How Long Will We Have to Wait?

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You are traveling
through a desert in search of a famed oasis and its promise of
riches, rest, and drink. But your journey has grown long, you
are weary, and you begin to doubt the oasis really awaits you.
But then signs appear from those who have gone before you that
your course is true, and the reward you seek in fact lies ahead.
Your spirit is renewed and you press on.

Does this
describe your journey with gold?

gold’s had a good run, rising from a monthly average of $760.86/oz
in November 2008 to $943.16/oz in February 2009, when will it
take off? That’s still going to happen, right?

Wimpy, Popeye’s
burger-loving pal, was always looking to get what he wanted today
with a promise to pay tomorrow. Sound familiar?

In their
thrashing attempts to get their economies going again, governments
around the world have pounded interest rates into the floor and
flooded their banking systems with liquidity. Take a look at the
monetary actions from the G7:

rates are at historic lows, an artifact of the robust, worldwide
efforts to debase currencies. M2, one measure of money supply,
is up in all G7 countries, which signals that tomorrow’s
inflation is being baked in the cake today.

bailout numero dos, with a rich pork filling, has been signed,
sealed, and is about to be delivered, including an endowment for
a “bad bank” that will buy up the loans that troubled
commercial banks would like to deny they ever made. In addition,
it guarantees hundreds of billions of dollars in bank assets –
all on top of bailout numero uno. And don’t forget the estimated
$493 billion the Treasury Department will have borrowed by the
end of the first quarter 2008; that on top of $569 billion the
government borrowed in Q408, an unprecedented amount for any quarter,

The word
“unprecedented” seems too weak to convey just how much
money is being printed and/or borrowed to buy off the recession.
So, when will all this money start showing up as higher prices
at the supermarket and shopping mall? And when will gold react
to this bumper crop of paper?

The historical
record indicates that a surge in money growth has its peak effect
on economic activity about 9 to 18 months later. Add another 12
months or so for the peak effect on consumer price inflation.
In other words, the Federal Reserve is always driving with a loose
steering wheel. Most of the experience behind those numbers is
with relatively tame ups and downs in the business cycle –
not the kind of financial violence we’ve been seeing lately
– which adds another variable. And on top of that, the numbers
are about peak effect, not initial effect.

So the timing
remains uncertain. But what we do know is that there are clear
and unavoidable consequences to wildly energetic money creation,
including, sooner or later, rampant price inflation.

beginning to see interest in gold from the mainstream, which is
encouraging. And enthusiasm from the general investing public
will be what ultimately sends gold to the moon. Here’s what
we’ve observed over the past 30 days:

1. A number
of mainstream economists and fund managers are openly expressing
interest in gold. “The government can print endless money,
but they cannot increase the supply of gold,” said Michael
Pento, chief economist at Delta Global Advisors Inc. “Anything
the government cannot replicate by decree, I want to own.”
The firm, with $1.5 billion in assets, is doubling its gold holdings
to 8%. We saw very little of this six months ago.

2. The mining
industry has recovered its ability to raise capital. Take a look
at the recent financings for some gold companies:

$1.2 billion
Newcrest $476 million
Kinross Gold $414 million
Agnico-Eagle $290 million
Red Back Mining $150 million

Compare this
to the financial woes we hear continually about banks, brokerages,
and government agencies. The only capital they can attract is
government handouts.

3. While
there are much better ways to turn gold into cash, Cash4Gold (who
advertised during the Super Bowl) and similar businesses bombarding
the airwaves with their pitches have sensitized the public to
the topic of gold. Expect the interest in the yellow metal –
and its price – to increase in a serious way.

4. January’s
Cambridge House Investment Conference in Vancouver was well attended,
with the second day setting a record. Every session was packed,
standing-room-only for most speakers, including Casey Research’s
Louis James and Marin Katusa.

While no
one was emphatic about the timing, most speakers agreed that at
some point gold will be sought as a safe haven by the masses,
who will catapult the price to new highs. Here is a quote from
John Embry, chief investment strategist, Sprott Asset Management:

average retail investor has little or no investment in gold and
no understanding of how important it will be. The year 2009 will
be volatile, but volatility is a small price to pay for where
gold is headed. An explosion in gold and silver is inevitable
in the years to come.”

overriding theme was clear: Gold is going up. Period. It may or
may not happen as quickly as you want, but the recent range trading
hasn’t defused its explosive potential.

So when will
gold take off? The signal won’t be inflows to ETFs (although
they are indicators), or jewelry sales (the ’70s bull market
had nothing to do with bracelets), or even sales of physical bullion
(we had that in ‘08 and gold was up 5.5%, hardly meteoric).
No, the payday rise in gold will occur when there is a significant
shift in the psychology of the general public.

And whether
the glory days are just months from now or a year or two away,
it’s clear that the oasis is real and lies ahead. Is your
cup ready?

9, 2009

Jeff Clark
is editor and one of the primary writers of Casey Research's BIG

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