|Investment Research Group|
The U.S. government abandoned the gold standard of fixing gold at $35/oz, opening the flood gate in early 1972. We saw gold quickly explode to $200 in 3 years. Then there was a severe correction, bringing gold back to $100, a 50% retreat, lasting for almost 2 years.
However, the $100 mark, once broken, became a resistance in 1976 for gold. Gold has never fallen below $100 since.
But we did see a 20 year bear market in gold, where the metal completely lost its lustre. Things were going too well for gold to really perform.
It took the meltdown of our banking system in 2005 to bring gold back to the fore.
The well known analyst, Thomas Z. Tan, believes the breach of $1000 last week is a significant event.
"An even round number of $1,000 is always an important level for any actively traded securities," he says. "Since early last year, gold has attacked this level 3 times, including the current 3rd time and succeeded breaking it. As it is often said, the 3rd time is the charm.
"Will gold stay above $1,000? Who knows? However, the chance is very good that gold will never fall back to $1,000 level again on the monthly chart."
Tan supports this alarming gold price prediction with an equally alarming economic outlook.
"The worst is yet to come," he says. "The first phase of the banking crisis has only wiped out bank equities, but the second phase will wipe out many bondholders".
In 2007, says Tan, "I successfully predicted the collapse of the banking industry and $1 trillion in losses. Looking back, my prediction was too conservative, and probably should have said several trillion."
"The banking industry has already gone through the first phase of free fall, with the Fed dumping trillions of taxpayer's money implicitly and explicitly to provide some temporary shoring. However, the upcoming second dip will be much worse, with the commercial real estate market taking the same percentage hit as its twin sister, the residential market."
"When the second economic dip comes, dumping money like we did during the first one won't work. We have already seen the sign of diminishing effect. The biggest impact is always when it was done the first time.
“The more money being dumped, the less effect it has on the system. Pretty soon we will only see the unexpected and unwanted negative consequences of this monetary inflation."
It is this prospect of rising inflation in a troubled global economy that is giving gold its appeal to many investors.
Inflation and the prospect of an ever weaker US dollar is part of the story that has enabled gold to break $1000.
In this sense, says Tan, "gold not only saves people during inflation, but also during depression. Gold is the only credible, trustful, fair, safe and honest asset left in the whole universe. It is the foundation on which all other assets are built upon.
This is the only asset which can, once and for all, end the capital manipulation, distortion, rip-off, and cover-up by Wall Street during 20 year Greenspan era."