Before Larry tells you what’s next for gold, let me jump in and give you some background.
Four years ago, Larry Edelson, who had been mostly a gold bear, made a dramatic turnaround.
He pounded on the table. He shouted from the rooftops. And he did everything in his power to persuade me and our readers that …
- gold had finally hit rock bottom …
- gold was headed to $500 per ounce …
- gold was likely to blast off even further from there.
That was in early 2001 — before 9/11 — when you could buy an ounce of gold bullion for just $260, near its cheapest level in 21 years.
The evidence he showed me at the time: His rich study of the historical cycles in gold going back almost 5,000 years … his proprietary trading models developed with the Foundation for the Study of Cycles in the mid-1980s … and his money flow analysis showing the start of a massive shift from paper assets to tangible assets.
He said he was so confident in the potentially enormous magnitude of the rise, he also wanted to publish very specific targets far beyond $500 gold.
But with the yellow metal at just half that level, I told him it was premature to speculate that far out. “First let’s see if you’re right about $500 gold,” I said. “Then, when that time comes, write about what’s next.” He agreed.
And now that time has come.
So after nearly four years waiting in the wings, here’s Larry’s analysis of what’s likely to come next.
What’s Next for Gold
Target #1: $540
Target #2: $618
Target #3: $740
When gold hit $500 this week, it set off a chain reaction of events that are just now beginning to unfold.
It signaled a new wave of world inflation.
And it triggered dramatic implications — not only for gold itself but also for silver and other precious metals … for a myriad of scarce natural resources … for stocks and bonds … and for the entire world economy.
Strangely, however, the financial media has treated it as a non-event.
No big headlines. No front-page stories in the Wall Street Journal or New York Times business section. Little excitement, and certainly no euphoria.
This is a bad sign for Wall Street. But it’s a good sign for gold investors — your first indication that the rise of gold has barely begun.
This week, with gold now hitting my target, we’ve been flooded with e-mails, letters and phone calls asking one simple question: “What next?” My response:
You haven’t seen anything yet. Once gold breaks through $540 an ounce, which I’m confident it will do very soon, the metal could skyrocket to $618 … then $740 … and beyond!
Sound extreme?
Perhaps. But that’s what most people said four years ago about $500 gold. And that’s what many experts have told me over and over again, every time I repeated the same forecast.
Most recently, for example, in March of this year, the headline in my Real Wealth Report was “Wall Street goes brain-dead on gold … AGAIN!”
The price of gold at the time: About $445.
The increase in the average gold share since then: About 18%.
The average increase in gold shares since I turned bullish on gold in 2001: 136%.
But if you missed that opportunity, or some portion of it, don’t fret. Because …
The Forces Driving Gold Bullion to
$540, $618, $740 — and Beyond —
Are Now More Powerful Than Ever
You still have all the same supply-and-demand forces I’ve been telling you about all along — rising consumer demand, investor demand, industrial demand, and extremely limited supplies.
Plus, now you have a new, critical factor that’s kicking in: Inflation.
Inflation is coming back — with a vengeance. Martin feels it won’t be as bad as the late 1970s when hyperinflation threatened to overwhelm our economy.
I disagree. This time around, I think it could be even worse.
The chief reason: Despite all the lessons we’ve learned from history about the great propensity of politicians to print worthless currency, there is still not one nation in the world with a monetary system tied to a gold standard.
Even the Swiss franc is no longer a true gold-backed currency.
This gives central bankers around the world carte blanche to massively pump up money supplies whenever their economies slow down … devalue their paper currencies anytime they go deep into debt … and drive asset values skyward.
The speed of money printing presses, the one limitation they had in previous eras, has been overcome with the advent of paperless, electronic money. All they have to do is press a single button.
This is critical for you to understand: With a gold standard, governments would effectively be constrained to a strict budget, handcuffed to a single benchmark, reined in to prudent financial behavior. That’s why there’s no person in power favoring a gold standard. They want to keep their freedom — to do the wrong thing!
This is not my way of advocating a particular solution. I’m just stating a fact: There is no gold standard or equivalent mechanism. Ergo, there is no discipline. Period.
The Consequences
Of This Imprudence
Are Far-Reaching
First, governments and central banks almost invariably wind up deep in debt. They borrow heavily from future generations to gain more political support from current generations.
Second, in a desperate, underhanded attempt to fight their way out of the debt cycle, they print still more money. And the more they print, the more they have to borrow.
Third, as this vicious cycle reaches a crescendo, they are inevitably caught off guard, swept away by swings in mass psychology. Why? Because everyone begins to expect, plan for, and speculate on still more inflation.
Governments still don’t seem to understand how these swings unfold or how powerful they can become once set in motion.
How do we evaluate, ahead of time, the severity of the next cycle? One telltale sign arises from my first point: The quantity, proportion, and quality of debt.
Where you find major debt excesses — that’s where you can also expect the greatest pressures on governments to generate more inflation.
So let’s take a quick world tour to examine the debt levels that now exist …
Europe: $2.6 trillion
Asia (excluding China): $747 billion
Latin America: $760 billion
Third-world countries overall: Some estimates place third world debt at $2.1 trillion.
Right here in the USA: Over $39 trillion. That’s more than $141,000, for every man, woman and child.
And all this is just interest-bearing debt.
These figures don’t include U.S. derivatives, now at $96.2 trillion in the U.S. alone, according to the latest report from the Comptroller of the Currency.
They don’t include derivatives overseas, which could be over $40 trillion.
Nor do they include other kinds of financial obligations such as:
• The U.S. government’s commitment to make future Medicare and Social Security payments — $20.2 trillion, according to a U.S. General Accounting Office study.
- Similar commitments made by the governments of Japan, Germany and other major nations.
- Commitments made by private companies, such as Fannie Mae and Freddie Mac, to guarantee mortgages and other debt payments.
- Millions of other debts and contractual obligations there are not counted by any government agency.
This mountain of debt is not limited to just certain nations or certain industrial sectors. It’s worldwide. It’s pervasive. And it adds up to at least $200 trillion.
Do the derivatives numbers overstate the actual risk? Yes. But despite that fact, $200 trillion is still a mind-boggling number — a massively powerful force driving leaders to devalue the money they will use to pay back their creditors.
To most economists, the debt mountains are just part of the landscape, taken for granted and largely ignored. The economists are oblivious to the fact that the debt mountants can easily become debt volcanoes — creating explosive, out-of-control, inflation.
Armchair Analysts Also Fail to Understand
The Real Potential for a Global Currency Crisis
In recent months, the dollar has stopped sinking and turned upwards.
So many analysts are telling you the dollar is “strong,” America’s massive trade deficits “don’t matter,” and earlier concerns about a dollar collapse were “greatly exaggerated.”
But despite all the rhetoric, the dollar has gained back, on average, only about one-third of what it had lost over the last few years. The long-term trend has not changed.
And the only reason the dollar has risen is because the U.S. Fed has been a few steps ahead of its counterparts in Europe and Japan in its campaign to raise interest rates. As soon as other countries raise their rates too, a step that is now imminent, the dollar rally could end.
As I have stated repeatedly,
On a long-term basis, the U.S. dollar is, without a doubt, one of the weakest paper currencies.
But let’s not fail to see the big picture: Without the backing of a gold standard, ALL paper currencies ultimately decline in value. As time goes on, they purchase less and less.
And in that broad, worldwide currency decline, the U.S. dollar is bound to lead the way. We’re not at that phase quite yet. But we’re close.
Indeed, in recent months you’ve seen the political fever rise.
- The stronger euro is now hurting Europe’s exports.
- Many more countries — not only in Europe but also in Asia — are complaining the Chinese yuan is too strong.
- All year long, U.S. authorities have tried to get Beijing to increase the value of its currency as well. But alas, that effort has also failed. Indeed, just this week, the U.S. consented to back off on their demands on the Chinese to revalue their currency. Result: When the dollar falls, the yuan will fall with it.
These are the first warning signs of a worldwide currency crisis I expect to see next year.
You will see one currency devaluation after the other, each vying to get cheaper than the next.
You will see the dollar collapsing against currencies perceived to have the backing of natural resources.
Then you’ll see all currencies collapsing with respect to gold and other measures of real value.
Most Analysts Also Fail to Understand the Impact
Of the Technology Revolution on Inflation
When Wall Street and most investors think of technology, they think of the next killer application … the next super-fast chip … the next lightweight laptop … and more.
Here’s the big picture I think they’re missing: The Internet and email have broken down barriers to communication. This has lifted hundreds of millions into the modern world … opened their eyes to modern lifestyles … generated new demand for consumer goods … perked up the desire for luxuries they had never known before.
So while certain technologies have improved worker productivity, the other, widely understated side of the tech revolution is this: A giant tidal wave of demand for commodities and natural resources unlike any in human history.
That’s the most powerful inflationary force I’ve ever seen in my lifetime.
Your Core Inflation Strategies
Should Have Two Key Anchors
Anchor #1. Gold
Keep watching the gold market like a hawk. Then add to positions on price dips. Specifically …
* Gold Bullion: If your allocation to gold bullion is not up to snuff — about 5% of your total net worth — buy gold bullion now.Alternatively, and much easier for many investors, put that 5% in streetTRACKS Gold Trust (GLD), the largest exchange-traded fund that tracks gold bullion.
The price of GLD is valued at roughly one-tenth the price of bullion gold, less expenses, which are very small.
It trades on the NYSE, allowing you to buy and sell it just like any common stock. I first recommended it in March, when it was near the $43 level. It’s now at $49.91, up almost 16% in 8 months.
* Gold Mining Shares. Overall, I think you should have roughly 20% of your net worth in core recommended senior and junior gold stocks, plus a maximum of 5% in speculative gold shares.
I can’t go into the specific recommendations here. Those are reserved for subscribers to my Real Wealth Report. But I will give you my two favorite gold mutual funds …
* Scudder Gold & Precious Metals (SGLDX) … and
* Tocqueville Gold Fund (TGLDX).
Anchor #2. Natural Resource Stocks
That includes oil and gas, other metal companies, coal companies, agricultural companies, and more. For specific recommendations, see my Real Wealth Report.
And for speculative profit potential in the triple- and even quadruple-digits over time, consider my friend and colleague, Sean Brodrick’s new specialized service. We just launched it.
The very first recommendations are already out. The next one is a copper company whose share price values their copper for less than 3 cents on the dollar. The upside profit potential is huge. Call 800-871-2374 for details.
Best wishes,
Larry Edelson
About MONEY AND MARKETS
MONEY AND MARKETS (MAM) is published by Weiss Research, Inc. and written by Martin D. Weiss along with Larry Edelson, Tony Sagami and other contributors. To avoid conflicts of interest, Weiss Research and its staff do not hold positions in companies recommended in MAM. Nor do we accept any compensation for such recommendations. The comments, graphs, forecasts, and indices published in MAM are based upon data whose accuracy is deemed reliable but not guaranteed. Performance returns cited are derived from our best estimates but must be considered hypothetical inasmuch as we do not track the actual prices investors pay or receive. Contributors include Marie Albin, John Burke, Beth Cain, Amber Dakar, Michael Larson, Monica Lewman-Garcia, Julie Trudeau and others.
© 2005 by Weiss Research, Inc. All rights reserved.
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