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.

One of my favorite activities is calculating compounding returns. I find that it helps stimulate my imagination and think up ways to generate different rates of return. If you’re ever bored I suggest grabbing a piece of paper and compounding your own numbers. Think of what you can afford to invest each month and calculate your return over the first year, second year, and so forth. It gets really exciting around the 8th or 9th year when you generate a larger return than you add to the investment.

Show me some sample numbers!
(Click the image to see more details)

The above image assumes you have an investment strategy of investing 15% of your gross annual earnings. It also assumes you can generate 15% return. Further, it assumes you are able to grow your earnings by 4% a year (ie, get a raise).

Over the course of the 31 years (above), a total of $143 861.41 was invested but in the end you have nearly $3 000 000!

I’ve made this excel spreadsheet available here. Simply substitute your own values into the maroon fields (Salary, Invested, Return) and see how you can customize your own plan!

Remember, you don’t need to invest into a stock market to get returns. In fact, one of the best ways to generate a 15% return is to invest in a side business. Not only will doing something you enjoy help you attain a 15% return with a lot more ease, it can also supplement your annual earnings—the beauty is you can start small. With the chart above, you need to attain 15% on $4.5k. That is, you need to make $675.00 and you have $4500 to help you do it.

The most important part of compounding money is TIME. It is essential that you begin today because in later years your money will grow very rapidly. Don’t wait till you’re 60 to enjoy it. Start an aggressive plan when you’re in your 20s and you can retire rich in your 40s.

This strategy holds true even if you have debt. Again, time is on your side, but only if you take advantage of it and compound those dollars. I like to use the following strategy for putting money away and investing:

1. Pay your rent/mortage. This needs to be paid first or else you won’t have a roof over your head. Enough said.
2. Pay yourself next. This is done by investing for your future. Paying yourself second leaves no excuse to not invest.
3. Pay your debts. By paying your debts right before your spending, you’ll want to reduce the debt more by reducing the spending. Investing stays out of the picture and you will grow to despise debt even more.
4. Pay for the present, fun, shopping, etc.

You must begin investing now. It is essential to begin building the habit of investing.

Of course, this was a very simple post but I hope that you are convinced that saving a measly amount of money every month is a great idea. The benefits far outweigh the ability to immediately consume. If you haven’t started an investment plan, I hope you’re motivated now and will begin with the very next paycheck.