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Good as Gold

Gold has rallied to a 27-year high and continues to make headlines. It seems like just yesterday Gold was trading around $300 oz. It has more than doubled to $750 per/oz in the past five years. It's obvious we are in the midst of an upward cycle in relation to Gold, and for that matter all precious metals. These commodities thrive in times of uncertainty, and times are sure uncertain. There are several reasons, but the most recent has been the credit-crunch. There is also a terrible trade deficit within the U.S. and geo-political tensions that continue to escalate. It becomes clearer and clearer why Gold is rising. It is impossible to predict the ultimate high for gold, but if things continue the way they have, I assure you we'll surpass the all time high of $800 per ounce set back in 1980.

The American monetary policy is out of control. The last ten years I've witnessed two bubbles, both in stocks, during the late 90's, and more recently the present day housing bubble. The thing to realize, of course, is that the housing bubble is many times more dangerous than the stock market bubble, because it affects the whole banking system. This is why interest rates were sliced half a point on Sept 18th, trying to fuel our economy. There is huge liquidity in the asset markets, but unfortunately it is all based on credit not cash. This is an illusion. This is liquidity that could easily turn into a savage deflation tomorrow. How much more can we continue inflating assets? When this does stop and liquidity is gone, if there is a lot of leverage in the market, it can collapse. It has not happened yet, but someone is going to have to pay the piper. The effects can be felt today as credit is becoming more expensive and difficult to obtain. But who needs credit when we having savings, right. No, it seems the average American has abolished that a while back. Clearly we are a consumption nation and this is weighing heavily on the shoulders of our trade balance, especially when our manufacturing sector is disappearing and technical jobs are being lost to overseas competitors. So it's no wonder the dollar is weakening compared to other currencies like the Euro and Canadian dollar, which has traded one to one with the US dollar, sad to mention. The bottom line is a weaker economy, a probable recession, and more uncertainty.

No wonder gold and all precious metals have roared, and in my opinion will continue to do so throughout 2008. From a fundamental perspective, time's being what they are, the weakening dollar, the geopolitical instability, global energy crisis with crude at all time high of $80 per barrel, to the conventional Econ 101 imbalance of supply and demand make it clear that gold should have a definite place in your portfolio. This is an asset you want to own for protection against risk, and things are getting risky. Also, what better hedge can you have against a falling dollar. The rest of the world seems to have notice as there is plenty of demand from the flourishing middle classes in China and India, and from central banks in countries that have enjoyed gains from foreign trade, like Russia, the Persian Gulf states and, again, China. China has been buying gold with US dollars, and there are more than 1.3 billion Chinese. If investors buy the arguments for gold, they must then decide how to buy access to it. They can acquire the physical metal but that entails costs for storage to guard against theft and the hidden cost of holding an asset that does not pay interest or dividends. If you are interested in learning more about alternative ways to invest in gold and the strategies I use please request information here.

 

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