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Nadeem Walayat Financial Markets Analysiis and Trend Forecasts

Re-Inflation About to Send Gold and other Commodities Soaring

Commodities / Resources Investing Sep 11, 2008 - 09:18 AM GMT

By: Money_and_Markets

Commodities

Larry Edelson writes: Diamond Rated - Best Financial Markets Analysis ArticleWith events changing daily ... with the government takeover of Fannie and Freddie ... with important news coming out almost hourly — I'm sure you're often wondering: "What does Larry think here? How do I make money in these crazy markets and economic environment?"

Indeed, I'm receiving more questions about the markets ... more doubts about the commodities bull market ... more inquiries about inflation versus deflation, than I have in years.


That's not surprising, considering the extreme, wild swings in the markets. Emotions are running deep. Confusion is everywhere. Even the most experienced investors and traders are having quite a spell with the current economic and market environment.

So I'm going to convey as many of my views as possible in this report ... and the reasons behind them. That way you'll know exactly what I'm thinking ... why ... and how to both protect your money and reap gobs of profits to boot.

I'll do it via questions and answers. So let's get started ...

Q: Larry, is the bull market in gold over?

A: No way, no how. What we've seen is merely a major pullback in gold, a healthy pullback that will renew the bull market and lead to much higher gold prices down the road.

My basis for that view ...

First, the charts and technical analysis. As you can see from this long-term chart on gold, the recent pullback has retraced less than one-third of gold's bull market gains since the low of $256 in February 2001.

Gold's bull market intact.

Does it look to you like gold is in a bear market? Heck no!

Even if gold were to break the first uptrend line on that chart, it has major system support (not shown) between $735 and $763.

While it's true that gold has fallen a bit further and faster than I expected, that does not change the fact that the pullback is merely a retracement on the charts.

What to do about your gold investments?

For your core gold holdings, remember you are investing in gold for the long-term. And I believe gold is headed much higher. So it does not pay to try and side-step the correction. By trying to do so, you risk getting whipsawed by the market, and almost always end up paying more to get back in.

I recommend holding on to your core positions. And if gold declines any further, look to add to those positions.

For short-term trading, it's a different story. Make use of the stops I give you if you're following my Real Wealth Report . And if you are a subscriber to my trading services, don't be afraid to take my put option or inverse ETF recommendations to profit from short-term declines.

For instance, subscribers to my Resource Options Alert just had the chance to bag up to 171.6% gains (before deducting broker commissions) on some put options I recommended.

Second, gold's inflation-adjusted price — $2,270 — has not yet been reached, indicating the price of gold can nearly TRIPLE from current levels.

If history is any guide, and I believe it is, then I hold that there is nearly a 100% certainty that gold will reach $2,270 before gold's bull market is over. And quite possibly, even higher!

Keep in mind that throughout history, asset classes always reach their inflation-adjusted price. They wax and wane, falling behind the inflation curve at times, and at other times, catching up and exceeding their inflation-adjusted prices.

That's true of all asset classes, be they bonds, stocks, commodities.

This is especially true in the post-1971 period when paper money's relationship with real money has been severed via the elimination of the gold standard.

Third, the bear market in the dollar, one of the principal forces behind gold's bull market, is not over. I'd like to believe that it is, but it's not — the dollar has much more to go on the downside.

You can see it in this long-term chart of the dollar index.

Dollar clearly remains in a LT Bear Market

Notice how the index is merely bouncing back a tad. Yet it remains deeply embedded in a bear market and way below levels seen just last year.

In other words, the dollar's recent rally is nothing more than a bear market bounce.

Fundamentally, I believe the U.S. economy is much weaker than Europe's. While the euro zone is certainly having its problems, Europe is NOT the epicenter of the current crisis. The U.S. is.

Moreover, I have absolutely no doubts whatsoever that our Federal Reserve, led by Chairman Ben Bernanke, will do everything in its power to "inflate away" the debt and credit problems in the U.S. — by continuing to sacrifice the value of the dollar.

Fourth, the credit crisis hitting the U.S continues, unabated.

My best guess is that it's probably in its sixth inning, past the half way point, but by no means over.

There will be more financial failures. The bailout of Fannie and Freddie will not prevent that. There will be more bailouts. And more money pumping from the Fed.

And hence, a weaker dollar ... soaring inflation ... and frightened money that avoids paper assets, seeking out instead assets with intrinsic value, namely gold, oil, other tangible assets and natural resources.

Fifth, supply and demand fundamentals support a continuing bull market in gold.

In fact, demand for gold in dollar volume reached a record high in the second quarter of this year. Meanwhile, supplies seem to be tightening further.

South African gold production plunged more than 12%. And many major gold miners are now forecasting a slide in production for the second half of this year.

Plus, central bank sales of gold are running at their lowest level since 1999.

Both short and long term, the demand/supply equation in gold favors a long-term bull market.

Q: Larry, is the bull market in oil and energy over?

A: No. As with gold, what we are now witnessing in oil is merely a technical correction, and nothing more. Massive support lies at the $107 - $110 level in oil. But even if oil were to break that level, it would most likely hold the $90 to $95 level, and then resume its bull market.

In terms of fundamentals, all of my research indicates that the world has effectively reached "peak oil" — and that supplies are now in a virtually perpetual state of decline, save an occasional new oil find here or there.

Additionally, supply constraints and disruptions from terrorism and wars will unfortunately continue. Upward pressure on oil will also be created when the dollar resumes its bear market.

Bottom line: Once this technical correction in oil is over, I expect to see oil's bull market resume, with oil reaching $200 per barrel early next year, if not sooner.

Q: Larry, is the bull market in natural resources over?

A: No. For all of the reasons I cited above for gold and oil, and more.

Every natural resource under the sun remains in a long-term bull market — from A to Z.

Especially bullish — agricultural commodities such as wheat, corn, soybeans, sugar, cocoa, coffee. Although they have had large corrections over the last few months, almost all of them are set to double, triple, and in some cases, QUADRUPLE over the next few years.

Q: The U.S. economy is clearly slowing sharply. So is Europe, and even parts of Asia. How could the bull markets in gold and natural resources continue in the face of such slowdowns?

A: Several reasons ...

First, the global economy is not slowing as much as many would like to think. That's in large part due to continuing growth in India, China and the rest of south Asia.

Never forget, that's nearly 3 BILLION people, almost half the world's population. Their actions — with their new found freedoms — are far more powerful than those of the 300 million in America and the 491 million in Europe, which combined represent only 11.4% of the world's population.

Second, central bankers everywhere will always side with growth policies rather than take the pain of a slowdown. That means they will enact policies that keep interest rates artificially low ... that keep the lid on currency appreciation ... that pump up fiscal spending ... prime the monetary pumps ... cut taxes, and more.

We are already seeing this throughout Asia, where policymakers are enacting all of the above to ensure growth. Will it work? Yes, I believe it will. It will cushion Asian economies by insulating them from the illnesses afflicting the U.S. and European economies, and by stimulating domestic demand.

Q: What is your view on deflation? Many say we're headed for a deflationary collapse like we experienced during the Great Depression. What do you think?

A: I do not agree with that view. Chief reason: The world is no longer on a gold standard. And central bankers are free to print money whenever they want.

I do believe, however, that in the absence of a gold standard — deflation and inflation co-exist at the same time. For instance ...

  • We are currently witnessing deflation in real estate prices ...
  • We have, and will continue to experience, deflation in the value of the dollar — its price is falling, and it buys less and less ...
  • We are experiencing deflation in the cost of money — the price to borrow money, interest rates, is falling, and ...
  • We are experiencing deflation in other paper assets — for instance, the Dow Jones Industrials, which has lost nearly 72% of its purchasing power in the last seven years.

Simultaneously ...

  • We are experiencing inflation in tangible assets ...
  • Inflation in the supply of money, and ...
  • Inflation in natural resources.

So the big question is not whether the world is heading toward deflation or inflation, but rather — which sectors will inflate, and which will deflate in the years ahead?

For many of the reasons I already mentioned in the gold, oil and natural resource questions above — I believe that deflation in the value of our money (its price and purchasing power are falling) ... and inflation in the value of hard assets — will continue for several more years.

I also believe that at some point, real estate and even broad stock markets will join in and re-inflate, rising simultaneously with the bull markets in commodities and natural resources.

How is that possible?

I call it the "Great Re-Inflation." And it will occur in the final phase of the crisis we're experiencing, when all currencies begin battling each other with "beggar thy neighbor" trade and economic wars, with one currency vying against another to be the cheapest currency on the market.

At that point, which is a few years away, you will see virtually everything inflate, except paper currencies, which will be losing massive amounts of purchasing power.

Keep in mind, ever since the gold standard was abolished, all fiat currencies have ultimately been destroyed by policymakers — systematically devalued to inflate away fiscal imprudence (budget deficits), and bad debts, both public and private.

It's how wealth is transferred from savers to debtors ... from the private sector to the public sector (to pay off government debts and liabilities).

It's a shell game, but at your expense. That's why I consider it absolutely mandatory that you understand this process ... and why I harp on it over and over again. Your only chance of financially surviving it is to understand the mechanism, and what the government is doing to your money.

Q: Larry, many claim that the U.S. is heading toward a 15-year recession like Japan experienced from 1990 to 2005. Do you agree?

A: No, I do not believe the U.S is heading toward a 15-year recession as Japan experienced.

True, the similarities between the U.S. now and Japan at the outset of its Great Recession in 1990 are uncanny — but they are similarities on the surface only.

Dig deeper and you will see ...

  • Japan refused to let normal market forces devalue the yen. Instead, the Bank of Japan acted to prop up the yen, which added to the deflationary pressures.
  • Cross-shareholdings amongst Japan's major corporations slowed the recovery. At the outset of Japan's recession, fully 20% of the outstanding stock of Japan's major corporations was tightly held in cross-shareholdings. This reduced market liquidity and prevented many of the bad debts and losses from rising to the surface, thereby slowing the recovery.
  • Institutionalized domestic price support schemes in many industries in Japan further acted to hamper recovery and clear markets.
  • The Japanese mafia, the Yakuza, held a tight grip on industry for almost the entire 1990s.
  • The Japanese culture, in general (and without offending any of my Japanese friends), was largely inflexible to the crisis — highly bureaucratic, resistant to change, and slow to recognize losses.

In summary, while many of the underlying causes between the current crisis in the U.S. and the 1990s recession in Japan are similar (excessive debt and real estate speculation), the symptoms, treatment, and healing processes are very different, due largely to huge cultural differences.

Q: What are your short-, intermediate-, and long-term views on the stock market?

A: We are still in the throes of a bear market. But keep these two major points in mind ...

1. In terms of the real value of money, in purchasing power terms, the Dow Jones Industrials has already lost 72% of its value in a giant stealth bear market. Ditto for the S&P 500 stocks and the Nasdaq.

The financial sector has lost a whopping 99.5% of its value in real terms!

2. The bear market is largely occurring through — and disguised from the public — the bear market in the dollar.

In nominal terms, all of my indicators suggest that the DJIA could fall to as low as 8,900. But after that, the DJIA (and other indices) will join the Great Re-Inflation and begin an ascent to well over Dow 25,000.

Do note, however: In real terms, the Dow will merely be catching up with inflation. It will not be offering positive, above the rate of inflation, returns. Those will still largely be found in tangible assets such as gold, oil and other natural resources.

Q: What are your views on Asia now?

A: There is some slowing in Thailand, Hong Kong, and Singapore, but that's about it.

The slowdowns are merely knee-jerk reactions to the disasters in the U.S., and are temporary. Meanwhile, the fundamentals underlying the growth in India and China remain rock solid.

Proof? Consider the following ...

  • Industrial and Commercial Bank of China (ICBC) just announced that its first-half net profit soared more than 50% over the first half of last year, to US$9 billion. And ...
  • Three Chinese mid-size banks also posted soaring first-half net profits. China CITIC Bank, the country's sixth-largest lender, announced first-half earnings up 163% year-on-year. Shenzhen Development Bank saw net profits rise by 91%, while the Bank of Nanjing posted a 126% jump in earnings.

Sound like a slowdown to you? What's more, I expect growth in the post-Olympic phase of China to explode even higher. Main reason: Beijing is already doing everything in its power to prevent an Olympic hangover. And I believe they are taking the right steps.

For example, Beijing is relaxing its grip on money supply, pumping up loan growth, reducing taxes, and more.

As China forges ahead, its growth will pull up the rest of Asia and Southeast Asia, as it has done in the past.

Q: What are your views on Europe?

A: Europe is slowing. There is no doubt about that. And it will continue to slow. But don't bet on the euro falling much more than it already has. European monetary policy is more restrictive than U.S. monetary policy.

Q: How about Latin America?

A: With the exception of Brazil, I am not optimistic about Latin America. And do not believe there are many investment opportunities there.

Q: What's your view on Obama and McCain?

A: No matter what I say here, I'm bound to offend someone. So rather than detailing my views let me put it this way: Whoever wins the White House in November will have their work cut out for them.

The U.S. is going through its worst financial crisis in at least 70 years. One candidate may handle it better than the other. But it won't change the course of events.

Q: What are your latest views on terrorism, Iran, Russia?

A: Sadly, I do not believe the war on terror is over. Nor do I believe the nuclear row with Iran will be resolved amicably. Both terrorism and the Iran crisis are likely to worsen in the months ahead, no matter who wins the White House.

What's more, I believe that we are very possibly on the edge of a new cold war with Russia. It's too early to say for sure. But the possibility of a new cold war should not be dismissed.

Q: I send you questions by e-mail, but you don't reply. Why?

A: Two reasons ...

A) As editor of various publications, securities regulations do not permit me to give individualized advice.

B) Even if they did, it's physically impossible to answer all the e-mails I get.

But I do read them with great interest. And you may find my responses to many of them on my blog at:

http://blogs.moneyandmarkets.com/blog/real-wealth

Be sure to check my blog frequently for my day-to-day thoughts on the markets.

Q: What is your trading strategy going forward?

A: To prepare for the next phase of the Great Re-Inflation!

That means ...

  • Keeping the long-term picture firmly in view, with discipline and patience ...
  • Looking to buy values during the pullback, in virtually all natural resources ...
  • Using stops to protect positions and reduce downside risk, and ...
  • Expecting to make a bundle of money going forward!

Let me repeat that ...

KLUE ... Keep the long-term picture in view ... Look to buy value ... Use stops to reduce risk ... Expect to make a bundle.

To sum up, I believe the next phase of the Great Re-Inflation will be the most profitable yet! Provided you have the KLUE!

Best wishes,

Larry

P.S. You're witnessing the wildest market moves and most extreme financial stress our country has experienced in at least 70 years. So not only is it critical that you protect your money, it's also one of the best times I've ever seen to get set up for huge profits.

My mission: To help you protect your money and make gobs of moolah as well. So why not join me and my subscribers ?

For a mere $99 per year, you get 12 hard-hitting objective monthly issues covering virtually all markets ... all of my recommendations ... all of my flash alerts ... and 24/7 access to my website.

I think it's a bargain, and the best $99 you can spend. Subscribe now to get started.

This investment news is brought to you by Money and Markets . Money and Markets is a free daily investment newsletter from Martin D. Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil. Dr. Weiss is a leader in the fields of investing, interest rates, financial safety and economic forecasting. To view archives or subscribe, visit http://www.moneyandmarkets.com .

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