In my lifetime, I believe I will wake up one morning to the news headline, “Gold up $100 Today as U.S. Dollar Crashes.”
The popular media is slowly starting to pick up the gold bull market story. Investors are getting interested in it, and the smart money is buying in, but gold is still only in the second phase of its bull market. Once the third and most speculative stage sets in, we will see big single-day price rallies in the metal. That’s why I believe it’s still not too late for my readers to get into gold.
So far in the gold bull market, the majority of the rise in the price of gold can be related to the decline in the price of the greenback compared to a basket of the world’s other most popular currencies: the euro; yen; pound; Canadian dollar; Swedish krona; and Swiss franc. If you’ve looked at a chart of the U.S. dollar lately (against the currencies listed above), it reads like a straight line down.
I’m often asked, “Michael, why did you see gold as a buy in 2002?” Back then, two of our analysts wrote a report on how then Fed Chairman Greenspan had a secret plan to reduce interest rates to bring the value of the U.S. dollar down to help our exporters.
My realization was that, as the U.S. dollar fell in value, the 70% of the countries around the world that used it as their reserve currency would get squeezed and would look to abandon the U.S. dollar as a reserve currency. Their only alternative: gold.
By pushing interest rates so low in the summer of 2004, Greenspan not only succeeded in starting the devaluation of the U.S. dollar, but he also unwittingly set the stage for the greatest real estate bubble in American history—a bubble that eventually burst, causing the worst recession since the Great Recession.
To fight the recession, the U.S. government increased debt to record levels, putting more strain on the U.S. dollar. Gold has many “thirsts” that fuel its rise. One being a falling U.S. dollar. The second being increasing U.S. national debt, because a currency backed by a lot of debt is a currency in trouble. Both thirsts are being fed to gold right now.
(The above “classic” Michael gold article appeared in PROFIT CONFIDENTIAL on October 6, 2010. Gold bullion traded at $1,346.50 an ounce on October 6, 2010. Today, it trades in the $1,500-an-ounce area, a gain of 11% in six months. The reason we reprinted the article: there’s been no change in Michael’s feeling about gold bullion continuing to rise in price. In fact, what Michael wrote about six months ago is still fueling gold’s price rise today. And, yes, he’s still expecting to wake one morning to, “gold up $100 today as U.S. dollar crashes.”)
Michael’s Personal Notes:
The inflation rate in Canada surged in March to its highest level since September 2008—to an annualized rate of 3.3%. The Canadian dollar has been surging vs. the U.S. dollar for months now. Years ago, it took $1.50 Canadian to buy $1.00 U.S. Today, it takes $1.03 American to buy $1.00 Canadian! A total about-face.
I’ve been screaming for at least five years now: Americans, buy your stocks denominated in Canadian dollars on the main Canadian stock exchange, so you can get the additional whammy of a currency gain! I continue with that opinion today.
The worst-kept secret: the Bank of Canada is not far from raising its benchmark interest rates again.
Where the Market Stands; Where it’s Headed:
As we enter the final trading week of April, a bear market rally still presides. The risks for the economy are increasing each passing day, but this bear has not finished its job yet of convincing investors to get back into stocks.
What He Said:
“Over the past few weeks, I’ve written about subprime lenders and how their demise will hurt the U.S. housing market, the economy and the stock market. There’s no escaping the carnage headed our way because the housing market and subprime business are falling apart. The worst of our problems, because of the easy money made available to borrowers, which fueled the housing boom that peaked in 2005, have yet to arrive.” Michael Lombardi in PROFIT CONFIDENTIAL, March 22, 2007. At the same time Michael wrote this, former Fed Chief Alan Greenspan was quoted as saying, “the worst is over for the U.S. housing market and there will be no economic spillover effects from the poor housing market.”