Gold Thoughts

Recent weakness in gold bullion prices could be confusing to gold stock investors. I personally believe there are several factors behind gold’s recent price weakness: The primary reason being the sudden rush to U.S. dollars.

What I’m taking of is all the “noise” about rising interest rates. The bond market has been hit hard over the past month as investors move out of bonds because they believe, and rightfully so, that higher interest rates will push bond prices lower.

So where are all the bond investors going with their money? Often, bond investors are conservative investors. So they are not going to the stock market; they are moving their cash into short-term U.S. CDs, T-bills, and money market instruments (cash). This has caused an immediate-term demand for U.S. dollars.

As we all know, gold often weakens when the U.S. dollar strengthens. Do I think the strong U.S. dollar (and weaker gold prices) will continue for some time? No. I have not sold any of my gold stocks. My charts tell me to buy more gold stocks if gold bullion hits $375 U.S. per ounce. Also in the immediate term, gold is severally oversold, so I would not be surprised to see a rally develop.

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Here’s why I believe gold will move higher:

— Greenspan is now saying that deflation is dead and inflation is in. According to the U.S. Department of Labor, U.S. consumer prices jumped by 0.5 per cent last month, that’s two- thirds more than economists had been expecting. Inflation rallies gold.

— Little old me isn’t so sure deflation is dead. Wal-Mart now accounts for 8% of all U.S. retail sales and the figure is only growing. Wal-Mart is an importer of deflation from China. Deflation is bad for U.S. bonds and our dollar, and, again, good for gold.

— Between tax cuts and the Iraq war, among other things, the U.S. government has created the biggest debt ever seen in our country’s history. The U.S. government debt is increasing at the rate of more than $10 billion per week. And the Fed has done its share by enticing consumers to spend themselves silly… creating record consumer debt. All this debt will eventually need to be dealt with. It may not be until after the election, but the piper will need to be paid.

— You’ve heard me say it before, and I’ll say it again: how long can foreigners go on buying U.S. bonds to finance our debt before they realize they are not going to be repaid? Not very long as I see it.

The markets don’t move slowly like they did only 10 or 20 years ago. With a global economy, price changes happen quickly. And, with gold in my portfolio, I feel protected from a weak U.S. dollar and the mountains of debt in the economy. I don’t trade gold to make a quick profit. I’m a long-term thinker and player. I feel good sleeping at night knowing I have insurance… and that insurance is my gold investments.