Thread: Gold will Reach Mind-boggling Levels - for Good Reason!

Gold will Reach Mind-boggling Levels - for Good Reason!

By Lorimer Wilson
Nov 26 2009 10:56AM
www.preciousmetalswarrants.com

We are staring at a nascent but potentially and probably startling increase in the price of gold and precious metals mining stocks and warrants. Gold will reach mind- boggling levels because the actions of our political leaders and their academic and credentialed enablers are virtually guaranteeing it with their current actions.

Currency Traders Strengthening Price of Gold

The US dollar has and continues to be pummelled by currency traders because they see the US Treasury and FED working overtime to deliberately devalue the dollar in response to politicians who think that spending money the country doesn’t have on programs it doesn’t need is the answer to the continuing economic malaise. Setting interest rates at near zero percent obviously exacerbates the dollar problem.

Carry Trade Supporting Price of Gold

The dollar has now replaced the Japanese Yen as the favoured currency of the carry trade. Borrowing US dollars at nominal interest rates is the hedge fund manager’s most obvious go-to strategy. Currency traders will be most reluctant to allow a sudden rise in the US dollar to cut the legs from beneath the carry trade of which they are participants. Consequently, there is little reason to think a rise in the US dollar will interfere with the consistent and persistent rise in the price of gold.

Supply and Demand Ratio Increasing Price of Gold

Couple these currency issues with the limited supply of above-ground gold and the fact that mine production has been reducing year over year and the inevitable consequence is demand exceeding supply resulting in gold being bid to ever higher prices.

Loss of Safe-Haven Status for U.S. Dollar Supporting Price of Gold

Perhaps the most significant new factor in the gold price equation is that the US dollar is no longer perceived as the automatic safe haven harbour for concerned investors around the globe. While this statement cannot be made definitively, the fact is we are already a long distance from the fall of 2008 when global investors reflexively flocked to the US dollar as a safe haven in the face of the global financial turmoil.

Increased U.S. Budget Debts Strengthening Price of Gold

Needless to say, scepticism about the merits of the dollar mounts monthly. The actions of the US administration and Congress place it on an unprecedented spending binge organized by the Treasury and FED which dishes out vast quantities of new digital dollars designed to mop up the flood of new and maturing debt.

This revolting process is causing foreign central banks to rapidly lose their appetite for US Treasury bonds. The expanded FED balance sheet coupled with monetizing debt inherent in quantitative easing is the boogeyman of international finance.

Increased Investment Demand Maintaining Price of Gold

That leaves us with gold, the only safe haven refuge of undisputed value. It is real money, and everyone knows it instinctively. That is why many foreign central banks are quietly and actively accumulating it. Investment buying, especially by the big money players as represented by central banks, sovereign wealth funds and leveraged hedge funds inevitably spring into the purchase mode whenever price weakens, even modestly. They provide a floor price for the metal on its inexorable trek northward.

This means you and I can invest with confidence knowing that major pullbacks almost certainly will not happen. Moreover, if and when they occur, it will be purely a very temporary, brief and shallow phenomenon.

How high will precious metals equities and the gold price go?

My sense is that it will be in orders of magnitude far greater than most analysts allow themselves to state or believe. We frequently see price projections of 20 or 50 percent higher than today.

Some even allow themselves to suggest that gold will double in price before it has reached its cycle high. We may even see a rare analyst allow himself to speculate that gold prices may find and end at the $3,000 an ounce level. Of course a few discredited gold bugs suggest numbers even greater.

So why am I so optimistic about the eventual price of gold?

It is because an affinity for and an understanding of the political mindset causes me to understand what decision makers will do…and why. Because a politician follows the political calendar, s/he only concerns himself/herself with the time horizon leading to the next election.

Anything requiring decisions beyond the date of the next election will be the responsibility of whoever is on the next watch. If the politician in office today is in office after the next election, a shrug of the shoulder indicates that worries of that kind can be dismissed for now to be dealt with later.

So major and difficult, but necessary, decisions are inevitably deferred. In their place spending money gives the appearance of concern and of doing something to fix the apparent problem. Aren’t those elected officials doing what we elected them to do? It certainly looks as if they are.

More cynical observers would characterize these actions by the political class and their senior bureaucratic minions as buying time hoping that something positive might magically emerge.

Those who are super cynical would even conclude give-away programs are designed simply to bribe the voters in order to curry goodwill for another term at the levers of power.

What all this means is that there is no discipline or inclination to do anything of real value in fixing the core economic and financial problems. That being the case, new programs, more spending stimulus and money creation will always be the order of the day. Hence the currency will devalue and investors will find gold as their best safe-haven refuge.

The dollar will devalue because massive dilution caused by incessant money creation allows future obligations to become more manageable – for government – because it is the only way that it can meet its future obligations for employee pensions, accumulated debt, Medicare and social security.

A nominal dollar which buys much less in the future than it does today is still a dollar. Unfortunately the holders or recipients of those devalued pieces of paper will find they are essentially fraudulent promises.

These realities make gold the closest thing to a sure-bet investment. They are also the reasons why gold will go much higher than most of us allow ourselves to contemplate.

Buckle your seatbelts and enjoy the ride ahead!

By: Arnold Bock
www.preciousmetalswarrants.com and www.insidersinsights.com

http://www.kitco.com/ind/Wilson/nov262009.html

This Little-Known Rule Could Send Gold to $10,000

By Porter Stansberry
Dec 2 2009 9:10AM
www.dailywealth.com

It's one of those numbers that's so unbelievable you have to actually think about it for a while...

Within the next 12 months, the U.S. Treasury will have to refinance $2 trillion in short-term debt. And that's not counting any additional deficit spending, which is estimated to be around $1.5 trillion.

Put the two numbers together. Then ask yourself, how in the world can the Treasury borrow $3.5 trillion in only one year? That's an amount equal to nearly 30% of our entire GDP. And we're the world's biggest economy. Where will the money come from?

How did we end up with so much short-term debt? Like most entities that have far too much debt – whether subprime borrowers, GM, Fannie, or GE – the U.S. Treasury has tried to minimize its interest burden by borrowing for short durations and then "rolling over" the loans when they come due. As they say on Wall Street, "a rolling debt collects no moss."

What they mean is, as long as you can extend the debt, you have no problem. Unfortunately, that leads folks to take on ever greater amounts of debt... at ever shorter durations... at ever lower interest rates. Sooner or later, the creditors wake up and ask themselves: What are the chances I will ever actually be repaid? And that's when the trouble starts. Interest rates go up dramatically. Funding costs soar. The party is over. Bankruptcy is next.

When governments go bankrupt, it's called a "default." Currency speculators figured out how to accurately predict when a country would default. Two well-known economists – Alan Greenspan and Pablo Guidotti – published the secret formula in a 1999 academic paper. The formula is called the Greenspan-Guidotti rule.

The rule states: To avoid a default, countries should maintain hard currency reserves equal to at least 100% of their short-term foreign debt maturities. The world's largest money-management firm, PIMCO, explains the rule this way: "The minimum benchmark of reserves equal to at least 100% of short-term external debt is known as the Greenspan-Guidotti rule. Greenspan-Guidotti is perhaps the single concept of reserve adequacy that has the most adherents and empirical support."

The principle behind the rule is simple. If you can't pay off all of your foreign debts in the next 12 months, you're a terrible credit risk. Speculators are going to target your bonds and your currency, making it impossible to refinance your debts. A default is assured.

So how does America rank on the Greenspan-Guidotti scale? It's a guaranteed default.

The U.S. holds gold, oil, and foreign currency in reserve. It has 8,133.5 metric tonnes of gold (it is the world's largest holder). At current dollar values, it's worth around $300 billion. The U.S. strategic petroleum reserve shows a current total position of 725 million barrels. At current dollar prices, that's roughly $58 billion worth of oil. And according to the IMF, the U.S. has $136 billion in foreign currency reserves. So altogether... that's around $500 billion of reserves. Our short-term foreign debts are far bigger.

According to the U.S. Treasury, $2 trillion worth of debt will mature in the next 12 months. So looking only at short-term debt, we know the Treasury will have to finance at least $2 trillion worth of maturing debt in the next 12 months. That might not cause a crisis if we were still funding our national debt internally. But since 1985, we've been a net debtor to the world. Today, foreigners own 44% of all our debts, which means we owe foreign creditors at least $880 billion in the next 12 months – an amount far larger than our reserves.

Keep in mind, this only covers our existing debts. The Office of Management and Budget is predicting a $1.5 trillion budget deficit over the next year. That puts our total funding requirements on the order of $3.5 trillion over the next 12 months.

So... where will the money come from? Total domestic savings in the U.S. are only around $600 billion annually. Even if we all put every penny of our savings into U.S. Treasury debt, we're still going to come up nearly $3 trillion short. That's an annual funding requirement equal to roughly 40% of GDP.

Where is the money going to come from? From our foreign creditors? Not according to Greenspan-Guidotti. And not according to the Indian or Russian central banks, which have stopped buying Treasury bills and begun to buy enormous amounts of gold. The Indians bought 200 metric tonnes this month. Sources in Russia say the central bank there will double its gold reserves.

So where will the money come from? The printing press. The Federal Reserve has already monetized nearly $2 trillion worth of Treasury debt and mortgage debt. This weakens the value of the dollar and devalues our existing Treasury bonds. Sooner or later, our creditors will face a stark choice: Hold our bonds and continue to see the value diminish slowly, or try to escape to gold and see the value of their U.S. bonds plummet.

One thing they're not going to do is buy more of our debt. Which central banks will abandon the dollar next? Brazil, Korea, and Chile. These are the three largest central banks that own the least amount of gold. None owns even 1% of its total reserves in gold.

I examined these issues in much greater detail in the most recent issue of my newsletter, Porter Stansberry's Investment Advisory. Coincidentally, the New York Times repeated my warnings – nearly word for word – a few weeks ago. They didn't mention Greenspan-Guidotti, however... It's a real secret of international speculators.

My readers know that Greenspan-Guidotti means the U.S. is likely to have a severe currency crisis within the next two years. How high will gold go during this crisis? Nobody can say for sure. We've never been in the situation we are now. The numbers have never been so large and dangerous. But I wouldn't be surprised at all to see gold at $10,000 an ounce by 2012. Make sure you own some.

Good investing,

Porter Stansberry

http://www.kitco.com/ind/stansberry/dec022009.html

Do not buy gold. It is already over priced. They are pumping it right now so they make money. Dont believe this bs.