Why Didn't Gold Soar?

Why Didn't Gold Soar?

By Dr. Steve Sjuggerud | 31 October 2008

"If gold didn't soar in the last year, then when will it?" A few weeks ago, Jack Crooks asked a crowd of currency speculators why gold had fallen from over $900 to $725 in less than a month. What a great question! The crowd— a room full of gold bugs— didn't know what to think. They hadn't considered this yet.

They knew Financial Armageddon was here. Many of them had been waiting for it for decades. And they knew the only possible outcome: a soaring gold price and a crash in the dollar. Well, they got the crisis right. But they were wrong on the way to profit. The price of gold has fallen by over 25% from its highs earlier this year. And as Jack predicted back in July, the dollar has soared.

It all started because of credit, of course. Many large investors (like hedge funds) borrowed a mountain of money to speculate. But the banks called in those loans. So these funds were forced to sell their investments.

Investors who held these funds got scared and asked to get their money back. So funds got hit with a double whammy— redemption requests and the need to pay back borrowings. The funds were forced to sell, at any price. Prices of everything— including gold and gold stocks— spiraled lower.

Investors around the world, in turn, sold everything to get out of the way of falling prices. U.S. Treasuries were the one "safe" place everyone flocked to, which supported the U.S. dollar. Jack believes the dollar will continue to rise, as money comes out of assets like gold and into the world's most liquid investment... the U.S. dollar.

Jack expects the U.S. will fare far better than most of the rest of the world. This is contrary to most forecasters, who expect the U.S. economy to weaken dramatically. Jack expects the emerging markets that export heavily will get hit the worst, as the credit problems are unwound and consumer demand in America declines. Europe's recession will be much more severe than in the U.S., according to Jack, as European banks are much more exposed than the U.S. to emerging markets [[plus, remarkably, they were far more highly leveraged: AIG was "rescued" at the explicit request of the ECB, which feared a total collapse of several Eurobanks, otherwise.: normxxx]].

In the end, Jack believes "the U.S. will maintain its vast capital market advantage and will emerge from this crisis in much better shape than its competitors as a result." I've known Jack for many years. We used to sit close to each other at an investment firm, hashing out ideas. Jack is as honest as they come, and he thinks for himself. His thoughts on the dollar were right on. I don't know anyone else who thought this way.

Jack believes this trend of a higher U.S. dollar and lower gold prices will continue for longer than anyone thinks. While the Great Deleveraging continues, I believe Jack will be right about the dollar. And I believe that, once the Great Deleveraging is over, the Great Inflation will come. Gold should soar then. So I'm not selling my gold just yet.

Either way, you can always count on Jack for a different view. But think about this... if you follow the average path, you'll have average returns, at best. Extraordinary thinking can lead you to extraordinary returns.

Good investing,

Steve