What causes an economic system to collapse is not changing fundamentals, it is a recognition of these fundamentals by the public en masse, who then heads for the door. The public loss of confidence in governments throughout the Western World has big implications for the price of gold. The interesting part about this is that during the 1920s and 30s, the public was very wrong when it came to their perceptions.
In the 1920s bull market, people expected the stock market to crash. During the Great Depression, they failed to recognize that the country was in for a long period of a weakened economy. The cause of their miscalculations was a failure to adjust an economic model to take underlying conditions into consideration. Individuals continue to use the same solutions to new and different problems and they wonder why this approach is not effective.
Some skilled investors look at capital flow rather than inflation when determining how gold prices will move. At this time, they predict that capital will begin flowing out of bonds and into gold. Because the bond market is so large, just a small change in capital from bonds into gold will make a huge difference in gold prices. The bond market is what they believe will determine whether gold skyrockets to the moon.
These investors feel that U.S. government bonds are a huge bubble that is ready to burst. Those who go long on bonds are on the wrong side of things. People will soon wake up, engage in a paradigm shift, and get their money out of the bond market. This may not occur overnight, but in the coming years, and when it does, it is going to be big.
As the government financial crisis worsens, people will become more focused on things like bond rates, capital flows, the dollar, and worldwide government response to failing economies. Economic stimulus has been used for years and is only making the situation worse. When everyone recognizes this reality, the real changes will begin and they will yield some very positive results for gold investors.
Source: Kim, Moses. Expected Returns. Paradigm Shifts And Gold Rocket Launches.
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