While it is true that our gold stocks have not been giving us nearly as much punch of late as some other sectors (most notably uranium) of our portfolio, we remain in a very strong secular bull market that cannot be ignored, much as the ruling elite would like you to think otherwise. Since Wall Street can't mine gold, they would much rather that you continue buying stocks and bonds, which they do create out of thin air, just as the Federal Reserve banking system manufactures money with computer keystrokes. So all of the propaganda of our mainstream media would have you believe that gold is a very bad place to be. Just make sure you don't buy into this big lie as these spinsters try to pick your pocket in the process.
The chart above illustrates just how powerful this long- term gold bull market is. Notice the red line, which represents the monthly average price of gold from 1995 to the present time. So far this month, it is at $673.82, which is just slightly lower than the all-time high monthly average price of $679.37 in April 2007. In nominal terms (not in real terms), the average price of gold is at an all-time high. The prior high for gold was in September 1979, when it reached $670.50 and then plunged to $598.50 by December of 1979.
Looking again at the chart above, we see the 20-month moving average of $600.94 and the 40-month average of $509.92. Notice how, since the bull market began back in 2002, the monthly average gold price has remained consistently above the 20-month average and the 20-month average has remained consistently above the 40-month moving average. However, note how the monthly average kissed the 20-month average on several occasions through 2005, at which time the price of gold blasted off into space like a rocket, distancing the monthly average from the 20-month and 40-month moving averages. That gap is now narrowing somewhat, as gold has moved more or less sideways during the past year or so. Clearly the markets, especially in New York, are losing interest in gold, not only as evidenced by the day-in and day-out propaganda from MSNBC and Bloomberg radio and TV, but also by the tepid turnout at the New York gold show, which by the way I take as a super positive. I believe we will be nearing the end of this super bull market in gold only when Americans begin to think of ditching their dollar in favor of gold. As James Turk pointed out, subconsciously they have been doing that already when they buy real estate and other tangible items, including stocks that are backed by tangibles such as oil and gas companies. However, until there is widespread understanding that our economy is headed for the trash bin either by way of hyperinflation or a deflationary collapse, Americans are likely to continue to be sucked into the paper game that Wall Street so dearly wants them to participate in. Keep in mind that Wall Street does have computers from which debt obligations and money are created with simple keystrokes. They do not have goldmines, from which real money is produced. And so in order to optimize profits, they try to keep all manner of paper games going in stocks and bonds and derivative markets of every imaginable combination.
I believe the current situation is even more dangerous for most Americans because as nominal prices of stocks rise, Americans are distracted from the fact that the dollar is losing value and the things the dollar buys are losing value at a very rapid pace. As John Williams of the Shadow Government Report points out, inflation is rising at over 10% now and the money supply is growing at over 13%. So as the Dow makes new highs there is the appearance of wealth creation, but in this increasingly global economy, America is losing its standard of living at a very rapid pace. As credit availability is eventually cut off from Americans so that they cannot perpetuate their standard of living by borrowing, and/or as hyperinflation begins to render our economy dysfunctional, there will be a realization that all is not well in America and with its currency, and there will be a mass exodus out of dollars and into gold.
At the present time, however, there is enormous complacency in the market and ill-placed confidence in the American economy and America in general. That is seen by the constantly new highs in the Dow. However, what people in America are not realizing is that they are losing money in stocks in terms of gold and other currencies. As they become aware of that, we will see gold rise dramatically against other assets, including stocks, and there is every reason to believe we will see gold again rise such that the Dow-to-gold ratio falls to a 1:1 ratio, as it has repeatedly at the bottom of stocks markets over the past 100 years. At the start of 2000, it took 39.74 ounces of gold to buy the Dow. Now it takes only about 21.5 ounces of gold to buy the Dow. If history repeats, as we expect it will when confidence in the dollar and the U.S. market hits bottom again, we will be looking at something like a 1 to 1 ratio so that you will be able to buy one unit of the Dow for a single ounce of gold.
What I am hearing from Ian MacDonald, a big-time gold trader, whom we are getting ready to interview in this letter in the near future, is that there has been heavy, heavy central bank selling of gold to hold it down once again. And Trader Rog tells me he reads that there has been a huge amount of gold sold by Spain in an attempt to try to hold their welfare state together. Portugal is reportedly in a similar precarious position. This reminds me of the Soviet Union, which foolishly sold gold toward the end of its regime in order to buy more time. But the handwriting is on the wall. Big trouble is heading toward the Western economies. Bernanke can try to hide this fact by printing more and more money, and people can make believe all is well by borrowing it to buy new houses and cars to maintain the pretense that nothing is wrong. But all is not well. Thanks to mountains of indebtedness and mal investment caused by debt money (fiat) we heading either over the abyss or into a deflationary depression or we will face an exploding hyperinflation. When that happens, gold is heading to the moon.
How high will gold rise? It really doesn't matter. If we get hyperinflation, those predictions of 36,000 on the Dow or 100,000 on the Dow could well come true. But as that happens, we are likely to see an ounce of gold rise to similar levels as the Dow-to-gold ratio approaches 1:1. If my good friend Ian Gordon, the proponent of the Kondratieff deflationary winter, is right, we might see 5000 on the Dow and $5000 gold, or, as Ian would suggest, 1000 and $1,000.
The disappointing attendance at the New York gold show was very encouraging to me. A few minutes before I took the stage to speak, I believe there may have been only 20% or 25% of the chairs filled in the main auditorium. While this may indicate a lack of excitement for gold by New Yorkers, demand is surging internationally, where people are not kept stupid about gold, as the establishment keeps most Americans here. This provides you with a gigantic chance to add to your gold exposure through the ownership of the metal itself and/or buying more gold shares. We suggest you do both. If you are more conservative lean toward more gold bullion. If less so, allocate more to gold shares.
The recent trashing of gold by European central banks has temporarily kept gold from rising to over $700. It will fail and when it does, Americans will seek to buy gold in droves, as they did at the peak in 1980. Then, the party will be over. We are not there yet, which means gold is rising to much higher levels, and in real terms it continues to be the one metal we want to build our portfolio around. And now with gold stocks recently showing weakness, we see this as a super buying opportunity for gold and gold shares.
May 19, 2007
Jay Taylor, Editor of J Taylor's Gold & Technology Stocks
www.miningstocks.com