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Nice Try G20! But Gold Is Still Going to Rise No Matter What

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Nice Try G20! But Gold Is Still Going to Rise No Matter What

Post by Sean on Fri Apr 17, 2009 9:30 am

The gold market got a scare recently.

Two weeks ago, the G20 approved that the International Monetary Fund could sell some of its gold holdings. As the third largest gold holder in the world, even the idea that the IMF could sell is enough to move the market.

Naturally, that’s exactly what happened. Gold tanked and the dollar immediately rose. But here’s the thing: The market was just jumping to conclusions. Even if the IMF sold off a large chunk of its gold (which they didn’t), it won’t stop gold’s eventual ascent or the dollar from falling in the long-term.

Let me explain. The IMF got approval to sell US$6 billion worth of gold. Sounds like a lot right? It did to the market too. However, it’s all-relative. And in reality, US$6 billion is NOT that much.

For starters, if you price gold at US$900 an ounce, then the IMF owns about US$9.3 billion worth of the yellow metal. So this is only about 6.4% of their gold. Believe me, if you sold something of yours that was only 6.4% of the total of what you had, it wouldn’t be that big of a deal. So it’s not like they’re selling out all of their gold or even close to it.

$6 Billion of Gold Sales over Two or Three Years is a Drop in the Bucket!
Next, these sales are approved to take place over the next two to three years! The IMF will most likely sell this gold in the London Bullion Market. Why? Tons of ounces are traded daily.

Just how much? If you go off of the February 2009 numbers, it’s 23.8 million ounces EVERY DAY. Therefore, if they sold it off all in one single day, it would only amount to about 28% of the daily volume for that day. However, this is to be sold slowly over YEARS.

Also, the IMF has to follow their “governing principles on gold.” One of those principles states, “the IMF has a systematic responsibility to avoid causing disruptions to the functioning of the gold market. “

Interpretation: They aren’t supposed to “shake things up by their gold sales.” This is why they sell slowly over time and not in a short period of time.

Now if all of that weren’t reason enough to know that the market has overreacted, then let’s look at one more angle.

The Money-Printing Fed Wants Gold Worth Less
The U.S. Fed is out-printing every central bank in the market right now. They are literally throwing trillions of dollars out there into the economy. However, these dollars are chasing a finite (limited) amount of goods.

Historically, anytime you’ve had a ton of money chase a diminishing supply, it’s run the prices of those goods up. This is exactly what we are getting prepared for in the years ahead. Check out the chart below and you’ll see what I mean.

Buy Gold & Foreign Currencies as the Dollar
Prepares to Break an Uptrend!

[You must be registered and logged in to see this image.]

In the last year, the dollar soared as the global GDP slowed to a crawl. So of course there was no need to buy up commodities when economies weren’t expanding. In fact, some were even shrinking but even the high-growth nations weren’t growing at their usual break-neck pace.

So as commodities and stocks tanked globally, investors ran to the safety of the dollar. However, as central banks have cheapened the cost of money by bringing it down to almost 0% around the world…and as they’ve pumped tons of money into their own economies, it’s going to produce tons of inflation in the coming year to possibly years ahead.

What You’ll Hear About MUCH Later on CNBC…
The “smart money” is starting to realize this NOW. That’s why commodities have halted their sell off and many have even started new uptrends.

As investors prepare themselves NOW to surf the inflationary wave to come, they are buying up commodities, foreign currencies and starting their shift back out of the dollar…very quietly though, so that Main Street doesn't realize it yet.

Once they’ve gotten positioned like they want to, they will finally make an appearance on CNBC and Bloomberg TV and announce it to the world. This way, Main Street can push up their positions and make them look like geniuses once again.

But no! We’re smarter than that…and we’re onto their tricks. By the chart above, you can tell that the CRB index has already halted its sell-off and has perked up recently. Gold is still in a multi-year bull market on this three-year chart as each year has produced a gain on the year. (How many other investments can say that recently?)

The Dollar index at the bottom of the chart can’t seem to muster up enough strength to take out new highs. As commodities continue to soar and markets around the world continue to calm down, money will run out of the safe haven dollar and back into riskier assets that either earn more interest (like foreign currencies) or that can appreciate vs. a falling dollar (like gold).

Therefore, don’t believe the hype or the “knee jerk” reaction of the gold market as this IMF news hit the wires.

Gold has risen lately even as the dollar has gained. However, it’s about to pick up some serious steam as the dollar breaks its uptrend finally. When it does, foreign currencies like the Turkish lira, South African rand, and Aussie dollars will all catapult upward against it as money runs into commodities, commodity producing/exporting nations and back into emerging markets for high growth and high yield!

The dollar (and yen for that matter) will be left “holding the bag” as it will be the “last” place that anyone will want to be as this fresh inflationary/dollar diluting wave takes effect!

Sean

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