Gold $2107

• Gold shows resilience… Stuffy British bank forecasts $2,107 inside of three years
• Frank Holmes tells Zurich audience about the "fear trade," the "love trade"… and why gold isn't in a bubble
• Major gold stocks merely keep pace with the bullion… Where to find the outperformers
• Shocking 15.7% increase in the deficit! And why today's big budget speech in Washington is already a nonstarter…
• Readers carry on with their private debate: Should nontaxpayers be allowed to vote?

Precious metals are proving resilient after yesterday's beat-down. Gold is back up to $1,461. Silver spent a few nanoseconds below $40 yesterday and as of this writing sits smartly at $40.56.

With regular runs at historic highs, it's no longer cranky gold bugs and dollar bears doing their share of gold price forecasting. Analysts for the proper, if stodgy, British bank Standard Chartered announced yesterday they are expecting gold to reach $2,107 an ounce by 2014.

What's more, they say, "our modeling suggests a possible 'super-bull' scenario," based on a "powerful relationship" between per capita income in Asian emerging markets and the gold price.

Standard Chartered estimates that per capita income in China and India will reach 30% of the U.S. level over the next 20 years. On that basis, the bank sees "gold prices rallying up to $4,869 per ounce by 2020, should current relationships between Asian demand and gold persist."

Standard Chartered wouldn't find much argument from U.S. Global Investors chief and Vancouver alum Frank Holmes, who was the lunchtime keynote presenter here in Zurich today at the European Gold Forum.

For starters, he furnished visual evidence to back up Marc Faber's claim in this space on Monday that gold is not in a bubble.

You'll see the chart follows the trajectory of three bull markets — gold beginning in 1971, the Nasdaq beginning in 1990 and gold again beginning in 2001.

"Bubbles require massive leverage," Frank says, and there's no evidence investors are borrowing to load up on gold.

For now, gold demand will increase steadily, driven by two of Frank's favorite themes — the "fear trade" and the "love trade."

That is, investors buy gold because they fear what the Federal Reserve is doing with its balance sheet…

The result — negative real interest rates. That's when inflation is greater than the nominal interest rate. "Whenever you have negative real interest rates coupled with increased deficit spending," says Frank, "gold tends to rise in that country's currency."

Likewise, the two party blockade on fiscal reform writ large in the U.S. Congress, as evidenced just four time segments below.

The "love trade," on the other hand, is something alien to North Americans and Europeans. "It is customary in most emerging countries to give gold as a gift to friends and relatives for birthdays, weddings, and to celebrate religious holidays," he explains.

Thus, the point to which Standard Chartered agrees: As incomes rise in China and India, jewelry demand is driving the "love trade."

Gold demand in India during the first three quarters of 2010 exceeded all of the previous year. And China was on a pace to exceed the 2009 figures as well… all of that despite a steadily rising gold price all last year.

We visited a gold vault here in Zurich this morning located in a free trade zone near the airport. Refineries here in Switzerland import gold, refine it into bars and bullion suitable for the jewelry trade and then bundle it and ship it out "primarily, well, to India," our guide chuckled to himself.

More our visit to the vault tomorrow.

Like gold itself, gold stocks have pulled back from last week's highs. The HUI index reached an all-time high of 606 on Friday. This morning, it's back at 585.

Over the last 12 months, the bigger gold stocks represented in the GDX ETF have basically kept pace with bullion… while "junior" players represented by GDXJ have substantially outperformed:

Within the GDXJ, names like Gabriel Resources are up 56%, Allied Nevada is up 123%, and Fronteer Gold is up 153% as it awaits the completion of a buyout by Newmont.

"Over 70 million ounces of gold have been mined from the Timmins region in northern Canada," says Chris Mayer, commenting himself on the movement in the junior miners. "That makes it, by far, the largest gold rush in the world in terms of actual gold produced — $99.6 billion in today's gold prices."

The first discovery came in 1909. And they've continued ever since. "The Timmins camp is an area still flourishing with mining activity. And any gold miner will tell you that the best place to look for gold is NEXT to a spot where it's already been found."

That's what has Chris so intrigued by a tiny company working a district that sits cheek to jowl with Timmins. It has a market cap of $300 million. The amount of gold it could be sitting on comes to $1.26 billion. That's impressive enough… but it's also sitting on other properties in Western Canada, Mexico and the Dominican Republic.

Chris has already bagged junior gold winners for readers of his premium advisory Mayer's Special Situations, including 78% on Jaguar Mining and 135% on Detour Gold. But this one has the biggest potential yet: He sees it going from the present $1.73 all the way up to $27. You can see exactly how he arrives at that number in his newest presentation.

Ah…. we see this morning the media is abuzz with the U.S. Treasury Department's announcement that the U.S. fiscal deficit reached $829 billion during the first six months of fiscal 2011.

The news was greeted with surprise on The Drudge Report, for example: Why, that's 15.7% higher than a year ago!

Shocking.

Unless, of course, you do the math. Today's $829 billion annualized comes out to $1.658 trillion…. which is not too far off the administration's projections from two months ago.

By the time you read this episode of The 5, the president will have unveiled his budget proposal. Like the Rep. Paul Ryan's The Path to Prosperity plan advanced last week, it's meant to accurately project the next 10 years… as if a sitting president or a majority whip have any control over the political whims of their successors.

Neither proposal will mean anything.

At least, not until we see what shenanigans Congress gets up to when the national debt hits its current ceiling of $14.29 trillion on (or around) May 16. Even then, we're fairly confident we can agree with this forecast offered by Rep. Ron Paul yesterday:

"Instead of the left agreeing to cut social spending and the right agreeing to cut military spending, the right agrees to more welfare and the left agrees to more warfare. In spite of all the rhetoric, we will go deeper in debt, the Fed will print more money and the value of the dollar will continue to plummet."

In a masterstroke of timing, the International Monetary Fund says the United States lacks a "credible strategy" to stabilize the national debt. In a biannual report, the IMF says if current trends hold, the U.S. and Japan would be the only G-20 countries that still have a rising public debt in 2016.

The Financial Times, with characteristic reserve, called the report "an unusually stern rebuke to [the IMF's] largest shareholder." It's also another spooking factor contributing to the "fear trade" in precious metals.

U.S. retail sales grew last month by 0.4%. Even if you don't back out rising gasoline prices, the increase stacks up as the smallest in nine months.

But if you're cranky like us and you do back out rising gasoline prices, the increase was, well, even smaller at 0.1%. That's not what Congress intended, we suspect, when they agreed to cut the "payroll tax" from 6% to 4% and put more spending money in the average Joe's pocket. Nor is it likely they were counting on gas rising to $3.79 a gallon — the most current national average, according to AAA.

Like the metals, stocks have recovered about a third of yesterday's losses. The Dow has pushed back above 12,300. Traders appear to have been titillated by quarterly numbers posted by J.P. Morgan Chase.

Oil has bounced after yesterday's big sell-off — but not much. Kuwait is shutting down oil exports on account of sandstorms. Even with that, a barrel of West Texas Intermediate remains below $107.

The dollar index remains mired below 75 this morning. At last check, it was 74.8.

"On the thread of voting rights," a reader suggests, "each citizens' vote should be weighted based on their his/her federal tax bill less unearned government benefits.

"A weight of 1 would be the minimum so nobody would be left out. Could you imagine a windfall to the Treasury on pre-election years? Along that line, put the national budget up for referendum with this system now that we have the technology."

"At the risk of someone actually running with it," writes another in a surprisingly similar vein, "I have to toss in an idea I had called 'fractional weighted voting' that could be implemented with today's electronic voting technology. The basic idea is that everyone's vote would be weighted by the percent of their net worth that they were willing to contribute in taxes that election cycle.

"Someone with more time on their hands can model that and let us know if it will be the coup de grace to current paradigms of progressive taxation.

"I always enjoy The 5."

"Possibly," writes a third with a cautionary note, "your readers are unaware that other taxes exist for those with incomes so low they cleverly manage to dodge our beloved income tax.

"Rather than hoard their ill-gotten zombie money like some millionaire CEO, they are gracious enough to pay their fair share by way of payroll taxes, sales taxes, gasoline taxes, license fees, their share of property taxes (if they rent) and so on. With what's left, they splurge on luxuries like clothes, food, shelter and transportation.

"There may actually be a few people in this country that actually can get away without paying 'net' taxes. Therefore, the suggestion to deny their civil right to vote is really only a ruse to justify yet another government bureaucracy to monitor those miscreants and keep them out of the voting booth!

"So let's those of us with money do everything we can to keep it out of the hands of these ne'er-do-wells and put in the hands of deserving CEOs and their golf buddies instead!"

The 5: Oy,

Gute Nacht,

Addison Wiggin
The 5 Min. Forecast

P.S. An "engaging compilation of essays for the finance professionals' shelf," writes a reviewer in India's national English-language daily The Hindu about Bill Bonner's Dice Have No Memory: Big Bets and Bad Economics From Paris to the Pampas.

"One of the opening essays, somberly titled 'From Funeral to Funeral,' brings out the difference between science and finance. Citing the saying that science evolves from funeral to funeral, Bonner explains that each exquisite cadaver is another reminder that there are only two kinds of scientific theories, viz. those that have been disproved and those that have not been disproved yet."

Bill performs many an autopsy in this fine volume, which we're certain delivers more chuckles than an episode of CSI. Get yours at a 20% discount right here.