Why Gold is a buy again!

Gold is down today to USD 1,587 due to new rules from China to control the gold speculation.

If we look at the attached chart, we see that Gold has been consistently rising since 2001, when it touched USD 280 levels.

We can also see a downward blip in Sept 2008 when the world's financial system was almost about to collapse and only Lehman Brothers went bankrupt but various other 'insolvent' banks of the USA were allowed to continue at the cost of the American taxpayer and the '99%' masses who continue to pay the price for the high handedness of the American banking system through more debt, more job losses, weak real estate pricing, no lending, weak stock and bond markets and insolvent businesses. We have entered a vicious cycle of DEBT - BANKRUPTCY - JOBLESSNESS -

Until Lehman collapsed in Sept 2008, we can see gold rising gradually, however, thereafter, as Governments around the world started printing more and more money, Gold started rising in a parabolic manner instead of a gradual arithmetic rise. Hence, we can actually time the rise of gold and show high degree of correlation to the 'bailing out' of privately owned banks and other large financial companies despite allegations of wrong doing and fraud.

Gold has always remained over its 50 day average and now is at that level again. This level indicates strong support and gold has remained above this level since 2002 except for the 5 month period Aug 2008-Dec 2008.

Of course, if gold drops below its 50 day average of USD 1,583, then it may go slightly more lower, but chances are quite low.

Next support of 100 day average is at USD 1,414 and 200 day average at USD 1,173.

Meanwhile, Historical price of Gold and US 10 year bond yield:

Dec 96 - USD 367      6.41%
Dec 97 - USD 289      5.74%
Dec 98 - USD 288      4.64%
Dec 99 - USD 288      6.44%
Dec 00 - USD 272      5.11%
Dec 01 - USD 278      5.05%
Dec 02 - USD 348      3.81%
Dec 03 - USD 415      4.24%
Dec 04 - USD 438      4.21%
Dec 05 - USD 517      4.39%
Dec 06 - USD 636      4.70%
Dec 07 - USD 833      4.02%
Dec 08 - USD 882      2.21%
Dec 09 - USD 1,096    3.83%
Dec 10 - USD 1,420    3.29%
Dec 11 - USD 1,587 - as on date...US 10 yr Yield 2.00%

There is a strong negative correlation between interest rates on USD bonds with Gold, when USD 10 year bond yields go down, gold rises.

Meanwhile, doubling of Gold price took over 8 years from 1997 to 2006.

From 2006, gold doubled only in less than 4 years from 2006 to early 2010.

While from Dec 2008, it took only two years to double up, from  USD 882 to USD 1,600 levels today.

Point here is that gold is doubling up due to:

1. More money in circulation and debasement of the 'value of money' in almost all currencies. More money in reality means higher national debt, which is the cause of problems in Ireland, Greece, Portugal etc and ultimately leads to higher prices in precious metals. US debt is over USD 15 trillion and rising while Eurozone debt is at USD 10-12 trillion and rising. Japanese debt is legendary and the highest.

2. Rising global population of upto 7 billion now, which was 6 billion only until 12 years ago, 1999, hence rising demand.

3. Declining mining and exploration of all major commodities such as oil, gold, silver etc.

4. 'Safe haven' status of gold since it not backed by any 'unstable' or 'risky' sovereign Govt.

5. Until the 'real' rate of return, i.e. actual/nominal yield on US bonds less inflation which is running high due to oil and other increases such as fertilisers, food, pharmaceuticals, car prices etc. This applies to all countries where inflation is higher than both GDP growth or respective yields.

In my view, today and this week is a great buy of physical gold and averaging it on purchases on a weekly or bi weekly basis, at every dip and holding it over the next few years until the global crisis can be controlled and some sort of stability and growth is seen.

I expect gold to rise to USD 2,000 levels shortly as most major banks such as UBS (USD 2,050), Barclays (USD 2,000), Goldman (USD 1,810), Citibank, JP Morgan, Morgan Stanley (USD 2,200) have already said in their research over the last few weeks! Some of these banks may be wrong or trying to once again 'frontrunning' their clients, but all cannot be wrong!