When you’ve been trading the gold market for nearly 30 years like I have, you develop a sixth sense for the precious yellow metal.
You can hear it speak to you. You can feel its rhythm. You can interpret its signals. And let me tell you, gold can anticipate otherwise unforeseen events better than any other investment I know of.
Gold’s recent rally back over $600 an ounce is telling me that all is not well with the world … that a financial crisis of major proportions is about to strike. The forces that could precipitate this crisis are varied:
The stock market is now at unjustifiable levels based on earnings, dividend yields, relative strength, and more;
Real estate is in shambles;
The country’s national debt is off the charts;
Economic growth is slowing;
Inflation is still picking up steam;
And the threat of another terrorist attack on U.S. soil is still an unfortunate possibility.
Now, I don’t know exactly when the crisis will hit or what shape it will be. It could be tomorrow, next week, or next month. It could start with derivatives, a hedge fund, the bond market, or in some other over-leveraged, overly speculative area.
But whatever it is, I repeat my warning: I see a crisis on the immediate horizon, and it won’t be pretty.
Gold is already signaling it, but when the crisis strikes, the yellow metal will fly through the roof. So will gold shares. In a moment, I’ll tell you how to play it. But first, I want to tell you …
How Gold and the Dollar
Got Irrevocably Separated
It’s 1947. We’re looking into a London office on St. Swithin’s Lane. Inside are six members of the London Gold Committee. A bullion expert from N. M. Rothschild & Sons says, “Gentlemen, it is eleven o’clock. We begin.”
Each member immediately calls his office on a special direct telephone line to determine how much gold is available for sale and how much is bid for.
All heck is breaking loose because there’s not enough gold for sale to meet demand. Reason: Investors around the world have been jittery for weeks. They’ve been watching the U.S.’s financial position deteriorate.
In fact, America’s balance sheet is in such terrible shape that Treasury Secretary John Snyder had earlier been forced to announce new bond offerings to help cover the worst budget deficit in the history of the U.S. ($45 billion in the red), not to mention a $247 billion national debt.
The official price of gold is $35 an ounce and climbing. It seems like everyone wants the metal. They’re worried about the cost of World War II still hanging over the market. They’re worried that the value of the U.S. dollar will plummet in international currency markets. Everyone’s hanging onto the gold they have, making the market even tighter.
Over the next several months, the buying pressure mounts, driving gold’s price up to $43.25, a gain of 23.5%. There are frequent rumors that the U.S. Treasury’s stockpiles of gold are dwindling. The squeeze is on!
The bull market in gold lasts until 1951 when Washington announces the so-called Treasury-Federal Reserve Accord, which stipulates that the Treasury and the Federal Reserve will act separately with respect to “dollar policy” and “monetary policy.” The agreement effectively begins the process of cutting the link between the dollar and gold.
Twenty years later, the prior agreement on currencies, the Bretton Woods Agreement, was disbanded. Then, in 1973, all ties to gold were officially cut by President Richard Nixon.
Why do I bring this up today? So you can see how authorities will always opt for a weaker currency when they smell trouble.
In fact, let me show you by way of another example – pictures of actual U.S. paper currency – how officials have gotten rid of all ties to gold over time.
First, here’s a real $50 gold note from 1913, just before the formation of the Federal Reserve. This note is real money because it’s worth “fifty dollars in gold coin, payable to the bearer on demand.”
Next is the first paper money issued after the formation of the Federal Reserve in December 1913. The reference to gold is minimized at the top of the note in fine print: “Secured By United States Certificates Of Indebtedness Or One-Year Gold Notes, Deposited With The Treasurer Of The United States Of America.”
Starting in 1928, the last run of U.S. Gold Certificates was issued. They were discontinued in 1934, the same year that the U.S. stopped issuing gold coinage.
Last, here’s a 1934 $1,000 Federal Reserve Note. It says, “The United States Of America Will Pay To The Bearer On Demand One Thousand Dollars.” Notice that all references to gold are gone – in its place, the term “Lawful Money.”
And this is pretty much what U.S. currency remains to this day. It’s not redeemable into anything of value, much less gold. It’s whatever IOU Washington wants to give you. And the value of those IOUs are not linked to anything but the “Full faith and credit of the U.S. government.” The problem …
The Full Faith and Credit
Of the U. S. Government
Has Never Been Weaker
You can see this in the value of the paper dollar. Once worth more than six British Pounds, it’s now $1.90 to a pound. A dollar used to be worth three Swiss francs; today a dollar will only buy .80 Swiss francs.
The U.S. dollar has already lost nearly 30% against the euro, a currency that’s barely six years old. The dollar is even at a seven-year low against the Thai baht, a country that recently experienced a military coup!
Worst of all, my warnings about the next move in the value of the dollar are coming to pass. In the last few trading days, the dollar has begun to fall in value against a basket of major world currencies.
Here’s what I see: The dollar going into a freefall as gold is starting to take off again.
Keep in mind, there isn’t much real money, or gold, around. All the gold ever mined in the history of the world (about 151,000 metric tons) can fit into a cube measuring only 62.3 feet on each side.
What all this means …
Gold Could Soar When the Rush
For Real Money Gets Underway
There’s not much gold in the world, and as I’ve noted on previous occasions, gold production is declining despite today’s high gold prices.
So when the crisis I am anticipating gets underway, gold will soar like the dickens.
My view: We’re going to see new record highs in gold, before the end of the year.
Here are three steps to consider taking …
First, minimize your exposure to the stock market. With the exceptions of the gold and natural resource stocks recommended in my Real Wealth Report, tread very lightly in the stock market. I expect a sharp downdraft soon. The Dow could easily give up 1,000 points or more.
Second, continue to keep the bulk of your money in safe, liquid, short-term investments such as money markets. You can get near 5% a year … even a tad higher in some.
Third, if you don’t own any gold, consider buying some NOW. The best way, in my opinion, is the streetTRACKS Gold Fund (GLD).
Each share represents 1/10 of an ounce of gold. When you buy this fund, it’s kind of like buying a mutual fund, but one that holds only physical gold. You eliminate storage and shipping worries. The gold is held in trust for you.
Or, if you’d rather buy a gold stock mutual fund, my two favorites are Tocqueville Gold Fund (TGLDX) and the DBS Gold Fund (SCGLDX).
Stay safe and cautious,
Larry
For more information and archived issues, visit http://www.moneyandmarkets.com
About MONEY AND MARKETS
MONEY AND MARKETS (MaM) is published by Weiss Research, Inc. and written by Martin D. Weiss along with Sean Brodrick, Larry Edelson, Michael Larson, Nilus Mattive, and Tony Sagami. 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. Regular contributors and staff include John Burke, Amber Dakar, Monica Lewman-Garcia, Wendy Montes de Oca, Kristen Adams, Jennifer Moran, Red Morgan, and Julie Trudeau.
Attention editors and publishers! Money and Markets issues can be republished. Republished issues MUST include attribution of the author(s) and the following short blurb: This investment news is brought to you by Money and Markets. Money and Markets is a free daily investment newsletter from Martin D. Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil. Dr. Weiss is a leader in the fields of investing, interest rates, financial safety and economic forecasting. To view archives or subscribe, visit http://www.MoneyandMarkets.com
From time to time, Money and Markets may have information from select third-party advertisers known as “external sponsorships.” We cannot guarantee the accuracy of these ads. In addition, these ads do not necessarily express the viewpoints of Money and Markets or its editors. For more information, see our terms and conditions.
© 2006 by Weiss Research, Inc. All rights reserved.
15430 Endeavour Drive, Jupiter, FL 33478
