The price of Gold broke
the $700 mark and is now hovering
near $730/ounce. In fact, I believe that we will
have a relatively quick move
to $800 and even stand a
chance of breaking $1000/ounce
before the year is over!
This
might come as a bold statement to some, but as a reminder I was one of the
few that correctly predicted that we would break
$600/ounce early in 2006 when gold was still hovering at below $500. In an updated prediction,
I also stated that I believed that we would break $700/ounce before the end
of the year. In the midst of these predictions, there were a number of skeptics that scoffed at my predictions. So what makes me
think that we can potentially reach the $1000 before year end? Those same skeptics still exist.
If
you are interested in the fundamental reasons why Gold is heading higher you
can read my $600
Gold: We Have Only Just Begun article.
Your Average Investor
This
past week, I had an opportunity to step away from my office and speak at a
couple of conferences. I really enjoy interacting with the general public
(that is, people that do not read my commentary or Gold websites on a daily
basis!), because it gives me insight on what the typical investor sentiment
is. Here are some of the comments that I have heard during the past week.
"I
am not buying Gold; I remember buying it at $850/ounce in 1980!"
"Jewelry demand is expected to decline. If that's the
case, won't the price of Gold decline?"
"What
Central Banks are buying Gold? I thought they have been selling them for the past
20 years!"
"This
is a bubble…and it's very speculative! I wouldn't touch this
market!"
"Are
you a Gold Bug?! [Said with scowl on face]
"What
do you mean we have inflation- the Fed says that inflation is in check?"
"I
have been a major believer in Gold for years, but I have been waiting for an
entry point!"
Believe
it or not, these statements were actually made to me. At one of my
presentations, I asked the crowd to raise their hands if they believed that
we were in a commodity bull market. About 25 % of the people in the room
raised their hands. I bring these anecdotes up to make the point that your
average investor is still not buying into the legitimacy of this bull market.
The talk about a bubble is absolutely absurd. We will likely experience a
bubble in the Gold market when your average investor starts quoting the
percent of reserves that countries have in Gold.
So
what is keeping the general public from buying the legitimacy of this Gold
market? If you think about it, this bull market has been around for the
better part of five years. We have seen the price of Gold nearly triple
during that time. Why aren't people buying into this bull market? Here are
some potential reasons and my short cursory response. Maybe you fit in one of
these below categories:
The Real Estate Focused Investor: Do you know how much money I have made in
the real estate market? Not only have my condos appreciated in value, but I
have rental coming in. Why would I want to sell a portion of my real estate
to buy Gold? Any additionally money I get, I will buy another condo! In fact,
I don't even need any down payment! I can just get one of those zero down,
interest only loans!
Emanuel Balarie: Have you considered that the
market has been pushed up by artificially low interest rates? Record low
interest rates will inevitably rise. In turn, this will lead to defaults, a
slowdown in demand, and greater supply of homes on the market. Read My
Real Estate Burst Article
The Stock Market Fan: The Stock Market is Hot! Corporate earnings, consumer confidence
numbers, and a strong economy are driving this market! Why would I want to
shift from an earnings driven market to a
speculative Gold market!
Emanuel Balarie: I do not doubt that we have
strong corporate earnings. But where are these earnings coming from? Your
average American has negative savings, record credit card debt, and they have
been using their homes as ATM machines. What do you think is going to happen
when the above mentioned Real Estate owner now has to pay an additional $2000
month for his mortgage? Chances are he will not buy a new car every two
years, frequent his local restaurant as often, travel, or simply spend as
much discretionary money in the economy. The consumer will no longer be as
confident!
The Disgruntled Historian: Don't tell me about Gold. I still own the
Gold that I bought when it was $850/ounce. If I could break even…I
would be a happy camper! I wouldn't touch Gold again if you paid me!
Emanuel Balarie: I understand that you happened to
buy Gold at the speculative top. However, that does not change the fact that
we are in the midst of a bull market in Gold. You can either participate in
it, or live in the past.
The Data Dependent Statistician: The core CPI is minimal; long term bond yields
have remained low; the fed has inflation in check. Why is Gold heading higher
in the midst of low inflation? It has to be a bubble.
Emanuel Balarie: Believe it or not, data does not
always tell the true picture. Often times, it is delayed. I don't know about
you, but I am paying more at the pump, I have a higher cable bill, airfare is
more expensive, and pretty soon, the manufacturer who now has experienced
higher energy and raw material costs, will pass on those higher costs to me
(the consumer).
The "I have enough money to last a lifetime- I could care less
guy": I
have enough money to last two lifetimes! My advisor has me in
treasuries…and that is good enough for me!
Emanuel Balarie: Do you realize that since 1914,
when the Federal Reserve was created, the purchasing power of the US dollar
has declined greater than 90% in value? The interest you are receiving on
your treasuries will not be enough to cover rising inflation.
Someone Has To Be Wrong
The
above interaction is of course meant to be both humorous and educational. The
failure of your average investor to acknowledge and participate in this bull
market is one of the reasons why I believe that we are still in the early
stages of this bull market. Quite honestly, I would have thought that by the time
we reached $700/ounce, more people would participate in this Gold market. Interestingly
enough, this has not been the case. I strongly believe that the longevity of
the real estate bubble, the subsequent stock market rise, and the other above
mentioned factors have distracted investors from the rise in Gold.
To
an extent, the distraction is somewhat understandable. How can we be in a
bull market in stocks, a bull market in commodities, and a bull market in the
real estate sector? One would imagine that the higher raw material and energy
costs would take a toll on the consumer and producer alike. One would also
imagine that these higher costs would also translate into inflation. So who
is right? Something has got to give. But one thing is for sure; you cannot
have all of these markets continue moving higher in tandem for much longer.
My Reasons For The
Potential Move To $1000
Over
the last several years, various factors contributed to the price of Gold
heading higher. In the beginning of this bull market, we had the US Dollar
decline. If you look at the below chart, you can see that the declining
dollar and the rise in Gold coincided in 2001.
Lately,
we have seen the decline of the US dollar intensify and the subsequent rise
in Gold prices. In 2005, when the US Dollar actually rallied, inflationary
concerns sparked fueled Gold prices higher.
Most
recently, geopolitical tensions and central bank buying has also intensified.
So what does this mean for the price of Gold?
I
believe that we are on the verge of having all of the above mentioned factors
coincide and intensify all at the same time. From a geopolitical perspective,
tensions with Iran
continue to rise. Additionally, the growth of nationalism and anti-US
sentiment in Latin America will continue to
spur safe haven buying from around the globe.
From
an inflationary scenario, most people have been paying attention to the Fed
and their data of choice (like the core CPI). I expect the high energy prices
and higher raw material costs to eventually pass through to the Core CPI by
the end of the year. I also believe we that we will have a spike in the Core
CPI that will force the data dependent Fed to both acknowledge inflation and
raise rates. Acknowledging inflation will drive a further round of buying
into Gold, which has always been an anti-inflationary hedge. Higher rates
will accelerate the housing slowdown, curb consumer spending, and have an
adverse effect on the overvalued stock market. I do believe that we will most
likely experience a crash in the stock market, rather than a slow decline.
The
US dollar index can also break through a key support level and continue its
multi year decline. This will serve to intensify dollar selling and gold
buying by Central Banks. This past week, there is news coming out of China stating
that they are looking at doubling their Gold reserves. Doubling their
reserves, however, would still put them at 50% of the world average. I would
imagine that they will not stop there. This would be bullish for Gold on two
levels. Not only is the demand significant, but it will also take a
substantial supply off the market.
If you are interested in learning more about the
commodity bull market, I urge to pre-order my forthcoming book, "Commodities for Every
Portfolio: How To Profit from the Long-Term Commodity Boom".
Emanuel Balarie
Senior Market Strategist
Wisdom Financial, Inc.
Direct toll free: 866-465-0017
International: 949-548-2021
Emanuel Balarie is the Senior Market Strategist at Wisdom
Financial. As an expert on foreign markets, foreign currencies, and the
precious metals industry, Mr. Balarie often speaks
at public engagements and his research is regularly published in investment
newsletters. You can find out more about Mr. Balarie
and his services at www.wisdomfinancilinc.com
The risk
of loss in trading commodity futures contracts can be substantial. You should
therefore carefully consider whether such trading is suitable for you in
light of your financial condition.
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