Get Set For Gains
Lee Rogers
After months of price declines, gold has rallied substantially in the past few weeks driving the price over the $620 mark. I've touched upon many of the fundamental reasons why the gold price is going up in my previous articles but the one main reason why gold is going higher is because of the continued devaluation of the U.S. currency. Gold isn't necessarily going up because its becoming more valuable, it is going up because the purchasing power of our Federal Reserve Notes are consistently becoming worth less and less. Many believe that we are on the brink of a major currency crisis or even collapse. From a technical basis, the gold price has a great deal of support around the $560 - $575 area, which indicates to me that we are headed back up to a $700 an ounce gold price in the short term. Every fundamental and technical indicator I have seen leads me to be bullish in gold.

So is there really a coming currency crisis? All indicators seem to point to that being the case. For starters, our country has become a nation of debt where anybody can get a line of credit. Once reserved for the select few, many Americans are now relying on credit to purchase the essentials of everyday life. Americans no longer save what they earn. Second, the U.S. government for all intensive purposes is bankrupt with a debt in the trillions. Third, the Federal Reserve throughout its existence has continuously devalued our currency by expanding the money supply. They continue to do so, but since they stopped reporting the M3 money supply numbers we no longer know exactly how much they are destroying the currency. Fourth, foreigners are looking for ways to withdraw from U.S. currency holdings into something more stable. Fifth, the housing boom Alan Greenspan created is in the midst of crashing. Anyone with adjustable rate mortgages or home equity loans are getting slammed. Sixth, real wages are going down and the price of tangible assets is going up. Seventh, the Government Accountability Office is warning of a future economic disaster. Eighth, U.S. Treasury Secretary Hank Paulson is now organizing more frequent meetings of the President's Working Group in Financial Markets otherwise known as the Plunge Protection Team every six weeks. The question is why would Paulson be organizing additional meetings of this group if the economy is in good shape?

With all of these factors to consider gold is only going to go up as the Federal Reserve and our government continues to play these dangerous games with our currency. The Federal Reserve has no choice but to expand the money supply in order to keep the economy from crashing. By doing this, they devalue the currency which robs people of its purchasing power. By purchasing gold, you protect your purchasing power throughout any sort of inflationary scenario. Even if the Federal Reserve finally sees the need to defend the currency, they'll have to hike interest rates to levels that will create all sorts of economic problems. In the late 1970's to early 1980's they had to hike interest rates up to around the 20% level in order for investors to get any real return on the paper. We could very well see the same sort of thing take place this time around before this bull market in gold is over.

Doing a quick analysis of the gold price on a one year chart, we can see that gold has twice tested an area of support at around the $560 - $575 mark. The gold price has established a bottom and looks set to move to higher prices from these levels. The gold based Exchange Traded Fund which goes by the ticker symbol GLD has gone up on heavier volume particularly this past week from November 1st through November 3rd. It has previously gone down on lighter volume which is another bullish technical signal.

I'm also bullish on gold mining stocks in the long term. One indicator that I like to look at is the Gold to XAU ratio which is an indicator of how cheap or expensive gold stocks are to the gold price. At the time of this article the Gold to XAU ratio is at 4.51. The closer the ratio is to 5.00 the cheaper gold stocks are to the gold price. At this level gold stocks are still relatively cheap to the gold price. The best buying opportunities for gold stocks in the short term are probably behind us but if you are going to get in it would be best to get in soon before gold moves higher. I would however avoid buying stock in Newmont Mining or Barrick Gold, because of their hedging practices. Additionally, both stocks have lagged despite a 5-year bull market in gold. I personally believe that the best place to be for gold mining stocks is in mid-tier producing gold miners that don't hedge to the gold price. They have more leverage to the gold price than large cap stocks but they don't have the risk involved of a junior exploration company.

Gold is simply the place to be to protect your wealth from this madness of endless credit creation that the Federal Reserve has brought on us. It is nothing more than a pyramid scheme of debt. Even the most conservative of investor should put some of their money in gold to protect themselves from what could be a total collapse of the U.S. currency. I'm even more bullish on silver, but I'll save that for a future article.


November 6, 2006

Lee Rogers
Funny Money Report
www.funnymoneyreport.com