Taking the short view on gold, this has been a discouraging few weeks. The spike in gold prices from early December’s $317 up to late February’s $380 engendered much too much confidence in gold, and brought a lot of very fresh money into the gold market. People who previously had no interest in gold ‘back in the day’ (1997-2001) when it traded in the $252 - $290 range, all of a sudden discovered gold’s bull market in the $350- $375 range and hopped aboard.

This current correction will shake the confidence of those newbies, and may shake the weakest of them out of the gold market entirely. The gold bull market that we are in is like any other bull market in that the bullish trend can stay in place while day-to-day or week-to-week fluctuations can be harrowing to those with weak stomachs. As Adam Hamilton of Zeal Research (www.zealllc.com) writes:

“Once again it is absolutely crucial to realize that no bull market rockets up in a straight line until its final terminal bubble climax stage near the very end. Normal pullbacks are to be expected and welcomed as fantastic speculation and buying opportunities, not perplexing events to be feared… …There have already been about five major gold rallies in our young gold bull market to date, all numbered above, and subsequently five major pullbacks right after these very rallies. Provocatively, and indeed in tell-tale bull-market signature fashion, each major gold pullback only managed to bludgeon gold down to a higher low. The very definition of a bull market is a series of higher lows and higher highs in any given price over a year or longer.”

Knowing that we are in a primary bull market in gold that may last for years, our clients who bought ‘back in the day’ but didn’t buy at $350+ levels are now starting to find new entrance prices at which to add to their holdings. Many of our clients know that the arguments for gold ownership are stronger than ever.

As a matter of fact, we couldn’t have seen a stronger buy signal for gold than what we saw this week - Congress acting on a proposed $800 billion tax cut just as the US started to spend vast treasure on a Mideast adventure. After all, what are the ramifications of a US policy of having guns AND butter, not to mention homeland security, drugs for seniors, and a massive tax cut, too? The cost, in the final tally, is the inflationary end of the dollar as the world’s supreme reserve currency.

As Dr. Hanz F. Sennholz (www.sennholz.com) writes in a March 17th article:

“For the American people the world dollar standard has been, and continues to be, both a welcome boon and a dreaded affliction. It is pleasant and beneficial as it permits the Federal Reserve System to engage in massive credit creation that generates unprecedented trade deficits now running at a rate of over half a trillion dollars a year. At some five percent of gross national product (GNP), the trade deficits actually have lifted the levels of consumption of the American people while they depressed the levels in creditor countries. Moreover, the dollar standard has enabled the U.S. Treasury to place much of its new debt with foreign investors and thereby shift much of the burden of debt to foreigners.”

Or as the celebrated Bill Gross of the Pimco bond funds writes in his March commentary:

“Typically, inflation is the primary driver of bond yields, and when the word "reflation" begins to characterize the outlooks of bond managers such as PIMCO, investors tend to fear the worst. I suspect however, a delay of bond market Armageddon until the U.S. and perhaps even the global economy regains sufficient traction to grow on its own - without the benefit of extraordinarily low interest rates or Bernanke's troops in reserve. A run on the dollar is perhaps the only substantial fly in this scenario’s ointment."

Mr. Gross further hit the nail on the head as to the vulnerability of the US dollar during his extensive interview in Barron’s last week:

"How much longer will the world be willing to devote 80% of its savings to finance our over-consumption? We've only gotten away with it because we're the globe's primary reserve currency, but fairly soon we're going to be regarded as the emperor with no clothes."

In short, the US dollar has been magically levitated over the past few years by a steady, massive influx of the world’s investment capital to finance American consumption. Will the world also want to finance our wars and a tax cut too?