From Bubble Watch to Bust Watch
Source: The Daily Reckoning Australia (1/23/09)
"My one recommendation for the longer term. . .is physical gold."
Tim Geithner, Obama's choice for Treasury Secretary, may not have seen the bust on Wall Street coming. . .but he promises action on a "dramatic scale" to fix it. That is probably what goosed-up the Dow yesterday—up 279 points. Oil rose to $43. Both gold and the dollar went down. The dollar fell to $1.29 per euro, while gold sellers got $5 less per ounce. The price of gold is $850.
We're watching for busts in U.S. government debt (U.S. Treasury paper), the dollar and, finally, after a big run-up, gold. Then, Americans can rebuild on a more solid foundation.
"Time to mobilize for all-out war," says a headline in the Financial Times, speaking of saving Britain's banks from themselves. But this could just as well refer to President Obama's attack on the correction. Nobody wants a correction. And Team Obama has pledged to fight it to the death.
Which is why we will stick with our "Trade of the Decade." Buy gold on dips; sell stocks on rallies. This trade—announced nine years ago—has been good to us. Gold has closed every single year ahead of where it started. From under $300 an ounce it went up over $1,000 (briefly). Now, it trades in the $800 range.
Is the gold bull market over? Are the troubles in the world financial system all taken care of? Is it time for another bust in the gold market—the only market (aside from U.S. Treasuries) to resist last year's sell-off?
Consider the basic set-up: World economies are so weak that we are seeing government stimulation of historic proportions. At first this is deflationary, but it will become inflationary. Gold is the only currency that won't get devalued. It will be revalued.
"If the Fed's liabilities had to be covered in gold, it would sell for more than $6,000 an ounce. We aren't going back to the gold standard, but the markets won't trust the central banks anymore. Gold is a very slow bull market. . .the gold market could have a shakeout in the next six months, and the price could fall back to $700 an ounce or below from today's $850. But two years from now, it will be a lot higher. It is one of the few commodities that held up during the forced liquidation of almost everything else."