Which way will gold swing?(Read article summary)
Despite recent downswings, gold is projected to reach $3400 in the next few years. And outside economic factors should help it climb even higher
Have yourself a merry little depression.
Dow up 45 points. Gold down $9.
Weâre still waiting for a major correction in the gold market. Each time one begins, it seems to run out of steam before doing any real damage. At yesterdayâs closing price, $1,577, gold is still solidly ahead for the year.
So, whereâs the soft spot? Whereâs the test? Where will it come from? When?
Donât worry, dear reader, Mr. Market will test us. Heâll throw his curve ball. We have to be ready.
âŚinstead of testing us on the downside, he tests us on the upside? This is not a prediction. Just a thought. What if gold suddenly shot upâŚand looked like it was going to the moon. What would we do?
Citigroupâs metals expert puts a $3,400 price on gold âin the next year or two.â
Jim Rogers makes a similar forecast.
What if theyâre right? We only mention it because The Trickster has more than one trick up his sleeve. And heâs perfectly capable of running the price up to $3,500 BEFORE testing us.
We could get giddy, watching the price of gold hit record after record. And then, just when we think it is ready to scale its final peak, gold could turn tail and run for the valley. We wouldnât believe it. We would hold on. We would wait for it to go back up.
And thenâŚwouldnât we feel stupid, if weâd taken that ride all the way to over $3,000âŚand then rode it all the way back to todayâs level? Wouldnât we be put out with ourselves, if we sold out thenâŚthinking gold had put in its final top and we missed it?
According to the 50% principleâŚit could hit $3,000âŚcollapse to barely $1,500âŚand then soar againâŚpossibly going to $5,000âŚor even $10,000. Thatâs what weâll get in the final âcrack upâ boom that is coming.
But what we see is more upside than downside for gold. Because the motor pulling gold up still has a lot of gas in the tank.
And guess how much the feds have already spent? They were so desperate to avoid a debt crisisâŚor a depressionâŚthat they threw the throttle wide open on the biggest rescue effort the world has ever seen. Bloomberg calculated that $7.7 trillion were put to work. Our estimate was higher â about $10 trillion, we guessed.
WellâŚwe were both way off. Hereâs the news report:
As part of the Ford Foundation project âA Research and Policy Dialogue Project on Improving Governance of the Government Safety Net in Financial Crisis,â Nicola Matthews and James Felkerson have undertaken an examination of the data on the Fedâs bailout of the financial system â the most comprehensive investigation of the raw data to date.
The extraordinary scope and magnitude of the recent financial crisis of 2007-09 required an extraordinary response by the Fed in the fulfillment of its lender-of-last-resort function.
The bottom line: a Federal Reserve bailout commitment in excess of $29 trillion.
Whoa! The feds put at risk an amount equal to 200% of US GDP. And for what? So that a depression wouldnât knock 5% off GDP? Even the Great Depression of the â30s only set the US back by 30% of GDP. A similar setback today would cost the economy less than $5 trillion.
Do you see what we see? Even if it worked â which it didnât â the fedsâ efforts would have been a disaster. Who would spend $29 trillion to save $5 trillion?
But wait. Thereâs more. This assumes that a depression is unnecessaryâŚor that it doesnât do any good. We know thatâs not true. A depression does a lot of good. It wipes out bad investments and eliminates bad speculators. It forces capital into more productive, more profitable uses. It kills off zombie industries. It retires worn-out industriesâŚand reduces costs so that new industries can arise. Itâs the âdestructionâ that Schumpeterâs âcreative destructionâ needs.
The more we think about it, the more weâre beginning to like depressions. After scammy bailouts and bogus recoveries, a depression would be something to look forward to.
Â for The Daily Reckoning