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I want to start off my first regular Money and Markets column with a simple statement: I am not a hardcore gold bug.
In other words, I am not always out looking for reasons to justify owning gold. I do not even believe gold is a productive asset!
However, I do think gold provides great insurance against political follies, especially those that will likely lead to inflation.
And while I consider life and investing most fun when there are no reasons to bet against the government, history has shown again and again that sometimes you have to take that position to protect your family and your wealth!
My point is simple: I think the only time to buy gold is when you’re critical of current monetary and fiscal policy.
So up until 2001, I didn’t see a reason to recommend the yellow metal.
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Times were good, the financial markets were booming, the economy was doing okay, and the Fed and its international brethren were doing relatively little harm (other than fueling a stock market bubble).
As long as the bubble was holding together there was no need to look for a store of value or for insurance against bad economic policy outcomes.
Besides, gold was mired in a secular bear market that started back in 1980. So my technical market analysis confirmed the unattractiveness of precious metals.
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| In 2001, I knew it was time to bet on gold. And I turned out to be right. |
Then, in 2001, I started to see an about-face happening …
The Fed implemented a highly inflationary monetary policy, and the Bush administration did the same in regards to their fiscal policy.
That was a clear starting signal for a brand new gold and commodities bull market. And when I looked to my charts for technical confirmation, it looked like there was a huge bottom forming. I knew then that it was one of those times to bet on gold, and I turned out to be right …
Gold’s price quadrupled from $255 on February 21, 2001, to a high of $1,034 on March 17, 2008.
But Now, Many Are Asking If
Gold’s Bull Market Has Run Its Course …
When the recession hit, stocks and commodities got clobbered. And gold’s price fell 30 percent.
Now, everyone wants to know if gold’s run is dead or if we’re just witnessing a healthy correction in an ongoing secular bull market.
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| First it was Bush. Now Obama is pumping billions into the system. |
My answer: What we are witnessing right now is just a healthy correction … one that is nearing its end. Remember, I’m not a hardcore gold bug. I have no preconceived idea that gold is the best investment in the world. Instead, I’m just looking at the facts before me. And here’s what I see …
Last year was a remake of 2001, only it was a real estate bubble bursting instead of one in the stock market.
And the monetary and fiscal policy reaction has been the same … on an even grander scale!
The combined monetary and fiscal stimulus to combat the recession, the banking crisis and all the other aftermaths of the burst bubble already add up to 30 percent of Gross Domestic Product.
That’s a new record by a HUGE margin:
- In 1974 it was 4 percent
- In 1982 it was 2.8 percent
- And in 2001 this figure was 7.2 percent.
The Fed and the government — first the Bush administration and now Obama’s — are pulling all available levers hoping to heal what went wrong by doing exactly the same thing that was done in 2001.
The chart below, showing all the dollars getting pumped into the system, sums it up … Isn’t that amazing? There seems to be no progress in politics or the financial markets!
In 2001, I interpreted these policies as a major signal for a gold bull market. So with today no different — but actually worse — I’m sticking to my belief that gold will continue to shine.
And I’d like to note that there are at least two more reasons to believe that gold will push higher …
Reason #1:
China says it’s a gold buyer!
According to several news services, China has admitted to having boosted its gold reserves. Since December 2002 the Chinese central bank added 600 tonnes of gold to bring its reserves to 1,054 tonnes.
And while more than a thousand tonnes of gold might sound like a lot, it is a miniscule amount in relation to China’s total currency reserves. Just look at my table and you’ll see what I mean …
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Official Gold Holdings as of April 2009
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Country
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Tonnes
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Percent of Reserves
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1
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USA
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8,133
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78.9
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2
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Germany
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3,412
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71.5
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3
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IMF
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3,217
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N/A
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4
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France
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2,487
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72.6
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5
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Italy
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2,452
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66.5
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6
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GLD (Gold ETF)
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1,104
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N/A
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7
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China
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1,054
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1.6
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8
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Switzerland
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1,040
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41.1
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9
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Japan
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765
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2.2
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10
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Netherlands
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612
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61.7
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11
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ECB
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537
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23.7
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12
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Russia
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523
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4.0
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|
13
|
Taiwan
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423
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4.2
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14
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Portugal
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382
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90.2
|
|
15
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Venezuela
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364
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35.5
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|
16
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India
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357
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4.2
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17
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UK
|
310
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18.7
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18
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Lebanon
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287
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30.0
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|
19
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Spain
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281
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40.5
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20
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Austria
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280
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50.5
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Source: World Gold Council
In other words, this may very well turn out to be just the beginning of a trend for China. For years China has been rumored to be adding to its gold reserves. But until now the Chinese government refused to comment and refused to publish its gold reserves.
The obvious change in this policy is important. I think the Chinese government is sending a message, maybe as important as the one the French sent back in the 1960s. Then, under the Bretton Woods System, the French demanded delivery of huge amounts of gold from the U.S. This eventually led to the demise of Bretton Woods.
Now China reveals its growing gold reserves. At the same time it has started to openly question the international dollar standard.
Doesn’t this sound like the beginning of a new currency order? A currency order that is less dominated by the U.S. dollar and replaced with a currency order including gold.
I know the U.S. doesn’t like the thoughts and understandably so. But reality seems to be shifting in this direction since the U.S. has unnecessarily and frivolously been risking the privilege of being the issuer of the world’s reserve currency.
No matter where this development finally leads right now … it’s bullish for gold.
Reason #2:
Gold’s Charts Look Bullish
I use charts to confirm the fundamental picture. And when I look at a price chart of gold from 2001 to today I see a very orderly uptrend, interrupted regularly by healthy corrections. The current pattern since March 2008 does not deviate from this orderly trend. Take a look …
Source: www.decisionpoint.com
I interpret the action as an inverse head and shoulder formation, which is both very bullish and very reliable.
So given the strong fundamentals and an exciting chart pattern, you should expect a continuation of the gold bull market. A breakout above the resistance line of around $1,000 would send a very strong buy signal with a minimum price target of $1,300.
And in my opinion, the gold mining sector looks even more attractive because in relation to gold prices, the mining companies are extremely undervalued.
Again, I am not a gold bug. But if all the stars point to a bull market in gold and certain gold stocks, I definitely want to participate and so should you!
Best wishes,
Claus
About Money and Markets
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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 Bryan Rich. 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, Dinesh Kalera, Red Morgan, Maryellen Murphy, Jennifer Newman-Amos, Adam Shafer, Julie Trudeau, Jill Umiker, Leslie Underwood and Michelle Zausnig.
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