THE COMING GOLD SURGE
There have been enough dips and outright plunges to make gold traders feel like they're riding the devil's own roller coaster. But one strategy has worked time and time again: Buy the dips.
My preliminary price objective for gold is $1,065 per
ounce, and it could go a lot higher than that. Let's look at some
forces driving precious metals higher.
Global gold production
fell to a 10-year low of 2,444 metric tonnes in 2007, according to Gold
Fields Mineral Service. This year, production will likely drop again.
While China is producing more gold -- up 12% -- South Africa's output
is falling off a cliff, down 8.1%.
Gold miners are
exploring frantically, but the mother lodes are getting harder to find.
This should drive consolidation in the industry going forward as the
big companies gobble up the smaller fish to replace their reserves.
Global demand for gold
is exploding. Especially in places like China, where the first gold
futures contract launched on January 9th. But also in the Middle East,
where petrodollars are pouring into gold, and the gold trade in Dubai
is accelerating.
The U.S. dollar is sliding. Since hitting a low in 2001, the Euro has nearly doubled against the
dollar, but gold has more than tripled. The dollar and gold are on what
I like to call "the see-saw of pain" -- as one goes up, the other
generally goes down.
The Federal Reserve's actions are bullish for gold. In January, the Fed slashed its benchmark interest rate to 3%. It's the
most aggressive rate-cutting since 1990, and I think Fed Chairman Ben
Bernanke will keep cutting until rates are at 2.5%. Why? Because the
Fed is worried that the U.S. is sliding into recession. Indicators
include the worst January for retailers since 1996, plunging consumer
confidence, and S&P 500 earnings expected to tumble for the second
quarter in a row.
Looking ahead, one
million adjustable mortgage resets will start hitting with a vengeance
in April. The Fed will likely want rates as low as possible when that
happens.
Lower interest rates
weigh on the U.S. dollar, because international funds will flow to
currencies with higher interest rates. So, cutting the benchmark
interest rate is generally inflationary and bullish for gold. Adjusted
for inflation, gold would have to hit $2,200 to hit its high from the
early 1980s. Even if we get just halfway there this year, it could be
one heck of a ride.
If you think the U.S. is dragging its trading partners into a global
recession, you'll probably want to own bullion, because the Fed and
other central banks will pull out all the stops to reflate the economy,
especially in an election year.
We're already seeing
inflation. Last year, consumer prices rose 4.1%, the most since 1990.
And despite some tough talk from Bernanke, I don't think the Fed gives
a rat's patoot about inflation. It will risk that to avoid a deep
recession.
A general inflationary
trend should keep gold prices moving higher even if market malaise
drags gold mining stocks lower.
