Doug Casey's last guest commentary on this site was posted on September 2, 2005. It was entitled "What's Holding Gold Back?", and he stated therein: "I'm on record saying that I expect gold to hit $500 by the end of this year. It may be soon thereafter, but I'm sticking with my prediction, and with my assertion that that's only the beginning -- gold isn't just going through the roof, it's going to the moon. And sooner than most people expect." Gold did indeed hit $500 as forecast, so it was obviously a good call. I'm aware of only three people who made that same forecast: Doug, Bill Murphy of www.lemetropolecafe.com and myself.

In the essay that follows, Doug concludes: "It's unwise to try picking tops and bottoms in the market. But, the way I see it, gold has made its bottom as you read this. The fundamentals haven't changed; there's only been a swing in traders' sentiments." I suggested a similar outcome in my last alert, and Bill Murphy has been 'pounding the table' on this point. In his June 22nd commentary, Bill says: "From a technical standpoint it appears gold, silver and the shares have put in their bottoms. No reason not to be long and strong."

So all three of us are again lined up on the same side of the equation. Will we be right again? Ah, there's the rub when it comes to markets. No one knows the future.

Nevertheless, everyone knows that the problems with the US dollar are not being fixed. Everyone also knows that gold is the 'go-to' safe haven to avoid the dollar's problems. So logic does suggest that the price of gold - as both Doug and Bill have been saying - is "going to the moon".

Some Thoughts on Gold's Steep Correction
By Doug Casey
International Speculator

Not surprisingly, gold's steep correction has generated some concern for resource stock investors. So let's take a look at the gold market.

I figure the metal "should" be worth something like $1,000 an ounce now to be in a rough equilibrium with the value of other things the dollar can buy. That's an arbitrary guess; there's no exact method I know of to determine gold's real dollar value. If the U.S. dollar were sound, there would be a fixed amount of gold in the treasury for every dollar in circulation; in the 19th century, a $20 note was a receipt for an ounce of gold held on deposit, and a "dollar" was just a convenient name for a 20th of an ounce of gold.

Today, of course, the relationship between the dollar and the amount of gold the U.S. Government has to redeem it with is so tenuous that it's completely academic. But, assuming that the government were just to make good on dollars held by foreigners-forget about Americans-how high a gold price might be needed?

First we need to know how many dollars are outside the U.S. Nobody knows exactly. They constitute the reserves of most foreign central banks and the de-facto currency of record in dozens of countries for ordinary citizens. The amounts are almost beyond belief; it's said that, in Moscow alone, there are more US$100 bills circulating than in the entire U.S. Could $5 trillion be the number? If so, and if there are the reported 261 million ounces in the U.S. Treasury, the value of that gold comes to about $20,000 an ounce. Just to make good on the reported U.S. trade deficit of $800 billion for the last year, we're talking $3,000 gold. Forget about what the numbers would be if you added in the domestic money supply, M-3. Especially since they don't even publish it anymore.

But the numbers, at this point, are academic. My basic view on gold is unchanged. And the fact it had a 37% gain this year, reaching a peak of $725 on May 12, or has given back 22% since then is meaningless in the big scheme of things. As I've said before, before this market is over, gold isn't just going through the roof; it's going to the moon. And the market is by no means over. It's just starting to wake up from a generation-long slumber.

Why did it heat up the way it did? Perhaps the attention of the traders was drawn to gold by Bush's brinkmanship and buffoonery over Iran. Perhaps it was people noticing that gold was a relative laggard among the metals in this bull market. Perhaps the market was paying more attention to the Russians and the Chinese, among others, divesting dollars. There is solid evidence that dehedging by the producers helped fuel the surprisingly strong rally, and that that dehedging is now slowing.

Likely it was a confluence of these and other factors. Thousands of hedge funds, most of which collect their 20% profits just to follow the trend, piled in. As the herd took their positions-especially when the short-term oriented traders had all bought-momentum slowed, and it went into reverse.

Remember that most of these traders were toddlers the last time gold got anyone's attention, back in the 1970s, and so they only know what they've been taught-that gold is an anachronism, a valueless relic. Consequently, they have almost no understanding of gold's fundamentals.

Consider, for instance, a primary reason given for gold's big correction is that higher interest rates will make gold a less attractive asset. As if there is some hard and fast rule that says gold can't move up when interest rates are rising. But that ignores the clear historical precedence of the 1970s when interest rates were surging at the same time as gold.

It's unwise to try picking tops and bottoms in the market. But, the way I see it, gold has made its bottom as you read this. The fundamentals haven't changed; there's only been a swing in traders' sentiments.

DOUG CASEY is the author of Crisis Investing, which spent 26 weeks as #1 on the New York Times Best-Seller list. He is also editor and publisher of the International Speculator, one of the nation's most highly respected publications on gold, silver and other natural resource investments.

To learn more about becoming a subscriber to the International Speculator, click here.

Published by GoldMoney
Edited by James Turk, alert@goldmoney.com

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