Looks like Gold May Be Heading for $1,100 to $1,150

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With gold breaking down below $1,200 today, it is beginning to look like Dr. McHugh’s alternative path for paper gold is the likelier one, which is into the range of $1,100 to $1,150. But this may in fact be good news for the gold mining shares. Let me explain.

What is taking the gold price down is related to what has driven the equity market lower today, and that is the threat of rising interest rates that followed a supposedly “good jobs” report. With that phony good jobs report, comes the notion that the Fed will be allowing interest rates to rise. But this is an example of Pinocchio’s nose once again gaining exposure. The lie being told through fudged numbers, constantly being repeated time and time again, leads people to believe the Fed can and will hold back on QE. But the stock market’s reaction says its sees a Pinocchio-nose protrusion. In other words, the market (which indeed is collectively smarter than the Fed) is not buying the big lie that the economy is getting stronger. It sees the reality that the economy is not as strong as the fudged numbers from the Obama Administration suggest it is, and so, as David Stockman says, “it throws a hissy fit.”

But at some point, lest the Fed does follow up on its promise to tighten the monetary system, it will lose credibility, and that is when gold will be off to the races in nominal terms. But the Fed is “between a rock and a hard place.” If it does tighten (which by the way only means “create new money more slowly), then the dollar is likely to continue getting “stronger” vis-à-vis other currencies, and all manner of stocks and commodities will plunge in value. This is in fact what I expect will happen in the Kondratieff Winter. But with this scenario, the “real” price of gold (even the fraudulent paper gold) will rise relative to other commodities, thus increasing the margins of gold mining companies. Indeed, in a relatively small way, this is what happened after the Lehman Brothers decline of 2008-09. Next time, when the financial system implodes (not if but when), I believe very firmly that the dollar value of commodities as a whole will fall even more dramatically, thus causing the “real” price of gold to rise even more dramatically, which in turn will cause the real price of gold to rise even more dramatically than during the 2008-09 timeframe that set the table for major gold mining profits up until 2011 when major owners of the Fed trashed the gold price following the downgrade of Treasuries.

From January 31, 2005, to the present, here is the price of gold relative to the Rogers Raw Materials Fund and to oil. Note the sharp spike up following the 2008-09 financial crisis that took the price of commodities (including oil) much lower and thus helped boost profit margins for most mining projects. Should the Fed tighten and cause the price of commodities to decline significantly below current levels, I believe we will see another major rise in the “real” price of gold, which in turn should boost gold mining profits.

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About Jay Taylor

Jay Taylor is editor of J Taylor's Gold, Energy & Tech Stocks newsletter. His interest in the role gold has played in U.S. monetary history led him to research gold and into analyzing and investing in junior gold shares. Currently he also hosts his own one-hour weekly radio show Turning Hard Times Into Good Times,” which features high profile guests who discuss leading economic issues of our day. The show also discusses investment opportunities primarily in the precious metals mining sector. He has been a guest on CNBC, Fox, Bloomberg and BNN and many mining conferences.