Money and Markets - Back in 2002, I forecast that gold would hit new highs by the end of 2007. Nearly everyone thought I was crazy!
Then, in 2004, many called me "absolutely insane" when I issued my forecast that oil would hit $100 a barrel within three years.
Now, in the first days of 2008, gold has already reached as high as $893 an ounce — above its all-time record high of $877 set on the Comex in New York on January 18, 1980. Plus, last week, oil crossed the $100-a-barrel threshold, hitting my 2004 forecast, albeit three days late.
Unlike when I made my original forecasts, today it seems just about everyone is jumping on the gold and oil bandwagon, predicting even higher prices to come.
Usually, that's a sign that a top is near. Latecomers and copycats almost always buy toward the end of a major uptrend.
But not this time ... I think gold and oil prices are headed much higher. Today, I'm going to explain why by answering the most frequently asked questions I've been getting on what's happening in the markets ...
Q: What's the significance of the new record highs in gold and oil?
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A: Three important points ...
First, they show that inflation, as I predicted, is coming back with a vengeance!
We've already seen the first signs in November's inflation data, which indicated the biggest increase in wholesale prices in 34 years.
And that was before the latest round of money pumping by the central bank. All told, more than $750 billion has been thrown into the global economy in the last five months.
As this "funny money" works its way through the global economy, inflation is sure to rise substantially.
Also note that latest data shows the broad supply of money in the U.S. — formerly known as the M-3 Money Supply — is growing at an annual rate of more than 34%. That's super inflationary!
Second, the new highs in gold and oil also reveal the giant cracks that are beginning to appear in the world's financial system.
By cracks, I mean financial insecurity ... geopolitical worries ... and outright FEAR.
On the surface, everyone is blaming the subprime mortgage crisis. And to be sure, the subprime crisis is a big factor. But the subprime disaster is symptomatic of a much bigger, deeper problem — the near bankruptcy of the entire United States.
Lest you forget, the U.S. is $55 TRILLION in debt ...
$9 trillion of Federal government debt.
All told, our debts have now reached 460% of national income — an all-time high — with no end in sight.
There is absolutely no way those debts can ever be repaid without continuing to systematically devalue the U.S. dollar.
But that's not the only crack driving gold and oil higher. There are also cracks and fissures in geopolitics, including uncertainties surrounding the U.S. elections.
These worries drive investors into tangible assets ... which adds to inflationary pressures ... and drives natural resource prices even higher.
Third, investors are beginning to lose confidence in governments and central banks.
When investors are confident in government and central bank policies, inflation tends to be low or declining ... municipal and government bonds do well ... and tangible assets like gold and oil tend to be mostly ignored.
But when investors lose confidence in their governing officials and central bankers, as they are now, they opt instead to buy more tangible assets ... more inflation hedges ... and more contra-dollar investments.
Q: How high can gold and oil go?
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A: Gold will ultimately reach at least $2,200 an ounce. Oil will reach $150 a barrel this year; $200 within three years.
Sound crazy? Again, that's what they thought years ago when I predicted new highs in gold and $100 oil. But there's absolutely no doubt in my mind that we will see those prices, sooner rather than later.
Remember, gold at $890 an ounce is undervalued when adjusted for inflation. In fact, $890 in today's dollars is the equivalent of just $332 in 1980 dollars (when gold hit its previous record high of $877).
Oil, at $100 a barrel in today's dollars, is the equivalent of just $37.35 in 1980 dollars. And back then we had nowhere near the shortages and tight demand/supply fundamentals that we have now in the oil market.
Q: But what about the obviously slowing U.S. economy? Won't it negatively affect natural resource prices, especially oil?
A: To be sure, the slowing U.S. economy is bound to cause some sharp pullbacks in natural resource prices this year, including gold and oil.
But growth and demand in other regions — particularly Asia — will more than offset any weakness in the U.S. Any pullbacks should be treated as buying opportunities within major bull trends.
Q: Won't Asia slow if the U.S. economy turns south?
A: Hardly!
Let's take a look at China first. It has ...
Virtually no external debt.
Moreover, Beijing has committed to spending more than $700 billion on rural infrastructure projects to bring China's 800 million farmers and peasants into the 21st century. That alone is enough to keep China's growth cooking for many more years.
Now, let's take a look at India. It has ...
India is now home to the largest number of billionaires in Asia ... and the number of millionaires in India is growing at a 20.5% annual rate, the second fastest in the world behind Singapore.
Many of these same trends can be seen in other Asian countries like Indonesia ... Malaysia ... Vietnam and Thailand.
And while there are bound to be some wild swings in these markets in 2008, their growth curves remain intact and will continue sharply higher regardless of a downturn in the U.S.
Any pullbacks should be bought!
Q: You said the Dow would decline to 11,800. Is this what we're seeing now? And how low do you think the Dow could ultimately fall?
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A. Yes, the bear move down in the Dow has begun! And I now believe the Dow will fall to about 11,000.
For now, I continue to recommend staying out of all stocks except select natural resource plays.
But there is something I must mention — while I am bearish on most U.S. stocks right now, longer-term I think the Dow is poised to move substantially higher ...
Reason: For the last several years, the Dow has not only failed to keep up with inflation, it's actually lost almost 70% of its value in real terms. I expect the Dow to join the inflation cycle that is now beginning, and quite possibly move substantially higher to regain its purchasing power via the much weaker dollar.
That's a ways off though. First, this bear move will strengthen.
Q: Do you think the dollar has bottomed yet?
A: No, not in the least!
I estimate the dollar will fall as much as another 40% over the next two to three years before its bear market comes anywhere close to an end.
That's not to say there won't be rallies in the greenback. In fact, a good bounce is way overdue. But long-term, the dollar has virtually nowhere to go but down. It's the only hope the U.S. has to get out of the financial mess it's in.
Q: Do you have any suggestions for the start of 2008?
A: Take advantage of the upside potential in natural resources and Asia!
Two of my favorite ways to do this ...
#1. The PowerShares DB Commodity Index Tracking Fund (DBC). The fund, which is incorporated in the United States, invests in commodities such as crude oil, heating oil, aluminum, gold, corn and wheat.
#2. The First Trust ISE Chindia Index Fund (FNI). The fund seeks out the best returns from companies in China and India in the following industries: oil and gas, software, telecommunications, banks, Internet and mining.
Lastly, I think everyone should own some gold! The single best way, in my opinion: The StreetTRACKS Gold Trust (GLD).
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