Here’s Why Gold Could Boom in 2013

In today's Money Morning:...the dismal results for hedge funds this year...what they could have done instead...why 2013 could be a boom year for gold...how the US Fed saves the banks at the expense of the '99%'...

Message to Investors: Here’s Why Gold Could Boom in 2013

Hedge funds have had another shocker of a year.

If you had parked your cash with those self-appointed Kings of finance, you would have gained just 5.5% so far this year.

That's according to the Hennessee Hedge Fund Index, which calculates this average of reported hedge fund returns.

Imagine all those hundreds of thousands of man-hours spent analysing, calculating, and theorising. All that effort expended, billions of dollars in brokerage, and the sleepless nights spent worried about trading positions.

Then consider that the 'hedgies' could have just bought gold at the start of January, then slept in a hammock in Bali until Christmas - and made a far better gain of 8.2%...

And 2012 was actually a slow year for gold. The average for US dollar denominated gold over the last ten years has actually been an incredible 17.5%.

Gold Gains 8.2% So Far in 2012

Source: Money Morning

You can see in the chart above that in the last decade, the relatively 'slow years' of 2004 and 2008 have been followed by big years.

And gold has now had TWO slow years in a row - so maybe gold is now set for a boomer year in 2013.

2013: A Big Year for Gold?

The gold market is fundamentally primed for a big year at any rate, and a gain of more than 20% next year could realistically be on the cards.

The single biggest reason to expect gold to run next year is the US government's laughable inability to balance its books.

The US debt level is out of control. And the tedious, endless debate over the 'fiscal cliff' tells you that it's not about to get under control any time soon. They couldn't decide on the colour of an orange, much less run a balance sheet.

And like I was saying in my letter to you last week, part of the discussion has proposed scrapping that pesky debt ceiling.

This hasn't caught much media attention yet - but it could be the biggest reason to make 2013 the year you finally buy that gold you've been thinking about.

The reason is that the debt ceiling is the only thing keeping any kind of restraint on taking on more debt from time to time.

And this chart shows very clearly that whenever the debt level is stepped up (black line), the debt (red line) rapidly rises to meet it.

Where the Debt Level Goes - So Does Gold

Source: sharelynx

Where it gets interesting is that the gold price follows the debt level up almost exactly.

In other words, the US gold price is very highly correlated to the US debt level.

You can this relationship in the chart above - as debt (red) tracked up, gold (yellow) followed it very closely.

And when the debt level accelerated after 2008 - so did the gold price.

So what happens in 2013 if the debt ceiling is scrapped?

Would you give a shopaholic a credit card that couldn't be maxed out? Me neither. Because having no credit limit will be an open invitation to push spending into overdrive.

The result will be a new acceleration in the US debt level, as the government spends with gay abandon. And if we see that - then gold will soar in its slipstream again.

More QE to Boost Gold Too

The second biggest reason to expect gold to rally in 2013 is the return of Quantitative Easing (QE).

Not just the 'QE3' program announced two months ago, but last week's announcement of the beefed-up version starting in January. Instead of $40 billion of asset purchases each month, the Fed will now buy $85 billion each month.

The extra $45 billion will be treasury purchases, which have had a big effect on the gold price in previous QE programs. It's been almost 18 months since the Fed wound up QE2, and the market seems to have forgotten what happened to gold back then.

But from the start of QE1 to the end of QE2, the gold price DOUBLED.

Gold is a good investment at any time, but when the Fed is printing, it is madness to not own gold.

The difference this time is that with this current QE program, the Fed is planning to keep going until the unemployment rate hits 6.5%.

This is one hell of a bizarre monetary experiment.

For one thing, linking the two arrogantly assumes that their policies are what is driving the fall in unemployment. This is just not the case. New jobs have appeared in spite of their endless meddling, not because of it.

Bernanke may just as well have linked the end of the QE program to the price of chicken sausages at the Coles supermarket in Wollongong.

Anyway, the US unemployment rate is 7.7% at the moment, and is falling. At the current pace, it would hit the target 6.5% around next December. This would give a full year of the current QE program.

But nothing is ever that simple in statistics. Normally, assuming any existing trend will continue is financial suicide. So - what happens if the unemployment rate turns back up? Does the Fed buy $85 billion a month for two years, five years, or longer?

And besides, the unemployment rate in large part is only falling because of massive numbers of people giving up looking for work. If you stop looking, then they don't even count you.

But if these people are encouraged by the falling rate, and start trying to come back to the job market, the unemployment rate could quite possibly start climbing again.

And what then Bernanke?

I wouldn't want his job.

But I know what I would do if I was a hedge fund manager. I'd stick all the funds under management into gold in early January - then go and find that hammock in Bali.

Dr. Alex Cowie
Editor, Diggers & Drillers

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