Why I am a Gold Bull

Earlier this year in April, I projected that Gold would surpass $1,000 per troy oz. and reach a target of $1,200 later this year or by April of next year. Those targets are still on.

If you look at the chart for the gold ETF (GLD), you’ll see a strong uptrend that shows no sign of letting up. RSI continues to press above the 70% line, not signs of overbought but unrelenting breakout. Positive volume accumulation has increase over the past month.

It is not coincidental that the adjusted monetary base and banking reserves in the US banking system has broken onto a new uptrend around October (see the two charts below, courtesy of the Federal Reserve Bank of St. Louis).

Meanwhile, bank loans and credit continue to decline (chart below). The “juicing” of the monetary system so far has failed to stimulate economic growth. Other charts show that banks are not only not lending to businesses and customers, but are not lending to each other. We remain in a credit crunch.

The Quantity Theory of Money has been around since the Austrian School of Economics , and postulates that there is a direct relationship between the quantity of money and the prices of goods and services — in essence, too much money chasing too few goods. Anna Scwartz and Milton Friedman’s 1960’s study  entitled A Monetary History of the United States, 1867 – 1960 examined this relationship in detail. This founded the modern economic school of thought called Monetarism.

Gold serves three primary utilities: 1) it serves as a universal currency, 2) it serves as a store of value and hedge against inflation, 3) it serves as a precious commodity for personal (jewelry) and industrial usage (think gold plated conductors, etc). Any and all of these utilities are and will continue to support a higher gold in the future.

This morning, Bloomberg reports that the CPI released was higher than anticipated. Are you worried?

Have you bought your gold yet? It’s not overbought, even at today’s price.