Don't Get Suckered by Wall Street's Wimpy Gold Price Forecasts

William Patalon III

I was scanning the news wires in search of a particular item late last week when a story caught my eye: It seems that Newmont Mining Corp. (NYSE: NEM), the world's No.2 gold producer, believes that the burgeoning demand from Asia's newly minted middle class will send the yellow metal up to $1,600 this year and even higher in 2011.

The Newmont story reminded me of another news item that I'd read just days before - a news-service poll of analysts that said that the current Wall Street consensus was for gold prices to reach $1,700 an ounce in 2015.

What a joke.

You see, just a few months back, when gold and silver prices seemed like they were jumping every day, Wall Street and the other Big Boys were blitzing us with messages explaining why we "had to" buy gold.

You heard it on the radio. You read it online. You saw it on the nightly news. We were even inundated with those late-night infomercials or "junk-mail" packets that detailed the benefits of those funky "collector coins" (including some that were "individually hand painted," no less!).

Gold was going to $2,500, $5,000 or even $10,000. And only fools weren't in gold - or so they claimed.

But when gold prices stopped running, so did Wall Street's aggressive forecasts. In fact, we've basically seen an about-face - as if the Big Boys are now low-balling their gold price forecasts.

Don't get suckered.

If you buy what Wall Street is selling right now, you'll lose in a big way - twice. You'll miss out on the major profits that will come when gold prices run up to their inevitable new highs. And - perhaps even worse - you'll get left behind and find your buying power eroded in a big way when the inevitable harsh inflationary pressures ultimately take hold.

The Truth About the U.S. Economy - and Inflation

Here at Money Morning, we deal in facts and analysis, not empty promises and hype. We bring you the news that explains what's happening and why, and that tells you what our experts believe will occur - and then we show you how to profit from the opportunities and protect yourselves from the dangers. And - thanks to our worldwide group of experts, many of whom are Wall Street veterans themselves - we can bring you insights no one else can.

So what do we see for inflation, one of the most-complicated, most-debated and most-controversial topics before us today?

It's going to get worse - much worse.

The most-recent figures initially appeared to be benign - because oil prices fell - but if you look below the surface it's clear that inflation has really taken hold: For instance, producer prices were up 7.2% on the previous year. Another new report that came out late last week said that a key measure of consumer-price inflation posted its biggest increase in nearly three years in May.

But there's a second part to the inflationary saga. You see, another report said that a gauge of regional factory activity actually contracted in June.

In other words, inflation is accelerating - even as the U.S. economy brakes toward a double-dip downturn.

That's not just a recipe for "stagflation" - the odious combination of rising prices and falling output that we haven't seen since the 1970s - it's a surefire catalyst for higher gold prices.

As I'm sure this week's meeting of central bank policymakers will underscore, U.S. Federal Reserve Chairman Ben S. Bernanke won't be raising rates anytime soon. Because the gap between interest rates and inflation will continue to get larger, U.S. monetary policy will become more and more inflationary.

With nothing to arrest them, inflationary pressures are going to get a lot worse - and pretty quickly, too.

The inflationary spike - and the decline in the U.S. dollar that accompanies an economic slowdown - will prompt investors to scurry (and eventually stampede) into gold.

In short, we're watching the clouds gather into a "perfect storm" that will cause gold prices to soar.

That's why Wall Street's forecasts for $1,600 or $1,700 gold are a joke. Gold prices will head much higher than that.

Spot gold traded at nearly $1,534 an ounce yesterday (Monday) -not much below the all-time record of $1,575.79 that was hit in early May. So we're essentially already at $1,600 - with inflation that's accelerating and an economy that's doing just the opposite.
That gives us two important questions to answer:

• Where are gold prices really headed?
• And why isn't Wall Street pounding the table - telling every American investor to buy gold?

The second of those two questions is so easy to answer that I'm going to tackle it first.

The Truth About Wall Street's Gold Price Forecasts

If there's one thing that I've learned during my three decades in journalism, it's that Wall Street loves Main Street.

But not in the way that you think.

When I say that Wall Street loves us, it's because it uses us - and not that it's looking out for our best interests. Wall Street manipulates Main Street - and does so in a way that makes money for its very best (read that to mean super-rich) clients and maximizes its own corporate profits.

It's known as the "Greater Fools" strategy, and here's how it works. Wall Street identifies a great potential investment, and then feeds it to its wealthiest clients. Then it whips up a bullish campaign that brings in the mainstream media and piques the interest of Main Street investors - the "marginal" investors who transform a regular bull market into a full-blown bubble.

Those investors, who aren't everyday players, are the difference-makers. They move in - slowly at first, and then in growing numbers - and ignite the market mania that drives prices skyward. This boosts the profits of Wall Street's wealthy clients and maximizes its own corporate profits.

The wealthy (first-in) clients cash out at maximum profit, and the Main Street investors get left holding the bag when there's no marginal (new) investors to bring in and prices collapse.

If you think about it, that's just what happened with the dotcom bubble - and with virtually every other market frenzy that you can identify.

So right now, there's no incentive for Wall Street to issue aggressive gold price forecasts that would let Main Street investors know that the so-called "yellow metal" is going to get hot. Gold isn't hot enough for the Wall Street marketing juggernaut to work its magic - which means it isn't worth messing with right now.

But when a clear trend emerges, mark my words - you'll once again be reading aggressive Wall Street predictions about how gold is going to soar. Investors will push and shove and elbow their way in, and gold prices will head for the moon.

Unfortunately, the investors who wait - and take their cue from Wall Street - are going to miss one heck of a profit opportunity.

Let me show you what I mean.

Where Gold Prices are Really Headed

Late last week, when I decided to write this note to you, I figured it would be a good time to schedule one of my periodic private briefings with Peter Krauth, our resident global-resources expert. I told him what I'd read, and then walked through my reasoning.

"It seems to me," I told him, "that these forecasts are all ridiculously low."

After he finished chuckling over Wall Street's latest demonstration of chutzpah, Peter said that my thinking was right on target - and warned that those crazy forecasts weren't to be trusted.

"In fact," Krauth said, "I'd say that we're actually looking at $1,900 for 2011, $2,500 for 2012, and $5,000 by 2015."

When Krauth talks, it pays to listen. Back in December 2009, for instance, in the Money Morning report "Why Gold Will be the ‘Greatest Trade Ever'," Krauth told readers to ignore a month-long plunge that sent gold prices from $1,220 an ounce to about $1,080 an ounce - because the metal would rebound and zoom to new records.

He even got it right with silver. In September, when the "other" precious metal was trading at about $19 an ounce, it was Krauth who rated silver as a "Strong Buy" in his special report "How to Buy Silver" - and then watched as the metal soared nearly 170% in the eight months that followed (it peaked at roughly $50 an ounce).

So what's the catalyst behind his latest predictions?

Inflation's a given - and I think that our earlier discussion of that topic pretty much proves that. There are also the other obvious candidates - including the lousy economy and the milquetoast U.S. dollar.

Then there's China and India.

India continues to be the world's largest consumer of gold. And as Money Morning just reported in a report we published on gold coins, the demand for gold continues to escalate - in almost every income class.

Back in April, for instance, the State Bank of Travancore announced that a program to sell gold coins through five of its branches would be expanded to 60 branches in a single month's time. But an executive for a bullion dealer in India probably summed it up best when he said, referring to India's fifth-largest city, that "in Chennai, even the poor buy [some] gold."

When it comes to any discussion of investing, China has really fallen off most folks' radar screens. And not without reason, as the Asian giant's many problems continue to come to light.

But dismissing China as a catalyst - with regards to any investment - would be a grave mistake. And if you're talking about the future direction of gold prices, ignoring China would be especially egregious, Krauth explained.

China is not only the top producer of gold on the planet, but it's second only to India in terms of world gold consumption.

"According to the World Gold Council, Chinese investment demand was up a staggering 71% in 2010 over 2009, and that pace followed through into the first quarter of this year," Krauth told me. "The People's Bank of China - China's central bank - has only 1.6% of its assets in gold, and it's no secret it wants that percentage to reach much higher levels. It's no wonder all the gold produced in China stays in China."

Krauth also noted that the World Gold Council predicted Chinese gold demand was set to double within the next 10 years.

Said Krauth: "Higher gold prices - much higher prices - are all but guaranteed. Wall Street's gold price forecasts are way off the mark - and much, much too low."

So it should be no surprise when gold reaches $2,500 in a year - and as much as $5,000 just a few years after that.

Those are what I call real gold price forecasts.

News and Related Story Links:

• Reuters:
  Newmont sees gold above $1,600 in 2012 on Asia demand.
• Reuters:
  Data shows troubling mix of weakness, inflation.
• Money Morning Special Report:
  How to Buy Silver.
• About.com:
  India to remain the World's Largest Consumer of Gold in 2011.
• Money Morning:
  What You Need to Know Before Buying Gold Coins.
• The Economic Times:
  High Gold Demand Pushes Up Coin Sales.
• World Gold Council:
  Official Website.

William Patalon III

About the Author

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Before he moved into the investment-research business in 2005, William (Bill) Patalon III spent 22 years as an award-winning financial reporter, columnist, and editor. Today he is the Executive Editor and Senior Research Analyst for Money Morning at Money Map Press.

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