What might occur to suggest gold will NOT continue higher?
*Dow Theory Letters, by Richard Russell, October 16, 2007:
"What might occur to indicate that we're wrong on gold? The first
item that comes to mind is deflation. Wouldn't gold hit the skids if
deflation enters the picture? And with the subprime housing mess still
very much in play, this could have a negative effect on the entire US
economy -- and bring on deflationary pressures.
OK, let's say deflationary forces enter the picture and simultaneously
US business begins to slow down. What happens next? The Bernanke Fed
would immediately begin aggressively lowering rates while flooding the
system with even more liquidity. Under these conditions, the dollar
would probably continue on its downward path -- and this would be
bullish for gold.
Then what? Either business would respond to Fed manipulations or it
wouldn't. If business responded, that would be bullish for gold, since
expanding business and low rates are both positive for gold.
But what if business didn't respond to the Fed's efforts? At that
point, I believe the Fed would become frantic and pull out ALL the
stops. Fed Funds would probably be lowered to 1% and the Fed would
start monetizing the debt, big time. This would be very bullish for
gold, since the dollar would almost surely unravel under the Fed's
all-out efforts to re-inflate
Wait, there's another possibility. The economy slows down -- not quite
a recession, but a drag. And inflation continues. We call that
stagflation. Under stagflation I believe the Fed would continue to jazz
up the economy, and under those conditions gold would continue on its
long-term bullish path.
Question -- So Russell, what you're saying is that regardless of
conditions, the future for gold appears bullish?
Answer -- That's right. The only situation that would be bearish for
gold would be Washington and the Fed willingly accepting a deflationary
recession. I just don't see that happening, either from a political
standpoint or an economic standpoint. There's just too much debt built
into the system for the Fed to willingly accept a recession, since a
recession would be highly deflationary. And as we know, Fed chief
Bernanke doesn't even want to hear the word "deflation." The Fed can
always halt inflation, but once deflation takes hold, it can get out of
control -- a nightmare situation for Bennie and the Feds.
In the big picture, I think it's clear that knowledgeable investors
view gold as real money as opposed to any and all versions of fiat
currency. My own belief is that as time passes, investors will become
increasingly worried about the worth of all paper (fiat) money.
Competitive devaluations will further erode faith in fiat paper, and a
rising number of investors (and increasingly the public) will opt for
the safety of the only true tangible money, which, of course, is gold
(I could include silver, but I feel safer with gold).
It goes without saying (but I'll say it anyway) that gold is always
open to normal corrections. Every item is subject to corrections, and
gold is no exception. We also know that governments and central banks
will resist any major rise in gold -- they will do whatever they can to
hold back the advance of gold against their fiat currencies.
Nevertheless, I believe the primary trend of gold is firmly bullish.
Therefore, government's or central bank's efforts to put a top on gold
is doomed to failure. The bull market in gold will fully express
itself. The more forceful the authorities are in holding gold back, the
higher gold's ultimate peak will be."
*This information is solely a highlight of the opinion of a third-party publication and is incomplete. Please subscribe to this publication for the full and timely opinion of the author and call a Monex Account Representative for any additional up-to-date information. This is not an offer to buy or sell precious metals. Investors should obtain advice based on their own individual circumstances and understand the risk before making any investment decision.
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