Why Gold Will Rocket

Welcome to the opening ceremony of a modern depression.

The effects of the financial shock are starting to make themselves felt in my neck of the woods. Neighbors on three sides not involved even peripherally in the financial markets are unemployed now. Vacations for the year have been cancelled.

Even Paramount Pictures announced this week that it would only be “green lighting” 20 films for production instead of its originally budgeted 25.

General Motors (GM), Ford (F) and Chrysler are laying off thousands upon thousands.

Copper and nickel mines are closing, and feasibility studies are being postponed. Yahoo (YHOO) is laying off 10% of its workforce.

There is barely a single industry outside of anything related to home foreclosure that is not in the process or about to enter the process of hunkering down and trimming the workforce to survive what is now universally perceived to be lean times ahead.

The joke of the week I heard was this: I went into Starbucks (SBUX) to buy a coffee and they offered me a free bank with it.

Starbucks is closing 600 stores this year. Bah humbug.

If for some reason you’re still wearing rose colored glasses through all of this, now is the time to prepare for the biggest social upheaval these generations will ever see.

Crime is about to become rampant. As police forces start laying off due to reduced tax revenue at the municipal, state, provincial, county and federal level, desperate times will force good people to do bad things. Bad people won’t even wait for times to toughen up.

And I don’t know about where you live, but here in Portland, the city is literally crumbling…the many bridges that criss-cross the Willamette River seem to be in generally good repair – they double as housing for a good number of the city’s shelter-challenged. But a truck dropped into a sinkhole that opened up in the middle of the street not so long ago, which was very entertaining while at the same time vaguely nerve-wracking.

Fortunately, the federal government isn’t hesitating in its stated promise of economic stimulus packages. $12.8 billion is being distributed to get crews working on bridges, tunnels and highway projects. The Federal Highway Administration claims 34 jobs are created with every million dollars spent.

That will come as cold comfort to the 6.1% of the population who is unemployed. That’s 9 million people, according to Bureau of Labor statistics. Including those who can only find part-time work or are otherwise not looking for work, the figure of under-employed Americans extends to more like 15.5 million, according to the American Federation of Labor.

There is nothing but trouble as far as the eye can see. Major threatened industries include airlines, tourism, automotive and of course, the financial industry.

For many, a Merry Christmas is as likely as gold falling from the sky. At least Fed Chairman Benranke has promised to dump dollar bills from helicopters…by the time that happens, they’ll probably be more useful as litter box liner. Which brings us back to gold.

The sheer magnitude of hate mail coming my way from people who revile my advocacy for gold is almost as mind boggling as the price weakness if the face of almost zero supply of small denomination coins and bars.

The chart below demonstrates the strong increase in gold lease rates in the last 90 days.

What does that tell us about the future price of gold?

Well, for one thing, it now costs as much to borrow gold as it does to borrow currency, which is a clear indication that the supply of gold for leasing is tightening while demand remains strong. Most central banks have ceased lending gold completely.

The most common question being asked is, “If gold is in such strong demand and short supply, why is the price so weak?”

And that’s a little bit complicated, but like most everything in these most volatile times, nothing makes sense. At least, not in the short term. Instead of re-iterating the explanation of the downward pressure created by the gold carry trade and the futures market, I refer readers to the excellent work of John Embry and Andrew Hepburn, who published a work called “Not Free, Not Fair."

The bottom line is this: the massive repatriation of US Dollars as a result of de-leveraging globally and the unwinding of so many credit contingent deals is making the US Dollar look strong, while the gold manipulation cartel is exerting its utmost effort to keep the spot price of gold low through concentrated short positions on COMEX. The price of gold will emerge from this negative influence on the next leg down and the economy goes into a broader paralysis instead of being limited as it is now to real estate and financials. Most credible analysts are recommending a minimum 30% exposure to gold for institutional portfolios.

Though its hard to imagine in the current price environment, both gold and silver are on the verge of a tremendous breakout to the upside, and if you can’t get your hands on the physical bullion over the next 24 months, the producing companies will be next followed closely by well cashed up junior explorers with million ounce+ deposits in National Instrument 43-101 compliant categories.

Ignore the negative press on gold, and recognize the current price weakness for what it is: the last time you’ll see gold this cheap in a long time, and therefore a huge opportunity.

Comments

[captmike:]

From what I can tell looking at your articles going back 6-12 months, every prediction you have made (with the exception of the decrease in the price of oil) has been wrong. Talk about a proven track record!

2008 Oct 23 06:54 AM

[Cesato:]

captmike I'm with you, there should be a filter in this blog to prevent markets losers to dump their anger in here and try explain why manipulation of markets make their own theories fall through the crack. I've read several terrific contributions in this Blog but curiously always coming from open minded writers who analyze the market not hoping for a move in the direction they want the market to move, but being contrarians or investor like thinkers, the manipulation theories are useless unless you've made money being a contrarian. For real money investors manipulation is the loser's definition for traders who don't understand real money (the one who actually move the market) market sentiment . Good one capmike

2008 Oct 23 08:34 AM

[MikeLovesGold:]

Great article. Investor's should consider dollar cost averaging a small portion of their portfolio into gold now.

2008 Oct 23 10:58 AM

[User 30121:]

captmike: Okay, let me get this straight/correct (you see, I'm learning here) you don't think gold is a buy at these levels, or is your emphasis merely on a personal attack on James West, the writer? I need to be enlightened.

Also, do you own gold (or silver)?

I have LOTS of both (physical only, thank you). Are you interested in buying some?

One last thing, why are you reading his post, which is clearly GOLD related! Do I sense sour grapes?

Enlighten me, please, because what James West has written makes sense to me??????????????????

2008 Oct 23 11:03 AM

[OilyGasMiner:]

Bah humbug in NEED James. The naton will fall and the skys will rain blood. You can't expect that a nation with thousands of homeless and jobless to sit tight and wait for things to get better. Bad things are upcoming in months ahead. Point Blank. Gold performs during periods of uncertainty. Let us be aware of this, and hedge not only our investments, but also our livelihood. Brace yourselves, as we are headed for rough seas ahead.


"it was reported last week (again I have not been able to verify this) that the European Central Banks sold 7.6 tons of gold (about U.S.$250 million)

in the week ended October 10. If this is true, that ought to have put downward pressure on the gold price. In any event, it strikes me there is a disconnect between the current market demand/supply equation and the futures market where gold is quoted this morning at under U.S.$760 per ounce, down from approximately U.S.$900 approximately two weeks ago. As best I know, the price of gold should gain ground in uncertain economic times – which we certainly are in – and it is not doing that as this is written."
source: www.stockresearchporta.../

2008 Oct 23 11:07 AM

[OilyGasMiner:]

Bah humbug in NEED James. The naton will fall and the skys will rain blood. You can't expect that a nation with thousands of homeless and jobless to sit tight and wait for things to get better. Bad things are upcoming in months ahead. Point Blank. Gold performs during periods of uncertainty. Let us be aware of this, and hedge not only our investments, but also our livelihood. Brace yourselves, as we are headed for rough seas ahead.


"it was reported last week (again I have not been able to verify this) that the European Central Banks sold 7.6 tons of gold (about U.S.$250 million)

in the week ended October 10. If this is true, that ought to have put downward pressure on the gold price. In any event, it strikes me there is a disconnect between the current market demand/supply equation and the futures market where gold is quoted this morning at under U.S.$760 per ounce, down from approximately U.S.$900 approximately two weeks ago. As best I know, the price of gold should gain ground in uncertain economic times – which we certainly are in – and it is not doing that as this is written."
source: www.stockresearchporta.../

2008 Oct 23 11:08 AM

[Simit Patel:]

no doubt the case for gold is bullish. the fiat currencies as we know them are coming to an end. i think gold could go to 645, but i don't think it will go below that. more importantly, getting physical gold is the real issue.

2008 Oct 23 11:11 AM

[xt:]

well ive played both the market and bought silver and gold over the last 20 years and i have to say that ive made and kept more of my own money with gold and silver than i ever had with the groups of professionally managed funds.

heres the kicker........you have to include inflation

in the 8 years bush has been in office (not that the dems will do any better) the dollar has lost 40 cents of buying power.

2008 Oct 23 11:45 AM

[bowman711:]

There is one possible wild card to the normal economics of gold. I don't know if you noticed that another $600-Billion was thrown at 'the crisis' this week (or late last week) to bail out money market funds. Two-plus weeks ago a $700-billion bailout was headline news for days; this one barely made the back pages of the newspaper. Frankly, these bailouts have been so reckless that I am leaning toward the idea that it doesn't matter to the G-7 governments how much of their dollars, yens, Euros, pounds, etc. they print because they are planning for a new world currency to replace the dollar. Time will tell how well all these 'strong' dollars would fare in any conversion. This morning this new 'Bretton Woods' summit was announced for November 15, the first of a series of expected summits to deal (on a world-wide basis) with the current economic meltdown..

There is talk that the new world currency WILL likely be backed by gold. Both China and Russia are certainly talking of tying their currencies to gold. Therefore, it would be in the interest of these new Bretton Woods governments to drive the price down as far as possible before they outlaw private ownership of gold so they can use it to partially back the new currency. [I don't think they would dare try to take gold without payment because there are too many people who own gold who are also stocking up on food and weapons to protect what they hold.]

Personally, I think the flap over Joe Biden's comments about a huge crisis coming if Obama is elected is not referring to a terrorist attack, but to a monetary meltdow - a planned meltdown - to introduce a new world currency. Yesterday, Obama himself said this expected crisis would not just be for his administration, but for anyone who is elected. Biden pleading with his Tacoma crowd to stick with them because they would not understand (at first. at least), and probably not like what the solution would be, gives more credence to the possibility of a new, gold-backed world currency.

After the history, especially the recent history, of all fiat currencies, I don't think the G-7 could get Russia, China, or even most ordinary U.S. citizens to accept a world, Euro-like currency, unless it is backed up by gold (or, possibly, a basket of precious metals.).

Time will tell.

2008 Oct 23 12:51 PM

[Pipo:]

Jim Rogers is also bullish on gold. Might be a good trade for the upcoming inflation period ahead of us

jimrogers-investments..../

2008 Oct 23 01:42 PM

[Carl Spackler:]

I am so tired of goldbugs crying about some mysterious anti-gold power wielding cartel that conspires to keep gold down - what a bunch of crap! Gold trades where it deserves to be traded. Right now, it is being perceived to be of less value than everyone thought - end of story. Quit trying to blame your poor prognostications on some nebulous group of power brokers who are out to kill the price of gold.

2008 Oct 23 02:44 PM

[Greg Weston:]

Another tired conspiracy-theory-lade... article pumping gold.

Sorry, those positions you bought at 950/oz are not coming back.

While a stopped clock is right twice a day, goldbugs have been right twice in 30 years. Gold has had 2 bull markets in the past 30 years. The first one ending in 1980 and the 2nd ending this year.

Not much of an investment if you ask me.

Gold is going to continue to fall just like every other commodity.

PS: Buy some GLD 65 puts for Jan 2010. Only $8 a pop. Huge profits when the gold bubble ends and the metal returns to its long-term price of $350-450/oz. I think we may even overcorrect to below that range.

2008 Oct 23 04:01 PM

[Greg Weston:]

Also beware of professional gold bulls. They are bullish on Gold at 100, 1000, and everything in between. That's their job.

2008 Oct 23 04:03 PM

[Homer II:]

right on, Capt. Mike and Greg Weston..

I have been hearing the gold bug rant/whine ever since 1982 when I first started saving/investing.. and their story never changes: conspiracy theories abound; some world-ending crisis looms urging, pleading with everyone to go out/rush out and buy PMs.

world currency... hahahahaha

2008 Oct 23 04:36 PM

[Marc Courtenay:]

I checked with a group of large precious metals dealers today. None of them had anything smaller than kilograms of gold and 1,000 ounce bars of silver. Supply shortages are world wide. Why is the US dollar soaring now during America's worst financial crisis ever? Check out the following video which is just one of several announcements on this topic which I've been hearing....
video.google.com/video... and even if you have to copy and paste it, hear Roubini's latest speech and you'll know,
bloomberg.com/avp/...

2008 Oct 23 05:55 PM

[Marc Courtenay:]

Whoops, the first video link which I refer to is:

video.google.com/video...

2008 Oct 23 05:56 PM

[xt:]

"goldbugs"???? and hahahahaha

are looking through the world in enron-style-glasses where stocks went from 250 bucks a share to 30 cents in a few months? must be.....

and remember, old kenny boy lay owned 14 houses in aspen alone, as you begged your wife and family for more money to invest in this "to good to be true deal of a lifetime" buying more stocks as it shot to a couple of bucks a share....

i think the joke is on you ;(

the Dow on 10-09-07 above 14,000
the Dow on 10-09-08 8582 that is down 39%

you have lost almost 40% of your retirement in 1 year, and the market continues to go down hundreds of points in a weekly basis.

Ford and GM are in big trouble of going under and cant get loans to keep them afloat, GM shares dropped 22% today at less than 6 bucks a share and lost 16 billion in the 2nd quarter, Ford fell 8% to less than 2.50 a share

the country of Iceland is bankrupt

one third of the world is eating well, one third getting by, the last third are starving to death

there is a bank run in Europe, dozens of banks have locked their doors because thousands are flocking to them demanding their money.

NEW YORK - In a sign of the times, the National Debt Clock in New York City has run out of digits to record the growing figure. As a short-term fix, the digital dollar sign on the billboard-style clock near Times Square has been switched to a figure — the "1" in $10 trillion. It's marking the federal government's current debt at about $10.2 trillion.

Cost of 911 30 billion not counting Homeland Security budget of over 100 billiion
Katrina 60 billion
bankers and wall street bailout 700 billion to a trillion

Schwarzenegger wants 7-40 billion to help California, Schwarzenegger said the crisis meant California, the most populous and wealthiest US state, was unable to access routine financing used to make payments to schools, local government and law enforcement.

As Washington lawmakers debate as massive, $700 billion, bailout for Wall Street firms that invested in mortgages, CEOs have come under new scrutiny for their multi-million-dollar salaries, even when their companies have suffered.

The bailout plan is likely to have limits on the so-called "Golden Parachutes" for executives forced to leave.

ABC News, in collaboration with James F. Reda and Associates, complied a list of some of the companies in the headlines today and looked at just how much money some of these CEOs are taking home.

CEO Cash Salary Stock, Other Pay Total Pay
Lehman Brothers

2007 Richard Fuld $5,000,000 $66,770,000 $71,770,000
2006 Richard Fuld $7,000,000 $55,323,679 $62,323,679
2005 Richard Fuld $14,500,000 $89,500,000 $104,000,000
2004 Richard Fuld $11,000,000 $24,300,000 $35,300,000

Morgan Stanley

2007 John Mack $800,000 $16,431,500 $17,231,500
2006 John Mack $800,000 $6,321,000 $7,121,000
2005 John Mack $337,534 $30,000,000 $30,337,534

Goldman Sachs

2007 Lloyd Blankfein $27,600,000 $15,500,000 $43,100,000
2006 Lloyd Blankfein $27,800,000 $15,700,000 $43,500,000
2006 Henry Paulson $129,087,000 $34,900,000 $163,987,000
2005 Henry Paulson $600,000 $3,363,422 $3,963,422
2004 Henry Paulson $600,000 $11,660,000 $12,260,000

Bear Stearns

2006 James Cayne $17,300,000 $14,800,000 $32,100,000
2005 James Cayne $12,900,000 $10,300,000 $23,200,000
2004 James Cayne $10,200,000 $9,500,000 $19,700,000

Merrill Lynch

2007 John Thain $15,800,000 $0 $15,800,000
2007 E. Stanley O'Neal $584,000 $161,000,000 $161,584,000
2006 E. Stanley O'Neal $19,200,000 $45,116,327 $64,316,327
2005 E. Stanley O'Neal $14,800,000 $3,120,000 $17,920,000
2004 E. Stanley O'Neal $700,000 $16,766,448 $17,466,448

Washington Mutual

2007 Kerry K. Killinger $1,000,000 $3,468,625 $4,468,625
2006 Kerry K. Killinger $5,100,000 $17,153,715 $22,253,715
2005 Kerry K. Killinger $4,600,000 $8,876,608 $13,476,608
2004 Kerry K. Killinger $2,900,000 $12,335,416 $15,235,416

AIG

2007 Martin J. Sullivan $10,200,000 $5,647,439 $15,847,439
2006 Martin J. Sullivan $16,900,000 $5,838,656 $22,738,656
2005 Martin J. Sullivan $7,750,000 $159,000 $7,909,000
2004 M.R. "Hank" Greenberg $1,400,000 $12,002,880 $13,402,880

Fannie Mae

2007 Daniel Mudd $3,200,000 $5,200,000 $8,400,000
2006 Daniel Mudd $4,400,000 $2,290,000 $6,690,000

Freddie Mac

2007 Richard Syron $5,590,000 $0 $5,590,000
2006 Richard Syron $5,150,000 $0 $5,150,000

Wars and economic recessions and depressions are the most important engines of wealth and power expansion that the global banking families have. Hence several families have profited from most wars over the last two hundred years, and from the distress caused by economic crisis like the Great Depression. To deliberately profit from, and worst to deliberately work to set up and cause wars and depressions, to enrich oneself is a very deep and sick form of evil. It is not surprising that many involved in these families are said to be satanic (Lucifer worshipers) in their beliefs. These are the evil criminals that control our politicians, our stock markets, our banking and insurance institutions, our industries, and our mainstream media.
You know you are living in most interesting times when more and more people are using terms like "new Great Depression" and "World War III". www.rense.com/general8...

all this going chaos and McCain speaks of this 100 year war and Obama says we will keep up the war on terror in afganistan and Iran.

Such a terrible shame that this is the best we have, out of over 300 million people and this is what we have???? pathetic

God we need Ron Paul right now

I, like many old people say, thank God Im old

2008 Oct 23 06:10 PM

[Alex_G:]

Gold is a store of value, nothing more, nothing less. It is a hard asset when your currency is in trouble. Investments provide growth in the intrinsic asset, a growing business, dividends, interest payments, etc.

If you believe gold will go up from here absent an inflationary environment, you should sell your house, stocks, bonds, everything that an economic nuclear winter would touch, buy guns and ammo, and build a defensible fortification in the mountains, because life as you know it is coming to an end.

2008 Oct 23 07:00 PM

[Cesato:]

User 30121. capmike's comments which I backed at that time does not seem to me as an attack against James, but when you make predictions that rarely come true, you wonder whether or not the analyst's sentiment is consistently accurate. What I don't agree with is the use of terms like manipulation, intervertion and so forth as a means to explain why the predictions never worked. Either the writer lost betting against the market or simply missed the move. As far as your Gold Holdings I've said several times here that physical Gold holders may stick to it if they are long term investors, but paper Gold investors and buyers of paper Gold in Margin better ride the wave of selling now and buy back when the risk/reward ratio matches closer the bottom for the USD. What I don't understand yet is if the US Government will be able to deal with such a strong dollar, it will be very funny to see if after intervening the market to strenghten the USD now central banks would to go back and intervene the market again to weaken the USD, hehe, what a mess, but seriuosly buy Gold and Silver whent the USD Index tops, it should coincide with supply destruction, stock market stabilization and the beginning of a medium term high inflation numbers, I still need to wait and see but probably Jan/Feb 2009 will offer strong long term buying opportunities in several markets.

2008 Oct 23 07:29 PM

[digger dave:]

Great debate guys but it's clear that there is the usual blog mix of money motivated conspiracy theories & sensible up to date analysis. Unfortunately there is little to conclude if you can't determine which factor in a complex system is going to trump its opposing forces over a certain time period. If you believe the market is being manipulated & those forces have over-powered the rules of supply & demand & are now influencing market sentiment then it's not really worth playing the game because you are betting not investing.

Having said that, I would currently wait before taking a position in Gold. I like Cesato's idea of watching the USD index. I would also add to keep an eye on the Wall Street/ SEC/ Treasury discussions that may lead to improved market transparency which may reduce afore-mentioned gold futures manipulation. If it exists, the passive hand actions are there to stabilize the market only not manipulate beyond recognition. If there is a gentle strengthening of gold & weakening of the US dollar then this will occur according to market fundamentals. Aso watch the progression of the economic slow down because the lower manufacturing demand will offset the fear factor for the next qtr strengthening the argument to currently wait before buying. If you didn't get a position in gold when it was 350 - 600 save your money & go play some golf!

2008 Oct 24 12:34 AM

[Samantha:]

I'm not an expert, but I can tell you this: I have a hard time trusting an article that declares Paramount's decision to greenlight fewer films for the next year as evidence that supports his thesis. Hey, Wallstreet may be across the country from those of us in Hollywood, but if he had followed the news at all this year, he would realize this is related to the ongoing stand-off with SAG, which has been a hair away from authorizing a strike vote from its members for quite some time now. You can't take facts out of context and attribute new causes....come on now!

2008 Oct 24 02:09 AM

[Jimmy Lathrop:]

Alex_G's comments are the closest thing to reality on this webpage. It is obvious that the notional value of gold was extremely overstated through derivative contracts outside of the futures market. Institutions got caught out with large long positions have been unwinding, pushing the notional value down - hence the price below $700. But the actual PHYSICAL price is much higher - because its so scarce! Despite all of that, the fact that it doesn't provide yield or dividend, and there is a 28 percent tax cut when it is sold, anyone with half a brain should understand that gold prices and equity prices are distorted through derivatives and forced selling and they have no actual bearing on the intrinsic value of the underlying asset. That being said, you want a lump of gold to bury in your back yard, or a stock that pumps dividends? I like my money to work. But some people enjoy digging up that lump of gold in their backyard and seeing some kid stole it, and some people enjoy panning for nuggets in those dude ranches in Canada, its like cat people, they are in a world of their own.

2008 Oct 25 12:38 AM

[GoldMan:]

Another Great article. This drop in gold & silver won't last. Smart investors are buying on the dips. The financial mess is long from over and the final round will be hyper inflation. Get yourself some physical gold & Silver
www.WholesaleBullion.c...
Or; www.PreciousMetals-SIl...

2008 Oct 25 12:59 AM

[xt:]

JImmy wants his money to work while the dollar has lost its ass, 40% in the last 8 years and this goveeement takes the other 28%

what is wrong with this picture?


Jimmy must be one of those illegals with 20 kids to stay afloat.

want some extra beans there Jimmy? lol

2008 Oct 25 04:59 PM

[Jimmy Lathrop:]

Hilarious XT! Surprised you put your prospecting pan long enough to write such a witty remark. Have fun sending your fillings to 1800 GOLD NOW.

2008 Oct 25 09:29 PM

[xt:]

goldbugs as we are called bought it when it was under 600 as well as silver when it was 5-6 bucks an oz. and we actually hold something other than a piece of paper.

ask the millions of people who owned Enron how there doing working at 7-11 now or the really smart ones that owned chevy or ford.

2008 Oct 25 10:00 PM

[nmelendez:]

Gold is still hedged. Until all the unwinding occurs, gold will go up and down. I believe a low of 600 followed by a rise to1050. By 2014, 1500 to 1800 due to demand and inflation, not fear. Remember, China, Rusia, India and a whole bunch of countries are bringing up their gold reserves.

2008 Oct 26 09:02 PM

[misterkel:]

To James West, Capmike, etc.

Jim Rogers - 'I have gold. If gold goes down, I’ll buy more. If it goes up, I’ll buy more. Gold is in a bull market, which has got years to go. But I expect to make more money in agriculture, Nina, than I do in gold. But I own it. Bought some yesterday, as a matter of fact.'

He's a billionaire. Are you?

2008 Oct 28 08:50 AM