RECESSION FORECAST--THE CASE FOR GOLD

Jan. 4 (Bloomberg) -- Bill Gross, manager of the world's biggest bond fund, said the Federal Reserve may not be able to avoid a recession even if central bank policy makers lower borrowing costs by at least another percentage point.

``I'm not sure if the Fed can do that by reducing rates to 3.5 percent or 3 percent or even lower,'' Gross, the founder and chief investment officer of Pacific Investment Management Co., said in a Bloomberg Television interview. ``The Fed has been behind the curve for a long time.''














US Treasury Bonds Maturity Yield

Yesterday Last Week Last Month
3 Month 3.09 3.11 3.01 2.96
6 Month 3.09 3.15 3.29 3.13
2 Year 2.72 2.81 3.09 2.93
3 Year 2.66 2.73 3.04 2.91
5 Year 3.18 3.25 3.49 3.32
10 Year 3.87 3.89 4.07 3.95
30 Year 4.38 4.37 4.49 4.43

Amid Friday's flight toward bonds, the 10-year yield slipped to about 3.85%, down from nearly 5.29% seven months ago




Are we at a rare and unusal period in time?
1) The rate of inflation has been higher than 6 months earlier, 2) Treasury bond yields have been lower than 6 months earlier, 3) the NAPM Purchasing Managers Index has been below 50, and 4) the Gold/XAU ratio has been above 4.0, the XAU has soared at an astounding rate of 123.63% annualized. In contrast, when none of these have been true, the XAU has plunged at -53.21% annualized.
http://www.hussman.net/html/gold.htm

"The mining sector should continue to be one of the top performing investment sectors in the coming 3-5 year period. The past actions of the Fed and other central banks mean they will surely do everything they can to avoid a credit and debt implosion that according to many experts could be in the trillions of dollars of potential defaults and bankruptcies. If this estimate is true then bailing out the institutions that are in danger will require the greatest expansion of paper money in history. The winner will be gold and other natural resources because the more money that is created the higher the prices of basic commodities and monetary substitutes (gold and silver) will go. Gold mining shares are the beneficiaries of the economic excesses of others.

It is important to be careful of exploration stocks and allocate only a small amount to this sector. The large mining stocks are now being bought by huge non gold savvy hedge funds and will create lots of volatility as we go forward. A stampede by these players either way can be profound. The developmental mining companies with solid resources in the ground and a 1-2 year horizon to production will be targets for buy outs by mid-tier and major mining companies.

Good luck - you are going to need it especially if gold goes to $1,200 and then back down to $700 and then to $2,000, which is very possible in the coming decade. So always keep a core portfolio as insurance (and long term appreciation) and a trading portfolio that rolls with the punches. Do not go on margin and do not spend much time or money on the exploration stocks as more than likely every share you buy is usually from an insider who is selling. Also if there ever is a major economic upheaval gold and silver mining companies with known and verified resources in the ground will go up dramatically but exploration companies with nothing but a geologist and promoter’s dreams will go no where because they have nothing in the ground. Remember that - they have nothing - so be careful."

Ken Gerbino
26 October 2007