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Bull Run for Gold


Still early, but gold looks set to soar.


Returning to a favorite theme of mine: The financial system needs parabolic money and credit growth (i.e., inflation) simply to function. Unfortunately, whether we like it or not, this is the sick and rotten system that Alan Greenspan has left us with.

Thus, the only way stocks are going to rally at present is if there's more Fed money-printing, resulting in more inflation and a weak dollar (assuming other central banks don't inflate just as fast, of course). Because of inflation and dollar weakness, the stocks that are more geared towards inflation will then lift the major indices to some degree, producing a bear-market rally.

We've been getting daily doses of that money-printing for months now, and there's even more to come. Stocks are going to see some sort of bear-market rally because of all this inflation, but the gold complex is going to go up more because of that same inflation. Thus, "long gold and gold stocks" is obviously where one wants to be.

We can see this theme playing out right before our eyes in the following chart of the Dollar Index, S&Ps and Gold. As you can see in the chart, it's not a coincidence that the S&Ps bottomed on virtually the exact same day that the Dollar Index topped out. Assuming the dollar's rally fails soon -- like I expect it to after the Treasury announces next week's banking bailout -- then the S&Ps are going to lift once again and extend the bear-market rally that began in November 2008. Gold, however, should also rally in its ongoing bull market and far outpace any gains that the S&Ps see.

Click to enlarge

Returning to the ratio between the SPX and gold that I've discussed before (but looking at it from the other way around), consider that if the Gold/SPX ratio was to return to its 1980 peak of 7.51 with the S&Ps still languishing around 1000, it would produce a gold price of $7,510. I'm not expecting anything like that ratio or that gold price anytime soon (even though, as a gold bull it would sure be nice), but it highlights once again how early we're still in gold's bull market.

Click to enlarge

A rise in this Gold/SPX ratio back to the December 1974 peak at 2.79 is much more realistic over the next 18 months, just as the Gold/SPX ratio did when it last crossed "1" to the upside back in mid-1973.

And if the S&Ps happen to be still churning around near the 1000 level 18 months from now (which wouldn't be too surprising in my opinion), that obviously produces a gold price of $2,790. That would be an over 300% rally from today's gold price, which also, coincidentally, happens to be roughly the percentage move that gold saw from 1973 to 1974, too.

Will history repeat? Probably not, but it will likely rhyme.

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No positions in stocks mentioned.

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