We don’t have capitalism, we have “creditism”

Since the U.S. went off the gold standard, credit is the force that drives economic growth.

IMF consultant and author Richard Duncan comes right out and says that capitalism died when we took the U.S. went off the gold standard under Nixon. In its place, we got “creditism.” Credit is the force that drives economic growth, Duncan argues.

“We have to understand that our economic system now is not capitalism in the sense that it used to be in the 19th Century. Now the government is directing the economy one way or another, either through budget deficits or fiat money creation or a combination of both. And right now the Fed is in the driver’s seat. And the Fed wants asset prices to go up.”

Using that thesis, Duncan believes that the Federal Reserve is targeting 10-15 percent appreciation in the stock market over the next two years. That would push the Dow up to 20,000, and – according to his theory – stimulate “economic growth” in the U.S. through the wealth effect. Namely, Americans would start spending more because they’d feel richer when looking at their 401K statements.

That’s well and fine in the short run, but it’s got to make you nervous about America’s economic future. How deep of a hole can we dig before the walls cave in and bury us? Duncan argues we’ve got a long way to go. His reasoning? Japan’s already done it.

While U.S. debt stands at roughly 100 percent of GDP, Japan’s debt is nearly 250 percent of their GDP. “The US government has the potential to continue borrowing and spending easily for the next decade before it’s anywhere near the levels of Japan’s government debt at the moment,” Duncan says. “So, the government does have the ability to continue directing the economy through fiscal spending and quantitative easing so long as inflation doesn’t rear its ugly head.”

Let’s just hope we don’t see rampant inflation (though I’m accumulating a small position in bitcoin in case we do).

Image source: Highwing.

When will inflation hit the U.S.? 2013?

When we’re going to see the serious inflation – and perhaps even hyperinflation – that economists have been predicting?

The price of gold, oil, energy and other hard commodities has risen steadily for more than a decade, and that can only mean one thing: global currencies are weakening and inflation has settled in. The real question, though, is when we’re going to see the serious inflation that economists have been predicting?

To answer that, we’ve got to do some data mining. First: what’s the current inflation rate? According to the U.S. government, it’s a paltry 1.7 percent. Ask anyone who goes grocery shopping or pays household energy bills and they’ll probably shake their heads at that number.

In fact, if we calculate inflation the way the government did in 1989, we’d see inflation’s actually hovering at an annualized rate of 5 percent (per ShadowStats). If we calculated inflation the way our own government did in 1980, we’d see it’s even worse at somewhere north of 8 percent (again per ShadowStats).

Those are scary numbers. And they’re indicative of just how fragile our so-called recovery has been. And yet, most investors – and particularly the media – are happy to get spoon-fed the more palatable modified inflation numbers that get announced every month. It’s just a matter of time before that changes.

When will inflation get worse?

Inflation’s already bad, but it’s probably just a glimmer of how bad it will ultimately get in the U.S. Unfortunately, we don’t have a roadmap that spells out exactly when the bottom will drop out, but we can take educated guesses.

Right now, the U.S. dollar is artificially propped up thanks to the fact that it’s in better shape than some of its neighbors. The EU is worse off than the US, China’s yuan is pegged to the dollar, India’s got official inflation numbers north of 7 percent and inflation’s ravaging South America. Since the U.S. is printing money at will, that gives central banks around the world little incentive not to do the same. In fact, other economies get penalized if their currency stays strong relative to the dollar and Euro because their exports effectively cost more.

That’s created a race among central banks, with each of them trying to devalue their currencies faster than their neighbors.

The U.S. is doing particularly well at devaluing the dollar. Yes, the government can say that unemployment is under 8 percent, and that our budget will be balanced in a decade, but the facts just don’t support those claims. We think we’re insulated from riots, draconian budget cuts and hyperinflation, but I would argue we’re just a black swan away from a bout of hyperinflation in the U.S.

And that black swan would be a sudden rise in interest rates that the government is forced to pay on bonds. At the moment, interest rates on bonds are unnaturally low. That’s thanks to investor uncertainty and the Federal Reserve’s bond buying spree (known as quantitative easing). Yields on bonds are so low they’ve crumpled 50 percent over the past decade and more than 70 percent over the past 20 years.

We truly are at a pivot point. The U.S. debt load threatens to collapse the economy, and if investors lose faith in the U.S. government’s ability to pay back it’s bonds, the U.S. national debt could transform itself from a heavy burden into a crippling death blow. That’s no exaggeration, either. The same thing, in fact, happened in Ireland, Greece and Spain. How? Investors stopped buying bonds and the rates those governments had to pay to borrow cash skyrocketed.

It can’t happen here

Surely Greece is in worse shape than the U.S., right? In fact, the U.S. has surpassed Greece’s debt-to-GDP ratio (per GlobalFinance), and Italy’s debt-to-GDP is only about 16 percent higher than the U.S. government’s. Should investors stop buying bonds, the U.S. would have to sell them at ever higher interest rates with each tick up in rates further burdening the ability for our economy to “grow it’s way out” of debt.

Since most of Europe shares a currency in the Euro, countries in the EU don’t have the luxury of cranking up the printing presses at will. The U.S. on the other hand, does, and when investors stop dumping money into U.S. treasuries (which they eventually will), the U.S. will be forced to print money even faster than they are right now.

When that comes, we’ll finally see the rampant inflation that everyone’s afraid.

Will it happen in 2013?

The short answer is, I’m not sure. The long answer is, it’ll probably happen when conditions start improving in Europe. The Euro is in bad shape right now, but the fact that it’s tied together a diverse group of countries means the EU can exert pressure on troubled countries, forcing them to cut their budgets and get on a more sustainable fiscal path.

We can’t say the same thing about the dollar, and that means our government’s going to be reluctant to make the hard cuts it has to make. Without those cuts, the only choice the Fed will have is to print even more than the $85 billion a month that it’s already printing. Once that happens, we’ll really understand what it’s like to live in an economy rampant with inflation – no matter what numbers the government throws at us.

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Silver prices set to surge higher

Bernanke didn’t say the Fed “may” stimulate, he said the Fed “will” stimulate. That was all it took. Gold and silver prices were off to the races.

Silver prices rocketed higher on Friday thanks to hints from Federal Reserve Chairman Ben Bernanke that QE3 could be around the corner. Prices for the white metal traded in a narrow range around $30.70 an ounce Wednesday and Thursday in the run-up to Bernanke’s speech.

Early Friday, prices started climbing and they didn’t stop until the markets closed. By the end of the day, silver was up to $31.74 an ounce – a gain of 4.58% in a single day of trading. The actual quote that had traders salivating is (in typical Bernanke fashion) vague:

“Taking due account of the uncertainties and limits of its policy tools, the Federal Reserve will provide additional policy accommodation as needed to promote a stronger economic recovery and sustained improvement in labor market conditions in a context of price stability,” he said (per IBD).

Bernanke didn’t say the Fed “may” stimulate, he said the Fed “will” stimulate. That was all it took. Shares in gold and silver mining stocks were off to the races. Majors like Silver Wheaton (NYSE:SLW) rose 5.2 percent and Silver Standard (NASDAQ:SSRI) climbed 7.9 percent. Some small-cap miners did even better with Great Panther Silver (NYSEAMEX:GPL) rocketing up more than 11 percent.

“My friend Eric Sprott of Sprott Asset Management is one of the smartest men I’ve ever met in my life and a real detail guy – and he thinks silver is going to go well above $100, and you might even be able to pick a number for silver,” Bill Murphy founder and chairman of the Gold Anti-Trust Action Committee (GATA) said in a recent interview with Financial Sense. “I think … people that are willing to do their homework and be patient and accumulate these cheap gold and silver shares will make fortunes in the years ahead.”

Of course, anytime there’s a run-up in gold and silver prices, it doesn’t happen smoothly. Since precious metals act as a barometer of the wider economy, political changes and economic numbers can cause large price swings. When prices are on the rise, though, it can happen violently. And it looks like we could be in the midst of another big upswing.

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What is gold price suppression?

A few weeks ago, I might have argued that gold price suppression is a myth. The more I learn about it, though, the scarier I find the concept.

A few weeks ago, I might have argued that gold price suppression is a myth. The more I learn about it, though, the scarier I find the concept.

Gold price suppression refers to coordinated efforts to lower the price of gold. On the face of it, that sounds like a meaningless goal. Dig deeper, though, and you’ll see there’s a whole lot at stake; namely, the future of the U.S. economy.

If governments, institutions and individuals lose faith in the dollar as a reserve currency, the Greenback’s value will plummet. It will be much harder for the U.S. to borrow money, and government services will have to be slashed. With 48.5% of the U.S. living in a household that receives some form of government benefits (per the Wall Street Journal), slashing benefits could collapse the U.S. economy.

Here’s what really changed my mind about gold price suppression: a single diplomatic cable released by WikiLeaks (click here to see the gold price suppression cable from Wikileaks). In it, the U.S. Embassy in Beijing wrote to the U.S. State Department, warning that the Chinese government was proactively dumping dollars in favor of gold reserves in an attempt to undermine the dollar and raise the clout of the Chinese Yuan.

The cable highlighted an article titled “China increases its gold reserves in order to kill two birds with one stone” from a State-sponsored newspaper in China. It was apparently alarming enough for the U.S. Embassy to send it straight to the State Department. Here’s an excerpt from the story:

“The U.S. and Europe have always suppressed the rising price of gold. They intend to weaken gold’s function as an international reserve currency. They don’t want to see other countries turning to gold reserves instead of the U.S. dollar or Euro. Therefore, suppressing the price of gold is very beneficial for the U.S. in maintaining the U.S. dollar’s role as the international reserve currency.

China’s increased gold reserves will thus act as a model and lead other countries towards reserving more gold. Large gold reserves are also beneficial in promoting the internationalization of the RMB.

Of course, right now, the yuan is tightly controlled by the Chinese government. It’s difficult for retail investors to even invest in the yuan (see our post How to buy Chinese Yuan for more), but China’s showing signs of loosening that control.

It’s not in their interest to de-couple the yuan and dollar yet, since tying it to the Greenback keeps Chinese exports cheap. It is interesting, though, that China’s could be building up enormous leverage over the U.S.

“When they [China] want the dollar to fall, they will let it,” Mark Weisbrot, the co-director of Washington’s Centre for Economic and Policy Research, told Al Jazeera recently.

In the meantime, China’s accumulating gold, even while they realize that the U.S. could be working to suppress gold prices. Should the U.S. economy continue to stagnate, suppressing gold prices looks like a losing battle.

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8 signs we’re headed for a bear market in stocks

Every day, it looks more and more like we’re headed for bear country. Here are 8 key signs that we’re a long way from an economic recovery.

Stocks are flirting with a 20 percent decline from market highs in April. A 20 percent decline is the generally-accepted definition of a bear market, and it looks more and more like we’re headed for the dreaded bear country. Here are 8 key signs that we’re a long way from a recovery:

1) The ECRI. There’s just one institution that can legitimately claim to have “never been wrong” at predicting a recession. That’s the Economic Cycle Research Institute (ECRI), and last Friday they sounded the warning bell. “Early last week, ECRI notified clients that the U.S. economy is indeed tipping into a new recession,” the company wrote on its Web site, “and there’s nothing that policy makers can do to head it off.”

If the ECRI is right this time, they’re predicting the official unemployment numbers could rise from 9 percent as high as 15 percent. That would put the “unofficial” unemployment numbers closer to 25 percent.

2) “Close to faltering.” Even Federal Reserve chairman Ben Bernanke acknowledged widespread weakness yesterday when he warned the U.S. economy is “close to faltering.”

“Recent indicators, including new claims for unemployment insurance and surveys of hiring plans, point to the likelihood of more sluggish job growth in the period ahead,” Bernanke told Congress. He hinted that the Fed is prepared to take more action if things worsen. The markets liked that, but it’s a clear indication that we’re far from out of the woods.

3) Manufacturing contraction. For the first time in two years, the Global Manufacturing PMI dipped below 50 – the cut-off line that differentiates growth from contraction. The measure hit 49.9 in August – a low we haven’t seen since June 2009. Things are even worse in Europe where the manufacturing index fell below 50 for the second month in a row.

4) Death to the Hang Seng? Hong Kong’s Hang Seng Index, which includes shares of many of China’s largest companies, sealed up its worst quarter in a decade when the market closed on Friday (per BusinessWeek). All told, the index shed 22 percent in three months. Hang Seng shares haven’t seen losses that steep since September 2001.

5) European contagion. Goldman Sachs slashed their forecasts for U.S. growth in the first quarter of 2012 to a paltry 0.5 percent. “The European crisis threatens U.S. economic growth via tighter financial conditions, reduced credit availability and weaker growth of U.S. exports to the region,” Goldman economist Andrew Tilton said (per the Financial Post). “This impact is likely to slow the U.S. economy to the edge of recession by early 2012.” Late last week, Goldman also published a report arguing that developed markets don’t just face a downturn but rather have a 40 percent chance of economic stagnation for the next five years.

6) Greek debt default looms. Yes, the EU’s frantically trying to find some way to stop Greece from defaulting on its debt, but the long-term picture for the country doesn’t look good. If they don’t get a bailout by November, Greece will have to start defaulting on pensions, salaries and bonds (per CBS). Even if they do get a bailout, it’s unclear how the government will be able to manage a debt load that stands at 150 percent of GDP. Recently, investors grew so pessimistic on three-year Greek bonds, the interest rates rose above 100 percent.

7) Class warfare. Doom and gloom newsletter writers have been talking for years about the coming civil unrest in the U.S. It’s something I’ve started realizing doesn’t just happen in other countries. Protests in Greece and Italy are so common they rarely make the international news. And now, Wall Street’s dealing with its own set of protestors. In a matter of weeks, Occupy Wall Street has spread from New York to Chicago, Los Angeles, Seattle and Boston. Now, several unions are getting in on the act, too (per CNN). High unemployment and a lack of opportunities leads to civil unrest – no matter where you live.

8) Down with bonds. Moody’s downgraded Italy’s government bonds yesterday from Aa2 to A2 (per the Financial Post). Funding’s getting harder and harder to get for the weakest European governments, and that means they’re going to be forced to slash their spending. That doesn’t bode well for consumer-driven economies abroad or at home.

Official government numbers may not show that we’re in a recession yet, but the signs are clear. In the words of ECRI co-founder Laksman Achuthan, “you haven’t seen anything yet.”

“A new recession isn’t simply a statistical event,” Achuthan writes. “It’s a vicious cycle that, once started, must run its course. Under certain circumstances, a drop in sales, for instance, lowers production, which results in declining employment and income, which in turn weakens sales further, all the while spreading like wildfire from industry to industry, region to region, and indicator to indicator. That’s what a recession is all about.”

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Photo credit: svilen001.

QE3 is coming soon to an economy near you

There’s too much at stake for the Fed not to act. And that’s got me convinced we’re going to see QE3 sooner rather than later. Here’s why.

With bad economic news piling up, it’s looking more and more like QE3 is just around the corner. Federal Reserve Chairman Ben Bernanke certainly left the door open after the annual Jackson Hole symposium late last month. “(We have a) range of tools that could be used to provide additional monetary stimulus,” Mr. Bernanke.

And the speculation is that an announcement of some sort will come as soon as Sept. 21 at the conclusion of the Federal Open Market Committee (FOMC) meeting. Rather than buying up even more short-term treasuries, though, analysts believe the Fed could announce plans to sell off short-term notes to buy longer-term bonds. The move’s been dubbed “Operation Twist” (per Bloomberg) because the ultimate goal would be twisting the yield curve, so that short-term rates rise while long-term rates fall. That would drive down interest rates on big-ticket items like cars and houses.

It’s not much in the way of stimulus, and some economists believe it may just be a delay tactic by the Fed to give the impression that they’re “doing something” before a full-blown, large-scale QE3 gets announced later in the year or early next year.

The danger, of course, is that the Fed could wait too long. By then, it may be “too little, too late.” And that’s exactly what the so-called Dr. Doom economist Nouriel Roubini has been arguing. Roubini believes that once the Fed finally moves to start a full-blown intervention (QE3), it will target ailing state and local governments. He just doesn’t think it’ll be enough to prevent another recession.

My gut’s telling me that the Fed could surprise a lot of people on Sept. 21 (including Mr. Roubini) by announcing aggressive new forms of monetary easing. The bad news has just gotten too bad to ignore without watching the U.S. slip back into another recession.

Friday’s jobs report led to another sell-off in the stock market when the government showed zero job growth in August. That goose-egg for job growth shows we’re flirting not with the prospect of slow growth but a shrinking economy that could edge toward double-digit unemployment again.

It’s hard to underestimate the impact jobs have on a consumer-oriented economy. Without jobs people don’t have income to burn. And turning around the job situation is like navigating a gigantic boat with a single oar.

Mr. Bernanke himself has said in the past that it would take a year of 5 percent economic growth in the U.S. to lower the unemployment rate by a single percentage point. Since we’re a long way from 5 percent economic growth, it’s hard to believe the president and congress isn’t putting pressure on the Fed to act. There’s too much at stake. And that’s got me convinced we’re going to see QE3 sooner rather than later.

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Eleven reasons to AVOID investing in Dow Jones Industrial Average stocks

Of the 30 stocks in the Dow Jones Industrial Average, 11 of them would actually be worth less or just about the same as they were 10 years ago (including dividends!).

When I first started writing this blog post, I was going to call it “How to Invest Safely in Stocks.” My second recommendation was that beginners should start with a handful of the 30 stocks that make up the Dow Jones Industrial Average. Once I started digging through the numbers, though, I was a startled at what I found. Apparently, the blue-chip stocks aren’t the no-brainers most investors like to think they are.

Need proof? Check out this chart I put together of the 10-year returns for each of the 30 Dow Jones stocks:

Company 10-Year Stock Return 10-Year Dividend Return on $1,000 investment $1,000 is now worth
3M Company +46.6% $590.94 $3,458 (aided by a stock split)
Alcoa Inc. -68.1% $134.46 $449.82
American Express Company +41.47% $122.40 $1,514
AT&T Inc. -31.8% $357.12 $1,024
Bank of America Corp. -51.8% $718.58 $1,109
The Boeing Company +12.54% $218.16 $1,311
Caterpillar Inc. +208.7% $787.17 $7,093 (aided by a stock split)
Chevron Corporation +113.9% $794.85 $4,791
Cisco Systems, Inc. -7% $7.20 $933
The Coca-Cola Company +45.2% $284.76 $1,734
du Pont +11.1% $372.72 $1,462
Exxon Mobil Corporation +82% $319.44 $2,086
General Electric Company -61.9% $200.4 $572
Hewlett-Packard Company +2% $123 $1,129
The Home Depot, Inc. -32.7% $117.58 $780
Intel Corporation -29.7% $136.54 $825
International Business Machines Corp. +57.1% $127.26 $1,605
Johnson & Johnson +20.8% $257.22 $1,426
JPMorgan Chase & Co. -16.1% $273.12 $1,107
Kraft Foods Inc. +8.7% $283.34 $1,339
McDonald’s Corporation +198.4% $387.25 $3,351
Merck & Co., Inc. -51.2% $218.70 $698
Microsoft Corporation -20.1% $416.64 $1,998
Pfizer Inc. -56.3% $196.56 $634
The Procter & Gamble Company +68.6% $607.79 $3,884 (aided by a stock split)
The Travelers Companies, Inc. +11.8% $120.34 $1,206
United Technologies Corporation +94.9% $529.54 $4,305
Verizon Communications Inc. -31.5% $305.33 $988
Wal-Mart Stores, Inc. +4.7% $130.29 $1,141
The Walt Disney Company +25.1% $110.20 $1,330

What’s startling is this: of the 30 stocks in the Dow Jones Industrial Average, 11 of them would actually be worth less or just about the same as they were 10 years ago (including dividends!). That’s remarkable considering I didn’t factor in inflation, which have averaged 2.4 percent over the past decade (per FinTrend.com).

That means your odds of throwing a dart at a list of the Dow stocks and hitting a winner are only around 63 percent. That’s not much better than going to the casino and counting a few cards at the blackjack table.

Before you toss your hands up and cash in your IRA for guns and ammo, though, I’d be remiss if I didn’t point out that the average return on $1,000 for the 30 Dow component stocks was $1,842 over the past 10 years. Indeed, a $1,000 investment in Caterpillar Inc. (NYSE:CAT) would be worth $7,093 today. That’s not bad, but seeing the returns from a company like GE, which has crumpled more than 60 percent over the past 10 years is scary. And this year hasn’t been kind to the Dow, either. Take a peek at the YTD returns on each of the component stocks:

Company Ticker YTD Return Dividend Yield
3M Company NYSE:MMM -10.8% 2.86%
Alcoa Inc. NYSE:AA -27% 1.07%
American Express Company NYSE:AXP +3.9% 1.61%
AT&T Inc. NYSE:T -3.17% 6.05%
Bank of America Corp. NYSE:BAC -51.8% 0.62%
The Boeing Company NYSE:BA -10.5% 2.88%
Caterpillar Inc. NYSE:CAT -14.7% 2.3%
Chevron Corporation NYSE:CVX +2.25% 3.34%
Cisco Systems, Inc. NYSE:CSCO -25.8% 1.6%
The Coca-Cola Company NYSE:KO +2.28% 2.79%
du Pont NYSE:DD -12.1% 3.74%
Exxon Mobil Corporation NYSE:XOM -4.02% 2.68%
General Electric Company NYSE:GE -17.3% 3.97%
Hewlett-Packard Company NYSE:HPQ -41.9% 1.96%
The Home Depot, Inc. NYSE:HD -7.9% 3.1%
Intel Corporation NYSE:INTC -7.85% 4.33%
International Business Machines Corp. NYSE:IBM +8.33% 1.89%
Johnson & Johnson NYSE:JNJ -1.51% 3.6%
JPMorgan Chase & Co. NYSE:JPM -21.2% 2.99%
Kraft Foods Inc. NYSE:KFT +6.47% 3.46%
McDonald’s Corporation NYSE:MCD +14.3% 2.78%
Merck & Co., Inc. NYSE:MRK -13.1% 4.85%
Microsoft Corporation NYSE:MSFT -14% 2.67%
Pfizer Inc. NYSE:PFE +0.9% 4.52%
The Procter & Gamble Company NYSE:PG -4.07% 3.40%
The Travelers Companies, Inc. NYSE:TRV -11.8% 3.34%
United Technologies Corporation NYSE:UTX -14.02% 2.84%
Verizon Communications Inc. NYSE:VZ -2.6% 5.6%
Wal-Mart Stores, Inc. NYSE:WMT -3.23% 2.80%
The Walt Disney Company NYSE:DIS -14.6% 1.25%

Just seven out of the 30 Dow component stocks have actually appreciated in value this year. That should give you pause before you invest in a high-profile company solely on the strength of its name and brand.

The Takeaway

Here are three key things I take away from the charts above:

1) Energy is the name of the game. One sector in the Dow has strongly out-performed others in recent years. Namely, oil (ala Chevron and Exxon). And I wouldn’t expect that to change – particularly as fears over inflation mount.

2) Banking stocks have a lot of ground to make up. The fact that JPMorgan Chase is down 16.1 percent over the past 10 years, and Bank of America’s down a whopping 51.8 percent could get you thinking banking stocks have to turn the corner soon. I’d argue there’s a lot of pain for them on the horizon, particularly with the imminent threat of inflation. Banks thrive and dive on interest rates, and all those fixed mortgages BAC’s underwriting at 3 percent could come back to bite them in a high-inflation environment. That’s a big part of why banking stocks have fallen in recent months, and it’s a trend I expect to continue.

3) Follow the macro-trends. If you would have invested $1,000 in gold at the start of 2001, you’d now be holding onto $6,797 in bullion. Energy and inflation are the stories du jour, and your portfolio should reflect that reality. No one can say the next 10 years will play out the same as the past 10, but we can say the demand for oil isn’t going away anytime soon, and neither is our government’s debt problem. You can’t afford to ignore the macro picture anymore, unless, of course, you’re happy rolling the dice in your IRA.

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The latest gold price forecast for 2011? $2,500 an ounce, says JPMorgan

Interestingly, gold is the last of the major commodities that isn’t trading at or near all-time inflation-adjusted highs. $2,500 gold would put us near the 1980 peak for the metal, and it’s looking more and more likely.

There’s blood in the streets and that has a lot of investors trading their greenbacks for gold. The yellow metal surged through $1,700 an ounce yesterday to hit a new all-time high of $1,728.

We could be just getting started. Case in point: JP Morgan has raised its gold price target to $2,500 an ounce. Two analysts at the bank – Colin Fenton and Jonah Waxman – issued a new note to clients yesterday. In it, they argued the downgrade of U.S. debts will force markets lower.

“Before the downgrade, our view was that gold could average $1,800 per ounce by year end. This view will likely now prove to be too conservative,” they wrote, according to Reuters.

JP Morgan isn’t alone, either. Professor Charles Nenner of the Charles Nenner Research Center made the same proclamation on Breakout yesterday without giving a time-frame for his prediction.

“There’s an interesting situation that gold doesn’t seem to be bothered much by short-term cycles going up and and down,” he said yesterday. “Silver is but gold is not… I wouldn’t say it goes right up to two-and-a-half thousand from this level, but that’s our end goal.”

Conditions are ripe for surging gold prices. The CBOE’s Volatility index or so-called “fear gauge” rocketed up 50 percent yesterday. That’s the biggest one-day percentage gain for the index in more than four years, and it can’t help but remind investors of the harrowing days during the winter of 2009.

Interestingly, gold is the last of the major commodities that isn’t trading at or near all-time inflation-adjusted highs. $2,500 gold would put us near the 1980 peak for the metal (when we factor in inflation). And that makes JPMorgan’s predictions feel all the more likely – particularly with unofficial inflation numbers hovering over 10 percent.

If we do hit $2,500 gold by the end of the year, the metal will have shot up 44 percent from here and nearly 80 percent on the year. Not bad, considering most money market accounts are yielding just 0.28 percent!

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Why invest in gold?

Too many investors miss the point of gold, but the yellow metal has something that dollars, yen, euros and yuan do not: it’s price can’t be easily manipulated. Therein lies its beauty.

Too many investors miss the point of gold. They look at it like a lump of metal well-suited for gathering dust in a vault. Gold, though, has something that dollars, yen, euros and yuan do not: it’s price can’t be easily manipulated. And that’s the key behind the metal’s meteoric price rise over the past decade.

As governments around the world quietly inflate their currencies, they are – in effect – reaching into our bank accounts and skimming some coin off the top. They do it quietly and most of us are none the wiser.

Right now, for instance, the official inflation rate in the U.S. stands at 3.56 percent. That means that if you stuff $10,000 into your mattress on Jan. 1, it’ll be worth $356 less than it would have if you spent it right away.

The numbers on the front of your bills stayed the same, but the actual purchasing power of those dollars went down. The supply of gold, on the other hand, can’t be arbitrarily increased based on political decisions out of Washington. If demand goes up, the price of gold is going to go up with it.

And, if the dollar’s going down at the same time the demand for gold is going up, the relative change in the value of gold will be compounded.

Still not sold? What if we hit double-digit inflation? You might have your cash sitting in a bank account that’s earning 1 percent interest every year. If inflation hits 10 percent, that means every dollar you have actually loses 9 percent of it’s purchasing power every year!

What’s scarier is the fact that many believe we’re already suffering through double-digit inflation. John Williams at ShadowStats.com calculates what’s known as the SGS-Alternate CPI number. It’s not something he made up. It’s actually the exact method Bureau of Labor Statistics used to report inflation through 1980. Since 1980, though, the government’s continuously fiddled with its calculations to make inflation look tamer than it would otherwise be.

Right now, ShadowStats reports that the inflation rate stands at 11 percent. That’s a scary number – unless, of course, you’re getting an 11 percent raise at work every year and your 401K is pumping out double-digit returns. Since most of us aren’t that lucky, precious metals like gold start looking attractive.

And, if metals look attractive to you and me, then they definitely look attractive to the Top 10 percent of the wealthiest Americans. Keep in mind, too, that that Top 10 percent owns fully 80 percent of all the outstanding stock in public companies. They know how and where to place their bets, and a lot of them are flocking to gold.

More arguments against gold

I’d rather invest in something tangible, naysayers argue. Something like oil or real estate.

Those aren’t bad ideas, but gold has distinct advantages over each of those alternatives. The most important advantage is the fact that supply of gold is largely static. Oil and real estate are intimately tied to market conditions.

If the cost of oil goes too high, consumers drive less and spend less. On top of that, businesses incur greater expenses and the price of goods rises. That slows down economic expansion and eventually drives down the price of oil. The same goes for real estate.

If the official inflation rate hits double-digits, there won’t be a bank in its right mind that would be willing to loan a consumer the funds to buy a house at today’s interest rates. And not many consumers would be interested in buying a house with a fixed mortgage around 10 percent.

The value of gold can’t be inflated away, and therein lies its power. In a world where economies around the world are racing to devalue their money, there are few places investors can turn. That’s why I’m confident we haven’t see the end of the bull market in gold.

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The warning lights have officially started flashing, and it’s an indication that you shouldn’t start bargain hunting yet.

Yesterday’s 513-point plunge in the Dow marked the ninth-worst stock sell-off in the history of the Index. The warning lights have officially started flashing, and it’s an indication that you shouldn’t start bargain hunting yet. Investors are jittery. Here’s why:

1) The debt ceiling debate. Yes, Congress found a way to avoid defaulting on its debt, but the strung-out drama was a wake-up call for investors – particularly after S&P threatened to downgrade the country’s credit-worthiness.

2) Sluggish growth. Last week, we learned Gross Domestic Product – the sum total of the U.S.’s economic output each year – grew just 1.3 percent during Q2. On top of that, QI-growth was revised down from 1.9 percent to 0.4 percent. That’s dangerously close to negative growth, and two consecutive quarters of negative growth is the generally-accepted definition of a recession.

Even scarier? The Treasury Department announced yesterday that the National Debt now stands at 100 percent of the country’s GDP. That hasn’t happened since World War II, and we now collectively owe out some $14.58 trillion.

3) Anemic consumer spending. For the first time in nearly two years, consumer spending dropped in June. That’s troubling as consumer spending accounts for 70 percent of the U.S. economy.

4) Say ‘no’ to QE3? The days of easy money are winding down now that QE2 has officially ended. If things get worse, the Fed might have to act, but for now, they’re standing by their “no QE3” stance. Without an extra kick in the economy, there’s just not a lot to get excited about.

Where do we go from here?

The bigger question, though: how far will this latest stock market crash go? That depends on economic growth, of course, and some of the world’s leading banks have started upping their bets that a double-dip recession’s on the horizon.

In the words of Bank of America Merrill Lynch economist Michelle Meyer, “The economy is only one shock away from falling into recession.”

Meyer says there’s a 35 percent chance of a recession in the next year (per the Financial Post).

Here are a few more predictions:

IHS Global Insight: 40 percent odds of a new recession (per Mercury News).

Vanguard: 35-40 percent odds (per Mercury News).

Former Fed officials: 20-40 percent (per UpperMichigansSource).

The boldest prediction, though, comes from Harvard economics prof Martin Feldstein, who has laid down 50 percent odds for a double-dip recession (per Bloomberg). If he’s right, the stock market is due for a lot more pain.

Regardless of the predictions, though, the financial crisis in 2008 taught us that sell-offs shouldn’t be taken lightly. Sure, you should buy when there’s blood in the streets, but you want to make sure the bleeding’s not just getting started.

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