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It’s time again for me to answer some questions my readers have. Often, this kind of forum can cut right to the chase, as I directly respond to the most popular questions I’m hearing. So let’s get right to them …
Bob writes in: “Gold’s broken above your key resistance level of $929. How much higher can it go, and how fast do you expect it to go up?”
You’ll see some backing and filling of the support areas just under $929, meaning you shouldn’t be surprised if there’s yet another pullback. But gold’s next leg up should easily exceed the prior record high of $1,034 an ounce.
Once that is accomplished, expect another pullback, then a move up to at least $1,250.
Longer-term, over the next three years, I expect to see gold reach at least $2,200 an ounce, and possibly much higher. Select gold mining shares and mutual funds should perform even better.
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Neal asks me: “Do you still think the Dow bottomed last November?”
Darn good question! Yes, and no. In nominal figures, the November 20 low is still holding. While in real terms, a slight new low has formed. On the other hand, many indicators I watch — such as the advance/decline line, also indicate the November 20 low was THE low.
However, there’s clearly too much nervousness and volatility in the markets right now to say with any certainty. I do expect the following though: One more selling panic in the Dow that could bring it down to the 7,000 level. Then, a quick turnaround followed by a multi-month rally that could easily take the Dow back over 10,000.
So unless you are a very short-term trader, or have guidance in that area, I would NOT be playing the short side of the stock market here, either for speculation, or as hedges.
Rona writes in: “Larry, the dollar seems to be defying gravity. What gives?”
On the surface, it looks like the dollar is strong. But stand back for a minute and consider the following: The British pound and the euro are plummeting. So is the Russian ruble and all Eastern European currencies.
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There’s not one shred of doubt in my mind that the dollar is headed much, much lower.
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Add in all the dollar-denominated debts that are being liquidated and paid off, and the dollar should actually be soaring. But it’s not. The Dollar Index is a mere 16% above its record low set last year.
On a relative performance basis, that’s terrible upside action in the buck. And it’s a sign of what’s to come. There’s not one shred of doubt in my mind that the dollar is headed much, much lower.
Either forced lower by the marketplace, which is fully aware of the trillions in fiat money that must be printed, or by authorities who have the legal means to change and depreciate the value of the dollar to alleviate the deflationary impact of the mountain of debt out there.
Note: Some say Europe is in much worse shape than the U.S., and in some respects, that’s true. But Europe is NOT expected to save the world, the U.S. is.
Couple that with the fact that most of the world lays the blame for this crisis on the U.S. and you have a geo-political situation that squarely puts U.S. authorities on the hot seat, under pressure to devalue.
Moreover, since a global economic recovery depends on a recovery in the U.S. — it actually behooves U.S. authorities to devalue the buck. By doing so, they can …
1. Stimulate U.S. exports
2. Re-ignite inflation and rising prices, both domestically and internationally
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This is exactly what President Roosevelt did in 1933 when he confiscated gold, raised its price, and devalued the dollar. Almost immediately, the economy began to recover, employment picked up, and both prices and wages started rising.
David asks me: “I saw a report you wrote last month indicating that the price of oil had bottomed. But since then, oil has fallen further. You were wrong. You’re probably wrong on deflation too. No?”
My cycle work relates only to timing and not price. When I say something or show a chart that indicates cycles are bottoming, it merely indicates that selling pressure is slowing. And conversely, if I say cycles are topping, it means we’re entering a time period where buying pressure should be exhausting itself.
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Although oil prices have recently fallen, we should soon see downside pressure reduced, and an eventual turn back up.
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Cycle analysis can be very helpful as a technical tool, but only if one keeps in mind that it relates to timing, and not actual price. Other indicators should be used to determine whether the price action is consistent with the cycle models.
In the case of oil, although its price has fallen further, we remain in a time window where we should see downside pressure reduced, and an eventual turn back up.
Barbara wants to know: “Are there any life insurance policies or annuities that allow you to hold gold?”
None that I know of in this country; however, there are some excellent programs based in Switzerland. You might consider looking at what the SafeWealth Group offers. They can be reached at: www.safewealthgroup.com.
Dick asks: “Larry, what are your latest thoughts on Asia?”
I’m in Asia now. There are pockets in Asia that are certainly slowing. But for the record, I will say this: The slowdown occurring in Asia is nowhere near as bad as the western press is leading you to believe.
Here in Bangkok, construction of new office and condo buildings continues almost unabated. Shoppers pack the malls at Paragon and Emporium. In Singapore, where I was last month, there are as many construction cranes peppered around the city as ever. And the world famous Orchard shopping district is practically elbow to elbow with people.
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In my opinion, western analysts are most notably wrong about China. Yes, thousands of factories have shut down in China. But those western analysts totally underestimate the Chinese and their ability to handle hard times, as well as their extremely proud heritage and nationalism.
Not to mention the fact that the Chinese banking system is now the strongest in the world … and that Beijing now has almost $2 trillion in cash on hand and hardly any foreign debt.
There is no doubt in my mind that China is going to turn back to the upside, even before the U.S.
Richard writes in: “Other analysts I read tell me the U.S. doesn’t have any gold reserves; that Washington secretly dumped them decades ago and that Fort Knox is empty. Is there any truth to those statements?”
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Gold bars at the Federal Reserve Bank of New York. Each gold bar weighs about 27.4 pounds.
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The U.S. Treasury has 261 million ounces of gold worth about $245.3 billion at gold’s current price.
A large part of it is still held at Fort Knox, but not exclusively, as in the past. Today most of the gold is actually stored 50 feet below sea level in a subterranean vault under the Federal Reserve Bank of New York at 33 Liberty Street, Manhattan.
Sally’s question: “You recommend up to 25% of investable funds be allocated to various gold investments, with the balance, 75%, in cash. But why so much cash when it’s only going to lose purchasing power over time?”
Excellent question Sally. I do so for one main reason: Everyone needs liquid cash in this environment. And over the short-term, cash — in the form of Treasury bills with a maturity of less than one year, or a Treasury-only money market fund — is the best way to go.
Later, when I see the real collapse in the dollar beginning, I will likely recommend moving out of cash and into select investments that will benefit from the next big leg down in the dollar.
Steve wants to know: “You’ve talked about the central bankers of the world changing the value of money. But how could they do that?”
They’ve done it numerous times before. They did it in 1933, in 1944, in 1971, and in 1995 at the Plaza Accord. Governments and central banks have the ability to tinker with exchange rates between currencies and the value of gold to create new valuations for paper money. They can do it by manipulating the markets, or, in extreme cases, by emergency rule.
It is likely to happen again, and sooner rather than later. If authorities amongst the G-20 do not see signs of a turnaround soon, I believe they will start looking further into a new monetary system that will re-align the world’s debtors, mainly the U.S., and the creditors. I expect this to be an ongoing effort and a major topic of the upcoming G-20 meeting on April 20.
I further suspect that a few years from now the world will largely be comprised of three currencies: The dollar, the euro, and a new regional currency for all of Asia.
Keith asks: “Why don’t you give out more recommendations in your Money and Markets column? We sure could use them!”
It would not be fair to paying subscribers to my Real Wealth Report. Put yourself in their shoes for a minute: I don’t think you’d be too happy if the timely recommendations I gave you, I also gave out for free.
Having said that, I often do give general suggestions in this column, and ideas about what is and is not on my radar screen.
Nevertheless, the best way to get all of my thoughts, writings, specific entry and exit recommendations and more is by becoming a subscriber to my Real Wealth Report. At $99 a year, it’s a bargain.
Best wishes,
Larry
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Money and Markets (MaM) is published by Weiss Research, Inc. and written by Martin D. Weiss along with Tony Sagami, Nilus Mattive, Sean Brodrick, Larry Edelson, Michael Larson and Jack Crooks. 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 in as much as we do not track the actual prices investors pay or receive. Regular contributors and staff include Kristen Adams, Andrea Baumwald, John Burke, Amber Dakar, Michelle Johncke, Dinesh Kalera, Red Morgan, Maryellen Murphy, Jennifer Newman-Amos, Adam Shafer, Julie Trudeau and Leslie Underwood.
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