Over the last few years I have been one of the few who sell gold and silver that have been dollar bullish as well as being in the deflation rather than inflation camp. Because of this viewpoint, I have been ingnored by some of the Austrian websites like LewRockwell.com because of their mantra for a dollar collapse and adherence to a gold standard. My experience has helped me as I have been involved in investment markets now going on my 29th year. I also have an unrelenting quest to know that for which I don’t know; the definition of ignorance. I read a lot. My goal is simply to give you the best advice so you can make good decisions with your investment capital. I am not perfect and I do evolve over time. Like a good wine, I hope to get better with age and hopefully my writings show this.
In this article I’ll address currencies and deflation first and then what I think the price of gold will do in 2015.
Inflation vs. Deflation
I first want to set the record straight.
I simply can’t look at things one way because some economics guru a few decades or century ago said it’s got to be this way. 90 year old Richard Russell of Dow Theory Letters also taught me years ago to look at price action. If price is doing one thing and your economic understanding says it should be doing the opposite, listen to price. Otherwise you’ll go broke thinking you are right if you are investing on what you think you know to be truth.
That’s what it has been like the last few years taking the deflation side of the coin rather than the inflation side. I wrote my book Buy Gold and Silver Safely in Sept. 2010 and in Chapter 4 I took the deflation side of things, quoting many Austrian economists and putting the pieces of the puzzle together.
But many Austrian economists don’t use credit in their definition of inflation and simply look at M2, the printing of money by the Fed. If you look at the chart below, you’ll see that M2 does indeed show out of control money printing.
But why doesn’t this matter at present? With all this printing, why isn’t inflation out of control and gold skyrocketing?
It’s because this small amount of printing is being dwarfed from the 20 year plus excesses in our society brought about by credit. The credit contraction is still upon us and it has been buoyed the last few years with quantitative easing, delaying the inevitable slide which we are now seeing in commodities and elsewhere.
We are sitting at 329 as of the 3rd quarter of 2014. Many Austrians don’t include this credit in their definition of inflation and thus have missed the boat on the deflation that is occurring.
Why We Have a Stronger Dollar
But the dollar is also a separate issue that some Austrian’s don’t understand either. By the way, I consider myself on the Austrian side of things and eventually those whom I disagree with today will be proven right, but I simply have to point out where they have missed diagnosed as well.
Where is the dollar crash so many are predicting? Where is the hyperinflation? See: Why the Predictions of Hyperinflation and Economic Collapse Were Wrong
While my predictions on the weaker Euro and Yen and stronger Dollar have come to fruition, it has taken a bit longer than I expected.
Pricing one currency in another currency results in the illusion that a currency from a large economy can go to zero. If the Euro does disappear, the return of individual currencies for the various countries will return. The Euro doesn’t go to zero and the dollar sure as heck isn’t going to go to zero.
Think of currencies this way. On one side of a ship you have the U.S. dollar. On the other side you have the Euro, Yen, Pound and Canadian Dollar. The currencies go back and forth running around the ship priced in each other. But the ship is the Titanic when it comes to purchasing power. Over time it takes more and more of a currency to buy gold. The illusion is that when they are priced in each other, one is strong and the other is weak until they reverse again. When some tell you the dollar will crash, how can it? If it crashed then by default, all of the other currencies that make up the Dollar Index, would have to skyrocket. That’s just not going to happen. The Yen and Euro, which make up 70% of the Dollar Index I have been saying for some time that they have issues and by default, this would be dollar bullish and put some pressure on gold and silver prices.
In March of 2010 I wrote;
While the U.S. has it’s problems with debt, being a net exporter, high unemployment and the like, Japan, with its ever decreasing population and increasing older population is in deep trouble. Their government solution has been adding more debt to debt to try and stimulate the economy.
I was a little early when I wrote to buy gold in Yen when the Yen was trading at 93.4. Today it’s 119.54 as we have indeed had a weaker Yen.
In January of 2012 I wrote;
The dollar index is now past 81 and moving towards the 88,89 level while the Euro moves down to its lows of around 117,118.
In August 2012 I wrote;
I put the odds of the Euro breaking the 2008 low of $1.1978 at about 75%. Why so high? Because I look at the economic data and see what it tells me. You must have people working to improve GDP and you must control your debt expenditures. Yes, the U.S. has its issues, and it will get worse here. But Europe has greater issues since the U.S. produces more than any other country and has a military that backs it.
While I was dollar bullish in 2012, saying that it could have an effect on gold prices, Goldman Sachs was bullish as ever on gold.
Goldman has three, six and 12-month price forecasts for gold of $1785, $1840 and $1940 a troy ounce, respectively.
As many readers know, I have recommended over the years to dollar cost average into gold and that advice still hold true for 2015. You want an allocation to the metals in your portfolio that acts as insurance against many things I’ll address in a bit. As much as I have preached dollar cost averaging into a position, I will however write my “all in” article finally this year and I’ll explain why below. I thought I was going to be able to write it last year, but the deflationary contraction is still too strong and my indicators are telling me to hold off for now.
Gold Dealers Have an Incentive to Sell Gold
Most people who sell gold have been calling for inflation year after year. But as you can see, inflation may be in some places, but the price of oil, gas, natural gas, copper, corn, wheat and of course gold and silver have come down much further than many thought they would, especially those who sell gold.
In the end, the ones who sell gold will get their inflation, but the question is, when will it come?
When I wrote about my 8 Indicators That Tell Us Where Gold Might Go Next in July of 2014 I was trying to help my readers understand more of what I see and to decide for themselves if now is the time to buy gold or wait. Please take a look at each of those indicators. All have become worse than July of 2014 and in no way indicate the price of gold is going to keep moving higher from here, albeit a small move up is occurring as we speak. Nothing goes straight down and there will always be bounces along the way until the cycle reverses. But what does the data say?
The price of gold was $1,283 when I first wrote the above article. Today it is $1,217.30 after breaking below $1,200 in 2014.
1. Demand from Buyers Down – check. My business has slowed and one of the reasons of course is I have been telling buyers to hold off. But my suppliers business has slowed down as well.
2. Stock Market at New Highs – check. Stock market was 16,736 then. The DOW again is flirting with its all-time high and breached 18,000 now.
3. VIX Volatility Index Not Showing a Lot of Fear – check. 17.99 now.
4. Europe Fighting Deflation – check. Eurozone falls into deflation for first time since October 2009
5. Dollar Bullish – 79 in July and 92 now. See chart above.
6. Velocity of Money Still Pushing On a String – Still pushing on a string
7. Commodity Prices Heading Lower – CRB Index 307 in July and 225 now
8. 10 Year Treasury Still Below 3% – Safety in Treasuries? 2.55% now 1.95%
While there is more that I follow than these indicators, and one must know that I have trillions of reasons to be bullish gold and view it as insurance more than anything else, I have to call it like I see it and point out what the data tells me. This is deflation! The Minneapolis Fed chief even agrees with me.
2015 Gold and Silver Predictions
I am still in the camp that market makers will take gold down below $1,000 an ounce. As such silver could break temporarily below $12 an ounce. I will write my all-in article with the price of gold between $850 an ounce and $1,000 an ounce. When gold and silver finally do bottom I believe it will be a V shaped quick return higher within a few days of reaching the low. This could mean a fall from $950 to $850 and an immediate bounce back up to $1,000 and the beginning of stage three, the stage where gold goes to “undreamed of heights” that 90 year old Dow Theory Letters writer Richard Russell has spoken about for so long.
At present we are in the midst of the second and longest stage where market makers will try and buck you off the bull. It takes some patience to hold onto gold and silver when you are down on them and it will take some patience at the other end of the spectrum where greed takes over and your hardest decision will be at what price to sell. It’s the tortoise (gold) vs. the hare (debt) and make no mistake this won’t end well for one of these two. There is no government throughout the history of mankind that has spent its way to prosperity. Yes, with some Central Bank magic the game can continue longer than most think. Look what $9 trillion did after the 2007-2009 financial crisis. What will the Fed be able to do with their current balance sheet should the next crisis that they can’t see occur? Who will believe the Central Bank talking heads of the world this time? How will you be prepared when our history as a nation shows that this cycle does repeat itself over and over? Will you ride out the storm again and expect the same result? Or will this time be different? How will it be different? Have you studied the problems in Europe and Japan and China? Is this just a U.S. only issue that the dollar will crash where by default all the other currencies that make up the Dollar Index will rise? Or will it take more and more of all currencies to buy gold?
No one wants to hear that the price of gold and silver will continue to fall and I want more than anyone to write my all in article as I have been talking about it for so darn long. But one can’t ignore the data. I get asked a lot about when this bottom will occur in gold and silver. All I can say is my data will tell me. This could mean I change my mind on these targets, but so far the data is quite clear to me. What does it tell you?
At some point you will have to look at gold and silver with the following foresight;
When the Dow was at 7500 in 2009 you may have been tempted to buy it. But the Dow fell further to 6443 and you might have been panicking a little bit. Yet 5 years later we hit 18,000 and we’re not sure when this run will stop. Do you think the investor who bought at 7500 really cares that they didn’t catch the exact bottom when they are sitting on a 140% return? Probably not, even though the few investors that caught the bottom earned 16.4% more on their money.
In the years to come I predict that silver will triple before gold doubles. The gold/silver ratio right now at 74:1 should go to 35:1 when silver hits about $60 an ounce. This would put gold at $2,100. From there I don’t know where gold will go, but I do believe much higher. There is no way I could tell you with a straight face that the Dow will double before gold or silver does. A 36,000 Dow may occur some day, but it would be because of runaway inflation, not because of a strong economy.
I will address more of the economic data for the U.S. and the World in my next article. Things aren’t as rosy as the talking heads at CNBC would have you believe. This doesn’t mean the Fed won’t hike rates. They did this once before too early under Greenspan and killed the economy if you recall. This doesn’t preclude the fact the markets believe still in the Fed story and fall for it hook line and sinker which is great news for those in the stock market. For now. I want to show you the other side of the story though. I want to show you reality. But I must repeat. Reality is ignored in a runaway bull market. This is part and parcel why gold may break below $1,000 an ounce taking silver down with it.
Gold and Silver Stock Mining Package
We will be coming out with a mining package where we pick what we believe to be the best mining stocks to buy based on my research the last 8 months. We have been patient in releasing this because of the timing in purchasing these mining stocks can be tricky. We were one of the only one’s who recommended selling mining stocks in September of 2010 when the HUI was trading at 512.56. Much has transpired in the mining industry since that call with many companies disappearing or being taken over. Today many companies are struggling and if we do get a further pullback in the price of gold and silver, more companies will go bankrupt. Knowing which companies have the best opportunity moving forward will be key to you getting returns that we believe will be in the 100% to 500% range, and possibly much higher for some of the miners. This package will be released in the next few weeks and we will announce it on the site.
If you are interested in this Gold and Silver Stock Mining Package let us know by clicking this link below and completing the form.
Doug Eberhardt is a 28 year financial services veteran and precious metals broker selling gold and silver at 1% over wholesale cost. Doug has written a book to help investors understand how gold and silver fit into a diversified portfolio, how to buy gold and silver, and what metals to buy. The book; “Buy Gold and Silver Safely” is available by clicking here Contact phone number for Buy Gold and Silver Safely is 888-604-6534
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