Gold Will Shine Once Again In 2009!

I think this one may be a shocker to many…that gold is going to be much higher at the end of 2009 than it is right now. I think it will take out its highs just above $1,000 an ounce and will head for at least $1,250 an ounce. (Gold is presently trading around $853 an ounce.)

When I was a stock broker, I hated gold. To me it was the dumbest investment on the planet. Of course I worked as a broker when gold was in a multi-year bear market.

But the more that volatile booms and busts have caused the need for more government intervention, the more of a believer I’ve become in gold.

Let’s look at several of the dynamics that have helped to form my view for gold in 2009.

South Africa is home to some of the biggest gold mines in the world. In 2008, their gold output shrank as exploding input costs caused them to close some of their most expensive mines. (Produce less of the metal and the speed of the supply shrinks which helps to support the price.)

This has been one dynamic that has helped to support prices in 2008 and that has kept it in an 8 year bull market. Even in 2005 and 2008 when the dollar rallied, gold still held its ground. This shows a lot of strength for the metal since the dollar and gold largely trade somewhat opposite of each other (being that gold is denominated in dollars and when the dollar is rising, it tends to calm the fears for the currency which typically dulls the demand for the precious metal).

In fact, had it not been for tons of hedge fund failures and liquidations, I think gold would actually be much higher than it is right now.

Helicopter Ben & Obama will do their part to help gold out!

With the credit crisis in full swing, the Fed has responded by turning on the printing presses at full speed. This enormous increase in the money supply (which is temporarily clogged up in the banks) will eventually be unleashed on the economy. Once this happens, you will quickly see deflation erased and we may actually move into a period of hyper-inflation.

Why would I go so far as to think that? Heck, the Obama administration may print as much as a few trillion dollars to help out the banks according to former central banker Volcker.

We’ve also got another stimulus package coming within weeks according to the Obama administration.

Another reason why I feel that a huge bout of inflation will return is because of interest rates. If you’ll remember, Congress got pretty harsh with Alan Greenspan for taking rates down to 1%. They even went so far as to accuse him of causing the recent bubbles in the economy which he denies.

Well, if the “1% cheap money” inflated things into the stratosphere, what do you think will happen with Ben Bernanke’s interest rate range of 0% to 0.25%? Could you say it would have any less of an effect? No, it will have an even greater “bubble effect” in time as the cheap money actually is released out into the economy.

Get ready for the “economic pipes” to be unclogged and for a tidal wave of inflation to head our way!

I assure you, that Obama’s economic advisors will be the “drain-o” that gets the pipes unclogged. When this happens, the Fed knows that it will have to “mop up” this excessive liquidity in the financial system.

However, here’s what I predict will happen. The Fed, while it wants to be a forecaster of the economy really just ends up becoming a “responder” after the fact to what’s going on in the economy. Therefore, between the time that the Fed starts to see the inflationary signs in the economy and starts the process of draining the excess liquidity from the economy, it will be too late. The hyper inflationary effects will already be in play. They will be “late to the ball game” yet again.

When all of this starts to happen (and possibly a bit before hand), savvy gold investors will sense it coming and will buy up gold ahead of time…positioning themselves like a surfer that gets out ahead of the coming wave that will propel him forward.

The Fed will do its best at that point to drain the money supply and hike rates, but there are delays from when they start to act and when it actually starts to affect the economy. This “lag time” will cause a huge return of inflation in a big way that will propel gold ever higher and will eventually dilute the dollar as well.

You see, when there’s more of something in existence, it begins to hold less value. So as the money supply is quickly increasing, the dollar will eventually feel the effects of it. Remember, there’s that delayed “lagging” period which is why it hasn’t already been felt even now.

However, as sure as the sun is coming up tomorrow…it’s coming. So get prepared ahead of time. For, the key to successful investing is to buy just ahead of the massive move. This requires an investor to “think ahead”. You can’t just see what’s happening at present and prosper like you should in your investing. It requires one to be “foreword looking” and thus “foreword thinking”.

When all of this unfolds, investors will buy gold (which is essentially exchanging their dollars for gold) as they seek safety, liquidity and an “insurance policy” against runaway inflation.

Gold production will continue to shrink and Central Banks will hold onto their gold in 2009!

So with the economy deeply damaged, unemployment claims hitting almost 600k as of this writing, there’s not going to be a huge incentive for investors to sell gold. That’s why gold has only come off of its top by 17.9% and stocks have been 40+% off of their highs on average. You can see its underlying strength just in that fact alone.

Also, remember that gold supplies will continue to tighten in 2009 just as they did in 2008. Why? Africa’s production of gold sank 14% which was the lowest levels since 1899. That’s serious! But it’s not just a South Africa story. U.S. gold production fell 2% last year. While China (which has now become the world’s biggest producer of gold) had their production rise 3% last year, the “net” result collectively among all countries is a net slowdown in gold production.

Central bank selling in gold was down a full 42% last year. And you’d be an idiot of a central banker to sell a bunch of gold in 2009 with the U.S. and global economy still hobbling along. Therefore, you can count on these guys not adding to the selling.

Therefore, get ready to buy gold, sell dollars and buy foreign currencies like the euro and especially the Aussie dollar which is greatly helped by rising gold and other commodity prices.

Most of the increase in gold and selling of dollars may come more in the 2^nd half of the year than the 1^st half due to the delayed effect of Fed policy and as the Obama administration starts to get its feet wet in tackling the economic woes.

But be aware and watch for the change just in case it happens even a bit sooner than I think.

Gold consolidates its multi-year gains as it catches its breath and prepares to run “ever higher” in 2009!

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