Tony Lepage

As bullish as I am on Gold, I am a little more than hesitant on where the price will go over the next few months. I‘ll be completely re-examining my stance on the gold price over the next two weeks . This is due to two major changes that I did not expect: Japan raising interest rates and the drastic escalation of the Middle East wars.

Looking back at May, the price of gold dropped nearly 40% over the course of 2 weeks. The question is whether gold has the ability to launch past the 26 year highs of May or if gold will get slammed once again. We are approaching a very important price level that can bring back the confidence that was lost during the drop. If gold can fly past the $760.00 level, we can be sure it’s headed for $800.00 and possibly $900.00 into the fall.

Point 1

There is a huge mess in the Middle East. I’m going to have to start researching deeply into this war—I am afraid that we may have entered world war three. Any form of war, especially one that seems to keep getting bigger, is bad for economic growth.

Generally, wars destroy everything from lives, dreams, and homes to economies, liberties, and growth. If this violence continues much longer you can be sure the economies of the world will slow to a halt. Usually, when the interest rate goes up, this is enough to slow the economy on its own. If you’re a reader of my previous posts, you will know that I believe the Federal Reserve is stimulating the economy with easy money to offset the effects of a rising interest rate. This means a slowdown may be delayed until the wheels fall off the wagon completely.

If the economies of the world begin to slow down, you can be sure demand for base metals like copper, zinc and steel will also decrease. Gold has broken away from its relationship with the USD (when the USD goes up gold used to go down). However, gold has not been able to break free of its relationship with the base metals (They go up, so does gold).

Point 2

Japan is slowly ending its role in the ‘carry trade.’ The carry trade is when an investor secures a loan at a very low rate and locks it into a guaranteed return at a higher rate.

An example: Obtain a $1 000 000 loan with an interest rate below 1% from Japan, convert it into the US Dollar (or, USD) and invest it for 5%. You can keep the 4% of $1 million!

This has been a strong stimulant in the US economy. With the carry trade ending and deflating the USD, investors will fear a demise of dollar strength and flee to a safe haven like gold.

The current action in the Gold price suggests that investors fear the drop of the dollar more than fearing the current war. If they haven’t thought about what the war means to metals demand, expect a harsh correction in the gold price. If this is the event that breaks the relationship between gold and base metals, expect gold to continue well higher into the $1000 range within the next year.

Furthermore, perhaps investors are starting to see that the USD is going to fall and are looking to ALL metals as a safe haven. Don’t get me wrong, I am still bullish on the price of gold because the demise of the USD is almost inevitable; I’m simply not sure that this is the end of the beating for gold. Adding to my hesitation is the length and strength of the spreading war.

Please offer your thoughts on this, I’m openly inviting them.