Ahad, 12 April 2009

Gold the Real Win Win Investment

Today I want to talk about gold again. Why? Because short term, gold is not acting so well. It's broken some chart support at the $898 level, and it could easily pullback further, to around the $838 level.

For short-term traders, that's an opportunity to get out, go short, and make some money. But for investors, gold's pullback should not be alarming … should not scare you out of any positions … and instead, should be viewed as a “win-win” situation.

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.

Under this scenario, the Fed's recent actions of pumping at least $1.3 trillion of new money into the economy and the Treasury's TALF program are successful — the U.S. economy starts to recover and global growth resumes. As a result, the credit crunch begins to ease and money flows through the pipeline. The big commercial and investment banks finally stop taking massive write-downs on bad mortgage securities. Foreclosures shrink, home prices stop hemorrhaging, and home sales pick up. Consumers start spending. In this scenario, many talking heads on Wall Street say that gold's bull market would be over. They'd point out that there would be no reason for investors to flock to the safety of gold. But holy cow, would they be dead wrong! Reason …

The Fed is GOOD for Gold

If the Fed floods the system with trillions of paper dollars, global demand for gold will soar. If the Fed is successful at turning the U.S. economy and credit crisis around, it will only be because it flooded the system with trillions of paper dollars, sowing the seeds for eventual wild inflation. If the economy were to pick up on top of that, between inflation and resumed economic growth, global demand for gold would soar. Of course, the media mavens would then argue that when the economy turns back up, the Fed will jump in with both feet to head off inflation by aggressively raising interest rates, thereby choking off the bull market in gold. That's also hogwash. Just check the recent record … From late 2004 to mid-2006, the Fed raised interest rates 17 times, in steady quarter-point increments to 5.25 percent from a low of 1 percent. And over that period, gold surged 127 percent!

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 …

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