What’s driving gold higher…how long will it continue to rise
…and what should we be doing to take advantage of it?
by Brien Lundin, Editor, Gold Newsletter
Gold is making headlines across the world, as it seemingly sets new price records on a daily basis.
But surprisingly few investors realize that the yellow metal’s been on a tear for over a decade now: Starting from around $250 in 2001, gold has risen nearly six-fold to date.
There are a couple of powerful reasons for gold’s historic run. More importantly for investors like us, these same factors all but guarantee that the bull run will continue for years to come.
So what’s providing the rocket fuel for gold? Simply put, money and debt.
Money Ain’t What It Used To Be
No matter what their political stripe, everyone can agree on one thing in regard to money: There’s a lot more of it around these days — if you’re talking about paper money, that is.
The problem is, it’s becoming increasingly worthless.
You see, not only the U.S., but all of the world’s economies, ramped up the printing presses as the Great Recession took hold. One program alone, the U.S. stimulus boondoggle, carried a price tag of nearly $1 trillion and is still shoveling those greenbacks onto the economy.
Despite this massive, globally-coordinated monetary reflation, the monetary mandarins of the Federal Reserve and other central banks assured citizens that price inflation was well under control. After all, weren’t the CPI indices (which they had conveniently created, by the way) showing that there was nothing to worry about?
The official economic data was enough to placate most of the public for awhile, but the rise in commodity and food prices eventually became too much to ignore — most especially when it began to manifest itself into gas prices approaching $4.00/gallon.
In other words, as the Fed was pumping out the dollars, everyone knew that inflation was somewhere down the road. But now the public — in the U.S. and around the world — is beginning to realize that inflation is right here, right now.
And it’s only going to get worse: Consider that, over just the last few months, the U.S. Monetary Base has exploded once again to the upside.
As you’ll remember, the Fed rapidly expanded the Monetary Base during the credit crisis of late 2008, and kept expanding it, albeit at a slower pace, through 2009. For much of 2010, however, the Monetary Base was actually contracting.
That all changed at the beginning of this year. Through the first week of March, the Fed grew the base at an annual rate of growth of 72.7%! And going back to September of 2008, the Fed has expanded the base by an incredible 2.74 times. (Data courtesy of TheChartStore.com.)
Want to know how this really becomes inflationary? If the economy improves, and banks begin to lend once again. There’s nearly $1 trillion in excess banking reserves sitting on deposit with the Fed, earning enough interest to keep the nation’s banks solvent. If the banks feel confident enough to begin lending those reserves once again, the complexion of that money changes.
In effect, once that $1 trillion in excess reserves gets loaned, it instantly becomes “money,” the multiplier effect kicks in and the inflationary consequences will be dramatic.
Of course, this is old news to anyone who’s been following and investing in gold. But not to the vast investing and saving public. While it can’t be credited for the big surge in gold in recent weeks, the fact that food, energy and gasoline prices are now galloping higher is awakening the public to the fact that inflation is here. And it’s likely going to stay awhile.
Deeper And Deeper…
The other side of the equation, and therefore intimately related, is the massive public debt that has been rung up not only in the U.S., but in profligate countries around the globe.
Much attention has been placed on European sovereign debt over the past year or so, and deservedly so. Greece, Italy, Spain and Portugal are about the only developed nations in the world that can make America seem fiscally prudent.
The recent downgrading of Portugal’s debt likely had some positive effect on gold, but it’s just one dab of paint in a bigger picture of towering global debt.
In the U.S., this picture is nothing short of ugly. With a cumulative governmental debt of $14.2 trillion, we’ve reached a frightening milestone where our debt equals the size of our economy.
In other words, the debt now equals or exceeds the amount of dollars in existence! And that’s just government debt — this figure doesn’t include private and corporate debts.
As I’ve been stressing to my subscribers, if the debt exceeds the amount of dollars that could theoretically pay it off, it tells you one very important thing: They’re going to have to make a lot more dollars.
That’s called inflation, and it’s the only way that America’s current and future debt load can possibly be addressed.
Protection And Profits
Inflation, of course, is great for gold and gold stock investors. That’s certainly been the case over the past 10 years, as I’ve delivered dozens of junior resource stock recommendations to my Gold Newsletter readers that have subsequently multiplied in price.
One of my recent picks even soared over 40 times in value!
We’ve recommended some of the biggest winners in the entire sector — many of which were never mentioned by other publications. We were among the first to recommend Northern Dynasty, NovaGold, Silver Standard, Silvercorp, Fronteer Gold and Rare Element Resources among many others.
These stocks were all huge gainers, multiplying from 10 to more than 50 times in price.
Here’s the best part: The fun is just beginning. The explosion of our money supply and the trajectory of our public debt virtually guarantee higher inflation ahead. In this environment, it is absolutely essential that you not only own gold and silver, but also the high-powered junior mining stocks that typically multiply the moves in the metals.
But before you enter this specialized sector, here are three important pieces of advice:
1) Don’t buy any mining stock on the U.S. over-the-counter bulletin board or “pink sheet” listings. There is very little effective regulation of mining stocks listed on these boards.
Instead, only buy stocks listed in Canada on the Toronto Stock Exchange or the Toronto Venture Exchange, or in the U.S. on the NYSE-A (Amex), the Nasdaq or the New York Stock Exchange.
2) Educate yourself before jumping in — subscribe to some of the leading investment newsletters specializing in this sector. Of course, I don’t believe anyone has done a better job than our own Gold Newsletter, and you can find all about it by visiting www.goldnewsletter.com.
There are about a half dozen other newsletters that I would recommend, as well, each written by ethical professionals with years of experience in the industry. If you do a little research, examine the track records and see what others are saying, you’ll be able to quickly see who the serious and most successful analysts are.
3) The best time to buy is when the markets are quiet. There are no guarantees, but the gold and silver markets, as well as the stock markets, usually bottom out sometime between the second week of July and the first week of August. For bargain hunters, that’s a great time to accumulate quality stocks.
But I advise you to get on with your education now. If you believe that the printing presses are going to keep spitting out dollars…and if you believe our mountain of debt is too large to address without inflation…then you simply must act to protect your financial well-being.
The good news is that the protection could also bring spectacular profits.