Let me beging by telling a little story: About a year ago, in late November 2008, I was in Nassau, Bahamas attending Sir John Templeton’s memorial.
Next to me happen to sit a gentleman by the name of Christopher Ruddy. We spoke of the markets, the financial crash, and money printing by the federal government. We tended to agree upon a lot of things.
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One thing we agreed on was that the U.S. government was going to inflate itself out of this mess and gold would skyrocket. What was amazing was at this same time gold and gold stocks were tanking in a mass panic.
I was writing at the time how they were a great buy. Sir John Templeton’s old adage, buy at the point of maximum pessimism, was playing out right before our eyes!
I told Chris to grab a copy of the book Money Mischief. by Milton Friedman. In this book, Friedman tells us that after a government prints huge amounts of money it usually takes a few years to filter through the system. Since the money printing started in October 2008, we should expect inflation to rear its ugly head later next year, by Friedman's calculation.
This is what gold is telling us. Gold trades on worries over inflation, the dollar, and the financial system. The fact that gold is breaking out tells me that we will see serious inflation and further dollar weakness going forward.
While many are warning of pullbacks and telling us that gold is not sustainable, it is. Gold peaked in March 2008 at $1,030 an ounce. It then spent the next 18 months consolidating. It did the exact same thing from May 2006 to December 2007, and when gold broke that resistance it soared straight to over $1,000 an ounce. If it were to do the same this time we would see a move to the $1,400 range.
You do not take out a huge resistance level like that then top out.
When those levels are taken out you usually trade much higher. Forget the naysayers. Gold has just started its breakout.
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