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Gold is Recharging

January 7, 2010 by  

Gold is Recharging

We knew it would have to happen sooner or later. With the gold price rising in nearly parabolic fashion since late August… and with speculators itching to pocket their rich gains at the first excuse… any significant rebound in the dollar was likely to trigger a significant correction.

That trigger was pulled by a surprisingly positive November payrolls report (which raised the possibility of U.S. rate hikes) and by credit downgrades for Greece, Portugal and Spain (which lowered the chances for rate hikes in Europe). These developments, in combination with credit troubles in Dubai, were enough to halt the slide in the U.S. dollar.

It’s not that the prospects for the dollar are great. It’s just that the prospects for the rest of the world were suddenly judged much worse in comparison.

The result, as I write this, has been a fall of about 10 percent from gold’s high-water mark in the rally.

The return of risk aversion to the global markets is certainly not bullish for gold. That may sound strange to those steeped in the lore of gold as the safest of safe havens. But in this day and age, when massive speculative positions are built like houses of cards on foundations of cheap money and margin, reversals of such trades mean that accounts must be settled in currency. And that currency is usually the U.S. dollar.

Thus, exiting speculations means a search for liquidity. And gold, as the ultimate source of liquidity, is often the piggy bank that is robbed when speculators need cash.

Even in these situations, the metal can serve as a financial life preserver—it didn’t do nearly as badly as other assets during the financial crisis of 2008. But there’s no denying that a global stampede to liquidity seriously hurts gold and gold investors.

The current situation has not devolved into a stampede just yet. But you can bet that there will be more credit-agency downgrades of U.S. states, and countries, as well as other assorted crises, in the days ahead. So caution is advised.

With that said there is certainly no reason to be bullish on the dollar for the long term. If the trillions in debt and new currency created over the past year weren’t already enough to dissuade one from relying on the future value of the greenback, President Obama’s decision to “spend our way out of this recession” by applying funds from the Troubled Assets Relief Program (TARP) to another round of supposed stimulus only makes the upcoming monetary inflation more certain and menacing.

This scenario is, obviously, very bullish for gold. But an even more positive outcome, like a significant economic rebound, would help gold’s cause by unleashing pent-up excess banking reserves that are currently overhanging the economy. So, over the longer term, gold wins either way.

But what about the short term? On an economic basis, as I noted, I expect more bad news from overseas. But I also expect the bloom to come off of the rose in the U.S. as well. For example, the November payrolls report that everyone went crazy over could be reversed as soon as the next report is released.

As John Williams of Shadow Government Statistics (shadowstats.com) notes, the November report was victimized by highly variable seasonal adjustments, which are themselves the result of the wildly volatile economic environment of last year. He expects the positive November surprise to be reversed, with an equally surprising upturn in the unemployment rate, with December’s reporting.

As John puts it, “The short-term reporting of payroll data is misleading—virtually worthless—at the moment.”

As far as gold itself, we were waiting for, even hoping for, some break in the metal’s dizzying ascent. But as Mencken warned, we should’ve been careful what we asked for. We wanted a healthy little correction or brief respite. What we got was a pretty vicious sell-off.

Still, this should be good for the market. The speculators were overloaded on the long end, and the commercials were oversold on the short end. Just as the speculators jumped ship, we should begin to see short covering from the commercials come in to support the market.

More importantly, we should also see physical demand return in force upon the first signs that the price has bottomed.

This brings up the argument that, until recently, was raging amongst gold bugs and bulls. Some maintained that it was physical demand driving gold higher, while others held that a weakening dollar was behind the big rally.

In truth, it was a bit of both—and for gold to continue its rally, we will need both factors to contribute going forward. The good news is that both seem likely to remain in effect for some time.

Physical demand will remain robust as the global economy recovers and grows and, as I’ve noted, there is little reason to expect sustained strength in the U.S. greenback.

A Buying Opportunity
If this rally was to play out like the similar breakouts in 2005 and 2007, I was forecasting a gold price in the $1,350-$1,500 range by March or April. Yet gold’s recent trajectory had left me wondering if the metal was going to hit that mark much sooner… or overshoot it on the upside.

As it turns out, the sell-off put a much-needed squiggle in the price trend, and leaves gold back on track to hit our previous targets.

So is this a buying opportunity? I think so. We may see further weakness if there are further credit downgrades overseas, or if some other potential crisis frightens the market and sends investors running for cash. And the thin holiday markets can bring nerve wracking volatility—to both the upside and downside.

But when it’s all said and done I expect short-covering and physical demand to stabilize the gold price and set us up for a renewed ascent this year.

—Brien Lundin

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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  • http://PersonalLibertyDigest Lora B

    How does an individual buy gold and know they are not getting ripped off, I watch the Lear, Capital, Godline etc and they all are trying to sell gold. But I am fearful of sending thousands of dollars to buy gold and it may not be legitimate.

    Thanks, I reverted to buying some Gold stocks, for now that is, still would be interested in buying some gold bars, and maybe coins

    • http://www.boblivingstonletter.com/ Bob Livingston

      Dear Lora B.

      Here is some information for you on gold buying: http://www.personalliberty.com/preserving-wealth/uncle-sam-did-something-right/ and http://www.personalliberty.com/personal-liberty-articles/rare-coins-and-precious-metals-101/. For your gold and silver buying needs I recommend these two companies: Asset Strategies International and Gold Rarities Gallery. There are links and telephone numbers to both companies in the stories I linked for you.

      Best Wishes,
      Bob

      • Paul

        People dealing in Gold and Silver as a Comodity and an Investment are as much a Traitor to destroy this Nation as is Warberg,Rothchild, Volker, and Greenspan,and NOW Bernakeas.the Same As ALL the Manufactures who Abandoned the Ship U.S.America when they Started to manufacture ther products in Mexico and Forgin Nation because of the high taxes put on labor That was put on them by the Same people who unlawfully Passed the SixteenthAmendment and Private Zionist Controled Federal Reserve Act.Which Violate the 4Th and Fift Amendmedments and the (Proiobitions )No Tax on Exports. The Federaslist paper stated ther is never to be paper money EVER. Why?? BECAUSE It has no Life forfiture, andZionist Jew Banker paper is Total Inslavement and earns them interest wen they have no labor involve n exchange for labor or Tangible assets.
        Gold and Silver money Is Our Pocket money Not what we stash for investment like Antiqus or realesrate and if you See How these Bastards(unlawful mattiges)Deceived You Gullible people to beleive a Note is a Dollar, and how it is being changed first frome Gold and Silver cetificates then to a Note and now Hiding where the private Bank is Located ,and the Lawful reuirement That y being only legal tneder note bach to Lawful Gold and Silver Coin.THAT THEY NEVER WERE DOLLARS… But a Receipt to get back Your Dollar.
        But when These Clever Anti American Jew Set up the Scam they were To Destroy them when the Notes were Repaid that is why they were nunberd1 to 12 and could only lend out 50% more then the gold they had in their Volt A Silver Certificate or Green federasl reserve Note Nver was or never will be a Dollar.a dollar Noey of Accountis a Spanish Milled Dollar 1.0Th Oz. Gold or 412 rains Silver and since they are not redeamable backt to Spicee They No longer are Legal But are Unlawful. and AreKept in Force by the Same Murdering Bastards that put it there in the First place ant not removed Because they Got rid of every American On the Supream Courts and District Courts
        “No State s To Make any thig but Gold and Silver Coin a Tender in Payment of a Debit “,The Congress has the oligationt to coin money Period and Judge the Value of other Nations Money Not the Rabbies As did in the Temple in the time of Christ and his Assination. The United States is Indivisable ,As WHY Niggard Abraham Lincom Selected Slaves to enforce th south from seperating from the Umion it was hois and the people who convined hiom to war rather let them Exi, that they Volentarly Ented in to.
        So if it is True that the United States is Indivisinle And the States can not Make any thing but gold or Silver,THEN Neither can This Communist Comtrolled Federal Banks or U.S. Government do it Either…
        Roosevelt did not Borrow Bankers Goldand Silver, he borrowed Credit,did not put new Goldin Circulation so he could then steal the Gold from the people. Therefore He did not have the Right to borrow Gold or Silver, except on the Good Credit of Wshinton D.C it’s assetes and it”s Territories, not on the States and If the Bastard Needed Money To pay His debits he Should have asked the people for loans of the money and then repay them when he got his Corporation out of Bankruptcy that they caused themselves.as they are now Doing Again

    • foldenrev

      Lora B
      I have bought precious metals thru APMEX.com with excellent results over a period of years. However, you probably also have coin/bullion dealers near you. Check prices at APMEX and then visit your local bullion dealers & compare prices, keeping in mind that the prices can change literally from minute to minute. Or just buy from APMEX.

      DO NOT let anyone talk you into buying numismatic (collectors) coins, they are way overpriced! Numismatics is an experts only market.

      DO NOT buy “paper” gold as in GLD, et al. Buy physical (in your hands) gold only. A lot of people are going to end up finding that their paper certificate gold is not actually there when push comes to shove.

    • Jack Lovett

      Check out themoney-changer.com Franklin Sanders is a fin man. Done biz with them since 1985.

      Jack Lovett

  • joe yechout

    Buy from Apmex, or TMG. You can use a credit card, or bank wire. But a bank wire is not cheap. I have sent a personal check, sending via FED-X, but not cheap either. Worked OK. With a personal check you get 3% reduction with most places and call them if they rec. or not.
    When you call and place an order, they lock in your price and expexy rec. of payment within 5 days. got to watch their premiums.
    I like silver because I’m convinced it has a longer way to run.
    Joe

  • joe yechout

    P.S. , to last response, Buy the bullion that comes form a well established refiner/mint company.

  • Bill & Dorothy in Indiana

    we do enjoy your emails and articles. thank you
    bill & dot in indiana

  • realbigal

    Try to be more accurate. The price of gold is not “…rising in nearly parabolic fashion…” Take a piece of standard quardrille graph paper and graph y = (x)(x) (That is, y equals x squared.) You will quickly see that your statement is an inaccurate exaggeration and is therefore misleading. Those of us who are fighting for freedom should try very hard to avoid inaccuracies and exaggerations. Leave those sins to the Establishment Media.

  • american eagle gold coin

    I stumbled upon your blog thru bing. I really like the entries which are well written and informative. I totally agree that collecting gold coins is a brilliant idea to diversify your portfolio. I have bookmarked your site and will certainly visit again. Keep up the good work.

  • http://www.cool-movies.zwid.org Kenton Lowenthal

    Nice post, thanks for posting. Now I just need to get up off the couch and actually do something… Pleasee continue this great work and I look forward to more of your great blog posts.

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