Gold: "True Wealth"
01/20/2006 12:00 am EST
"Gold has been rising for nearly five years in a major bull market and should continue to shine in 2006. During that time it has outperformed both the stock and bond markets, rising on average 20% per year. For a number of fundamental and technical reasons, we believe gold will continue rising in 2006, again outperforming stocks.
"China’s growing global and economic strength, and the major power shift that’s slowly taking place. This alone suggests that the government will have to keep printing money to pay for all these expenses. This money is created out of thin air and the more money that’s created, the more the money supply grows, and the more worthless that money becomes. This is the direct cause of inflation and it means that over time, your savings and income will continue to deteriorate.
"The debt and deficits are the largest in world history and there’s no sign this mega debt trend is going to end soon, or that it can, due to the war on terror, aging baby boomers and their growing demands on future government spending. The economy could sink into deflation due to the debt load. As a result, the Federal Reserve will take the better option, chosen by governments throughout history in order to keep it all together, which is inflation.
"The Fed, however, is currently in a dilemma. It’s been raising interest rates for the past two years and the yield curve has now inverted. This usually precedes a recession and in their latest report, the Fed signaled rate hikes are now likely near an end. If so, the Fed will have lost an important weapon in its fight against inflation and it could eventually be forced to take a ‘come-what-may’ route, regardless of how high inflation goes.
"We believe this is what gold sees as it looks ahead and this combination of factors is the main reason why gold’s been rising in a bull market since 2001, and why we’ve been recommending it for four years now. This is the basis of gold’s mega uptrend and why it’ll likely continue to rise this year, probably again keeping its #1 position. If interest rates peak in the months ahead, it’s going to remove the US dollar’s main prop. This suggests the dollar will resume its long-term bear market decline. And if the dollar begins another leg down in the bear market, these trends could explode.
"This makes our top conservative stock pick a pair of exchange traded funds— streetTRACKS Gold Trust (GLD NYSE) and iShares Comex Gold (IAU ASE), which both track the price of gold. For more speculative positions, we suggest a package of gold shares including Newmont Mining (NEM NYSE), Royal Gold (RGLD NASDAQ) and GoldCorp (GG NYSE). All three of these stocks should also continue to do well in the year ahead as gold heads higher."
The key risk-on and off drivers today are the same – U.S. politics, global growth, other centr...