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Gold Defying Expectations…And Gravity

October 7, 2009 by  

Gold Defying Expectations…And Gravity

I have to admit it: Gold’s performance in recent weeks has amazed even me. And I’ve been one of the most ardent bulls over the past few months.

As I’ve written before, I fully expected gold to begin rising between late-July and mid-August, beginning a stealth rally before much of the market started paying attention again after Labor Day.

Then I expected the fall physical buying season to support the price into the holiday season, whereupon—at some point—investors would begin to realize how much currency and debt had been created across the globe and begin buying up gold as the only viable counterbalance to massive currency creation.

But I never expected this whole scenario to play out within a few short weeks. For the record, gold dipped—briefly—back below $1,000 a couple of times, as cynical investors bet that the metal would once again fail to hold the millennium mark…or as concerted forces worked to prevent it from doing so.

But then the metal broke free from the attempts to shackle it. It even established a new record price when it closed over $1,002.80. So what’s behind this latest spike in gold?

Short answer: No one knows for sure…but there’s been no shortage of speculation from pundits everywhere.

My view is that the important transition in investor expectations that we’ve been predicting is being completed. And the result is that investors now understand that the dollar simply must fall in value relative to other currencies—both the actions and inactions of U.S. officials over the last few months completely support that view.

Moreover, all currencies will fall in value relative to commodities, primarily gold, as debts must be inflated away…and as the oceans of new currency created during the bailouts are pulled into commerce by the nascent global economic rebound.

From another standpoint, gold bugs have to be comforted by the level of skepticism that still accompanies this rally. If a true bull market “climbs a wall of worry,” then gold seems to be advancing steadfastly up a near-vertical slope of concern. There has certainly been no shortage of naysayers and unbelievers during the metal’s ascent past the $1,000 plateau.

And, frankly, there have been some valid reasons for concern. The large commercial net short position in gold, for example, just shot to record levels, even as heated demand for gold forced prices into backwardation. As Gene Arensberg and I have noted, the large commercials are rarely wrong in their prognostications.

But when they are wrong and are forced to cover their massive shorts (as in 2005), they are spectacularly wrong—and the gold price explodes higher in a short-covering frenzy. Were they going to be right or wrong this time?

Then we had the announcement in September by Barrick Gold that it had—finally, after a $750/ounce rise in gold from 2001—decided to buy back all of its remaining gold hedges.

This blockbuster announcement left many wondering if a top in gold had been marked. Indeed, considering how Barrick’s market calls over the years had been so perfectly erroneous, it was understandable that some experienced traders, the esteemed Dennis Gartman among them, considered this an opportune time to exit some of their bullish gold bets.

But perhaps that conclusion was just too simple…to easy…to be correct. Perhaps Barrick, with their sources inside the most hallowed boardrooms of Wall Street and Washington, were tipped off that gold was about to break loose from all efforts to constrain it. Perhaps they realized that the commercials were going to have to cover their short positions. Perhaps they became aware that the bottoms of government vaults had finally been reached…or at least a decision had been reached that no more official supplies would be forthcoming to dampen the market.

We can wonder all day long. But, as my old friend Jim Dines is wont to say when pointing at a particularly compelling chart, “Don’t think. Look!”

And it doesn’t take a master of technical analysis to look at gold’s chart and marvel at the power and clarity of this bull run. In fact, gold’s remaining real resistance has most likely already been cleared. The old intraday “high” of around $1,030 was fairly ephemeral. With the old, March 17, 2008 record close on of $1,002.80 on a spot basis growing distant in its wake, gold is truly breaking out to new territory on a nominal price basis.

And yet, on a real, inflation-adjusted basis, there is plenty of headroom ahead—to at least $2,200 in current dollars.

Yes, anything can happen…and gold could be driven back below $1,000 at any time. Gold’s foes may not have much ammunition in terms of bullion, but they still have bull—and plenty of it. While the rally was largely sparked by Ben Bernanke’s pronouncement that the recession is technically over (a fact we announced in July), the right words spoken at the right time by the right person could throw a barrel of cold water on this gold rally.

Regardless, as I’ve stressed over and over again, we are on the right side of the long-term move. Stand pat in your general allocations, while taking profits where prudent.

Brien Lundin

is the editor and publisher of Gold Newsletter, a publication that has ranked among the world's leading precious metals and resource stock advisories since 1971. To learn more about Gold Newsletter, visit www.goldnewsletter.com. Mr. Lundin is also the host of the famed New Orleans Investment Conference, the world's oldest and most respected gold investment event. To learn more, visit www.neworleansconference.com.

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  • DaveH

    For those who agree with Brien or just want to keep track of Gold spot prices:
    http://www.kitco.com/charts/livegold.html

  • http://N/A Airrpony

    Don’t you think the price of gold zooming upwards to who knows where will collaspe the jewlery industry in general putting and adding to unemployment???

    • s c

      Airrpony, I’m more concerned with our government’s years of artificially depressing the price of gold and raping the dollar. The government added to its long list of crimes a penchant for shipping jobs overseas (never to return). Do the math. It’s our government that is the single greatest threat to our economy and our way of life.
      If we don’t stop the insanity-on-steroids that so fittingly describes our government over the past 60 years, Americans won’t have ANY jobs, the dollar will have gone the way of the dinosaur and useless politicians (ref. congress and the white house) will still be stumping for easy votes to make America “better,” when it’s those same, miserable (REMOVED)were responsible for creating and maintaining generations of (REMOVED) wealth-destroying problems.

    • http://goldnewsletter.com Brien Lundin

      Record-high gold prices will dampen physical jewelry demand, and even other types of physical demand in price-sensitive regions such as India. But demand for gold as an investment and as a safer form of money should more than make up for any decline in jewelry demand. In addition, jewelry buyers and Indian consumers eventually get accustomed to higher prices, and tend to step up their purchases on any price pull-backs. This acts as a cushion to support gold on any significant price retreats.

      Thanks,

      Brien

      • DaveH

        More dollars will be chasing fewer goods.

  • stanley kanter

    What group or groups want to destroy the dollar .Do they have the means to do so??WHY would they want to do so???WHO BENEFITS from such a move AND what are the consequenceses ????????

    • DaveH

      Stanley,
      There may be a few that want to destroy the dollar (thus the United States). I doubt they could pull that off. I think most are just reacting to the swelling of the money supply as a result of all the government spending. If you had your dollars in a country that suddenly dramatically increased its supply of fiat money would you want to remain invested in their dollar? The only way we are going to fall is if we do it to ourselves. And we certainly are headed in that direction.

      • April

        I do not believe that We the People of the US want to destroy the dollar but maybe a few representatives who are more interested in their socialistic agendas rather than actually representing We the People. But you make an excellent point.

    • So

      Stanley,

      As scary as it seems, there are people that want to destroy different countries monetary systems.
      Go and read up on what George Soros did to England’s money in the early 90′s.
      And here he is here now again, doing the same to us.

  • So

    This all sounds well and dandy, but isn’t there a little known provision of the Federal Reserve Act that the Secretary of the treasury can call in all forms of Gold if necessary to protect the currency systems of the United States.
    And since the government also has the power to call in paper money by destroying it’s value through a rapid increase of the money supply, i.e Hpyer inflation. Sounds familiar right now.
    Perhaps we need to check into this before we get too comfortable.

    • DaveH

      So,
      Here is an excellent article on the FDR Gold confiscation.
      http://www.strike-the-root.com/columns/Chkoreff/chkoreff1.html

      • DaveH

        There is no way around this kind of tyranny except to first educate ourselves as to what government is all about. And then to put people in office who will actually reduce the size of government and uphold the Constitution.
        The only Republican President I have known that actually made an effort was Ronald Reagan. He came in like a fireball his first year, but was soon brought under control by his own party members in Congress, notably Bob Dole. According to the Democrats he was ‘cutting the budget to the bone’ when in fact, all he did was to dramatically slow ‘government growth’.
        There have been a scattering of Republican Congressmen who have worked to reduce the size of government but the notable one – Ron Paul – was/is really a Libertarian who had to run as Republican to get elected.
        I know of no Democrats who have worked to reduce government size.

        The only real chance we have is to support and promote the Libertarian Party, the only party I know that offers individual freedom to everybody and expects individual responsibility from everybody. They are the only ones that have stuck consistently to their principles of freedom for the last 30 years (since their establishment in the 1970s). If we want to get this country back to Constitutional Law the Libertarian Party is the best bet.

        • So

          There is a great book that explains what is happening to the country now. It was written in the 80′s, but it is like it was written yesterday. It is written in layman’s terms and a great read.
          “The Unseen Hand.” An education to the corruption of our Gov’t.

  • http://www.easyinvest.co.za pete

    Bernanke has repeated what you said 6 months ago – “the recession is technically over”. Will somebody please explain to me why there are so many jobs being lost everyday if that is the case. Please also explain how we are supposed to “get out of debt by borrowing?”

    I have never seen that work before but there is always a first time (or not) – does the simple process of printing so much money strengthen or weaken the economy?

    Are there some truths being untold here, or are we simply mixing up our theories with reality or just ignoring reality and replacing it with misplaced “hope”?

    Hoping to win just does’nt cut it without a well designed plan and doing the same thing over and over will definitely produce the same result – is the US economy in crisis? Maybe Warren B can tell us?

    What exactly is the answer because we have a very serious problem which will not be solved simply by printing more money and increasing the deficit to levels which we all know we cannot afford.

    • DaveH

      Bernanke is controlled by Obama and crew. Evidence of this is a recent statement of his that the Federal Reserve is “not monetizing the debt”. An expert interviewed by Glenn Beck showed the trail of a 5 Billion dollar note that the Treasury had issued. It was bought by a private party and then just 3 days later it was purchased by the Federal Reserve. The old government shell game.
      When the government borrows money eventually the cash money enters the main stream. The result is monetary inflation which results in price inflation (from more money chasing fewer goods). This causes the buying power of your cash savings to decrease. Over time the government scheme is to pay down their debt with these newer less valuable dollars. In other words, price inflation is a hidden tax. Anybody who tries to get ahead by saving cash money for the future will be subject to this hidden tax. Future goals are a big motivator for people to work hard. So, of course price inflation (therefore decreased buying power of your savings) greatly reduces a person’s motivation. This is bad for an economy.
      Very few people are educated enough in economic matters to understand that, so the government gets away with it. This brings up another matter. With all the garbage courses that public schools teach, why do they not routinely teach economics? Could it be that the government-run schools don’t want people to be that educated?

      • DaveH

        For those that don’t know “monetizing the debt” is when the Federal Reserve trades newly printed money for the debt instruments of the Federal Government.

    • s c

      Pete, Ben the Boob (Bernanke) has much in common with FDR’s Sec of Labor (James ‘the worst is over without a doubt’ Davis). Between bernanke and comrade obama, we have an incompetent comedy team that knows how to schmooze a crowd. However, they have a tough time keeping their feet in the real world.
      Bernanke forgot everything he ever knew about the Depression, and comrade obama can’t remember things they never taught him at Haaavid. Couple comrade obama’s non-performance with bernanke’s faulty memory, and we have a formula for an epic hollywoood disaster.
      Frankly, I’d rather have bernanke in the white house (for comic relief). Comrade obama should be running the Fed. Then he can do to the Fed what the Fed has been doing to America for generations.

  • BABUSHSKA

    The administration has an agenda to print more and more money to repay back our debt with cheaper dollars. China, which holds the majority of US debt, is no longer using US dollars to purchase goods because the dollar is so devalued — thus gold is soaring. In the WSJ it was written that China has called for a universal currency. I truly believe that is Obama’s agenda – to eventually make the “case” to the US public that to avert a currency crisis in this country, we’ll have to convert to a one-world currency. All signs are pointing to it. And Obama intends to be President of the world. If you know anything about Bible prophecy, end time events are happening right before our eyes.

    • s c

      Babushska and DaveH, do you think it’s any coincidence that ultralibs avoid certain topics? They seem to be very predictable in avoiding any topic that deals with money, the Fed, inflation or debt.
      They are their own willing, self-made victims, and they betray themselves by pretending to care. They fall back on the idea that their fearless leader has ‘all’ the answers (HA!).
      For a long time, ultralibs and their pals say nothing about money matters because they’ve fooled themselves into believing that they don’t need to think about such topics. What counts most in their philosophy is how things ‘feel.’ Without realizing it, they’ve made losers like J M Keynes a god. Some of his theories are responsible for the mess we’re in now (try and get an ultralib to understand or believe it).

      • DaveH

        SC,
        There are many problems with educating the citizens about the problems created by government spending and taxing.
        1) A little over 40% of the citizens are negative taxpayers, meaning they receive more from the government than they have paid in income taxes or payroll taxes. Does ‘vote buying’ come to mind?
        2) Our schools do little to teach the students about economics.
        3) The current and future hopeful recipients of government largesse have their gaze firmly on the trough, so they just plain don’t want to learn.
        4) Those corporations that are profiting greatly from the government’s misadventures and those individuals that are profiting greatly from same are going to resist downsizing vigorously and vociferously.
        And there are certainly other impediments to our task of educating the public. So, you can see that it is going to take a monumental effort on our part to reverse the tide. But it is now or never.
        I am very hopeful that Obama has shocked enough people into action to create some real ‘change’ in the Big Government that is plaguing our once-great nation.

  • BABUSHSKA

    S C: Your comment “their fearless leader has all the answers” is right on the mark. It’s the mentality of poverty and gov’t entitlements that is so pervasive in inner cities. And those “we’ll take care of you” programs do nothing more than keep the poor, poor. Even the schools can hardly overcome this mentality. It is generational. Over 15 years ago, our city put forth a pilot program aimed at inner city minority students modeled after one in NY that would provide a college education to all students who graduated from high school. What they soon found was that without the support from a parent(s) in the home to help their child do homework, study, and encourage them to stay in school, student’s didn’t succeed. So the program was revised to actively involve parents and educate them on the value of education as the way out of poverty. It’s important to have advocates in the home. It did increase somewhat the number of students who graduated and went on to college. But those numbers never equaled non-minority school’s graduation rates. But it is a start in breaking the mental cycle of the poor to look beyond the govt to take care of them, and realize they have to do for themselves to improve their lot in life. However, Obama’s policies and this democratic congress, perpetuate this “gov’t will take care of you,” attitude and as I said, only serves to keep the poor, poor.

    • s c

      Speaking as a former ‘educator,’ there is no reason to make colleges and universities part of an assembly-line process. It’s bad enough that many kids know very little and aren’t
      motivated to change their ways. There are times when I’m convinced that schools specialize in graduating kids who aren’t allowed to think, walk, talk and breathe at the same time.
      As long as losers like comrade obama keep shipping jobs overseas, there is no reason to think hordes of college and university graduates will be able to get a job. For many, it will be a waste of time and money.
      To me, having hordes of degreed job-seekers makes about as much sense as the Fed running its printing presses 24 hours a day. The end product is watered-down and inferior, and it takes a pair of heavy duty rose-colored glasses to see it as something worth having [thanks for nothing, Washington and intellectual pimps who pose as professors and union teachers].

  • s c

    This topic deals with gold, so I’ll limit my remarks to gold and its potential. If you haven’t heard yet, China’s government is urging its people to BUY GOLD. That means the dollar is going to be destroyed soon.
    The dollar’s destruction is not an accident. It was planned many years ago – by some of the same people who are sworn to protect America. No, I don’t mean conservatives and liberals.
    Five years from now, if America still exists as we know it, we will look back to 2009 as the last of the good old days when we could afford gold. True, you can’t eat it, but neither can you live on comrade obama’s ‘good intentions.’ By 2014, every twit in congress should be the proud owner of a Nobel Peace Prize – for having the best of intentions and lots of ‘plans.’
    I’ll take gold and silver and perhaps one other precious metal. Washington can have the back of my hand and a high colonic before and after a 20 mile, forced hike.

  • http://kenandjo.scott@gmail.com Ken Scott

    The colapse of the dollor is planned by the elite to rule the world. It sounds quite Biblical and we will see judgment, because the U.S. wanted to leave God and that will help bring on God’s plan to return to Israel and the jews to preach Jesus is coming soon. It is for the second time and not the first like most of them think. Gold is going to fly high, but there is no hope and safety without Jesus. God Bless!!! Ken

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