The Still Unpaid Price of the Global Bailout

Eric Roseman (April 8, 2010)

Let’s get one thing straight. I may be long and strong gold, but I’m definitely NOT romantic about the yellow metal.

What I mean is, some investors fall in love with one investment and refuse to sell it – even when the entire market is working against them.

I would NEVER advise you do that. Instead, I would recommend working with what the market has to offer at this moment in time. That brings me back to gold…

I’ve been recommending my readers buy gold since 2002, and I’ve also been buying gold for my own portfolio.

So far, I haven’t been able to convince myself to sell any – even though it’s climbed fourfold since 1999. No matter who’s selling gold or which ETFs drive up gold’s price, or even as the dollar strengthens, I’m still drawn to the yellow metal.

But again, it’s not because I’m romantic about gold. It’s because the primary trend is still bullish and the fundamentals remain intact. That’s how I feel about gold, and to a lesser extent, silver.

The reason? In short, I see major financial hurricanes heading our way in countries (and even a few currencies) around the globe. Let me explain…

It’s Time to Pay Those Stimulus Bills

By far, the most compelling reason to own gold these days is the explosive price tag of this global credit crisis.

Most investors fail to appreciate just how much cash governments around the world have pumped into their economies to “fix” this global credit crisis. Also, the average investor still doesn’t understand the relationship between fiat money and gold.

(I’m sure you know this, but gold is rewarded anytime currencies falter – especially the U.S. dollar. So if currencies start to stumble, gold will skyrocket.)

In many ways, governments have boxed themselves into a corner with all this spending and they will be paying for it for years to come.

Gold Has Had a Hell of a Run – But Still Could Hit $2,000 Before It’s Done

I see some nations even defaulting on their sovereign debt. This means some countries that borrowed the most won’t be able to pay back their bond investors. It’s a huge mark of shame for a nation – almost like filing for bankruptcy. This list of possible “sovereign debtors” includes the U.S. and the U.K.

And the only way to survive this type of crisis in credit is to print more money. This can help jumpstart inflation, and make debts easier to repay. But again, it also hurts your currency.

Mark my words. A horrible day of financial reckoning will come when all these governments start draining all this excess liquidity in their economies.

This won’t happen tomorrow but it’s fair to speculate that ongoing monster-sized fiscal imbalances will lead to some sort of currency crisis eventually. That crisis will make 2008-2009 look like a cocktail party in comparison.

During times of crisis, gold tends to rise as the true “safe haven” investment.

On Top of This, Gold’s Demand May Overtake the Supply

Supply and demand dictates the most important reason for owning or avoiding any commodity including gold.

If you don’t understand a commodity’s supply and demand situation, then the odds are you’ll lose on that investment.

Frankly, I don’t care about market rumors, hedge funds, or the dollar’s short-term trend. In the end, if there’s a supply imbalance for a commodity then I’m buying either the physical commodity or its companion ETF.

According to the World Gold Council, gold’s supply is keeping up with investors’ demand. But that may change. Right now, some producers are struggling to find new reserves.

For example, South African gold production has collapsed over the last 10 years. Pervasive strikes and labor discontent have crippled output. South Africa eventually lost the title as the “world’s #1 gold producer” to China in 2008.

Fabrication demand has tanked a cumulative 27% since 2007 – mainly in India, Russia and Turkey. In case you don’t know, fabrication demand includes industrial demand and demand for gold jewelry.

But although fabrication demand has fallen off a cliff since gold hit $750 an ounce, gold ETFs are absorbing the remaining supply. So are hedge funds. The two biggest hedge fund titans in the world – John Paulson and George Soros – are among those institutions with substantial gold holdings.

ETFs and institutional gold demand has increased from 253 tons in 2007 to almost 600 tons as of December 31, 2009. At the same time, retail demand for gold has increased from minus 14 tons in 2007 to 236 tons through 2009. Just so you know, that’s another major reason to hold gold – the demand is picking up.

The Next Move to $2,000 Gold and Beyond

Also, another wildcard for gold remains emerging market central bank purchases. The International Monetary Fund (IMF) still holds about 200 ounces of gold – the IMF sold some of its hoard to India in October at $1,050 an ounce.

Other regional banks in the Indian sub-continent made smaller purchases, too. I reckon we’ll see more central banks increase their gold purchases over the next several years. It will be the best alternative to the deluge of dollars and Treasury bonds already suffocating their coffers.

Bottom line: Gold still has a long way to rally. My projections call for $2,500 to $3,500 an ounce over the next five years, or sooner. Unfortunately, I see that price coinciding with a financial crisis, brought on by all this credit crisis spending. At that point, I’ll be advising investors to sell gold while everyone else is in panic-buying mode.

Best Regards,
Eric Roseman, Editor of
Commodity Trend Alert

EDITOR’S NOTE: Eric Roseman is one of our distinguished currency speakers in our new 2010 Currency Trader’s Almanac. Click here to get the full details on this Almanac. Also, make sure you scroll down so you can see a free clip from Eric’s presentation.

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