Gold is starting to take off. The U.S. dollar is breaking down. These and other markets like global stocks and bonds are signaling that the worst of the financial crisis is behind us.

Remember, the markets lead and they’ll start moving well ahead of the world economy.

GOLD IS SURGING

Currently, gold is showing real strength. This clearly appears to be the onset of what we call a “C” rise. These rises are the strongest rises within the bull market when gold has consistently reached new record highs.

Plus, the fundamentals continue to reinforce this. The rescue packages alone mean that gold will be the beneficiary of this. That’s especially true when we sit back and put what’s happening into perspective…

Probably the most shocking revelation was how much this economic bailout is going to cost and how fast the numbers keep growing…

ASTRONOMICAL & STILL GROWING

At last count, the Federal Reserve and the government have either lent, guaranteed or spent $12.8 trillion in their efforts to get the economy back on track. We know that these numbers lose their significance after a while and it’s hard to relate to them but we’ll try…

You may remember a couple of years ago when a study was done by two respected economists estimating that the total cost of the Iraq war would eventually reach $2 trillion. At the time, people were shocked. But compared to the nearly $13 trillion for the economy, the Iraq war expenses now seem small in comparison.

Looking at it another way, the value of all the gold in existence since the time of Christ is currently worth about $2 trillion. In other words, just the costs to bail out the economy and nothing else, like Social Security, military, infrastructure, is so far going to be more than six times all of the gold that’s been produced over the past 2000 years. (Just last December the cost was three times, which illustrates how quickly the costs have multiplied over the past five months.)

MORE THAN HISTORY IN THE MAKING

This is beyond shocking and it’s difficult to know what the full extent of the repercussions will be in the years ahead. Obviously, the dollar will fall sharply and gold will soar (see Chart 1). Interest rates will eventually move much higher and bonds will plunge.

Beyond that, we’re entering uncharted territory so no one really knows because there’s never been a crisis of this magnitude in the history of mankind. Ultimately, the spending will probably make things better for now, but there’s a high price to pay to get from here to there.

This has raised many questions and we apologize for not being able to personally answer each of your e-mails. If we did, we wouldn’t get much else done. But we do read every e-mail and here’s what’s on your mind…

FREQUENTLY ASKED QUESTIONS

Q. Are years of deflation ahead a good possibility?

A. Yes, this is indeed a possibility. Even though the world’s central banks are doing everything they can to avoid this, deflation is already taking hold.

Real estate prices, for instance, continue to drop at a record pace, 10% of the U.S. population is now receiving food stamps, unemployment is at a 25 year high and consumer prices posted its first year-over-year decline in 54 years.

So even though we believe that inflation has the upper hand and it’ll eventually emerge as a result of the massive spending and other government actions, it’s important to keep an open mind and recognize that anything is possible. As we’ve often said, this is a time to be flexible, alert and open.

Q. Is it possible to see gold rising in a recession or disinflationary environment?

A. Yes it is. That’s essentially what it’s been doing for the past eight years. Gold rose steadily during the tech boom collapse and throughout the current crisis. As the economy worsened, gold benefitted as a safe haven during times of uncertainty, as it has throughout history, including the Great Depression.

At that time, the gold price was fixed but the two largest gold companies gained five and six times in those four years. Over the past eight years, gold has gained nearly 300%. That’s a lot better than most other investments and this will continue whether we see more recession, deflation or inflation.

Q. Do you think Obama, central banks or others can push the gold price down?

A. Temporarily yes but the major trend will always prevail, despite short-term setbacks. The IMF, for example, may soon be selling their gold but that may not affect the market because there’s so much demand out there.

Q. When you say you may be selling shares during the rebound rise in stocks, does that include gold shares?

A. No. Gold shares move with gold. Even though they can temporarily be affected by stock market movements, gold is the driving force and as long as it’s headed higher, gold shares will rise too.

Q. Is this a time for bargain hunting?

A. Yes. Many stocks are good buys now. And with commodities and metals starting to rise, the metals shares are looking very good.

Q. Mining stocks are at a point where they were when gold was about $450. Why?

A. There’s no question that gold shares have been weaker than gold since early 2008. This year gold shares have been stronger than gold and that’s primarily a rebound from extremes. As fear gripped the markets, investors fled to gold as a safe haven. But now that fear is easing, gold shares are again attractive.

Q. Is gold a good buy now or should I wait, or buy in increments over one year?

A. Gold is a good buy now. If you don’t own any, buy. Currently, there is more availability and the premium on popular one ounce gold coins, like Gold Eagles, Maple Leafs, Krugerrands and Philharmonics have come down and they’re almost normal again.

Currently, we feel it’s most important to have the majority of your portfolio in metals and cash. Metals, primarily gold, because it’s the best in this environment and cash, which should be held in the strongest currencies.

by Mary Anne & Pamela Aden
May 25, 2009