[gonebroke2]

case for gold:
I believe that gold is going to go to $2000/ounce because of an inevitable currency crisis. The USD used to be backed by gold until Richard Nixon ended that on August 15th 1971. Now the USD is backed by nothing; the only thing that it is backed by now is faith. Throughout history, all fiat money (paper backed by nothing) has returned its intrinsic value which is nothing. I believe the USD will suffer the same fate but this is over a very long time period, maybe not in our lifetime. First a little background on the USD. The current world reserve currency is the USD. It achieved world reserve currency status because the most important commodity in the world today, oil, is traded in USD. I don't want to turn this into a political thread but some of the following is necessary to say. I believe the US made deals with certain Middle Eastern countries to offer them military protection in exchange for cheap oil and a promise to trade oil solely in USD. Saddam Hussein threatened to trade Oil in alternative currencies and we all know what happened to him. Iran has threatened the same thing and who knows what will happen to them. My point so far is that the USD has been able to survive so far because it was indirectly linked to oil. It wasn't backed by oil directly, but indirectly in the sense that it was necessary to own dollars to buy oil. This is one of the main reasons a bankrupt country like America has been able to keep the USD in demand. Now on to why I think gold is going to go bonkers and the dollar is going down the drain.

First, I would like to say Kimchi (few posts up) did a great job stating his case for gold and I hold very similar beliefs. My original post was basically going to reiterate his case. Read his post first. Below are some of my own comments.

If America traded as a corporation on the stock market it would have already been delisted years ago. America as a corporation is broke. America has been printing unlimited amounts of paper money for years and it is finally going to bite them in the ass. Most of that printed money is now in the hands of foreign nations. China and Japan have about 2 trillion USD in their reserves. They have already lost a ton of money just holding their reserves because the USD is being devalued and they are looking for a way out. Like Kimchi said, they might start refusing to accept USD. The demand for the USD is going to go down and this will add further upward pressure to gold.

The inflation rate as reported by the CPI is bogus. Inflation is an increase in the money supply, not an increase in prices. Inflation causes an increase in prices, not the reverse. I believe that the correct way to calculate the true inflation rate is by measuring M3 growth. Nowandfutures.com & shadowstats.com believe that M3 growth is 10-13%. So the inflation rate is 10-13%, not the 3% the bogus CPI figures tell you. Ask yourself why the Federal Reserve stopped printing M3 figures last year. On the other hand, gold cannot be printed out of thin air. There is a finite amount of gold in the ground and on average, the amount of gold mined each year only adds about 1% to the existing supply of gold worldwide. Therefore, the inflation rate of gold is approximately 1%. So if gold is currently fairly priced, then it should theoretically move up in percentage terms the difference between the growth of paper money vs the growth of gold 13%-1% = 12%. This will allow holders of gold to maintain purchasing power. That is assuming gold is fairly valued today and I don't think it is. I think it is extremely undervalued.

Most bull markets are driven by greed. The beauty about this gold bull market is that it is going to be driven by greed & fear. The fear coming from a fear of a currency collapse. The market for gold is so small relative to the general stock markets of the world, that if only a handful of investors jump into gold it is going to go ballastic. If you look at the historic gold bull runs, some of the shares went from below 1 dollar to triple digits. I think that history is going to repeat itself, but on a much grander scale. I am putting my money where my mouth is and I am placing relatively huge bets on the gold sector. I like to take plunges in the stock market and pick a handful of stocks and bet heavily on them. In my opinion, that is the only way to play the game.

Conclusion:
1. The USD is going down the drain because of excessive money supply growth.
2. Foreign countries are becoming less willing to hold dollars.
3. Sub-prime mess is going to spread to ALT-A and Prime and the derivatives exposure might bring down the entire financial system. I expect 50% of current hedge funds to go broke or close up shop within 5 yrs.
4. If the Federal Reserve lowers interest rates in an attempt to save the economy and the housing market, the demand for USD will sink as foreign currencies will offer better yields. This will be super bullish for gold.
5. If the Federal Reserve raises rates, that will temporarily save the dollar but crash the stock and housing market. This will also be bullish for gold because M3 growth will rise to over 20%. This will be necessary to avoid a depression. Gold in the late 70's increased dramatically during a period of rising interest rates because the real interest rate was negative. Interest rates went to 20% during that time.
6. Best way to play the sector is by buying the stocks as they tend to rise more relative to the physical metal.