I have to confess that – deep down – this makes me smile. The reason: I know that the real question to ask is “When will gold go on to set new highs?”

So let me cut right to the chase. This breakout run in gold prices will last.

The “Golden Staircase” tells us so.

After bottoming out about $250 an ounce about nine years ago, such key fundamental catalysts as increasing demand, lower supply, inflationary fears and a flight to safety have been driving the price of gold northward.

But gold is like any other financial asset in that prices don’t rise in a straight line – especially if they’re rising a long way. But they follow a clear and discernable pattern.

As asset prices rise, they often initially overshoot. Then they “correct” – fall back a bit. Then they “consolidate,” or trade sideways, usually for a period of six to 18 months, but sometimes for even longer.

It’s this period of sideways trading that creates the horizontal “step” in the “Golden Staircase” – a technical-analysis tool that lets us “see” the foundation for the next step up in the long-term uptrend in the price of gold.

The formation of the newest “step” in the staircase was started in mid-2007. That’s when the $1,000 price level was first breached. On Tuesday, Sept. 8, when gold prices eclipsed that key barrier on Tuesday, Sept. 8, it was the fifth time they’d attempted to do so.

Each of these attempts has helped define $1,000 as a ceiling.  But in a “Golden Staircase,” the ceiling eventually becomes a new floor.  So once the $1,000 price point is eclipsed in a decisive manner, it will become a key “support level” for gold prices.

You can also think of it as the top surface of a new step.

And that’s precisely the juncture where gold finds itself right now. [Editor's Note: Please see accompanying graphic: "Gold 'Steps' Toward New Highs"].

From a technical standpoint, the outlook for gold is bright, indeed. But the fundamental picture is even more bullish.

Barrick’s Bullish ‘Bought Deal’

Now, I realize it was probably pure coincidence that the world’s largest gold miner, Barrick Gold Corp. (NYSE: ABX), announced it would raise $4 billion on the same day gold flirted with $1,000.  But the conspiracy theorist in me likes to believe otherwise.

For Barrick Chief Executive Officer Aaron W. Regent, this so-called “bought deal” was a conscious strategic move. Barrick has a reputation for wisely using hedges to its own advantage.  The strategy served the company well in its copper-production business. And when gold prices fell in the late 1990s, Barrick turned to this strategy again – and again benefited nicely.

Recently, however, Barrick’s bankers have been coaxing the company’s leaders to ditch the hedges in order. The reason: In an environment of rising gold prices, hedged bets dampen profits. Removing those hedges, by contrast, elevates profits. But it also elevates the company’s risk.

So when a company such as Barrick makes a strategic decision to raise equity capital in order to close a large portion of its infamous hedge-book, that’s a highly bullish sign for gold prices.

When Central Bankers Become Gold Buyers

A third Central Bank gold agreement has recently been ratified. And, interestingly, it’s a weaker version of its two predecessors.

New limits will allow for only 400 metric tons to be sold annually, down from 500 metric tons in the previous deal.  The deal is bullish on its face. And, even better, this more to it than meets the eye.

You see, the last 10 years of these agreements have seen some 4,000 metric tons unloaded into the market.  And even into the face of the $80-billion-selling headwind these divestitures created, gold has managed to stage a rise from $250 an ounce to the current $1,000.

And story gets better, still: According to the World Gold Council, the world’s central banks became overall net buyers of gold as of this year’s second quarter – the first time that’s happened since 2000.

China Goes For the Gold

In the post-financial crisis global economy, China is quickly becoming the proverbial “800-pound gorilla” – the player that has to be courted, but that can’t be tamed.

And now, in a signature move, China has decided to take a remarkable step, choosing to take control of its own gold.

Just this month, in fact, Hong Kong announced that it would bring all its gold bullion back home, recalling the reserves from depositories in London. Hong Kong has just completed construction of a high-security depository at the city’s Chek Lap Kok Airport (Hong Kong International Airport), and plans to market the facility as a safe storage option to other Asian central banks, commodity exchanges, precious metals refiners, commercial banks, and exchange-traded funds (ETFs).

This development can (and will) be spun in all sorts of ways, but what it really means is that China has lost confidence in the West.  After last fall’s near-meltdown of the global financial system – a financial cataclysm due almost entirely to major missteps by Western economic powers – China’s Beijing-based leaders want much greater control over its own assets.

And who can blame them?

China’s Ravenous Gold Appetite

At more than $2.3 trillion and counting, China’s foreign currency reserves have become the stuff of legend in recent years. But here’s the rest of that story, with apologies to the late Paul Harvey: According to a late August Financial Times report, “Beijing recently revealed that it had been secretly buying gold for years in order to diversify its foreign reserves, and has almost doubled its bullion holdings.”

China’s official gold reserves now run 1,054 metric tons. That means its holdings have doubled in just six years.

And when you consider the risk China faces on its $2.3 trillion in paper (foreign currency) reserves – much of them U.S. dollar denominated – it’s understandable that China has been ardently seeking shelter.  In a late-July special report for Money Morning called “The Three Triggers of the Global Gold Bubble,” I told readers:

“All it would take is a loss of faith in the greenback. It’s important to understand that dollars are nothing more than paper and ink, backed by the full faith and credit of the U.S. government.  In a year in which the budget deficit could easily top $2 trillion, this does not reassure me.

The dollar holds its value only as long as the greenback’s holders maintain their faith in the currency. The moment people decide they don’t want your dollars, they become worthless, or at least worth much less.  In that case, it will take a lot more dollars today to buy the same thing you bought with many fewer dollars only yesterday.”

For China, this is a very real concern. Especially when it comes to the Beijing’s concerns about the loose-credit stance of the U.S. Federal Reserve. China’s Cheng Siwei, former vice chairman of the Standing Committee of the Chinese Communist Party, recently told Great Britain’s Telegraph newspaper that “If [the Fed] keep[s] printing money to buy bonds, it will lead to inflation, and after a year or two, the dollar will fall hard. Most of our [Chinese] foreign reserves are in U.S. bonds and this is very difficult to change, so we will diversify incremental reserves into euros, yen and other currencies.”

In an exciting addendum, Siwei noted that while gold is solid alternative, “when we buy, the price goes up. We have to do it carefully so as not to stimulate the markets.”

This statement tells us a lot. For instance, there’s definitely an upward price bias contained within gold’s recent price consolidation. And don’t expect gold’s price “floor” to fall too far below the $1,000-an-ounce level: China will almost certainly step in to scoop up all it can.

Meanwhile, it seems that China’s populace is catching on to the ideas of its central government.  In the just-mentioned FT article, the newspaper said “the rising tide of wealth among middle-class Chinese has made China the second-largest gold jewelery market in the world since 2007, behind only India.”  The article goes on to say “Total gold demand in China last year was nearly 400 [metric tons], up by 21% from 2007.”

The lesson here is clear: China’s growing appetite for gold is a powerful trend that will benefit gold investors for years – even decades – to come.

Warning: The IMF Is Now The World’s Central Bank

This fundamental bullish sign for gold is perhaps also the most ominous for the world’s financial well-being.

In an August maneuver that somehow stayed off the radar screens of most global investors, the International Monetary Fund (IMF) Board of Governors “voted” to create new “money” in the form of Special Drawing Rights, or SDRs.

As Money Morning told readers back in April, SDRs have been a unit of account used by the IMF since 1967, and denominated in a basket of currencies, including the dollar, pound, yen, and euro.

But now they’ve become a convertible asset.  China, Russia, and Brazil will begin purchasing SDR bonds later this year, with China’s share starting at a whopping $50 billion.

As Bloomberg News reported, “the allocation … will not increase the fund’s pool of money available for lending [but] will provide members with an additional method to obtain hard currencies.”

And that’s scary, because the implications are enormous.

The IMF has become the world’s central bank.

The IMF can create SDR debt instruments out of thin air, without having hard assets to back them.  The IMF’s own Web site explains the basic process, noting that “SDR allocations provide each member with a costless asset.”

Sorry, but I have to ask.  What in the world is a “costless asset?” How can you “create” an asset that has no cost to either produce or acquire? And if it costs nothing to create, how can it have any real value?

It’s outrageous. And it would even be comical – laughable, even – if the implications weren’t so dangerous.

The IMF no longer has to depend on borrowing – much less on contributed assets – to increase the funds it has available to lend.

So a new international fiat currency has just been created and added to the long list of national fiat currencies already in use.  Like most of its brethren, this “currency too an this one, too, can be expanded at will by a handful of un-elected officials. And, as one writer recently stated, “hyper-inflation is the terminal stage of any fiat currency.”

Consider yourselves forewarned. Worldwide inflation is now a bigger threat than ever. Expect the IMF to embark on its own monetary printing spree. A tidal wave of inflation could be headed our way.

Folks, this is going to get ugly.

The Next Bubble?

I have said in the past, that gold could very well be the next bubble.

Now, it seems, that idea is gaining acceptance.

In a recent interview with Canada’s BNN (Business News Network), Canada’s serious business program, Sam Stovall, chief investment strategist at Standard & Poor’s Equity Research (NYSE: MHP), said that “if we end up with concerns about the U.S. dollar, we could probably end up with a bubble in gold prices.”

I rest my case.

How to Play Your ‘Golden’ Opportunity

So what can you do to protect yourself?  Well, it seems that even former U.S. Federal Reserve Chairman Alan Greenspan knew the answer to that question.  In May 1999, while testifying before the U.S. House Banking Committee, Greenspan actually said that “gold will always remain the ultimate form of payment in the world.”

That’s one piece of Greenspan-given advice that I believe investors should take.

As the price of gold advances, gold-miners will be the “go to” stocks to play. They will benefit from leverage as the yellow metal advances in price.

To measure the health of gold stocks, an often-used proxy is the Amex Gold Bugs Index (HUI), a weighted benchmark composed of 15 of the world’s largest gold-and-silver mining companies. However, the HUI only includes those companies who don’t hedge their gold production beyond 1.5 years. That was done on purpose. The index was designed to provide significant exposure to near-term movements in gold prices. In an environment of rising gold prices, these stocks tend to be much more profitable.

To then gauge whether gold stocks are a relative bargain, we look to the HUI-to-gold  relationship.  By dividing the HUI “price” by the price of gold (HUI/gold price), we get a ratio that’s a very useful value indicator.

From mid-2003 until mid-2008, this ratio held around the 0.50 range, meaning the HUI bought about 0.50 ounces of gold.

In last fall’s stock panic, we saw this relationship insanely stretched to 0.20.  In late October 2008, the HUI only bought 0.20 ounces of gold.  That was totally irrational and unsustainable.

Gold stocks were trading at levels not seen in nearly two decades.  Extremes like this simply cannot last.

Today, we’ve seen that gap close as I had predicted in January.  To see how the HUI-to-gold relationship looks now, check out the graphic below.

This chart provides a ratio that tells us the “buying power” that gold stocks have to buy gold. The ratio had improved from the 0.20 ratio of last fall and was recently as 0.42. Expect that to continue to shift toward the 0.50 level. In fact, it will most likely overshoot, running up to 0.65, before settling back to the historical norm in the 0.50 neighborhood.

The message here is that spectacular gains are still in store for gold and silver stocks.

The biggest bang-for-buck still lies with the junior gold sector.  The best proxy for this is the S&P/TSX Venture Composite Index (CDNX), otherwise known as the Toronto Venture Exchange. It consists of about 75% resource stocks.

The CDNX has been steadily carving new highs almost uninterrupted since March, now posting a whopping 80% gain since its December 2008 low.  That’s an impressive performance. Remember, this is an index.

The players in this sector promising the best returns are the junior gold-and-silver companies either already producing, or with near-term production.

In the next 12 months, some will likely throw off returns of in the multiple hundreds of a percent, or even multiple thousands of a percent. Major miners really need them to replace depleted production and to grow their reserves. So many will be takeover candidates.

And with gold breaking and sustaining the $1,000 barrier, junior gold and silver miners are the place to be for explosive returns.  Just hold onto your hat.

Source: The ‘Golden Staircase’ Points to Record Prices for Gold

It all started back in 1991, when J. Aron & Co., Goldman’s commodities-trading division, recommended that a large institutional client invest about $100 million in commodities.  The vehicle “du-jour” was Goldman’s own investment vehicle, the Goldman Sachs Commodity Index (now the S&P GSCI Commodity Index).

The GSCI is a 24-commodity dollar-weighted index, comprised of 70% energy (oil and natural gas), 8% industrial metals (aluminum, copper, lead, nickel and zinc), 3% precious metals (gold and silver), 14% agriculture (wheat, corn, soybeans, cotton, sugar, coffee and cocoa) and 4% livestock (cattle and hogs).

Goldman was to take the other side of the bet, meaning that should the index rise, Goldman would have to pay equivalent returns to the investor.  In order to hedge, J. Aron needed to institute similar positions in the futures markets for those commodities.

But the plan had one wrinkle in it.  At the time, the U.S. Commodity Futures Trading Commission (CFTC) – the agency that regulated the commodities sector – placed position limits on certain agricultural commodities, like wheat, corn and soybeans.  Other commodities weren’t subject to these same limits.  Yet it was necessary to hedge all the commodities concerned in order for this investment arrangement to work.

So with a large chunk of new business at stake, J. Aron asked the CFTC to grant it an exemption.  Goldman contended that it was not a speculator, but was instead a true “hedger.”

The upshot: In October 1991, J. Aron was granted the sought-after exemption.

Inspired by J. Aron’s success, other members of the commodities-trading oligopoly followed suit, and soon had similar exemptions in hand.

The Global Commodities Boom

In the 18 years that followed the exemption grants, the commodities sector was all in all a pretty orderly place. Between 1990 and 2002, in fact, commodities prices essentially traded sideways.

Unfortunately, that stability wasn’t to last. Like a greyhound that sets out after the hare after having been penned up for too long a stretch, commodity prices started to surge – and ended up doubling over the next six years, albeit in a relatively orderly fashion.

Finally, last year, a market that had been simmering for far too long finally came to a full-fledge boil – and last summer boiled over. Food prices soared, intensifying inflationary fears here in the United States while prompting the leader of the United Nation’s World Food Programme to warn that a “silent tsunami” of hunger was threatening to span the globe.

It seems, though, that the actual boiling point was reached last summer when oil went into a near-vertical climb, surging 63% in just five months, and hitting an all-time high of $147 a barrel last July. Given that oil is in many ways the most relevant commodity to the general public (think fuel for transportation and heating), the new record price touched off a media feeding and prompted projections that crude oil could be headed for $500 a barrel.

As commodity prices were shooting skyward, however, U.S. stock prices saw their already-steep descent turn into a nearly vertical plunge – thank to a worsening of the deepest financial crisis since the Great Depression.

As a result of that crisis, the world’s largest banks, insurance firms and brokerages have been forced to take nearly $1.5 trillion in writedowns, Bloomberg News reported. Because of that and some other related problems, U.S. Treasury Secretary Timothy F. Geithner is pressing Congress to somehow restrain the $600 trillion worldwide derivatives market.

And that has set the stage for a showdown that pits the regulators against the speculators.

What Gensler Wants …

As the spotlight has increasingly been focused on Goldman in the last couple of years for its trading prowess, it’s been suggested on many occasions that the investment bank must be benefiting from some sort of a “special” relationship with the federal government.

The suggestion is understandable on several levels.

Only a month ago, for instance, when Goldman reported its financial results for the second quarter, the investment bank’s trading results helped it record all-time-record profits of $3.44 billion – a good 50% above what experts had been forecasting for what had been expected to be a “blowout” quarter for Goldman.

The stunning profit results once again reminded observers that Goldman Sachs alumnae seem to have a “knack” for landing in positions of high influence.
Former U.S. Treasury Secretary Henry M. “Hank” Paulson Jr., who held that position under former U.S. President George W. Bush – where he was widely viewed as the mastermind behind many of the bank bailout programs conceived last fall – was once the chairman and CEO of Goldman Sachs.

While he was serving as Treasury secretary, Paulson’s office calendar says he called Goldman Sachs Chairman Lloyd C. Blankfein roughly 24 times the week that the federal government opted to bailout out busted insurance giant American International Group Inc. (NYSE: AIG). Remember, had AIG been allowed to collapse, Goldman would have been left holding the biggest of all bags, because of the oversized bets they’d made on AIG’s financial insurance.  Paulson, it seems, would have none of that.

The “Six Degrees of Goldman Sachs” doesn’t end there, either, as the many connections show. Geithner, the current Treasury secretary, was mentored by Goldman alumnus John Thain [the last chairman and CEO of Merrill Lynch before it merged with Bank of America Corp. (NYSE: BAC)].  Plus, Geithner just chose Mark Patterson, formerly a lobbyist for Goldman, as his top aide.

And don’t forget about Gary Gensler, the newly installed head of the CFTC whose resume includes a 20-year stint at Goldman Sachs. But interestingly – perhaps even ironically – Gensler’s new job pits him directly against Goldman, as the CFTC looks to rein in what some consider to excessive speculation.

During hearings held in July and August, attended by representatives from both Goldman Sachs and JPMorgan Chase & Co. (NYSE: JPM), Gensler commented that the CFTC “must seriously consider setting strict position limits in the energy market.” He also indicated that his staff had been instructed to determine “every authority available to the agency” to guard the interests of the public as well as the markets.

What Goldman Should Get

In its defense, Goldman has argued that setting position limits on trading commodities is likely to prove harmful, as restricting access could affect liquidity.  (Highly liquid markets, or “deep” markets with large volume, are considered to be more fairly priced).

Steven Strongin, a managing director at Goldman, recently told a Senate hearing committee that “attempts to regulate volatility have rarely – if ever – succeeded.  Yet they often have unintended and significant consequences.”

Although commodities trading accounts for a considerable part of Goldman’s revenue – some estimates place it at about 8% to 9% – making it a target for would-be reformers, Strongin’s cautionary words should serve as a warning to back off for one simple reason.

He’s right.

Because of the exemption granted to the trading houses, institutional investors have been better able to provide commodity diversification to their portfolios, thereby minimizing some asset and inflation risks.
United States Oil Fund LP (NYSE: USO) and the United States Natural Gas Fund LP (NYSE: UNG) – two ETFs that are among the largest such products in the world.

Though very popular, such exchange-traded funds (ETFs) as the United States Oil Fund LP (NYSE: USO) and the United States Natural Gas Fund LP (NYSE: UNG) could also be affected.  They currently boast large volumes in the 12 million and 40 million units traded/day, respectively. That means that a limitation on futures positions – let alone an outright prohibition – would work against the best interests of individual investors.

Even producers and refiners of petroleum products could end up being squeezed, as well. These oil-sector players sometimes hedge risks by calling on the large commodities traders who can provide them with custom trades on demand.  The dealer then turns around and wisely hedges its own risk.  Now, doubt is being cast on the ability to perform these transactions.
So we know that Goldman, along with JPMorgan Chase) and others – as the largest owners of derivatives – have a lot to defend.
But there’s actually an even-bigger-picture view that argues against regulation – of any kind.

Who Needs Rules?

Government oversight, intervention, and insurance schemes usually lead to problems – often really big problems.

A simple example should be enough to make my point.

Just think back to what happened last year to mortgage giants Fannie Mae (NYSE: FNM) and Freddie Mac (NYSE: FRE).  It doesn’t take an accounting degree to figure out that, by having their loans government guaranteed, management had no incentive to follow cautious lending practices.

After all, why should they?  When a base salary is certain, a bonus is tied to sales or growth, and there are no consequences for bad results, why not take on more risk and just shoot for the moon?  If you hit it out of the park, your bonus swells.  If you strike out – even so badly that you even make “Mighty Casey” look like Henry Aaron – and you lose really badly and your company loses big, even to the point of bankruptcy or outright collapse, you still get your base salary.

Where’s the incentive to manage your risks?

In the case of a bank, there’s no incentive to be careful with depositor assets when the Federal Deposit Insurance Corp. (FDIC) is your bottomless backstop.

Clearly, the government does not always know better.

And that brings us back to Goldman Sachs.

Goldman Sachs: Unplugged, Unfettered, Unregulated

In the debate about regulating the commodities markets, I come down on the side of Goldman, reasoning that a free market – left unfettered – knows best, since the forces of supply and demand will ultimately price things fairly.

Inside an economic system as highly developed as that of the United States, everything operates at a level of complexity that no single person – let alone a government bureaucracy – can operate, or even fine tune. And as soon as anyone begins to tinker with it, there are always going to be unintended consequences.  Which leads us back to the question of regulation.

According to Prof. Kent Moors, a noted global oil consultant, only a small portion of a commodity’s price, at any given point in time, can be attributed to speculators.  He believes that speculators they are necessary to provide liquidity and that, in the end, the benefits speculators provide cancel out any of the negatives often ascribed to their marketplace activities.

If regulations with real “teeth” – in this case, position limits on energy futures – are actually put in place, U.S. financial leaders will end up playing the economic equivalent of Whac-A-Mole – an unwinnable game, and a dangerous one, at that.

While the final result is difficult – if not impossible – to picture, here’s my best guess: The financially lucrative, economically prestigious and strategically important commodities-trading business won’t fold up and disappear – it will just move to another country, where it’s better treated, and even nurtured.
Perhaps it will end up in Asia, as has been the case with so many other important businesses during the past couple of decades.  And that, once again, will end up costing America jobs – these jobs high-paying and prestigious – at the worst possible juncture.

According to commodities guru Jim Rogers – who is frequently quoted here in Money Morning – “the three commodity exchanges in China are booming.  Dalian trades more soybean contracts than Chicago does already, and that’s with a blocked currency [and] a closed market.  Can you imagine what’s going to happen if and when they open that market up to foreigners?  It’s going to explode.”

So as you think about “big bad trading firms” such as Goldman Sachs, and commodities speculators, remember the necessary role they play.  And realize that restrictive regulations will end up being bad for consumers, investors, and the same free markets we should be defending.

Source: How Over-Regulating Goldman Sachs Will Lead to Higher Oil and Commodity Prices

As you review your investment portfolio to size up your current exposure to gold, keep one key point in mind: When it comes to profits, there’s no rush like a speculative gold rush.

And that’s just what we have at hand.

Inflationary fears are on the march the world over. And most of those worries are due to the trillions of dollars in stimulus spending the world’s central bankers have engineered. Those worries about the pressure from rising prices are destined to cause the next big asset bubble.

And the color of this particular bubble will be gold.

The irony here is that even though central bankers are the cause of this looming bubble in gold prices, a higher gold price isn’t their objective.

They apparently believe that freshly minted “fiat dollars” – trillions of them – are just what’s needed.

Let me explain.

The plan, you see, is quite ingenious – on its face, at least. With a simple wave of their monetary wands, and a midnight run of their printing presses, central bankers such as U.S. Federal Reserve Chairman Ben S. Bernanke will be able to “create” the money that’s needed to repay their governments’ obligations, shore up their financial systems and jump-start their economies, all at the same time.

But nothing is ever that simple.  And there’s a problem that’s been overlooked, or perhaps just ignored.

It’s called an “imbalance.”

As central bankers flood the world’s financial system with ever-increasing amounts of cash and increasingly easier credit, there won’t be an offsetting increase in the amounts of goods and services available for purchase.

The result: you have more capital chasing the same amount of production.  As your mind treks back to Economics 101, you’ll realize that the laws of supply and demand haven’t been rewritten. The additional dollars will cause the prices of the goods (especially such commodity assets as precious metals, crude oil, industrial metals, agricultural commodities, and later on even property assets such as global companies) to rise in a scenario that’s akin to a global auction.

That means there’s only one possible outcome.

Higher prices. Just around the bend.

As that almost-certain inflation tsunami approaches, gold will be your safest flotation device.

The Three Trigger Points of the Coming Global Gold Rush

Every bull market in gold runs through three stages:

• Stage One: Currency Devaluation.
• Stage Two: Investment Demand.
• Stage Three: A culminating Mania-Buying Spree.

In Stage One, gold gains the most ground against the leading global currency. This one’s easy.  Gold, and virtually every other commodity I follow, is quoted in U.S. dollars. Despite the many epitaphs that have been written, the greenback remains the world’s dominant legal tender.  Its status is very likely to change someday, but that’s fodder for another essay.

Since April 2001, and until a couple of years ago, the increase in the price of gold was much more muted in other currencies. With gold seemingly locked in a sideways trading market, demand for the “yellow metal” remained low.

In Stage Two, gold begins to decouple from the dominant currency (the U.S. dollar), rises versus most other monies, and investment demand kicks in.  That inflexion point was reached by mid-2005, and gold’s upward slope began to take shape.

It’s at this point that foreign investors begin to take notice. Investors from Asia, Europe and other key markets outside the United States have a much stronger attraction to gold than we do, and often better recognize its ability to preserve wealth.

Just as important: At this point in the cycle we see sophisticated individual investors – and professional institutional investors – increase their portfolio allocations.

Twice before gold has taken a shot at the psychologically significant $1,000-an-ounce price level, even eclipsing it for a time and setting a new record high in March 2008.

Already, demand for physical bullion has been on a marked rise since entering Stage Two. And with last fall’s stock-market panic, demand zoomed almost vertically.

During the fourth quarter of 2008, for instance, North American and European purchases of gold coins and gold bars rose 811% over the same period the year before, and premiums on physical gold escalated stratospherically.

Overall, this intensified interest in the yellow metal pushed the global retail investment in gold up n early 400% in last year’s fourth quarter, compared with the final three months of 2007, according to the World Gold Council.

Exchange-traded funds (ETFs) have been a tremendous catalyst for swelling gold demand. SPDR Gold Trust (NYSE: GLD), the largest physically backed ETF on the planet, is now the sixth-biggest holder of gold bullion in the world, holding more than 1,000 metric tones of the precious metal.

Indeed, the fund’s influence on the market is such that it actually seems as if every year or so it moves up past year another nation in the global rankings of gold-bullion holders.

Because it’s becoming so much easier to invest in gold, individuals are becoming much larger owners and holders of the yellow metal, a reality that’s gradually decreasing global government influence over the valuable commodity.

We’ve clearly passed Stage One. And we’ve certainly completed much of Stage Two.  That means the fun is about to begin.

Enter Stage Three …

Stage Three is when all the stops get pulled out.  That’s when the public finally becomes aware of gold’s progressive rise.  It’s when we see a market bubble akin to what we saw with “dot-com” stocks back in the late 1990s, or U.S. stocks (and a Dow Jones Industrial Average inexcess of 14,000) in late 2007.

A mania sets in and higher prices, by themselves, beget higher prices, with gold now rising in the kind of near-vertical climb that is the hallmark of a speculative mania – a bubble.

According to famed market observer Richard Russell, publisher of theDow Theory Letters, we have entered the beginnings of Stage Three.  Russell has the perspective to understand what he’s saying: He’s been following and writing about the markets for more than 50 years – without interruption – having started all the way back in 1958. And Russell says that “my belief is that we’re now nearing the beginning of the third speculative phase of the great gold bull market …”

And Russell’s not alone.

In an interview with Bloomberg TV, Marc Faber – another noted writer and commentator – was asked about the inflationary pressures facing the United States, and responded by saying that he is “100% sure that the U.S. will go into hyperinflation. The problem with government debt growing so much is that when the time will come and the Fed should increase interest rates, they will be very reluctant to do so and so inflation will start to accelerate.”

So if Russell is predicting a bubble (Stage Three), and Faber is predicting a huge surge in demand (inflation – Stage Two), that leaves us to find a recognized outside expert to address Stage One (currency devaluation).

For that we turn to noted author and global adventurer Jim Rogers, who has been interviewed many times by Money Morning.

And Rogers isn’t keen on the future of the U.S. dollar.

“We’re going to have a currency crisis, probably this fall or the fall of 2010,” Rogers said recently. “It’s been building up for a long time. We’ve had a huge rally in the dollar, an artificial rally in the dollar, so it’s time for a currency crisis.”

How Dark Will it Get for the Dollar?

Currency crises occur all the time. Even the really bad ones – known as “hyperinflation” – have occurred on a fairly regular basis throughout history: Zimbabwe has experienced this extremely painful affliction for much of this decade; in Germany’s Weimar Republic, the paper mark/gold mark ratio went from a one-to-one ratio in 1921, all the way to a one-to-1.0 trillion ratio in 1923 (see accompanying chart).

Now just imagine what would happen to gold in any remotely comparable situation involving the U.S. Dollar.  Remember, the dollar is the world’s reserve currency today.  Simply put, this is an experiment pure and simple, since there is no precedent for the current world money order.

All it would take is a loss of faith in the greenback. It’s important to understand that dollars are nothing more than paper and ink, backed by the full faith and credit of the U.S. government.  In a year in which the budget deficit could easily top $2 trillion, this does not reassure me.

The dollar holds its value only as long as the greenback’s holders maintain their faith in the currency. The moment people decide they don’t want your dollars, they become worthless, or at least worth much less.  In that case, it will take a lot more dollars today to buy the same thing you bought with many fewer dollars only yesterday.

Historical anecdotes recount stories of workers having to be paid several times a day (because the Weimar mark was falling in value so quickly), or of wheelbarrows full of marks being trundled up to the local store just to purchase a loaf of bread. At one point, the mark had fallen so far that it had more value as a wallcovering than as a currency.

The worst part of such a scenario is when there’s an actual “panic run” on the dollar, where holders dump it en masse, meaning there are a lot of folks trying to exit all at once through a very narrow doorway. For the greenback, it would be nothing short of the currency’s death knell.

Painting a Picture of a Powerful Profit Play

But in the dollar’s demise would be a major profit opportunity. As noted, gold is priced in U.S. Dollars all around the world.  That’s why I have no doubt that gold will absolutely soar, as people the world over will seek refuge in its anti-inflation properties.

Add into the mix the fact that – compared to stocks, bonds and currencies – gold is actually quite a small market, and you start to understand the magnitude of the opportunity we’re depicting.

Add in the cash held back by investors who were burned by last year’s panic sell-off, coupled with the liquidity being created by the often-profligate government stimulus programs. That’s a potentially hefty catalyst in such a small market.

How hefty? Just think back 10 years to the dot-com bubble of 1998, 1999 and the first part of 2000, when any company with a “dot-com” suffix was automatically lumped into the “Gold Rush” in cyberspace.

Or, if you want something more recent, think about the near-vertical-ascent in housing prices we watched just a few years ago – a real estate bubble that induced countless numbers of homeowners to take cash advances on the homes that they lived in to buy second homes, vacation houses, or rental properties “as an investment.”

In both cases, think about the profits reaped by those who got in early, and who understood the game that was afoot.

Fueled by the long-term, inflation-supercharged changes in the world financial system, the flood of newly printed money, and the looming demise of the dollar, the imminent gold mania will put the dot-com craze, and even the real estate frenzy, to absolute shame.

Here’s one last point to consider: We’re only about seven to nine years into a “secular bull market” in commodities that was poised to play out anyway, and that has an additional eight, nine or 10 years to run. And key among those commodities is gold.

But if you really want to juice your returns, be sure to get some exposure to companies that explore for and produce gold, as their margins will rise exponentially along with a rising gold price.

After all, as history shows us, there are a lot of ways to profit from a gold rush.

Source: The Three Triggers of the Global Gold Bubble ]]> http://www.contrarianprofits.com/articles/the-three-triggers-of-the-global-gold-bubble/19497/feed 1 http://www.contrarianprofits.com/articles/two-ways-to-profit-from-the-obama-administration%e2%80%99s-energy-dilemma/13291 http://www.contrarianprofits.com/articles/two-ways-to-profit-from-the-obama-administration%e2%80%99s-energy-dilemma/13291#comments Tue, 10 Feb 2009 17:25:55 +0000 Peter Krauth http://www.contrarianprofits.com/?p=13291 While everyone is focused on what Obama will do with green energy, it is pointed out that Canada is the largest, nearest, most reliable, and friendliest source of oil the U.S. has. Obama would be smart to enhance that relationship even further.

This from Money Mornings Peter Krauth:

There’s an epic confrontation brewing inside the new administration of U.S. President Barack Obama. And it has nothing to do with the controversial economic stimulus package, or the new banking-bailout blueprint that U.S. Treasury Secretary Timothy F. Geithner is expected to unveil today (Tuesday).

This “other” confrontation has to do with energy. And the two sides are very clearly delineated.

On the left is renewable energy. On the right: Secure access to oil.

Upping the ante…