PRECIOUS METALS RALLY

Precious metals are rallying robustly today with gold up $13 and silver up $.20. That is a nice rebound from yesterday's correction. Gold is beginning the month on a strong note and looking as though it will try to push considerably higher as we move through the remainder of the summer. B of A/Merrill Lynch is forecasting gold above $1,000 an ounce by October. Other analysts are forecasting that gold will be between $1,200 and $1,300 an ounce by the end of the year. Therefore, as we move through the summer doldrums we should expect gold and silver to perform well. The dollar, which rallied yesterday, is down 51 basis points today at 79.63 on the index. Similarly, oil is up $1.72 at $71.61 a barrel and the equities are up as well. The weaker dollar and stronger oil both supported gold this morning as did some bargain hunting, which occurred overnight in the Asian market.

Although gold is up nicely today, recovering almost all of yesterday's correction, it nevertheless continues to range trade and build a base above the rising trend line, which is likely to lead to a breakout in the relatively near term.

This morning's ADP jobs report showed that private sector firms cut 473,000 jobs in June, when the market had been expecting a 400,000 loss. That indicates continuing weakness in the U.S. economy. A number of analysts are forecasting that unemployment will continue to rise into next year and may reach as high as 10.4%. Other data hitting the markets today such as the ISM report also indicate that the economy remains weak although improving. One analyst on Bloomberg Radio this morning said that the Japanese economy is in even worse shape than the U.S. economy. He said their government also has horrendous financials. Their government is running a deficit in excess of 100% of GDP. Layoffs are occurring at a massive rate in Japan and this is affecting the very structure of their society. The economy is cratering and manufacturing is basically in a depression. That country may be in the final crash before a turnaround. However, some analysts are of the belief that Japan is on the verge of a crisis that could destabilize the country.

In the U.S., lawmakers in half a dozen states are working to stave off government shutdowns, as their revenues are not enough to cover their expenses. California is among the more notable of these states, as devastating service cuts and shutdowns are likely and the government is about to issue IOUs, as it cannot pay its debts. This is the consequence of the years of overspending, massive debt, and an inability of government to function on behalf of the people. This is likely to become widespread across the country and portends future problems for both our economy and our political system.

These are, again, many reasons why investors are turning to gold in record numbers. It's also the reason why sophisticated investors have been driving gold higher and higher, year after year for the past ten years. Ultimately, all of this debt and deficits by both the states and the Federal government will have to be liquidated. As USA Today newspaper has said, this debt can be liquidated by raising taxes (highly unlikely), cutting spending (almost impossible), or inflation (the only likely alternative). Clearly, the government will devalue the dollar, creating an inflationary scenario, which will reduce the burden of this debt across the board. In time, it may lead to a collapse of the currency and a run on the dollar, which would have negative consequences for those who are not prepared for it. USA Today reports that inflation of only 2% results in a loss of 81% of purchasing power over 30 years. Can you afford to lose that much? If not, buy some gold insurance.

We see many people purchasing gold just for this particular reason alone. It is an asset that provides protection or insurance against such a catastrophe. Moreover, it is about the only asset that has been going up consistently year after year for the past decade. It is likely to continue to move higher for the foreseeable future as commodity bull markets generally last between ten and twenty years. This market has yet to achieve a frothy state, therefore the potential on the upside is excellent. We have a number of analysts forecasting $1,200 to $1,300 an ounce for gold this year, and perhaps highs in the $3,000 to $6,000 range over the next five years or more.

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