Pinnacle Digest Article Gold speculators wept on Wednesday following its one day decline of $80 an ounce (after a multi-month rally). We had to smile as it still surprises us how quicklyBernanke can shake out the loose leaves. It continues to amaze us that almost 4 years following the 2008 panic, speculators still have knee jerk reactions to vague statements by Bernanke. Forget about what he says - focus on the facts. His actions over the past 4 years speak far louder than any words.
On the last day of February, Ben Bernanke, Chairman of the Federal Reserve, brought down gold from its multi-month high, as the US dollar rallied following his testimony on the economy before the House Budget Committee. He accomplished this by reassuring the world that the US economy was growing and stabilizing better than the Fed had 'expected' and that no additional stimulus was warranted at this time. Bernanke re-emphasized that inflation was low and under control. This resulted in the dollar rallying and precious metals and all commodities falling fast and hard. Wednesday was a classic overreaction and triggered a sharp selloff no different than any other we've seen in this decade long gold bull market.
All of the macro economic factors which have led to gold's rise and the dollar's collapse over the last decade are still intact.
Let us be clear about something. The Fed is already implementing QE3, despite what we've been told. We are currently in a period of the loosest monetary policy in recorded financial history! Prolonged record low interest rates are fuelling the flames of inflation and will quickly renew a decline in the dollar (which has been trending lower for years). Bernanke can only hold back the floodgates (rising price of oil, rising price of gold, inflation, etc.) with statements like he made on Wednesday for so long. Look at the price of oil today. Inflation is all around us and it's going to intensify.
As an investor (and not a speculator) you have to ask yourself one question: Did the individuals selling gold and gold stocks on Wednesday honestly believe it was all about to turn around and that the US government was returning to prudent, responsible fiscal policies?
This gold bull market has lasted more than 10 years and is nowhere near finished. Record gold prices are coming in 2012.
The Fed will keep printing. The US government will keep running deficits. Most importantly, the USD will continue to lose value. If the US raises interest rates, it will default. If the US continues its low rate policy until the end of 2014 as scheduled, the dollar will lose value, inflation will take over and gold will continue to skyrocket. These are the facts investors need to be concerned with. The correction gold experienced (and the commodity based indexes) on Wednesday was needed for this bull market to continue. It's all a part of the natural consolidation phase any stock, commodity or index goes through. We have just witnessed a healthy correction in a commodities super cycle and see it as a great buying opportunity.
The gold market, as a whole, has been resilient for years and most impressively over the past 3 months. Demand for gold investments in 2011 broke 2010's record by 5%. All signs point to another record breaking year for gold demand in 2012. An ounce of gold could very easily be worth over $2000 by the end of the year. JP Morgan predicted that it would hit $2500 an ounce much sooner.
We can thank central bankers and our irresponsible politicians for gold's surge. Many of the most powerful money managers in the world are beginning to acknowledge that gold has become a quasi-currency. This is because no one trusts the authorities to properly manage fiat currencies over the long-term. And why should they? Unlike fiat currencies, which have all continually lost purchasing power, gold has maintained its value for 5000 years. Gold is a commodity investors can't afford to ignore.
It's not just the fanatic, lifelong gold bugs rushing into gold stocks and bullion anymore. The elite of the financial world are betting big on gold to skyrocket from these levels. John Paulson, one of the world's most successful hedge fund managers and the man who made billions shorting the US housing market prior to 2008, told clients his own money comprises 55 percent of the Gold Fund's $1.2 billion in assets. This was reported by Bloomberg just a week ago. Do you think Wednesday's pullback has him flustered? Heck no. Gold will see new highs and investors like Paulson know it. Just last week, Warren Buffett, the Oracle of Omaha, said that he hates paper currencies over the long-term. For the short or long-term, it is only prudent to hedge some of your wealth against our manipulated currencies which are depreciating. To keep things as simple as possible, without inflation, GDP suffers and without GDP growth, tax revenues decline and the government feels its noose tighten. The government will not allow deflation to win, which is why you have to hedge against inflation.
Gold bullion has risen nearly 200% since the 2008 crash. Senior gold producers have risen as high as 400% since the crash. Value investors are beginning to look towards the juniors - a group that has yet to collectively join the gold frenzy.