Why Gold Will Surge To $2,500

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December 22, 2013 11:08pm NYSE:GDX NYSE:GDXJ

india-gold-etfMichael Lombardi: I turned bullish on gold bullion in 2002. At that point, gold bullion was trading around $300.00 an ounce. Now, it trades above $1,250. Simple math suggests this is an increase


of about 260% in 11 years, or an average gain of about 23.6% a year.

Other asset classes, like stocks, haven’t performed this well. In 2002, the Dow Jones Industrial Average was trading near 10,000. Now, it hovers close to 16,000, up 60%, or an average of 5.45% per year, over the last 11 years.

The big question from my readers these days is “If I buy gold here at $1,250 an ounce, will it more than double again?” My answer to this is YES, because I see gold moving to $2,500, even $3,000, by the end of this decade, if not sooner.

You see, over the past few months, we have seen a significant amount of negativity in the gold bullion market. On some days, the precious metal’s price has fallen more than two percent in a matter of minutes (I will let authorities eventually decide if it was a case of manipulation). But when no one wants a particular type of investment, that is often the best time to buy. Go back to 2009, when the stock market was plunging. No one wanted to buy stocks. In the midst of it, in the spring of 2009, we saw one of the best buying opportunities for stocks ever. I believe gold bullion is in a very similar situation today.

At the center of the “gold story,” aside from the fact that central banks are buying gold again for their reserves, demand by the countries that are known to be the biggest consumers of the precious metal (I’m talking about India and China) keeps climbing.

While the Indian government and its central bank have been trying to curb demand for gold bullion by its consumers, this has only given birth to an unprecedented level of gold bullion smuggling.

According to the World Gold Council, 150 tonnes to 200 tonnes of gold bullion will be smuggled into India this year. Between April and September, Indian customs authorities seized almost double the amount of gold that was smuggled into India in 2012. (Source: Reuters, December 4, 2013.)

In an effort to curb the smuggling of gold bullion into India, Mumbai customs authorities said that they will give a reward of 50,000 rupees per kilogram of gold confiscated as a result of tip-offs. Rewards for informants who lead customs to cocaine and heroin seizures are only 40,000 rupees and 30,000 rupees, respectively!

In China, demand for the precious metal is strong, too. In October, imports of gold bullion from Hong Kong into China were registered at 121.19 tonnes—the second-highest amount on record after March of 2013, when 136.185 tonnes of gold bullion was imported into China from Hong Kong. (Source: Reuters, November 27, 2013.)

From a technical perspective, when you look at a short-term chart of gold bullion prices, you will see nothing but negativity. You have to keep in mind that in the short term, emotions and speculation prevail. The best idea is to look at the long-term picture, as the chart below of monthly gold bullion prices illustrates.

Gold - Spot Price (EOD) CME Chart

Chart courtesy of www.StockCharts.com

The above chart suggests the long-term trend of gold bullion prices is still intact—I don’t think anyone can deny this. At the same time, an indicator of momentum that I watch closely called the moving average convergence/divergence (MACD) suggests the bearish pressures are bottoming out (I’ve circled this in the bottom right of the chart).

From a big-picture point of view, we continue to see an unprecedented amount of easy money. Inflation, which the precious metal really protects against, seems to be subdued, according to the government figures; but the average American Joe will tell you that inflation is much higher than what the official figures say.

For investors, I see great opportunities in the gold mining sector.

This article is brought to you courtesy of Michael Lombardi from Profit Confidential.


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