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Good News for Gold Prices: Commodities are Wounded, But Far From Dead

Greece is frozen in a political stalemate. Youth unemployment is running at over 50%. And there has been a $1 billion run on Greek banks.

From near and afar, there appears to be no easy way out, especially now that the Eurozone is heading back into a recession.

It's times like these when investors pour into the U.S. dollar for its "perceived safety."

With commodities priced in U.S. dollars, this spike in the greenback has sent commodities-including gold prices-into a tailspin since early March.

That has many doubters asking: "Has the commodities super-cycle ended?"

It's a reasonable question considering the Continuous Commodity Index (CCI) is back down to levels it last saw in September 2010.

What's more, gold prices have backed off to near $1,500/oz., and oil prices have fallen from $110 to $90/barrel.

But as you'll see, the commodities coin does have another side.

The Other Side of the Commodities Story

In fact, a recent article by Frank Holmes, CEO and chief investment officer at U.S. Global Investors, pointed out how China and other emerging nations are in better fiscal shape than much of the West.

Even if China is slowing somewhat, it is still growing at an enviable 8% per year, with only 42% debt to GDP ratio. So rather than go for more outright stimulus, it's expected that China will target new loan growth and its M2-money supply growth to around 14%.

Meanwhile, India and Australia have just lowered interest rates while other central banks are basically refusing to raise rates.

It means the world will keep turning, people will keep consuming and annual demand of raw materials is likely to remain elevated.

As for gold prices, let's cut right to the chase.

Real interest rates are running around negative 2% and thanks to ZIRP (Bernanke's Zero Interest Rate Policy), they're likely to remain so at least until late 2014.

And debt in the West (U.S., Europe, England, and Japan) has doubled in a little over three years to almost $8 trillion in a veritable monetary flood that's bullish for gold.

On top of all that, the demand for physical gold is still increasing.

According to the World Gold Council's (WGC) Q1 2012 trends review, they see record levels of Chinese demand, surging 10%, for a new quarterly high of 255.2 tonnes. They also see further growth, as the Chinese remain concerned about high inflation persisting.

The demand is so great that China has surpassed India as the world's largest gold consumer.

European demand has also held up well, with physical metals in the form of bars and coins selling at higher than historical levels.

And central banks keep doing their part, with net purchases totaling 80.8 tonnes, or about 7% of global demand. WGC believes there's been a secular shift, with central banks now set to remain net buyers of gold for the foreseeable future.

Yet, gold investors who are dismayed by its recent price action need to be psychologically prepared.

If we were to see a scenario similar to the 1970s bull market, gold could easily drop in half at any time.

That's exactly what happened when gold reversed from $200 in January 1975, and fell for 18 months to $100 in August 1976.

Certainly, a drop that big would have forced a lot of gold investors to sell. But the truth was that the best was yet to come.

From $100 in August 1976 until its peak in 1980, gold rose 8 times to over $800.

In fact, a chart of the entire current bull market shows that gold prices could easily pull back to $1,300 and still not violate its upward trend line.

A QE Boost to Commodity and Gold Prices

So yes, the markets are in a funk over Europe and less-than-stellar economic news here.

But this is déjà vu all over again. Since the financial crisis began, we've been here three times before. In fact, each time since then, the Fed has stepped in following a clear market pullback and opened the monetary spigots.

First came Quantitative Easing 1 (QE1), then QE2, then Operation Twist. Each one of these liquidity injections quickly sent the market soaring.

The Fed also promised to keep rates low until the end of 2014. Of course, Ben's been denying for months that more stimulus is coming. Yet recently released Fed minutes from its April monetary policy meeting showed more openness to another round of easing to coax the economy along.

But each time one of these injections ends (wears off), the market (junkie) goes into withdrawal, and looks for its next fix.

I've been saying for awhile that it's coming. With an election pending this November, odds are good we'll see QE3 before the end of summer.

With falling stocks, retreating commodity prices, and weak jobs reports, it'll make the QE3 sales pitch a much easier sell than your average time-share.

And based on the reaction the last three times, I'm pretty confident the commodities markets will smile at this one, too.

Still, it won't be enough. We're going to see a lot more central bank easy money. QE4, QE5, and QE-pick-a-number will not be far behind.

Get ready. Commodities and gold are about to come roaring back.

The commodities bull market is far from over.

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About the Author

Peter Krauth is the Resource Specialist for Money Map Press and has contributed some of the most popular and highly regarded investing articles on Money Morning. Peter is headquartered in resource-rich Canada, but he travels around the world to dig up the very best profit opportunity, whether it's in gold, silver, oil, coal, or even potash.

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  1. john r ridings | May 24, 2012

    I am feeling suckered at the moment, having bought a few thousand dollars worth of Gold and Silver bullion in the past 3 months, only to see the price drop over 10% – entirely because of advice from articles like this one. When is the great recovery going to happen? I thought that traditionally, precious metals go up if stock markets go down – so what is happening ? Is it all hype like Gold at $5000/oz, Silver $200 or do you know something I don't ?

    • Steve | May 24, 2012

      You are being suckered both ways. By Fed policy and market reactions. Ever been in a casino? They're far more honest and the food is great.

    • GARDNER04707 | May 25, 2012

      Patience. Gold and silver are long term holds – that's the way I look at it. If you don't need the money, hold on to those assets. I wish I had the cash to buy more right now – I'm hoping the price stays low throughout the summer so that I can buy at these prices when I can free up some cash.

  2. Eddy Widjaja | May 24, 2012

    According to Warren Buffet and his companion Munger Gold is not a productive asset compared to -say- stocks. Well may be, may be not. Stocks can drop to zero if you choose the wrong stocks, whereas gold would never drop to zero.
    I own gold for the simple reason that it is so SCARCE. In the old days of the goldstandard the increase of the yearly production of gold was barely 2 to 3 % , whereas the international trade grew yearly 10% or more. so gold is the in reality the strongest reserve currency in the world.

    Eddy Widjaja.

  3. robert bishop | May 24, 2012

    I agree with john r, there has been a lot of positive 'spin' on the PMG commodities. The typical gold as a 'safe haven' play does not seem to be occurring. Granted some of the metals retracement is due to the dollars strength that ( at least for me) does not fully explain the weakness. I also realize that India and China are not buying into the weakness. Perhaps someone can provide a better explanation, I for one am at a loss to explain it.

  4. Mickey | May 24, 2012

    Consider that the central banks keep buying up gold. Consider that nations keep buying gold.
    consider that the elite who run the world keep suppressing the value of gold and silver so as
    to buy it cheaper, discourage people from holding metals, and continue to use non-existent
    metals to hold down the real price of metals particularly gold and silver.

    Yes the value of the dollar will in some ways affect the price of gold as will crisis/non-crisis.
    The real story…if I sold one hundred people the same valuable would that
    house be on the market. Supply is perceived at 100 houses not one. Value would go down.
    Now compare it to gold. If I say the supply is 100 times what it is based on ETF's and other
    paper purchases..what happens when the day of reckoning comes? Exactly…gold wont be 1500
    it amy well be 15,000. Why? the real supply will exist once the paper crashes and people demand
    their gold…and only one in a hundred will get it.

    Patience…you are holding real money not fiat currency. Lawful money not legal tender.
    Read Revelation..the great world govt will trade in gold and silver. Why? It is real money.
    Do not look at the price of today or next week..look for the difference in the soon coming crisis.

    If you have metals…let no one know. They wont come for what they don,t know you have.
    It may be the difference between life and death…dont be discouraged by those who want to
    take your gold and silver cheap. Stop being a hedonist and start being a winner- a survivor.
    I represent no buyer or seller of gold and silver. My position is…he who endures to the end shall
    reap the rewards. Hope this makes sense to you.
    ps. Always take physical delivery…in a crisis who will
    be able to get their hands on paper or stored gold.

  5. Dean | May 24, 2012

    Be patient, and stay through the cycles. Don't go into debt investing. Only invest what you can afford. Commodities are like a 401-k they are volatile to market trends. Be in for the long haul and if gold and silver continue to fall be ready to buy when it hits bottom. World demand and dwindling supplies will eventually bring the price back and you will receive the return we have been promised. I invested in Gold and Silver starting in the late 70's. I have bought high and low and never worried about the up's and down's. Don't place all your eggs in one basket. Diversify and work hard.

  6. Dean | May 24, 2012

    Very well put Mickey! Thanks

    • Mickey | May 24, 2012

      You are welcome Dean. Also remember the banksters hate deflation…it does not
      allow them to crawl out of debt or steal the people's money. This artificial gold and
      silver price will end…and then watch the fireworks. Inflation is on the way. Real
      eye popping inflation. It may take another year or two…but it will be with us.
      As you astutely point out…dont curse the buying opportunities–take advantage of them.
      And keep only so much cash as you need for emergencies and reserves…the rest might do
      well in non paper investments.

      Diversity has been the rule…but we do live in exceptional times. Whatever one does they need to be able to sleep at night. The metals have exhibited no more volatility than the markets
      have over the years and usually less. Finally this is not a matter of if but when. Mike

  7. The Market Wizard | May 24, 2012

    Fundamentals dictate the bull market in commodities. Investor sentiment and the cycles of greed and fear dictate the short and mid term moves. A few months in a decade is not a long time. Commodities investing requires patience and a trust in the bullmarket. In a bull market the price will eventually keep climbing, but there are always corrections in between bull moves that shake out the "John R Ridings" and let smart players buy for cheap.

  8. ATIYYA | May 24, 2012

    HI I totally agree with deans comment what an excellent comment and example for people to follow i think that best things come to those who wait and be patient because patience is a virtue. as for the fact that you are worried about gold going down you could sell your coins now if you are too worried and when gold drops further buy at that time and wait for it to go higher hope fully fingers crossed you should make back your money you lost the first time i didnt know people do this but agood friend advised me to do this if i was too worried abot the price of gold dropping or otherwise you could hold tight and wait and see what happens remember nobody can predict the future only GOD so have your faith and trust in him and you will be rewarded

  9. MARCO | May 24, 2012

    I was selling new cars in Mexico city and I have rich customers,I would like to sell gold to them
    what can I do ,how in order to make a profit for me.I am living right now in Las Vegas.

    Thank you

  10. Bill Poster | May 24, 2012

    The parabolic rise in gold from June to September last year was bound to be followed by a prolonged correction. Gold may not have bottomed yet: it has really been sidelined by the Euro-Dollar action. As Dean and Mickey have commented, patience is required.

    It is apparent that Obama intends to run an annual deficit of $1T indefinitely. You don't need to be an economist to figure that isn't going to have a happy ending for the Dollar and that gold should be the beneficiary. If Romney wins in November, I don't believe it will change much. Remember, Paul Ryans' recent budget proposal was claimed to balance the budget in 2040. Reality is that neither party has the cojones to cut entitlements and defense to the degree necessary to save the buck.

    Short-term the Dollar will probably continue to gain value, but as traders have commented that only makes it "the prettiest horse in the glue factory" or "the leper with the most fingers". Eventually the Dollar, Euro, Pound and Yen are all toast: gold will then be the shining star.

  11. bikerdick | May 25, 2012

    Gold is an insurance policy. Don't try to time it. you should own at least 10% gold. Buy it, put it away.
    The dollar is strengthening only because of payday in Europe for excess socialism; soon payday in the US if Obama gets re-elected. The parasites may now outnumber the hosts. Asia will be the last man standing because of their disciplined saving. Maybe Russia, but I think Russia's return to central control will destroy their economy again.

  12. newbie on the block | May 27, 2012

    I am very new to buying silver and in fact only started this year thanks to a very old friend pointing out the pluses.
    The technical digital age is very quickly using up earths silver therefor demand out strips supply and hey presto you are on to a winner.It requires patience and a little long term thinking just hold on in there ,never invest more than you can afford.
    MY aim is 30 kilos of silver in 3years depending on price.
    As i live in europe we are all waiting for the fall out so now is the time to invest plus the US has not told all the truth about their fiscal state and don"t blame it all on Obama as Camaran in UK he took over from predessors who never stopped the free for all in banking systems.
    So think for yourselves good luck and much patience

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