st barbara packs up and heads east..., page-5

Gold to $50k?

GOLD FEAR PREMIUM RETURNING VS ECONOMIC SLOWING
by Christopher Laird
PrudentSquirrel.com
November 11, 2006

With gold vacillating around 620, I thought to address again why I say the short term gold bear is over.
Interest rates and the USD
The world CB’s are either talking about raising interest rates, or are doing that. In light of a weakening US inflation environment, and rising world rates, the USD is a bit weaker. However, the CB’s are talking the gold price down, and often not following through with real interest rate increases. Japan is case number one. The Fed is case number 2. Another major influence is the continued Yen Carry trade, with Japan acting as a de facto central banker to the world because you can borrow Yen at virtually zero, then buy any other currency you want etc, and speculate, which is the sickness of the world, and even some of the gold market.
If world interest rates do indeed rise a percent or a half percent in the next year, the USD would be pressured, as the 2 to 4% USD interest advantage going into 07 starts to erode.
Alternatively, if inflation weakens in the US, and particularly China, that motivation will tend to lessen gold’s financial flight to safety from inflation.
China is already experiencing a modest slowdown in economic growth of about 2%. This is a welcome development in China, but China is concerned that any significant drop in their economic growth will cause domestic strife possibilities. On the other hand, China is toying with a very overheated manufacturing sector that has overcapacity and mal -investment…Those chickens are going to come home to roost in 07 too.
China’s problem and the US’s problem in 07
China’s problem is that the credit bubble world wide has created a ‘manufacturing bubble’ there which is just as bad in its negative implications as our finance bubble, and the West’s problem is that it has a finance and credit bubble in every sector imaginable. The US stock ‘bull’ with ‘all time highs’ is just waiting to tank. It is always so with credit bubbles, they go on longer than expected. But the end is near.
China has further trouble in having to sterilize their trade surpluses with the US, gaining lots of new USD that have to be sterilized into local currency, which is a big contributor to their monetary growth each year on the order of an astounding 18%. This is inflationary. It also leads to excessive lending, even while China is actively reducing money for various projects, and removing tax incentives for industries already overbuilt.
Mid East fears
Gold’s biggest bullish forces at this time, and gold’s rise in the face of a weak CRB, and a horizontal USD more or less, (see my last article for why I said the short term gold bear is finished) is due to very valid concern over Mid East security. This is in light of the fact that Iran is successfully defying the US- to the glee of China and Russia- who are gaining a very strong foothold of financial and industrial influence in the region, buying Iran’s favor, arming Iran, and generally scaring the hell out of the more moderate Mid East oil nations.
And of course, Iran appears to have achieved a great influence in Iraq, which is already in a civil war at this time, and again scares the hell out of many in the ME, and world, over how things can destabilize so badly….the old order – cheap oil for security courtesy of the US is ending, and our traditional geopolitical opponents, China and Russia, gaining the upper hand… again scaring the hell out of a world that was used to the former state of affairs….
When old orders, change it scares people.
And of course, Israel, having to contemplate either a nuclear Iran, or a risky attack to stop them.
The US elections, handing both houses of congress to the Democrats, does not bode well for Israel getting the US to ‘cream Iran’ as I was surmising.
On the other hand, Bush has the authority to do a 90 day US strike on whomever he wants and congress be damned…so we will see how Iran/US/Israel works out, but, at the least, there is a great deal of tension in the Middle East. The gold fear premium is returning, and the oil fear premium will also return if things don’t cool down soon.
Don’t think that many Middle Easterners wouldn’t like to see Iran creamed. But they will give lip service to Iran, lest they become the next Iranian target for subversion.
US cannot stop mass movements
The US can annihilate any army, but is not able to deal with mass movements, such as the one Iran is fostering everywhere… the Mid East obviously, but even in Europe. Iran’s weapon, and a feared one at that, is the mass movements they appear very adept at fostering. The gold market will certainly reflect the fear this creates in 07. The gold market is so small in actual valuation that a few scared billionaires can move gold up or down $20 to $50 in a week. There are articles out that there are a lot of billionaires in the world. Only $1 Billion translates into 1.7 million ounces of gold roughly and that is about 52 tons. A few billionaires fleeing into gold would make it go out of sight, not to mention if any significant amount of the other paper wealth in the world in every currency and financial universe even begins to flee into metal…in the prospect of central banks all debasing themselves to support the USD system (not the USD only but the whole system and all the USD instruments).
I give a surprise attack by the US on Iran about a 50% chance, whereas, if the Republicans had maintained control of the US Senate, I would give a 90% chance. This attack would be sooner rather than later. The next US congress goes into session in early 07. Lots of readers have told me I’m crazy talking about the US attacking Iran … which tells me that I probably could be right- all the dialog with Iran merely buys them time and the US a nice red herring operation…It doesn’t matter if the US actually does attack Iran because the fear is already very much alive in the ME over Iran anyway. If the US does attack Iran there is fear, and if the US doesn’t attack Iran there is probably more fear, believe me or not.
I don’t know how many of you remember this, but Hitler made a non aggression pact with Russia, just before he mopped up half of Europe, then went around and attacked Russia when that was under control….Iran is not Russia, the US is not the Nazis, but the idea is similar, and Sun Tzu, and many other military strategists of influence, not the least of whom was Muhammad, all talk about deception as key military strategy….and are widely read by the present protagonists – Iran, Russia, China, the US….don’t count on the US and co. allowing the former US centric cheap oil regime to die a peaceful death.
In my opinion, the gold market has only scratched the surface of a major gold/oil fear premium rebuilding over concern in the Middle East. The latest oil market weakness could easily be overshadowed by tension in the ME.
Iraq already in civil war
Iraq is a goner. It is already in the midst of an undeclared civil war with Sunni and Shiite warlords battling it out in non US/Brit/coalition held territory, which is about 99% of the territory… and the coalition forces are having a hard time merely protecting themselves, let alone restoring order, there are food shortages in Baghdad… Baghdad and other cities are surrounded by warring warlords. As I said, there is already a civil war in a big way in Iraq.
We don’t hear much about it, but it is very much alive and confounding the US agenda. It is a lost cause, the Iraq democracy is losing influence, and Iran is just licking its chops to create a radical Muslim regime of their particular flavor in Iraq, to create a Iraq/Iranian Axis, round which the moderate Mid East oil nations tremble.
A big fear premium is coming to gold and oil. This is not to mention what damage such a war would do to gulf oil shipping…the last time such a war happened with Iran and Iraq battling it out, about 80 tankers were sunk in the Gulf, and oil tankers were having trouble getting insurance… a very dicey situation. We can easily see a new oil crisis, not due to an embargo, but due to actual destruction and disruption, and the whole mess would take possibly several years to get the Gulf oil flowing again with safety after whoever wins the battle starts to clean up the mess.
I personally believe the gold market is very much underestimating the trouble in the ME right now. That will definitely change.
The falling Mid East stock markets are also indicative of this fear premium. Stability and good oil prices are good for Mid East stocks, and we have neither. We also have lots of nervous billionaire oil Sheiks, who comprise about 70% of Arab stock markets…that are crashing, due to the fear in the Middle East over Iran, and who would be next on their target list – read billionaire oil sheiks – ala Al Qaeda.
One of the biggest dilemmas in the Middle East is a burgeoning mass population that barely benefits beyond subsistence in the oil wealth… nothing new, but very scary, particularly having a religious mass movement developing in a big way -to boot.
At present, there is roughly a $20 fear premium in gold. I foresee a $50 premium returning by early 07, and you can easily add $30 to gold present price range of $620 to $640 to come up with $650 to $670, on a fear premium alone by early 07.
I am not a military analyst, (I was in the Army however), but after reading probably 400 gold related news articles in the last 3 weeks, many of which cover the issues above, I can easily come to the conclusions about the rising gold fear premium above.
These reasons are why I can be very assured about the gold short term bear being over, something I am sure people are wondering about. In any case I am sure of it, but there is some healthy profit taking going on, and gold right now is about $$620.
Watch $640
I wrote to subscribers that $640 is a key number being watched, and gold needs to get above it for several days to formerly declare the gold bear dead. But I like to look ahead a little, and make an estimation, and not wait till the actual reality appears…so, as I say, the short term gold bear is over. But I would definitely be careful around $640, as a wave of profit taking can occur there, but, I expect gold to rapidly rise and stay over $640 after that mark is definitively taken out.
After that happens, we will see probably $670 as the next mark. (gold could easily surge for a week or two to that level after $640 goes.
Reader question about why I am so gold bullish now
I had a reader ask me a good question which I will paraphrase:
‘How can you change your prognosis for gold so fast, How can /did all the factors change that quickly?’
The answer: Yes the factors did change that quickly. And when you see the major behavior of gold and oil, gold and the USD, gold and US economic stats, and so on, all reverse for two weeks in a row (gold and the CRB no less too which means gold is detaching from the CRB due to things like a fear premium again)…
When I see all the factors reverse decidedly, then, yes, I can change the prognosis. And that happened irrefutably. Go read my last public article, a short one called Gold Short Term Bear Over – Gold Detaching from CRB? All the details are well laid out.
One thing about the gold market (gold in particular as a very quick financial indicator) is that it reacts to changing views and consensuses about which particular economic/political variable is at focus in the markets. Since, all I do is macroeconomic gold research, no charting, nothing like that, when I see there is a changing gold consensus on what is most at play, I am usually ahead of many analysts.
If I spent all my time calculating technical analysis ratios, I would not have the time to read 10000 gold related news articles a year. Not that there are not some very good TA guys. But that is not my focus. I could if I wanted to.
I am a mathematician. As such, I know that following TA is past centric. But the gold market is very mercurial, and any significant change in either the geo-political environment, or a financial surprise, is like a change in the wind, either helping the present seas, or causing a sea change. Right now, we are in the worst of sea conditions, called a cross sea.
A cross sea has one well developed swell created by a wind of direction A. Then the wind shifts, and we get a new sea overlaying the already existing sea A. Until sea A finishes its run (over the fetch) the seas are cross seas and are the most dangerous of them all, and kill many sailors…(I know cause I have many sailing miles under me, this is not a trivial analogy about cross seas and the prevailing sentiments in the gold markets).
I could give the same exact model in dynamics use interfering sine waves, but let’s not overcomplicate the concept. Just trust me about the validity of cross seas and gold market sentiments, and changes in the sentiment (wind changes).
This is why I focus so much on macroeconomic and geopolitical news affecting gold and why I have been so often right…..
Of course, anybody can be wrong. But I do have a very good method. This year, I have been quite accurate, naysayers aside.
I cannot say this definitively, but as far as I know, I am one of the very few macroeconomic gold analysts. One other who is like me is Richard Russell. I have also seen some good TA guys, but I really see them as trend followers, and one thing that sets me apart is my willingness to make some prognostications, other than ‘gold is going to $2000 eventually’.
HUI head fake
TA guys are good as long as trends don’t change. That is my professional opinion as a mathematician. I also am not a qualified TA guy (I don’t focus on it). But I base that on my understanding of mathematical modeling, and what can or can not be inferred from it. From what I do know about TA, it is past centric. If trends change, you can be badly misled, like the HUI giving a very bad head fake before gold’s short term bear recently. Here is a chart I put out to subscribers showing this HUI head fake before the gold short term bear:

Not to say that I don’t think gold is going to $2000 eventually. But, that will be very brief because, I foresee gold at over $50k within my lifetime (I’m just about to be 46), as I said, I am very much a long term gold bull. And when I say over $50k, that is an understatement of my actual view, but one has to pick a number to illustrate the concept.

This is not wishful gold bullish thinking on my part. Firstly, the economic damage that will occur will be so bad that I would like this NOT to happen. But it will happen because of all the financial and fiscal excess of the West, particularly the US – borrowing, and Japan – Lending.
I had a very few emails (maybe 4? in 2 months) that objected to my writings about the gold short term bear of several months, after I had predicted well in advance that gold was showing weakness, and was going below $600. That battery of public articles started in July. Well, if I see gold going down for a while, I’ll write about it. Alternatively, I also got a lot of emails saying that was very much appreciated.