Buy Gold Now… It Should Logically Be Trading at $3,000
Oct 16th, 2008 | By Karim Rahemtulla | Category: FeaturedGold prices fell below $800 an ounce today. It’s a baffling trend, says Karim Ramentulla. Logically, gold should be trading at around $3,000 by now. Karim is convinced gold has a shiny future. Luckily, gold mining stocks are available at fire-sale prices.
This from The Smart Profits Report:
The most bizarre thing among the current situation is that gold — the financial world’s tried-and-tested safe haven for troubled times — is acting like it couldn’t care less about what’s happening.
It’s astounding.
Either this is the single best opportunity to buy gold and gold stocks, or we may as well put the “gold is a great safe haven” story to rest permanently. One would think that investing in gold would be a no-brainer at the present time, but it’s been tricky, to say the least.
Because of the massive disconnect between gold prices and gold share prices, I’ve been accumulating gold shares in recent weeks. And so far, the tactic has failed.
So why it is that the one time in modern history that the entire global financial system is on the verge of meltdown, gold can’t even break $300? (That’s $300 in inflation-adjusted terms).
Gold Appears To Be Kissing Goodbye To Logic
Heck, gold was really even higher by a factor of three in the early 1980s than it is today.
Logically, gold should be trading at $3,000 an ounce today. But sometimes, logic doesn’t matter one little bit — and the metal just isn’t doing that right now. Nevertheless, hope springs eternal for gold bugs — and this time, I think they’ll be right on the money.
Amid all the fear and panic, this market will eventually stabilize again and we’ll go through a harsh recessionary cycle. After all, business is business. But the long-term outlook for gold just got really, really shiny.
Many people were surprised to see the stock market take off on Monday. But the jump higher — over 10% across the board — was predictable. In fact, not only did I touch on it last week, but in one of my trading services, we even took a bullish position on the Nasdaq a few days ago.
Don’t get carried away, though… we should retest the recent lows again in the coming days or weeks.
However, if that holds, we could be in for a sustained rally.
If you need an indicator, just take a look at the CBOE Volatility Index (VIX), which (as the name suggests) measures market volatility and fear. Having hit all-time highs over 70 at the height of the crash, it has since lost 20%. This is a sign that stability is returning.
Nothing Says “Happy Holidays!” Like Gold
Remember… the market always anticipates the future. So while the economy may be heading south for a while, and the Grinch will doubtlessly be making multiple visits this holiday season, the market has already discounted this to some extent.
If you need any proof, just take a look at any well-diversified portfolio. Mark my words: It will be down over 20%, and probably more.
But with gold, Christmas has come early.
You’ll know what to expect when the market retests its low — and if you see the VIX jump to over 65, let that gold bug roam free!
If you’re looking for a place to put some of your overvalued cash right now, consider buying some shares of your favorite miner — it’s on sale.
Source: Gold Is Ready To Run Again… Make Sure You Watch This Indicator And Get On Board
Karim Rahemtulla is one of the country's foremost specialists in options trading, and, along with Executive Director Julia Guth, a principal founder of Mt. Vernon Research, as well as the founder and editor of Strategic Income, The 400 Report and The Smart Profits Report. Over the past three years, his options strategies have cashed in winners more than 70% of the time. Karim is also an editor of Mt. Vernon Research's Xcelerated Profits Report, a monthly newsletter devoted to making money using the safest stock and option strategies to reap great returns. An internationally renowned options trader who's been dubbed a "Market Maven" by CNBC, Karim also sits on the Advisory Panel for The Oxford Club, and is a frequent contributor to The Oxford Club Communiqué. Karim was educated in England, Canada, and the U.S. and is fluent in several languages. He travels the world regularly to find the best investment opportunities for our members.
I have a theory on why gold isn’t reacting as expected today. Gold increases in price during times of instability which we have in spades and inflation. We are currently going through a monetary deflation. I realize that sounds counterintuitive considering the billions of dollars that are being thrown around but consider where the money is going? In a fiat money system the banks have the ability to create money out of thin air. They have gone into hyperdrive over the past decade doing that by increasing leverage. Morgan Stanley CEO mentioned they were over 30 to 1 at one point and many European banks are over 40 to 1. Now they are targeting to get back to under 15 to 1. That is a lot of money that is coming out of the system. Normally that would cause a huge amount of deflation in the economy as a whole and probably a very deep world wide recession. The Fed and counterparts in Europe are flooding the system with money to keep that from happening but they are barely maintaining the level in the pool.
This is also the reason that everyone is so concerned about interbank lending. Why should a bank lend to another bank? So they can create more money. It is the way our system is designed. Bank A loans 100 dollars to bank B. Bank A now has an asset on its books of the loan. Bank B now has the asset of the cash on its books. It goes and lends money to a consumer (say $95 to stay within their funding requirements by the Government). Now bank B has a $95 loan on its books as an asset +$5 cash and the consumer has $95. He goes to Bank A and deposits it. Bank A can now loan another $90 to bank B and the cycle continues. Without interbank lending money supply dries up. With excess money supply, deflation sets in. Gold doesn’t rise in a deflationary setting.
Will gold eventually shoot up? I think so because of response delay. The Fed/ECB will overshoot the amount of money to keep deflation at bay. Eventually we will have rip roaring inflation as we bottom and banks start loaning money to each other again. When? Probably in the next year though we could have some more downside as the Feds/ECB will be selling gold to help pay for some of those billions of dollars they are firing with abandon.
Gold is an excellent place to keep some money though for the next year steel, black powder and ag commodities (guns, ammo and the ag products you eat). Gold will see its heyday but when it does we are closer to the end of the fiat system in America and a far greater upheaval than we see today. Once that happens we will look back at the decade of the 2000’s as the quiet before the storm.
Scott