You would think a gold bug was writing this article to imply that gold is preparing to take off. But I am not a gold bug, just a pragmatic realist. All I do is concentrate on keeping an eye on the fundamentals. 

Hey David,

“Recent data seems to indicate that price inflation is slowing down. What do you think happens to gold if we go into a recession or the economy slows down sufficiently to take inflation out of the news?” “Thanks!”

Santosh V 

Santosh, last article I mentioned that all the magic bullets have been used up. I was really incorrect in that assertion because there does remain one very widely used magic bullet that will never go away. Can you take a guess what that magic bullet is that the Fed will never cease using?

That remaining magic bullet is the power and ability to print paper money. You really believe that inflation is just going to quietly go away? It will not and the only quick fix that the Fed knows how to apply to all financial problems is to print more paper dollars. So, you really wish to believe that price inflation is slowing down? You might just as well believe in pixies and fairy dust.

But why do I believe gold is preparing to yet take off…again?

John Doody - “Gold’s Season Begins!” “Working to gold’s advantage through end-06 are:

1) “US interest rates. The foreign capital magnet that supports the US Dollar has peaked. Pick your telltale: Fed minutes for Aug 8 meeting showing only one Governor “for” an 18th rate increase and 9 voting to “pause”. Housing market. Consumer confidence. Fed staff’s lower fcst growth rate. All equal US$ headed lower.”

2) “Seasonal demand peaks in the coming months, and this time prices are aided by falling mine production. In Jan-06 issue, GSA’s companies were forecasting 45.1

mil oz prod in 2006. Now at end-August, their total forecast has fallen 6.2% to 42.3 mil oz….” 

So what did the venerable John Doody just tell us?

Number one the US dollar IS headed lower and mining production is falling. That is why I believe we will see gold heading higher with the closing of 2006. Also, I know we get tired of hearing about China all the time, but get used to it because their 1.5 billion people are not going away.

“China 2006 gold demand seen rising to 320 tonnes.” “Wan Guoli, a manager of the association's International Cooperation division, told Reuters that China's actual gold consumption was higher than amounts estimated by the industry-backed World Gold Council. “ "Actual (2005 consumption) is larger, maybe 300 tonnes. It will be more than 300 tonnes this year ... 320 tonnes," Wan said on the sidelines of a global mining and metals investment conference, without giving a reason for the rise. “Asked when China's gold consumption would reach 600 tonnes as forecast by the World Gold Council, Wan said: "In five or six years. Then China will become the second consumer in the world after India." http://asia.news.yahoo.com/060829/3/2p4pp.html

That’s a lot of gold folks. And if you refuse to believe these statistics I guess you are one of those folks who believe that the oil price will forever remain under 2 dollars a gallon. 

Martin Weiss – “…imagine 188 Hong Kongs or 295 Singapores!” “Because that’s China’s population today…” “And that’s what China is becoming today!” “But this time, the Chinese are doing it with the natural resources…”

I like what Dana says from Halifax.

Hello David.

“Dana here from Halifax. I do feel for the new gold investors who are uncertain and fearful in today's gold market. We have seen these periods since 2001 and yet gold is higher in the end. We will see even more volatility in the years ahead and yet the gold price will be higher still. I recall an email I sent to you a few years ago in which I stated that regardless of the market gyrations, I will buy more gold and silver, and more quality stocks. You have to see the forest through the trees, as hard as it may be. All I can say to the uninitiated is: Know the facts, don't let spin fool you, stay the course! What do I plan to do? Buy more, and more, and yet more. The day will come to unload my holdings, but that day is far off. All the best to you and yours.”

Dana D.

Halifax, Nova Scotia, Canada

Now what did Dana say that was so earth shaking important?

“Know the facts”

And in just a few short years Chinas’ growing gold demand is expected by conservative forces to grow by another 300 tons…effectively doubling? And you are worried about the price of gold crashing? Sure, gold is going to crash. And oil is dropping back to below 10 dollars a barrel. And the Arabs and Jews are signing a peace treaty next week forever ending all Middle East tension and conflict. Yeah, right.

Hi David – 

“Chris Laird of the Prudent Squirrel just published this article. This information seems contradictory to your thoughts as well as many others on gold and silver. What are your thoughts on this article? Many thanks in advance!”

Todd

Wow! I got a lot of these emails concerning what Chris Laird said recently and everyone is panicking. Chris wrote the following below and everyone has their shorts in a wad.

Chris Laird - “…little regard is given to a coming severe US economic contraction. That is to begin in earnest by about Jan 2007.” “The US will lead the heavily indebted west, the EU and Japan into a deep recession. The rest of the world, even gangbusters China and India, will follow soon after.” “…the US is fast about to begin a depression. The housing bubble will lead to a once in a century depression like the 1930’s.” “In short, we are about to witness the ‘post prosperity’ world in the West.” “…all the other players, China, India, Russia, Latin America, Asia, will deconstruct.”

And what specifically did Chris say about gold that shocked everyone?

Chris Laird - “Frankly, I smell a weak or horizontal gold market this winter.” “I think the gold bugs who are forecasting gold to rise to 725 or higher this year are not seeing the impact a slowing US economy will have on commodities and gold…” Christopher Laird, Editor-in-Chief, The Prudent Squirrel

Actually I like really negative writing like Chris Laird has just written because it causes us to pause and think. And there is never anything wrong with thinking. We may not always agree with one another but we can be stimulated by what each of us has to say regardless of how controversial or different it may be to our thinking.

Do I think the world is soon to end taking the price of gold down with it? Beats me. I don’t know for certain what will happen tomorrow. Neither does Chris. But each of us can examine existing trends and come to our own conclusions based on our own interpretations about what we think will happen tomorrow and the day after.

As a student of history I will make the following observation I have observed over time. Sure, there might be a depression in 2007. We clearly experienced a severe depression in the 1930s. But what happens in a depression? The vast majority suffers but a very small minority prospers because of their preparedness, no debt and liquidity.

My grandfather provided for his family quite well during the 1930s and his family was the most prosperous family on their street in their neighborhood. In every cyclical downturn I like to remind myself that 20% of the population will do well though the majority may live in shacks and homeless shelters. 

But will gold provide the blanket salvation so many are expecting in an economic downturn? That is really what you want me to answer. Well, I’ll be honest with you. I cannot say for sure. But what I can do is observe history, study trends and contemplate a scenario built on historical truths.

I believe if you are prudent today and take steps to get out of debt and prudently allocate your resources then you will have a better chance of surviving no matter what may occur. Unless the world totally collapses there will continue to be commerce, there will continue to be a government, an army and bureaucracy. Trade will carry on and folks will still eat and buy and sell.

And the final comment about Chris’s predications for 2007? If Chris is correct and the world does crash with such a force that even gold is brought crashing down as he is predicting… Well, if all of that happens then ole’ Chris just might to have share his squirrel with us. But personally, all joking aside, I believe we are going to see gold at 700 by years’ end.

Let me mention here which mining stocks you should consider buying. 

Number one, there are always mining resource projects just entering the development stage some where in the world. These are companies that have already found a significant deposit and their present efforts are in the proving up and the development of that deposit. 

And this company, whoever they may be, will be engaged in drilling programs to prove up what they have got. And these are the promising and developing situations that often make the best overall speculations. Of course this is also where careful analysis of a company is necessary. But if you can attach your portfolio to these rising stars you will build wealth.

Oh, by the way I came across a great article on silver. 

I have to admit that I often forget gold’s side kick. Anyway, the following material below touches on silver as an even better investment than gold. And while it is not my desire to see the two fighting one another for pre eminence I think we have to give silver it’s due from time to time. There are some really great silver mining companies out there to invest in that I personally believe are going to do very well. You are not aware of which companies I am referring to? Well, you need to be.

But read the material below.

“Will Silver Pay You More Than Gold as an Investment?” “What most investors don't know is that even though silver has never been as highly valued as gold in dollar terms, it has the potential to be a lot more profitable than gold in future.” “…silver could get you 5 times higher returns. During the last silver boom, some Americans made 1,585 percent. Every time gold prices soar, silver prices soar about twice as high.” “During the last precious metals bull market, gold went from $35.12 to $306.68. A respectable 773 percent. But silver shot up from $1.29 to $21.793 during the same period. An incredible 1,585 percent.” “If we keep our low estimate of gold at $2,000 silver’s reversion to its historical value could cause it to spike from $11 to $125...” “If gold glitters, then silver shines.” 

Let me repeat what I said earlier in this article. The US dollar is headed lower and mining production is falling. It is principally these two factors that will continue to drive the price of gold yet higher still. Subscribe to Gold Letter to receive emailed alerts of under valued gold, silver and resource stocks. Receive upon order 21 gold and silver stocks to buy now report. 

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David Vaughn
Gold Letter, Inc

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