At USAGOLD, we are monitoring three developing situations that we believe could have a profound impact on gold demand during the remainder of the year — driving forces that could provide impetus for a classic gold run that could begin with a summer surprise. . . . .
1. A possible stock market meltdown
Jon Hussman (Hussman Strategic Advisors) is predicting a stock market correction in the near future that will wipe out 38% to 50% of current valuations. When it comes to the stock market, we give Hussman’s analysis a bit more play on these pages than others simply because he called both the 1987 and 2007-08 crashes — a feat few, if any fund managers can chalk up on their resumes. Hussman sees the same build-up of overvaluation now that he saw then and has issued warning to his readers. Some will be put-off by Hussman’s Doomsday thinking, but we should keep in mind that “I didn’t see it coming” was the most commonly verbalized refrain following the last stock market meltdown in 2008.
2. A potential adjustment in the gold-oil price ratio
Ever since Saudi Arabia’s King Ibn Saud traded 35,000 old British sovereigns for oil concessions in his kingdom , there has been a connection between oil and gold. The good king understood the difference between the value of gold and a paper promise. At the time, the British sovereign — a coin many of you hold in your own financial kingdom — could buy about ten barrels of oil. (British sovereigns at the time were valued at $8.24 and a barrel of oil was 85¢.) Today a British sovereign’s melt value is roughly $71 and a barrel of oil is about $115. For the British sovereign to buy what it bought in terms of oil in 1933, it would have to be valued at $1150 or about $4900 per troy ounce — a statistic that gives you an inkling just how undervalued gold might be for the long term.
3. A possible make-up rally based on gold’s historic undervaluation when compared to inflation
“That light at the end of the tunnel? It’s an oncoming train.” Popular joke from the 1970s
That oncoming train, as far as financial markets are concerned, might well be in the form of real unemployment and inflation numbers that the Washington’s politicians and Wall Street’s money managers don’t want you to know about. Recently, I made a post at the USAGOLD Blog suggesting that if you wanted to get a real fix on the inflation rate rely on your own experience at the grocery store not the Bureau of Labor Statistics’ (BLS) Consumer Price Index. Similarly, if you want to get a real fix on the unemployment and wage situation talk to the folks lined up with you at the check out counter and politely file what the Department of Labor is telling us.
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