-- Posted Tuesday, 11 January 2011 | | Source: GoldSeek.com
By The One-handed Economist
2011 will be a great year for gold. The yellow metal gained 30% in 2010, hitting a new all-time high of $1420/oz in late December. 2010 was an excellent year for gold and silver. Gold hit its low for the year early in February at $1044/oz, and its seasonal low in July 115 points above that. The upswing accelerated from August through December resulting in a yearly gain of 324 points. Silver gained 71% for the year, with a massive move up from late August to New Years Eve.
In comparison, the Dow gained 9% over the same period. The SP500 gained 9.7% in 2010. US Bonds (e.g 10-year Treasury note) returned a nominal 2.5%, (actually, a negative real return for the year).
What we know is that the gold will continue to gain in value in 2011 and over the next several years, for the same reasons that pushed gold beyond the $1000/oz mark in September 2009.
GOLD IS IN A MAJOR AND GRAND CYCLE BULL
Readers have seen my argument for gold on these pages before. What we have observed over the last year confirms the premise; the stock market is in a bullish major trend but a bearish grand cycle trend. The commodity markets are in a bullish major trend and a bullish grand cycle trend. Equities and commodities are in a bullish period, recovering from their decline of late 2008.
The major trend is a move in the markets caused by an action of the central bank (easing or tightening). Equities react for 2-4 years. The grand cycle trend is much bigger and consists of many major cycle trends. It is caused by a large scale economic event which itself affects the behavior of the central bank and influences both the bull and bear (major term) cycles. An example is the Kennedy tax cut of 1963, which re-established Keynesianism into America. It led to the creation of money through the late ‘60s, which caused a rise in consumer prices, and later, commodity prices. By 1971, consumer prices and commodity prices had risen significantly. Prices began to rise very rapidly, and the central bank was forced to tighten twice (in 1973-74 and 1979-81). The stock market reacted by big sell offs. The 1970s were a grand cycle move made up of 3 major cycle moves in bonds and commodities and 5 major moves in stocks. Another grand cycle (stock) bull trend in began in 1982. This consisted of several major term bull and bear cycles (the most famous of which was the bear trend of late 1987).
We have just had a major cycle bear (Oct. 2007 to March 2009) which took the DJI down more than 50%. That is good evidence we are in a grand cycle bear trend. It will be composed of several major term moves and will likely last 10-20 years.
Gold bugs should be happy to know that gold and other commodities are in a grand cycle trend up which will last a very long time. Price action shows that the declines in 2006 and 2008 must be counted as intermediate declines (5-7 months); we are still in the first major term upswing of the grand cycle (analogous to the 1971-1974 rise). Thus both gold and stocks are in an upswing of major term proportions. The major term upswing in equities will be cut short, however, by the prevailing grand cycle decline, as well as continuous intervention by the central bank and the meddling general government. My estimate is DJI 12,000. Current major term price increases in gold/commodities will continue to eclipse the broad stock market due to the prevailing grand cycle advance.
INTERVENTION FAILS
Easy money, subsidized housing policies, lax regulators and moral hazard caused the financial meltdown called the “Great Recession.” Gold has climbed to new highs since the depth of the financial crisis of 2008. Having caused the problem, the Fed and central planners in Washington have used every monetary tool available (as well as a few they invented for the job) to “stimulate” the US economy out of the crash of 2008/2009. More easy money and more regulation, they argue, will create jobs. Taxpayer bailouts of the banks, insurance companies, mortgage giants and Detroit automakers, they say, will save jobs and restore US competiveness in the global marketplace. But the measures these central planners have taken have not worked very well. Unemployment stubbornly remains over 9% even after $2.9 trillion in “stimulus” spending. Monthly job growth needs to exceed 250,000 per month just to absorb those coming of employment age in the United States. Job growth needs to exceed 450,000/month to make up for the jobs lost since the 2008 collapse. According to the BLS, December 2010 non-farm payroll was 103,000. The same Bureau stated it did not count 2.6 million out of work Americans in its adjusted December 2010 unemployment rate of 9.4% because they are “marginally attached” to the labor force, not having looked for a job in four weeks. 1.3 million of the “marginally attached” simply quit looking for work altogether.
Ben Bernanke’s Federal Reserve Bank exhausted its traditional monetary policy options 2 ½ years ago, when it cut Fed rates to essentially zero and added $1.6 Trillion reserve credit to the money supply. Then, the Fed and Treasury executed the TARP bank bailout. The Democrat Congress added $835 Billion in stimulus for “shovel ready” projects. When those measures didn’t work, Bernanke concocted Quantitative Easing 2 (QE2) to add another $600 Billion “stimulus”, which as he testified before Congress would “lower long term interest rates” and provide more liquidity to the system. But history has shown that printing trillions of paper dollars eventually creates massive inflation. That’s why prudent investors hedge against inflation with gold.
No degree of Washington eloquence can spin this sow’s ear into a silk purse. Quite a few of first-orbit West Wing advisors recently have jumped ship, including the economic advisor team, budget director, chief of staff and the press secretary. The campaign story of hope and prosperity seems to be unraveling day by day. Government spending and federal control of industry is not the solution. Midterm voters made that statement with crystal clarity.
One serious consequence for the massive government intervention of the last three years is overpowering US debt, now approaching 100% of US GDP. Without fundamental spending cuts, foreign buyers may sidestep US bonds, and the already weak Dollar will drop like a stone. When the US Dollar weakens, investors around the world run to gold.
The reason for the failure of government intervention has not changed since the days of Thomas Payne and Ludwig von Mises. The root of viable economics is human action. That is, the free exchange between parties, each of which values the good or service exchanged at its natural price. Free market exchange. Unsubsidized. Pure. Honorable. Transparent.
Returning to free market principles and national prosperity will take time, likely no sooner than 2012 or 2016. In the meantime, individual investors can benefit from owning gold and gold stocks.
The question for you to consider is how are you going to protect yourself from the vagaries of the financial world and the secession of economic bubbles and crashes which characterize our age? We publish the One-handed Economist to help people make better decisions about their money. Our Model Conservative Portfolio gained 66.7% in 2010. Subscribe by visiting our web site, www.thegoldspeculator.com and pressing the PayPal button ($300/yr) or by sending your check for $290 ($10 cash discount) The One-handed Economist, 614 Nashua St. #142 Milford, NH 03055
Thank you for your interest.
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-- Posted Tuesday, 11 January 2011 | Digg This Article
| Source: GoldSeek.com
