$850B Stimulus Plan Signals Gold Take-Off

Last night the US passed its much anticipated $850 billion Obama stimulus package, representing another huge monetary expansion. Countries all around the world have been at it, and the volume of money in circulation is increasing at a record level.

Meantime, gold prices have been perky and past $900 earlier this week. Now gold has fallen back a little. The gold chart has completed an almost perfect inverse head-and-shoulders pattern which should mark the reversal of the falling trend that started at $1,050 an ounce last March.

Gold technicals

Aside from the technicals of the gold chart, let us also get back to fundamentals: the supply of gold and silver is pretty much fixed. Money supply is undergoing huge and unprecedented expansion.

At present, governments are printing money like fury and little is happening to their economies because banks, companies and individuals are hoarding cash. But eventually pulling on this string will work, and money will flood into the economy in an uncontrollable way.

It is at this point that gold prices will go ballistic. That should not be more than nine months to a year away based on past precedent.

However, before that golden age occurs there will be increasing speculation about the future of the gold (and silver) price. More and more investors will read articles like this one and be impressed by the argument - which is far sounder than trying to come up with a new bull market for equities, bonds or real estate.

Bond crash

Sometime soon the bond markets of the world are also going to weaken much further, and that will give precious metals another reason to rise in value as an alternative safe haven class.

For investors in precious metals then it is just a matter of holding on and taking advantage of price dips to stock up with bullion and shares, although it is surely arguable that the best buying opportunities are behind us now as the price trend is about to head back up.

Trying to time the market exactly or using borrowed money is not a clever approach in volatile markets, but a diversified precious metals portfolio is going to be a winner over the next two years.

Comments

[Ian R. Campbell]

It is evident that with the U.S. government passing the $850 billion Obama stimulus package last night that monetary expansion in the U.S. will be further advanced. Aside from the reasons Cooper puts forth as to why in his view “a diversified precious metals portfolio is going to be a winner over the next two years”, I continue to have the same fundamental problem I had back in September when the first ‘bail-out’ bill was introduced. My problem is simply this. I don’t care how smart the people are that are concocting and administering these ‘bail-out’ schemes, they are moving at a speed (and I understand why they are doing this, or at least think I do) where they can’t possibly understand all the fall-out and consequences of their actions. On September 13 I said this in a post on this Blog titled ‘The U.S. Financial System is in Uncharted Waters – Is there an Iceberg Nearby?’ that you can read here. Late last year Henry Paulson said as much on at least one occasion. I am not aware of anyone else that has focused on this issue of speed of action/no real understanding of consequences issue. It is much as if the U.S. government (and other world governments acting in their own jurisdictions) are piloting a fighter plane at 1,000 miles an hour looking backwards while they do it.

To me these ‘bail-out plans’ have little chance of being effective in commercial terms for at least two reasons. First, because of the speed at which decisions are being made. Second, because they are administered by government. It is largely for reasons of uncertainty related to these two things I currently am bullish on gold.

2009 Jan 29 07:57 AM

[kelm]

Good article. I agree with Mr. Campbell's comments above We were asked fro the first TRAP funds because Paulson and company got together with congressional leaders and painted a dire picture of what would happen if the money was not made available. Remember the stories of how "the air seemed to just get sucked out of the room" as the congressional delegation digested what they had been told? Well, the money was made available, most of what they said would happen if the money was not released has happened, some is worse, and they can't account for the money. I do not believe they have a plan that makes economic sense. I think their view is if we can throw enough money at it quickly enough and politically appear to be on top of it then make the markets will respond. Economically there is little real data to support what they are attempting. I think speed is a variable they are hoping has an effect. As you point out though we have no idea of the consequences. Looking at the stimulus I see very little immediate stimulus.

2009 Jan 29 09:48 AM

[ussmls7]

These people are moving to fast,Ifeel we will see more of the same sorry crap from our lawmakers,thus I agree,those holding PMs will be sleeping a lot better. I still would like to see the CFTC release its findings about the Silver markets?

2009 Jan 29 09:53 AM

[optionsgirl]

So long as the deflationary spiral continues, the precious metals will stay in a wide channel.
The new Obama plan will take more than a year to spend, and the entire TARP is not yet spent.
Therefore,the flooding of fiat currency hasn't run its course-in the US and in Europe.
Long term, the metals should deliver. Short term, expect more of the same.
Treasuries are surely a trap. The US is functionally bankrupt.

2009 Jan 29 10:00 AM

[NeoConVeteran]

If "we the people" expect a miracle of thoughtful actions from the likes of the Political Class of Washington...then we are truly re-arrainging the deck chairs on the Titanic of fiscal responsibility. I belive that we will have to hoard gold (may even conceal it to avoid a 1930's like confiscation) in light of a looming failure of the dollar as the printing presses run out of ink!

2009 Jan 29 11:13 AM

[dieuwer]

What deflationary spiral?... oh, you mean deleveraging.


On Jan 29 10:00 AM optionsgirl wrote:

> So long as the deflationary spiral continues, the precious metals
> will stay in a wide channel.
> The new Obama plan will take more than a year to spend, and the entire
> TARP is not yet spent.
> Therefore,the flooding of fiat currency hasn't run its course-in
> the US and in Europe.
> Long term, the metals should deliver. Short term, expect more of
> the same.
> Treasuries are surely a trap. The US is functionally bankrupt.

2009 Jan 29 11:30 AM

[secmaven]

Gold is in a mighty 8 year bull market. What fundamentals can anyone point to that suggest this trend will not continue?

2009 Jan 29 12:36 PM

[Al-USA]

We don't need monetary expansion. The financial elites which bled the system dry in and contributed to its near collapse have more than enough "blood" money. Tax the ___ out of them. No expansion needed. Of course, we'll probably need something close to the French Revolution before that happens, but never say never...

2009 Jan 29 01:17 PM

[Marc Courtenay]

Good article Peter and good comments as well. The economic stimulus package will probably be even bigger than it looks once it is negotiated through both houses of Congress and signed by the President. Let's also face the fact that the economy in the western world, as well as consumer confidence, is in a deep funk for now. There is also unusually high volatility (DJIA up 200 one day, down 200 the next). Plus, both gold and silver have come up a long way from their Oct-Nov 2008 lows. A healthy correction is in order and would be a good time to buy in. I agree with Ian McAvity (Deliberations on World Markets), that if gold can punch through the October high of $936 we will probably see "a dynamic change of character" in gold's status as a monetary symbol. This could mean higher lows and a march to new highs that could reach $1200, which would be a 60 to 70% upside move from the $700 low reached during the Oct-Nov 2008 period. Oh how I hope for at least a near-term correction for gold down to around $850 and silver at $10.50, so we can load up on GLD, SLV and maybe even CEF.

2009 Jan 29 04:36 PM

[BernD]

I am with the Obama admin. on this stimulus plan(not bailout). All they are trying to do is get cash flow within the economy again. I am not for bailing out the banks with my tax money. Even though its nothing but loans. I am long Minning, Silver and GOOD STRONG A-AAA Bank Bonds.

2009 Jan 30 03:04 AM

[yellowhoard]

If you are for Obama and his plan, why would you be invested in Gold. Surely, equities will outperform all other asset classes as his economic plan produces prosperity.


On Jan 30 03:04 AM BernD wrote:

> I am with the Obama admin. on this stimulus plan(not bailout). All
> they are trying to do is get cash flow within the economy again.
> I am not for bailing out the banks with my tax money. Even though
> its nothing but loans. I am long Minning, Silver and GOOD STRONG
> A-AAA Bank Bonds.

2009 Jan 31 09:26 AM