THE SIMPLEST REASON GOLD WILL SOAR
Michael Checkan
January 5, 2010
Welcome to 2010! Last year may go down as "The Year of Gold," as the Midas metal reached an all-time high of $1,215.70. The price was driven not just by demand from a few "gold bugs," but by a global gold rush from Asia to America and from Main Street to Wall Street. It was not just a year for gold, but "The Decade for Gold," as it appreciated by almost 400% in the past 10 years.
Now, the big question is, "What will gold do in 2010?" The answer is that it should not matter if you buy gold as wealth protection. The short term (up to one year) will find gold volatile. For example, with the mid-December to mid-January seasonally thin gold market; it is not unusual to see the metal go through a correction, just as it has been doing. But, a short-term correction of 5%, 10% or even 20% should not matter to the medium- to long-term wealth-protection investor.
My friend Steve Sjuggerud points to one reason he thinks gold will soar in the coming months. With his permission, we're reprinting an essay he wrote last November on "The Simplest Reason Gold Will Soar."
By the way, my own "simplest reason" is because of continuing weakness in the U.S. dollar. There is no way gold will go down and stay down, in my humble opinion, considering what Barack Obama and Ben Bernanke are doing to our fiscal and monetary policy.
Now, here is Steve Sjuggerud's essay.
The Simplest Reason Gold Will Soar
When the bank pays you nothing in interest, gold goes up. And right now, the bank is paying you nothing in interest.
Why does gold go up when interest rates are low? It's simple.
The knock against owning gold has always been that, unlike cash, it pays no interest. Compound interest is almost irresistible. If you can earn 7% a year on a $10,000 deposit, in 10 years time, it will be worth $20,000. Gold will just sit there like a bump on a log.
But every so often, like right now, paper money pays you no interest ... and the scales tip in favor of gold.
That's the simple version. Let's add one little tiny wrinkle to it, so you can see why gold has become irresistible now.
The forecast for inflation in 2010 is around 2%. Yet the Fed is keeping interest rates near zero. So instead of earning nothing in interest at the bank, you're actually losing 2% a year to inflation. That's what's really happening - the real interest rate at the bank (minus inflation) is negative 2%.
My longtime friend Porter Stansberry asked me to do a study of what happens when real interest rates are less than zero. The results were astonishing. In short, when real rates are negative, gold soars and stocks stink. And when real rates are positive, gold stinks and stocks soar, as the chart below shows.
Here are the actual results. (Note: These are compound annual gains.)
1973 through 1980
The median real interest rate was -1.15%.
Gold returned +32% per year.
The real return on the S&P 500 was -7% per year (not including dividends).
1981 through 2001
The median real interest rate was +2.7%.
Gold returned -3.5% per year.
The real return on the S&P 500 was +7% per year (not including dividends).
2002 to today
The median real interest rate was -0.4%.
Gold returned +18.5% per year.
The real return on the S&P 500 was -3% per year (not including dividends).
Well, there it is, plain as day. And you can see, these trends persist.
In 2010, real rates will be negative. (Bernanke will keep nominal rates near zero, so subtracting inflation will give you a negative real interest rate.) There is essentially no chance for a positive real interest rate in 2010. Said another way, you will lose money in the bank in 2010. Whatever interest you earn won't keep up with inflation.
History shows, under that environment, stocks don't do well ... and gold soars. There's nothing in sight to end that trend. Trade accordingly.
LiveStrong,
Michael Checkan
Here at ASI, we specialize in helping clients exchange dollars for precious metals and other currencies. Give us a call at 1-800-831-0007 or 301-881-8600 and let us know how we can assist you.
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