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Even
though gold prices have risen to over $600/ounce, investors are still failing
to acknowledge that we are in a fundamentally driven precious metals bull
market. Instead of focusing on the specific fundamentals(declining US dollar,
central bank buying, inflationary concerns), that have driven this bull
market from the start, your average investor and Wall Street pundit is
attributing this move up to "geopolitical unrest" and unnaturally
high" oil prices. While it is true that those factors have contributed
to gold prices moving to a 25 year high, they are by no means the reasons why
we have seen gold prices double over the last several years. In fact, the
same fundamental reasons that have driven the price of gold from its lows in
2001 will continue to drive it still higher in the years to come. As such, it
is important for investors to note that we have only just begun, and it is
not too late to participate in this gold bull market.
Putting $600 Gold into Perspective
As
a point of reference, it is important for investors to realize that the real
all time high for Gold is not $850 an ounce. Although the nominal all time
high is indeed $850, the inflation adjusted all time high for Gold is closer
to $1250. Comparing today's price of Gold with the price of Gold in 1980,
fails to take into account the rise of inflation over the last 25 years. Simply
put, $850 could buy you a lot more in 1980 than it can today. In 1980, you
could buy a house for under $100,000, buy a cup of coffee for less than a
dollar, and put gasoline in your car for under a dollar. Having this
perspective, allows you to realize that the price of Gold is still cheap at
these levels.
Dollar Decline Will
Continue to Fuel This Bull Market
Since
the US dollar experienced significant appreciation in 2005, many people have
forgotten that we are in a multiyear downtrend in the dollar.
 
In
fact, if you compare it against the Euro, the Dollar is down over 40% from
its high. The same factors that initially triggered the US Dollar decline
will continue to add towards this sell off. In the past, the dollar was the
world's reserve currency. It signified strength and security in a growing US economy. Investors
all over the world where scrambling to purchase our US dollar assets. Today,
we are no longer a booming and growing US economy. Sadly, we have become
an economy that is driven by consumers that are going further into debt
everyday and a real
estate market
that has been pushed up by artificially low interest rates. Although this has
fooled your average American to believing that the economy is strong, it has
not fooled central banks around the world that are looking at diversifying
out of the US dollar. The United
Arab Emirates and other Middle Eastern
countries have already switched or are looking at switching some of their US
dollar reserves into Euros and Gold. Russia,
Korea,
and other countries have also reacted in the same manner.
The China Factor
The
Chinese government has also stated that they are looking diversifying out of
the US dollar into Gold. This news in itself holds tremendous significance
towards the overall direction of Gold. Presently, China has under 2 % of its
reserves (850 billion +) in Gold. Most of their reserves are US dollar
assets. According to the World Gold Council, the world average is 9 % of its
reserves. The EU average is at 25 %, and the US holds 60% of its reserves in
Gold. In comparison, China's
percentage of its reserves in Gold is unbelievably low. As China
continued to become a world economic power, they will continue adding Gold to
their reserves. Even if they only reached the 9% average, the amount of Gold
that would be taken off the market would have a significant impact on the
price of Gold.
In
the past year, China
has begun laying the groundwork for substantial Gold investments from both
its citizens and its Central Bank. Floating their currency and allowing the
average Chinese citizen to own Gold were the first steps. The Bank of China
will start facilitating US dollars for Gold transactions within recent
months. The Bank of China also reported last month that they will slash the
spread on gold trading by up to 20 % for a trial period. All of these factors
combined with continued demand for Gold jewelry (as
Chinese citizens continue to increase their standard of living) will continue
to fuel this Gold bull market.
Yes, Virginia...We
Do Have Inflation
The
question of whether we have or don't have inflation is a hotly debated topic.
On one end of the debate, you have data dependent individuals that argue that
the Core Consumer Price Index does not show that we should be concerned about
inflation. Therefore, all of this talk about inflation is incorrect and
purely speculative. On the other end of the debate, you have the price of
Gold (which has always been an anti-inflationary hedge), rising to a 25 year
high. So who is right?
Investors
can answer the question themselves, if they truly step back and look at what
is happening around them. The first aspect to consider is the fact that the
Core CPI index does not take into consideration food and energy prices. As a
result, even though we have experienced high oil prices, this is not
immediately reflected in the Core CPI data. Although $70 oil is not initially
reflected in the Core CPI data, it will eventually pass through to the Core
CPI index as manufacturers pass through the higher costs of producing the
goods to the consumer. Additionally, copper, zinc, aluminum,
and other raw materials have steadily risen higher over the last several
years. These costs will also pass through to the consumer. It is important to
note, however, that this pass through effect will not be immediate. Manufacturers
typically have contracts where they are required to sell their products for a
certain amount for a fixed period of time. I do believe, however, that we
will experience a sharp jump in the Core CPI numbers by 3rd or 4th quarter of
this year, as the high energy and raw material prices we have experienced for
the last several years finally are reflected in the Core CPI numbers. At that
time, I expect another influx of gold buying from investors who finally
acknowledge that we do have inflation.
The
continually higher energy and raw material costs are not localized strictly
to the United States.
Inflationary concerns can be seen throughout Europe and even Japan. In the
same manner that Americans will likely buy more gold as inflationary concerns
seep through the economy, the same will be true for Europeans and the
Japanese. Magnifying these inflationary concerns is the fact that there has
been a tremendous increase in money supply across the globe. Although the
below chart shows the increase in money supply for the United States,
the scenario is true for a number of different countries.
Look
at the below Chart of the M3 (Money Supply):
The
immediate implications of Central Banks flooding the markets with excess
liquidity, is that it paints a false picture of wealth. The more money that
is created might offer an initial stimulus to the economy, but it actually
serves in diluting the purchasing power of their currency. In turn, as the
decline in purchasing power of fiat currencies is magnified, Gold will start
attracting even more interest from individuals that are seeking an alternate
"currency".
Any
of the above mentioned factors (and others that I have not written about)
would in themselves, increase Gold demand and push Gold prices much higher. A
combination of those factors is creating the greatest precious metals bull
market in history. Additionally, continued geopolitical concerns further
propel this bull market, as investors are naturally drawn to a historical
safe haven during times of instability. Going forward, I expect Gold prices
to consistently make new highs as the true fundamentals that are driving this
market can no longer be ignored. If you have been on the sidelines, the time
to act is now.
Gold from a Trend Following
Perspective
Even
if you ignore the above fundamentals, you cannot ignore that Gold has been in
an obvious uptrend over the last several years.
A
number of our trend following systems, that do not take fundamentals into
consideration, have triggered buys on Gold and other precious metals based
purely on technical indicators. The basic logic behind long term trend
following is that you cut your losses quickly and you let your winners run. This
long term trend following strategy can also be applied to other commodity
markets. With trend following, you are able to follow trends (both on the up
and downside) regardless of fundamentals. Often times, this allows you to
participate in markets that move higher in the face of contradictory
fundamental data. For example, Gold prices have trended higher even though
Core CPI data has not revealed inflation. If you waited for the Fed to scream
"inflation", you would have missed out on Gold prices more than
doubling in price.
If
you are interested in learning more about trend following and how it can
compliment a fundamentally driven portfolio you can request one here
If
you are interested in receiving my free weekly newsletter, please sign up here
Lastly,
if you would like to hear more about my thoughts and on gold, I will be
speaking at the Atlanta Investment Conference on May 6 and the Las Vegas
Money Show on May 15. I will talk about "The Secular Bull Market In
Commodities and the 5 Commodities you Have to Own" If you would like to
attend or receive additional information on these events please click here
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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