1. The US have the biggest international trade deficit and domestic budget deficit in their history.
2. A record-breaking consumer debt, with near-zero savings rate.
3. New jobs are not being created as fast as they used to be. Unemployment is creeping up in some regions.
please see post for more on unemployment rates.
4. Declining Dollar that countries, such as China and Japan, may grow leery of buying in huge quantities.
US Dollars held by other nations (2005):
- Japan, $832 billion
- China, $818 billion
- Taiwan, $255 billion
- Korea, $205 billion
- Hong Kong, $125 billion
5. The value of US Stocks (blue chip) grew nearly 10 fold in the two decades from 1982 to 2000, while real earnings (adjusted for inflation) increased only three fold over this same period.
The most recent drop in the Dow Jones and other indices will not be forgotten and will likely continue.
6. The US economy is heavily dependent on unprecedented low interest rates that simply cannot last forever.
Note how the interest rates have been declining to support the other bubbles such as housing and stock market.
- The huge supply of foreign money helps keep interest rates low.
- The government uses this money to fund its deficits. This deficits spending is highly cumulative of the economy. It allows for lower taxes and more jobs created by government spending.
- Low interest rates encourage purchases of capital goods such as cars and houses
- Low interest rates help make credit cards cheaper and easier to obtain, creating growing pool of capital to buy more goods (and a credit card industry boom).
- Low interest allow business to expand more easily.
- Low interest help the stock market.
- A booming stock market encourages foreigners to put even more capital into the US by investing in the stock market.
And what about Gold?
Gold could be a spectacular investment after the bubbles pop and a very good investment before they pop.
- The gold market is very, very small ($500 billion) compared to the stock and bond markets ($45 trillion). Even a small shift of capital out of these markets into gold will greatly boost the gold market.
- Gold is easily sold for euros, giving investors a double benefit. That means, if you buy gold, you are indirectly buying euros at the same time.
- Gold has significant potential for being an illegal tax avoidance technique.
- The gold market is much more of a world market than U.S. stocks and bonds.
- It’s very difficult to rapidly increase gold production. Gold mining will not be able to keep pace with demand for many years. When demand for gold goes up, so will the price.
- Gold’s value increase with inflation. Inflation will be very high in the U.S. and also in major European and Asian nations.
- If the banking system comes under severe stress, as it likely will, gold will have even further appeal.
- Short term, the central banks of world, which have been selling about 500 tons of gold a year since the 1999 Central Bank Gold Agreement, will likely reduced their sales. In fact, some are already saying they will increase their gold reserves - instead of buying dollars.
- Short term, South Africa’s production fell 15 percent in 2005.
As usual, here are some supporting charts - first, the Monthly chart for Gold:
How does it compare to the Dow Jones?
How does it run against interest rates? Do you see my point, it doesn’t go along with Interest Rates…
Finally,
- you can see my Gold-related trades here. They are for real.
- please feel free to comment, I would like to hear your opinion.
References:
- “America’s Bubble Economy” by David Wiedemer, Robert Wiedemer, Cindy Spitzer and Eric Janszen.
4 Comments until now.
[...] Go to the author’s original blog: Reasons I believe Gold will continue climbing [...]
A very good analysis again!
You have shown many facts which are pro gold rising.
But don´t forget that you can´t see into the future,
furthermore the facts are useful for midterm trader or investors, but are they for shortterm-trading?
Especially the one with the extraction of gold.
The probability is high that the gold price will rising, but it doesn´t promise that it will do so.
From March to June the price has dropping und has broken a stronger trendline, but why? I don´t know, there you had the same facts why gold should be rising.
And I don´t think that you want to be longer then a month into gold.
The goldchart looks like a wonderful saucer formation, but if I already told, nobody knows what will be tomorrow, you can only trade insecure probabilities
So be wakefully if the goldmarket will not do what you want!
Good luck to you!
Matthias from Dresden, Germany
Hi,
it woudl be great to see some T.A. of silver and gold here, personaly I find these isntrments difficult to analyze. This could be in part due to the deliberate selling of Gold by the central banks around the world. GATA is the grass roots organization who are tryign to prevent this intentional pushing down of Gold prices.
Excellent article that really goes to the crux of the issue. Did you find the Money Masters videos ok?
Kind regards
Peter.
Mathias - You are correct about my reasons being long term, however, I see this trade as a short term, looking to sell when (if) gold reaches $1,000-$1,100… perhaps I will decided to sell 1/2 at that point and keep the remainder at break-even… charts will tell. Regards.
Comment!