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How to Profit from the Big Gold Squeeze

Commodities / Gold & Silver 2009 Jun 26, 2009 - 10:41 AM GMT

By: Money_and_Markets


Best Financial Markets Analysis ArticleSean Brodrick writes: Man, we are seeing some wild times in the metals markets recently — big swings up and down, as gold and silver move opposite the U.S. dollar. It’s almost as if international investors are having trouble finding the value of the dollar. To me, it’s just laying the groundwork for a coming gold boom … and potential dollar doom.

That means there is plenty of profit opportunity for those with the courage to act, as soaring demand and falling supply squeeze gold prices higher!

Gold Shortage — It’s Here!

While gold trades every day on the exchanges, there’s already a physical gold shortage — just ask the U.S. Mint. On Monday, the Mint announced:

“Production of United States Mint American Eagle Gold Proof and Uncirculated Coins has been temporarily suspended because of unprecedented demand for American Eagle Gold Bullion Coins. Currently, all available 22-karat gold blanks are being allocated to the American Eagle Gold Bullion Coin Program, as the United States Mint is required by Public Law 99-185 to produce these coins in quantities sufficient to meet public demand …

“The United States Mint will resume the American Eagle Gold Proof and Uncirculated Coin Programs once sufficient inventories of gold bullion blanks can be acquired to meet market demand for all three American Eagle Gold Coin products.”

You want to bet that the Mint is going to suspend sales of its regular American Eagles as well as the proofs? They did it last year, they’ll probably do it again — the Mint simply can’t meet the ENORMOUS demand.

I talked to private gold dealer Eric Drawdy, one of my sources. He says that while premiums have come down on some coins, gold coins are still flying out the door on any pullback in the metal price.

“A lot of people are watching for when gold dips,” he says. “As soon as it does, they snap it up.”

And it’s not just well-heeled Wall Streeters buying gold … it’s mom-and-pop investors. They can see the writing on the wall … they know that the U.S. dollar is in trouble, as are many paper currencies. And when the dollar buckles, gold prospers.

Investors Accumulate Gold With Both Hands

Total demand for gold in the first quarter rose a whopping 38 percent, according to figures published by the World Gold Council in its first-quarter Gold Demand Trends report.

Identifiable investment demand for gold, which includes exchange traded funds (ETFs) and bars and coins, was the major source of growth in the quarter, reaching 596 tonnes. And net retail investment (total bar and coin demand) rose 33 percent year-on-year to 131 tonnes.

We’re used to gold being snapped up in the Middle East and China, but Germany was the single biggest gold bar and coin market in the first quarter. Demand in Germany rose a whopping 400 percent to 59 tonnes!

The Germans know a little about paper currencies turning worthless — memories of the hyperinflation of the Weimar Republic years still haunt that land. In the Weimar years, people who had money in banks or paper currency got burned, while people who held gold prospered.

Deflation Could Be Dollar’s Deathbed

Does that mean we’re going into a Weimar-Republic style currency slide here in the United States? No … not yet anyway.

For now, we’re experiencing deflation, and deflation is the deadliest environment for the U.S. dollar.

It chokes the economy and turns already huge debts into unserviceable mountains of IOUs. A country that cannot service its debts does not have a viable currency. What is a paper currency after all, but a debt obligation backed by the full faith and promise (to pay) of a government.

And the United States is piling up more debts all the time — Uncle Sam must borrow almost $2 billion every day to keep our nation running. If we do this in a deflationary environment that’s accompanied by economic weakness, it could doom the dollar as we know it.

Even “Bad” News Is Met With A Shrug

A week ago, the U.S. Congress finalized the process whereby the IMF can sell 403.3 tonnes of gold. That’s equal to about 16 percent of the gold that was produced by mines last year, yet the market shrugged off the news.

Why? Probably because traders figure that the gold is going to be snapped up by one of the Central Banks that has been accumulating gold lately … China, Russia, Venezuela and even Argentina. They’ve all been buying gold for a simple reason: To diversify away from the U.S. dollar!

As I told you recently, China held high-level meetings with Brazil, Russia and India. The topic of a “super-sovereign” currency was on the table. The U.S. was pointedly not invited to this meeting.

The mere fact that they’re discussing this is laying the groundwork for an eventual move away from the U.S. dollar. Do you think investors and traders will wait for the announcement, or will they move far in advance?

The more immediate factor is that gold did not go down when the IMF gold sale was announced. When a market shrugs off bad news, that’s usually a sign that it wants to go higher.

Global Mine Supply Keeps Falling

Despite higher prices, gold mine output fell last year to a 12-year low!

In fact, output dropped from 2,478 metric tonnes in 2007 to 2,416 metric tonnes in 2008, according to the GFMS consultancy — a London-based research group that serves gold mining companies and supplies the World Gold Council with its data.

Looking ahead, GFMS estimates that gold production will fall AGAIN this year to 2,302 metric tonnes.

Gold Mine Production 2003 to 2009

Sources: World Gold Council/GFMS/Barclays

And the production decline certainly isn’t due to lower prices. Prices more than TRIPLED from $271 an ounce in 2001 to touch $1,000 an ounce this year.

The fact is, the gold industry needs to replace almost 100 million ounces of reserves per year. Clearly, this has not been happening. This means a supply/demand squeeze is building up — one that could result in an explosive move higher for gold!

Gold Is THE Investment For The Last Five Years  … And The Next FIVE Years

Take a look at this next chart, which shows the five-year performance of gold, the AMEX Gold Bugs Index (a basket of gold miners), the S&P 500, and the U.S. dollar.

Over a five-year period, gold is up an astonishing 129.5 percent. The gold miners aren’t doing bad either — up more than 70 percent! But stocks and the dollar? Down, down, down.

Gold Miners, S&P 500, and US Dollar


This is a visual example of how gold is the eternal value. And considering the problems facing the economy and world — massive recession, financial crisis, oil prices heating up again, a powder keg in the Middle East — I believe gold and gold mining stocks are THE investment for the next five years, too.

All This And Silver, Too

Gold shines so brightly that it’s easy to overlook silver. But silver can act like gold on steroids — with bigger moves in either direction. While gold moved just 48 percent from its lows to its highs over the past year, silver soared 93 percent from its lows to its highs!

What’s driving silver? It’s following the same track as gold, only delayed a couple years, as investment demand heats up.

Investment accounted for only 50 tonnes of silver demand in 2008, according to analysis by GFMS. In the first quarter of 2009, buying by the biggest silver exchange-traded fund, the iShares Silver Trust, alone hit more than 1,500 tonnes.

The growth in investment demand for silver is such that it could account for between one-quarter and one-fifth of total consumption of the metal in 2009.

At the same time, silver supply is expected to fall this year, with mine output, scrap and government sales all dropping slightly.

Does that seem bullish to you? It sure does to me!

Dollar’s Last Hurrah Is A Great Set-Up For Precious Metals

I think the U.S dollar could go higher in the short-term, sending gold and silver lower, but precious metals are probably near an important bottom — and with other forces in their favor, they could soon springboard through overhead resistance.

You’ll want to be onboard the profit train before it leaves the station.

That’s why I’ll be sending subscribers to my Red-Hot Global Small-Caps and Red-Hot Commodity ETFs a new, special report: “Gold Fever — to $1,300 and Beyond.”

In it, I’m going to go into detail on the forces I see driving gold and silver — and I’m going to offer my best picks to get the most out of gold’s coming rally to $1,300 and higher, as well as my hottest silver picks.

You really need to see this report. You can get it by signing up for one of my services — I hope you do — or you can buy just the report itself.

My exclusive special report, plus a minimum of three follow-ups over the course of the year, is normally priced at $295. Order now, and it’s yours for only $195 — a big discount. Are profits guaranteed? Of course not. As with any investment, you CAN lose money. But I’m convinced each of my picks is loaded with value and on the verge of blast-off.

I’m publishing my report in SIX DAYS — I want to make sure to get the timing right on the dollar’s next peak and gold’s next bottom. You have a very limited window of opportunity to get this report at the right time.

Sign up now, and as soon as the report is published, I’ll send it to you directly by email.

These will be my best picks … the hottest stocks … the power-packed funds. These are the picks that can potentially make you a fortune as gold blasts off.

PLUS — I don’t want to give you a bunch of recommendations and leave you hanging in the dust. So I’ll throw in three follow-ups absolutely free with your purchase of the report. In those follow-ups, I’ll update you on the latest news in gold, tell you if you should add to positions, and most importantly, tell you when to sell!

Don’t miss out on this opportunity. Order your copy of “Gold Fever — to $1,300 and Beyond” today.

Yours for trading profits,


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