Categories: Precious Metals
Topics: General Precious Metals

Gold Newsletter - Breaking Away

 Safe haven demand -- and perhaps some short-covering by large commercials -- send gold rocketing higher.

Next target: $1,000.

They say absence makes the heart grow fonder. From all appearances, a similar effect took hold of the gold market, as a three-day holiday weekend only made investor demand for gold grow stronger.

Right on the opening in Hong Kong, the rush was on. Gold began surging higher in Asia, and the rally gained steam in London and New York.

So what was behind today's big rally in gold?

Undoubtedly, the spike was partly fueled by short-covering from the large commercials who -- as we've been reporting -- had been increasing their bets against higher prices.

But at its core, everything you saw in today's market, from near-panicked demand for the dollar and gold to a sell-off in stocks and base metals, resulted from a rush to safe havens.

Investors were worried for a number of wellfounded reasons. First, a Moody's report came out warning that the growing economic crisis in Eastern Europe was putting great stress on European banks. This didn't play well in Moscow, as Russian stocks plummeted, forcing the two major exchanges to halt trading. And reports I'm hearing indicate that Ireland is teetering on the brink of financial collapse, with some government paper going "no bid" today.

Adding to gold's allure was a Reuters interview with the deputy governor of the Russian Central Bank, Alexi Ulyukayev, in which he noted that "Gold's share (in reserves) has increased.We are aiming to continue this tendency this year, we are buying gold." Evidently, this policy has been adding considerably to the global demand for the metal recently.

Throw in President Obama's signing of the pork-ridden stimulus bill today -- plus the need for Uncle Sam to print up at least $2 trillion to fund this bill, the upcoming housing bill and the bank rescues -- and it's obvious why gold is soaring.

I must say, it was quite fun to see gold catapult $25 higher right out of the gate this morning, and to watch nearly every analyst and talking head brought on by CNBC extolling gold's virtues as an investment in the near and long term.

It was enough to make a gold bug blush...and a contrarian tremble.
Because it's hard to imagine the enthusiasm for gold getting much greater. And if things can't get any better, then they can only get worse.

The one saving grace, as I've been saying, is that the very structure of today's gold market is unlike any before. The gold and silver ETFs have opened up a massive new market for these metals, and allowed broad public participation to a degree never possible before.

My take: While today's rampant bullishness makes me nervous, I think we've still got some legs to this rally. It seems as if investors have already assumed that $1,000 gold is baked into the cake -- which likely means that the metal will have to take one or two good cracks at that benchmark before successfully clearing it.

But rather than focus on gold's behavior in the short term, we need to look further down the road. And on the horizon we will see a mountain of new money -- the greatest world-wide, coordinated creation of fiat currency in history.

Over four thousand years of human existence, in every previous instance of monetary inflation, gold has steadfastly protected wealth and soared in value relative to the reigning fiat currency. But every previous inflation would pale in comparison to what is headed our way.

If I have one overriding concern, it is this: An inflationary environment will help gold and silver, but financial turmoil will not help our gold and silver stocks. So we must maintain positions in the metals themselves, while hoping that the equity markets preserve some semblance of order.

So today's bout of safe-haven buying is a bit disconcerting, while the success of the major U.S. stock indices in holding above their November lows is a bit encouraging. The best of all worlds would be a recovery in equities, a weakening of the U.S. dollar, and a short-covering rally in gold. I believe all of these are not only possible, but probable over the next few weeks.

But the next few days will be critical, so we'll hold pat on all of our current stock recommendations until we see how the metals and equity markets progress from here.

--- Brien Lundin

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Brien Lundin is the editor and publisher of Gold Newsletter, a publication that has ranked among the world's leading precious metals and resource stock advisories since 1971. To learn more about Gold Newsletter, visit  www.goldnewsletter.com. Click here to subscribe: http://www.goldnewsletter.com/subscribe.htm

Mr. Lundin is also the host of the famed New Orleans Investment Conference, the world's oldest and most respected gold investment event. To learn more, visit www.neworleansconference.com

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