens … depression deepens
Bearish for gold? No way, Jose! Not only will the Fed just keep pumping trillions more dollars into the economy — confidence in government will plunge to such abysmal lows, that the greenback will lose dramatically more purchasing power than in the first scenario.
Do you think gold's bull market would end in such an environment? Do you think that would be bearish for gold? Hardly! The plunging dollar would cause investors to flock to gold even more than they already have. The price of the yellow metal would soar even more than in the first scenario, and it would likely even exceed my most bullish target — rising well above $2,270 an ounce!
Plus, in Either Scenario … The Supply of Gold Is Plunging
Many analysts are claiming that in either of the above scenarios, gold's current price is high enough to bring oodles of new supply to the market, hence killing, or at least smothering the bull market for a while.
But in fact …
In 2007, the world's gold supply dropped 2.6 percent to 3,488 metric tonnes. And it dropped further to 3,468 in 2008. When you compare that to total world demand of 3,659 tonnes, you're left with a supply deficit of 191 tonnes! In 2008, gold mine production fell 3 percent to 2,407 metric tonnes, declining for the third straight year. South Africa and Australia had the steepest production declines. In fact, South Africa's production dropped an estimated 14 percent, to 220 tonnes, its lowest level in 86 years! Australia's gold production hit 19-year lows in 2008, falling 12 percent to 299 tonnes.
So let me set the record straight on the supply situation in gold:
Do not, I repeat, do NOT expect any relief from new supplies of gold.
The Long-Term Bull Market in Gold Is Alive and Well.
Consider Buying the Dips!
I have absolutely no doubt whatsoever that gold will ultimately reach at least $2,270 an ounce, and perhaps even higher. So any time you hear that gold's bull market is over, I strongly suggest you ignore those sound bites, and instead, consider using virtually every price dip — like we have now — as an opportunity to buy. Because as I just showed you, gold is in a “win-win” situation.
With that in mind, and given gold's current pullback, I want to make ABSOLUTELY sure you've got the basics you need to have gold in your portfolio …