1. Technical Breakout
From a technical analysis perspective, there has never been a better time to own or purchase gold. Every tradable asset has what is known as support and resistance. Support is the value by which any asset is assumed safe for buying. This is determined by previous price levels.
When prices reach this level more buyers than sellers step into the market. In the latest leg of the gold bull market, $1,000 has been established as the new floor.
Resistance is the price by which assets cannot move beyond because of an overhang of existing supply in the market. After gold reached $850 an oz. in 1980, those unfortunate buyers at that price level waited 30 years, watching the price of gold fall below $300 an oz. before $850 eventually was taken out.
The price of gold traded briefly in 2008 and 2009 in a range between $725 and $1,025 before rising short-term and long-term trend lines confirmed that the path of least resistance of the price of gold was upward.
2. Undervalued on an Inflation-adjusted Basis
If you calculate the cost of gold from it 1980 high of $850 an oz., on an inflation-adjusted basis, the price of gold today would be $2,250 an oz. At today’s price around $1,318 an oz., gold can increase $900 before it would equal its 1980 high. From there, its price can expand from increase demand.
All assets trade in cycles. Before the end of a cycle an asset becomes overvalued. Likewise, at the beginning of a cycle, an asset has been neglected by its market and is undervalued. Gold, having cleared overhead resistance, is now free to seek its 21st century value; including overshooting that fair value before the cycle ends.
3. A Store of Value
The major stock averages 10-year average annual return is virtually zero. Over the last three years, residential real estate has lost 25% to 50% of its value, depending on the market you’re referencing, yet gold has been up nine of the last ten years. This should continue.
The market meltdown of 2008 nearly destroyed the credit market. Real estate is the most credit dependent asset there is. The Mortgage-Backed Securities market, which provided the liquidity for the mortgage industry has not been repaired. Therefore, a structural cap has been placed on the future value of real estate.
U.S. stocks rose in value in the 1980s and 1990s because of deregulation, loose credit, and undervaluation. The inflationary 1970s made stocks poor investments relative to hard assets. By the beginning of the 1982 secular bull market in stocks, the average market multiple for stocks, the number of times over earnings stocks are bought for was between five and ten. Currently, the P/E (price x earnings) ratio for the S & P 500 Index is 17.08.
4. A Rising Asset in a Rising Asset Class
The soft and hard commodity complexes are on a roll. There are various recessionary and depression levels for many assets here in the U.S. towards home ownership, unemployment, commercial real estate vacancy rates, etc. But demand in Asia (the 21st century center of the universe) and South America is strong and getting stronger, monthly.
Foxconn in China, Apple (AAPL) Computer’s primary supplier recently gave its employees a 66% wage increase following 10 work-related suicides. Average U.S. wages have been flat for 10 years. Russia’s heat wave this summer severely reduced its wheat crop. Palladium, silver, coffee, cotton, wheat, pork bellies, and lean hogs are all up significantly for the year. The emerging market countries were not as leveraged as the west; therefore, their economies rebounded faster from the global recession. Their demands for commodities are driving up prices.
5. Upcoming Currency Devaluation
Last week, the Financial Times reported that Brazilian finance minister Guido Mantega said central banks are locked in an “international currency war”. The U.S. Treasury Secretary Tim Geithner is currently pressuring the Chinese to adjust the Yuan against the dollar. Japan is manipulating the Yen to increase exports. Other exporting countries are deliberately attempting to drive their currency lower to expand their respective domestic exports. Unfortunately, this race to the bottom cannot be won by all.
Europeans fled the Euro this spring after Greece debt problems appeared to be growing. Now, the Euro is surging because Ben Bernanke has all but signaled the availability of QE II or QE Lite after the November elections. The U.S. dollar became the least bad currency in the world and a safe haven. That is changing.
The U.S. economic recovery, which is now forecasted to struggle until 2015, will compel currency debasement by the Feds and compel countries and investors to reexamine their dollar holdings. This will add significant downward pressure on the dollar and upward pressure on the price of Gold.
6. Gold as an Upcoming World Reserve Currency Component
This story ran in Reuters at the end of September:
(Reuters) - The U.S. dollar will remain the world's reserve currency, though some diversification over time is inevitable, Atlanta Federal Reserve Bank President Dennis Lockhart said on Tuesday.
"It's very far-fetched ... that the dollar will lose much of its position in the near term as a reserve currency," he said in response to an audience question after a speech at the University of the South.
"I do, however, expect a gradual reduction in the dollar's role as the rest of the world diversifies and some new currencies become qualified to be held as a reserve currency," he said.
It’s rumored that discussions are underway by various countries to prepare for when the U.S. dollar is no longer the world's reserve currency. China, Brazil, Russia, and France are in talks, with the aid of the International Monetary Fund (IMF), when the world loses faith in the dollar.
Central banks from around the world have stopped selling their gold. This is a reversal from your normal practice for much of this decade which implies that the value of gold is on the ascent.
Since no single currency has the ability to replace the dollar, a basket of currencies and gold will be created. Until such time, the informal reserve currency has defaulted to gold.
7. A Shift in Supply/Demand
The World Gold Council reported on second-quarter demand rising 36% compared with the second quarter of 2009, to 1,050 metric tons. Investment demand rose 118%, to 534.4 tons, and of that segment, ETF demand represented 291.3 tons, which was a 414% rise over 2009's second quarter.
Worldwide demand for gold is rising. From gold bar dispensing ATM machines at the Frankfort, Germany airport and the Abu Dhabi Emirates Palace Hotel, to Exchange Traded Funds (ETFs) such as GLD, IAU, PHYS, and SGOL. The U.S. Mint 2009 Ultra High Relief Double Eagle Gold Coin has sold out. However, Thursday evening, the U.S. Mint opened the 2010 American Gold Eagle Proof Coins, Rust was discovered forming on the Bank of Russia’s 2009 "St. George the Conqueror" .999 fine coins.
Domestically, baby boomers will live longer and will need more principal in order to sustain their lifestyle. This will necessitate the need to diversify away from paper assets and into hard assets such as silver and gold as inflation returns.
8. A Momentum Play
The return on gold this year is forcing money managers to throw in the towel and adjust their allocation for the yellow metal. Managers will have the remaining 90 days of 2010 to salvage their portfolio’s return for the year.
The year-to-date return for the S&P 500 Index is 3.8%, the DJIA is 4.9%, the NASDAQ 100 is 8.2%, and the Russell 2000 is 9.6%; while gold is up 22.7%, silver is up 37%, and palladium is up 43.8%. True alpha, and the path of least resistance is precious metals.
9. Betting With the House
For the price of gold to collapse from current levels, congress would need to enact legislation to correct the problems of wasteful spending, high unemployment, an expanding federal debt liability, and sensible tax increases.
The November elections of 2010 are completely irrelevant. Whether it is the Republicans or the Democrats who control Washington DC, the government's inability to correct the problems that persist in today's economy will continue. The price of gold will move higher whether it's gridlock or austerity by the GOP or of fiscal stimulus by the Democrats.
Thomas G. Dolnan’s Barron’s editorial dated October 2 observes:
Even a step in the right direction would face huge opposition. A permanent 10% cut in retirement benefits of all kinds, and the same cut applied to health-care spending, including doctors' and hospital fees, would be worth maybe $150 billion a year. A 10% cut in military spending was worth about $60 billion last year. It could occur automatically if the wars wind down. A 10% cut for everything else the government does except pay interest would be worth about $120 billion.
These would be real cuts from last year's spending, not a reduction from the rate of growth, with allowances for inflation and population growth. But they would take us only a quarter of the way to a balanced budget.
The expiration of the Bush income-tax cuts and restoration of the estate tax would raise about $400 billion a year. The tax hike and the 10% cut together would leave another $700 billion a year to be cut or taxed. Fortunately, that happens to be the advertised cost of the anti-recession programs.
Such spending cuts and tax increases are a reasonable program for national renewal—and for political suicide. So don't ask why candidates aren't proposing spending cuts to balance the budget. Borrowing is so much easier—until no one will lend.
10. The US stock and bond markets are predicting no growth in the future.
The yields on bonds and corporate earnings through cost-cutting informs sober investors that between now and 2015, the U.S. economy will struggle and will be unkind to equities.
Stock rallies are no longer a proxy for economic growth. Stocks can just as easily rise because of a drop in the dollar allows foreign buyers to purchase U.S. stocks at a discount.
Corporate culture, the ego to the stock market’s id, no longer cares about long-term goals and results, when the future is always 90 days away. Therefore, long-term, as we now know it is a contemporaneous creature that is shallow but dangerous. This environment debases paper assets and benefit hard assets.