Is the present rally in stocks a good opportunity to diversify into gold?
"As noted on yesterday's site, in the space of 10 days the Dow has advanced 1228 points. Any way you look at it, this is rapid action typical of a bear market correction -- 16% of the bear market's damage has been recouped in 10 days. Hey, where's the correction going with this? Unfortunately, nobody knows. A correction halfway back to the high of 14164 would take the Dow to 10355. Is that possible or reasonable? The market can do anything, and the bear market would like nothing better than to turn everyone bullish again while sucking in thousands of eager players who are hoping to cut their losses or even getting their money back.
A few fundamentals -- The world is up to its neck in debt. Most of the debt is denominated in dollars. Consequently, there now exists a world dollar shortage. The world debt acts as a short position against the dollar, since only dollars can relieve this debt. The Fed is attempting to relieve the situation by manufacturing dollars by the trillions. This increased printing will put downward pressure on the dollar. Meanwhile, other nations will do the same thing, since every country wants to export, and a cheap currency is a big aid to exports. The net result of all this fiat money creation will be increasing suspicion regarding paper money. The rising world amount of fiat currency will tend to swamp deflation, and ultimately there will be distrust and a move out of paper money into gold.
The trillion dollar question is 'Will all this currency creation lead to credit creation?' Personally, I don't think it will -- in fact, I think the nation would be better off if the government had stayed out of the situation and the natural processes of a bear market had been allowed to occur. Every bear market in history has come to an end, and this one would too if the government allowed it to. But the government must from a political standpoint be seen as 'doing something,' even if that something prolongs the recession and wreaks further havoc on the markets.
So what are we to do? I think the best thing we can do is protect ourselves the way I've been suggesting for months on end. By paying off as much debt as possible, while accumulating dollars and gold. A position in dollars and gold, so far, has served us very well over the 18 months of this brutal bear market."