Is the Gold Rally over? Or, has it just begun?
September 15, 2008 – The U.S. credit crisis erupted with the failure of Lehman Brothers. Overnight, $600 billion vanished in the largest bankruptcy in American History. Panic set in to the already beleaguered markets. In just 3 weeks the Dow lost 2,937 points, the S&P lost 356 and the NASDAQ 624. It is said, we were just minutes away from economic Armageddon.
By October 3, with seemingly no choice, the Troubled Asset Relief Program (TARP) was signed into law. It provided $700 billion be used to purchase toxic assets from banks deemed too big to fail. However, that alone wasn’t enough to halt a market freefall. Not until late November, when the Fed announced its infamous $600 billion round of Quantitative Easing (QE1), did market stability return.
By March 2, 2009, as the last of the $600 billion was spent, it became apparent QE1 wasn’t enough as the markets teetered on the brink of total meltdown. The DOW had fallen from record highs above 14,000 to just 6,626, the S&P 500 fell from a record high above 1,500 to 683 – the NASDAQ fell from 2,810 to 1,293.
Then, in the markets’ darkest hour, the Fed once again came to the rescue with an extension of QE1. On March 18, 2009, it announced another trillion dollars would be committed to easing. Immediately, markets reacted positively and proceeded to rebound.
The rebound was strong seeing a steady rise over the next 12 months. Then, in anticipation of March 31, 2010 (the end of QE1), the markets began to crash. The four months to follow saw the S&P fall 16% creating fear of another wholesale collapse back to March 2009 lows.
By August 23, 2010, yielding to market pressures, the Fed, during Jackson Hole, hinted at another round of easing. The markets immediately sent a signal of approval and edged higher. On November 3, 2010 the Fed confirmed another $600 – $900 billion for the purchase of treasuries. QE2 would now run to June 30, 2011.
In the time between Jackson Hole and the expiration of QE2, markets soared. The S&P climbed 28%. Then QE2 ended and the markets threatened another crash. Printed money had become to the markets what a drug is to an addict. Take away the drug and a crash is inevitable. Again the Fed was cornered.
In response, the Fed made an August 9, 2011 announcement of plans to hold interest rates at already historic lows. Shortly after, on September 21, it announced the Twist – a fancy term for "refi". The quick successive moves were intended to produce similar rescuing effects on the markets as quantitative easing without having to print more money. Instead, confidence failed to be restored as today’s markets flounder in volatility. Hence, rumors of QE3 have surfaced.
It’s clear, past stimulus efforts have had only a temporary effect. Numbers don’t lie. Since Lehman, the markets have produced Zero Gains. This is especially troubling when you consider an additional $5.2 trillion of national debt incurred for government’s own stimulus and bailout programs. That’s $8 trillion dollars or more spent with zero results.
One investment, however, has been a consistent winner. GOLD!
Since Lehman, gold prices have doubled as rising demand suggests that, with or without stimulus Gold is in a win-win situation. Without stimulus it’s believed markets will crash leaving gold as the safe haven investment that’s never been worth zero. And, with stimulus and higher deficits, paper currencies lose value, inflation sets in and gold prices rise as the purchasing power of paper money falls.
Will QE3 become a reality? Will deficits continue to climb? According to a special report released by Lear Capital that deals with the question, Is Gold still the answer for investors?, "The Fed may have no choice but to print more money." And, when we asked Kevin DeMeritt, President of Lear Capital what that would mean for the gold price, DeMeritt responded, "More stimulus would set the stage for gold to repeat its performance of the last 3 years. That would mean another 30% rise in 2012."
He quickly added however, "But more stimulus and rising debt are just 2 of the 7 reasons we’ve identified that could send gold prices 30% higher this year. If a combination of 3 or more play out at the same time, gold could go much higher than that."
Lear Capital is not alone in its call for higher gold prices ahead. In December, Citi Bank released its report The 12 Charts of Christmas wherein Citi projects gold at $2400 an ounce in 2012 and $3400 in 2013. That’s a 50% rise in 2012 and more than 100% by 2013. Morgan Stanley joins the chorus with a $2200 projection and a 35% rise this year. Merrill Lynch and Goldman Sachs, while less aggressive, are also bullish on gold projecting 33% and 23% gains respectively.
As revealed in Lear’s report, many factors are driving these bullish outlooks on gold. The report delves deeply into the global debt crisis and its effect on gold prices, geopolitical tensions surrounding Iran and the now insatiable demand for gold by the Central Banks of the world. Last year, for the first time in 20 years, Central Banks turned from being net sellers of gold to net buyers. As Lear points out, it is especially intriguing when those who have the power to print more paper money are demanding gold.
Perhaps it’s time for a little self-examination. How many 30% winners are in your portfolio right now? No one has a crystal ball, but the case for rising gold is making a lot of people wonder if the gold rally is over or just beginning.