Gold Could Still Triple From Here.

Gold broke out to a new high yesterday of $1084, and the yellow metal is glittering again today.

More impressively, strategists note, gold prices moved higher on Tuesday even as the S&P 500 ticked up two points and the DXY index modestly rose to 76.3.

What has triggered this headline-making move in the gold price?

For one, the International Monetary Fund reported that it had sold to India 200 of the 403 tonnes it wants to sell this year. All that remains, market pros note, is the prospect for the other 203 tonnes to be sold, with speculation upon China as the eventual buyer.

But strategists point to another, perhaps equally important reason for gold’s surge: fiscal policy in the USA.

Specifically, Peter Orszag, the Administration's Director of the Office of Management and Budget (OMB), delivered a speech yesterday morning at New York University, in which he said that the federal deficit during the current fiscal year will match last year's record high of $1.4 trillion.

But he continues to predict the administration will cut that in half by the end of President Barack Obama's first term.

Is there a relationship between the price of gold and the US federal deficit and the amount of US public debt outstanding?

Apparently there is, says Ed Yardeni of Yardeni Research.

In a client note this morning, he notes that the price of gold has tended to lead the US federal deficit since the 1990s. The 12-month deficit peaked during the previous decade at $332.1 billion during April 1992. It then turned into a surplus of $277.8 billion during April 2001, on a 12-month basis.

During the previous decade, the price of gold peaked at $414.80 on February 5, 1996, Yardeni points out. It fell to $255.95 on April 2, 2001.

"It then took off without much downside volatility to yesterday's record high," Yardeni emphasizes. "As gold soared, the federal surplus evaporated and turned into a structural deficit that Orszag's OMB projects at $9 trillion over the next 10 years."

The investment strategist concludes: "So why did gold rally so much yesterday despite Mr. Orszag's assurance that the federal budget deficit will be cut in half? Apparently, the gold bugs don't believe him."

The American Enterprise Institute for Public Policy Research (AEI) published a paper indicating that "by all relevant debt indicators, the US fiscal scenario will soon approximate the economic scenario for countries on the verge of a sovereign debt default."

Steven Hess, Moody's lead analyst for the US, put it this way on Reuters TV: "The Aaa rating of the US is not guaranteed. So if they don't get the deficit down in the next three to four years to a sustainable level, then the rating will be in jeopardy."

David Einhorn of Greenlight Capital, recently speaking of why he's become a fan of gold, had this to say:


I have seen many people debate whether gold is a bet on inflation or deflation. As I see it, it is neither. Gold does well when monetary and fiscal policies are poor and does poorly when they appear sensible. Gold did very well during the Great Depression when FDR debased the currency. It did well again in the money printing 1970s, but collapsed in response to Paul Volcker's austerity. It ultimately made a bottom around 2001 when the excitement about our future budget surpluses peaked.

Einhorn added, "Prospectively, gold should do fine unless our leaders implement much greater fiscal and monetary restraint than appears likely. Of course, gold should do very well if there is a sovereign debt default or currency crisis."

David Rosenberg, chief economist and strategist at Gluskin Sheff, also continues to favor gold. The fact that the yellow metal continues to surge higher -- even with ongoing deflationary developments -- suggests that other factors are driving bullion to new bullish heights, he says.

"It's called scarcity of supply relative to fiat currency, "Rosenberg argues.

The strategist wrote today in a research note that he thinks gold can at least double if not triple from here.

"The cup is still half full -- and still can be filled with gold eagle coins," he said.

For investment advice about how to play gold, checked with Curt Hesler, the longtime editor of the Professional Timing Service newsletter.

Hesler says there's no doubt that long-term gold will reach at least $1600. However, he thinks the near term is still a bit "dicey." The veteran says he'll get more excited about buying gold at $950 to $960.