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Affluent Investor | April 29, 2017

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The Gold Prediction for 2014

Gold Coins

Gold is a nearly perfect form of money. It is one of the few things on planet earth that contains all of the following attributes; beauty, scarcity, virtual indestructability, and is also transferable and divisible. However, even after five thousand years of utility as a store of wealth, gold is still completely misunderstood by most on Wall Street.

This is why most money managers wrongfully predict another disastrous year for the yellow metal. These advisors have never realized the simple truth that the value of gold never changes; only its expression in dilutable currencies changes. Therefore, it always preserves its purchasing power over time and is the best hedge against a fiat currency that is headed down the pathway of destruction. Gold prices increase when the market presages a currency will lose its purchasing power-it’s just that simple.

The reason why the dollar price of gold soared from $200 per ounce in the beginning of the last decade, to nearly $2,000 per ounce by the year 2011, was because many feared skyrocketing deficits in the U.S. would soon lead to massive money printing and debt monetization on the part of our central bank. Even though the debt monetization did materialize, as many had feared, the government has also managed to manufacture a temporary “recovery” in the economy by forcing interest rates to zero percent and thus producing bubbles in bonds, stocks and real estate. Theses asset bubbles led to a consumption bubble, which brought about an ersatz resurgence in government revenue. Deficits then fell hundreds of billions of dollars (although they are still gigantic and unsustainable), which has in turn caused the price of gold to undergo a correction from its decade-long advance and to consolidate at the $1,200 per ounce range.

However, there are now only two outcomes for the current fiscal, monetary and economic conditions; and they are both bullish for gold.

The Unlikely Scenario

The Fed will stop buying $85 billion per month of bank debt and will be completely out of the bond-buying business by the fall of 2014. Nevertheless, this will have an inconsequential effect on bank lending, money supply growth and economic growth. The continued condition of negative short and long-term interest rates will lead to a rapid expanse of the fractional reserve lending system and inflation.  The fear on the part of gold investors about the Fed’s taper will then quickly fade away, as rising inflation sends bullion prices higher, just as it did in the middle of the last decade.

The Realistic Scenario

On the other hand, the Fed’s taper leads to spiking longer-term interest rates, falling asset prices and a faltering economy. Those rising interest rates cause the economy to slip back into a recession and deficits to once again spiral out of control. This will force the Fed to adopt a more substantial and protracted QE program than at any other time before, as it desperately seeks to keep long-term rates low in the context of soaring debt and deficits.  Money supply growth in this case would be significant because the Fed would yet again be back in the business of monetizing trillion dollar deficits.

In either case the secular bull market in gold will re-emerge in 2014. I believe the yellow metal will approach $1,600 per ounce by the end of next year. I further contend that mining shares have already bottomed in anticipation of a failed Fed exit and will offer investors significant returns in the year ahead.

Michael Pento is the President and Founder of Pento Portfolio Strategies (PPS). PPS is a Registered Investment Advisory Firm that provides money management services and research for individual and institutional clients.

Michael is a well-established specialist in markets and economics and a regular guest on CNBC, CNN, Bloomberg, FOX Business News and other international media outlets. His market analysis can also be read in most major financial publications, including the Wall Street Journal. He also acts as a Financial Columnist for Forbes, Contributor to and is a blogger at the Huffington Post.

Prior to starting PPS, Michael served as a senior economist and vice president of the managed products division of Euro Pacific Capital. There, he also led an external sales division that marketed their managed products to outside broker-dealers and registered investment advisors.

Additionally, Michael has worked at an investment advisory firm where he helped create ETFs and UITs that were sold throughout Wall Street. Earlier in his career he spent two years on the floor of the New York Stock Exchange. He has carried series 7, 63, 65, 55 and Life and Health Insurance Licenses. Michael Pento graduated from Rowan University in 1991.

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  • Michael , I completely agree on your analysis of the ratio and real purpose of gold to any fiat ? You are also quite correct about the majority of wall streeters or so-called investment professionals perception/understanding of Gold or even silver for that matter. As debasement continues even though the fed gave a slight lessening message, it is still just a tad below 1 trillion a year ? Not exactly a trend going on there ? But they are very good at creating illusions now aren’t they ! I have not figured out how the so-called smart guys cannot see that the entire market has been run up or propped up by the massive QE stimulus of the fed buying its own debt and doing that with more debt ? WTF ? So given that as fact, what is the basis for any of it to be a stable force? Just more printing and nothing else. It really is incredibly simple stuff. Of course nothing has been resolved or fixed at all , but much more debt has kept the sinking ship afloat. So it is beyond obvious that the market manipulators, ie wallstreet, banks, fed, are simply milking this cow until it will no longer produce a drop ! So their motives are not at all to deal in any reality or fiscal responsibility. They are solely focused on today and the profit motive directly in front of them is all they see as their reality. No mystical magical or even conspiratorial anything , Just plain old ordinary greed with a large dose of ignorance as in ignoring the facts of history ! Simple stuff if a tithead like me can figure it out and grasp their paradigm.
    The real question IMO is how long can the illusions be maintained of a recovery when we currently have that 17-20 trillion floating around and building ? At some point even greed will be trumped by events and even a small dose of fiscal reality. So I have been watching closely for those outlier events to show up and form a new paradigm. And I believe all the pieces of the puzzle are in place for exactly that to unfold and perhaps is already in motion. So yes I will be a buyer again likely soon , but just watching my own metrics and gathering a lot of data from many sources. There is of course a constant struggle between the forces of fiat and the metals. The only question in my mind is watching to see how that plays out and when? History does not lie, but men and governments certainly do !

  • Rick Jory

    I agree with what has been said, but what is the “value” of one ounce of gold? Should it be $700 an ounce? $1200? $2000? Of course, before going off the gold standard, gold was pegged at $35 an ounce, which was too low. I once heard that “an ounce of gold can buy a good suit.” Based on this, which certainly isn’t scientific, I’m not sure gold at $2000 makes sense. But, as we continue to turn up the printing presses and flood the market with more and more pieces of paper, we will see inflation . . . we will see $2000 for a good suit . . . and I would guess gold will go for around $2000. Any more than this and perhaps it is “inflated.”

  • craig

    I feel like gold and silver will both go up dramatically this year ..and my reasoning behind this is…if it does not I will probably kill myself otherwise..and my maid does not want to clean anymore of my messes.

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