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Friday, July 25, 2008
When Event X takes place, gold soars.
People buy gold for all kinds of nutty reasons... But Event X is what actually makes gold go up. Each time it's happened, gold has absolutely soared. So you simply look out for Event X, and then you buy.
It's really simple, as I'll show. It has nothing to do with end-of-the-World paranoia or complicated statistics...
Event X first happened in 1973-75, and gold tripled. Event X happened again in 1978-80, and gold had its steepest ascent ever, rising from $150 to peak at $850.
The only other time we've seen Event X is, well, now. And once again, gold has been soaring.
How high can gold go? Our two historical examples suggest that gold simply keeps going – almost infinitely. In short, as long as Event X is in place, gold just keeps going higher.
So what is Event X? It's simply when interest rates fall so low, they don't keep up with inflation. As long as we're in that situation, gold goes up. The logic is incredibly simple... As soon as people get paid less interest than the rate of inflation, they're willing to own gold (which pays no interest).-
I made a chart of it, so you can see what I'm talking about. When the blue line crosses above the black line – when inflation rises above interest rates – gold goes nuts. Right now, inflation (as measured by the Consumer Price Index, the "CPI") is at 5%. The other major measure of inflation (the Producer Price Index, the "PPI") is running at an astounding 9.2% a year.
Today, we have the same inflation figures we saw in 1981-82. I don't know if you remember 1981... It was the last time inflation (as measured by the PPI) was this high. Even the CPI is currently at October 1982 levels of 5%.
With inflation running so high in the early '80s, interest rates on even "boring" Treasury bonds were more than 10%. But today, interest rates on Treasury bonds are only around 4%.
Right now, inflation is (conservatively) running at 5%. And Ben Bernanke is flat out telling us there's more inflation to come. Last week, he said, "Inflation seems likely to move temporarily higher in the near term." Yet somehow, Treasury bonds pay just 4%. When you add it up, you're actually losing a percent a year by holding Treasuries now.
Most of the time, gold doesn't do you much good in your portfolio. Since gold pays no interest, big investors choose to park their money in high-yield bonds, where the interest more than covers the inflation rate.
But now, putting your money in bonds doesn't even cover the rate of inflation. Sure makes gold look attractive...
A GOVERNMENT-BACKED SHORT SALE IS HERE
Betting against oil is a moneymaking activity right now. After all, you've got the government on your side.
Here's the latest from the boobs in Washington DC: The market needs more government "help" to operate properly. So Congress is looking to cap how much money hedge funds can have in the oil markets.
How successful will the government be at driving hedge funds out of the futures markets? We don't know... but crude's $20 drop in the past few weeks tells us the meddling will send prices lower. Our guess is another $20 haircut is in the cards. The market loves to catch everyone off guard...
Just as investors were shocked when oil climbed from $70 to $140, most investors will be shocked if oil slides from $140 to $70. As you can see from today's chart, crude could do exactly that and still be within the confines of its long-term uptrend.