Gold - Now this guy is bullish!!

  1. 9,081 Posts.
    Here it is - eat your heart out Michaelmou (our resident gold bear):

    Gold Power Cycles Toward $1,253

    By Ned W. Schmidt CFA,CEBS
    May 7 2002

    Gold is increasingly developing a Power Cycle that will carry the U.S. dollar price toward the long-term target of U.S.$1,253. The fuel for that Power Cycle is the monetary policy of the United States. Fans of that policy are still hoping the Federal Reserve will somehow cause their massive losses on financial assets to be erased. Those more realistic in appraising U.S. monetary policy, growing in number, are looking to Gold as their vehicle for wealth protection and enhancement.


    Please note before we go further that the long-term target for Gold was revised upward on 1 May. Each month the valuation work is recalculated. That final target now is US$1,253 and CN$1,962. Fair value is estimated at US$498 and CN$780. This valuation work continues to suggest significant potential rewards for investors, particularly those in North America.


    A long-term target is a powerful magnet, but some kind of road map for now till then may be helpful. In the accompanying graph are estimated Gold power curves. This effort is in infancy so these estimates are clearly on the conservative side. They will be revised on a regular basis. As we go through time the power curves should lock on the long-term target providing some insight into timing.

    The philosophy behind these power curves is that in a bull market we are looking for two things. We are seeking out, one, the potential of the move and, two, buy points. Too many investors are still trying to decide if the move is real. Hello, the bottom was in July of 1999.

    The current Gold bull market has been confirmed by (1) a bottom(7/1999), (2)valuation(
    Three power curves are shown, and each has different strength. The lowest power curve is built on the current power of the Gold bull market. Moving upward the middle power curve is one and one half times the current power and the upper most curve is two times the current power. In my view the probability of being below the lower curve is 20%, or less. My estimate of the probability of being above the upper curve is about 30%. But, remember these curves are subject to revision. Before we go on, the power curves suggest US$400 no later than 8/2004 but remember these are likely to be conservative estimates.

    Markets gain power in a bull market and lose strength in a bear market. The power of a market is determined by the flow of money into or out of a market. Quite clearly money is flowing out of financial assets and flowing into real assets. Gold is clearly one of those real assets benefitting from money flows. We can make that conclusion as Gold is advancing as the value of financial assets withers. Were we just observing relative strength in Gold without the absolute performance we might not be able to make that conclusion. However, the existence of absolute performance is confirmation of money flows.

    As investors seem to be drawn to returns, we can expect money flows into Gold to accelerate, For that reason we can also expect the power of the Gold market to increase. The Delusion of Paper Currency is waning around the world. Gold's price is simply reflecting the weakening of that delusion. One need not look very far for examples of paper money's ultimate fate. Argentinian bank accounts anyone? How about investing in some Canadian dollars? Or perhaps Indian or Pakistani rupees, one might survive the nuclear exchange?

    The fuel for the Gold Power Cycle will be as it has always been, central bank miscalculations. Monetary instability breeds only economic instability. The Federal Reserve is again violating that fundamental rule of central banking. Again our good Chairman contended that he did not yet see signs of any significant bubble in housing. His record on managing bubbles is a little light given his inability to see one, or correct one before it caused damaged, when the NASDAQ Composite Index was screaming out of control toward 5000.

    In writing for a future issue of THE GLOBAL ADVISOR, published in Toronto, a review of the annual growth rate of M-2, a broad U.S. money supply measure, as a useful leading indicator of economic bubbles proved fruitful.(Contact [email protected] to get a copy.) The rapid expansion of M-2, reaching almost 9% on a year-to-year basis in December 1998, was a source of excess liquidity that led to the U.S. stock market bubble. Likewise the excess liquidity created in the past two years by the Federal Reserve has again resulted in an economic bubble, or distortion. U.S. M-2's year-to-year growth rate reached almost 11% in October 2000, and has pumped up the Greenspan Housing/Mortgage Bubble.

    Current trends in U.S. M-2 suggest that the Housing/Mortgage Bubble will begin to deflate in November/December of this year. Prospects for those industries and investments will become seriously negative. The second dip for the U.S. economy will follow. With about 25% of U.S. manufacturing capacity already idle the prospects for a Mega-Recession are high. Since the U.S. government deficit is already over $300 billion and the federal funds rate is only 1.75%, few tools remain to fight the severity of the recession.

    Perhaps that economic reality is what the dollar and Gold are telling us. Certainly they seem to be diverging from the "advice" we hear on the popular cable shows. Both of these two markets, or perhaps really one market, are suggesting that the prospects for future U.S. economic performance may be less than lovely. The Gold market does not worry about the old adage about fighting the Fed, cause the Gold market is bigger than any Fed.

    The breakdown of the U.S. dollar and the move to higher Gold prices we are witnessing suggest that the Delusion of Growth in the U.S. is about to end. Growth, or really just forecasts of growth, have been the holy grail of investing for years. The results of this growth mania have been as the historical studies suggested likely, dismal. A currency's value is not a function of growth expectations. A currency's value is a function of the relative scarcity of that currency.

    As the Housing/Mortgage Bubble is deflated, the Era of Bubbleconomics in the U.S. will come to an end. The Delusion of Growth will fade. The delusion of economic security in the U.S. dollar will be revealed. The Dollar Bubble will become part of history. Some money is obviously already an "early mover," and hesitating is not wise. As an aside, avoid any mortgage backed securities and mutual funds holding Fannie Mae or Freddie Mac bonds.

    In the past year or so the U.S. and Canadian dollars have been depreciating in terms of Gold at about a 16% compound rate. Too much of both currencies exist and too much of these currencies are being created. The question is no longer when will the North American dollars depreciate for that is already the case. Rather, the question is what will stop the North American dollars from depreciating. The answer is really rather simple. These currencies will stop depreciating when they finally hit bottom, and Gold is over US$1,200.

    Counting the number of countries that have suffered a currency crisis in the past decade would certainly require us to remove our shoes. All this economic suffering developed despite all the brilliance of the best economic schools, the fastest of computers and the savior of all, the internet. Currencies have been the most important economic issue influencing the largest number of global citizens in the past decade or so. Currencies are the issue of the day. The value of the North American dollars is the question of tomorrow.

    Prosperity is a function of a currency's value. Inflation is a function of a currency's value. Interest rates are a function of a currency's value. Economic performance is a function of a currency's value. Your wealth is a function of a currency's value. Gold's price is a function of a currency's value. But of this list, Gold is the only one that rises in value when a currency depreciates making it an essential component of every portfolio.

    Too many are asking how much more is there for Gold. This bull market is just beginning. In the last great bull market Gold went from under $100 to over $800. The Dow Jones Industrial Average went from a 1000 to 11000. If the potential for Gold is only six times the low, the price would be US$1500. Today's price of Gold is only 21% of that potential. Most of the move, 80% or more, is yet to come. In a bull market potential is the focus!

    ********

    Ned W. Schmidt,CFA,CEBS publishes THE VALUE VIEW GOLD REPORT, a monthly review of the developing Gold Super Cycle. His major report, “$1,245 GOLD”, 150+ pages with 70 charts and graphs, is essential reading for investors wanting to understand the coming Gold Super Cycle. As a special offer “$1,245 GOLD” is available for $10 off the regular price, or $45.

    This report can be ordered by contacting Ned at [email protected]
    or by clicking on this button
 
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