Gold Set Up For Long Term Gains

Posted: Jun 11, 2012 12:01 AM

Even though gold is technically down on the week, fundamentals have paved a fairly bright path for gold in the future. 

Gold started off the week in the $1,620 range and ended on an upward path at $1,593.  Federal Reserve Chairman Ben Bernanke took a bite out of gold prices on Thursday when he apparently slapped down any talk of further easing. 

At this point it may not matter to gold and silver if the Fed decides to print more money or not; many of the forces that could move gold and silver prices higher are already in place. 

European finance ministers are working quickly to put together a bailout plan for Spanish banks.  Since most of the EU’s rescue fund has already been committed to Greece and European banks with exposure to Greek debt, the money for Spain is going to have to come from the EU printing presses.  Even if it’s just a “loan”, that’s still another injection of cash into a system that’s already flooded with money.

The real reason I believe gold and silver may track considerably higher in the days and months ahead; because the world is already flooded with cash.  You can see the cash surplus building up in the balance sheets of corporate America which, despite the recession, has done quite well during the recovery.  While gross profits are trending down, the amount of free cash in corporate balance sheets borders on the obscene. 

Add to the total of corporate cash the combined value that global stock markets have dropped in the last 60 days.  Notice I didn’t say the value markets have “lost” because unless the global stock market has a giant hole in its trouser pockets, it didn’t “lose” anything.  Those stocks and derivatives were sold and someone pocketed all that money; that is cash that’s now burning a hole in their trouser pockets. 

Investors are keenly aware that the Federal Reserve and central banks around the globe have literally been stuffing banks and big business with all the nearly free cash they can handle to try and keep the global slowdown from turning into a giant crash landing. All that money has to go somewhere or it will start to lose value to inflation.  Investors are giving the U.S. government so much of their cash that bond yields are in the tank.  All it will take to light gold and silver prices on fire is for one or two of these huge cash reserves to start taking a look at precious metals as a place to park some tiny fraction of their free cash. 

Not only do I think that’s going to happen, but once the trickle turns into a flow, it will capture the headlines and the rush will be on. 

Last year I predicted 2011 gold price peaks of $2,200 to $2,400 an ounce and was off by $400 on the low end.  If we see precious metals become a haven for even part of the world’s cash reserves, we’ll be looking at those prices in the rearview mirror and laughing about the days we bought gold for under $1,600 an ounce. 

Chris Poindexter, Senior Writer, National Gold Group, Inc