Gold and Energy Advisor
Real Wealth #297 08/03/2011
Gold Soaring To New ALL TIME HIGHS; World's Financial Markets on the Brink of New Crisis
Gold made a new and very important high today climbing to over $1670 for the first time in history. There are three major forces driving gold higher.
Force 1: The negotiated debt ceiling settlement is being seen by world's Financial markets as a smoke screen. No matter how many times my fellow Republicans repeat the mantra that Washington has a spending problem not a revenue problem the truth is we cannot make a dent in the national debt unless we reduce spending and raise revenues. Without swift tax reform, lowering corporate and individual rates in exchange for eliminating the special interest patch work of tax breaks and subsidies we're going to continue to see the national debt spiral higher and the dollar weaken.
Force 2: Europe is creeping forward way too slowly on addressing its fiscal and monetary problems. Greece, Italy, Spain and Portugal are in serious shape. Banks in Europe are on the hook as are many banks throughout the United States who have been playing interest rate arbitrage i.e. borrowing at a quarter of a percent and lending to Italy for 6% and 9% in Greece. For anyone in the know its a catastrophe in the making. Bottom line: A financial crisis worse than the one that took place in 2008 and 2009 could ignite at any moment. Meanwhile, since many Europeans take the month of Auguist off the first emergency meeting to address the Euro and the danger isn't scheduled until September 6th, in France. This is a dark cloud getting darker by the day.
Force 3: Central banks are now increasing their gold reserves away from the dollar and Euro. South Korea became the latest government to disclose a big bullion purchase, saying Tuesday that it recently bought 25 metric tons - more than doubling its holdings to 39 metric tons. Mexico, Russia and Thailand have also been HUGE buyers in 2011.
When I say HUGE I mean HUGE. This year alone, governments have almost tripled their net gold purchases, increasing their holdings by 203.5 metric tons, up from a 76-metric ton rise in 2009, according to the World Gold Council, an industry group backed by miners.
The demand marks a major shift in central banks' thinking about gold. Increasingly, they see bullion as protection against risks posed by declining paper currencies and global economic upheaval, and their vast resources and conservative bent make them a powerful force in the gold market. In short they're recognizing the safety that gold has represented during the last 5000 years of human history.
While gold doesn't generate income, which doesn't mean as much when you consider interest rates are at historic lows.that shortcoming is less glaring among historically low interest rates.
Before 2010, governments had on balance been shedding their bullion for two decades, during which gold was seen by some as a relic. According to data from GFMS Ltd., a metals consultancy, 1988 was the last year that official holdings increased.
Greece, Italy, Spain and Portugal are in serious shape. Banks in Europe are on the hook as are many banks throughout the United States who have been playing interest rate arbitrage i.e. borrowing at a quarter of a percent and lending to Italy for 6% and 9% in Greece. For anyone in the know its a catastrophe in the making. Bottom line: A financial crisis worse than the one that took place in 2008 and 2009 could ignite at any moment. Meanwhile, since many Europeans take the month of August off the first emergency meeting to address the Euro and the danger isn't scheduled until September 6th, in France. This is a dark cloud getting darker by the day.
"We definitely have seen a sea change" in central bank attitudes toward gold, said David Greely, chief commodities strategist at Goldman Sachs Group. Central bank buying provides "longer-term support for gold prices," he said.
I predicted that gold would hit $1750 this year back in January. With gold trading as high as $1670 today it is still fare below the inflation-adjusted record of $2,395.03, hit in January 1980. I fully expect gold to climb to $2500 in the next 12-24 months with a real possibility that it hits $2,500 in a panic.
The panic could take place any day. As you are aware the Dow and S&P have fallen for 8 straight days and is off more than 10% from its recent highs. We've seen the vast majority of indexes break their 200 day moving average.
My staff and I believe there is a good chance that the Dow and S&P could have entered a BEAR MARKET that could wind up driving the major indexes down another 10 to 15%. Yes, the odds are now in favor of a total correction of 25% putting the Dow back to 10,500.
This is a remarkable when I and my staff believe the stock market is already trading at a 10% to 15% discount of its real value.
If you've been following my oil stock recommendations in the Gold and Energy Advisor model portfolio you should have put in place the covered calls we have recommended. Our covered call and put writing strategies should work very well in this market.
Since inception the GEA model portfolios have delivered about 25% return a year. I expect oil stocks to fall back a bit BUT remain confident that we will see $125 oil sooner than later. So please make sure you follow my oil recommendations. When the economy starts to show some light or if the dollar continues to fall we should see the oil and energy stocks we recommend- to do extremely well.
An amazing accomplishment in the insane markets we have lived through the past few years.
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