The Correction Isn’t Over, But Gold’s Headed to $20,000

This guest editorial by Louis James, Chief Metals & Mining Investment Strategist

The Gold price is heading to $20,000
$20,000 per ounce Gold?

In April of 2008, Casey International Speculator published an article called “Gold—Relative Performance to Oil” by Professor Krassimir Petrov, then at the American University in Bulgaria, now a visiting professor at Prince of Songkla University in Thailand. He told us he thought the Mania Phase of the gold market was many years off, which was not a popular thing to say at the time:

“In about 8-10 years from now, we should expect the commodity bull market to reach a mania of historic proportions.

“It is important to emphasize that the above projection is entirely mine. I base it on my own studies of historical episodes of manias, bubbles, and more generally of cyclical analysis. In fact, it contradicts many world-renowned scholars in the field. For example, the highly regarded Frank Veneroso and Robert Prechter widely publicized their beliefs that during 2007 there was a commodity bubble; both of them called the collapse in commodity prices in mid-March of 2008 to be the bursting of the bubble. I strongly disagree with them.

“I also disagree with many highly sophisticated gold investors and with our own Doug Casey that the Mania stage, if there is one, will be in 2-3 years, and possibly even sooner… Although I disagree that we will see a mania in a couple years, I expect healthy returns for gold.”

It turned out that Dr. Petrov was right. Five and a half years later, here’s his current take on gold and the metal’s ongoing correction…

Louis James: So Krassimir, it’s been a long and interesting five years since we last spoke… Gold bugs didn’t like your answer then, but so far it seems that you were right. So what’s your take on gold today?

Krassimir Petrov: Well, most gold bugs won’t like my answer again, because I think we are still between six to ten years away from the peak of the gold bull. We are exactly in the middle of this secular bull market, and a secular bull market is usually punctuated or separated by a major cyclical bear market. I think that the ongoing 24-month correction is that typical big major cyclical correction—a cyclical bear market within the context of the secular bull market.

Thinking in terms of behavioral analysis, most investors are very, very bearish on gold. People who are not gold bugs overall still dismiss gold as a good or even as a legitimate investment. That, too, is typical of a mid-cycle. So as far as I’m concerned, we are somewhere in the middle of the cycle, which may easily go for another 10 years.

I expect that this secular bull market for gold will last a total of 20 to 25 years, dating back to its beginning in 2000. Some people like to date the beginning of this secular bull market at the cyclical bottom in 1999, while others date it at the cyclical bottom in 2001. I prefer to date it at 2000, so that the secular bottom for gold coincides with the secular top of the stock market in 2000.

L: That’s interesting. But I’m not sure gold bugs would find this to be bad news. The thing they’re afraid to hear is that the market has peaked already—that the $1,900 nominal price peak in 2011 was the top, and that it’s downhill for the next two decades. To hear you say that there is a basis in more than one type of analysis for arguing that we’re still in the middle of the bull cycle—and that it should go upwards over the next 10 years—that’s actually quite welcome.

Petrov: Yes, it’s great news. But we’re still not going to get to the Mania Phase for at least another two, but more likely four to six years from now.

Now, we should clarify what we mean by the Mania Phase. Last time, it was the 1979 to early 1980 period. It’s the last phase of the cycle when the price goes parabolic. Past cycles show that the Mania Phase is typically 10% or 15% of the total cycle. So it’s important to pick the proper dates for defining a gold bull market. I prefer to date the previous one from 1966 as the beginning of the market, to January of 1980 as the top of the cycle. That means that the previous bull market lasted 14 years, and it’s fair to say that the Mania Phase lasted about 18 months, or just under 15% of the cycle.

So I expect the Mania Phase for the current bull cycle to last about two to three years, and it’s many years yet until we reach it.

In terms of market psychology, we still have many people who believe in real estate; we still have many people buying and believing in the safety of bonds; we still have many people who believe in stocks. All of these people still outright dismiss gold as a legitimate investment. So, to get to the Mania Phase, we need all of these people to convert to gold bull market thinking, and that’s going to be six to eight years from now. No sooner.

L: Hm. Your analysis is a combination of what we might call the fundamentals and the technicals. Looking at the market today—

Petrov: Let’s clarify. When I say fundamental analysis, I mean strictly relevant valuation ratios. For example, according to the valuation of gold relative to the stock market, i.e., the Dow/gold ratio, gold is extremely undervalued, easily by about 10 times, relative to the stock market.

Fundamental analysis can also mean the relative price of gold to real estate—the number of ounces necessary to buy a house. Looked at this way, gold is still roughly about 10 times undervalued.

Thus, fundamental analysis refers to the valuation of gold relative to the other asset classes (stocks, bonds, real estate, and currencies), and each of these analyses suggests that gold is undervalued about 10 times.

In terms of portfolio analysis, gold today is probably about one percent of an average investor’s portfolio.

L: Right; it’s underrepresented. But before we go there, while we are defining things, can you define how you look at these time periods? Most people would say that the last great bull market of the 1970s began in 1971, when Richard Nixon closed the gold window, not back in 1966, when the price of gold was fixed. Can you explain that to us, please?

Petrov: Well, first of all, we had the London Gold Pool, established in 1961 to maintain the price of gold stable at $35. But just because the price was fixed legally and maintained by the pool at $35 doesn’t mean that there was no underlying bull market. The mere fact that the London Gold Pool was manipulating gold in the late 1960s, before the pool collapsed in 1968, should tell us for sure that we already had an incipient, ongoing secular bull market.

The other argument is that while the London Gold Pool price was fixed at $35, there were freely traded markets in gold outside the participating countries, and the market price at that moment was steadily rising. So, around 1968 we had a two-tiered gold market: the fixed government price at $35 and the free-market price—and these two prices were diverging, with the free price moving steadily higher and higher.

L: Do you have data on that? I never thought about it, but surely the gold souks and other markets must have been going nuts before Nixon took the dollar completely off the gold standard.

Petrov: Yes. There have been and still are many gold markets in the Arab world, and there have been many gold markets in Europe, including Switzerland. Free-market prices were ranging significantly higher than the fixed price: up to 10, 20, or 30% premiums.

There’s also a completely different way to think about it: in order to time gold secular bull and bear markets properly, it would make the most sense that they would be the inverse of stock market secular bull and bear markets. Thus, a secular bottom for gold should coincide with the secular top for stocks. And based on the work of many stock market analysts, it is generally accepted that the secular bear market in stocks began in 1966 and ended in 1980 to 1982. This again suggests to me that it would make a lot of sense to use 1966 for dating the beginning of the gold bull market.

L: Understood. On this subject of dating markets, what is it that makes you think this one’s going to be a 25-year cycle? That’s substantially longer than the last one. We have a different world today, sure, but can you explain why you think this cycle will be that long?

Petrov: Well, based on all the types of analyses I use—cyclical analysis, behavioral analysis, portfolio analysis, fundamental analysis, and technical analysis—this bull market is developing a lot slower, so it will take a lot longer.

The correction from 1973 to 1975 was the major cyclical correction of the last gold bull cycle, from roughly $200 down to roughly $100. Back then, it took from 1966 to 1973—about six to seven  years—for the correction to begin. This time, it took roughly 11 years to begin, so I think the length of this cycle could be anywhere between 50 and 60% longer than the last one.

Let’s clarify this, because it’s very important for gold bulls who are suffering through the pain of correction now. If we are facing a 50-60% extended time frame of this cycle and the major correction in the previous bull market was roughly two years, we could easily have the ongoing correction last 30 to 35 months. Given the starting point in 2011, the correction could last another six, eight, or ten more months before we hit rock bottom.

L: Another six to ten months before this correction hits bottom is definitely not what gold investors want to hear.

Petrov: I’m not saying that I expect it, but another six to ten months should not surprise us at all. A lot of people jumped on the gold bull market in 2008, 2009, 2010, 2011, and these people haven’t given up yet. Behaviorally, we expect that these latecomers—maybe 80-90% of them—should and would give up on gold and sell before the new cyclical bull resumes.

L: Whoa—now that would be a bloodbath. Can we go back to your version of fundamental analysis for a moment and compare gold to other metrics? You mentioned that gold is still relatively undervalued in terms of houses and stocks and some things, but I’ve heard from other analysts that it’s relatively high compared to other things—loaves of bread, oil, and more.

Petrov: Let’s take oil, for example. We have a very stable long-term ratio between oil and silver, and that ratio is roughly one to one. For a long time, silver was about $1.20, and oil was roughly $1.20. At the peak in 1980, silver was about $45, and oil was about $45. Right now, silver is four to five times undervalued compared to oil, so in terms of oil, I would disagree for silver. The long-term ratio of gold to oil is about 15 to 20, depending on the time frame, so gold may not be cheap, but it’s not overvalued relative to oil either.

But suppose gold were overvalued relative to other commodities—which I doubt, but even if we suppose that it’s correct, it simply doesn’t mean that gold is generally overvalued. The other commodities could be even more—meaning 10, 15, 20 times—undervalued relative to the stock market, or real estate, or bonds. There is no contradiction. In fundamental analysis, it is illegitimate to compare gold, which is largely viewed as a commodity, to other commodities. We should compare it as one asset class against other asset classes.

For example, we could compare gold relative to real estate. By this measure, it is easily five to ten times undervalued. Separately, we could evaluate it relative to stocks. When you compare gold to stocks in terms of the Dow/gold ratio, it’s easily five to ten times undervalued. Separately again, we could evaluate it relative to bonds, but the valuation is much more complicated, because we need to impute a proper inflation-adjusted long-term yield, so it’s better not to get into this now. And finally, we could evaluate it separately against currencies. More on that later.

Now, I believe that when this cycle is over, we are going to reach a Dow/gold ratio far lower than in previous cycles, which have ended with a Dow/gold ratio of about 2:1 (two ounces of gold for one unit of Dow). This time, we are going to end up with a ratio of 1:2—one ounce of gold is going to buy two units of Dow. So, if the ratio right now is about 8:1, I think gold could go up 16 times relative to the stock market today.

L: That’s quite a statement. Government intervention today is so extreme and stocks in general seem so overvalued, I can believe the Dow/gold ratio could reach a new extreme—but I have to follow up on such an aggressive statement. What do you base that on? Why do you think it will go to 1:2 instead of 2:1?

Petrov: If I remember correctly, we had a 2:1 ratio during the first bottom in 1932; the Dow Jones bottomed out at $42 and gold was roughly about $20 before Roosevelt devalued the dollar. That was also the beginning of the so-called “paper world,” when we embarked on the current paper cycle.

The next cycle bottomed in 1980; gold was roughly 850 and the stock market was roughly 850, yielding a ratio of 1:1. Now, if we look at it in terms of the “paper” supercycle, beginning in the early 20th century and extending to the early 21st century, you can draw a technical line of support levels for the Dow/gold ratio. If you do this, you end up with Dow/gold bottoming at 2:1 (in 1932), then at 1:1 (in 1980), and you can project the next one to bottom at 1:2.

Another way to think about it is that we are currently in a so-called supercycle—whether it’s a gold supercycle or a commodity supercycle—and this supercycle should last 50 to 70% longer than the previous one. It will overcorrect for the whole period of paper money over the last 80 years.

From a behavioral perspective, I could easily see people overreacting; we could easily see that at the peak we’re going to have a major panic with overshooting. I expect the overshooting to be roughly proportional to the length of the whole corrective process.

In other words, if this cycle is extended in time frame, we would expect the overshooting of the Mania Phase to be significantly larger. It should be no surprise, then, if we get a ratio of 1:1.5 or 1:2, with gold valued more than the Dow.

L: That’s a scary world you’re describing, but the argument makes sense. How many cycles do you have to base your cyclical analysis on, to be able to say that the average Mania Phase is 15% of the cycle?

Petrov: Well, gold is the most complicated investment asset. It is half commodity, and it behaves as a commodity, but it’s also half currency. It’s the only asset that belongs in two asset classes, properly considered to be a financial asset (money) and at the same time a real asset (commodity). So, even though gold prices were fixed in the 20th century, you can get proper cycles for commodities over the time period and include gold in them. If you look into commodity cycles historically, there are four to five longer (AKA Kondratieff) commodity cycles you can use to infer what the behavior for gold as a commodity might be.

L: So would it be fair, then, to characterize your projections as saying, “As long as gold is treated by investors as a commodity, then these are the time frames and the projections we can make”?

Petrov: Right.

L: But if at some point the world really goes off the deep end and the money aspect of gold comes to the forefront—if people completely lose confidence in the US dollar, for example—at that point, the fact that gold is a commodity would not be the main driver. The monetary aspect of gold would take over?

Petrov: No, not exactly, because you will still have a commodity cycle. You will still have oil moving up. Rice will still be moving up, as will wheat, all the other commodities pushing higher and higher, and they will pull gold.

Yet another important tangent here is that in commodity bull markets, gold is usually lagging in the early stages. In the late stages of a commodity bull market, as gold becomes perceived to be an inflation hedge, it begins to accelerate relative to other commodities. This is yet another very good indicator that tells me that we are still in the middle of a secular bull market in gold. In other words, because gold is not yet rapidly outstripping other commodities like wheat, or copper, or crude oil, we’re not yet in the late stages of the gold bull market.

L: That’s very interesting. But if I remember the gold chart over the last great bull market correctly, just before the 1973-1976 correction, there was quite an acceleration, such as you’re describing—and we had one like it in 2011. Gold shot up $300 in the weeks before the $1,900 peak.

Petrov: Absolutely correct. This acceleration before the correction is exactly what tells me that the correction we’re in now is a major cyclical correction, just like in the mid-1970s. The faster the preceding acceleration, the longer the ensuing correction. This relationship is what tells me that this correction will be very long and painful. Yet another indicator. Everything fits in perfectly. All of these indicators confirm each other.

L: Could you imagine something from the political world changing or accelerating this cycle? If the politicians in Washington are stupid enough to profoundly shake the faith in the US dollar that foreigners have, could that not change the cycle?

Petrov: Yes, that’s a possibility. This is exactly what a gray swan is; a gray swan is an event that is not very likely, that is difficult to predict, but is nonetheless possible to predict and expect. One example of a gray swan would be a nuclear war. It’s possible. Another could be a major currency war, à la Jim Rickards. There are a number of gray swans that could come at any time, any place, accelerating the cycle. It’s perfectly possible, but not likely.

Now, going back to your question about monetizing or remonetizing gold—the monetary aspect of gold taking over that you mentioned. The remonetization of gold wouldn’t short-circuit the commodity cycle; the commodity cycle would continue. Actually, you’d expect the remonetization of gold to go hand in hand with a commodity bull market.

You also need to understand that the remonetization of gold would not be a single event, not a point in time. Remonetization of gold is a process that could easily last five to ten years. No one is going to declare gold to be the monetary currency of the world tomorrow.

What will happen is that countries like China will accumulate gold over time. Over time, gold will be revalued significantly higher, and there will be global arrangements. The yuan will become a global currency, used in international transactions. Many institutional arrangements need to be in place around the world, including storage, payments, settlements, and some rebalancing between central banks, as some central banks have way too little monetary gold at the moment.

L: I agree, and see some of those things happening already. But I don’t expect any government to lead the way to a new gold standard. I simply expect more and more people to start using gold as money, until what governments are left bow to the reality. I believe the market will choose whatever works best for money.

Petrov: Indeed, and that’s a process that will take many years. Getting back to gold in a portfolio context, relative to currencies, gold is extremely cheap. Historically, gold will constitute about 10-15% of the global investment portfolio relative to the sum of real estate, stocks, bonds, and currencies. Estimates suggest that right now gold is valued at roughly about one percent of the global investment portfolio.

L: That implies… an enormous price for gold if it reverts to the mean. Mine production is such a tiny amount of supply; the only way for what you say to come true is for gold to go to something on the order of $20,000 an ounce.

Petrov: Correct. $15,000 to $20,000. That’s exactly what I’m saying.

In a portfolio context, gold is undervalued easily 10 to 15 times. On a fundamental basis, gold is undervalued relative to stocks 10 to 15 times, and relative to real estate about 10 times. When we use the different types of analyses, each one of them separately and independently tells us that we still have a lot longer to go: about six to 10 more years; maybe even 12 years. And we still have a lot higher to rise; maybe 10-15 times.

Not relative to oil, nor wheat, but gold can easily rise 10 to 15 times in fiat-dollar terms. It can rise 10 times in, let’s say, stock market terms. And yes, it can go 10 to 15 times relative to long-term bonds. (We have to differentiate short-term bonds and long-term bonds, as bond yields rise to 10 or 15 percent.)

So, portfolio analysis and fundamental analysis tell me that we still have a long way to go, and cyclical analysis tells me we are roughly mid-cycle. It tells me that from the beginning of the cycle (2000) to the correction (2011) we were up almost eight times, from the bottom of the current correction (2013-2014) to the peak in another six to ten years, we are still going to rise another 10 times.

Whether it’s eight years or 12, it’s impossible to predict; whether it’s eight times or 12, again, impossible to predict; but the order of magnitude will be around 10 times current levels.

L: You’ve touched on technical analysis: do you rely on it much?

Petrov: Well, yes, but in this particular case, technical subsumes or incorporates a great deal of cyclical analysis. It’s very difficult to use technical analysis for secular cycles. We usually use technical analysis for daily (short-term) cycles, or weekly (intermediate) cycles, or monthly (long-term) cycles. We use them as described in the classic book Technical Analysis of Stock Market Trends by Edwards, Magee, and Bassetti.

If we apply technical analysis to our current correction, it doesn’t appear to be quite over yet. It could still run another three to six months, possibly nine months. But when we talk about the secular cycle, we need to switch from technical to long-term cyclical analysis.

L: Okay. Let’s change topic to the flip side of this. Can you summarize your view of the global economy now? Do you believe that the efforts of the governments of the world to reflate the economy are succeeding? Or how does the big picture look to you?

Petrov: The big picture is an austere picture. Reflation will always succeed until it eventually fails. The way I see it, the US is going down, down, and down from here—the US is a very easy forecast. The UK is also going down, down, and down from here—another easy forecast. The European Union is going to be going mostly down. However, most of Asia is in bubble mode. Australia is in a major bubble that’s in the process of bursting or is about to do so; it’s going to go through a major depression. China is a huge bubble, so China will get its own Great Depression, which could last five to ten years. This five- to ten-year China bust would fit within my overall 10-year forecast for the remainder of the secular bull market in gold.

I see a lot of very inflated and overheating Asian economies. I was in Hong Kong in January, and the Hong Kong economy is booming to the point of overheating. It’s crazy. I was in Singapore just three months ago, and the Singapore economy is clearly overheating. Last year I was teaching in Macao for a few months, and the economy is overheating there as well—real estate is crazy; rents are obscene; five-star hotels are full and casinos crowded.

Right now I’m teaching in Thailand. It’s easy here to see that people are still crazy about real estate—everyone’s talking about real estate; we still have a peaking real estate bubble here. Consumption is going crazy in the whole society, and most things are bought on installment credit.

Another easy forecast is Japan; it too will be going down, down, and down from here. Japan has nowhere to go but down. It’s been reflating and reflating, and it hasn’t done them any good. Add all this up and what I actually see is a repeat of the 1997 Asian Crisis, involving most Asian countries.

L: So your overall view is that reflation works until it doesn’t, and you believe that on the global scale we’re at the point where it won’t work anymore?

Petrov: Not exactly. We’re at the point where reflation doesn’t work anymore for the US, no matter how hard it tries. It doesn’t work for the UK; not for most of Europe; not for Japan—no matter how hard they try. But reflation is still working in China. Reflation is still working for most of Asia and Australia. As I see it, Asia is overheating significantly, based on that global reflation.

Even the Philippines was overheating when I was there two years ago. Malaysia is overheating big time—consumerism at its finest—and I’m hearing stories about Indonesia overheating until recently as well. Maybe we have the first sounds of that bubble bursting in countries like India, Malaysia, and Indonesia. The Indian currency is weakening significantly; so is the Malaysian currency. If I remember correctly, the Indonesian currency is weakening significantly, and I know well that their money market rates are skyrocketing in the last few months.

So we may have now the beginning of the next Asian Financial Crisis. Asia is still going to be able to reflate a little longer, another year or two, maybe three. It’s very hard to say how long a bubble will last as it is inflating. The same thing for Australia; it will continue to reflate for a few more years. So for Asia and Australia, we are not yet at the point when reflation will no longer work. Very difficult to say when that will change, but we’re there for the US, UK, Europe, and Japan.

L: Why won’t reflation work for the US and its pals?

Petrov: Reflation doesn’t work because of the enormous accumulated economic distortions of the real sector and the labor market. All the dislocations, all the malinvestments have accumulated to the point where reflation has diminishing returns.

Like everything else, inflation and reflation have diminishing returns. The US now needs maybe three, four, or five trillion annually to reflate, in order to work. With each round, the need rises exponentially. The US is on the steep end of this exponential curve, so the amount needed to reflate the economy is probably way more than the tolerance of anyone around the world—confidence in the US dollar won’t take it. The US is at the point where it is just not going to work.

L: I understand; if they’re running trillion-dollar deficits now and the economy is still sluggish, what would they have to do to get it hopping again, and is that even possible?

Petrov: Correct. The Fed has tripled its balance sheet in a matter of three to four years—and it still doesn’t work. So what can they do? Increase it 10 times? Or 20 times? Maybe if they increased it 10 or 20 times, they could breathe another one or two or three years of extra life into the economy. But increasing the Fed’s balance sheet 10 or 20 times would be an extraordinarily risky enterprise. I don’t think that they will dare accelerate that much that fast!

L: If they did, it would trash the dollar and boost gold and other commodities.

Petrov: Yes, that’s clear—the bond and the currency markets would surely revolt. That’s a straight shot there. The detailed ramifications for commodities, if they decide to go exponential from here, are a huge subject for another day. For now, we can say that they have been going exponential over the last three to four years, and it hasn’t worked.

Also, we know well from the hyperinflation of the Weimar Republic that they went exponential early on, and it stopped working in 1921. For two more years, they went insanely exponential, and it still didn’t work. I think the US is at or near the equivalent of 1921 for Weimar.

L: An alarming thought. So what happens when Europeans can no longer afford to pay the Russians for gas to heat their homes? Large chunks of Europe might soon need to learn Russian.

Petrov: Not necessarily, but Europe is going to become Russia’s best friend and geopolitical ally. The six countries in the Shanghai Co-op are already close allies of Russia. So is Iran. So Russia has seven or eight very strong, close allies. European countries will, one by one, be joining Russia. Think about it from the point of view of Germany: why should Germans be geopolitical allies of the US or the UK? Historically, it doesn’t make any sense. It makes a lot more sense for them to join the Russians and the Chinese and to let the Americans and British collapse. So that’s what I expect, and Russia will use all its energy to dictate geopolitics to them.

L: Food for thought. Anything else on your mind that you think investors should be thinking about?

Petrov: Well, it’s fairly straightforward. First, I do expect that the stock market is going to lose significant value over the next five to ten years. Second, I believe that real estate is still grossly overvalued; as interest rates eventually rise, real estate will fall hard—overall, it will not hold value well. Third, I also believe that bonds are extremely overvalued and that yields are extremely low. I expect interest rates to begin to rise and bond prices to fall, so I strongly discourage investors from staying in bonds. Finally, I expect that governments will continue to inflate, even though it doesn’t work, and that currencies will devalue.

I strongly encourage investors to stay out of all four of these asset classes. Investors should be staying well diversified in commodities. They shouldn’t ignore food—agriculture. They shouldn’t ignore energy. But their portfolios should be dominated by precious metals.

L: That’s what Doug Casey says, and that the reason to own gold is for prudence. To speculate for profit, we want the leverage only the mining stocks can give us.

Thank you very much, Krassimir; it’s been a very interesting conversation. We shouldn’t let this go another seven years before we talk again.

Petrov: [Laughs] Okay. Hopefully a lot sooner.

Hopefully you’ll be prepared when the gold bull market reaches the Mania Phase… and hopefully you are taking advantage of the low gold price to stack up on your “hard money” safety net. Find out the best ways to invest in gold, when to buy, and what to watch for—in Casey’s 2014 Gold Investor’s Guide. Click here to get your free special report now.

Why Don Coxe Expects Gold to Soar on Good Economic News

This guest editorial is from The Gold Report

The standard wisdom on gold is that it does well in times of economic bad news such as in the 1970s, a period of stagflation and recessions, when the yellow metal rose from $35/oz to peak at $850/oz in 1980. But this time, Don Coxe, a portfolio adviser to BMO Asset Management, believes, things are different. In this interview with The Gold Report, Coxe explains why gold will rise when the economy improves.

The Gold Report: Are the days of easy money drawing to a close?

Don Coxe: I don’t think so. Even if the Federal Reserve begins to taper quantitative easing, the front of the curve is going to stay at zero interest rates. A trillion dollars is going through the Fed’s balance sheet, which works its way through the system. As long as the Fed keeps interest rates at zero, it’s easy money.

TGR: Will overt monetary inflation return any time soon?

DC: It will return when we have sustained economic growth. The Eurozone has been the big drag. It is definitely stronger than it was a year ago. The Eurozone has lots of problems, but it is experiencing economic growth despite the European Central Bank reducing its balance sheet in the last 12 months by almost exactly the same percentage amount that the Fed increased its balance sheet. This says that it has lots of firepower if it needs it. In addition, the Eurozone government deficits are lower than ours in terms of percentage of GDP. The Eurozone actually, despite all its highly publicized problems, has improved its financial shape relative to ours.

Also, in the last 12 months, Japan, the world’s third-biggest economy, has gone from negative growth to strongly positive growth. It is doing that by printing yen at a prodigious rate. The days of easy money are going strong.

TGR: If inflation returns, will it first appear in goods or services?

DC: In goods. If I had to pick the one point at which we’ll start to see the change, it’s when the razor-thin inventory-to-sales ratio comes under strain. Corporations are controlled by people who learned in business school over the last 20 years that the first thing to manage is inventories. This way they don’t have to worry about prices going up and don’t use corporate cash to finance an inventory that may decline in value. Therefore, when things change, it will show up in the pressure that comes because companies have so little inventory on hand. Corporations will decide that they’ve got to invest in more inventory because they’ve got more demand.

TGR: Do you think that will shake loose the vast amount of capital that’s being retained by the multinationals?

DC: It will shake loose some of it, but the big thing is it will come because prices are starting to rise. The two reinforce each other.

TGR: What do increases in monetary inflation and capital growth mean for gold?

DC: Gold rose along with the Fed balance sheet for years. The two have decoupled in the last two years. I believe the reason is people have just thrown in the towel that there will ever be inflation. If you’re “Waiting for Godot,” at some point you can reach the conclusion that Godot may never come.

TGR: Should investors bet on gold’s return to previous highs or something in that direction?

DC: I don’t think we’re going to see anything like the double-digit inflation that we saw back in the 1970s. The big difference was the tremendous power of unions then. They all had cost of living adjustments in their contracts; the Consumer Price Index (CPI) would rise in a quarter, then automatically wage rates would increase, and the two fed off each other. The weakened power of unions today has meant that we don’t have an automatic reinforcement right at the core of the system.

TGR: Let’s talk about monopolies and competition and why does the focus of big investors shift from growth to income?

DC: I’m not convinced that we’ve got a lot of monopolies out there. OPEC is no longer able to control oil prices, for example, because its share is no longer large enough to give it freedom on pricing. I believe that oil fracking will gradually start spreading from the US to other parts of the world. We don’t have that monopoly, which was the big one back in the 1970s that made it possible for OPEC to quadruple the price of oil. A quadrupling of the price of oil here is impossible because the global economy would collapse with a doubling of oil prices.

TGR: Are companies borrowing money at cheap rates to increase dividends and buy back stock? And, if so, how does that affect the system?

DC: Yes, companies are basically removing from the system what I believe is the core of capitalism, that corporate cash is used to grow a business. Investors pay a high price-earnings ratio for companies because they believe the companies can reinvest that cash and sustain their growth. When we see that corporate cash is being used to buy back stock and pay dividends, the decision-making force in the system becomes stockholders redeploying cash. In the past it was the corporations themselves through their retained earnings and effective reinvestment that drove the system.

If money that people got in dividends was invested in shares of companies that were issuing new stock in order to grow their business, then the whole system would not be losing the money. When you have a system where corporate treasurers do not assume strong future growth and they assume that these zero interest rates are going to continue for a long time, the incentive to retain earnings and plan on capital expenditures (capex) goes away.

Capex is putting money out at great cost, where companies get no immediate returns from it, whether it’s building a new building or opening up a whole area of the country. When you take that out of the system, the result is that you turn the system on its head. It used to be that the companies would, when they had the cash, decide how much was needed for capex; after that they figured out how much they would payout in dividends. The decision makers within the companies are no longer focused on creating overall economic growth through capex and expanding production.

TGR: Are we in a triple-dip or a quadruple-dip recession here?

DC: No, I think we’re coming out of it, but we’ve come out of it at a gigantic cost. The Fed had to quadruple its balance sheet, which raises all sorts of problems. We have no precedent in history of this kind of expansion of the Fed’s balance sheet.

The ratio of paper wealth to GDP is so high at a time when it’s going to be difficult for corporations to expand because, as I said, they will need a large amount of capex to meet rising demand at a time when there’s all that money out there. I would regard that as a virtual guarantee that at some point we’re going to see inflation.

This time inflation won’t come from rising wages. It will come from rising demand and the inability of corporations to swiftly respond to that demand. The technology industry can expand in a hurry because it keeps coming out with new products, but for most of the rest of the economy, it takes a while to build a plant and get the machinery ready and test it out before there actually is any production. That period of time, if you’ve got strong demand because there’s so much paper money, is the moment at which you will see inflation coming.

TGR: How will that affect gold?

DC: It will deal with the problem of faith in gold. When gold tracked the growth in the monetary base, which it did so well, there was a general conviction based on Milton Friedman’s theories that expanding the monetary base too fast eventually translates into inflation. Inflation is harder to stop than it is to just watch start growing.

We will see that interest rates will have to rise because of another group that has not been heard from in a long time: bond vigilantes. They are threatened with extinction. It will be a combination of rising interest rates and rising prices that will get people to say, “Ah ha! Milton Friedman was right after all—if you print the money, eventually you’re going to have the inflation.”

TGR: When you talk about bond vigilantes, are you talking about junk bonds or what’s known as private equity?

DC: The bond vigilantes work primarily on government bonds because they are the ones they can trade most effectively. Junk bonds are a small part of the market. With inflation the bond vigilantes sell off their 30- and 10-year bonds and move down to the 2-year note. At that point the cost of capital for expansion rises through the system because corporations can use short-term cash for some of their work, but they tend to use long-term borrowing from banks and the bond market for major projects. The cost of building those projects increases because of the steep yield curve.

TGR: Do you consider yourself to be a bear or a bull on gold?

DC: I am neutral in the short term. I’m not a bear. I’m a bull in the long term because I believe it’s not a question of if but when all this money printing eventually comes to haunt us. Gold as an asset class is so tiny in relation to the vast expansion of money around the world. With the printing that’s gone on, China has had to expand its renminbi supplies to prevent the currency from soaring relative to the dollar.

TGR: You are appearing at the upcoming Casey Fall Summit. Are you going to talk about gold there and will it be more or less what you just said?

DC: Yes. I am going to point out that the big story for gold is up until now gold has been only a bad news story. The reason why it’s in trouble right now is there always seems to be bad news in terms of inflation. People say if inflation hasn’t come now with the quadrupling of the Fed’s balance sheet, it’s never going to come, and the Fed is going to have to keep on pouring out more money because the economy isn’t growing.

When the economy starts to grow all of a sudden because, as I said earlier, of the inventory cycle, we are going to start to see inflation. Gold will become a good news story in the sense it will be responding to strong economic news at a time of massive liquidity, which translates into inflation. The fact that we’ve had all that money printing, which has only prevented us from going down into a pit, at such time as this actually leads to good economic growth. That is the point at which we’re going to see people wanting to have gold. It’s because we didn’t get the direct pass over of the money printing into rising prices that gave people a loss of faith saying, “Well, if it hasn’t come with quadrupling the Fed’s balance sheet, it’s never going to come.”

TGR: Given that, is it a good idea for investors to buy gold stocks while they’re available at basement prices?

DC: I believe that everybody should have gold insurance now. The question varies from investor to investor. What we have is an extremely high-risk central bank policy in the world, and it’s high risk based on monetarism. I believe monetarism will prove to be right because all past experiments with paper money eventually led to inflation and monetary collapse. At some point the fear of that will come. You need gold for insurance, but this time the payoff will come when the economy improves; in the past when everything was falling all around you, commodity prices were soaring out of sight. We had three recessions in the 1970s and gold went from $35 an ounce to $850. But this time, gold is going to appreciate when we start getting 3% GDP growth.

TGR: Thank you for your insights.

Don Coxe has 40 years of institutional investment experience in Canada and the US. As a strategist and investor, he has been engaged at the senior level in global capital markets through every recession and boom since the onset of stagflation in 1972. He has worked on the buy side and the sell side in many capacities and has managed both bond and equity portfolios and served as CEO, CIO, and research director. From his office in Chicago, Coxe heads up the Global Commodity Strategy investment management team, a collaboration of Coxe Advisors and BMO Global Asset Management. He is advisor to the Coxe Commodity Strategy Fund and the Coxe Global Agribusiness Income Fund in Canada, and to the Virtus Global Commodities Stock Fund in the US. Coxe has consistently been named as a top portfolio strategist by Brendan Wood International; in 2011, he was awarded a lifetime achievement award and was ranked number one in the 2007, 2008, and 2009 surveys.

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What To Think About The Recent Price Of Gold

12 Gold Bugs Bring Christmas Cheer

gold-bugs-chime-in-on-price-of-gold
Gold Bugs – The Only Bug I Like

While the price of gold has languished in a trading range much of the year, leaving some investors scratching their heads, many have been buying – and in some cases, really loading up.

It’s a tad puzzling that gold hasn’t broken into new highs, despite enough catalysts to move a herd of stubborn mules. But that’s the hand we’re dealt right now. We can’t get up from the table until the game reaches its conclusion. Besides, I think the stall in prices is giving us one last window to buy before prices break permanently into higher levels for this cycle.

At least that’s how a number of prominent investors and institutions are viewing the price action right now. Here’s a sampling of this year’s “gold bugs” and what they’ve been doing about precious metals recently.

Jim Rogers, billionaire and cofounder of the Soros Quantum Fund, publicly stated last month that he plans to “sell federal debt and purchase more gold and silver.”

George Soros increased his investment in GLD by a whopping 49% last quarter, to 1.32 million shares. His stake is now worth over $221 million. Many investors don’t realize that he also placed call options on GDX worth $9 million. The most logical explanation is that he thinks gold equities are undervalued and that there’s big money to be made in them within a year.

Marc Faber mocks those claiming gold is in a bubble. “It’s nowhere close to that stage,” he says. And even though he’s already sitting on a huge gain, he won’t take any profits. Why? “I keep a picture of Mr. Bernanke in my toilet, and every time I think about selling my gold, I look at it and I know better!”

Brent Johnson, a San Francisco hedge-fund manager, believed in gold so much that he started his own gold fund, Santiago Capital, earlier this year. His latest video points out that there have been “278 global easing moves in the last 14 months.” How does someone not own gold in that kind of environment?

Don Coxe, a highly respected global commodities strategist, stated at the Denver Gold Forum that “now is the best climate I have ever seen for an increase in gold prices.” He told fund managers, mining analysts, and mining executives to prepare for significantly higher gold prices and thus higher gold-mining-stock valuations. “The opportunities ahead are the best I’ve seen.” He thinks a new gold rush is ahead for gold stocks, and that a “lustrous” rally will occur within a year.

Jeffrey Gundlach, cofounder of DoubleLine Capital, predicts that deeply indebted countries and companies will default sometime after 2013. Central banks may forestall these defaults by pumping even more money into the economy – but at the risk of higher inflation in coming years. He recommends buying hard assets including gold, and also “gold-mining firms because we consider them to be bargains.”

Rob McEwen, CEO of McEwen Mining and founder of Goldcorp, is buying precious metals because he believes gold will someday hit $5,000 and silver $200.

Savneet Singh, a former investment analyst at Morgan Stanley, was frustrated with the options available to acquire physical gold in an allocated, whole-bar format outside the banking system. He started Gold Bullion International, the platform service used by the Hard Assets Alliance, a service that virtually does away with the need to buy GLD.

This is only a handful of individual investors who have made recent news with their bullion buying. But institutions, governments, and others are participating, too…

Central Banks

  • The South Korean central bank added 14 tonnes (approximately 450,000 troy ounces) of gold in November, and now holds six times more than back in June of 2011. “Gold is a physical, safe asset, and allows us to deal with changes in the international financial environment more effectively,” bank officials said.
  • Brazil bought 18.9 tonnes (607,650 ounces) in September and October alone. It will likely buy more, since gold still accounts for only 0.8% of its reserves.
  • Paraguay bought 7.5 tonnes (241,130 ounces) in July.
  • Turkey imported 4.2 tonnes (135,000 ounces) of gold in November. It has bought 117.2 tonnes (3.7 million ounces) so far this year, almost double last year’s purchases.
  • Central banks around the world bought a total of 351.8 tonnes of gold (11.3 million ounces) in the first nine months of 2012, up 2% from a year ago.
  • Even Argentina added 7 tonnes last year (225,000 ounces), and Colombia 2.3 tonnes (almost 74,000 ounces).
  • And of course there’s China. While nothing official has been announced by its central bank, its imports and buying habits are mind-boggling.

These data suggest in and of themselves that dips in the gold price are likely being bought – and will continue to be bought – by central banks. They’re not exactly short-term traders. Remember, central banks were net sellers as recently as 2009, so this reversal will likely play out for years.

India. I tire of the reports that proclaim something like, “Indian buying dropped this month!” Let’s be clear about India and gold: Imports have more than doubled in three years (through 2011), and investment demand has climbed almost fivefold. And all this occurred while prices were rising and from a nation that already has a strong cultural predisposition towards the metal. Further, silver demand is taking off: sales have jumped 24% this year over last.

There is some government interference, but no slump in demand in India. This trend will continue and may even strengthen when inflation begins making front-page headlines.

Germany. A precious-metals group recently reported that Germans are increasingly buying gold because of fears about economic uncertainty, and that a third of citizens are now considering gold as part of their investments. “There has been a significant increase in demand in recent months because of worry about actions taken by the European Central Bank and US Federal Reserve, as the two central banks seek to counter the euro zone crisis and slow US economic growth.”

Commercial Banks

  • Morgan Stanley’s preferred metal exposure for 2013 is gold, though the company expects silver to outperform it. The bank stated that it believes “nothing has changed with gold’s fundamental thesis: QE 3 (and 4…) and similar commitments from the ECB and BoJ; low nominal and negative real interest rates; ongoing geopolitical risk in the Middle East; and mine supply issues.”
  • ScotiaMocatta stated that it will “not be surprised to see prices reach $2,200/oz.” Why? “One of the main reasons we are still bullish is because of the mess the Western world is in. Europe has a debt problem that is proving all but impossible to solve, and all efforts to date have revolved around throwing more money at the problem to avoid the monetary system from breaking down… that should be reason enough to be bullish.”
  • Deutsche Bank released a new report essentially declaring that gold is money. “We see gold as an officially recognized form of money for one primary reason: it is widely held by most of the world’s larger central banks as a component of reserves. We would go further, however, and argue that gold could be characterized as ‘good’ money, as opposed to ‘bad’ money which would be represented by many of today’s fiat currencies.”
  • Bank of America Merrill Lynch says gold will hit at least $2,000 by the end of 2013.
  • JP Morgan now accepts physical gold as collateral.
  • Another source of demand from banks could be the change in Basel III regulations. If you haven’t read about it, gold could get promoted to Tier 1 status, meaning it would be considered a “zero-percent risk weighted item.”Eric Sprott recently wrote, “If the Basel Committee decides to grant gold a favourable liquidity profile under its proposed Basel III framework, it will open the door for gold to compete with cash and government bonds on bank balance sheets – and provide banks with an asset that actually has the chance to appreciate. Given that US Treasury bonds pay little to no yield today, if offered the choice between the ‘liquidity trifecta’ of cash, government bonds orgold to meet Basel III liquidity requirements, why wouldn’t a bank choose gold?”We’ll be watching the news on this topic.

None of these parties think the gold bull market is over, nor the price too high. They recognize the implications of a world floating on fiat currencies, and that government “solutions” to debt and deficit spending will significantly – perhaps catastrophically – dilute the value of currencies, the fallout of which has yet to materialize. As for me, I think that the longer the malaise continues, the more likely the breakout is to be both sudden and dramatic.

We can all speculate about when the next leg up for gold will kick in, but the point for now is to take advantage of the weakness, like many of these gold bugs. When the price breaks out of its trading range, are you sure you won’t wish you’d bought a little more?

I say give you and your loved ones a lasting Christmas gift and call your favorite bullion dealer.

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Your Window to Buy Gold Below $1,700 Is Closing

By Jeff Clark, Casey Research

Even the hardiest investors have been lamenting that gold prices have been stuck in a rut for a long time. Others with less experience have watched the market waiting for something to happen….

And as always, many bailed out of the market entirely, licking their wounds.

But some, including me, have been stocking up.

We’re convinced prices won’t stay down forever.

In fact, I think there’s a good reason to buy gold if you can, and as soon as possible.

Here’s why:

Based on the data I chart below, I believe the window of time to buy gold for less than $1,700 an ounce is very limited.

I examined gold’s three largest corrections since the bull market began in 2001, including how long it took to recover from those corrections and establish new highs.

The conclusion that emerged is that the current lull in gold prices will almost certainly end soon, if it hasn’t already.

Gold set a record on September 5, 2011 at $1,895 an ounce (London PM Fix) and to date has fallen as low as $1,531 (December 29, 2011), a decline of 19.2%. Gold has tested that level several times since but never broke below it.

In order to determine how long it might take to breach $1,895 again, I measured the time it took to mount new highs after big corrections in the past.

The following chart details the three largest corrections since 2001, and calculates how many weeks it took the gold price to a) breach the old high, and b) stay above that level.

gold's biggest corrections and recoveries

In 2006, after a total decline of 22.6%, it took a year and four months for gold to surpass its old high. After the 2008 meltdown, it was a year and six months later before the metal hit a new record. The 16.2% drop in 2003 lasted seven months, and another two months before the price stayed above it.

You can see that our correction has lasted just shy of a year. If we matched the recovery time of 2006, gold would hit a new high on Christmas Eve (Merry Christmas!).

But here’s the thing: that’s how long it would take gold to breach $1,900 again – it will take a couple months or more for the price to work up to that level, meaning the remaining time to buy gold under $1,700 will likely be measured in days or weeks, not months.

This is bolstered by the fact that the price moved up strongly last week.

And just as importantly, we’re on the doorstep of the seasonally strongest month of the year.

This is an educated guess, of course, but what the data make clear is that all corrections eventually end – even the bloodbath in 2008.

The current lag will come to an end too, and we’re certainly closer to the end of this corrective period than the beginning.

This has direct investment implications.

First, once gold breaches its old high, you’ll probably never be able to buy it at current prices again in this cycle.

That’s a rather obvious statement, but let it sink in.

The next few days or weeks will likely be the very last time you can buy gold below $1,700. You’ll have to pay a higher price from then on.

And think about this: it’s entirely possible that by this time next year you will never again be able to buy gold for less than $2,000 an ounce – unless maybe it’s in “new dollars” or some other currency that circulates with fewer zeros on the notes.

Second, the data can help you ignore the noise about gold’s bull market being over and other nonsense spewed from mainstream media types.

If gold doesn’t hit $1,900 until December, you’ll know this is simply normal price behavior and that they’re overlooking basic patterns in the data. And when the price nears that level again and they’re caught off guard by it, you’ll already be positioned.

There are three intelligent ways to buy gold, understanding them means you are there in good time for the turn around.

Regardless of the date, we’re confident that a new high in the gold price will come.

The highs will come because many major currencies are unsound, overburdened with debt, and being actively diluted by governments.

Indeed, the ultimate high could be frighteningly higher than current levels.

As such, we suggest taking advantage of prices that won’t be available indefinitely. I think we all need some of nature’s cure for man’s monetary ills.

The window of time to buy gold at current prices is closing. I suggest taking advantage of the sale while you still can.

When Will Gold Reach a New High?

By Jeff Clark, Casey Research

Some investors are frustrated and a few are worried that gold seems stuck in a rut. This stall in price has happened before, of course, but since 2001 it’s always eventually powered to a new high. Unless one thinks the gold bull market is over, it’s natural to wonder how long might we have to wait before seeing another new high.

Absent some sort of global shock that sparks another rush into gold (easily possible in today’s climate), I think the answer may lie in examining the size and length of past corrections and how long it took gold to reach new highs afterward.

It makes sense that big corrections would take longer to reach new highs than small ones, but I wanted to confirm that assumption with the data. I also wanted to determine if there were any patterns in past recoveries that would give us some clues that we can apply to today.

Gold set a record on September 5 at $1,895 an ounce (London PM Fix) and to date has fallen as low as $1,531 (December 29), a decline of 19.2%. In order to determine how long it might take to breach $1,895 again, I measured how long it took new highs to be mounted after big corrections in the past.

The following chart details three large corrections since 2001, and calculates how many weeks it took the gold price to a) breach the old high, and b) stay above that level.

As you can see, it took a significant amount of time for gold to forge new highs after big selloffs. And yes, the bigger the correction, the longer it took.

In 2006, after a total fall of 22.6%, it took a year and four months for gold to surpass its old high. After the 2008 meltdown, it was a year and six months later before gold hit a new record.

Our recent correction more closely resembles the one in 2003. After a 16.2% drop, gold matched the old high seven months later. It took another two months to stay above it.

So when do we reach a new high in the gold price?

Let’s apply the same ratio from the 2003 correction and recovery: If it took 29 weeks and four days to reach a new high after a 16.2% correction, a 19.2% pullback would take 35 weeks and 0 days. That works out to Monday, May 7, 2012.

An exact date is pure conjecture, of course. On one hand, gold could drop below the $1,531 low if the need for cash and liquidity forces large investors to resume selling. On the other hand, Europe and/or the US could resume money printing on a large scale and send gold soaring overnight. The point of the data is that it signals we shouldn’t be too surprised if we don’t hit $1,900 for another four months yet. And if it takes another two months or so to stay above it.

Think that’s too long? There are some important reasons to not let it discourage you…

Once gold breaches its old high, you’ll probably never be able to buy it at current prices again.

That’s a rather obvious statement, but let it sink in. Buying now at $1,600 and then watching the price fall to, say, $1,500, wouldn’t be fun – but it’ll probably hit $2,000 or higher before the year’s over, never to visit the $1,600s again this cycle. If that turns out to be correct, the next four months will be the very last time you can buy at these levels. You’ll have to pay a higher price from then on.

Look at it this way: If the “rebound ratio” is similar to the one in 2003, you have four months and counting to buy whatever gold you want before it’s no longer on sale. It’s entirely possible that by this time next year you will never again be able to buy gold for less than $2,000 an ounce – unless maybe it’s in “new dollars” or some other currency that circulates with fewer zeros on the notes.

The data can also help you ignore the noise about gold’s bull market being over and other nonsense spewed from mainstream media types. If gold doesn’t hit $1,900 until May, you’ll know this is simply normal price behavior and that they’re overlooking basic patterns in the data. And when September rolls around – seasonally the strongest month of the year for gold – and the price is climbing relentlessly and they’re caught off guard by it, you’ll already be positioned.

Regardless of the date, we’re confident that a new high in the gold price will come at some point, because many major currencies are unsound and overburdened with debt – and they’re all fiat and subject to government tinkering and mismanagement. Indeed, the ultimate high could be frighteningly higher than current levels. As such, we suggest taking advantage of prices that won’t be available indefinitely.

After all, you don’t want to be left without enough of nature’s cure for man’s monetary ills.

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Why Has Gold Been Down?

By Jeff Clark, Casey Research

After all, in spite of some short-term fixes, there remains no real resolution to the sovereign debt issues in many European countries. We’re certainly not spending less money in the US, and now we’re bailing out Europe via currency swaps with the European Central Bank. Shouldn’t gold be rising?

Yes, but nothing happens in a vacuum. There are some simple explanations as to why gold remains in a funk.

  1. The MF Global bankruptcy, the seventh-largest in US history, forced a high degree of liquidation of commodities futures contracts, including gold. Many institutional investors had to sell whether they wanted to or not. This is similar to why big declines in the stock market can force funds and other large investors to sell some gold to raise cash for margin calls or meet redemption requests.
  2. The dollar has been rising. Money fleeing the Eurozone has to go somewhere, and some of it is heading into US bonds, which means first converting the foreign currency into dollars.
  3. It’s tax-loss selling season, something that’s also impacting gold stocks. Funds and individual investors are selling underwater positions for tax purposes. Funds also sell their big winners to lock in gains for the year and dress up quarterly reports.

These forces have all acted to depress the gold price.

Notice I didn’t say that gold has suddenly become viewed as a poor safe haven. Nor that many of the world’s major currencies are no longer being debased… nor that global sovereign debt issues are resolved… nor that interest rates are positive. No, the fundamental reasons for owning gold are still intact. So don’t let the selling depress you.

Let’s put gold’s recent price action into perspective. It peaked on September 5 at $1,895 (London PM Fix) and has thus been in decline for about three months. Yet look at the bull market’s biggest three-month correction in relationship to the ultimate trend.

Gold fell 20% from August 1 to October 31, 2008, the biggest rolling three-month decline in our current bull market. And yet, it eventually powered much higher, in spite of many investors and industry experts thinking it had peaked at the time. The final quarter of 2011 ended down 5.5% over the previous quarter.

The point? Don’t confuse short-term volatility with long-term forces. The investor who looks only at today’s headlines is prone to making ill-timed decisions.

I realize that prices could trade lower – but this is why we keep a high level of cash. By the time this bull market is over, our current pullback will probably look something like the small red box in the chart above, with far higher prices in the intervening months and years.

Which makes current prices a buying opportunity. I don’t know if we’re at the bottom of our recent decline or not – but I do know where gold and silver are ultimately headed Casey Research’s Chief Economist and Editor of The Casey Report, Bud Conrad, is convinced gold will hit $2,000 in the first half of this year. If he is right, the opportunity to buy at today’s levels will be fleeting.

In the meantime, stay the course with your precious metals investments, no matter how the short-term picture looks. Gold stocks remain undervalued, and these are turbulent times. They appear to be far from over. Gold remains the #1 asset protector.

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Gold At $1600: Are You A Buyer Or A Seller?

Are You Tempted to Sell, or Eager to Buy?

By Jeff Clark, Casey Research

It wasn’t a fun week for gold. By the close on Friday, the metal was down 6.7% (based on London PM fix prices), the biggest weekly decline since September. It got downright irritating when the mainstream media seemingly rejoiced at gold’s decline. Economist Nouriel Roubini poked fun at gold bugs in a Tweet. Über investor Dennis Gartman said he sold his holdings. CNBC ran an article proclaiming gold was no longer a safe-haven asset (talk about an overreaction).

While the worry may have been real, let’s focus on facts. Have the reasons for gold’s bull market changed in any material way such that we should consider exiting? Instead of me providing an answer, ask yourself some basic questions: Is the current support for the US dollar an honest indication of its health? Are the sovereign debt problems in Europe solved? How will the US repay its $15 trillion debt load without some level of currency dilution? Is there likely to be more money printing in the future, or less? Are real interest rates positive yet? Has gold really lost its safe haven status as a result of one bad week?

And one more: What is the mainstream media’s record on forecasting precious metals prices?

Our take won’t surprise you: not one fact relating to the trend for gold changed last week. We remain strongly bullish.

So why did gold, silver, and related stocks fall so hard?

The reasons outlined in this month’s BIG GOLD are still in play (the MF Global fallout, a rising dollar, year-end tax-loss selling, and the need for cash and liquidity to meet margin calls or redemption requests). Last Wednesday’s 3.5% fall took on a life of its own, selling begetting selling, fear adding to fear (especially the case with gold stocks). None of these reasons, however, have anything to do with the fundamental factors that ultimately drive this market. Once those issues shift, then we’ll talk about exiting.

So, should we buy now? Is the bottom in?

Let’s take a fresh look at gold’s corrections and compare them to the recent one. I’ve updated the following chart to include the recent selloff.

[How do I calculate the data? I look for the periods in every annual gold chart that represent a distinct fall greater than 5%, then measure the highs and lows.]

major corrections in gold

Our recent drop equals 12.5%. This isn’t to suggest that the correction is over, but it does show that we’ve already matched the average decline, which is also 12.5%. This comes on the heels of the 15.6% fall in September. You’ll notice something else: We’ve now had three major corrections (greater than 5%) in one year, the first time that’s happened in this bull market.

The worst-case scenario would be a drop that matched the biggest on record, 27.7%. From $1,795 – the recent interim peak price – that would take us to $1,295. That wouldn’t be fun, but a fall to that level would not by any stretch signal the end of the bull market, nor a fall into unprofitability for our producers. And it would represent a true blood-in-the-streets buying opportunity. After all, that’s exactly what happened in 2006 and again in 2008, and in both instances gold eventually powered much higher. The bears were wrong then, and they’ll be wrong again this time, even if that extreme scenario were to come to pass.

Here’s the updated picture for silver:

major corrections in silver

Silver’s volatile nature really comes through in these data, which measure corrections of 10% or more. The recent decline tallies 18.4%. It, too, comes on the heels of a recent correction, a 35.2% tumble in September. The average of these declines is 20.3%, which would take our current correction to $28.22, close to last Thursday’s price. Like gold, we’ve now had more corrections this year (four) than we’ve ever had in this bull market.

The worst plausible scenario we see for silver in the near term would be a fall to $16.32, matching 2008’s 53.9% drop. But you’d have to be awfully bearish to think it will plummet that far.

These data should actually give you some comfort. We’ve been here before. We’ve seen worse before. And yet, in every instance, gold and silver eventually climbed higher. So, unless you really believe that Obama and Merkel have brought happy days back to the world economy, precious metals will resume their ascent, and probably sooner rather than later. And when they do, you may well never be able to buy at these prices again. Those who were too scared to buy at $560 in 2006 and $700 in 2008 missed out on what were some of the greatest buying opportunities of this bull market.

Would I buy now? Given that each metal has already met its average decline, and that both have seen more corrections this year than any other, we’re likely closer to the bottom than the top. So yes, I added an extra contribution to my favorite bullion accumulation program last week.

Either way, my advice is to spend a little more time watching the drivers for gold and a little less time worrying about the price. Until those things change, look for an entrance, not an exit.

[While no one can know just yet if gold has bottomed or not, those who understand the inevitable path of all fiat currencies know these prices represent a good buying opportunity. Learn more about how to protect yourself from being robbed by your government – and how to invest in gold for maximum profit potential.]

Start Thinking in Terms of Gold Price

By Jeff Clark, Casey Research

A young woman – let’s call her Andrea – inherited some money from her father in late 1997. She was only nineteen at the time. Not knowing the first thing about investing, she kept the money in stocks and bonds as her father had, wanting to hold on to it until she really needed it. She played it “safe.”

She got married last year and so began to withdraw the money. She was pleased to see a chart from the broker that showed her portfolio was up about 20%. While admittedly not a great return over 12 years, her account had nevertheless survived both the 2000 tech crash and the 2008 market meltdown. She knew not all investors could not say the same thing.

Andrea began spending the money, thankful that she’d saved the money to start a family. But a cruel reality slowly began to set in: the money didn’t seem to be going very far. She couldn’t quite put her finger on why, but it all clicked when she saw the lofty price of a new SUV she wanted. She remembered her Dad’s favorite vehicle back in the day – a Ford Ranger pickup – and recalled him boasting that he paid only $8,500 for it in 1992. A comparable vehicle today costs more than twice as much.

It hit her like a slap in the face. While the number of dollars in her portfolio was greater than what she inherited, they bought less stuff. It was such a revelation that she actually uttered the words out loud…

“My investments didn’t keep up with inflation… I LOST money!”

Gold Is the Benchmark

Whether they realize it or not, the same thing is happening to most people’s investments. Over time, real returns are diluted because of inflation. The only reliable way to measure the value of investments is in terms of a financial intermediary that cannot be inflated: gold. That way, investors can tell how they’re doing in real terms.

This has practical ramifications for all of us. Someday, we (or our heirs) are going to spend some of the wealth we are accumulating. How much we can actually buy with our gains will directly depend on how hard inflation has hit whatever our investments are denominated in. A 15% gain in dollars is only 9% in real terms if USD inflation was 6% during that time frame. A money-market return of 1% is a losing investment if denominated in something inflating at 3%. In Andrea’s case, by keeping all her funds in dollars, her 20% gain turned into a 16% loss in purchasing power.

In other words, since most people don’t adjust for inflation, their investments are not doing as well as they think.

In contrast, if Andrea had kept part of her inheritance in gold, that portion would have grown 332% (from December 1998 to June 2010, when she got married). More importantly, she would have lost no purchasing power during that time. In fact, after inflation and taxes, Andrea could’ve bought 50% more in goods and services than in 1998, if purchased using liquidated gold. She could buy two small pickup trucks today with the same number of gold coins it took her father to purchase the Ford Ranger in 1992. (This all while gold went nowhere for those first three years and lost a third of its value in the fall of 2008.)

With gold as her savings vehicle, she could have completely sidestepped the erosion in the dollar.

How have you done?

Re-Indexing in Gold – “This Changes Everything”

To demonstrate the effect of currency dilution, we’ve developed a tool for re-indexing popular indices from dollars to gold. Doing so provides a more accurate picture of the dilution of investments made in dollars (and would work just as well in euros or other currencies). We use gold in grams so the indices won’t be priced in decimals.

Here’s how the DOW has fared since 2000 when measured in both dollars and gold:

Dow Jones Index since 2000

While the Dow Jones Industrial Average is up 4.7% in dollar terms, it’s lost 82.5% when measured in gold grams. An investment of $10,000 on January 1, 2000 would total just $10,470 today (excluding dividends) – but in gold it’s worth only $1,750.

In other words, investments made in the DJIA Index have not only lost money in real terms, they’re worth a pittance when measured in gold. This is a breathtaking loss.

How about a broader measure of stocks, like the S&P 500?

s&p 500 since 2000

The S&P 500 is down 15.1% in dollars since 2000, but it’s lost 85.8% against gold. If you’ve owned an S&P index fund, you not only have fewer dollars that what you started with (excluding dividends) but have fallen dramatically behind when compared to the monetary asset of gold.

How about the technology sector?

nasdaq 100 index since 2000

Tech stocks show a whopping decline of 38% in dollars over the same time period, but money invested in that sector has lost 89.7% when measured in gold grams.

We also decided to look at some foreign markets. Are they doing better than the US?

hang seng index since 2000

The stock market for Hong Kong, one of the largest exchanges in Asia, shows an increase of 6% in dollars. However, it’s lost 82.3% when priced in gold.

ftse 100 index since 2000

The primary stock market for UK companies is down 22.4% since 2000 calculated in dollars, but has fallen 87.1% in gold grams.

Conclusions

Obviously, measuring portfolios in dollars exaggerates performance in real terms. This isn’t to say that one shouldn’t invest in stocks. It means that one must: a) be cognizant of how results compare to gold or other real assets that one might buy with whatever currency one is dealing with; b) adjust brokerage statements to allow for currency dilution; and c) not rely on stocks in general to outpace inflation.

In fact, it isn’t just investments that are eroding. Our entire world is being devalued, even as one reads this article – from groceries and gas to cars and college. Someday we’ll want to spend the gains we’re making; how will we avoid the long-term erosion of the currencies we invest in?

The answer is simple: save in gold. The dollars you keep in a money-market account will steadily lose value year after year. In fact, monies deposited into a simple savings account in 2000 have lost an incredible 25% of their purchasing power since then. Conversely, if those savings were denominated in gold, the wealth would have not only been preserved but increased. We believe this trend will continue – and accelerate. It will become increasingly important to your financial future that you cash in earnings from time to time and save them in precious metals – not in dollars, euros, yen, yuan, or even Swiss francs.

Don’t make the mistake Andrea did. Save in gold. That new car or retirement home or world travel you want to spend money on someday will be a lot easier to afford if your savings are denominated in the one asset that can’t be debased, devalued or destroyed.

[Don’t continue to be robbed by government – take steps today to start preserving your wealth. This report will help you get started.]

Don’t Sweat the Correction in Gold

By Jeff Clark, BIG GOLD

I’ve told more than one concerned investor that when the gold price falls, they should “come back in three months” and see if they’re still worried. The idea is that the daily and monthly gyrations are nothing to fret over, that the price will recover and, in time, fetch new highs.

That advice has worked every time gold underwent any significant correction (except in late 2008, when one had to take a longer view than three months). Here’s proof.

I’ve traded emails regularly with Brent Johnson ever since meeting him at an investor event I spoke at a couple years ago. He’s the managing director of Baker Avenue Asset Management, a wealth management firm with over $700 million in assets. He forwarded some charts he’d prepared for his clients that put gold’s September decline into perspective; it’s a good visualization of my standing advice to worriers.

The following charts document corrections in the gold price of 8% or more – first measured with daily prices, then monthly, quarterly, and finally annually. See if this doesn’t put things into perspective.

While the gold price has had plenty of big corrections since late 2001, they’re not so concerning when viewed beyond a day-to-day basis. In fact, if one resists checking the gold price except once a quarter, one might wonder what all the fuss with price declines is about.

You’ll also notice that the September decline, when measured monthly, was our second biggest in the current bull market (and third when calculated daily). This suggests to me that unless we have another 2008-style meltdown in all markets, the low for this correction is in.

That’s not to say the price couldn’t fall from current levels, of course, nor that the market couldn’t get more volatile. It’s simply a reminder that when viewed on any long-term basis, corrections are nothing but one step down before the next two steps up. It tells us to keep the big picture in mind.

It also implies that pullbacks represent buying opportunities. It demonstrates that one could buy any 8% drop with a high degree of confidence. Keep that in mind the next time gold pulls back.

Until the fundamental factors driving gold shift dramatically – something that would require most of them to completely reverse direction – I suggest deleting any worries about price fluctuations from your psyche.

And if you’re still a tad uneasy about today’s gold price, well, let’s talk next February.

[The current issue of BIG GOLD lists the top stocks to buy in our portfolio, ones we’re convinced are destined for much higher stock prices before this bull market is over. Get their names, along with our new Bullion Buyers Kit, with a risk-free trial here.]

Why Gold Should Set New Highs for the Holidays

gold-set-new-high-price-holidays

By Jeff Clark, BIG GOLD

Most gold followers know the metal has a seasonal tendency to perform better in the fall and winter than in the spring and summer. Indeed, since 2001, the annual high for the gold price has occurred after Labor Day every year except two (2006 and 2008). Further, that peak was hit in November or December in seven of the last ten years.

So, are we destined for new highs in the gold price between now and New Year’s Eve? And what about gold stocks?

Perhaps one way to answer the first question is to determine if gold has been following its seasonal price trends so far this year. If it has, we might have a reasonable expectation of higher prices ahead. Let’s take a look…

The following chart shows the average monthly performance of the gold price from 2000 to present, along with its returns so far this year.

 

As you can see, this year’s gold price has followed the typical seasonal pattern in every month but three. This is actually a strong correlation, because seasonal patterns are adhered to only about two-thirds of the time. (The performance appears more volatile than normal, but it’s not; the averages are a composite of eleven years’ worth of data.) You’ll also notice that gold has had only three losing months this year.

If this trend were to continue, it suggests that gold’s 2011 high may yet be ahead, meaning the September 5 price of $1,895 (London PM Fix) would be eclipsed.

Here’s the picture for gold stocks (as measured by the AMEX Gold Bugs Index).

 

As a group, gold stocks have performed in the opposite direction of the seasonal pattern in six of ten months so far this year. This might speak to some of the frustration we gold stock investors have had, particularly after they bucked the trend in May and August with big sell-offs.

This doesn’t mean, of course, that gold stocks won’t rise over the next two months. In fact, the average cumulative gain of gold stocks during this 60-day period is 11.8%. You’ll also see that November is typically the second strongest month of the year.

Perhaps another way to determine if a new high for gold is just ahead is to look at its average return from the summer low to the fall high. (We detailed this measurement previously.) To summarize, since the bull market began in 2001, the average gain in the gold price from the summer low (June, July, or August) to the autumn high (September through December) is 20.7%. Our summer low this year was $1,483 on July 1, so $1,790 would match the average… a price we’ve already exceeded.

Of course, this ignores the effect of another country in Europe blowing, up or the Fed instituting another QE program, or Israel attacking Iran, or…

The largest autumn gain has been 33.5% (2009); if this year’s climb mimicked it, the price would hit $1,979 before year-end. That’s a 10.7% jump from $1,787, a relatively big climb in a short period of time, but I wouldn’t dismiss it given the precarious state of the world’s economies and finances.

In the big picture, though, all this talk about where gold might go in the short term is just for fun. It’s clear that sooner or later we’ll be looking in the rear-view mirror at a $2,000 gold price. And even that level is well short of any inflation-adjusted price.

The ocean barge of inflation hasn’t hit our beach yet – but it’s been spotted offshore. Buy gold and silver – along with their stocks – because higher prices are ahead, regardless of what they do in any given month.

And because if you don’t own enough gold, it is definitely your season.

[Gold stocks have historically outperformed gold by 3 to 1, but right now they’re seriously underperforming the yellow metal – a situation that’s long overdue to correct. Free Report shows you how to profit from this anomaly]