Gold Undervalued?

Buying gold coins and gold bullion makes sense when you look at the big picture in regards to the value of the dollar.  Gold coins and bullion are set to rise two to three times from present levels.  Do not let this opportunity slip away!

Gold ends the week at $885.80 after having once again given up it’s tenuous hold on $900 per ounce.  This is becoming a monotonously repetitive story in the short term, but if we step back and look at the big picture, gold’s performance this past week is just a continuation of the trading range that gold has been in for weeks.

The markets closed Friday with the Dow up 44.29, the NAS up 1.90, the dollar off .25 (.32%) at 84.54 and gold was down .40 cents at 885.80. Lack of interest in gold was blamed, once again, on a lessening of fear and the need for hedging with all the signs that the economy could be nearing a bottom.  What hogwash. This general equities rally could be a really handsome dead cat bounce, but the bottom line, the cat is still dead!

Three items were generally noted for gold’s fall from grace this week.

1. Gold’s safe haven demand diminished after the S&P posted its best month in nine years this April.

2.  Gold came under pressure after the Reuters/University of Michigan Survey of Consumers showed that  consumers felt more confident in April than at anytime since the Lehman brothers failure last September.

3. U.S. data has been showing signs of declining consumer spending and income, which hints at a deflationary  climate.  Which “experts” say is bad for gold.

Let’s step back and look at this picture from a little distance.  These are knee jerk reactions that do not look at the big picture.  If anything they are extremely microcosmic in their perspective.

The current bull market in gold is about 8 years old, and it has breached $1000 twice and has been trading above the old high of $850 for weeks. The naysayers are saying that with the recession nearing an end, gold’s bull is over and will once again retreat into the background and stay a meaningless player for the foreseeable future.  Nothing could be further from the truth!

That having been said, the truth is that the four-digit price that we have seen so far comes to us with no price inflation to speak of,  no effects of the huge increase increase in the money supply due to quantitative easing, and in spite of a rising dollar. Consider for a moment what happens to gold when those three factors are felt in unison: high inflation, a cash explosion effecting the economy, and a falling dollar?  These are huge factors that are built into the pipeline.  The only thing that is not predictable is the exact timing of the their appearance.  Gold can only react in one direction as these forces are felt in the economy and that direction is up.  This is why I am urging you to buy gold coins and gold bullion on any dips that we experience going forward.

There are five factors that play into the decision to take advantage of these dips and buy gold coins and gold bullion.  Individually they might not make the case for gold, but when combined, the conclusion is inescapable!

1.  What Was Gold’s Percentage Rise in the Last Bull Market: What if gold in this bull market repeats the  percentage  rise of it’s  last bull market? In the 70′s gold rose from $35 to $850, or 24.25%.  If that were to  occur with the 2001 low of $255, gold would trade at $6183.75 per ounce.  Not a bad return on gold that is  purchased in the $850 to $950 range.

2. U.S. Gold Holdings In Relation To The Money Supply:  Imagine for a moment that the U.S.   Government had the best interest of it’s citizens in mind (I know that’s a huge stretch, but  bear with me  here for a moment).  Government data indicates that the U.S.  currently holds 286.9 million ounces of  gold.  If  the government were back to each dollar by the amount of gold it possesses, the price of   gold would be $5,468 based on the current estimate of $1,569 trillion dollars in circulation.

3. Gold and the Dow Ratio: The ratio was about 1 to 1 in 1980 when gold peaked, meaning that the DOW and  the gold price were the same.  For that to occur today with the DOW at 8,212 gold would be at $8,212 per  ounce. The DOW is obviously over priced, so pick the level that you feel it will drop to and you will have the  price that gold should currently be trading at based on the price of the DOW.

4. All the Money in the World vs. Gold Reserves: If you line up the total currencies printed in the world,   roughly $4.8 trillion, divided by 929.6 million ounces total gold reserves held by all governments  that issue currency, you get a gold price of $5,246 per ounce.

5. U.S. Gold In Relation to  U.S. Government Liabilities: The current deficit and the new monies added to  the deficit by the current administration is but a drop in the bucket when you add in the  future liabilities for  Medicare and Social Security. Let’s play that game now and see what gold would be worth if those liabilities  were backed by gold. With the current value U.S. government liabilities at $55.2 trillion,  gold would have  to be valued at $192,401 per ounce. We know that will never happen, but it does kind of put things in  perspective!

Are you beginning to see the big picture.  There are too many signs pointing to a rising gold price for it to be held down for long.

Last year the general equities markets fell off a cliff and still we heard nothing but how gold wasn’t performing the way it should as a safe haven investment, and yet it ended the year 4% up. Name one other investment that performed that well in the “mother” of all financial debacles.  The case is undeniable that buying gold coins and gold bullion is a safe bet in this environment.

We very well may see gold trading in the upper to mid $700 range for a short time and I would urge you to back up the truck if that were to occur, but I do not see it as a lasting price for an ounce of gold.  The upside potential is two to three times whatever low gold finally puts in. Now is the time to buy while “blood is in the streets”.

For those of you looking to get into the mining stocks, I feel we still have a little lower to go, but I am not going to stop acquiring stocks for fear that we may have a little bit lower to go.  Once again the upside potential far out ways the downside risk.

Till next time, good luck and good trading.

Also Noteworthy:

• Buy Gold Coins and Bullion Now!
• Gold: Close To Spot
• Gold’s Next Move
• Buy Gold Coins, Bullion to Hedge Dollar Drop
• Golden Reality Check

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