How and when will the gold market respond to the fresh flood of money inflation...?
IMAGINE YOU are traveling through a desert...searching for a famous oasis and its promise of riches, rest and drink, write the editors of Big Gold for Casey Reasearch.
Your journey has grown long, and you are weary. Indeed, you have begun to doubt the oasis really exists.
But then signs appear from those who have gone before...signs that your course is true, and the reward you seek in fact lies ahead. Your spirit is renewed and you press on – just as long-term investors in gold should press on today.
Although gold's had a good run, rising from a monthly average of $760 an ounce in November 2008 to $924 in March 2009, when will it take off? That's still going to happen, right?
Well, in their thrashing attempts to get their economies going again, governments around the world have pounded interest rates into the floor and flooded their banking systems with liquidity. Take a look at the monetary actions from the G7 leading economies.
Interest rates have plunged while the money supply has surged. Now the returns paid to cash – before inflation and tax – stand at historic lows, an artifact of the robust, worldwide efforts to debase currencies. New money creation by central banks everywhere, meantime, signals that tomorrow's inflation is being baked in the cake today.
Furthermore, "Bailout Part II" here in the United States – with its rich pork filling – has been signed, sealed and is about to be delivered, including an endowment for a "bad bank" that will buy up the loans that troubled commercial banks would like to deny they ever made.
In addition, it guarantees hundreds of billions of dollars in bank assets – all on top of bailout numero uno. And don't forget the estimated $493 billion the Treasury Department will have borrowed by the end of the first quarter 2008. That's on top of $569 billion the government borrowed in Q408, an unprecedented amount for any quarter, ever.
The word "unprecedented" seems too weak to convey just how much money is being printed and borrowed to buy off the recession. So, when will all this money start showing up as higher prices at the supermarket and shopping mall?
And when will the Gold Price react to this bumper crop of paper?
The historical record indicates that a surge in money growth has its peak effect on economic activity about 9 to 18 months later. Add another 12 months or so for the peak effect on consumer price inflation. In other words, the Federal Reserve is always driving with a loose steering wheel.
Most of the experience behind those numbers is with relatively tame ups and downs in the business cycle – not the kind of financial violence we've been seeing lately – which adds another variable. And on top of that, the numbers are about peak effect, not initial effect.
So the timing remains uncertain. But what we do know is that there are clear and unavoidable consequences to wildly energetic money creation, including, sooner or later, rampant price inflation.
We're beginning to see interest in Gold Investment from the mainstream, which is encouraging. And enthusiasm from the general investing public will be what ultimately sends gold to the moon. Here's what we've observed over the past 30 days.
- A number of mainstream economists and fund managers are openly expressing interest in gold.
- January's Cambridge House Investment Conference in Vancouver was well attended, with the second day setting a record. Every session was packed, standing-room-only for most speakers, including Casey Research's Louis James and Marin Katusa.
- While there are much better ways to turn gold into cash, Cash4Gold (who advertised during the Super Bowl) and similar businesses bombarding the airwaves with their pitches have sensitized the public to the topic of gold. Expect the interest in the yellow metal – and its price – to increase in a serious way.
- The mining industry has recovered its ability to raise capital.
Just take a look at the recent financings for some gold companies:
Newmont $1.2 billion
Newcrest $476 million
Kinross Gold $414 million
Agnico-Eagle $290 million
Red Back Mining $150 million
Compare this to the financial woes we hear continually about banks, brokerages, and government agencies. The only capital they can attract is government handouts.
While no one at the Cambridge House conference was emphatic about timing, most speakers agreed that at some point Gold Bullion will be sought as a safe haven by the masses, who will catapult the price to new highs.
Here is a quote from John Embry, chief investment strategist, Sprott Asset Management:
"The average retail investor has little or no investment in gold and no understanding of how important it will be. The year 2009 will be volatile, but volatility is a small price to pay for where gold is headed. An explosion in gold and silver is inevitable in the years to come."
The overriding theme was clear: Gold is going up. Period. It may or may not happen as quickly as you want, but the recent range trading hasn't defused its explosive potential.
So when will gold take off? The signal won't be inflows to Gold ETFs (although they are indicators), or jewelry sales (the '70s bull market had nothing to do with bracelets), or even sales of physical bullion (we had that in '08 and gold was up 5.5% for Dollar investors).
No, the payday rise in gold will occur when there is a significant shift in the psychology of the general public. And whether the glory days are just months from now or a year or two away, it's clear that the mania phase remains ahead, not behind us.