Tuesday, June 30, 2009

Gold - It's Just Time

To borrow a phrase from a recent piece by Martin Armstrong, “it’s just time” for Gold to shine and revert to its role as money. Of course, the powers that be and their minions laugh in contempt at such a concept. Wall Street laughs at the investment that has no growth potential and pays no dividends.

And yet, these are the people who didn’t see this economic crisis coming and now declare that it is over! It may be over for them, since they have lined their pockets with taxpayer funds to mitigate their losses, but for the rest of us, the pain is just beginning. Economic depressions are a process, not a one-time event.

Japan has been in an economic depression for 19 years now, yet you won’t see pictures of soup lines on Japanese television. Their government has a printing press, a fiat currency and has ramped up government debt to levels relative to their GDP that make The United States look like a model of government restraint. Yet, debt deflation still reigns and the Nikkei Japanese stock market index remains 75% below its 1990 peak 19 years later.

Will we repeat this two decade depression (which is not over for Japan by a long shot)? Of course. The only wild card is our currency. History tells us that the U.S. Dollar will hold up well during a deflationary depression and is a good place to put one’s money if one does not wish to trade the bear market. But the reserve currency status of the US Dollar is at risk and the calls for a replacement grow louder every day. If a geopolitical event dethrones the US Dollar, an immediate and significant devaluation of the Dollar will occur.

So, why is it Gold’s time? Many reasons, but here are the main points to consider:

• Gold is an international currency and store of value, not a commodity. Cash is king during deflation and Gold has been chosen as the best form of cash by civilizations over the past several thousand years. Apparatchiks cannot decree otherwise with any lasting success.

• Growth for stocks in aggregate is negative, dividends are being slashed rapidly, and dilution via new equity offerings is coming at a rapid clip. This wipes out the reason for taking a risk with equities right now.

• Gold provides a hedge against a rapid currency devaluation, which many governments around the world are trying to achieve. A holder of fiat cash or government bonds is not automatically hedged against this risk. Gold cannot be successfully debased by bureaucratic decree.

• Other asset classes besides cash will do poorly over the next decade and will likely produce negative returns, while Gold will hold its value. Everyone and their grandmother, with the exception of underwater bankers and real estate industry employees, knows real estate is poor investment and the bottom won’t be in for at least 2 more years (the wildly bullish scenario). Stocks and corporate bonds are dead for the next decade, trading opportunities aside. Commodities will be crushed by the deflationary scenario that has started if it continues as anticipated.

• Trust is evaporating and fear and pessimism are the new long-term sentiment. People underestimate the importance of this concept. Gloom and doom are gaining a head of steam. The future is not looking good for at least 70-80% of people in the U.S., Europe, and Japan. Gold thrives in this setting.

• Gold is in a long-term bull market that demonstrates no signs of being over. In fact, Gold made new highs in 2009 in multiple currencies, including the Euro, Swiss Franc and Canadian Dollar (among others). Here’s a 10 year weekly log scale chart of the price of Gold relative to the Swiss Franc, people’s traditional fiat currency “of last resort”:

• Finally, consider the Dow to Gold ratio, or a ratio of the “price” of the Dow Jones Industrial Average divided by the price of an ounce of Gold in US Dollars. This ratio will absolutely reach 2 before this secular bear market is over (the bullish scenario for those who are anti-Gold) and could fall below 1. In other words, maybe Gold won’t make you rich in deflation but it will preserve your wealth and allow you to buy a whole lot more shares of the Dow Jones once the dust settles. This ratio filters out the effects of inflation or deflation, since the ratio hit 2 in the deflationary 1930s and 1 in the inflationary 1970s. Here’s a chart of the last 30 years of action in this ratio on a log-scale weekly chart:

Now the ratio could reach 2 with the Dow at 4,000 or 20,000 (I think the former is much more likely) and either scenario is bullish for holders of Gold and indicates a higher return for Gold relative to holding the stocks that make up the Dow Jones Industrial Average (or the S&P 500).

I think the intermediate-term low for Gold is already in and we are set to re-challenge $1000/ounce. We may or may not make it through on this attempt, but the time is growing short for the breakout above $1000/ounce to occur. Once $1000/ounce becomes support instead of resistance, the final stage of the bull market in Gold will be set to begin. Based on the recent events in Europe, I would say that by the time ATM machines in the U.S. are installed to allow people to buy Gold from ATMs in this country, then it will be time to start thinking about the bull market in the Gold price coming to an end. A sentiment event like this, coupled with a Dow to Gold ratio at or below 2, is when I’ll start looking to trade Gold for something else. Until then, Gold is the safest and best no-brainer investment and wealth preserver out there.

And don’t get me started on the Gold miners, because once this cyclical bear market in equities is just about over (we’re not close in time or price yet), this will be the go to sector and will strongly outperform other investments, including the price of Gold. Those looking to buy in to the Gold stock bull market are advised to be patient, as good buying opportunities will come along later this summer.

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