Why Gold Won't Fold

"I don't get no respect," the late comedian, Rodney Dangerfield, repeatedly lamented. Unhappy gold buffs know the feeling. Despite mounting political, economic and financial turmoil worldwide, the precious metal, many gold traders gripe, is not getting the respect it deserves, as evident by what they view as its listless performance in recent years.

That listless showing they're complaining about refers to gold's lethargic performance since November of 2007--a 31-month period during which the metal has basically been languishing in a narrow trading range of between $800 and $1,000 an ounce.

Granted, gold, currently trading at around $955, is a bit above 9% from its 2008 close of $880.80 and it did scoot to an all-time high of $1.034 an ounce on March 17, 2008. But gold enthusiasts say the current price should be considerably greater, given the extent of global economic and political chaos, which some believe is likely to get progressively worse.

This lethargy, though, could give way to a renewed outburst of vigor, which may indeed provide the metal with the kind of respect its boosters are hoping for. At its present price, the metal is just a brief sprint away from the magical $1,000 mark, which some gold trackers believe could evolve into an established new low price once, as they see it, the $1,000 price tag is surpassed in a meaningful fashion. That's something they firmly believe is in the works.

First, though, before explaining the reasoning behind such a buoyant expectation, it's worth understanding why gold has essentially pulled a Rip Van Winkle in recent years and why some say any sustained decline from current levels is unlikely.

For starters, online investment adviser Mark Leibovit, publisher of the VR Gold Letter, attributes much of the recent sleepy showing to technical base-building following a roughly 300% gain in the price of the metal from 2000 to 2007; In other words, gold, he says, is basically stabilizing at around its current price level in preparation for its next run. That run, Leibovit predicts, will boost the price of the metal to $1,200 to $1,300 an ounce before year end and then on to $3,000 18 to 24 months later.

Many gold fans, Leibovit among them, believe gold has a major ally in President Obama, given the administration's expenditures and pledges well up in the trillions of dollars to bail out the floundering financial system and revitalize the slumping economy. That, in turn, of course, is leading to a massive buildup of government debt.

Leibovit, who views gold as "the bargain of the century," also contends that the government--in an effort to inflate the dollar--has been manipulating the price of the metal by trying to short-circuit any advance. Paul Craig Roberts, the former assistant of the Treasury during Reagan administration, recently echoed similar thoughts when he raised the question: "How long can the U.S. government protect the dollar by leasing its gold to bullion dealers who sell it, thereby holding down the gold price?"

The government's anti-gold efforts, Leibovit maintains, are not working and won't work. A key reason: he sees the weak dollar (a significant gold catalyst) falling another 50% over the next two to four years. Spurring this drop, he says, is our exploding deficit. Some countries, he notes, such as Russia, don't want our dollars anymore. "With the printing presses going 24/7---an action apt to produce rising inflation or perhaps hyper inflation--we're printing ourselves into oblivion and the world knows it."

Leibovit also questions the growing comments that the economy is bottoming. "I don't believe it," he says. "Just look at housing, which is still going through hell. Home prices are still going down and foreclosures are still going up."

Taking pot shots at the growing number of positive economic remarks, Leibovit says, "It's not the real world. They're trying to put lipstick on a pig."

He's also critical of the Obama administration's stimulus program, asserting that "we're bailing out all the Wall Street crooks who stole money from us."

To Leibovit, it means that the doldrum days for gold are nearly over, that a surge to new highs is just around the corner. Indicative of this, he says, is the sharp run-up this year in the price of many gold stocks. As measured by the GDX Exchange, an index of major gold stocks, the average share is up this year an impressive 28.4%. Historically, such a rise is a prelude to solid new advance in the price of the metal itself.

Yet another plus is his contention that we've entered a commodities boom cycle, with a number of metals, such as copper, uranium, platinum and iridium, all moving higher.

Leibovit believes that gold--which China has aggressively been buying and which he views as a safety valve--should occupy a core position in every portfolio. Among his investment favorites are Central Fund of Canada, Ltd. (CEF), Central Gold Trust (GTU), and an exchange-traded fund, Market Vector Gold Miners (GDX).

He also favors one-ounce minted gold coins, such as American Eagles, Mapleleafs, and American Buffalo, which can be purchased through any reputable gold dealer, such as Monex and Blanchard & Co.

Though a gold bull, Leibovit has some near-term reservations. He cautions that his charts show some volume reversals in gold and gold-related ETFs, which have made him defensive for the short term, especially given gold's traditional seasonal weakness in the summer. Leibovit stresses, though, that he wouldn't sell physical gold and, in fact, would fish a bit for gold shares on any decline.

The clear message from our gold bull: No ifs, ands or buts, gold is about to become golden again.

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Comments

[beaupritchard]

How about just figuring out how much gold there is in the world and pegging the dollar to it. Instantly all this speculative nonsense would cease. Any good physicist or astrophysicist could do it. (Hell ... I could do it it's not that hard).

[RevSpaminator]

The great thing about gold is you can buy it, sell it, hold it and store it in a safe. Should you invest all your money in gold? Of course not, but it never hurts to put some away, especially when the price is sitting low because everyone has devalued it.

Gold will always have value, no matter what. The next time the banks need a bailout, there may not be any bailouts to be had. If bailouts do happen again like we saw last fall, they could cause a ridiculous rise in inflation or an all out collapse of markets around the world. Then gold will regain its stature as the base monetary unit.

The other thing about gold (in a safe, in your basement), it isn't sitting around in some fund used to buy a bunch of unregulated overinflated garbage. When the guys managing the funds have traded back and forth a few million times and siphoned off as much as they can in commissions before the mess implodes, you'll have something put away that is illegal to steal.

[Kache]

Unless of course the IMF goes ahead and dumps 403 tonnes of gold on the market, which is what they will have to do if Repugs have their way about stripping the 100b contribution to the IMF out of the military spending bill.

[Henry]

Gold is like the lifeboats on the Titanic. If you have this feeling that things will get ugly the lifeboat is a good bet. Historically gold was the safe haven. However, if it is true that the dollar drops by 50% then there are clearly alternatives other than gold (which did not exist in previous decades). The stocks of foreign countries in "adr" form provide both a hedge on the shrinkage to the dollar and a foreign play emerging markets.
I remember the late 70s and I also recall the statement of the Hunt brothers (or was it only one?) to the effect that the silver market was an insiders game. So face it... it's all a game and it's all controlled by the house. The central issue is that we (collectively) have let the dollar become exposed. And isn't that stupid.

[Indra]

Bullion is not such a good idea at the moment, but gold stocks are.

[TJCole]

I sold precious metals at 99 Wall St. among other commodities and futures years ago, and the closer we get to war and the worse the world economic situation is the higher gold will go...

What you must do though, is buy actual gold not futures, the Krugerrand is the best choice because if you want it as an alternative to our ever less reliable dollar, these come in very small denominations really tiny which you may be able to trade for food or guns or ammo or fuel once the whole thing goes south...as it will if we don't actually fix the corrupt practices of our banking class..Obama favors over the American people..!

[KillTheMessenger]

TJ, why don't you tell people about 1980 and how gold went to $2000 back then... and why it hasn't recovered more than half of the peak of that gold bubble in almost 30 years of trading?

:-)

[OtayPanky]

There are several markets which are subject to artificial constraint all the time. Oil is one, and gold is another.

If the constraining agent (read government) has an agenda, and you're on the other side of that trade (like all these gold bugs), you can wait a LONG time for your dreams and wishes to come true.

I'd rather play in markets where there are plenty of buyers and sellers, so no one faction can control the price, and value discovery can happen naturally.

[KillTheMessenger]

The government does not constrain gold. Gold is a mineral mined by an exclusive club of mining companies. It's constrained by how much those people want to invest in their mines. Needless to say... they won't invest so much that the gold price collapses.

[jhNY]

Gold bought with dollars now will be worth more dollars later, as inflation remains any government's politically self-preserving reaction to debt obligations. But that only means that if you could buy a guitar for the price in dollars of an ounce of gold today, next year when the price is higher in dollars for an ounce of gold and for a guitar, selling the gold to get the guitar you'll still receive one guitar for one ounce of gold. The investment in gold now or anytime mostly works as a protection of your present buying power from the tendency of governments to print reams of oncreasingly worthless money to pay off debt. Not that there's anything wrong with that... But as I over-exercised my borrowing power previously, I cannot now exercise much buying power, and thus, my future is unlikely to be golden, which fills my heart with a dread like lead.

[KillTheMessenger]

Gold always goes up, just like real estate!

Wait...

[OtayPanky]

And diamonds...and fine art, too.

Wait...