Where Will Gold Go Next?

Gold prices have rebounded strongly from their late 2011 lows, and we believe this will be another banner year for gold.  However, there’s one major concern with that prediction which we’ll detail here for you.  We were able to tell you about the sale on gold & silver that was going on back in October in this series, so we hope you took advantage of it.  Today, we’ll be looking a little further out.

Over the long run, the value of gold doesn’t change.  However, in the short run, the value can certainly fluctuate.  Because the world has been on a 40 year experiment to say that pretty pieces of paper are money and that gold is not, the value of what an ounce of gold can buy you have fluctuated fairly dramatically over these four decades.  This isn’t the first time a government has tried to tell the world what is and is not money, but it is the first time that the entire world has tried to pull off this masquerade.

However, even though many Americans seem to have totally forgotten that gold is money.  Many people of the world have not.  It is interesting to note that while Europeans leaders tell us that gold is unimportant, they are absolutely unwilling to sell their countries gold to help in this financial crises.  And the EU has strong armed Greece into relinquishing their gold as collateral for bailouts.  So indeed, even the world leaders who claim that gold is not money, understand very well that gold is most definitely money.  Those in Asia never had any confusion in the matter and China is rapaciously grabbing hold of every spare ounce of gold that they can.

So, in reality, it’s not the price of gold that is going up.  It’s the value of the US Dollar which is going down against the only true money on the planet.  So gold is a very important holding for you to have to protect yourself against the printing presses of the world’s central banks which run at full power.

However, it’s important to note that the price of gold in US Dollars does crash from time to time within the confines of a fantastic bull market.  Of course, we saw a smaller version of this in just the past 6 months, but let’s talk about a bigger crash.  The 1970’s was the biggest bull market in the price of gold in our lifetimes.  In the early 70’s, the price of gold went from $35/oz to $200/oz.  In 1975, the price dropped back down to $100/oz.  (These are all rough numbers based on memory, but they serve the point).

If you saw the value of your gold drop in half in such a short amount of time, you would have been tempted to panic!  Most who held gold at that time, probably did panic and sold all their gold.  This is how a long term bull market is able run so high.  It shakes out the weak hands along the way with scary downdrafts.  If you would have held on through this period until 1980, it would have been possible to sell your gold at $800/oz.  That’s 8 times the $100/oz where many probably sold their gold!  It’s four times what you would have received if you would have sold it at the peak before the 1975 correction.

In an ideal world, you would have bought at $35, sold at $200, bought back at $100, and sold at $800.  But that’s nearly impossible in the real world.  We simply don’t know when these big changes in direction will come nor how long they will last.  The trick is to be in the big move and hold on till the end even though the ride will certainly be scary.

We tell you this story to prepare you because it’s certainly possible this could happen again.  However, we don’t know that it will.  It’s really hard to see the price falling that far with China trying to catch up to US holdings in gold, but it could happen in a panic in a short amount of time.  The trick is to know why you own it.

The sovereign debt continues to accumulate.  The central banks are printing more and more money.  Ask yourself, Are these problems fixed?  (Don’t take politicians or main stream news’ word for it!)  If not, the price will continue higher.  Remember also that the only way the gold market’s bull run was ended in 1980 was because Volcker drove interest rates into double digit territory when he was running the Fed.  This is the exact opposite of what the Fed is doing now.  And it’s impossible for the Fed to even consider because the level of the debt is so high now that the interest payments on the debt alone would be more than the US tax revenues. Keep this in mind when you’re getting scared out of your position.

Which is safer, a US Dollar which is constantly being printed on demand?  Or an ounce of gold which only sees its supply increase at about the same rate as the world wide population?  In Monday’s post, we’ll look at the dangers in waiting to buy gold.

This is the 15th post in a series.  You should read the initial thoughts on these forecasts here. and the Overall Prediction Page here.  Here are the rest of the posts:  3) Ben Bernanke’s Dollar Devaluation Plan, 4) The Coming US Dollar Devaluation, 5) Stock Market Volatility, & 6) Stocks to Fall in 2012, 7) The European Crises, & 8) European Options, 9) European Prediction, 10) Recession in Japan, 11) Japanese Yen Crash,12) War with Iran, 13) Jewish Perspective on Iran, 14) Commodities to End 2012 Lower, & 15) Where Will Gold Go Next?

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