Geopolitical Concerns -

At the end of the day, gold is not an asset class as so many touted during the commodities craze in 2006, but it's an alternative to paper money -particularly the world's current reserve currency, the U.S. dollar. The single biggest reason to seek it as an alternative currency is not inflation, as Wall Street likes to tout, but in times of perceived trouble. The world has plenty of trouble these days, none bigger than the mushrooming turmoil in the Middle East.

I like to be proven wrong, but I don't see Iraq staying one sovereign country as it stands now. In the end, Iraq is all but certain to be split up. The problem is how to share the oil revenue among the different groups? Trust me, if it was just sand there, the U.S. would be long gone by now.

Then there's Iran. Its President Mahmoud Ahmadinejad mustn't be taken lightly (Israel isn't doing so). I think most of us realize where he's coming from and it is no place most of us want to be or see realized. You can virtually be assured Israel will not live with a nuclear power Iran. That's why I believe the most recent reports of Israel having drawn up secret plans to destroy Iran uranium enrichment facilities with tactical nuclear weapons is, sadly, real.

This scenario is real and, while mind-boggling to even consider, is likely to at least become points of discussion soon and influence financial markets going forward. A growing number of Israelis believe they face a second Holocaust un-less somebody - preferably the Americans, but if not, then Israel itself - forges a pre-emptive strike and bombs into rubble Iran's nuclear facilities. A 'kill or be killed' attitude is now, or soon may be prevalent as reports show Iran closer and closer to nuclear capabilities. In addition (and not discussed in the mainstream), much of Israel has lost hope that it can have a manageable peace with its neighbors. It looks like a question of 'when' not 'if' the fragile Democracy in Lebanon will cave. And Palestine? Well, I don't think anyone really knows.

While I expect the Middle East to be the primary geopolitical hotspot, let's not forget North Korea and Venezuela. I've advocated not owning anything in Venezuela. That suggestion has never looked more appropriate.

The American dollar - Listen up! It's rare to find an historical factor that proves to work more than 50 percent of the time, let alone 80-85 percent, and that's about how often the inverse relationship between gold and the U.S. dollar has worked (they move in opposite directions). That's why it's critical for those interested in gold to realize the path of the U.S. dollar is the single most important factor for determining the path of gold. Despite what the 'don't worry, be happy' crowd is touting of late, the U.S. dollar has only one long-term direction, and that is down.

The 80-area basis the U.S. dollar Index is the line in the sand for the whole world. If and when that breaks - and yours truly believes it's merely a question of 'when' not 'if' - the world should get a sell signal on the dollar and that can only greatly enhance an already bullish environment for gold. Conversely, we would need to re-think our stance if the U.S. dollar Index rose above 93.

Supply versus Demand - We must take into account jewelry demand, which is still over 75 percent of the yearly physical off-take. But keep in mind; part of it is simply for show while others buy it as an investment. A slowing world economy can and will impact jewelry demand, but I fully anticipate the other two key factors previously discussed to more than make up for it on the demand side.

And while I believe the previous factors to be the most important, there are others as well.

Money Supply: It was no coincidence that our government decided to stop reporting M-3 money supply figures.

People in the know have still been able to make a good guess based on what is being reported and they say money supply is growing rapidly despite the many interest rate hikes. We're also seeing global money supply rising sharply.

Negative real U.S. interest rates have also been an historical bullish factor for gold. I see little chance of this abating anytime soon.

Manipulation: While I don't see the daily manipulation, the Gold Anti-Trust Committee does, I firmly believe their main argument that past and current manipulation has and is occurring.

Central Bank: Central Bank sales, and/or the threat of them, used to crater the gold market for months if not years. Now, the impact is just days or weeks. The pleasant surprise by this time next year could be how much their sales have fallen, plus how some of them were net buyers.

Gold ETFs: While some goldbugs were (or still are) not in favor of the ETFs, it has been my contention that they were, and are, one of the best things that happened for gold in the modern era. For a very long time, private investors and institutions avoided gold's lure simply because there was no easy and cost-effected way for them to gain exposure to it - until the birth of ETFs.

Hedging: Thanks to the combination of lower interest rates (which make contangos unattractive) and the unpopularity of it, hedging has become gold's "seven" letter word. I don't anticipate most management teams wanting to be the first kid on the block using it again to any great extent.

Economic Growth: This is always good for gold. Where it's occurring now in the world coincides to lands where gold historically has been widely accepted as the best form of money. China's gold consumption continues to rise, along with India's.

The best is yet to come for Gold bulls.

12 March 2007

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