Gold prices are due to climb in 2012, but don't rule out silver and keep an eye on stocks for good value investments, says David Skarica, editor of The Gold Stock Adviser newsletter and author of "The Great Super Cycle."
The United States will likely roll out more extraordinarily loose monetary policies such as quantitative easing, not solely due to necessity, but also to keep the dollar competitive with a weaker euro.
Such easing measures will fuel inflationary pressures, and when inflation even threatens to rear its head, gold rises and shines.
"I think because of the eurozone crisis, the euro is getting a little too weak for what the Fed would like to see, especially if the euro got down to the 1.20 area," Skarica tells Newsmax.TV in an exclusive interview.
The euro is currently trading around 1.29 per dollar.
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"I think they'll print money just to try and devalue the dollar to gain an export advantage and, of course, more printed money is more inflationary and it debases fiat currencies even more and then we see higher precious metals prices because they are the protection against debased fiat currencies," Skarica adds.
Under quantitative easing, a central bank buys assets from banks like government bonds or mortgage-backed securities with freshly printed money.
The idea is to flood the financial system with liquidity and send stock prices rising with the aim of avoiding crippling deflation and spurring investment and hiring. Such easing is commonly used when normal measures like interest-rate cuts don't work.
As a side effect, the currency in question weakens and inflationary pressures rise.
Federal Reserve officials have said that consumer prices aren't a problem, and that higher prices hurting consumers at the pump and in the grocery store are due to cyclical factors and not due to any surge in underlying demand.
Such comments often leave markets to interpret that there is room for a third round of quantitative easing if the U.S. economy doesn't gain steam and cut into high unemployment rates (the Fed has already rolled out two rounds so far).
Even if the Fed does nothing, the liquidity left over from the first two rounds remains in the system while debts remain sky high, which means the dollar stays weak and its traditional hedge, gold, continues climbing — possibly spiking to $10,000 an ounce.
"I believe we are going to be in an inflationary end to this game and not a deflationary end, and again let me reiterate myself, when I say that $10,000 price, it's not like gold is going there tomorrow, number one," he says. "And number two, it's not like it's going to sit there for years and years. I really believe that will be the blow off of the gold bull market," Skarica says.
In the last bull run for gold, from 1979 to 1980, the metal tripled in a year, shooting up to $800 an ounce from around $270. Today, gold is trading around $1,650 an ounce after breaking $1,920 an ounce in 2011.
"The last move from $3,000 an ounce or $4,000 an ounce to over $10,000 will probably occur very quickly and then come right back down but I think ultimately we will get there as these debt crises unfold in Europe and then in the United States and we see an inflationary end to it."
Minding the miners
Investors shouldn't focus all of their attention on gold itself but also look at the companies that mine the metal.
Many equities in mining companies fell amid recent stock-market selloffs and also amid gold's correction, but they will rise again when gold goes back up.
"When people are worried about banking crises, they sell everything to raise cash, and they sell all equities, and this includes, for example, gold stocks because they are equities as well," Skarica says.
"And gold stocks on average dropped about 10-20 percent in 2011 despite the fact that precious metals prices were up over 10 percent."
Expect that differential to narrow.
Furthermore, even though stocks aren't due to soar any time in the future, there will be buying opportunities out there, especially in sectors that have taken a beating.
Take alternative-energy stocks.
"Alternative energy really got whacked in the last move lower in the market in 2011. I like to buy stuff that is down 80-90 percent and is really beaten up. If something falls from 10 to 1, it only has to go back to 2 to be a 100 percent gain," Skarica says.
"So the solar companies fall into that, a lot of the wind companies, the geothermals and all those companies as well."
Plus oil isn't likely to plunge soon from its current levels of around $100 a barrel, which will make alternative energy even more attractive in the longer term.
Experts say oil demand will remain high for years to come.
Consumer stocks that are down will make good value plays as well, especially amid today's frugal times marked by deleveraging and saving.
"People when they treat themselves, they are not going to treat themselves to big vacations to Asia or Europe. What they are going to do is treat themselves to some small things like consumer electronics and things of this nature. That's one reason why Apple has done so well," Skarica says.
Another asset class set to perform well is silver due not only to fundamentals, but also due to affordability.
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"Silver is what they call the poor man's gold, so as the mainstream gets into the precious metals, they might look at an ounce of gold and say $1,600-$1,700 or $2,000 an ounce is just too expensive. Then they'll look at silver and see it at $30 or $40 an ounce and just from a pure economic standpoint think it's more affordable," Skarica says.
"So I think silver is probably a better value."
When investing in bonds, investors should keep deficits in the back of their minds despite recent rallies in the Treasury markets.
The U.S. government's public debt recently eclipsed its gross domestic product and will soon resemble Greece or Italy, where debts have soared well above 100 percent of total economic output.
Currently, European investors are demanding sky-high interest rates in Italian and Spanish government bond auctions, but as those countries pay down their debts and tough austerity measures bear fruit and bolster their economies, investors are going to pay closer attention to spending issues in the United States.
"I think once you start to see austerity measures paying off in places like Spain and Italy and the deficits come down, then they are going to turn their attention to some of these other countries and I think the United States will be the main victim to that."
"So for 2012 I would suspect to see slightly higher interest rates, but I really think in 2013 and definitely by 2014, we're going to start to see spikes in rates like we have seen in Italy."
About David Skarica
David Skarica is a member of the Moneynews Financial Brain Trust. Click Here to read more of his articles. He also writes the Gold Stock Adviser. Discover more by Clicking Here Now.
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