Where Is Gold Headed?

Gold continued to fall on Friday as the rising U.S. dollar reduced its hedge appeal. December gold fell to $1,115.30 per ounce, down $10.40 on the session. Prices fell as low as $1,110.80 earlier in the day. The metal lost $46.50 on the week, falling in four of five sessions. Gold is more than $100 off the record $1,218 reached last week. Yesterday, gold was flat.

Nothing has changed.

The strategy to buy and hold gold now is predicated on the following rational:

Gold should be held for at least three to five years.
We are at the beginning of a new cycle for gold accumulation.
Economic indicators still favors commodities and hard assets.
The long-term trend is still up for the price of gold.
The secular bull market in equities that began in 1982 exhausted itself in 2007. The current bull market in gold started in 2002. The economic data pouring out in November and December has a tremendous amount of “white noise” in it. The fourth quarter of 2008 had such a dramatic collapse that year-over-year comparisons and seasonal adjustments distorts the true economic picture. This will continue another two or three months.

April 15th, the deadline to pay taxes, is 120 days away. This will be the day of reckoning for municipal budgets when shortfalls in tax receipts around the country become apparent. The federal government will be shocked in the drop in taxes collected, also.

People invest for one of two reasons: greed or fear. Over the next two years, investors will buy gold primarily out of fear. There are insufficient funds to service the obscene amounts of outstanding debt that was issued this decade. As more and more defaults occur from real estate, corporations, and governments, trust in domestic and international financial systems alike will diminish. The price of gold will rise.

Historically, it is documented that after periods of hyper-credit, the swift and troublesome reversal of credit causes an economic depression. Unemployment swells, lifestyles and life choices are interrupted, altered, or sometimes ruined. Public anger begins to rise; politics becomes more bitter and partisan, and true solutions are prevented from reaching the surface and being enacted.

When economic systems are broken, to protect their jobs, politicians rely too heavily on monetary and fiscal policies, which have limited impact on the aftermath of busted bubbles. Political discontent ensues, the propensity for violence by all sides’ increases, and a pattern for chaos emerges. This current edition of growing anarchy isn’t my paranoia; I’m borrowing it from several senior Goldman Sachs bankers who applied for gun permits (soon after receiving first dibs on the H1N1 vaccine before city hospitals) in November before their lavish Christmas bonuses were paid. Their CEO, Lloyd Blankfein, also upgraded the security system on his two New York homes.

These types of events occur pushing up the price of gold absent real inflation.

Then inflation begins.

We are leaving the first decade of the 21st century. The second decade will be quite different from the previous one. Ten years ago, the federal government was running huge budget surpluses and paying down the debt. Then Federal Reserve Board Chairman, Alan Greenspan, speculated aloud about the distant problem of the debt market running out of treasury obligations if the US borrowing needs continued to fall. Congress became concerned and decided to study the problem. So, the future can be changed.

As the price of gold continues to rise, fear is replaced by greed as the primary reason to hold gold bullion. This is a recurring theme throughout history which is never discussed in the mainstream media. I don’t work in the mainstream media; I provide economic commentary to preserve wealth and to manage risk for clients. What investment strategies did work this decade is ill-equipped for tomorrow.

Make no mistake about it: near term, wealth is under assault and risk is growing- from all sides.

Buy Gold at or Below Net Asset Value with This Closed-End Fund

It appears that the correction in gold will be extended a second day today. If this correction continues, I have found a closed-end gold bullion-backed ETF, with a visible net asset value, that you can purchase at, perhaps, a discount in the near future. The Central Gold Trust , which trades on the NYSE Euronext, closed Friday at a 5.7% premium to NAV.

The following description is from Quantumonline.com:

“Central Gold-Trust, launched in Canada in April, 2003, is a passive, single purpose, self-governing closed-end trust, 98% invested in long-term holdings of gold bullion, substantially in physical international bars, and does not actively speculate with regard to short-term changes in gold prices.

Central Gold-Trust’s gold bullion is held unencumbered in allocated, segregated and insured safekeeping in Canada, in the treasury vaults of the Canadian Imperial Bank of Commerce. The gold bullion is physically audited by Ernst & Young in the presence of Gold-Trust Officers and Trustees as well as bank officials.

Central Gold-Trust Units now trade on both the AMEX with symbol GTU and the Toronto Stock Exchange (TSX) with symbols GTU.UN in Canadian dollars and GTU.U in United States dollars.”

The closing market price on Friday was $47.12 while the NAV was $44.58. That is a $2.54 premium to NAV. The trading range on Friday, December 4th was $48.74 to $46.47. During extreme moves closed-end funds can and do trade at discounts to NAV.

If the premium evaporates during this correction on any given trading day, buying gold bullion at a discount or even at NAV is considered a decent entry price for intermediate and long term investors.