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Nadeem Walayat Financial Markets Analysiis and Trend Forecasts

Will Gold Skyrocket to New Highs?

Commodities / Gold & Silver 2009 Jan 15, 2009 - 04:04 PM GMT

By: Money_and_Markets

Commodities

Best Financial Markets Analysis ArticleLarry Edelson writes: In my August 2 and September 6, 2007 , Money and Markets columns, with gold trading at $664 and $694, respectively, I told you to increase your core gold holdings.

Since then, gold has risen to $855, a gain of as much as 28.7%. Assuming you had invested equal amounts on the aforementioned dates, your gold positions have gained an impressive 25.9%.


Compare that to the Dow Jones Industrials, which has lost 33.9% since January 1, 2007. Or the S&P 500, down 39.8%. Or the Nasdaq, down 35.49%.

Or compare it to cash, which because of low interest rates, has gained a measly 4.04% (and a meager 1.34% when including the decline in the value of the dollar.)

What's more, gold has solidly outperformed all major assets on the planet for the past nine years! You can clearly see it in this table …

Asset Jan 1, 2007 - Jan 9, 2009 Jan 1, 2000 - Jan 9, 2009
Gold +23.13% +91.1%
Dow Jones Ind. -33.90% -33.90%
S&P 500 -39.80% -48.02%
Nasdaq -35.49% -72.46%
Cash w/interest 4.04% 30.48%
Value of a Dollar -2.70% -20.69%
Net Value of Cash 1.34% 9.79%

Check out the right column:

Since January 1, 2000 …

  • Cash has gained 30.48%, assuming an average money market yield of 3% for the nine-year period. Include the international loss of purchasing power in the dollar, and cash has only gained 9.79%.
  • The Dow Jones Industrials has lost 33.9%
  • The S&P 500 has lost a whopping 48.02%
  • The Nasdaq has lost a devastating 72.46%
  • But gold has GAINED a stunning 91.1%!

So whither gold now?

Will it skyrocket to new highs …

trade sideways for a period …

or fall back to lower levels?

First, let me address the short-term outlook for gold — the next three to six months — because the picture is not as clear as the long term.

Gold could easily trade sideways in a broad range defined by $750 on the low side and $925 on the high side …

Or, it could face one more sharp selling bout bringing it back down to a major long-term support at the $600 to $625 level …

Or, it could blast off to the upside to new record highs.

Which course will gold take? It's too soon to say for sure. But I will say this:

Even if the worst case unfolds in the short term and gold suffers one more sharp drop, do not — I repeat DO NOT — get shaken out of your core gold holdings.

Instead, be prepared to buy more gold and gold shares. Because I have absolutely no doubt in my mind, whatsoever, that long term, gold is headed to well over $2,200 an ounce.

Moreover, you won't have to wait that long to see $2,000+ gold either. By long term, I'm talking three years.

So it's important to keep the following in mind:

No matter what the yellow metal does short term, with gold at $855 as I write this column, your downside risk in gold is about $255 maximum — whereas your upside potential is at least $1,345 an ounce.

That's a reward-to-risk ratio of better than 5 to 1. A terrific investment profile for gold, to say the least!

Why Am I So Bullish On Gold?

Gold is the ultimate currency. It has always preserved and protected one's assets, whether in inflationary times OR in deflationary panics.
Gold is the ultimate currency. It has always preserved and protected one's assets, whether in inflationary times OR in deflationary panics.

In a nutshell, my answer is simple: Because gold is the ultimate currency — it's the only real money in the world.

And in my opinion, there are three reasons why that has never been more true than today.

Reason #1 — There is not a single central bank or financial institution in the world that can create more gold.

Its supply is extremely limited. All the gold ever mined in the history of the world would fit into two Olympic-size swimming pools.

Reason #2 — Meanwhile, every central bank on the planet is printing fiat money like crazy.

I don't blame them … They don't have many other choices.

Here in the U.S., I figure the Federal Reserve will likely end up creating at least $3 TRILLION of new money to throw at the economy.

In Europe, I figure the European Central Bank will create at least $1 TRILLION worth of new paper euros.

Even the more conservative central banks on the planet, such as those in Asia, will likely print another TRILLION.

Now mind you, all that fiat money being printed will not work its way into the system overnight. And it pales in comparison to the wealth destruction that's already occurred. So short term, deflation still has the upper hand.

But, and this is very important, when the wheels of commerce and business begin to turn again … when banks begin to lend again … and when investors start to pull their money out from underneath their mattresses — you are going to see a tidal wave of worthless money get thrown into the markets.

And when that happens, it will re-inflate almost all tangible assets. And the chief beneficiary? Gold!

But it won't stop there because …

Reason #3 — If you think the financial crisis is bad thus far, tighten your seatbelts because it's about to get a heck of a lot worse.

So far, we've seen the debt bubble burst only in the private sector. And to be sure, it's the biggest bubble to burst yet.

But here's what's starting now: The bursting of the public debt bubble. Washington's debt bubble … the biggest in the world … dwarfing all others.

I am referring to the more than $70 TRILLION in debts Washington has incurred that is comprised of the more than $10.6 trillion in national debt … the $58 trillion in unfunded Social Security obligations and Medicare IOUs … and more.

Not to mention the $1.2 trillion in fiscal stimulus programs coming down the pike … the $700 billion allocated to the Troubled Asset Relief Program (TARP) … and surely more government spending on the horizon.

And Washington only has two assets to back up those debts:

  1. Its ability to tax its citizens and pay off the debt from future revenues, and
  2. Its word that it will make good on the debts.

I don't know about you — and I don't want to sound unpatriotic or overly pessimistic — but for the life of me, I don't see how Washington can …

  • Raise the money it's now about to start spending to supposedly kick start the economy.
  • Or ever get out of debt.

And I believe bond investors are beginning to realize the same thing. That's why the bond market bubble is clearly now bursting — having plunged more than 9 full points in the past two trading weeks …

Washington's out-of-control spending spree is about to cause what will become the biggest debt disaster of all.
Washington's out-of-control spending spree is about to cause what will become the biggest debt disaster of all.

… in what will become the biggest debt disaster of all, a complete collapse in the confidence of government to right the economy.

After all, isn't Washington doing the same thing that the private sector did, spending money it doesn't have?

So I don't see how the U.S. is going to make it out of this crisis without drastically devaluing the dollar to inflate away part or all of the debt nightmare.

Bottom line: Hold that gold, the ultimate currency!

It's an asset whose purchasing power has outlasted governments, civilizations, financial crises and panics for more than 5,000 years.

Gold has always preserved and protected one's assets, whether in inflationary times OR in deflationary panics.

For my latest core gold and natural resource recommendations and my gala 2009 Real Wealth Report Forecast Issue, click here .

It will be one of the best investment decisions you'll make this year. I guarantee it.

Best wishes,

Larry

This investment news is brought to you by Money and Markets . Money and Markets is a free daily investment newsletter from Martin D. Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil. Dr. Weiss is a leader in the fields of investing, interest rates, financial safety and economic forecasting. To view archives or subscribe, visit http://www.moneyandmarkets.com .

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