The Gold Rush

Well the precious metals have taken a huge hit the last couple days.  It reminds me of the move it make a a couple months ago.  Volatility is running rampant right now.  It's easy to get nervous about the yellow metal and the stocks surrounding it.  I continue to look at fundamentals and these companies are trading at historically low valuations.  Then I read things like this from Citigroup:

While we remain cautious on Gold in the near term and believe that we could correct lower towards $1,600 and possibly re-test the $1,550 area we continue to believe that the bull market remains intact. As with the Equity market we believe that 2012 may be reminiscent of 1978 when Gold rallied nearly 50% off the 1977 close. Such a move would likely put Gold in the $2,300-2,400 area in the 2nd half of 2012.

On a longer term basis we expect even higher levels and target a move towards $3,400 over the next 2 years or so. We are not yet on board with the idea of a move with the same magnitude as seen in 1970-1980 when the last spike in Dec 1979-Jan 1980 saw Gold almost double in price as Russia invaded Afghanistan. Such a dynamic would suggest a move above $6,000 but we prefer to take a more conservative stance and look for a move similar to that seen without that final event driven push at the high which was a “blowout top” in Jan. 1980.

 Or this from Jim Rickards:

With gold and silver continuing to consolidate the recent gains, today King World News interviewed KWN Resident Expert Jim Rickards, Senior Managing Director at Tangent Capital Markets, to get his take his take on where gold is headed.  When asked about what he is watching right now Rickards stated, “With the G20 coming up, Eric, I think they are going to dust off the SDR solution.  The next time there is a major global financial crisis the Fed is not going to be able to bail out the world because they are out of bullets, but the IMF and the G20 will be able to print these SDR’s.”

 Jim Rickards continues:

“At that point the game really is over.  It will be very transparent that we’re just replacing one kind of paper money with another kind of paper money and that is going to accelerate the rush to gold. 

As soon as people do the math, this is where you start to see these $5,000, $6,000, $7,000 an ounce price targets for gold.  That’s coming sooner than people expect.  Sometime in the next couple of years we will see that radical transformation of the international monetary system into gold.

The thing is right now we are nowhere near bubble territory.  If gold were $10,000 we’d be having a conversation about whether that was a bubble, but at the $1,800, $1,900 level that’s absolutely not the case.  If you are going to ride this long-term trend at the very high levels that we are talking about, you are just going to have to bear this volatility....

My view is when I see the price of gold go down $100 I buy more.  I say, ‘Here is a great buying opportunity.’  I have a substantial percentage of my investment portfolio in gold.  I have other assets as well, I have land, fine art, cash and other things.  It is worth noting that if institutions even went to 5% (of their assets) in gold, the price would go to the moon. 

Even if you apply only .5% to the kinds of trillions of dollars of investable assets that we are talking about, as I say there is nowhere near enough gold at anywhere near these prices to satisfy that kind of demand. 

That’s not a big shift.  That’s not saying they are going to quadruple or quintuple their gold holdings, it just says they are going to maybe double it at most, and that would be an earthquake right there.  And keep in mind that doesn’t even include the central bank buying and the retail buying.”

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Greg Hunter of USA Watchdog says bullion's fundamentals are as strong as ever

Economist Dennis Gartman announced in his newsletter, yesterday, that he has sold all of his gold. I don't know if it was physical or paper gold in an ETF (exchange traded fund), but it is gone. According to Bloomberg, Gartman said, "Since the early autumn here in the Northern Hemisphere gold has failed to make a new high. ... Each high has been progressively lower than the previous high, and now we've confirmation that the new interim low is lower than the previous low. We have the beginnings of a real bear market, and the death of a bull." Mr. Gartman thinks so much damage has been done to the price of gold and to market psychology that, in his words, "wholesale liquidation, and perhaps forced liquidation, shall be the outcome."

I think Mr. Gartman is a trader at heart, but there is a big difference between a gold trader and a gold investor. Traders are usually looking at the short term, and in the short term, Gartman is probably correct. The price of gold will probably sell off some more before this move is through, but the gold bull is hardly finished. I say this because of two main reasons. Unprecedented global debt is reason number one. More debt has been created than ever before in human history. Global over-the-counter derivatives total more than $700 trillion according to the Bank of International Settlements (BIS). (This is more than a $100 trillion increase from the BIS number from December 2010.) This is a staggering amount of debt that is more than 10 times the entire world GDP. You cannot "grow" your way out of this kind of leverage. This is a mostly unregulated dark pool of debt bets with no rules, guarantees or public market. 

Dr. Marc Faber of the popular GloomBoomDoom.com recently predicted one day the entire derivatives market will "cease to exist and become zero." Faber thinks that "global collapse" is coming and "most people will be lucky to still have 50% of their wealth in 5 years' time." That is one big reason to hold physical assets like gold. Gold should be looked at as insurance. Selling your physical gold now would be like driving your car or living in your home without an insurance policy.