The Future for Gold
By Larry Edelson
Gold fell from its record-high of $1,038 set on March 17 down to the recent $850 level. But Edelson does not believe this is the end of gold’s bull market based on two possible macroeconomic background scenarios for gold.
The first scenario Edelson outlines is if the Fed’s efforts to save the U.S. economy and financial system succeed and the credit crisis eases.
Under this scenario, the Fed’s recent actions of slashing interest rates and pumping money into the economy are successful — the U.S. economy recovers and global growth resumes.
As a result, the credit crunch eases, and money flows through the pipeline. The big commercial and investment banks finally stop taking massive write-downs on bad mortgage securities, foreclosures shrink, home prices stop hemorrhaging, and home sales pick up. Businesses start hiring and consumers resume spending.
In this scenario, many on Wall Street would say that gold’s bull market would be over. However, if the Fed is successful at turning the U.S. economy and credit crisis around, it will only be because it flooded the system with hundreds of billions of paper dollars, creating wild inflation. If the economy were to pick up on top of that, between inflation and resumed economic growth, global demand for gold would soar.
The argument could then be made that when the economy turns back up, the Fed will head off inflation by aggressively raising interest rates, choking off the bull market in gold. But, from late 2004 to mid-2006, the Fed raised interest rates 17 times, in steady quarter-point increments to 5.25% from a low of 1%. And over that period, gold surged 127%!
Even with the U.S. economy in a downturn, gold demand hit a record $79 billion in 2007. Most of the increased demand came from Asia and the Middle East. Demand from India rose 7%.China’s gold demand jumped 26%, catapulting it to the second-largest gold jewelry market in the. Other Asian and Middle East countries are seeing rising gold demand as well: Hong Kong is up 15%, Saudi Arabia is up 15%, Egypt 12%; UAE up 7%, and Russia up 11%.
The second scenario is if the Fed’s rescue efforts fail, the credit crisis worsens and the recession deepens. The greenback will continue its long-term decline, dramatically losing even more purchasing power than it already has, and inflation will continue to rise. Meanwhile, Asian and other emerging economies will continue to grow just as they have been doing for the past six months.
The plunging dollar would cause investors to purchase gold even more than they already have been. The price of gold would soar even more than in the first scenario above, and would likely even exceed Edelson’s most bullish target, rising well above $2,270 an ounce.
Many analysts are claiming that in either of the above scenarios, gold’s current price is high enough to bring oodles of new supply to the market, at least smothering the bull market for a while.
However, when Edelson compares the supply/demand forces in gold to the same fundamentals in oil, his analysis illustrates the supply situation in gold is far worse.
* In 2007, the world’s gold supply dropped 3% to 110.7 million ounces.
* Gold mine production hit an 11-year low of 2,447 metric tons in 2007. Africa had the most precipitous drop of 29 metric tons while Latin America saw a 23 metric ton decline in output.
* South Africa, once the world’s largest gold producer, is now producing its lowest amount in 86 years and it’s getting worse. In February alone, South Africa’s gold production fell 28.2%.
Edelson sees three opportunities to capitalize on gold. “The first is gold bullion coins such as the American Eagles and Canadian Maple leafs or one- and five-ounce gold ingots available at most reputable gold dealers. Second, the streetTRACKS Gold ETF (GLD) fund allows you to invest in an ETF that owns the physical gold for you, but without the storage hassles. And finally, gold stock mutual funds. Some of my favorites are Tocqueville Gold Fund (TGLDX), U.S. Global Investors World Precious Minerals Fund (UNWPX), and the U.S. Global Investors Gold and Precious Metals Shares (USERX).”
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About the Author
Money and Markets (www.moneyandmarkets.com) is a free daily investment newsletter from Dr. Martin Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil. Weiss Research, Inc. is located in Jupiter, Florida. For more information about our editors, or to set up an interview, please contact Jennifer Moran at 561-627-3300 or visit www.moneyandmarkets.com.
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