This week saw gold cross the $1,400 barrier for the first time, before it pulled back. Is the gold bull market over? Ha! Since my $50 Silver and $2,500 Gold report launched Oct. 8, gold gained more than $150 to its recent peak — at a time when many people were expecting gold to take a trip back to test $1,000 an ounce. So we’re due for a correction, but it may not be nearly as deep as many people are hoping.
Corrections are a normal and necessary part of any bull market, and man, do I see this pullback as a golden opportunity — a chance to buy great gold and silver stocks that we missed the first time around! Meanwhile, silver is outperforming gold percentage-wise, just as I predicted in my report. Gold has done well, but silver is up more than 15% in a little over a month! Quite a move, eh? Now, the U.S. dollar is rallying — as I talked about in my Tuesday video titled Is the U.S. Dollar Poised to Rally? — and both gold and silver are pulling back.
Many people are waiting for silver to pull back to $20 to buy it again, just as they waited for gold to pull back to $1,000. Don’t hold your breath, and don’t waste the opportunity. Many people missed that last $400 move as gold charged from $1,000 to $1,400. Don’t miss the next leg of gold’s big rally.
Let me show you six reasons why this pullback may not be a big one and why gold is going much higher, and probably sooner than many on Wall Street believe possible.
Reason #1: Europe’s Debt Problems Haven’t Gone Away. The United States isn’t the only country with a debt crisis. The euro zone has its own government debt/banking crisis, a crisis that nearly sank the euro mere months ago, as Portugal, Ireland, Italy, Greece and Spain teetered on the brink of insolvency.
Europe was able to paper over the problem for a while, but now we’re seeing Irish 10-year spreads moved to 5% and Greek spreads to 9%. Investors are starting to bet those governments will bust their budgets. So, worried Europeans are (again!) moving into the safety of the hard currencies — gold and silver.
It’s a trend that could continue through December as Greece holds elections and Ireland wrestles with a new austerity budget plan.
Reason #2: The Debt Crisis Is Global. The Wall Street Journal recently reported that the 15 most advanced nations of the world, including the United States, will have to borrow a whopping $10.2 trillion in 2011.
The money is needed to repay maturing bonds and finance budget deficits. Selected Governments' Borrowing Needs Japan is in worse shape financially than the United States. But we’re giving the Japanese a run for their money. The Federal Reserve has committed to buy an additional $600 billion in U.S. government debt over the next eight months. This raises another red flag.
The International Monetary Fund (IMF) warns that the chances that investors will balk at lending to governments “remains high for advanced economies.” If the risk of government default is rising, where do you hide out? Gold and silver are a good place to start!
Reason #3: Central Banks Continue to Buy. You know who’s not worried about the high price of gold? Central banks. They continue to snap up the yellow metal; obviously they’re banking on higher prices. There are two parts to the central bank/gold equation: Buying and selling.
On the sell side, central banks and the IMF sold about 94.5 metric tons of gold in the year that ended last month. Most of this was IMF gold. And the total was down a whopping 40% from a year earlier! On the buy side, we know that countries including Russia, Venezuela and India are buying a lot of gold. In fact, Russia has been steadily building its stockpile of gold all year, buying it every month.
It started with 16.7 million ounces in January and just added another 500,000 ounces in October to hit 19.5 million ounces. Even developed nations are buying gold — France’s gold as a percentage of its reserves rose from 42.5% to 63.3% and Portugal jumped to 83.7% in 2009 from 39.9%. And China is probably buying a lot of gold, though we won’t know until long after the fact.
Reason #4: Investors Are Piling Into Gold. Central banks aren’t the only ones not deterred by higher gold prices. Investors large and small aren’t blinking either. The World Gold Council estimated late last month that gold holdings in ETFs hit a new record in the third quarter.
What’s more, a new gold ETF just made its debut in Hong Kong. The Value Gold ETF will hold its gold locally, and offers Asians unnerved by the global currency and debt crises a new way to hedge their portfolios.
Reason #5: The World Starts to Shift Away from the U.S. Dollar. If you watched my video Tuesday, you know that I have turned short-term bullish on the U.S. dollar. But that’s just a zig-zag in a long-term bear market for the greenback. The storm clouds gathering over the U.S. dollar are ominous. French President Nicolas Sarkozy recently emerged from a meeting with China’s leader Hu Jintao, and called for a new global monetary system.
Since the current system is based on the U.S. dollar as the reserve currency, this move is a direct assault on the dollar’s primacy. And since gold is priced in dollars, if the dollar is going down, gold will go up. In fact, World Bank chief Robert Zoellick said in an article in the Financial Times that the Group of 20 leading economies should consider adopting a global reserve currency based on gold as part of a bigger reform of the global financial system.
Such a move would be an end to the current global regime which is based on the dollar as the world’s reserve currency. That would cut the hamstrings on the U.S. dollar. So ask yourself, how can both the euro go lower and the U.S. dollar go lower? The answer is that both are going to go lower against hard currencies — gold and silver.
Reason #6: Gold Is Running Rings Around the S&P 500. The S&P 500 is up nearly 9% so far this year, which seems pretty good. But that’s only because the S&P 500 is priced in dollars, and the U.S. dollar’s big trend is lower. What happens if you price the S&P 500 in gold or silver?
The results may surprise you … S&P 500 is up nearly 9% this year ... but valued in gold it's actually down 15%, and valued in silver, the S&P is down more than 33%! As you can see, priced in gold, the S&P 500′s 9% gain turns into a 14.85% LOSS. And valuing the S&P 500 in white-hot silver is even worse — since silver has soared this year, the S&P 500 has lost more than 33% of its value in silver terms.
To be sure, past performance is no guarantee of future results. But if these trends stay in place — and I think they should — gold and silver should continue to outperform the S&P 500.
All This and Silver Too
I think silver will continue to outperform gold going forward, at least in the short term. It is an industrial metal as well as a precious metal, and the global economy is firing on all cylinders even as the U.S. economy continues to sputter. Investment demand for silver is rip-roaring, and it got a shot in the arm from the $575 million debut of the new Sprott Physical Silver Trust (PSLV on the NYSE, PHS.U on the TSX) in Canada.
My intermediate-term target of $31.39 on silver that I gave in October now seems too conservative. Longer-term, I think silver is going to $50 an ounce. We’ll see just how fast we get there. Lock and Load with an Arsenal of Gold and Silver Bullets I’ve published two gold reports this year. The first, New Gold Rush, came out in June. Subscribers grabbed profits on that portfolio multiple times. We track banked gains of about 17% (or more than $4,300 before commissions) on the closed positions, and recently the remaining open positions showed about 43% in open gains.
These gains, open and closed, ran rings around the S&P 500. New Gold Rush is closed to new subscribers. Then, last month, I published $50 Silver and $2,500 Gold. This report is oriented more toward the smaller-cap silver and gold names I think can blast off in this leg of the precious metals bull market. It also took off straight out of the gate.
Now, it wasn’t a smooth ride — one of the picks didn’t work out, as sometimes happens with these small stocks, so we exited that one quickly at a loss of less than $300. While losses aren’t fun, knowing when to cut your losses is part of the business. I then added a new pick that quickly racked up enough open gains to more than make up for the loss — and then some! Warts and all, the $50 Silver and $2,500 Gold portfolio was recently up more than 11% since it was published Oct. 8. Individual performance may differ. Meanwhile, the S&P 500 gained just 4.9% at the same time. So, my SECOND silver and gold report is showing about twice the performance of the S&P 500.
And we’re seeing a pullback in gold and silver right now — a pullback that probably won’t last long. If you’re a gold bull — like I am — you’ll use this opportunity to add to your positions and maybe buy new positions. And if you haven’t gotten onboard the train with $50 Silver and $2,500 Gold, this pullback is a GREAT opportunity for you to do. It takes nerves of steel — and sometimes balls of brass — to buy when the market is going down.
But that’s when you stand to make the biggest gains. The big trend in gold is up, and my $50 Silver and $2,500 Gold portfolio should go along for that sweet ride.