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Best Days For Gold Still Ahead

July 22, 2013

The prevailing mantra on Wall Street is that gold’s bull market is now over and it’s time to bury precious metals as an investment theme for the indefinite future. Their rational is based on the belief that many investors held misguided fears during the credit crisis about a breakout of massive inflation and economic chaos, which drove gold to nearly $2,000 per ounce. Of course, (the perma-bulls claim) those worries have now completely failed to materialize and will never be a genuine risk in the future. 

This argument is blatantly false because it assumes that the final chapter has been written on the Great Recession and debt crisis that paralyzed the entire globe back in 2008. The truth is the most pernicious effects of the devastating economic collapse that began five years ago has been merely held in abeyance due to record low interest rates and an aggressive expansion of central bank assets; which is being used to boost real estate values, equity prices and the economy.

For the crisis to truly be declared over, the Fed would have to raise the overnight lending rate to near 6%, while selling nearly $3 trillion worth of MBS and Treasuries. Then, if the real estate and equity markets can withstand interest rate normalization and the paring down of the Fed’s balance sheet to a sustainable level, we will be able to finally give the all clear signal. However, if the now record $54 trillion in total U.S. debt cannot be serviced under a normal interest rate regime, investors will know nothing has been resolved. And, since the progenitors of inflation are; massive debt levels (especially on the government level), artificially-low interest rates and an ever-expanding central bank balance sheet, it is far too early to declare a victory over inflation.

The Fed is aware it cannot ever allow interest rates to significantly rise without destroying housing, stocks and the economy. Therefore, this dangerous cocktail of low interest rates, continuous and massive money creation from the Fed and intractable government debt will be in place for a very long time. Unfortunately, those factors taken together will eventual bring to fruition runaway inflation and economic chaos that the perma-bull crowd on Wall Street and Washington have summarily declared vanquished.

Once investors become aware that the economy has become completely addicted to the provisions of perpetually low interest rates and central bank asset purchases, the gold market will then resume another leg higher in its secular bull market and eclipse its all-time record high soon thereafter.



Michael Pento - President - Pento Portfolio Strategies

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Michael Pento is the President and Founder of Pento Portfolio Strategies (PPS). PPS is a Registered Investment Advisory Firm that provides money management services and research for individual and institutional clients.

Michael is a well-established specialist in markets and economics and a regular guest on CNBC, CNN, Bloomberg, FOX Business News and other international media outlets. His market analysis can also be read in most major financial publications, including the Wall Street Journal. He also acts as a Financial Columnist for Forbes, Contributor to and is a blogger at the Huffington Post.

Prior to starting PPS, Michael served as a senior economist and vice president of the managed products division of Euro Pacific Capital. There, he also led an external sales division that marketed their managed products to outside broker-dealers and registered investment advisors.

Additionally, Michael has worked at an investment advisory firm where he helped create ETFs and UITs that were sold throughout Wall Street. Earlier in his career he spent two years on the floor of the New York Stock Exchange. He has carried series 7, 63, 65, 55 and Life and Health Insurance Licenses. Michael Pento graduated from Rowan University in 1991.

Minting of gold in the U.S. stopped in 1933, during the Great Depression.
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