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FIRST ACCESS to Nadeem Walayat’s Analysis and Trend Forecasts

Ride the Gold Juggernaut

Commodities / Gold & Silver 2009 Aug 10, 2009 - 07:29 AM GMT

By: Uncommon_Wisdom

Commodities

Best Financial Markets Analysis ArticleSean Brodrock writes: The U.S. dollar is in a world of hurt, and that means the golden juggernaut — the long-term rise of gold — is gathering steam.

What do I mean by a world of hurt? I mean the U.S. dollar tumbled below crucial support. Oh sure, it could bounce higher for a bit — nothing travels in a straight line — but the easiest path for the greenback is lower.


That means the easiest path for gold is … you guessed it … higher.

Gold still needs to get above the $1,000 level, but its climb should be easier now. That puts my target of $1,300 gold, which I explained in my recent “Gold Fever” report, squarely in sight.

Why is the dollar going lower? Here are some reasons …

ishares FTSE/ Xinhua China 25 (FXI)

Investors are becoming more optimistic. Since the U.S. dollar is seen as a safe haven, good news is actually bad news for the greenback.

And there is good news coming out of China. China’s manufacturing expanded in July, with the CLSA China Purchasing Managers’ Index rising to a seasonally adjusted 52.8, the highest level in a year, from 51.8 in June.

Chinese banks are throwing money at customers, and the government has pumped $585 billion into stimulus programs to stoke a recovery and make China the world’s fastest-growing major economy again.

The good news isn’t limited to China. U.S. consumer spending rose 0.4 percent in June, spending on U.S. construction projects also rose in June, the ‘cash for clunkers’ program is boosting America’s auto industry, and Europe’s factory outlook is improving.

With good economic news popping up, investors are dumping dollars and buying equities, especially overseas. The iShares FTSE/Xinhua China 25 ETF (FXI) is up 10.6 percent in the last two months, but the iShares MSCI Australia ETF (EWA) is doing even better with a 15.7 percent gain. The iShares MSCI Brazil ETF (EWZ) clocks in a gain of just under 10 percent. Meanwhile, the SPDR S&P 500 ETF (SPY) has managed a 6.5 percent gain.

The lesson here is obvious: Investor money is flowing into foreign stocks.

This is putting pressure on the U.S. dollar even as longer-term forces threaten to crush it. For example …

  • The U.S. government debt has soared to $11.7 TRILLION. That debt is increasing by $1 MILLION every SIX SECONDS.
  • The national debt is now at 80 percent of gross domestic product. Soon, it will likely climb to 100 percent of GDP.
  • If President Obama serves two full terms, the debt will probably hit $20 TRILLION under his tenure. America is on track to pile up $1 TRILLION a year in annual deficits for the next 10 years.

There are other forces at work on the U.S. dollar, but even with just the ones I’ve mentioned, is it any wonder that the greenback is breaking down this week?

The dollar index broke weekly support. It's probably headed much lower.

To be sure, the dollar could bounce from here. In fact, since nothing moves in a straight line, that’s what I expect.

But if you aren’t long gold already, use that bounce in the buck to add positions in the yellow metal and mining stocks. Gold is on the opposite end of the “See-saw of Pain” from the dollar — when one goes up, the other usually goes down. That’s because gold is priced in dollars.

And a sinking dollar isn’t all gold has going for it.

Bullish Forces Are in Place for Gold

I covered a lot of bullish forces driving gold in my recent report. Some things have changed — we’ve heard that gold ETFs have sold some of their holdings recently … we’ve heard that consumers in India have slacked off on gold purchases.

These should be bearish for gold, and yet gold still goes higher. Here are some interesting developments …

Precious metal consultants at GFMS recently reported that …

  • Net official gold sales have plunged — totaling 39 metric tonnes, down a whopping 73 percent year-on-year.
  • Of the gold that was sold, most of it came from within the Central Bank Gold Agreement (CBGA) — the 11 primary nations that formed the euro currency, plus Sweden, Switzerland and the United Kingdom. Those central banks sold 92 tonnes in the first half of the year.
  • For the year, GFMS forecasts net official sector sales of only about 140 metric tonnes, the lowest calendar year total since 1994’s low of 130 tonnes.
  • Central banks and other official institutions in the “rest of the world” (i.e. outside the CBGA) were overall net buyers of gold in the first half of 2009.

Gee, who could that include? Russia, China, and Japan are three biggies I can think of. Probably the Saudi Central Bank and Brazil, too.

Any country that worries the U.S. dollar is headed for the rocks and wants to stock up on the truly eternal currency — gold!

To be sure, the International Monetary Fund is still planning to sell 403 tonnes of gold, probably in 2010. What do you want to bet some metal-hungry central banks are lined up to scoop that gold right off the market?

The Big Gold Buying Has Yet to Begin

Most Americans today trust completely in the power of their currency. While I think there’s nothing wrong with holding cash — in the short-term, anyway — I think more people are going to buy gold and silver, for the simple reason that the government can’t print more of it at will.

I read recently that less than 5 percent of Americans own physical gold. Compare that to the more than 90 percent of the Americans who own IRAs, 401Ks, Keogh’s, mutual funds, money market accounts and bank accounts.

So, I expect those ratios to change. By the time this gold bull really ramps up, at least 10 percent to 15 percent of Americans will probably own physical gold and silver.

And what will that do to the price? ZOOM!

How You Can Get Your Own Slice of the Dollar-Gold Dynamic

If you want to ride gold up and the U.S. dollar down, here are two exchange-traded funds that will help get you there…

    • The SPDR Gold Trust (GLD) is the biggest gold ETF. It held 1,072.87 metric tonnes of gold on Monday. Its holdings dropped early, 50 metric tonnes in July, but seem to be stabilizing. It tracks the price of gold very closely.
    • The PowerShares DB U.S. Dollar Index Bearish (UDN) is a fund designed to go up as the U.S. dollar goes down.

    I’d wait for pullbacks before buying either fund.

    Also, there’s nothing wrong with buying physical gold, even at these prices. You’ll feel better about buying gold over $900 an ounce when it’s over $1,100 an ounce.

    Naturally, physical gold should only be a portion of your portfolio. I have a diversified portfolio, and I think that’s the safest way to go.

    If you want to look at individual stocks, you might take another look at Timmins Gold (TMM on the TSX-V in Canada, or TMGOF on the pink sheets in the U.S.), a stock I profiled last year when it was an explorer. It has since become a producer. The stock has not gone up in price adequately to reflect that change.

    Timmins is putting ore on the leaching pads at its San Francisco mine in Mexico and should be pouring bars of gold by the fourth quarter. Timmins expects to be producing 80,000 ounces a year of gold at a cash cost of $412.

    Just be aware that individual stocks are more risky than ETFs, and small stocks like Timmins carry more risk as well as potential reward than the big boys. You need to know when to get in as well as when to get out. Do your own due diligence.

    Gold Fever Portfolio

    Gold Stocks Are Taking Off

    Let’s go back to my “Gold Fever” report. Here’s how those stocks, many of which are foreign gold miners, are doing in American markets as of Tuesday …

    Individual open gains may vary, but not bad for holding these a little over a month.

    Now, here’s the interesting thing — in their home countries, these stocks are up a lot less. Why is that? Because the U.S. returns are boosted by the decline in the U.S. dollar. This shows that owning the ADRs of foreign stocks — particularly foreign stocks with exposure to commodities like gold — is a great way to hedge against the long-term decline in the U.S. dollar.

    Now here’s the best news — I think these gold and silver stocks have a long way to go. It’s not too late to get in on the action. If you want to catch your own dose of “Gold Fever,” CLICK HERE. Wait another month and you’ll probably end up kicking yourself.

    Yours for trading profits,

    Sean

    P.S. Remember, you can check out daily updates on my blog at http://blogs.uncommonwisdomdaily.com/red-hot-energy-and-gold/ and you can follow me on Twitter at www.Twitter.com/Seanbrodrick

    This investment news is brought to you by Uncommon Wisdom. Uncommon Wisdom is a free daily investment newsletter from Weiss Research analysts offering the latest investing news and financial insights for the stock market, precious metals, natural resources, Asian and South American markets. From time to time, the authors of Uncommon Wisdom also cover other topics they feel can contribute to making you healthy, wealthy and wise. To view archives or subscribe, visit http://www.uncommonwisdomdaily.com.

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