Gold: The Calm Before the Storm

The excitement that surrounded the gold and silver markets for most of last year has somewhat subsided this year. Although events in the first quarter of the year have been very interesting, gold hasn’t been making the headlines as much as one would think. These are the type of lull periods in the gold market that get me the most excited.  We are clearly in a period of consolidation, which in my opinion, is very bullish for gold.

My number one wish is for sentiment to turn decidedly bearish. I want people to believe that our debt problems can be papered over forever without repercussions. I want people to trade in their gold for stocks and be done with it. I want deflationists to explain for the 10th year in a row why gold is going to $200. I want people to say gold is a bubble even though gold, having consolidated for 4 straight months, resembles no bubble I’ve ever studied. These are the kind of things I will look for in an intermediate term bottom.

Balanced Outlook

While gold is positioned to go much higher from here, I believe those with the most balanced outlook in gold will be the most profitable. When gold is rocketing higher day after day, it is common to hear that the dollar is going to collapse and gold is going to $10,000. On the flip side, when gold is correcting. you hear about how the dollar is the ultimate safe haven currency and how gold is going back to $200. Neither of these views is truly balanced.

In the same way that the British pound didn’t disappear but merely made way for the U.S. dollar, I believe the U.S. dollar will make way for a new global currency. If this is in the form of SDR’s, the dollar will still be in demand. The real debate doesn’t necessarily revolve around the dollar disappearing, it concerns the dominance of the dollar. As long as the U.S. is the dominant military power, they will have the dominant currency. However, no matter how much airplay the rise of Asia receives, I still think people are underestimating the magnitude of the shift we are seeing. These shifts in power occur a lot more frequently than you think. In ancient times, the Assyrians made way for the Babylonians, who made way for the Persians, who made way for the Greeks, who made way for the Romans. I strongly believe Asia, led by China, will dominate the 2nd half of the 21st century.

Gold and silver will play a critical role in the ascent of Asia. China has been accumulating gold at a torrid pace and they are positioning themselves very wisely for what is to come. Trading in depreciating Treasuries for gold is just about the smartest thing China can do- and they are doing it. Heck, China can use their dollar reserves to buy the U.S.’s gold, thereby contracting our current account deficit with China. This will not only strengthen China’s financial position, but it will allay some of the political pressure coming from Washington D.C. These are the trends I see coming.

This is a lull period that gold bugs will just have to fight through. If gold does suffer a major correction, block out all the talking heads on TV. States have yet to figure out how to legitimately balances their budgets. Debt growth on the federal level is still oupacing GDP growth. Pensions are still underfunded. Last time I checked, Boomers are still getting a year older every year. We are facing major funding problems in our near future. Believe me, gold is getting prepared to launch to outer space as a result.

Gold: The Calm Before the Storm is a post from: Expected Returns

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