Why Didn't Gold Soar?
By Dr. Steve Sjuggerud
October 31, 2008
"If gold didn't soar in the last year, then when will it?"
A few weeks ago, Jack Crooks asked a crowd of currency speculators why gold had fallen from over $900 to $725 in less than a month.
What a great question!
The crowd – a room full of gold bugs – didn't know what to think. They hadn't considered this yet.
They knew Financial Armageddon was here. Many of them had been waiting for it for decades. And they knew the only possible outcome: a soaring gold price and a crash in the dollar.
Well, they got the crisis right. But they were wrong on the way to profit.
The price of gold has fallen by over 25% from its highs earlier this year. And as Jack predicted back in July, the dollar has soared.
It all started because of credit, of course. Many large investors (like hedge funds) borrowed a mountain of money to speculate. But the banks called in those loans. So these funds were forced to sell their investments.
Investors who held these funds got scared and asked to get their money back. So funds got hit with a double whammy – redemption requests and the need to pay back borrowings. The funds were forced to sell, at any price. Prices of everything – including gold and gold stocks – spiraled lower.
Investors around the world, in turn, sold everything to get out of the way of falling prices. U.S. Treasuries were the one "safe" place everyone flocked to, which supported the U.S. dollar.
Jack believes the dollar will continue to rise, as money comes out of assets like gold and into the world's most liquid investment... the U.S. dollar.
Jack expects the U.S. will fare far better than most of the rest of the world. This is contrary to most forecasters, who expect the U.S. economy to weaken dramatically.
Jack expects the emerging markets that export heavily will get hit the worst, as the credit problems are unwound and consumer demand in America declines. Europe's recession will be much more severe than in the U.S., according to Jack, as European banks are much more exposed than the U.S. to emerging markets.
In the end, Jack believes "the U.S. will maintain its vast capital market advantage and will emerge from this crisis in much better shape than its competitors as a result."
I've known Jack for many years. We used to sit close to each other at an investment firm, hashing out ideas. Jack is as honest as they come, and he thinks for himself. His thoughts on the dollar were right on. I don't know anyone else who thought this way.
Jack believes this trend of a higher U.S. dollar and lower gold prices will continue for longer than anyone thinks.
While the Great Deleveraging continues, I believe Jack will be right about the dollar. And I believe that, once the Great Deleveraging is over, the Great Inflation will come. Gold should soar then. So I'm not selling my gold just yet.
Either way, you can always count on Jack for a different view.
But think about this... if you follow the average path, you'll have average returns, at best. Extraordinary thinking can lead you to extraordinary returns.
Good investing,
Steve
P.S. Jack makes me think... He helps me see the world in a different way. And his extraordinary thinking has just recently led to some extraordinary returns for his subscribers. For the full story, click here.
Editor's note: Steve Sjuggerud is a regular contributor to DailyWealth, a free investment newsletter focused on the world's best contrarian opportunities. We write with a simple belief in mind: You don't have to take big risks to make big money with your investments.
Sign up today to read more investment ideas from Steve Sjuggerud.
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| WHY PIPELINES HAVE COMPLETELY RECOVERED
It's like October didn't even happen for the MLP sector.
MLP stands for "master limited partnership." And as we've covered here and here, these special corporations are one of the world's top income investments right now.
Most MLPs own infrastructure assets, like natural gas pipelines and storage tanks. Uncle Sam gives them tax breaks to make sure the country's energy system runs efficiently... and a lot of that untaxed cash flows straight to shareholders in the form of big income distributions.
But MLPs are ultimately stocks. In October, stocks of all kinds were sold with no regard for their underlying values or business prospects. MLPs suffered a stupendous 25% correction.
But wait... MLPs don't buy crooked home loans... They don't manufacture cars that nobody buys... They don't sell $50 T-shirts. They just own steel pipes and collect tolls as the energy flows through them. That's why the benchmark MLP index has recovered to pre-panic levels already... and is still paying out safe, double-digit dividends. Click here to learn about the ultimate MLP investment program.
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The Federal Reserve agreed to provide $30 billion each to the central banks of Brazil, Mexico, South Korea and Singapore, expanding its effort to unfreeze money markets to emerging nations for the first time.
The Fed set up "liquidity swap facilities with the central banks of these four large systemically important economies" effective until April 30, the central bank said yesterday in a statement. The arrangements aim "to mitigate the spread of difficulties in obtaining U.S. dollar funding."
The Fed announcement coincided with a decision by the International Monetary Fund to almost double borrowing limits for emerging market countries while waiving demands for economic austerity measures. |
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I turned bullish on precious metals and the metal stocks a couple of weeks ago.
After all, with the U.S. government and all the governments of the world printing currencies faster than ACORN prints phony voter registrations, precious metals had to rally. Of course, my timing could not have been worse. As soon as I said "buy," the dollar shot higher and the metals fell.
But I've stuck with the trade because logic is on my side. And despite all the emotion in the marketplace, logic eventually wins.
[On Wednesday], the currency markets took a giant leap in the direction of rational thought. The U.S. dollar suffered its worse one-day loss in eight years. Gold and silver both rallied.
There is no guarantee this one-day downtrend will continue. After all, logic hasn't spent a lot of time hanging around Wall Street lately. But you're more likely to find it there than in Washington D.C.
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– Jeff Clark
Growth Stock Wire
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