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Gold: Rally Like It's 2009


Fed focus on banking system, inflation a boon to yellow metal.

Prof. Lewis.

What's your forecast on gold for this time next year? Also, where would you buy in, in the short term?

I guess now is good, but it appears iShares COMEX Gold Trust (IAU) could fall to $800 before turning?

-Minyan M

Minyan M,

In answer to your first question, gold will be well over $1000 this time next year in my view.

As for where to buy in, let me answer that with a question of my own. Was it wise to expect the Dow to fall back below 1000 after it finally broke out above it after 20 years in 1982? Clearly not.

After nearly 30 years, gold broke out above its all-time high of $850 back in January.

Click to enlarge

How likely is it that we'll now fall back below that old all-time high now? It's rather doubtful in my view and as I've said, I actually think there's a high degree of probability that we'll see gold bottom around the April 1st low (mirroring the November-December correction relative to the euro) and rally once the Fed pauses after having sold off in front of it already on expectations of the Fed pausing. It's very similar to the way stocks would rally into rate cuts back in October-January as if they were "magic" healers only to then collapse once the rate cut became a fact because the rate cut wasn't doing a thing for the problem even though everyone long stocks desperately hoped it would.

Tough talk from the Fed with respect to inflation is just that: talk. Talk isn't going to increase the supply of oil or food on the market is it? Inflation is not just a weak dollar event. Has everyone forgotten that gold and oil have been making all-time highs in euros as well as dollars? Just take a look at some of this week's headlines: On Monday, we learned that the Saudi inflation rate hit a 27-year high of 9.6 percent in March. Just last night, the BOJ basically gave a stagflationary outlook. I could go on and on...

Honestly, some of these scenarios that people are tossing around on TV for how inflation is magically going to go to zero overnight after the Fed pauses sound like outright lunacy.

If the Fed wants to get tough on inflation, then fine. Do so. Why doesn't the Fed simply to tighten 500 bps today and collapse the financial system and the economy in order to depress demand? That will kill commodity prices and rally the dollar I assure you. But oops... it can't do that now if it wants to keep the banking system intact and the economy out of a depression, can it? And the Fed obviously does care about keeping the system intact. The last six months of emergency Fed actions should make that more than clear.

The bottom line is that the fact that gold did surpass its all-time high after 30 years of remaining below it tells you that "something is different" in gold, regardless of whether one agrees with my fundamental case for it. It would be highly unusual to now go back below such a level.

So should one wait for lower prices or simply step up right here? You tell me. I can't find a vocal gold bull at the moment (other than myself), and all we read in the press and see on TV every day is how disinflationary Shangri-la is about to arrive on Earth after the Fed pauses. I'm even hearing about retail customers calling up their brokers and asking "how do I get long the dollar". Financial TV even has a show on every evening that tells you to short gold for the coming collapse in inflation and the rally in the dollar (never mind that they never understood why it was going up in the first place).

Despite all of this very public bearishness, gold continues to stubbornly hang on to its positive YTD return (something the major equity averages can't even claim yet). That should tell you something.

And don't even get me started on how cheap these gold shares are. But then again you have the same situation in the oil shares too. As Boone Pickens said yesterday, most oil stocks are priced like oil is $70 to $75. Well, most gold stocks are priced like gold is $700 and headed lower.
Positions in GLD, gold shares

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