Bill Bonner (The Daily Reckoning, UK Edition):
The Dow fell slightly on Friday. Oil ended the week at $77. The dollar went nowhere.

But gold rose to a new high – $1,146. Today it’s hitting more new highs above $1,160…

Whatever else may be going on, there’s a real bull market in gold. It’s a bull market that began ten years ago. If you’d bought stocks then, you’d have about what you have now… less inflation. If you’d bought gold… you have about 4 times what you had then.

Today, a quick glance at a chart shows gold looking a little toppy. Expect a correction. But remember, this is a bull market. In a bull market, you buy the dips.

Stocks, meanwhile, are in a bear market. In a bear market, you sell the rallies. This looks like a good time to sell – if you haven’t done so already.

“Take Your Gains,” says Forbes. And once you’re out of stocks, stay out until the bear market is over… probably at around 3,000 – 5,000 on the Dow. When the price of gold equals the price of the Dow, it will be time to switch.

We haven’t seen the last of this bull market in gold. It’s what you buy when you think government is making a mess of the monetary situation. You put your trust in gold as an antidote… as protection… as wealth insurance.

Are the feds making a mess of the monetary situation? Oh dear, dear reader… please ask us something harder. Trillion dollar deficits as far as the eye can see… Stimulus spending that turns the US into a Zombie Economy… Handouts to the bankers… gifts to the carry traders…

The feds are out-doing themselves… more below…

As for the bear market on Wall Street, investors are counting on a miracle… a ‘recovery’ that doubles corporate earnings in just a couple years. They think it’s “just like 1982”. Of course, it is just the opposite of 1982… see the table below.

Besides, there is no recovery… and profits will go down, as businesses compete for less spending.

The recovery may be all in your head, writes Robert Shiller, in the New York Times:

“Consider this possibility: after all these months, people start to think it’s time for the recession to end. The very thought begins to renew confidence, and some people start spending again — in turn, generating visible signs of recovery. This may seem absurd, and is rarely mentioned as an explanation for mass behavior late in a recession, but economic theorists have long been fascinated by such a possibility.

“Back in 1931, for example, The New York Times attributed the emerging economic cataclysm to a “mood of pessimism which had been carried to grotesque extremes.” In 1932, it compared reckless talk about “depression” to shouting “fire” in a crowded theater.”

It doesn’t matter what anyone says. It’s a depression. It’s nothing like the garden-variety recessions of the Post-War period.

It’s a depression because of the nature of the work it has to do. It has to clean up 3 decades’ worth of filthy balance sheets.

Click here for the rest of Mr. Bonner’s insightful commentary at The Daily Reckoning, UK Edition.

Guess what happened last year? According to a study from Boston Consulting Group, the only area of the world that got richer last year was Latin America… led by Brazil!

The rest of the world got poorer. By 11%, according to BCG. Down in the rum and sun zone, on the other hand, they got 3% richer.

So maybe our investments in South and Central America will turn out all right after all.

Meanwhile, back in the developed world… what’s going on? There are two main schools of thought. Ours. And theirs.

Who’s right? You decide.

They say – the crisis is over. We can thank our lucky stars – and the feds.

Now, we’re getting back to ‘normal’… or maybe a ‘new normal,’ with lower growth rates than before. Janet Yellen, San Francisco Fed governor, says the recovery will be ‘tepid.’ Others say it will be weak… soft… drawn out.

“The slowest recovery since 1945,” says a Bloomberg report.

It may be slow, they say, but it’s sure. The stock market proves it.

Stocks are up 65% worldwide, with the US a laggard… stocks in the US are up barely 40%. The Dow rose 21 points yesterday – still a long way to go to get to the 50% rebound mark, at 10,300.

Gold closed down, but still over $1,000. And the dollar continued falling – reaching $1.46 per euro.

In our view, there is no recovery. None. All of the improvement in the economy can be traced directly to bailouts. None of it – not a single penny – is organic, natural or durable. When the subsidies for new cars go away, for example, so do auto sales.

We wrote a book, with Addison Wiggin, several years ago. In it we predicted that the US would follow Japan into a long slump. We thought it would begin after the tech crash of 2000. We were wrong about that. But it seems to be beginning now. And the government, predictably, is doing the same things the Japanese government did – despite Bernanke’s assurances that he won’t allow the country to fall into the Japanese deflation trap.

One thing the Japanese did was to reduce interest rates… practically giving away money to anyone who would borrow it. But Japanese consumers didn’t want to borrow; they wanted to save. They had speculated on the bubble and lost money. Then, with retirement approaching they wanted to replenish their savings and rebuild their balance sheets.

So, the Japanese government put out money… and it was taken up by speculators, not by the real economy. The speculators borrowed yen, at very low interest rates, and then reinvested the money in go-go sectors elsewhere – such as the US dot.com bubble. The yen became the world’s “financing currency.” If you wanted to build a factory in China or speculate on Argentine bonds, you could begin by borrowing cheap money from Japan. Thus, Japan contributed to a huge boom all over the world. But not in Japan. The land of the rising sun never seemed to get up in the morning. Property investors lost 80% of their money. Stock market investors lost as much. Even now, nearly 20 years later, they’re still 75% down.

And now, along comes the United States of America with super-low lending rates. But who’s borrowing? Not the moms and pops of Middle America. They don’t have anything to borrow against. And the banks won’t lend to them. The banks need money for themselves. Besides, everybody knows the average household in America is losing income.

What’s more, mom & pop don’t want to borrow. They’ve been through 10 years of losing money on Wall Street. Stocks are no higher now than they were a decade ago. And their houses – on whose rising prices they had counted for their retirements – have gone down 20% – 40%. And they’re still going down.

The poor moms & pops can’t seem to get a break. They’re now desperately saving for retirement – at the worst possible moment, when jobs are scarce and wages are falling. But what else can they do?

Spengler, in Asia Times:

“An aging population increases its purchases of securities and decreases its purchases of goods as it saves for retirement. Americans have saved nothing for the past 10 years, and the capital gains that they considered savings-substitutes have vanished. That means that an enormous savings deficit accumulated over more than a decade has been exposed, and that Americans must attempt to correct it quickly and under the worst of circumstances. Americans will work more, spend less, and save more. America may have the worst of both worlds: currency devaluation and price deflation, as in the 1930s.”

*** So, the feds push money into the economy, but it’s hot money. It’s money that speculators use to place bets on gold… or on Brazilian bonds… or on oil exploration companies. The money never ends up in consumers’ hands. It never bids for consumer goods. It never pushes up consumer prices.

As in Japan during the ‘90s, America’s hot money may go all over the globe. It may turn the entire world into a casino. But it won’t bring about a real recovery…

…if cheap money from the government were all it took to bring prosperity Zimbabwe would be richer than Switzerland. Obviously, it doesn’t work that way.

But here’s the shocker. While we know easy money policies don’t create prosperity, you may be surprised to learn that they don’t necessarily cause inflation either. In other words, government may be incompetent, even at what it does best.

So, why is gold rising?

Ah… we were afraid you were going to ask. We’ve been doing a lot of thinking about it. Partly because our family office partners are smart fellows who ask smart questions. And partly because we’re wondering what to do with our own gold. Buy? Sell? Do nothing?

We spent half the night drinking and meditating on the subject. Finally, we’re not sure we had a clearer idea… but at least we were able to sleep.

We’ve already unveiled the idea to you. The feds can cause speculation in gold; but they can’t easily cause consumer price inflation. As explained above, they can get cash into the hands of speculators, but not into the hands of consumers. Not in the middle of a major consumer retrenchment.

The Roosevelt Administration was faced with the same problem. But back then, gold and the dollar were linked. Roosevelt could devalue the dollar by edict. The Japanese couldn’t do that. Nor can the Obama Administration.

In a deflationary credit cycle, you may only be able to cause consumer price inflation by resorting to extraordinary Zimbabwe-style money printing. You can drop money from helicopters, as Ben Benanke promised. But as Zimbabwe demonstrated, that cure is far worse than the disease it is meant to heal.

All of that said… gold can rise… partly because people are betting on it as an antidote to inflation (not realizing that consumer price inflation may be a long way off)… and partly for other reasons.

Lately, one of those other reasons may be heavy buying by the Chinese. The Middle Kingdom wants to diversify out of the dollar. It also has a central bank with very little in gold reserves. What better to do than to diversify out of the dollar by adding gold to its central bank reserves? Word on the street is that it is buying steadily.

The Chinese have made a number of announcements on the subject. We don’t really know who’s in charge there, so we don’t know whose comments to weight most heavily. One Chinese official has said that the government is buying gold and intends to buy more. Another says they will buy “when people don’t expect it.” Another says the Chinese expect gold to go to $3,000 an ounce.

The Chinese have the money and the motive. They alone could move the price of gold to $3,000 if they wanted to. And maybe they do.

Until tomorrow,

Bill Bonner

Source: What China Could Do to the Price of Gold

This issue is entirely in the contrarian spirit of playing devil’s advocate. So put your pitchforks down. Take a deep breath. There is plenty of space to poke holes in (or rant) about our thesis by writing to info@contrarianprofits.com

So here it goes. The four reasons you shouldn’t buy gold today…

Reason 1: Did you know that the seventh largest holder of gold in the world is not a country, but an exchange traded fund? Yes, gold ETF SPDR Gold Shares (GLD) has amassed the seventh largest gold reserve in the world. This fund holds more gold than China, Switzerland, Japan, the United Kingdom or the European Central Bank.

So why does this matter? Because should big investors (hedge funds, pension funds) who hold this fund (and many due), decide to dump their shares or are forced to liquidate their holdings because of investor redemptions, who will buy up the excess slack? This excess supply would surely drive the price of gold down making for some unhappy gold bugs.

Reason 2: Gold is overbought at today’s price level. When anything becomes overbought quickly, as gold has in recent months, it has a habit of correcting just as quickly. According to Bob Prechter, CEO of Elliot Wave International, the precious metals are “heavily overbought” and the “path of least resistance” will be to the downside for many months. “[Gold's] going to go much further [down] than people think.”

While gold stocks have recently pushed their 200 and 50 day moving averages higher, which is a bullish indicator, the threat that speculators are leading the way is ever present. And if the current recession takes a double dip, which we think is highly possibly (and so does Nouriel Roubini), investors around the world will flee to the dollar again. When the dollar gets propped up, gold falls. And when it starts to fall, you can bet these speculators will be abandoning ship just as fast as they boarded. This could leave you, dear reader, with a sinking boatload of gold in the middle of the vast and hopeless ocean.

Reason 3: More inflation hedges are available today. In the past, gold served as the best inflation hedge out there. In the 1970s when inflation started taking off, so did gold. People piled into the precious metal at rates never before seen, driving the price up to historic highs.

Fast forward to today, and you have a much different investing environment. Gold’s monopoly as the only inflation hedge is over. Now, investors have a wealth of options such as currency ETFs, TIPS, short US Treasury ETFs, other baskets of commodities, and stock in companies that can raise prices on pace with inflation. While none of these vehicles is the perfect inflation hedge, each attracts money away from gold. And the less demand for gold, the less upward price pressure there will be.

Reason 4: The run up in gold is based on fear, not on increased demand. Right now, owning gold is a “fear trade.” The price of gold is not up because people are buying more jewelry or Indian saris. It’s up because people are scared of hyperinflation taking over, the mountain of debt crushing the US, and the fiat money system collapsing. But what if Chairman Ben, and all his merry henchmen, are actually doing the right thing? While it is hard to say this with a straight face, what if everything returns to normal and we experience a nice V-shaped recovery? Or, more plausibly, what if deflation wins the day? Both these scenarios will have serious downward consequences on the price of gold.

So, dear readers, what do you think? Are any of these scenarios possible? Write to us at info@contrarianprofits.com

At this level, gold isn’t overly dramatic. We haven’t seen any really big moves one way or the other. The big moves will happen, eventually, I believe. We just have to be patient.

Why do I believe that gold will soar? Well, we’re still in the early chapters of the overall “gold story.” The plot is still forming, although I believe that all of the main characters are on stage.

We have excessive U.S. government spending. It’s out of control, to all intents and purposes. We have the deepening federal deficit, and associated exploding national debt. We have significant monetary players overseas, like Japan and China and Middle Eastern nations, holding trillions of dollars worth of U.S. bonds and other paper — and getting nervous about it. We have a hollowed-out North American economy that’s turned into what historian Charles Maier calls an “empire of consumption.”

Then we also have the utter incompetence and hubris of upper-level U.S. politicians and policymakers. They’re collectively so out of touch that they don’t even know that they’re out of touch. We have the parallel incompetence of the Big Media, with their overall “infotainment” approach to presenting vital news to the American people.

Where’s the tragic theme? There’s this sense of denial that anything really bad can possibly happen. It’s the monetary equivalent of a Dec. 6 or Sept. 10 kind of thinking. It’s a failure of imagination at the highest levels.

And whatever does happen, there’s this attitude that the U.S. can add complexity to the system and “spend its way” out of anything. Big government? Sure, and let’s make it bigger. (Hey, let’s have the government take over health care while we’re at it.) Stimulus? Go for it. Bail out Wall Street? Of course — aren’t they too big to fail? Cap and trade, and thus cripple the U.S. energy economy? Yep, we’ll just “conserve” more energy and build lots of windmills. Right?

It’s just spend, spend, spend, spend, spend. Or control, control, control, control, control. And bureaucratize, bureaucratize, bureaucratize, bureaucratize, bureaucratize. Modern governance is all about spending money we don’t have on complexity that we, as a society, cannot afford in any sense of the word. And few of the power brokers at the top seem to think that there’s anything wrong with it. They’ll just pass another law, spend some more money.

The tragic part of this drama is that the high and mighty are setting themselves — and the U.S. economy — up for a terrible fall. Sooner or later, with all the spending and new bureaucracy, we’re going to have an implosion and see a collapse in the level of complexity. Those green “notes” that the Federal Reserve prints — with the nice pictures of dead presidents on them — will not be worth nearly what most people believe.

Neither you nor I can do anything to prevent it. (OK, write to your congressman, for all the good it’ll do. Or go to a town hall meeting, for all the good it’ll do.)

The answer, of course, is to protect yourself and your family, and save what you can. When the mighty tumble, be sure not to be standing there in the crash zone.

Source: My Favorite “Mistake”

And as Adam Lass points out in Taipan Daily, “for most of this year, $50/barrel has been one of those psychological ‘lines in the sand,’ much like Dow 8,000 for a while there.”

There can only be two reasons for this, according to Adam:

First of all, there is the obvious: if the global economy recovers even in the slightest, the ensuing increases in manufacturing, shipping and travel will require energy, and despite the best of green intentions, for now energy still means oil.

Second, despite all the rumblings about finding a new world currency, oil is still priced globally in dollars. And while it may be taking Washington an agonizingly long time to actually disburse all the dollars it has promised, it is finally getting around to it.

Eventually, an increase in GDP might soak up enough of those dollars to make a difference. Just as eventually my wife’s dog will grow thumbs and learn to open his own food. Could happen: he’s a pretty smart little guy and all. Still, I am not holding my breath – on either front.

Gold is also likely to benefit from inflation. What many investors – even gold bugs – don’t realize is that small gold ‘explorers’ always produce the biggest gains in gold bull markets.

But what’s really interesting is that they typically explode in price after the price of gold has already jumped. In the late 1970s, for example, the price of gold skyrocketed from around $200 in 1979 to over $800 in January 1980. But it wasn’t until after the price of gold peaked that the best exploration companies saw their biggest gains.

What kind of profits are we talking about? Carolin Mines up 1,739%; Lincoln Resources up 2,464%; Copper Lake Expl. up 13,025%; David Minerals up 1,726%; Eagle River Mines up 3,479%; Silverado Mines up 3,987%; Wharf Resources up 2,779 %

A simple $500 invested in just 11 of these companies would have given you $172,585. $1,000 invested in each would have given you about $350,000.

Mining guru and friend Doug Casey has written a special report about today’s gold exploration companies, Toronto’s Secret Gold Investment. You can get the details here.

But what most investors don’t realize is that it’s the second type of company, the small gold “explorers,” that always produce the biggest gains in gold bull markets.

These are the companies that send geologists around the world, scouring for the next gold discovery. They find a promising deposit and get samples of the rock beneath the surface using drill rigs. If the samples indicate there may be enough gold to profitably mine, they either sell the rights or do the work themselves.

What’s interesting about gold bull markets is that these exploration companies explode in price after the price of gold has already jumped.

In the late 1970s, for example, the price of gold skyrocketed, from around $200 in 1979 to over $800 in January 1980. But it wasn’t until after the price of gold peaked that the best exploration companies saw their biggest gains.

What kind of profits are we talking about?

• Carolin Mines up 1,739%

• Lincoln Resources up 2,464%

• Copper Lake Expl. up 13,025%

• David Minerals up 1,726%

• Eagle River Mines up 3,479%

• Silverado Mines up 3,987%

• Wharf Resources up 2,779%

A simple $500 invested in just 11 of these companies would have given you $172,585. $1,000 invested in each would have given you about $350,000.

Doug, who was also recently down in Buenos Aires visiting us here at Notes, has written a special report about today’s gold exploration companies, which he calls Toronto’s Secret Gold Investment. You can get the details here.

This from Karim:

President Obama has all-but sealed the fate of the U.S. dollar.

In doing so, however, his policies – no matter whether they’re forced upon him or deliberate – have opened the floodgates for gold and gold stocks.

In fact, they’re setting the stage for the biggest rally in gold’s history.

Over the past several months, we’ve told you why you should buy gold and highlighted one of the best gold indicators you can use to determine when to buy gold. But today, we’re simply going to show you how to profit from the yellow metal…

Three Reasons Why Gold Is Headed Higher

Okay, so Obama hasn’t specifically said, “Buy physical gold,” but  he’s certainly saying it with his actions instead. Here’s why the metal is headed higher…

1. The Printing Press: The U.S. government is printing a massive amount of money every day. In fact, we’re up to $2 trillion since last November. But here are the questions we should be asking…

~ Where’s this money coming from?
~ What is supporting this huge flow of new money?

America can print money today because the world believes that one day we’ll pay it back. But we haven’t paid down our debt in decades! In fact, over the past 30 years, our debt has increased 10-fold. (We have paid the interest though and that is better than most countries).

However, each new dollar we print is like adding a tiny little bit to the price of gold. And we are printing trillions of dollars.

1. The Currency Fear Factor: Gold is going higher because people are frightened that they won’t allow themselves to fall into the dollar/yen/pound/euro trap again.

For example, did you know that gold is at new highs against the Pound and Euro? Because those two currencies have fallen sharply against the dollar, the price of gold in both currencies is much higher than the last time gold was at this level (about this time last year).

1. More Educated Investors: With the huge amount of upheaval that the economy and stock market has faced over the past year or so, we now have a greater number of educated investors, who can plainly see that gold is the asset to hold. We wondered out loud why this wasn’t the case back in October, as investors seemed to ignore the dire news coming out each day and gold prices were stagnant. They’re not ignoring it now – and readers who took our advice to buy gold are doing very well.

But because more investors have jumped on the gold bandwagon now is exactly why you should not be buying gold right now.

That is, of course, unless you’re using a strategy that allows you to make some money or reduce your cost if the shares move down. I’ll give you an example in a minute…

Mind The Gap: Why You Should Set A Buy Alert At The $800 Level

Since mid November 2008, gold prices have pretty much moved up in a straight line.

Be warned: Like any investment, this cannot last forever.

Gold will sell off for a variety of reasons: Because they need money more than jewelry… because China and India are a little bit poorer… because investors sell for technical reasons.

Gold needs to fill a gap on a chart that goes back to the $800 level. And that is when you should buy gold. But not physical gold. Let me explain…

When Gold Hits $800 Again, Here Are Four Gold Investments You Should Buy

Rather than buying physical gold – as many people like to do – you should instead buy shares in gold mining companies. This includes…

~ Goldcorp (NYSE: GG)
~ Yamana Gold (NYSE: AUY)
~ Barrick Gold (NYSE: ABX)
~ Newmont Mining (NYSE: NEM)

You could even buy a silver-based play like Silver Wheaton (NYSE: SLW).

Here’s the thing with physical gold: Unless you’re counting on it to come in handy during something like a government coup where you need to flee the country (in which case, you’d better take a donkey with you, as it will be a heavy load), there are disadvantages to owning physical gold. Ones that result in less money for you.

For example, physical gold is difficult to store. It doesn’t pay dividends. And you can’t apply professional investment strategies like covered call writing to gain additional income.

Most importantly, gold shares move up by a factor of between two times and three times more than the percentage move for gold. So if gold prices move up by 10%, you can expect gold shares to move 20% to 30%, depending on what their cost is.

Everyone Is Buying Gold… But Not Everyone Is A Pro: Here’s The Pro Way To Profit From It

Okay, so once you’ve bought some gold mining shares, how do you start milking the investment for bigger profits than most other investors? I’ll show you…

The bottom line is that not only do you want to capture the price appreciation of your gold shares, you also want to sell call options against your stock to reduce your cost and take money off the table. Here’s how it works…

Let’s say you buy shares of Silver Wheaton for $7. Using a covered call strategy, where you sell one call option for every 100 shares you own, you can get back almost 6% in cash over the next seven months – and still have the chance to more than double your money.

Think of it as a free dividend that no one else knows about.

That’s the kind of stuff we do all the time in my Strategic Income service and every so often in our Xcelerated Profits Report (XPR) newsletter.

Gold Is Going Higher… Let It Take You Along For The Ride

The bottom line is this: Gold is going to move higher. Ultimately, much higher.

There will be opportunities to buy the metal along the way – and you’re going to hear a lot of people crowing about those opportunities.

But what they probably won’t tell you is that there’s a way of not just buying gold, but buying it through a simple strategy that pays you back and also mitigates some risk.

Understand though, that gold is not going to shoot to the moon tomorrow. That’s why we’ve taken a defensive posture on two of the gold stocks I mentioned above. One is a covered call play on Goldcorp, and the other is a spread play on Yamana Gold that has allowed us to take 95% of our money off the table, yet still left us with the chance to make over 4,000% on the money we have at risk.

The question is: Are you just going to “buy gold” because everyone else is? Or are you going to really profit from gold like the pros do?

Source: Obama Says, “Buy Gold”… Three Reasons Not To Listen

There has been a lot of talk lately about the gold-to-oil and gold-to-silver ratios. This is understandable, as both ratios are further out of whack than they have been for a long time.

The gold-to-oil ratio, for one, is now at ten-year highs.

The gold-to-silver ratio is similarly extended, though not by nearly as much as gold-to-oil.

For gold-to-silver, the 200-month moving average is 57 and the current value (as of this writing) is a touch above 69 – meaning a single ounce of gold is worth 69 ounces of silver.

The 200-month simple moving average tells us that 57 is closer to the norm. So that puts a better than 20% premium on the price of gold versus silver (based on U.S. exchange-traded futures contracts).

Analysts have looked at these relationships and come to some interesting conclusions. Some feel strongly that it’s time to buy oil (or silver). Others feel – quite foolishly in my opinion – that it’s time to short gold.

Let me expand on a few key points here so you can come to your own conclusions.

First of all, many investors and traders have gotten into the habit of throwing gold, oil and silver all into the same bucket – the “inflation expectations” bucket. Reason being, when inflation comes roaring back, all this stuff should come roaring back too (as the value of paper currencies plunges).

That’s the basic theory. But it’s also a bit simplistic. We need to remember that all three of these commodities lead “double lives,” so to speak. There is more to the equation than just inflation expectations.

Oil’s Industrial Role

Oil, remember, is an industrial good. We use it to power nearly everything that moves (and a lot of stuff that sits still).

During oil’s run-up to $147 a barrel, the world was barreling ahead (no pun intended) at full steam. A global economic boom was under way, and the supply/demand balance for oil was very tight.

When the global economy fell into recession, though, global oil demand fell too. That slip in demand at the margins was enough to send oil prices crashing through the floor.

Remember that the demand for commodities (and most everything come to think of it) is determined at the margins. The price is set by the most desperate buyer (or anxious seller).

So when there was very little daylight between supply and demand, the price of crude just kept marching higher. But it didn’t take much of a drop-off in demand before, suddenly, the world had excess oil on its hands, as we were no longer burning up every last drop of the 86.4 million barrels being pumped out each day.

When the price of oil went into freefall, sharp-eyed traders saw a chance to store the stuff in tankers and wait for higher prices to return. But eventually most of the storage facilities filled up, and the stuff just kept coming. And so crude continued to fall.

Peak oil is still in effect, mind you. It’s just a long-term type phenomenon that needs a rising global demand trend to really have effect.

When the global economy gets back on track, oil demand will relentlessly tick back up. Think of long-term oil demand as the needle on a dial: At some point growth will take us back to 86 million barrels per day… 86.5 million… 87 million and beyond…

When those days come back, oil will be expensive again as we run headlong into a production ceiling. For now, though, oil is cheap.

The Golden Thermometer

Gold has a “double life” too. Or maybe two double lives, if you count jewelry and ceremonial demand. The double life we’re going to talk about here is gold’s role as a general anxiety barometer – a sort of thermometer for how the world is doing.

Gold is the ultimate safe haven asset. It’s the thing you buy when nothing else can be trusted.

Furthermore, gold has earned its safe haven reputation over a history of thousands of years, whereas the present-day fiat currency experiment is less than 40 years old (dating back to Nixon’s shutting of the gold window in 1971). Four decades versus multiple millennia… hmm, is there any wonder people are flocking to gold in this time of great upheaval?

The other wild thing about gold is the supply/demand picture. We just talked about the ugly supply picture for crude oil right now – how the stuff is overflowing because the world isn’t burning it.

With gold the opposite is true. There just isn’t enough gold in the world to even begin to satisfy total demand right now.

Consider that the total dollar value of all the gold ever mined, at present prices, is something like 4 trillion to 4.5 trillion dollars.

Four trillion bucks is a drop in the bucket. Foreign central banks already hold at least $3 trillion worth of U.S. Treasury securities, with trillions more set to be issued in 2009. The Federal Reserve alone has nearly 2 trillion dollars on its balance sheet – one entity with paper assets and obligations totaling close to half the worth of all the gold in the world!

Central banks around the globe would probably love to own lots more gold. But they know that they can’t buy it in size, because if they tried to they would run the price into the stratosphere.

That’s why, even now, countries like China, India, Russia and Japan have 3% or less of their total reserve holdings in gold. If they made a concerted effort to ditch dollar-denominated assets and up that total, the price of gold would explode.

Supply, Demand and Anxiety

In light of this information, the extreme highs of the gold-to-oil ratio make perfect sense.

Oil is in a deep funk right now due to the supply/demand situation and the prospect for a continued slump in global economic activity. While there is reason to be long-term bullish crude, there is little reason to expect a higher oil price until global demand trends show signs of returning to form.

Gold, on the other hand, is in high demand right now as a safety blanket – a salve for the general anxieties brought on by flailing governments, out-of-control printing presses, and mass “stimulus” schemes that get bigger by the day. There is not enough gold to go around right now. Hunger for the yellow metal is waxing, not waning.

As for the gold-to-silver ratio, gold’s 20% premium isn’t hard to understand there either. While silver is a bona fide “precious” metal, it is also an industrial metal… and silver has less psychological traction as an anxiety barometer.

There will come a day when the price of silver could explode, and perhaps even rocket past gold like it was standing still in percentage performance terms. But we will need to enter a mania phase for that to happen, and we are far from seeing that just yet. People are buying precious metals more out of a safety motive than a speculative one at this point, and so silver waits.

A Word on Economic Revival

There is another point that is important to address. Some pundits in the “sell” camp argue that gold will be ripe for a fall when economic recovery starts to take hold. When the sun begins to shine again, they reason, investors will come back to traditional equities and hoary old gold will go back in the closet.

I don’t think so, and here is why – the U.S. Fed and Treasury would consider the return of serious inflation a “win” at this point. Right now, Ben Bernanke and his global counterparts are doing everything they can to fight a deflationary death spiral. Inflation is a mosquito bite in comparison.

And so, in a dangerously deflationary world – the one we inhabit at this present moment – noticeable and persistent inflation pressures must take hold in order for us to have clear assurance that the Fed and Treasury’s rescue policies have worked.

And because mass stimulation is a highly inexact science, we won’t get to choose the amount of inflation we get. When you dynamite the deflationary dam, so to speak, you don’t get a say in whether it’s a trickle or a flood that results. The same goes for the Fed’s reflation efforts.

This leads to the odd conclusion that, in the event we see signs of recovery accompanied by signs of inflation, gold’s upside movement could actually accelerate.

But it’s really not so odd, when you think about it, because the price of gold is anticipating a future outburst of inflation here. Either that, or the debasement of all paper currencies into oblivion. One’s as good as the other as far as gold bulls are concerned.

Runaway Train?

In conclusion, I would argue that the extraordinary nature of the gold-to-oil ratio at this point is merely a reflection of extraordinary times.

We have seen a global deflationary bust knock down the price of oil, even as general anxiety and currency debasement fears have sent the price of gold rocketing higher. We are also seeing a marked divergence in the supply/demand picture, with plenty of oil to go round but not nearly enough of the yellow stuff.

I am chomping at the bit to go long oil and gas at some point in the coming year, but not as a currency debasement play. I’ll wait for global demand to show signs of life before getting on that train.

As for the gold train… if the $900 level holds, we could see another blast of upside movement soon as all the “wait for a pullback” folks get nervous and pile in.

And silver, which is still very much playing second fiddle at this point, will likely start going nuts once we hit the true “mania” phase – which we are nowhere near as of yet.

Source: The Gold-to-Oil and Gold-to-Silver Ratios – What are they saying?

Gold hit two historic milestones in 2008. First, it hit its all-time high of $1,030 an ounce in early March.

Just three months later, the price of gold for December delivery fell to $681 an ounce, a 21-month low and 33.9% drop from its record high.

Most gold bugs were equal parts heartbroken and puzzled. Global stock markets tanked alongside the world’s biggest economies. But so did gold, which is widely considered to be a safe haven investment when everything else in spiraling south.

However, Money Morning Contributing Editor Martin Hutchinson- an investment banker with more than 25 years’ experience on Wall Street and Fleet Street and leading expert on the international financial markets- understood perfectly.

“Gold is not a safe haven against recession,” said Hutchinson. “It’s a safe haven against inflation.”

In the past year, commodities prices across the board skyrocketed- especially oil, which hit a record high $147 a barrel. Corn, wheat, and soybeans all hit record highs, as well.

That tightened household and corporate budgets, and was a primary reason why the U.S. economy walked backwards over the third-quarter finish line with -0.3% annualized growth. It was the first quarter of what most economists believe will be the nation’s first recession since 2001.

However, the inflation epidemic that preceded it- and arguably contributed to it- has waned significantly, as global demand for raw materials has slumped.

Prices for staple foods such as corn, soybeans and wheat have all come down from their record highs in near tandem.

Corn futures are down nearly 50% from their summer high of $8 per bushel. The same is true of soybeans and wheat, as each have lost roughly half their value. In fact, wheat hit a 16-month low in mid-October.

As most of us noticed, gas prices have fallen 48% from their July 17 high of $4.114 a gallon.

And not coincidentally, gold has fallen 22% in that same time frame.

However, this report examines the pending “re-re-correction” of commodities- the slow and steady rise of commodities after the roller coaster of record-high inflationary highs and a sudden breakneck fall below real value- to find the charted path of gold prices in 2009.

But it also reveals another wild card inflationary indicator that Hutchinson believes carry gold prices to $1,500 an ounce by the end of 2009…

Two Catalysts For Gold’s Climb

The U.S. Department of Agriculture’s Oct. 10 Crop Production Report said acreage for a handful of staple food commodities has shrunk:

• Corn acreage fell 1.2%.
• Soybean acreage dropped 1.4%.
• Canola acreage dropped 1.9%.
• Sunflower acreage shrank 0.8%.
• And acreage of dry edible beans fell 0.7%.

That naturally translates to higher prices because a squeezed supply increases demand, especially from the growing economies and populations in China, India and Latin America.

But Hutchinson believes another caveat in the cracks of our economy’s recovery will spell a sharp rebound in gold prices… one that could catapult it to $1,500 by the end of 2009.

“The government is pumping money in so many banks, and that money has to come out somewhere,” Hutchinson said.

The U.S. government’s historic bailout pumped $700 billion into its failing banking system… all to give banks back the capital they squandered in doling out defaulting loans.

Since September 2007, Ben Bernanke and the Federal Reserve have cut interest rates nine times- from 5.25% down to the current 1.0% rate- to increase bank-to-bank lending and bank-to-consumer lending.

“The government is pumping money in so many banks, and that money has to come out somewhere,” Hutchinson said.

And by the time is does, food prices should begin ticking upward, adding another set of thrusters to gold prices.

“Everybody thinks that because we’re having a horrible recession, we’re not to go have inflation. I think that’s probably wrong,” Hutchinson said. “I think gold has quite good hidden-store value.”

Should gold reach Hutchinson’s top-range price of $1,500 an ounce, it won’t be its real value. Just like how its deflated price now doesn’t reflect real value either.

Rather, $1,500 an ounce would be the marked-up price caused by another inflation-fueled investor flood into the yellow metal.

“As gold goes up, it gets more popular and investors start piling into it,” Hutchinson said.

And if gold gets anywhere near the $1,500 mark, sell. Prices that high will likely fall back or plateau as the Federal Reserve begins raising interest rates and strengthening the U.S. dollar, Hutchinson said.

Five Ways to Play Bottom-Basement Gold

Before we get too far ahead of ourselves, let’s first look at five ways to play bottom-basement gold.

SPDR Gold Trust ETF (GLD)- formerly StreetTracks Gold- is a fund whose shares are intended to parallel the movement of gold prices. Since gold prices started falling along with gas prices, SPDR Gold Trust has stayed within a 0.5% margin of gold prices. This ETF eliminates any investor concern over storage and delivery while giving them exactly what they want- gold.

Toronto-based Barrick Gold Corp. (ABX) has 27 mines, mostly in North America and South America, and is developing or exploring 11 more. With a market cap of more than $20 billion, it has considerably more liquidity than most mining companies. Barrick is primarily a gold miner, but it also has copper and zinc mining operations. As far as investors are concerned, there are two ways to look at that: It’s not a pure play, per se, but then again, this is a company stock not a brick of bullion. Also, having operations other than gold can help stabilize the company’s bottom line in case problems arise at a gold mine.

Denver-based Newmont Mining Corp. (NEM) is primarily a gold producer with operations in the U.S., Australia, Peru, Indonesia, Canada, New Zealand and Mexico. Its reserves are hovering around 86.5 million ounces. Like Barrick, this is a mining stock play, and it subject to market swings on top of fluctuations of gold prices. That can be a significant tailwind, especially if you believe the stock market has bottomed out or is close to doing so. Hutchinson- forever a value-minded investor- warned that Newmont might be a little too pricey now. Investors may want to wait for the company’s stock price to settle before getting in.

Hutchinson thinks the best value for a gold mining stock can be found in Yamana Gold Inc. (AUY), another Toronto-based company that’s small now, but has rapidly expanding production. 

But for investors who just want gold- not an ETF or stock- the best avenue is an EverBank Select Metals Account: EverBank accounts has a minimum deposit that is 98% lower than its competitors, and its commission costs are up to 86% lower than other metals’ brokers and bullion banks. It offers two types of gold accounts: Unallocated (Your purchased gold is pooled with that of other investors, eliminating storage and maintenance costs. $5,000 minimum deposit.) and Allocated (You directly own the gold you purchase, held in your own private account. $7,500 minimum deposit.) Both types of accounts can be set up 24/7 online. But if you prefer the phone, call 866-326-6241, and be sure to give them the code 12608 when setting up an account.

We should point out that the publisher of Money Morning has a marketing relationship with EverBank, but that’s because its products are best in show.

Source: Outlook 2009: Five Ways to Play Gold’s Steady Advance