Why Buy Gold Today?

Inflation is the new law of the land. Scarcity is the new law of the planet...

THE BULL MARKET in commodities might take a breather very soon, but it is far from over.

   Inflation is the new law of the land. Scarcity is the new law of the planet. And together, these two new laws will fuel a continuing commodity boom.

   Here in snowy Connecticut, Old Man Winter is reminding us that he is not quite through yet and not to put away those wooly mittens...or our checkbooks, for that matter. Heating oil trucks are rumbling along from house to house here and filling up tanks throughout the Northeast.

   Our heating oil bills in this region have climbed 30%-plus for many families, so it's a good thing the Federal Reserve has acknowledged that inflation may be an issue...

   Man, oh man! Can the powers that be in Washington get any more obtuse? Inflation is here – it's been here for a while, in fact. It is a function of poor fiscal choices, but also because we do have a global growth story.

   Now $100 oil...$1,000 gold...13-cent beans and $5 corn are all the result. Welcome to the new reality.

   The old saying, "The cure for high prices is high prices", has simply not been true lately. Last night, I was watching some old clips of myself on Kudlow & Co. back from May 2006. The Gold Price was trading around $658 or so I think, after hitting 27-year record highs. Oil was in the high $60 range. Ah, the good old days...

   I stood my ground back then and said, "Buy now."

   "Buy what?" Larry asked, calling it a meltdown.

   "Everything," I said. He looked perplexed, and I said, "This isn't a meltdown; it's an opportunity."
Boy, was I ever right. The opportunity of a lifetime!

   Sometimes, trades are just so obvious that they almost scream at you, "Hey buddy! Buy me right now!" Other times it's not so clear.

   But if you're worried about the US economy, I suggest you Buy Gold. If you're not worried about the Chinese economy, buy some more gold.

   Why? Because China's economy is in overdrive, on pace to show 11.3% growth for last year as a whole. According to BusinessWeek, "In 2007, China will surpass the US as the world's second largest exporter, and in 2008 it will surpass Germany, the largest.

   "By the end of September, China had exported nearly $900 billion in goods. And that growth is pouring money into consumers' pockets."

   The McKinsey Quarterly reports that by 2010, some forty million Chinese households will earn more than 48,000 renminbi ($6,000) per year, equivalent to $24,000 in terms of purchasing power parity and enough to qualify a household as middle class by US standards.

   Meanwhile, the number of Chinese with at least $1 million in assets hit about 350,000 recently, and you can bet that number is increasing daily.

   Yes, the number of millionaires in the US is reported to be 9.3 million. So China has a lot of catching up to do. But as it catches up, the Gold Market will tag along.

   That's because the Chinese cherish Gold as the premier symbol of wealth and store of value. Gold demand in China relative to GDP is about five times higher than in the US. And this robust demand is growing. Gold consumption in Mainland China rose 25% to 78.9 tonnes in the three months ending last September.

   The real opportunity for gold in China, however, comes courtesy of China's central bank. For several years, Yu Yongding – a committee member of the People's Bank of China – has advised that China use its foreign currency reserves (the largest in the world) to Buy Gold. He's not the only one.

   Other Chinese economists are urging their government to QUADRUPLE the nation's gold reserves.
And isn't it interesting that these recommendations arrive at the very same moment that the International Monetary Fund (IMF) plans to sell gold to satisfy its budget deficits?

   China is accumulating tangible wealth while the West is squandering it. Here are two points of interest:

• China's foreign reserves now stand at nearly $1.5 trillion – more than doubling in the past two years. More than two-thirds of that sum sits in US Treasury bonds;
• China holds less than 1% of its reserves in gold – just 600 tonnes worth. By comparison, the US holds 70% of its reserves in gold.

   So the US has 70% of its reserves in gold. Let's say China puts just a THIRD of its foreign reserves into gold. That would be $500 billion worth – or about five times the amount of gold the IMF hopes to sell!

   And it's not just China's demand for gold. India's gold-hungry economy is growing fast, too. India is the world's largest gold market, where consumer demand in the third quarter amounted to 185.1 tonnes – or more than twice the Chinese demand over the same time frame. And during the first nine months of 2007, Indian demand totaled a staggering 500 tonnes, according to the Khaleej Times.

   Driving that Gold Buying is a booming Indian economy. India is the world's fastest growing major economy after China, and its GDP grew at a rate of 9.4% in the fiscal year to March 2007, which, according to The Economic Times, was "its strongest pace in 18 years."

   Household income in India is growing at a double-digit pace. A lot of disposable income means India's middle class – which is larger than the entire population of the United States – is buying everything from cutlery to cars to air conditioners...to gold.

   So while the yellow metal may be headed to $1,000 in short order in 2008, don't expect it to stop there.