Why Gold Will See $2,000 An Ounce Sooner Rather Than Later

So gold did not go to $2,000 an ounce by the end of September as was discussed last month, but that does not mean it will not get there, eventually. Gold gave back almost all of the gain it had in August (12%) in September, as the short term mentality of "return of capital, not return on capital" overtook the financial markets, and sent every asset class, save for the U.S. dollar, spiraling down. Gold lost 11% during the month, despite none of the world's economic issues being solved. In August we had the S&P downgrade of U.S. debt, the renewal of the Eurozone problems, and slowing growth. September saw much of the same, except now there are fears that the debt crisis in 2008 that happened in the U.S. is happening in Europe. We also saw the concerns that perhaps China is slowing more than anyone has given it credit for. The price of copper has come down drastically, to almost $3 per pound. In a no-growth environment, asset classes across the spectrum will be thrashed, and precious metals are not any exception. Still, despite all of this turmoil and worries of the month of September, governments have not really given into the fact that the only way to solve a balance sheet recession is time and letting the debt get worked off, not adding to debt levels. As such, there are rumors that despite the Federal Reserve already doing Operation Twist, (perhaps to no avail), the Fed may do an additional round of quantitative easing. Our current administration believes that spending is the approach to getting out of this current recession, despite record high deficits. When the volatility starts to subside, we may see the return of gold as one of the best asset classes, as governments around the world start the currency wars, and debase their currencies even more. There is speculation that the European Central Bank could lower interest rates at its next meeting, and that could further weaken its currency, making gold more expensive in that currency. We are also starting to move into the holiday buying season, which tends to push prices higher. In India, gold is considered a big gift, and gold prices generally rise as we get towards the end of the year. There is still a crisis of confidence around the world, although it has calmed down somewhat. There is also concern that as the third quarter comes to a close, we will see earnings reports for a lot of companies be revised down, and money has to go somewhere. It could flow to the safe havens, like Treasuries or the U.S. dollar, but ultimately, it will revert out of the U.S. dollar and back into commodities, most notably gold. If the Fed does enact "QE3" soon, and the ECB cuts interest rates, the currency war will be on. With that, we could see trade wars between countries, and then perhaps, even a real war. If that happens, there is no telling where gold could go, perhaps even higher than anyone has ever imagined. Greece is still a mess, and may default sooner rather than later. The European Financial Stability Facility has not been leveraged or increased, and can not come close to helping out Spain or Italy if things get worse over there. We may be in this kind of environment for a very long time, and money will have to go somewhere to get a return. When you are dealing with the "new normal" as PIMCO suggests we are in, very few assets classes will return any kind of meaningful performance. Gold may be the benefit of that lack of performance, given its safe haven nature. ACTION ITEMS:

Bullish:
Traders who believe that confidence will continue to be fleeting in the short term might want to consider the following trades:

• Buying gold miners such as Barrick Gold ABX, Hecla Mining HL or Yamana Gold AUY could prove to be profitable as gold soars to new highs.

• If traders do not want single equity exposure, they may want to consider ETFs, such as SPDR Gold Trust ETF GLD, which tracks the price of gold. Other ETFs to consider are Market Vectors Gold ETF Trust GDX or Market Vectors Junior Gold Miners ETF GDXJ.

Bearish:
Traders who believe that investor confidence will come back sooner rather than later may consider alternate positions:

• If confidence comes back from some outside force, equities could soar. Baidu BIDU, Amazon AMZN, Apple AAPL etc. all could soar from these levels.
  
  

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