The Next Big Move Higher In Gold

When you turn to the East and look at Japan, we are now almost at a record high gold price as measured in Japanese yen.  I think that tells you all you have to know about where the whole world is going in terms of the gold price.  The Japanese are being so overt about their intent to debase the yen that it’s being reflected in the gold price over there.That’s coming to America, Europe, and the rest of the world, where we see the same type of debasement going on... - John Embry, King World News

There's been a lot of media misdirection and appallingly invalid commentary about the relative strength of the economy and the outlook for the precious metals.  I've addressed the first issue in some previous posts, most notably my recent post on housing.

As for the latter, a blogger who goes by "Mad Max Trader" posted a widely distributed piece that suggested the bull market in gold has been fueled by China's huge buying over the past decade, that this demand will decline with the growth in China's economy, and the "air" will let out of the price of gold:  LINK.

Unfortunately, this analysis has absolutely no basis in actual fact.  The truth is that China imported a record amount of gold in 2012: LINK  It should be pointed out that this is gold that is "consumed" by the public and does not reflect the buying from China's Central Bank.  Furthermore, on more than one occasion a Chinese Central Bank official has made the comment that China needs to diversify its massive currency reserves by increasing the percentage held in gold.  The author further made no mention of the accelerating trend among most global Central Banks to accumulate gold; and neither did he mention the ongoing demand for gold in the largest gold buying countries like India and Viet Nam or the growth in demand coming from the Middle East.

On that note, I thought I would post this chart for everyone who is getting dragged down by the poor investor sentiment toward gold and the mining stocks:

(click on chart to enlarge)

This is a 10-yr weekly chart of gold.  I'm not sure that Richard Russell, or even Charles Dow himself, could create a more bullish snapshot of a bull market in process.  Keep in mind that in general, and certainly throughout the course of the 12-yr. precious metals bull market, extreme negative sentiment like we have currently has always marked the start of the next big up-leg for gold.  In fact, I can recall back in late 2003, when gold was trying to press through $400, famed Elliot Wave theorist Robert Prechter proclaimed that gold had failed the $400 level and was headed to $50.  You see how accurate the call was.

The Government is starting to run into a brick wall with regard to covering operating costs.  Just today the Postal Service announced it was cutting out Saturday delivery service in an attempt to stay alive without a massive bailout.  That bailout is only postponed.  The bigger problem for the Government is how to cover the more than $85 trillion of unfunded entitlement liabilities.  The truth is that the only way that can be dealt with is either by defaulting on them or printing the money needed to cover them.  They represent, by the way,  5.7x the GDP, so there's no way that the U.S. can ever hope to "grow" its way out of the problem.  Please note, the current amount of funded and unfunded liabilities does not account for any of the Government liability connected to the failing pension system (PBGC), the rapidly deteriorating quality of the FHA-guaranteed mortgage portfolio or the likely re-collapse of FNM/FRE.

As more money is printed to cover the accelerating Government spending and guarantees, confidence in the full faith and credit backing the U.S. dollar will plummet and the holders of the paper backed by that "full faith and credit" will seek refuge in hard assets, most notably physical gold and silver, which are increasingly seen as fiat currency alternatives.  Those who are the first to make this conversion will benefit the most from the inherent wealth transfer that will occur from the holders of paper assets to the holders of real assets.