The price of Gold broke the $700 mark and is now hovering near $730/ounce. In fact, I believe that we will have a relatively quick move to $800 and even stand a chance of breaking $1000/ounce before the year is over!
This might come as a bold statement to some, but as a reminder I was one of the few that correctly predicted that we would break $600/ounce early in 2006 when gold was still hovering at below $500. In an updated prediction, I also stated that I believed that we would break $700/ounce before the end of the year. In the midst of these predictions, there were a number of skeptics that scoffed at my predictions. So what makes me think that we can potentially reach the $1000 before year end? Those same skeptics still exist.
If you are interested in the fundamental reasons why Gold is heading higher you can read my$600 Gold: We Have Only Just Begun article.
Your Average Investor
This past week, I had an opportunity to step away from my office and speak at a couple of conferences. I really enjoy interacting with the general public (that is, people that do not read my commentary or Gold websites on a daily basis!), because it gives me insight on what the typical investor sentiment is. Here are some of the comments that I have heard during the past week.
"I am not buying Gold; I remember buying it at $850/ounce in 1980!"
"Jewelry demand is expected to decline. If that's the case, won't the price of Gold decline?"
"What Central Banks are buying Gold? I thought they have been selling them for the past 20 years!"
"This is a bubble...and it's very speculative! I wouldn't touch this market!"
"Are you a Gold Bug?![Said with scowl on face]
"What do you mean we have inflation- the Fed says that inflation is in check?"
"I have been a major believer in Gold for years, but I have been waiting for an entry point!"
Believe it or not, these statements were actually made to me. At one of my presentations, I asked the crowd to raise their hands if they believed that we were in a commodity bull market. About 25 % of the people in the room raised their hands. I bring these anecdotes up to make the point that your average investor is still not buying into the legitimacy of this bull market. The talk about a bubble is absolutely absurd. We will likely experience a bubble in the Gold market when your average investor starts quoting the percent of reserves that countries have in Gold.
So what is keeping the general public from buying the legitimacy of this Gold market? If you think about it, this bull market has been around for the better part of five years. We have seen the price of Gold nearly triple during that time. Why aren't people buying into this bull market? Here are some potential reasons and my short cursory response. Maybe you fit in one of these below categories:
The Real Estate Focused Investor: Do you know how much money I have made in the real estate market? Not only have my condos appreciated in value, but I have rental coming in. Why would I want to sell a portion of my real estate to buy Gold? Any additionally money I get, I will buy another condo! In fact, I don't even need any down payment! I can just get one of those zero down, interest only loans!
Emanuel Balarie: Have you considered that the market has been pushed up by artificially low interest rates? Record low interest rates will inevitably rise. In turn, this will lead to defaults, a slowdown in demand, and greater supply of homes on the market. Read My Real Estate Burst Article
The Stock Market Fan: The Stock Market is Hot! Corporate earnings, consumer confidence numbers, and a strong economy are driving this market! Why would I want to shift from an earnings driven market to a speculative Gold market!
Emanuel Balarie: I do not doubt that we have strong corporate earnings. But where are these earnings coming from? Your average American has negative savings, record credit card debt, and they have been using their homes as ATM machines. What do you think is going to happen when the above mentioned Real Estate owner now has to pay an additional $2000 month for his mortgage? Chances are he will not buy a new car every two years, frequent his local restaurant as often, travel, or simply spend as much discretionary money in the economy. The consumer will no longer be as confident!
The Disgruntled Historian: Don't tell me about Gold. I still own the Gold that I bought when it was $850/ounce. If I could break even...I would be a happy camper! I wouldn't touch Gold again if you paid me!
Emanuel Balarie: I understand that you happened to buy Gold at the speculative top. However, that does not change the fact that we are in the midst of a bull market in Gold. You can either participate in it, or live in the past.
The Data Dependent Statistician: The core CPI is minimal; long term bond yields have remained low; the fed has inflation in check. Why is Gold heading higher in the midst of low inflation? It has to be a bubble.
Emanuel Balarie: Believe it or not, data does not always tell the true picture. Often times, it is delayed. I don't know about you, but I am paying more at the pump, I have a higher cable bill, airfare is more expensive, and pretty soon, the manufacturer who now has experienced higher energy and raw material costs, will pass on those higher costs to me (the consumer).
The "I have enough money to last a lifetime- I could care less guy": I have enough money to last two lifetimes! My advisor has me in treasuries...and that is good enough for me!
Emanuel Balarie: Do you realize that since 1914, when the Federal Reserve was created, the purchasing power of the US dollar has declined greater than 90% in value? The interest you are receiving on your treasuries will not be enough to cover rising inflation.
Someone Has To Be Wrong
The above interaction is of course meant to be both humorous and educational. The failure of your average investor to acknowledge and participate in this bull market is one of the reasons why I believe that we are still in the early stages of this bull market. Quite honestly, I would have thought that by the time we reached $700/ounce, more people would participate in this Gold market. Interestingly enough, this has not been the case. I strongly believe that the longevity of the real estate bubble, the subsequent stock market rise, and the other above mentioned factors have distracted investors from the rise in Gold.
To an extent, the distraction is somewhat understandable. How can we be in a bull market in stocks, a bull market in commodities, and a bull market in the real estate sector? One would imagine that the higher raw material and energy costs would take a toll on the consumer and producer alike. One would also imagine that these higher costs would also translate into inflation. So who is right? Something has got to give. But one thing is for sure; you cannot have all of these markets continue moving higher in tandem for much longer.
My Reasons For The Potential Move To $1000
Over the last several years, various factors contributed to the price of Gold heading higher. In the beginning of this bull market, we had the US Dollar decline. If you look at the below chart, you can see that the declining dollar and the rise in Gold coincided in 2001.
Lately, we have seen the decline of the US dollar intensify and the subsequent rise in Gold prices. In 2005, when the US Dollar actually rallied, inflationary concerns sparked fueled Gold prices higher.
Most recently, geopolitical tensions and central bank buying has also intensified. So what does this mean for the price of Gold?
I believe that we are on the verge of having all of the above mentioned factors coincide and intensify all at the same time. From a geopolitical perspective, tensions with Iran continue to rise. Additionally, the growth of nationalism and anti-US sentiment in Latin America will continue to spur safe haven buying from around the globe.
From an inflationary scenario, most people have been paying attention to the Fed and their data of choice (like the core CPI). I expect the high energy prices and higher raw material costs to eventually pass through to the Core CPI by the end of the year. I also believe we that we will have a spike in the Core CPI that will force the data dependent Fed to both acknowledge inflation and raise rates. Acknowledging inflation will drive a further round of buying into Gold, which has always been an anti-inflationary hedge. Higher rates will accelerate the housing slowdown, curb consumer spending, and have an adverse effect on the overvalued stock market. I do believe that we will most likely experience a crash in the stock market, rather than a slow decline.
The US dollar index can also break through a key support level and continue its multi year decline. This will serve to intensify dollar selling and gold buying by Central Banks. This past week, there is news coming out of China stating that they are looking at doubling their Gold reserves. Doubling their reserves, however, would still put them at 50% of the world average. I would imagine that they will not stop there. This would be bullish for Gold on two levels. Not only is the demand significant, but it will also take a substantial supply off the market.
Get in before the herd. If you are interested in learning more about how you can participate in this Gold and Commodity Bull Markets you can request some information here. You can also sign up for my free weekly newsletter here.
