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What Does the Gold Breakout Mean?

I have been a "goldbug" since about 2002 when it became clear the yellow metal was entering a secular bull market. Earlier this year I said it is a required asset class investment in this environment. It seemed as if something was up, and the market was detecting this. This morning once again gold is trying to break through the four-digit barrier, trading just north of $1,000.

What's it all mean? I am not dogmatic or religious about gold (in fact, for throughout the 1990s I did not even follow it), but markets  send signals for a reason. Shouldn't we all find a way to make money in one of the great bull markets of our time?

It's curious how the investment "mainstream" is still so skeptical of gold. I believe this is a sign that the market can march on, and, in fact, enter its final euphoric stage (which I believe it is now entering). Before the bull market is over, this skepticism will end. And that will be the time to sell.

Consider for a moment, for example, that the stock market has gone nowhere for the last 7 y ears. In that time period, the gold price has quadrupled! If somebody told you in 2002 you could buy something that would quadruple in value, and then retain that value, wouldn't you have bought it? Why CNBC almost never points this out is a mystery to me!

The fact is that gold is reacting to fundamentals in the world monetary system. As gold steadily rose from its bear-market bottom in 2000 (which interestingly coincided with the apex of the technology bubble), the market was starting to sniff out major structural shifts in the financial markets: The housing bubble, overleveraged banks, and the derivatives nightmare that still lives with us today. Now we know why gold was rising so strongly.

Now, gold is becoming the last bastion of safety capital as governments around the world print money with only a limited effect on reviving the post-bubble economy. In 2008, bonds and the U.S. Dollar benefited from the "safe haven" play as financial markets around the world descended into crisis. Then, the U.S. Government announced massive financial programs, including the buying of hundreds of billions of mortgage-backed securities and government bonds, in order to "rescue" the financial markets. What now? The U.S. bond buybacks are set to end (in fact, with $130B in treasury issuance alone this week and only about $25B left in the government buyback kitty, the buybacks could be exhausted as early as next week).

The federal government, unless it announces an extension of its Quantitative Easing programs or convinces foreign governments to increase their bond buying (they have, in fact, been decreasing it), is losing the power to control the bond market and the dollar. I expect that support for the bond market will disappear shortly. The dollar is in a steady downtrend. So you have to ask yourself: As government deficits rise and public support of money-printing wanes, can you still look at bonds and the U.S. dollar as safe havens? The gold market says "no."

If you do not own any gold (and I recommend a significant position of physical bullion), this may be your last chance to grab it before the price becomes truly mind-boggling. Gold is insurance against your wealth, as the gold market is now showing. It is the last store of value in a financially unstable world.