Why There Is a Lot More Bounce Left in the Gold Rally

by Michael Lombardi, CFP, MBA

What’s the worst-kept secret in the financial markets these days? Answer: the rising price of gold bullion. And what is the worst-kept secret in the smart money circle? Answer: the great majority of investors have yet to join in on the gold bullion rally. So, better get in before the small retail guy does!

Dear reader; let me ask you another question. What investment has returned an average of 29% profit each year since 2002? The answer is gold bullion. If we look at gold stocks, they have done much better in terms of price appreciation than gold bullion has, especially the junior miners.

Here’s what is happening:

The U.S. national debt is expected to hit $20.0 trillion by 2019. The interest alone on the debt will equate to $2.0 billion a day. Hence, our government, by 2019, will be paying $2.0 billion per day just on the interest of the accumulated debt.

While a handful of market watchers like me have been predicting much higher gold prices for years, the world is finally searching for an alternative to a U.S. dollar plagued with debt. It is finally happening. Investors are seeing the writing on the wall — the writing that says the U.S. dollar will devaluate against other world currencies as government debt continues to spiral out of control.

Is there any alternative to the U.S. dollar as a world reserve currency? I don’t see one. The Chinese want to keep their yuan as low in value as possible against other world currencies, so people continue to buy “made in China” goods. The yen? Forget about it. Japan has been going in and out of recession/deflation for over 20 years now. And, as for the euro, after what I saw last week in Europe, our economy is well ahead of the major European countries in terms of recovery.

So, yes, gold is slowly becoming the new money. Why risk putting your money in T-bills that pay less than two percent when gold bullion is rising so rapidly?

I have gone on record before with this prediction, and I will do it again today for the benefit of my readers: I believe that, years from now, we will look back at 2009 and see $1,000 gold as having been a bargain. I would not be surprised to see gold bullion trading in the $2,000 to $3,000 range over the next decade or even earlier.

Today’s U.S. national debt sits at $11.0 billion. By the White House’s own estimate, this debt will rise to $20.0 billion by 2019. As the debt of the U.S. doubles over the next decade, I believe that the price of gold will much more than double.

Where the Market Stands:

The Dow Jones Industrial Average is up 6.5% so far for 2009, while the Dow Jones has rebounded a healthy 45% from its March 2009 low. Most retail investors have lost out on the market rally, because they were too frightened in March to enter the market. The great majority of mutual funds have also underperformed the major market, as they were too slow getting back into stocks. Is the rally over? I still see some life left…and Dow Jones 10,000 is a strong possibility.

What He Said:

“You’ve been reading my articles over the past few months and have seen how negative I’ve become on the U.S. economy. Particularly, I believe it’s the ramifications of the faltering housing sector that are being underestimated by economists. A recession doesn’t take much to happen. It’s disappointing that more hasn’t been written on the popular financial sites and in the newspapers about the real threat of a recession happening in 2007. I want my readers to be fully aware of my economic opinion: I wouldn’t be surprised to see the U.S. economy in a recession sometime in 2007. In fact, I expect it.” Michael Lombardi in PROFIT CONFIDENTIAL, November 13, 2006. Michael was one of the first to predict a U.S. recession, long before Wall Street analysts and economists were even thought it a possibility.