Once the facts are laid out on the table, the conclusion is clear.
We are heading for a perfect storm for gold.
Take a glance at the economy today and youll find that all our historically accurate indicators and measures all are saying the same thing: the U.S. economy is transitioning from a growth period into a downward spiral known as a recession. Dont take it from me, ask any economist, politician, or member of the federal reserve and youll see that no one is disagreeing with the fact that we are heading for a recession. The president of the Federal Reserve said himself that we are heading into an economic slump. Further evidence is in the fact that the Fed has lowered their projections for growth for 2008 from 2.5-2.7% to a new projection of 1.8-2.5%
But what does this all have to do with GOLD?
My research on oil, inflation, the dollar, interest rates, and social security all show that these seemingly unrelated economic measures are all important variables in the price of gold. In other words, in order to see where is gold going we must know where the economy is going. One undeniable fact is that gold shoots up when oil prices jump. For the last 30 years (Since gold was put on the free market in the 1970s) the price of gold has had remarkably consistent relationship with oil.
The first and most significant indicator for GOLD: Oil.
Just take a look at the chart for oil prices and put it on top of the chart for gold prices and you will find a remarkably close correlation. We see that the price of gold ALWAYS WITHOUT EXCEPTION follows the price of oil. But why? What is the relationship between Gold and Oil?
The relationship between GOLD and OIL.
Just as you learned in your geometry class that IF A=B and B=C THEN A=C that is the relationship between GOLD and Oil. To understand the relationship you must know that GOLD is an inflationary hedge. This means that gold rises with inflation. This is a historically accurate fact that no economist will disagree with. One thing you will hear is that gold has a time lag behind inflation but nevertheless gold rises as inflation rises. Next, the reader must know that increases in oil prices ALWAYS spur inflation. The reason behind this direct relationship is that energy is the lifeblood of the economy. And because the globe is so unimaginably dependent on oil this means that for at least the next ten years oil is the lifeblood or energy of the economy. Thus, an increase in oil prices takes a cut out of EVERYONEs profits which leads to price hikes to compensate. Now, IF increases in OIL create an increase in inflation AND GOLD keeps up with inflation this means that an increase in oil prices also increases GOLD prices.
So then our discussion turns to oil.
Todays global oil production is at 85 million barrels a day and very close to maximum capacity. Chiefs of the Oil cartel OPEC have admitted themselves that they can not meet the 100 million barrel a day forecast for demand by the end of the decade. Lets not forget that the GLOBAL economy is BOOMING. China, India, Brazil, and the EU are all flourishing which means their irreversible thirst for oil is rising. But it not always was like this. The last time we had a spike in oil prices, America was the only major consumer. Here is the part in my argument that some people stop me to say that alternative energy will come to the rescue and I simply reply that alternative energy as a SHORT-term solution is a myth.
Lets jump into the hypothetical and say that IF ALL the most powerful world leaders today decide that they all want to implement alternative energy instead of oil, that implementation would take ATLEAST 10 years. Leaders in the industry realistically think it will take 30 years. By having these facts about oil on the table we then see that its clear: the demand for oil is surpassing supply. Anyone in economics 101 can tell you that high demand and low supply means feverishly high oil prices. Now if your still not convinced that oil prices will keep going up, you should know that todays oil is not even at an all time high (when adjusted for inflation). The inflation adjusted record for oil is $102 a barrel and we are still not there. If you think that this is new news your wrong because you can read the reports of our past presidents who predicted oil would be $100 a barrel for 2008 or look at the book the Oil Factor by Stephen Leeb PH.D which states that oil will be at a minimum of $100 a barrel by the end of the decade. In conclusion, we see that the strongest indicator for GOLD is oil and oil will be posting high prices for a while.
By some estimates, there will be an average of two-percent annual growth in global oil demand over the years ahead, along with, conservatively, a three-percent natural decline in production from existing reserves. That means by 2010 we will need n additional 50 million barrels per day. Vice-President of the United States Cheney
The second indicator for GOLD: crisis and poor economic health.
Gold is more than a commodity people invest in for it has a psychological value to it to. Gold is seen as a safe place to put your money because you can touch it, its shiny, and has glamorous connotations to it unlike a stock which the investor simply gets a piece of paper. GOLD has always done well when other investments have underperformed, a crisis situation like a war is present, and when the general health of the economy is bad. If the rising prices in oil are not enough to convince you that gold is going up, up, and away, lets diagnose the health of the economy.
Indicators that the Economy is going through a downward trend.
The weak dollar is only getting weaker. Just listen to the reports of the high level executives in our government. They will all tell you the same thing: that the long term strength of the dollar is a priority not the short term strength. The Fed has many different, conflicting objectives to meet which means in order for them to get the economy back on track they are forced to lower interest rates to ease the economic slump we are heading for. Any economist will tell you that lowering the interest rates weakens the dollar and spurs inflation. Interest rates have dropped a whopping .75 points in three months which is huge relatively speaking. So we see that the dollar is weak which is another factor that hurts the economy and helps the price of gold and the economy is experiencing inflation but not only from oil but low interest rates too.
The kicker: Negative Interest Rates.
Now when gold really starts to zoom ahead is when the economy is experiencing what is called negative interest rates. This is a fancy term that just means that interest rates are lower than the rate of inflation. The reason why this formula is devilishly powerful for gold is that because gold keeps up with inflation all you have to do is buy gold and it will out perform the other interest rates in other investments. Essentially, an investor can borrow money to buy gold and the gold will cover the financing costs in addition to making the investor a profit. As interest rates get lower, we get closer to negative interest rates which makes the value of gold go up. And because the economy is going into a recession (as supported by Federal Reserve Chairman Ben Bernake) we can expect low interest rates as a tool for damage control just like we saw with September 11th when interest rates dropped to 1% to help the economy back on track.
A real estate market gone south, growing demand for social security, and a stock market that is going downward does not helping the economy either BUT they do help GOLD.
Let me give you a tried and true economic indicator that is very powerful for the STOCK MARKET. Remember we stated above that oil is the lifeblood of the economy and high oil prices means a cut in corporate profits which means increases in price also known as INFLATION. A formula has been come up with that says if oil has over an 80% year to date increase in price that this hike is to much too fast for the economy and the stock market will go down for the next year. But if the year to date price in oil is less than 20% this figure is sustainable by businesses and the the stock market will not go down. Remarkably, this formula has been applied time after time in the last 30 years and has always been true. Because there has been an upward spike in oil we will see the stock market go down for 2008. In fact it has already begun its downward trend with companies like FedEx lowering their projections because fuel prices are simply unsustainable.
But the stock market is not the only soar spot for our economy. In January 2008 there will be 78 million Americans filing for social security. Now wait a second how many Americans are there in total? That Figure is 300 million. That means that over one quarter of American is filling for social security. Where is all this money going to come from?
When the subject of real estate comes up it is the easiest one to understand. The 6 year boom in real estate due to cheap interest rates that were due to a recession in 2001 with September 11 have created an over build of supply. There is so much supply on the hands of America that if consumers buy properties at the rate they are buying today, there is enough homes to last 2 years. Now dont forget about the broken consumer confidence in the real estate market due to sub-prime loans which cost Bear Sterns trillions of dollars and caused for the CEO of Merrill Lynch to be booted. If you search the news for a piece of good information on real estate you wont find it.
War as an economic indicator.
Lets not forget our country is spending hundreds of billions of dollars on the war in Iraq. All this spending does not help our economic situation and it hurts an already damaged consumer confidence. Iran is not making the situation better with its nuclear program and its tensions with the U.S. Both of these factors are not going away for a while and both factors help raise the price of gold because they hurt both the economy and consumer confidence.
Lets Talk about GOLDs history
Now you might look at the price of gold right now ($800 an oz)and think that its expensive and that it cant possibly get more expensive. In fact Gold recently hit its 28 year high. But dont forget that the last time gold was valued at $800 an oz was in the 1980s. This means that $800 was worth a lot less than it is today. So when we adjust for inflation Gold is historically NOT cheap compared to its adjusted high of $1,800/oz.
It is important to know a historical fact about gold and that it has a lot of inertia. By this we mean that when it is going up it gallops ahead for years and when it goes down is sinks for years. This means that if gold begins to turn downward we will all know about it. You will never wake up in the morning to see that the value of gold has cut in half. In Conclusion we see that todays economic environment is in fact the perfect storm for GOLD. We should invest in gold.
How to Buy Gold
There are a number of ways to buy gold. I recommend to buy something that is new the market that facilitates commodities trading. See the problem with buying gold in the past has been that you have to worry about storing it. But now you can buy stocks that track the price of gold. These stocks are known as ETFs which stands for exchange traded funds. Search for the ticker symbol GLD or IAU and you will find a stock that perfectly tracks the price of gold. Right now GLD is selling for about $80 a share and gold is about $800. Also, we see that when gold was $600 this ETF was trading for $60.
No one will deny it.
No one will disagree.
You wont even find any information that contradicts the above because they are the facts from sources like The Wall Street Journal, Economics books, and different sources of news.
Thus, we are forced to label a situation like this as a PERFECT STORM for GOLD.
Article from 2005 on Supply and Demand problem of oil
CNN Money Article
Morningstar.com Article
The day after this was posted CNN Money came out with the article below: Here Comes the Recession
CNN Money Article
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