Gold is Near the Bottom. Return Risk Ratio Now Favourable.

Gold tumbled to USD1560oz two days ago. Yesterday, it recovered to USD1596 oz. The last time gold tumbled more than 30% was back in 2008, when the credit crunch hit the world. The start of the QE in the US reversed gold's drop. This week, we witnessed gold falling 19%. I calculated that if it were to replicate 2008's fall, it will reach around USD1470 - 1370 oz. That's another 8 - 15% drop. So buying it at 1560 or 1600 may not be the lowest level. But I will buy in stages because it's attractive. History never repeats. It rhymes. According to Mark Twain.

OECD countries are attempting to inflate their way out of debt. Printing money is the only way to meet the credit crunch and feed the budget deficits. The alternative is war, which thankfully the developed west cannot inflict on us this time. It was possible just 100 years ago, but I suppose the nuclear capabilities of China, India, Pakistan and Russia have balanced the power. We we turn into a deflationary spiral, you can be sure cenral governments will print money to prevent that. Check out the weekly chart of XAUUSD below to see how much gold has risen over the last 4 years. The correction seen now is similar to the one in 2008. This correction may not have run its course yet.

But I recently witnessed a short term reversal. See the daily chart below. A rebound is due and we may see a 7 - 12% rebound before hitting resistance again. I expect 2012 to be the start of another major rally.

Gold could rise until mid 2012 or mid 2013. Thereafter, we could witness hyperinflation and governments being forced to hike interest rates. With austerity measures in place, a deep and long recession may then take place in 2013 or 2014. This means that we are about to face a financial Tsunami never seen before in the last 60 years. Stagflation will mean a synchronised recession across the western world.

I believe though that all is not gloom and doom. Emerging economies will overtake the US and EU in size and will drive growth from 2014 onwards. 2015 could be the start of a tremendous boom in global economy, but with commodity prices at hightened levels.

Hang on tight. Keep lots of dry powder. Invest in CTAs like Winton and Amundi Volatility if you can because not even bonds can protect you again stagflation.