Gold and the $345 Myth

December 22, 2008 Gold Stocks, Inflation, Physical Gold No Comments

As we enter the Christmas week I would expect the markets to be relatively calm as a majority of traders have packed their bags and gone on holiday until after New Year. That being said, I would also expect the possibility of some devastating economic news being released while the traders are gone in an attempt to slide it under the rug while no one is looking. With light volume, any bad news could roil the volatility that’s already in the markets.

Let’s take a look at what the markets are up to this morning. The DOW is down 30 at 8,474, the NAS is down 21 at 1,543 and gold is up $9.50 at $847.40. It would be nice to see everything stay in the trading range until after the Holidays, but in this market I think it is best to expect the unexpected.

Today I would like to address the rumors that are floating around, that say the US and the global economies are entering a deflationary phase where gold will drop, along with everything else. Some predictions put the bottom for the price of gold in the mid $300.00 range. My position on this is to acknowledge that we are seeing deflating prices as the credit squeeze worsens, but that this deflationary phase should be very short due to the massive governmental imposed “quantitative easing” being applied around the globe. The brush fire of inflation has already been lit and so far the smoke has been concealed pretty well.

The dollar will be toast after all this “quantitative easing” filters through the economy. The chart is showing the beginning of this process already. As more and more of this printed currency filters through the economy the dollar drop will accelerate taking the dollar to .72 , .62 and on down to .52 or lower.

Gold Is Not Going To $345 Per Ounce!

Porter Stansberry summed up the condition of the US and global economy in his post on Dec 19th.

The world’s leading economy, the United States, has become fantastically indebted at every level of society.

Entire industries exist today purely because of the widespread availability of easy credit a trend that has ended. U.S. consumers have refused to save any significant portion of their earnings for more than a decade. This trend was unsustainable and has also come to an abrupt end.

As I’ve covered previously, fueling the debt and consumption binge in America were phony insurance schemes (AIG’s bogus default swaps), record high levels of mortgage debt, and global investors (primarily Asian) buying American mortgage paper. In the most basic analysis, China and Japan lent us endless sums of money so we could keep buying their exports. America’s real estate bonds became the world’s collateral, supporting ever-greater amounts of borrowing. This global game of credit expansion has come to a crashing halt because the creditworthiness of American consumers and financial firms collapsed. In the dark days of September, October, and November, we witnessed a synchronized margin call, where credit of all types was called in. Any asset liquid enough to generate cash was sold.

gold bars and passport Gold and the $345 Myth

Real Wealth

Gold was an easy asset to unload and one of the few where traders had made good profits. As the markets went down, gold was sold to raise cash to cover other positions. Now we are facing the next phase of this crisis. As confidence in the dollar wanes more and more foreign governments are seeking the security of gold to protect their capital. This move out of dollar denominated paper will drive the dollar to new all time lows.

Dennis Gartman gives us some numbers that are stunning to say the least. I’ve underlined the the two months part just so it is not missed!

The U.S. deficit for the two months of the fiscal year to date now stands at a record $401.6 billion, compared with the most recent official budget estimated for the full fiscal year of a deficit of $481.8 billion. This is a shockingly large number, and even we, who usually pay little if any heed to the deficit, find it both awe inspiring and terribly, terribly depressing as a tax payer.

These kind of numbers are unprecedented. The Fed has said that it will do anything to re-float the economy and apparently they were not kidding. Couple these numbers with the current rush for physical gold and it is pretty easy to see that the deflationary phase of this down turn will not last long. The physical market for gold is in direct contradiction to the paper market for gold. This will change shortly and I expect that gold stocks will lead the physical gold in the next leg up.

A lot of notables in the gold trade are on the inflation side of the discussion. Here are just a few comments for your perusal.

Howard Ruff , 12-8-2008 GOLD AND SILVER WILL BOUNCE BACK WHEN INFLATION REASSERTS ITSELF

It is axiomatic that deflation is the spawning ground for inflation, as the government doesn’t know how to fix deflation, depression or recession other than to throw money at it. THE CREATION OF ALL THE MONEY FLOATING THROUGH THE ECONOMY WILL EVENTUALLY MEET ALL THE CONDITIONS FOR INFLATION. You need to be patient, which is hard.

Jim Rogers, 10-22-2008 Throughout history, whenever you’ve had gigantic amounts of paper money created, it’s led to inflation down the road. Things are going down now because of forced liquidation but that’s not deflation, that’s temporary, Jim Rogers, CEO of Rogers Holdings said.

Puru Saxena, Editor, Money Matters, 11-14-2008 – These ridiculous government bail-outs are hugely inflationary and will further erode the purchasing power of paper currencies. I urge you not to be fooled by the recent strength in the US Dollar. This is nothing more than a short-covering rally and the American currency is likely to witness an epic crash in the future. There is no way you can have a strong currency when you are the greatest debtor nation in the world (debt of US$54 trillion).

These are just a sampling of what is being said around the world. There is a major financial storm brewing and we have only just begun to experience a small taste of it’s wrath. When all is said and done, gold and gold stocks will be seen as the place to have parked money in order to weather the storm.

Use any dips in the price of gold to acquire both physical and paper gold. These windows of opportunity will close rapidly.

Till next time, good luck and good trading!