Invest in Gold to Hedge Against Hyperinflation

There is no more miserable human being than one in whom nothing is habitual but indecision, and for whom the lighting of every cigar, the drinking of every cup, the time of rising and going to bed every day, and the beginning of every bit of work, are subjects of express volitional deliberation.

-William James 1842-1910, American Psychologist, Professor, Author

The current administration promised to produce a rather lofty number of jobs in a given period of time. To do this they were going to stimulate the economy by focusing on the antiquated infrastructure of the country, on developing alternative energy supplies, etc., but just 5 months after inauguration, the emphasis seems on what is politely called social services but the more accurate label would be welfare. Money is being thrown into every possible program out there that will produce little to nothing in terms of long term benefits and by comparison in the areas that could produce a long lasting effect hardly any money is being allocated. We are not going to list all the programs for they are constantly mentioned in the news.

Based on the number of programs that need funding and the rate at which money is being spent, federal deficits could average a trillion dollars a year over the next decade. The year is not done yet and the deficit is already over 1.1 trillion dollars. To give you an idea of just how massive these numbers are, consider that this time last year the deficit was roughly 290 billion dollars. These projections are based on current economic conditions and not worsening conditions; if the outlook should deteriorate then these projections are going to increase significantly. The deficit in the 2009 fiscal year which ends in September is now projected to hit 1.8 trillion dollars so we are already off to an incredibly bad start. Last year the US government raised 708 billion worth of new debt; this means it now has to find buyers to purchase almost 3 times the amount of debt it raised last year. Who is going to want to continue dropping huge amounts of money into a currency that appears to be headed down without strong incentives? The only incentive that will work is higher interest rates. Sooner or later the Feds will be forced to raise rates, otherwise they will find out that they are the only ones left at the bidding table.

Who is going to lend us all this money? China only has $2 trillion in reserves and Japan about $1.4 trillion, so even if both countries were dumb enough to lend their entire reserves out, it would still not meet our needs. So where are we going to get this money from? It will come from thin air, the Feds will simply create it as they are doing right as foreigners balking at investing money in a country that has no respect for its currency. Foreigners are already demanding more and there are rumours that the Chinese have privately renegotiated a higher rate of interest on the money they have lent the US so far. When a nation starts to purchase a large volume of its own debt, hyperinflation in most cases is the next step. Just for the record the US is not the only country guilty of printing money at a mind boggling rate; almost every nation is now guilty of this practise as they are desperately seek to inflate their way out of this problem. Britain recently had its credit rating lowered as a result of running the press in hyper drive mode.

Even with strong incentives to invest in the U.S., most nations are facing their own problems so it seems almost impossible that given this huge economic downturn the Fed's are going to be able to find nations or individuals willing to purchase almost 2 trillion dollars of new debt. The only other solution is for them to monetize the debt and this is about the worst thing a nation can do; it's what third world nations are famous for.

Thus it is of paramount importance that individuals place a fair portion of their money into bullion.

Gold has violated its main up trend line, and thus the odds of it breaking through the support zone (brown line) at 925 are rather strong. If Gold should now trade below this mark for 2 days in a row or close below it on a weekly basis, the next target falls in the 875-900 ranges. As the main down trend line and the top of an old channel formation (brown line) lie very close to each, a break below both these lines will turn a zone of strong support into a zone of very strong resistance. Such action usually indicates that a market is entering into a extended period of consolidation.

Some other factors to consider:

After putting in high of 81.75 on the 16^th of June, the dollar dropped to a low of 79.56 on the 2^nd of July. On the 16^th of June Gold closed at 931 and on the 2^nd of July Gold closed at 930. The very day the dollar was putting in a 2 ½ week low, Gold instead of rallying higher responded in the same manner and went on to in a 2 ½ week low. This type of action is not normal, at the very least gold should have put in a 2 ½ week high - Strike 1 for Gold.

On the 2^nd of June the Dollar put in a 9 month low and by logic Gold should have put in a 9 month high. It closed at 964 well below its Feb (2^nd) close of 1001 - strike 2.

On the 17^th of March 2008, it put an intra day high of 1014 on the 2^nd of February 2009 it put in an intra day high of 1004. Despite strong demand it was unable to trade past its old high - strike 3.

Taking all these factors together, the picture we get is that Gold is going to consolidate for several months before it breaks out and puts in a series of new highs. This is actually very good news for it will provide individuals with several opportunities to purchase Bullion at very reasonable rates.

If $875 is taken out on strong volume for more than 4 days in a row, then at the very least gold will pull back to the 800 ranges and it could dip as low as 750 before it puts in a bottom. If one looks at a 2 year chart one will notice that Gold is trading in a rather wide channel the bottom of which falls roughly in the 780 ranges and the top in the 990 ranges. It is not out of the ordinary for a market to momentarily trade below the base of a channel formation for few days before trading above it again and vice versa (look at the green boxes).

Conclusion

The current pattern is projecting that Gold is going to trade in a wide channel formation for several more months, possibly as late as the 2nd quarter of next year, though it is more likely to be until the 1st quarter of next year. This also coincides with the fact that the dollar and the bond markets are expected to rally into next year.

Gold is a good buy at any price below 830. If you have no position in bullion, we would strongly recommend opening up positions over the next few months for this might be the last opportunity you have to purchase bullion at reasonable rates.

There are several ways to take advantage of this situation and many offer very high returns; the high return strategies need to be monitored closely and constantly and it is something we do for our subscribers. As this is a general article, we are going to focus on less risk strategies and the best way to take advantage of the above scenario would be via the following ETFs:

GLD - It offers investors a chance to take advantage of higher gold prices without actually have to buy the physical metal.

GDX - This is a bit more volatile as it is a play on Gold producers.

Traders can use the above suggested pullback targets for Gold as entry points for opening up positions in either one or both of the above ETFs.

Most men ebb and flow in wretchedness between the fear of death and the hardship of life; they are unwilling to live, and yet they do not know how to die.

-Seneca, 4 B.C. 65 A.D., Spanish-born Roman Statesman, philosopher

Charts provided courtesy of www.prophetfinance.com and www.stockcharts.com

Disclosure: We currently have no position in either GLD or GDX.

Comments

[DONE_SONZ:]

Oh, another pullback specialist.What a surprise.You will be lucky to get gold under 950

Jul 20 03:21 PM

[kohalakid:]

I agree with the author's entry points for gold.
I'd target the 870-900 range as first strong support and 835-850 under that.

I'm happy selling 900 puts and if it gets to that level, I'll start selling 840 puts.

Jul 20 03:24 PM

[ScroogeMcduck:]

Gold's approching 1000 again.
3rd times a charm?

Jul 20 03:42 PM

[Roger Knights:]

"there are rumours that the Chinese have privately renegotiated a higher rate of interest on the money they have lent the US so far."

Wow! That makes perfect sense.

Jul 20 03:44 PM

[goldrealmny:]

Continually amazed at the number of retards who are in denial of this fact: fiat paper money is a scam. US dollars have no real value. They are merely a unbacked piece of paper that represents about $100 trillion in FUTURE debts. Just because the world was fine and accounts swelled in the 1980s and 90s does not mean it will always be this way.

I will be the first to admit gold was a lousy investment for 20 years. I will also like to point out that the 79-80 spike from $300-850 only lasted a few months (message: everyone who bought from for the decade before that was NOT underwater for 20 years.)

Everything has changed. Things will NOT go back to the way things were for the forseeable future. The FACT is that there are over 100 times more paper claims on gold and silver than there is actual physical supply. As investors scurry to secure REAL metal, look for the price to go stratospheric in coming years.

Everyone who purchased gold and silver at prices below $1000 and $20 will look like geniuses in the future. The fact that there are so many people completely ignorant of Austrian economics and history is bullish rocketfuel. All of the wanna-be "gold-contrarians" will look like the utter fools they are.

The precious metal ETFs are bankster designed conduits funneling would be precious metal buying power into more paper derivative claims. When the game of musical chair stops, use your imagination as to what will happen. The fact that people still trusts the charlatans and fraudsters who operate Wall St speaks volumes about the gullibility and stupidity of the average person.

David Einhorn, the legendary manager has just switched all his gold from ETF into physical. He was the largest holder of GLD. Hmmmm.

Jul 20 04:52 PM

[rick12345:]

Did someone short gold (recently) by any chance??

Jul 20 07:18 PM

[nmelendez:]

GLD = 1 piece of paper saying you have 1/10 of an ounce of gold in a vault. Just try and collect it. :)

Jul 20 07:29 PM

[gooter:]

IBM=1 piece of paper saying you have $116 ownership in the company. Try and have them liquidate to collect it. GLD trades on its current value same as any stock or investment. What fears buggers have of collapse have little to do with modern investment. Their main bet is the collapse of the world economic system, in which case physical gold may be the best bet. I see a lot of opportunity between now and then, and gld serves my needs.

Jul 20 08:24 PM

[conceptwizard:]

I like silver much better than gold. The upside is much greater and it is used in many more manufacturing processes. Real Coins or bars.

China is making a large attempt in increasing its tonnage in Gold this is having an effect on the demand.

One piece of advice for sure, if you are going to hold metal, hold it in your hand. Buy a safe and fill it. But dont put all your eggs in metal. A China index fund is a prudent investment.

A fool and his money will soon be parted in the US markets.

Jul 20 09:41 PM

[GMiki1:]

I read every analysis I can find. The only thing 90-plus percent of those who actually know gold agree on is that we're in a long-term bull. The predictions of timing are all over the map. I don't think I'd wait until gold hits $850 or whatever. You may never get in. You might, but you might not. Better two years too early than 20 minutes too late. Better to overpay $100 an ounce now (and I consider this a pretty good price, still) than come in when gold is at $1500. As for silver, buy silver eagles in bulk.

Jul 20 11:26 PM

[zenharmonics:]

Given the silver to gold ratio of approximately 70 right now, silver does look very attractive. Many say the gold to silver ratio has historically been 17.1. If you go to the 4th edition if the Geosciences statistics, it does appear there are no greater than 40 ounces of silver to one ounce of gold in the Earth's crust. Some seem to get a 20 to 1 ratio out of this, but I prefer to be conservative. Even at a conservative level, it would seem silver is going to run out at some point. However, one thing I didn't hear from Mad Hedge is that "gold is a currency". J. Sinclair might point out this fact. I'm not sure silver is quite to the level of a currency, but may be. Hyperinflation is a currency event, not a commodity event. In don't know much, but why not think outside the box.


On Jul 20 09:41 PM conceptwizard wrote:

> I like silver much better than gold. The upside is much greater and
> it is used in many more manufacturing processes. Real Coins or bars.
>
>
> China is making a large attempt in increasing its tonnage in Gold
> this is having an effect on the demand.
>
> One piece of advice for sure, if you are going to hold metal, hold
> it in your hand. Buy a safe and fill it. But dont put all your eggs
> in metal. A China index fund is a prudent investment.
>
> A fool and his money will soon be parted in the US markets.

Jul 21 08:50 AM

[lance sjogren:]

"Better two years too early than 20 minutes too late. "


I like that.

Jul 21 01:58 PM

[lance sjogren:]

Inflation:


The thing about inflation, you have to figure that in many key sectors of the economy, price inflation is going to take quite a while to kick in.

The government will be printing money like crazy, but it is hard to see wages go up for at least 2-3 years. People are losing their jobs, and those who are working are getting pay cuts.

So if you look at price inflation from a supply and demand perspective, it is hard for example to see how there is going to be price inflation in housing anytime soon. Who is going to be able to afford higher prices on homes? People will be LESS able to afford homes.

Now, sooner or later I do believe monetary inflation will start affecting the labor market and we will start seeing wage increases to help mitigate the devaluation of the dollar caused by our deficit spending binge. But I think that will occur over time.


The toughest question in my mind is: If we are going to be printing trillions of dollars of new currency, where is it going to go?

Well, the deflationists say, it will simply start filling up the black hole of debt that is dematerializing.

And I think it is true that is the first effect. But in my mind it is clear that the government/Fed will not be inclined to slam on the brakes once the black hole is filled back up, because the real economy is still going to be in a shambles.

So at some point the black hole gets filled up with US dollars and they start spilling out.

What will they spill into? My hunch is the first thing will be commodities, especially precious metals. To some degree maybe also stocks, but I can't see stocks going up much any time soon because they are pretty high priced compared to anticipated earnings.

Eventually, I would think stocks will go up, then wages, and then real estate.

Sooner or later all prices are going to go up, but I believe different sectors of the economy will see price inflation at different points in the new inflationary bubble period we are entering.

Jul 21 02:06 PM