The Future of Gold and the "China Put"

Lot of people have takes on the short-term price action in gold and silver. Some say it'll go up, some say it'll correct back down - good arguments are made on both sides.

My focus is on the longer-term fundamentals and trends, and I've been good at predicting them the past several years. Here's the economic scenario America faces:

We're heavily indebted and won't be able to grow our economy enough to pay off our national debt and unfunded liabilities, like Social Security and Medicaid. So the federal government and Federal Reserve (which really isn't federal) have decided to crank up the printing presses and try and inflate our way out of this mess.

The problem is that it devalues the purchasing power of US Dollars, and the wealth of Americans who save and invest in US Dollars. Foreign companies and governments holding large quantities of dollar-denominated debt (like U.S. Treasuries) want to get out of this type of debt so their wealth doesn't decline either.

China is the world's largest holder of US Treasuries, and is now a net seller of Treasuries instead of a net buyer. And last September, the Chinese government recommended to its one billion citizens to invest in gold and silver.

With this kind of strong demand for gold and silver, this makes me even more bullish on the longer-term prospects of precious metals. That's on top of my bullishness because of absolutely insane monetary policy from our Federal Reserve. Put options allow you the right to sell a stock or product at a given price, on or before an agreed-upon time. This eliminates the downside risk if the stock or commodity you've purchased goes down in value.

When a country with the population and increasing wealth of China is focused on buying gold and silver, that's the biggest put option on the planet today with the least downside risk. Now - can the price of gold go down in the short-term? Absolutely.

We could see another round of deleveraging like we did in the fall of 2008 - where investors were hit with margin calls, and needed to sell everything possible to raise cash for short-term obligations. Eventually, investors in America and around the world will turn away from financial paper assets, and look to invest more in tangible assets such as gold and silver.

It's not a guarantee that they will "always" go up in value. However, tangible assets always hold some value - and have never gone down to zero throughout the history of the world. And with the kind of demand that China has for precious metals, I believe that these so-called "barbarous relics" are among the safest places you can invest your wealth in the turbulent times we live in.