Forget about physical gold demand from India, rising gold production costs, or holiday jewelry sales. The gold market has disconnected from its physical fundamentals and will most likely remain so for much of 2010. The theme of the gold market is not supply/demand fundamentals. It's the massive expansion of U.S. sovereign debt and the mounting global concern about the nation's ability to pay it back. That theme will play out in 2010.

This means that last month's correction in gold prices was probably little more than a blip in a longer-term bullish trend. The big picture economic factors that drove the bull trend have not gone away. In fact, they are intensifying. Just this week, GMAC asked for another 3.5 billion in bailout money. It appears they will get it.



The deficit in the first two months of the new fiscal year already stands at $296.7 billion. Total debt as a percent of GDP has risen from $1.65 in 1982 to $3.70 in 2009. The current administration has flatly stated that nothing will get in the way of the economic recovery. Which means the coffers remain wide open, massive treasury auctions will continue (as long as there are buyers) and interest rates will remain at zero.

The economic recovery probably will continue. But there will be a price to pay. This will be in the form of a frightening U.S. interest payment on debt. This will continue to foster concern over the U.S.' ability to manage this debt and will keep the longer-term trend in the dollar moving lower.

This will almost ultimately lead to higher prices in gold. This does not mean prices cannot fall in the short term. This does not mean prices will go to $2,000 an ounce in 2010. These are simply the hard, cold facts. Interpret them as you wish.

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