Why gold now?

By WND Staff

Editor’s note: The following is a guest commentary from one of WND’s sponsors, Kevin DeMeritt, president of Lear Financial. If you would like to learn more about investing in precious metals, take advantage of the free information Lear Financial is making available to WND readers.

Some key factors are coming together to indicate what may be ahead for gold and the markets:

Dollar’s loss, gold’s gain?

With the U.S. stock market no longer the best game on the planet, and with America’s notorious $130 billion trade deficit continuing to climb (up $18 billion since the start of 2002), foreign money is no longer flowing into our dollar-denominated investments. One consequence is a declining dollar. The U.S. dollar fell 8.6 percent in the second quarter of this year on a trade-weighted basis. This is the steepest decline since the end of 1987. So where’s all that foreign money heading instead? Into gold. During the time the dollar swooned, gold saw an 18 percent rise. Dollar’s loss is, in fact, gold’s gain. It really is a chain-reaction: The more foreign money invests in gold, the less of it is available to support our deficit (the U.S. needs at least $1.5 billion a day in foreign capital just to help fuel the deficit), the higher the deficit grows, the lower the dollar sinks, the less attractive dollar-denominated investments appear, the more foreign money will continue to invest in gold.

Declining debt health – A preview of stocks and gold 4 months from now?

Barron’s Confidence Index is the main indicator of the state of health of U.S. bonds – and of American debt in general. The latest index figure is 68.0, which, according to respected stock market analyst Richard Russell, is the “lowest CI since the terrible 1940s! Something is scaring the hell out of the usually prescient bond crowd.” He goes on to say that the reason for this CI decline, down from an 85 in May, is because “20 percent of all high-yield debt was in default and another 25 percent was in distress.” In fact, the value of corporate bond defaults so far in 2002 has registered a record $140 billion, already beating last year’s record $135 billion. Russell believes that the index is a preview of the stock market a few months from now.

“Let me put it this way – the credit situation in the U.S. is moving toward a state of ‘shambles.’ Do you wonder why many bank stocks are falling apart along with insurance company stocks? By the way, the bond market (which is highly sophisticated) tends to lead the stock market. Back in the ’60s we used to say that the Confidence Index leads the stock market by two to four months. If that holds true, watch out!” If the pattern holds, the decline of traditional paper investments – stocks, funds and bonds – only means higher gold prices. You need to prepare accordingly.

The economic consequences of war with Iraq

What will happen if push comes to shove in Iraq? Three things are likely. First, commodity prices will probably rise. Oil will lead the way (as it traditionally does in the commodity world) on general principle alone. If the war somehow gets out of control and expands to more of the Middle East, oil prices could skyrocket. Because of the destabilizing influence this would have on world markets, gold would soon follow. Next, the dollar could further decline due to a lack of foreign participation in the war and our need to fund the thing ourselves. What’s more, the disfavor incurred by our actions in this part of the world could result in more losses of Saudi and other Middle Eastern deposits in American markets, again pressuring the dollar. Finally, inflation could rear up due to the continuation of massive war-related expenditures. The dollars to fund the war have to come from somewhere. If our allies aren’t going to help out, the printing presses will have to get busy. Together, these three conditions – rising oil prices, a declining dollar and soaring inflation – all sound like a solid recipe for bullish gold.

The Dow/gold ratio nearly half its year 2000 number

In 2000, at the end of the fabled bull market in stocks, the Dow/gold ratio – the ratio of the price of the Dow versus the price of gold – was at a sky-high 45. Historically, this ratio is healthiest between five and 10. Today, as a result of declining stocks and advancing gold, that ratio is 23, or about 23 times the price of gold, nearly half of what it was two years ago. But to revert to its historical norm, either gold would have to go up or the Dow would have to continue to plummet. For example, at a Dow/gold ratio of 10, the Dow would be around 5,000 … while gold would have to be $500 an ounce.

These four signals are by no means alone. The gold bull market is off and running, and signs of what may be coming ahead continue to build for those who care to look.

Special for WND readers, Lear Financial is making available free information on investing in precious metals.

With more than 20 years of industry experience, Kevin DeMeritt is president of Lear Financial, one of today’s fastest growing and most successful precious metals investment firms.