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08/10/2013
Gold Demand / Gold Prices

I read an article on the internet today, where the author said that Chinese gold demand will be the driver for gold prices.

I disagree. China demand is not going anywhere. They are importing boatloads and planeloads every month, and that will continue for the rest of the decade.

The key to gold prices are going to be the US economy and the 10 year US Treasury interest rate. As long as we continue to have low interest rates and steady growth (any growth will do) in the US economy, then gold will struggle to get anyone's attention.

But I think it is becoming problematic for both of these two factors to hold. Already the 10 year rate has been rising, and once it reaches 3.5% or 4% the derivative markets will likely begin to break down. There is so much leverage in the financial markets for low interest rates that once they turn higher, the losses could be staggering. Also, the housing market could easily tank at higher rates.

As for the US economy, the anemic recovery that began in 2009 is getting long in the tooth. A looming downturn is coming, it's just a matter of when. My bet is 2014. Does anyone doubt that the next downturn is going to be brutal? Unemployment is already severe and government budgets are constrained. Isn’t it obvious that we are losing our economic security? We got through 9/11 in 2001 and the economic crisis of 2008, but now we have spent our wad. Those two events eliminated millions of high paying jobs, and now we are at risk falling down hard. The next downturn could easily be messy and impact our way of life in profoundly negative ways.

Once interest rates rise and the economy falters, the run to gold is going to be dramatic in my view. Just consider how much higher the interest payments of the US debt will be? Perhaps $400 billion a year? How can you balance the budget with that much debt? Won't that create some unease and uncertainty in the financial markets?

What most people who ignore gold fail to grasp is that it is literally the only asset without counter-party risk. And it is an asset that is rare and only growing at 2500 tons a year. Plus it is highly liquid and easily transportable (50 lbs = $1,000,000). It is the ultimate form of money.

As billionaire investor Jim Rogers said it so eloquently: “I'm still buying gold and silver, and I have NEVER sold any.” In other words, he still owns every ounce of gold and silver he has ever purchased. Gold is like a house you intend to retire in. You don't sell it unless you have to.

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