Could Gold’s Climb Be A Harbinger Of Doom?
Tuesday, February 17, 2009
by Karim Rahemtulla, Investment Director, Smart Profits Report
Will gold climb higher?
That’s the question on many investors’ minds right now, which is why you’ll find opinions about it gracing so many financially-minded sites right now.
Over the past few weeks, as gold has approached that magical $1,000 level, many gold bears have come out of the woodwork to advocate shorting gold. Really though, their warnings of doom aren’t all that original, since they started when gold was down at $860.
Since then, gold has climbed to the $960 level thanks to a host of reasons. Yes, the dollar is doubtlessly stronger, but stocks are also just as obviously weaker. Inflation is dead - with more signs that prices will fall further than those pointing the opposite way - interest rates are at zero, and people are paying the government to hold their money.
The answer to our questions seems obvious, right?
Gold In The 1970s And Gold Today: A Study In Contrast
But hold up for a minute; let’s rewind for a minute to the late 1970s into the early 1980s, back when gold last reached the levels we’ve seen in the past couple of years.
Then, interest rates were exploding over 16%, the US dollar was stable, oil prices were heading higher, inflation was soaring and the market was flat to down. At the time, the big story making its rounds was inflation, so it made sense for gold to run up.
Now compare that period to today, where the situation is almost exactly the opposite. Despite the drastic dissimilarities, gold continues climbing to the point where it’s actually making new highs in many non-dollar currencies.
Of course it’s no secret why people are betting on gold; with the way governments around the world are printing money, inflation seems like the only logical end result. How can it be otherwise when they’re so busy debasing their respective currencies, right?
Gold is clearly moving higher as a hedge against catastrophic failure of the global financial system. In fact, that’s the reason we were buying and advocating buying gold in Xcelerated Profits Report last year when we were down in the $600s and $700s.
But that was last year, back in September to be exact. Today, I don’t think many people understand that gold may be moving up for a more sinister reason… That gold might be making its move because it expects higher interest rates down the line and a lower dollar.
That theory might have just made you blink and shake your head in utter confusion, and if so, I’m sure you’re not alone. Because at first thought, it doesn’t appear to make any sense, does it? After all, everybody knows that when interest rates move higher, currencies strengthen.
And that’s true… usually. But that also happens when economies get stronger as well, while today, we have some experts predicting that we could be in these tough times for anywhere from the next 10 months to the end of this current presidential term.
Gold Is Going Up, But Maybe For Completely Different Reasons
A couple of years from now, the United States will have issued over $3 trillion in new treasury paper. The market will be flooded, and not in a good way. Because the market only works if others are willing to buy the debt.
So yes, there will be plenty of currency floating around, but investors may clamor for higher rates from the US government to shoulder the risk of holding paper that is backed merely by its printing press… and little else.
That could mean higher rates when the market least expects it and when the economy simply cannot handle it. The result could be a massive blow to the economy, causing the government to further “stimulate” growth by printing even more money. And from there, we go from inflation to hyperinflation. Not a pretty scenario, to say the least.
But could it be what’s in store for us? Is that what gold prices are signaling today?
All I can say is: Let’s hope not. But while we can hope for the best, let’s not be so quick to dismiss the run in gold prices today as idle speculation. And just to be on the safe side, I’ll welcome any pullback to add to my positions… maybe you should too.
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