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Is Gold Going to Become a Mania Asset?

February 25, 2009 by Administrator 

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Steve Ellis, a manager of RAB Gold Strategy, is reporting for Yahoo News that the US Federal Reserve has flooded the market with liquidity by more than doubling its balance sheet in less than six months. This means it may be unable or unwilling to withdraw it in time for fear of precipitating a secondary relapse in economic activity. Meanwhile other central bankers are predicted to face intense pressures to “support” their domestic economy by weakening the currency, leading to competitive currency devaluations.

What does this mean for the San Diego gold seller or buyer? It means that the race to the bottom in fiat currencies has begun and hard assets, particularly gold and silver, should be the primary beneficiaries. According to Ellis, gold is a prime candidate to become a “mania asset” once its demand becomes mainly financially driven as opposed to gold jewelry and/or industrial demand driven where its upside may be capped by “sticker shock”.

Once the psychologically significant $1,000 an ounce gold price is broken convincingly, the speed of the move beyond that level could accelerate sharply, says Ellis. One precondition for a mania is there must be uncertainty about how the asset is properly valued which allows “new era” thinking to take hold. This is very true for gold.

How high can gold ultimately go? Ellis says to look at in terms of the Dow Jones Industrial Average. A Dow Jones Industrial Average/gold ratio of 2:1 would be a good sign the bull market in gold is getting well underway, as happened in 1932 and 1980. Getting to the 2:1 ratio again doesn’t mean the Dow must decline significantly from here; more likely gold prices surge and the Dow stays range-bound but volatile. Investors are looking for good risk/reward investments.

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In the end, it is always guess-work whether gold will become a mania asset. But if we look at the price of gold lately things certainly seem to be falling on the side of mania: Gold Prices Jump to 7 Month High.

San Diego Pawn Shops, Gold Buyers, Gold Refineries, & More

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