Friday, October 9, 2009

Riding The Gold Bull To Profit

Moses Kim of Expected Returns lays out a solid case for why gold will continue to appreciate to new highs in the future. One compelling reason is the growing debt that can only be repaid by printing more dollars, a recipe for disaster if you know about the history of fiat currencies. See the following post for more on this.

My projections for gold have remained the same throughout this whole bull market: $2,000, $3,000, and then $5,000. Skeptical? Think gold is "expensive"? Good. I'll keep on buying on every single dip.

I have already given a fairly comprehensive explanation of why I think gold will go to at least $2,000 an ounce. Our monetary system virtually guarantees that gold will appreciate against the dollar. Dollars are debt instruments whose interest can only be repaid through the creation of even more dollars. Every single dollar that enters the system debases currently existing dollars. Imagine an inverted pyramid scheme that must collapse. Don't understand this process? Good, I'll keep buying gold.

Do you think the Fed will let asset prices fall? Cash for clunkers + stimulus + bailouts + first time homebuyer tax credits = dollar debasement. Do you think politicians will risk reelection by restructuring Social Security, and thereby anger the single largest voting bloc- the Baby Boomers? Fat chance. Therefore, the unfunded liabilities of our government will be funded through the printing press.

Gold in inflation adjusted dollars is still trading well below its all-time highs. Sure gold is $200 more expensive than its nominal all-time high seen in 1980. But what has happened to health care prices during that timespan? What about higher education costs? What about real estate and stock prices? Thinking in purely nominal terms means you are thinking at a 3rd grade level.

What is a fiat currency? Fiat currency is money that derives its value purely from government fiat. There is no intrinsic value in fiat currencies. Now, if you study history, you know that fiat currencies have a 100% failure rate. Why? Governments from the beginning of time have funded their profligate spending and wars through debasement of their currency. Look at what our government is doing now. There is nothing materially different from what our government is doing and what Roman, Greek, and Chinese governments in the past did to hyperinflate their currencies. Believe this time will be different? Good, I'll take the other side of the bet and buy gold with both hands.

I could go on for pages, but people who don't want to believe are never going to believe. $2,000 gold is coming. The masses will not jump on board this clear bull market until then.

This post has been republished from Moses Kim's blog Expected Returns.

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