Waiting is rarely fun. I have never met anyone who enjoys supermarket checkout lines.
Millions of investors have that same feeling this week. Everything is building toward a magical moment Wednesday after Ben Bernanke says … something.
Will it be worth the wait? We’ll know soon enough.
While we all wait together, let’s chat about another favorite subject: gold. Holding the yellow metal has been an exercise in extreme patience recently. In greenback terms, gold prices peaked in late 2011. Since then, paper assets like stocks and bonds performed far better.
Plenty of experts will tell you they’re “long-term bullish” on gold. Getting them to go on record about the next few months is much harder … and I understand why.
Gold is notoriously tough to forecast because it is so much more than a precious metal. It is the ultimate store of wealth.
I’m bullish on gold both long-term and short-term. I think we will look back in a few years and see that current prices around $1,330 were a bargain. I know I’m going out on a limb here. I may be wrong, but I think gold has touched bottom.
Yes, sitting through a painful drop over the last year-and-a-half was tough. Bull markets are always tricky. They don’t go straight up. They break down, meander sideways, tease you and disappoint you. They shake off as many riders as they can.
So when I read about hot-money hedge funds giving up on gold, I just smile. When they finish selling, gold will zoom higher. I think we’re almost there. I could list dozens of reasons to be bullish on gold, but today I’ll focus on three of them.
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First, production costs are high and getting higher. This is important because, like any commodity, gold’s price depends on supply and demand. The easily tapped gold deposits are running dry.
Yes, there’s still plenty of gold locked inside the Earth, but it’s increasingly found in remote areas or deep underground.
Stubbornly high energy prices are a big part of the equation. Mines need enormous amounts of fuel. Gasoline is expensive enough when you’re in the middle of civilization. Imagine what it would cost if you were 300 miles uphill from the nearest refinery city with no highways, railroads or pipelines.
But that’s where the gold is.
The mining business is about cold, hard economics. If you can produce gold for $1,000 an ounce and sell it for $1,300 an ounce, you can make a nice profit. But if your production price goes up to $1,300, you’re just breaking even. Why bother?
The experts I trust don’t see production prices going down. This means new gold supplies will stay scarce. Score one for the bullish case.
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Second, demand for physical gold is strong and getting stronger. Tried to buy gold coins lately? You probably had a tough time, and you almost certainly paid a big premium to the “spot” wholesale price quoted on TV.
It’s happening everywhere. The U.S. Mint can’t keep up with demand for American Eagle gold coins. The same pattern is unfolding in India, China, the Middle East … even Africa and South America.People want gold in their hands — not hidden away in a vault where they can’t see it.
Why? I can’t read minds, but it looks to me like people are losing faith in markets, banks, governments and even private businesses. I don’t blame them. Just look what’s happened the last few years.
- Taxpayers found themselves bailing out politically powerful bankers in the U.S. and Europe.
- In Cyprus, bank depositors almost had their money confiscated.
- And right here in the U.S., we’ve learned the government is spying on our private communications.
Keeping your money accessible, safe and private is tough and getting tougher. For thousands of years, gold was “money” precisely because it was safe, private and portable.
Guess what: It still is. Billions of people know it, too.
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Third, central banks everywhere are in a race to devalue paper currency. It’s official policy in Japan and the U.S. The big shots want to cheapen the money in your pocket. They’ll tell you it’s for your own good, of course. It promotes exports, creates jobs, etc., etc.
I hear what they’re saying. I just don’t believe it. The Fed, the Bank of Japan, the European Central Bank and all the others are running out of ammo. They’re not powerless, by any means, but they are not near as omnipotent as many people think.
We little guys don’t ask for much. We just want our $10 bills to buy as much stuff five years from now as they did five years in the past. Otherwise they’re just ink and paper and a promise from some old guys in Washington. And those guys have already proven they can’t be trusted.
Again, the same thing is happening everywhere. We here in the U.S. actually have it better than most of the world. That’s why U.S. dollars are used everywhere. But as our government continues to lose credibility, people will have to look elsewhere … and they will look to gold.
So am I bullish on gold right now? You bet. Will it go straight up from here? The exact timing is always extremely hard to predict. Many analysts have been calling for gold to drop to $1,100 or even well-below that mark by the end of the year.
But if you’ve been reading our letters for the last month or two, you know we have been noticing the bottoming process for gold. It can be a long and drawn-out process, but one we feel confident is now upon us.
About this time last month I said, “We may not have seen a distinct bottom in gold yet, but the activity is certainly in-line with the beginnings of the formation of one.”
I also stated on April 15,”Sean (Brodrick) believes that we’re quickly approaching the bottom in gold prices. And with some of these companies trading at or below book value … now is the perfect time to start taking small positions in these companies.”
We have heard many times from experienced experts like Rick Rule and Doug Casey, who have said that trying to pick an “exact” bottom in precious metals is like trying to catch a falling knife.
So without trying to catch a falling knife before the Fed meeting on Wednesday, I will tell everyone that it is very important to pay attention to what Ben Bernanke and the Fed have to say on Wednesday.
If the Fed comes out and says that QE-Infinity will end, gold may be in for a slight tumble that we should be ready for.
If the Fed says QE-Infinity will continue with no mention of tapering, gold should go up — signaling a near term bottom — and we will ramp up our metals recommendations for our readers to buy.
If the Fed mentions QE-Infinity will stay in place but mentions some sort of tapering will occur, gold may trade sideways for the next month or two. But we will continue to pick and choose undervalued assets as gold completes the bottoming process. I just don’t see gold getting significantly cheaper from here in that scenario.
Conclusion: All eyes are on the Fed Wednesday.
Meanwhile, here’s what else is happening in the markets …
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- Netflix (NFLX) surged today after the company announced a deal for exclusive content with DreamWorks. This is another step in the giant shift out of traditional media toward on-demand viewing via the Internet.
- Hulu, which streams television shows and movies over the Internet, is up for sale … again. Current owners Disney (DIS), Comcast (CMCSA) and News Corp. (NWSA) allegedly disagree about how to run the site, so they’ve decided to sell it. Possible contenders includeYahoo! (YHOO), AT&T (T) and DirecTV (DTV), the latter of which may be offering more than $1 billion for the on-demand streaming site..
- The S&P 500 successfully tested its key 50-day moving average. Despite all the uncertainty,the U.S. stock market is holding up well. The S&P 500 is less than 3% below its all-time peak.
- President Obama is headed to Northern Ireland for this year’s G-8 summit meeting. U.S. support for Syrian rebels will no doubt be on the agenda, along with economic matters.
- The New York Fed’s manufacturing report showed that growth in the Empire State slowed more than expected in April. New orders fell from 8.18 to 2.20 and general business conditions dropped from 9.24 to 3.05. The bright spot in the data came in the number of employees, which rose from 3.23 to 6.82, and in the average workweek, which improved from zero to 5.68.
As you know, the Federal Open Market Committee holds quarterly Q-and-A sessions, with this week’s meeting preceding one of those highly anticipated events. What would you ask Ben Bernanke, if you had the chance?
Plus, today we talked about one of my favorite investing topics, gold. Do you think the bottom is in? Do you look for a “right time to buy” or is owning gold a good move at any price? What is your next move when it comes to stocking up on the precious metals? Tell me here.
Happy Investing,
Brad Hoppman
Publisher
Uncommon Wisdom Daily
Publisher
Uncommon Wisdom Daily
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