Gold has smashed through the $700 level like a bullet train through a paper barrier. Yesterday it reached $706. In the next few weeks, it could challenge its all-time high of $825.
And yesterday’s mamby-pamby Fed announcement, soft on inflation and uncertain about interest rates, will only drive gold higher sooner.
I’m not shocked. Not even mildly surprised. I knew we’d see this happening, and I’ve said so unambiguously. For six years.
But now it’s happened, and it still gives me goose bumps — anxiety about the implications for our world … along with excitement about the amazing opportunities for our readers.
Now, get ready for $740 (my long-standing target), a possible sharp correction, and then my next near-term target: The record-high at $825!
Some of My Favorite Gold Shares —
$2 – $5 Stocks Back in 2001 —
Are Now Trading at $30, $40, Even $50.
Glamis Gold, once as low as $2.68 a share, now $42. Agnico Eagle, a $5 stock in 2001, now $40. Royal Gold, trading at $2.60 just five years ago, now fetching $34 a share.
These are the mining companies that Wall Street “wouldn’t touch with a ten-foot pole.â€
Back in 2001, one Wall Streeter even told me so to my face: “It’s absolutely insane to recommend gold or gold shares to your readers,†he said. “Gold is dead.â€
I loved getting those kinds of comments. In fact, it’s when Wall Street’s in my same camp that I begin to get worried. And despite gold’s spectacular performance, that’s definitely not the case right now.
Gold is still seen as the anti-investment — the investment that’s strictly for gloom-and-doom soothsayers who foretell the end of the world. So most Wall Street analysts still treat gold mines as pariahs and their shareholders as lepers.
Good! It means the gold boom is far from over. Because when Wall Street finally wakes up … when thousands of mutual funds and pensions finally realize mining shares and gold ETFs are a must for inflation protection — that’s when you’re going to see the final phase of gold’s rip-roaring bull market.
And right now, although a minority of institutions is beginning to move into gold, the majority is still fast asleep or in the dark.
In the meantime, I hope you’ve been getting my Real Wealth Report, and I trust you’ve been enjoying the profits.
Just as I said back in 2001, gold’s new bull market has paved the way for a brand new inflationary cycle, with the price of virtually every natural resource under the sun exploding higher. As a result, Real Wealth’s portfolios are soaring. The total dollar gains on all recommended positions (closed and currently open): Nearly $70,000!
What Next?
With gold at $705, it’s just $35 shy of my intermediate term target of $740 an ounce.
So it’s time to take another serious look at what’s driving gold — and other natural resources — higher.
Is it all due to Iran? Is it a sign of higher prices yet to come? Will there be a correction? If so, how sharp might it be? What should you be doing now? What should you do next?
Let me sum it all up with the following statement, which will serve as my single broad answer to the above questions. Then, I’ll follow up with the details.
All of the same forces that have propelled gold from $225 an ounce to $705 are still alive and kicking. They will lead to much higher prices in the months and years ahead … signal more inflation … and sadly, they will reflect a deepening socio-political crisis both domestically and internationally. Ultimately, gold will reach $2,200 per ounce.
Now, the details …
Gold is many things to many people.
To jewelers, manufacturers and dentists, it’s essential to their businesses as an industrial commodity.
To the world’s central banks and the International Monetary Fund (IMF), gold is the world’s currency stabilizer.
To the world’s savers, gold is a safe haven that shelters their wealth from the corrosive effects of inflation.
To the world’s investors, gold is a shield that insulates their wealth from economic and political crises.
And in volatile times like these, demand for gold absolutely skyrockets, driven by multiple forces simultaneously:
Force #1
Skyrocketing Federal Deficits
The costs of 9/11 … Homeland Security … Afghanistan … Iraq … post-Katrina … and the most aggressive economic stimulus packages of low interest rates and tax cuts in history … have all come together to bust the federal budget and create a record-shattering $500 billion deficit.
And that’s after they’ve virtually confiscated hundreds of billions of dollars in surpluses from the Social Security Trust Fund.
When you include unfunded liabilities for Medicare and other obligations, all told, the U.S. is in debt to the tune of some $50 trillion.
Bottom line: The United States is effectively bankrupt. And that fact will continue to cause millions of jittery savers and investors to seek the safety and security that only gold can provide!
Force #2
A Tidal Wave of Newly Issued
Treasuries Is Already Beginning
To Crush the Bond Market
When the federal deficit surges, so does the quantity of bonds the government has to issue. And today’s record deficits mean record quantities of new U.S. Treasuries must be dumped on the market, even if willing buyers are becoming scarcer.
That inevitably causes:
A) Crashing bond prices, and
B) Explosive increases in longer-term interest rates — both of which have just now started.
A big deal for gold? You bet it is! The debt markets in this country are nearly three times larger than all the stock markets combined. If only 1% of that money ultimately finds its way into gold, that alone could propel its price up to my long-term target of $2,200.
Force #3
Foreign Bond Investors
Are Sitting on a Hair Trigger
The same can be said for foreign bond investors — who now buy the majority of U.S. Treasuries and other U.S. bonds. They’re now getting hammered in three ways:
First, their principal — the market value of the bonds — is plummeting.
Second, after inflation, most of the bonds bought over the last three years pay next to nothing.
Third, the declining dollar is digging into their principal even further.
Sooner or later, foreign investors are going to have no choice but to:
- go on a buyer’s strike, effectively boycotting future U.S. Treasury auctions, or worse …
- Start dumping some of their current U.S. Treasury holdings.
As the dollar collapses, foreign central banks would naturally be forced to slash the percentage of reserves they allocate to U.S. dollars, diversifying more into other currencies and gold.
We’re already seeing some preliminary signs of this, with Russia, Saudi Arabia, and even China rumored to be buying gold. But I think this is just the beginning of central bank gold purchases. Especially considering …
Force #4
The Dismal Dollar
You don’t have to wait for foreign investors to begin dumping bonds before you see a dollar plunge. Just in the past month, the dollar has already plunged 5%.
This is no trivial event. For many months, most pundits had been proclaiming “the end to the dollar bear market.†They said the dollar wouldn’t fall any more because the Fed was raising interest rates. They said the dollar was going to be strong because the U.S. economy was doing well. They laughed when analysts like me recommended dollar hedges like gold.
Well, guess what: The Fed did raise interest rates. And the economy did improve. But the dollar fell anyhow … and now nobody’s laughing anymore. Quite to the contrary, they’re quietly asking themselves:
If the dollar is already falling in the most favorable circumstances … what in the heck is going to happen if those circumstances are not so favorable?
Currently, foreigners hold about $2.5 trillion in U.S. securities. When they begin cashing in, they’ll have to put that money somewhere — and you can bet your bottom euro that even greater chunks of it will move into gold.
Force #5
Washington Has Lit the Fuse on
A Devastating New Explosion
Of Domestic Inflation
Washington has been literally flooding the U.S. economy with brand-new paper dollars for nearly five years now.
The lowest interest rates in history … the largest tax cuts in history … the largest federal deficits in history … plus … massive expansion in the money supply represent a veritable tidal wave of newly created dollars and they’re already triggering the first big inflationary wave since the early 1980s.
The Consumer Price Index — manipulated by the government — doesn’t yet show it. But it soon will.
Commodity prices are blasting off everywhere — not just in oil, or gas, but also in copper, tin, aluminum, zinc, sugar, soybeans, wheat, and corn.
Consumer expenditures that are toned down or excluded from the CPI — or simply ignored by most analysts — such as for fuel, housing, college tuition, and others — are also surging.
And according to the recent Department of Labor report, even wage inflation is now starting to kick in — with wages up an astonishing .5% last month.
So watch out: Wage inflation is rocket fuel for the overall inflation rate.
Force #6
The War Environment
You don’t need a bloody war to frighten investors. Long before the first shot is fired, many are already seeking out gold as a hedge far more actively than ever before. And as the war drums beat louder, the gold rush could easily turn into a stampede.
Bear in mind that Iran is not just any developing nation; and the Middle-East is not like any other region. It’s at the core of the world’s most important commodity — petroleum.
Also please understand that most international investors feel and smell the threat of war from a very different perspective than we do. While we watch it all on the nightly news from our comfy family room sofas, millions in Asia and Southeast Asia see it on their doorstep.
They’re sweating bullets. And they’re buying gold.
Meanwhile, on the supply side of gold …
Central bank sales of gold are virtually non-existent. Instead, as I pointed out earlier, central banks are starting to buy!
The “gold carry trade†is dead. When gold prices were falling in the 1990s, traders made a fortune borrowing gold from central banks at dirt-cheap interest rates of 1% to 2%, selling it and then reinvesting the money in higher-yielding Treasuries.
But now, with gold prices soaring … with short-term borrowing rates at 5% — the gold carry trade has ended, eliminating the 10,000 to 15,000 tons of extra supply this practice often added onto the market.
Forward-selling by mining firms is being sharply reduced. In the 1980s and 1990s, as gold prices retreated, many mining companies began hedging their bets. To protect themselves from future price declines, they locked in current prices by selling future production — gold that was still in the ground. That also effectively added to the supplies hitting the market.
Now, with gold prices soaring, mining companies are leery of new forward selling. And most are actually unwinding most of their hedges. Instead of adding more supplies, this has the opposite effect: It removes gold supplies — perhaps as much as 300 tons — from the market each year. It’s now a bullish force in the gold market and could be for years to come.
Marginal mines were closed and will take years to reopen. Scores of marginal mining operations were closed during gold’s 20-year bear market. And now, most of those mines are out of commission. Typically, closed mines decay or fill up with water. It can take years to get them back on line.
Gold exploration is drying up. Exploration expenditures by mining companies have fallen sharply since 1997. Despite gold’s new bull market, gold exploration expenditures are still not far from their lowest levels in nearly a decade.
Is it any wonder gold is heading even higher? I don’t think so.
What to Do
First, recognize that the rise you’ve seen in gold so far, however sharp, is just a preview — one phase in a massive new bull market, with much higher prices to come. I just gave you the forces that are driving it. Not one of those forces is any weaker today than it was when an ounce of gold was selling for $300, $400, or $500.
Second, also realize there will be corrections. That’s bound to happen — from current or higher levels. They could be sharp. They could come fast and furious and be downright scary. But hold your ground. The trend is your friend and the main trend is UP.
Third, when you do get the corrections, consider them gifts. Use them to add to your positions. For the right timing and specific picks, follow my Real Wealth Report for recommendations and timing.
Fourth, use this once-in-a-generation situation to make as much money as you can! This is one powerful bull market, with loads of profit potential still ahead.
Best wishes,
Larry Edelson
Editor, Real Wealth Report
For more information and archived issues, visit http://legacy.weissinc.com.
About MONEY AND MARKETS
MONEY AND MARKETS (MAM) is published by Weiss Research, Inc. and written by Martin D. Weiss along with Larry Edelson, Tony Sagami and other contributors. To avoid conflicts of interest, Weiss Research and its staff do not hold positions in companies recommended in MAM. Nor do we accept any compensation for such recommendations. The comments, graphs, forecasts, and indices published in MAM are based upon data whose accuracy is deemed reliable but not guaranteed. Performance returns cited are derived from our best estimates but must be considered hypothetical inasmuch as we do not track the actual prices investors pay or receive. Contributors include Sean Brodrick, John Burke, Beth Cain, Red Morgan, Ekaterina Evseeva, Amber Dakar, Michael Larson, Jennifer Moran, Monica Lewman-Garcia, Julie Trudeau and others.
© 2006 by Weiss Research, Inc. All rights reserved.
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