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The "Two Outlooks" for Gold Prices

One of the best parts of my job is when I hear back from you.

And two recent columns in particular on gold generated a larger-than-normal response.

The comments were related to the two-parter on gold prices that we published on Nov. 5 ("The Secret Gold Standard") and Nov. 13 ("Why Obama's Victory Means Higher Gold Prices").

Let's take a look at what you had to say.

The comments related to the "Secret Gold Standard" column were especially intriguing because a number of you thought I was advocating a literal return to the "gold standard."

I wasn't, of course. I employed the term as a convenient metaphor to try and help folks understand how the world's central banks were adding gold reserves for the first time in nearly a quarter century.

In fact, a global return to the gold standard isn't possible – there literally isn't enough gold to allow that to happen. It would crimp money-supply growth in such a way that global economic growth would be stymied.

A number of you wrote in to make that same point – including one reader who actually performed all the necessary calculations to make his case.

Al K. wrote in to ask: "Some analysts believe gold will drop further & others believe gold has bottomed out now. What do the experts of Money Morning believe?"

Since Al requested an "expert" opinion – a fair request – I put in a call to Chief Investment Strategist Keith Fitz-Gerald.

The Outlook For Gold Prices

Right now, Keith explained, there are two separate outlooks for gold – one for the near-term and another for the longer-term.

"If you're looking at the long haul, I believe that gold is tremendously undervalued," Keith told me. "I expect a combination of factors – including demand, the trillions of dollars that have been printed/injected into the economy and the development of new partially asset-backed international drawing rights – to create higher prices ahead."

But the outlook for gold is very different in the short-run, Keith explained.

"In that near-term time horizon, however, I still believe the risk is to the downside," he said. "The Eurozone situation remains problematic on a number of levels. And gold prices could also correct (fall), if traders have to contend with redemption requests, or if there are other factors that force them to raise cash."

In his mention of "traders," Keith was referring to the fact that these market insiders may have trading positions that are collateralized with gold. If they are forced to raise cash, they might have to sell that gold to do so, which could put downward pressure on "yellow metal" prices.

There are also some "market mechanics" to keep in mind, Keith told me.

Historically speaking, the months that follow presidential elections tend be to weak for gold prices, he explained. But the year that follows tends to be strong. If we follow that pattern this time around, it would mean the rest of 2012 won't be so hot, but that the odds for a rally in 2013 are high.

In fact, Keith said he won't be at all surprised to see a sharp drop (sell-off) in gold prices before the year ends.

"I can't say when, or how big, that drop will be – chiefly because the U.S. Fed and the other world central bankers are doing all that they can to keep the financial markets from flat-lining … which is distorting the normal and healthy market-adjustment mechanisms that exist," Keith said. "But I expect that we will see [a correction]. When that occurs, consider it a buying opportunity. President [Barack] Obama's first-term policies created a lot of damage and his second term is likely to reinforce the need to preserve value even more."

This puts gold in a special category, making it an asset that all investors should include in their investment plan.

Here's the thing about Money Map Press: We're fortunate here to have the sharpest group of experts that you'll find. But we need them. Because I believe we also have the sharpest group of readers in the business, too.

And that's what makes this job fun.

By the way, in our first 15 months of publication, four of our recommendations have doubled or better, two of our recommendations have ended up as takeover targets and we've had more than four dozen winners.

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About the Author

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. With his latest project, Private Briefing, Bill takes you "behind the scenes" of his established investment news website for a closer look at the action. Members get all the expert analysis and exclusive scoops he can't publish... and some of the most valuable picks that turn up in Bill's closed-door sessions with editors and experts.

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  1. fallingman | November 26, 2012

    Not enough gold, huh?

    Questions about the wisdom of a state created "gold standard" aside…or the likelihood of same…there is as much gold as there is and as much paper "money" as there is. You do a little arithmetic and, voila, you come up with a price at which paper is convertible.

    It's silly to say there "isn't enough gold." I thought that canard had been put to rest.

    It's all a function of price.

  2. Dianne | November 26, 2012

    "President Barack Obama's policies created a lot of damage?" Just what policies are these? He has merely continued the policies of his inestimable predecessor, which is why I am not a fan of his. If you are criticizing him for staying the course with Bush policies, then I'm with you. Otherwise, you are off base.

  3. William Patalon III | November 26, 2012

    Greetings Fallingman;

    You're one of our most-frequent respondents, so it's always good to see your name attached to a comment — I know even before I look that it will be something that's worth taking the time to read, and worth taking the time to respond to myself.

    On your comment today … you only repeated back part of what I said. I didn't say there wasn't enough gold … I said there wasn't enough gold to allow for an effective return to the gold standard, and to allow for a healthy growth in the global money supply (… I use the term "healthy" in the loosest sense possible here … healthy in terms of the setup that our expert leaders in Washington have created for us …).

    There's a big difference between the quandary as I described it and your interpretation that there "isn't enough gold" without factoring in the provisos that I set forth.

    Interestingly, one study I found (I talked about this in Private Briefing) postulated that a return to a true gold standard would cause the yellow metal to immediately spike to $10,000 an ounce. But the big issue was still the concern that the the annual growth in gold stock (invetories) would not be in tandem with the expanding monetary base.

    Again, was great hearing from you, and we always appreciate your contributions, but wanted in this case to make sure you were clear on the big picture.

    Hope you have a fine holiday season …

    Respectfully yours;

    William (Bill) Patalon III
    Executive Editor
    Money Morning & Private Briefing

  4. gold standard | November 26, 2012

    Agreed, when I read there isn't enough gold, I pretty much stopped reading because that is quite the novice statement to make. It's been debunked enough already.

  5. Richard Chaput | November 26, 2012

    Very astute comment about there 'not being enough gold'. The gold standard may never be employed, but not because there is not enough gold. At the 'right price', this could happen, and the scramble for gold will drive the price.

    R C

  6. fallingman | November 26, 2012

    Thanks for the personal reply.

    As Jim Rickards points out, there are many issues to be resolved before a gold standard of any kind is re-introduced. A big one is, indeed, how quickly the money supply would grow. I would contend that gold would offer more advantage than disadvantage in this regard. I see no particular downside to a gently deflating currency. What I do see a big downside to is pegging the dollar's convertibility at too low a gold price upon re-introduction, as happened following the great war. But those rather global observations aside, I really don't pretend to know exactly the best way to go about it, only that some discipline needs to be re-established to a system that's on "tilt."

    I, personally, am opposed to any kind of state issued, controlled, or mandated currency, be it the purely fiat FRN we're now forced to use or a state issued currency that's "backed" by gold or even 100% convertible into gold. I'd like to see free competition among currencies. Let participants in the market decide what they'd like to use as money.

    I believe in the separation of money and the state. I know, it's crazy. How could regular people ever possibly figure out that whole money thing? We need the high priests at the Marriner Eccles building at 20th and Constitution Ave to handle it for us. We too dumb.

    By the way, I'm not holding my breath. I seriously doubt we get any reforms whatsoever until the whole monetary system collapses…and won't THAT be fun?

    • BHOLMES1 | November 27, 2012

      Again, thought-provoking comments … (although, unfortunately, the two other commenters failed to grasp the full nuance of our discussion … lol).

      We're clearly in agreement on the topic of free market competition, BTW.

      Always glad to see you post here, Fallingman — whether you agree, disagree or are expanding upon a point we made, you always do so with graciousness and respect, and we can always count upon your comments to be additive to whatever discussion is taking place. That's the kind of approach that fosters enlightened discourse and new discoveries … our readers are very smart and are very good at alerting us to alternate views. Even more important, you and other readers with similar savvy and the same ability to nurture intriguing discussions remind us what's important to YOU. Make no mistake, reader feedback is taken seriously, read carefully and is shared and discussed in-house. It helps shape our thinking, and assists us in our quest to develop, deliver and maintain content, products and services that MATTER to all of you.

      And you, my friend, are a welcome and valued member of the Money Map Press readership family. And though it may come across as flattery, it's really intended as candor.

      William Patalon III
      Executive Editor
      Money Morning & Private Briefing

  7. H. Craig Bradley | November 26, 2012

    You mean that if the G-20 adopted a "gold standard" such that central governments and their central bankers would not be able to so easily engage in money printing? Well, the country that can get the lions share of the gold first will have the advantage and call the shots, won't they? China sure would like to be such a country. We used to be the one with the most gold in the 1950's. Question is, is there enough gold available for sale or in production to enable China to realize its global monetary ambitions. I doubt it. Central Banks are no longer net sellers, but instead, buyers. Have been since 2004.

    • BHOLMES1 | November 27, 2012

      Great to hear from you, Craig.

      You are correct about the central banks, although the report I saw says they made the switch in 2010. I would normally point you toward our earlier report on this, but I already know from earlier discussions that you've already read it … lol.

      And you clearly understood our point about the global gold supply, and global monetary objectives.

      Thanks for taking the time to post. I know the gurus read your comments on a regular basis, as well, and are grateful for the time you take to post them.

      William Patalon III

  8. Reed Pedrick | November 26, 2012

    What is your outlook for the price of oil per barrel for this next year?

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