The long-term bull market in gold is now 11 years old – and, in spite of recent market stagnation, the latest phase of the rally appears to have just started.
My advice is simple: Prepare yourself. It still has a long way to go.
In the wake of very disappointing news on the U.S. labor market, the gold price today soared above $1,600 an ounce.
The long term bull-run in this yellow precious metal has been slow and steady. After Gordon Brown finished selling 60% of the U.K.’s gold reserves in 2002 at an average price of $275 an ounce, the market has never looked back.
Yet, until this morning, the price of gold has been basically unchanged since last year. Gold closed out 2011 at $1,566.80 an ounce. But at last glace today, thanks to the fact that the U.S. economy added only 69,000 jobs in May, far fewer than expected, the yellow metal had surged almost $60 to $1,621.77.
The gold price may even make another dip – but it will not remain at these levels for long.
Debt woes in Europe have prompted a sell-off across a broad spectrum of financial assets and commodities. A weak U.S. economy has added fuel to the fire and a weak Chinese economy has further eroded market confidence.
These days, the market perceives the only safe haven investments to be the greenback and the U.S. bond market.
The market is wrong. The only safe haven is the ultimate reserve currency – gold. And today’s lackluster employment figures prove it.
The Fundamentals Tell the Real Gold Story
A $16 trillion U.S. deficit and artificially low interest rates here and in Europe have created the perfect environment for gold.
Fiat currencies are now worth less than ever before in history. The U.S. dollar is simply the best of the worst, and that’s why it’s catching a bid.
The fact of the matter is that the U.S and Europe cannot allow interest rates to go higher. Higher interest rates mean it will cost more for governments to finance their unprecedented levels of debt. If interest rates were to move higher, the deficits would swell. The compound impact of interest would cause both governmental and individual turmoil. And governments will not allow that to happen, particularly in an election year.
However, low interest rates are the gold market’s best friend, and they’re here to stay for the time being. The higher dollar has caused gold prices to slip to the bottom of its trading range, but it will not stay there for long.
Central banks are continuing to buy gold in 2012. They purchased more than 450 tons in 2011, and they will buy at least 400 tons this year. According to the International Monetary Fund, the Philippines raised its gold holdings by more than one million ounces in March alone. Mexico, a large buyer last year, bought more gold in April. Turkey, Kazakhstan, Ukraine and Sri Lanka have also been buyers this year
Technically, Gold is a Screaming Buy
So far over the past 12 months, gold has traded up to $1,920.70 and down to $1,523.90. Since September 2011, gold has hit its support level on three occasions.
In technical-speak, this weekly gold chart shows a strong triple-bottom formation. When a triple bottom occurs, technicians generally expect a break above resistance. In the case of gold, this would mean a new high and a move to $2,000 an ounce.
The monthly chart is indicating that the current price correction in gold looks a lot like the correction that occurred in 2008. The chart pattern looks eerily similar.
One of the most bullish signals for the gold market is that the non-believers have been coming out of the woodwork lately. For example, Warren Buffet and his sidekick Charlie Munger both spouted anti-gold sentiment during Berkshire Hathaway’s recent annual meeting.
Munger went as far as saying that an investment in gold is “uncivilized.”
But they aren’t the only bears out there. Whenever the gold market has dipped over the past decade, the bearish commentary spews forth. And the more bearish these pundits get, the higher the market climbs. Even the believers have been getting nervous lately. Open interest (the total number of long and short positions) in gold futures traded on the CME has dropped by more than 16% in the past year. This means that weaker longs have liquidated their positions.
The Perfect Time to Buy
Government deficits in the U.S. and Europe keep growing. Interest rates are making record lows in the U.S. A continued sluggish economy may even cause the Federal Reserve to introduce another round of quantitative easing, just to keep things chugging along.
We are currently in the midst of a U.S. Presidential election, which promises to center on future economic and fiscal policy. Regardless of which candidate wins in November, the $16 trillion debt will be a noose around the president’s neck.
The current administration has conducted policies that have addicted many Americans to entitlements. Without entitlement reform and reducing the size of government, it will be impossible to lower the debt without raising taxes dramatically. Raising taxes will slow the economy down even further.
While the greenback rallies, remember that is not rallying on U.S. strength – but rather on weakness elsewhere. Even the world’s central banks doubt the viability of paper currency and continue to buy gold on dips. And so should you.
Now is the perfect time to buy, whether you’re new to gold or are already a holder of the ultimate reserve currency.
I have no doubt that 2012 will be another up year for the gold market. I maintain that gold will trade above $2,000 an ounce by the end of this year.
Your eyes and ears in the commodities market…
P.S. No matter what people may try to tell you, gold and other precious metals will always have value as real, hard currency. A little over twenty years ago, everyone was saying that silver was done for. I knew they were wrong, and I could see that silver was in prime position to rise higher than ever before. When silver’s wild ride came to a stop, it was up over 800%. Today, I see another commodity in the same place that silver was all those years ago. To find out where I see this commodity heading – and how you can profit from it – click here for my latest video.