Nov 16

Be Careful What You Wish For

Gold Price No Comments »

So have the bail-outs and stimulus seen the West through the worst of its financial crisis…?

RECENTLY at the 36th New Orleans Investment Conference, held October 27-30, The Gold Report caught up with Deliberations on World Markets Writer Ian McAvity between sessions.

In fact, Ian was among the experts featured on the conference agenda, graphically updating his big-picture expectations for stocks, gold and the dollar. He continues here in that vein in this Gold Report exclusive…

The Gold Report: Over time, Ian, you have accurately predicted the bull market in the ’80s, the housing bubble and the credit crisis. So the obvious question: what are your key predictions going forward?

Ian McAvity: Despite people thinking that with all of the bailouts and everything else in the last year somehow the crisis is over, I think basically that the crash of 2007 through 2009 was only the first half of a much larger problem. I don’t want to say the worst is yet to come, but the second half may not be any more pleasant. The housing, banking and financial industry situations have not changed at all. The accountants changed the reporting rules so you just don’t see all the toxic paper still in the banks, and they don’t have to report it.

Since 1971 the dollar has lost something like 3.7% per annum against the Japanese yen. The Japanese continue to buy long-term U.S. Treasury bonds with a coupon of less than 3.7%. That’s a hell of a business. In the ’90s, the argument as to why the Japanese were still buying bonds in spite of the currency losses was that they didn’t have to mark the currency losses to market in their banking system. This is one of the reasons why the Japanese banks went on to have some problems. I like to use that example to point out that we don’t really know what’s going on inside the banks anywhere because they have their own accounting rules. What’s off balance sheets? What’s on balance sheets? What’s the flavor of the month and what flavor do we want to ignore this month? It’s scary.

We don’t know how deep this sewer is, and it really is a sewer. Poor old Bernie Madoff is awfully lonely in jail. A lot of the people involved in the bailouts really should be his cellmates. We’re not entirely sure who got that money, where it went or what it did. The grandchildren of today’s American taxpayers have been handed $3.5 trillion of debt that’s going to hurt them their whole lives.

TGR: Many people, including speakers at this conference, would say that bailouts were necessary so that the whole banking system didn’t collapse. Do you disagree?

IM: Some sort of a bailout was necessary. I’m not sure that a little pain was avoided at the risk of creating greater pain later. Years ago, Lee Iacocca was the champion for getting government money to bail out Chrysler and turning the company around. I had a confrontation with Iacocca, and I told him he did a great job turning the company around, but if the government had allowed the company to fail, the receiver would have sold those factories. Maybe the Japanese would have bought them and maybe it would have resulted in a more successful auto industry that wasn’t saddled with the autoworkers’ unions. It’s the same with the banking system on this occasion. Some of those banks should have been allowed to fail.

TGR: What will be the impact of China, Brazil, India and so on buying less and less U.S. paper?

IM: The degradation of the dollar. The problem is that nobody wants their own currency to take over as the transactions currency for international trade because the minute you get into that position you lose control of a lot of your own domestic monetary policy. So the most significant development this year—and the American media haven’t touched on it—is the agreement between Brazil and China to basically settle their trade balances with each other in reals and renminbi. Those are two of the largest holders of dollars in the world saying that they want to stop accumulating dollars. With your national debt scheduled to go from $13 trillion to $18 trillion, who’s going to buy that other $5 trillion?

TGR: The Fed.

IM: The Fed basically is trying to debauch the purchasing power of the currency. They keep pointing their fingers at China saying that China is artificially manipulating their currency and they have to devalue the USD and revalue the Chinese RMB upward by 40%. China owns $860 billion of paper. Who’s going to give them the $344 billion that they’re being asked to write off? It’s an interesting way to negotiate with your banker.

TGR: You’ve said that before—it’s no way to treat your banker.

IM: Exactly. Another element of this that’s not being addressed in the currency revaluation talk is that all of the surplus countries are putting in capital controls to keep the hot money out. Brazil taxes incoming capital. Everything in Korea is about to have some sort of tax control imposed. China, Singapore and many others are putting tight controls in place that will be a contentious item at the upcoming G20 meeting in Korea.

TGR: When you say hot money. . .

IM: International investment flows. It may be coming from traders, or it may well be coming from corporations trying to redirect their activity. But in essence they’re building walls to keep unwanted currency flows out because they don’t want outside forces driving their currency. It’s the constriction of international currency flows that really becomes a big issue. This is getting back to the 1930s where you get a combination of competitive devaluations and protectionism. Whenever times are tough, the first thing America always talks about is protectionist barriers. We, the great free traders, are free traders only as long as it works our way. The rest of the world is getting a little fed up with that.

TGR: You did some analysis of a dollar crisis in the late ’60s, early ’70s. Do any lessons from that apply today?

IM: If you think about it, we’ve had several dollar crises since the gold window was closed in 1971. From 1946 to 1971, the Bretton Woods Agreement had served as the foundation for the post–World War II monetary system. That was based on the U.S. dollar being tied to the gold price; it was a gold-exchange proxy discipline. The key is that it was an external, apolitical measure.

In the late ’60s, the pressures were building so the central banks ran a gold pool to stabilize the gold price. Finally in 1969 and 1970 the pressures were getting so big that they were losing too much money. So they in turn put the pressure on America to change its policy. This dates from Lyndon Johnson’s guns-and-butter speech in April of 1968. He said we’re going to fight the Vietnam War and we’re going to have the Great Society and we’re not going to raise taxes. The rest of the world asked, "How are you going to pay for it?"

TGR: What’s different today?

IM: Back then, the major holders of dollars—the Arab OPEC oil producers—quadrupled the oil price. I well remember Sheik Yamani making the argument that the U.S. was taking the oil out of the ground and giving them pieces of paper that would become worthless.

TGR: Similar to what China’s saying now.

IM: Exactly. There were two separate rounds of big oil price spikes in the ’70s—first a tripling of the oil price in early 1974, and then another tripling in 1979. The U.S. tried to print its way through it. In October ’78, there was a panicky moment when currency markets were frozen. The German, French, Swiss, Canadian and about half a dozen other central banks went to Washington and said, "You have to stop this decline of the dollar." A massive coordinated intervention to stop the dollar’s devaluation followed, and when that happened the gold price fell back from $243 to $193, and then turned over the next 15 months and ran up to $850 in January 1980. In fact, it was another currency crisis that got me started in the gold market. In October of ’67, the British pound was devalued from $2.80 to $2.40. At the time that was a huge event. I was working in an office in Montreal, and I remember an old-timer there with tears in his eyes, saying, "There goes the empire."

TGR: Back to the future, so to speak. What else do you foresee?

IM: Proclaiming the end of the recession, I think, virtually guaranteed a double dip. It’s the same recession from 2007 in my opinion, but if they insist that one bottom was a real bottom, it’s basically going to be a double dip. The U.S. consumer is still buried in debt. The government is trying to fund everything with debt. The notion of borrowing your way out of debt makes no sense. In the long term, they have to effectively deflate the purchasing power money or debauch the currency. This is going to reduce the American standard of living.

I’m wondering how mad the kids who are 20 to 25 coming into the workforce are going to get when they realize the extent of the burdens that have been handed down to them. The American standard of living and stature in the world will go down for many years to come as a result of the recent bailouts and ballooning budget deficits. Brazil, China and India are going to play much more important roles.

TGR: As an investor what should I do with this information?

IM: At the end of the day, on the other side of the deflation of paper asset values, we’ll have inflation, potentially hyperinflation. In that kind of environment, tangible assets are number one. The most viable tangible asset is gold in the context of money that preserves purchasing power. But even quality property that isn’t mired in mortgage paper and questionable titles will preserve some relative purchasing power when a phase of prosperity returns. The tangible asset basis works the same with companies; for instance, paper manufacturers with large forestry reserves have something of enduring value. Those reserves will grow every year as long as it rains and it doesn’t burn down and so on.

TGR: Many of the conference speakers have been talking about the big resource bull market we’re in. Beyond gold, what resources do you consider tangible assets?

IM: If you drop it on your foot and it hurts, that’s tangible. Ross Beaty, a geologist and resource company entrepreneur, is very articulate about the need for copper. Almost anything in the industrial process is going to use some copper. Silver comes in both as an industrial metal and a monetary play as a leveraged proxy for gold. In some respects, silver is like gold on steroids when the wind is blowing in the right direction. But the simple answer is gold.

TGR: You don’t buy the talk about gold being in a bubble at this point?

IM: With every $100 increase in the gold price since it crossed the $400 mark, The Financial Times has published a bubble article. They have no idea what they’re talking about. I find them more amusing than illuminating. In the first place, get gold prices up to new highs in both nominal and real dollars; then you can start talking about a bubble. That would be $2,400 gold, or nearly double the current levels.

Secondly, I have a cycle model that I’ve been publishing in my Gold Now Versus Then chart for probably seven or eight years. It overlays the cycle starting in 2000–2001 with the one starting in 1970–1971. If we were to replicate the swings and roundabouts on this, the January 1980 top would translate to about $5,480 in this cycle and that would be scheduled to occur in something like April 2011.

TGR: So the top should hit in April?

IM: No. It would only happen if we were to exactly repeat the past bubble, but that would be impossible to forecast. It’s interesting, though, that in the acceleration phase of the last cycle, the October 1978 dollar crisis fueled the final run-up in gold. In the current cycle, that coincides with all of the hype last spring about the demise of the euro triggered by the Grecian debt crisis and bailout.

For the past five years at all of the different gold shows, I have been saying the final stage of the run in gold would come when the credibility of the currencies themselves came into question. This year we’ve had three bumps of a real currency crisis. First came the euro, and then suddenly the Japanese intervene because their exporters are going to get killed by it. Now everybody’s rejecting the dollar. In essence, we’re replicating the currency environment of 1978 that set the stage for that last bout of inflation. If the market’s going to go crazy, this is when it’s going to happen.

In some respects this currency crisis may be an even bigger one than that of 1978, given the huge holdings of global reserves in the hands of China and the other emerging countries and the growing power they wield through the G20. They’re flexing their muscles now, which could set the stage for a blow-off run comparable to 1980, but I can’t forecast that $5,479 price in April of 2011. It is a useful illustration of what a real bubble run might look like.

TGR: But you think it will happen?

IM: I can’t rule it out. As I say, be careful what you wish for; the economic circumstances resulting from a breakdown of the system would not be pleasant. I don’t want to see it, but I have little confidence in the bureaucratic elites like Geithner et al coming up with any successful resolution.

TGR: What will the changes in the Congress mean for investing?

IM: I don’t have a simple answer. One thing that worries me is a resurgence of optimism that somehow we’ve put the crisis behind us and we’ve printed our way through it. That conclusion is just structurally wrong. The housing market is starting to fall again. A new series of scandals reflects back on the banks. It’s going to get worse.

I think 2011 poses a number of shocks. Coming into December of 2010, we still don’t know what the tax rates are going to be. An awful lot of paychecks in January may have withholdings based on the expiration of the Bush tax cut, so workers all over the country will suddenly be asking, "Why is my paycheck $300 less?" What’s consumer spending going to look like in January? I don’t think consumers will be spending at the levels we saw earlier in the decade, when they converted their houses into ATM machines, for quite a few years to come.

TGR: We talked about your Gold Now Versus Then chart earlier, but that’s only one of many charts you run in Deliberations on World Markets and use in your presentations. What do you consider some of the best charts?

IM: I love showing the S&P Composite 1900 to 2020.

The key point I make from that chart is that the big bull markets that excite people so much really represent only about 38% of those 120 years. The market had three big runs, topping in 1929, 1966 and in 2000. The rest of the time it basically traded sideways for about 17 to 20 years. In essence we’ve been going sideways since 1998.

TGR: If trading sideways is part of a natural course of cycles, what does it mean for investors?

IM: It basically means that investors better recognize there are times to not get carried away with the perception that equities always go up. In the "Other Phases," the bear market phases tend to run longer and cut deeper than people got used to in the 1982/1999 era. Everybody’s saying we’re in a new bull market. If the S&P and the Dow stay above last April’s highs, they say that’s technical evidence. I’m dubious about that holding, but I’ve been wrong many times before and I could be wrong again.

Over time the markets go up. But if I tell you that you’re going to get the stuffing knocked out of you between now and 2018, will you want to hold on for 2020? Wall Street wants you to buy and hold but they have to sell you something new to buy and hold every year; otherwise they don’t make any money. So basically the biggest risk for many investors is that their long-term plan changes almost every time your broker calls.

TGR: How much do you rely on what you see in the charts versus your knowledge about human nature and what’s happening in the geopolitical world?

IM: It’s basically 40 years of experience in one big cocktail, a mix that includes the assumption that every single price at any moment in time contains all the hopes and fears of everybody who knows or thinks they know whatever evidence is out there. At the end of the day if the background fundamentals are uncertain but a pattern is visible where price has gone up and up and up, it tells me that the buyers dominate at that point. In that sense, the technicals would be the purist measure.

Having accumulated scar tissue over the years, I’m inclined toward the fundamentals as well. Prices walk on a technical leg and a fundamental leg. It would be naïve to ignore either, but when in doubt I’ll bet on technical analysis of price trends. Where I probably differ from most of my age group until recently, I’ve always focused on the international markets. I was publishing global market charts back in the 1970s, long before John Murphy published his book on Intermarket Relationships. I didn’t come up with that label, but having been brought up in Montreal and Toronto, I was always in touch with the British markets. For years I published charts showing that London led. New York followed. Tokyo lagged and the Canadian market lagged New York by one leg. I had an article on the Canada/New York lag published in Barron’s back in 1976, illustrating that when Canada actually had its highs, New York was often making its first failing bear market rally top before a decline. That worked from the 1950s into the early 1980s.

But when you do that kind of analysis you get pretty cynical pretty quickly; the operative phrase today would be, "Every time I find the key, they change the lock"—because it ain’t easy. It’s really a question of balancing the different influences. For most investors, the simple discipline would be to watch a couple of longer-term moving averages under a trend. If the price is above the 200-day moving average, that’s governing the trend. If something you own goes through its 200-day moving average, stop and think and do some homework. Many free Internet charting services let you customize a chart, and a good mix that I suggest for patient longer-term investors is a combination of a 50-day and a 200-day moving average. For as long as the 50 is above or below the 200, that trend is going to continue for longer than you think. It’s a lagging confirmation tool, not a short-term trading idea. When they cross, the market is telling you that something’s changing and you may want to revisit and rethink your portfolio.

TGR: You also have analyzed the relationship between gold mining equities and gold bullion. Can you explain that to our readers?

IM: I refer to it as the shares-to-metal ratio because prior to 1975 when Americans could not own gold, North American gold mining shares typically were very expensive as the proxy for owning gold. At times, the expectation levels that get priced in are just outrageous. The shares-to-metal ratio, which I’ve calculated going back to the 1930s, peaked in 2003 when the gold price went through $400.

When gold ran from 1971 to 1980, the miners’ shares could not keep up with it. The Miners Index in Chart 4 is a composite of the leading miners of the day, with the modern period from 1993 being the GDM Index that underlies the popular GDX ETF. The great growth and transformation of the Industry came after gold stabilized, from 1982 to 1996. That was followed by a vicious secular bear cycle that bottomed in 2000/01.

The gold-shares-to-metal ratio hit its highest level of expectations in December 2003, as gold was moving through $420 to confirm this new cycle.

The irony in this cycle is that the gold mining industry has consolidated into bigger and bigger companies, a complete flip from the industry’s history. They’re not finding many big deposits anymore. Investment bankers, in my view, have been harvesting the industry by promoting takeovers where the big miner issues a bunch of stock to absorb the miner that’s made a discovery in the hope that the new deposit will grow. The 50% premium over market that the bigger miner is willing to pay to replace the reserves they just mined, and capture some growth later, is popular with those being acquired, but in the meantime, yesterday’s shareholders of the major just got diluted.

TGR: Right.

IM: The major gold mining stocks are barely keeping up with the gold price since the crash. Yet all these new billionaires such as John Paulson are running around singing the gold song. The theory is that the miners always will make more money than the selling price of the commodity they mine. It sounds great, and it makes all kinds of economic sense—but I have a history of charts going back to the 1930s that says it happens for a little while but it’s not a sustained trend. The miners right now are heading into a period during which they’ll probably outperform the metal price. But if I’m right about the S&P 500 going back and testing the lows of March of ’09, I’d have to remind you that gold mining shares are just shares. When the market goes down they’re going down with it, and in such declines the metal price is likely to decline a lot less. Remember that volatility works both ways.

TGR: When do you foresee the S&P 500 going back and testing those lows?

IM: I expect the next six to nine months to be an interesting period. During this window of time, with the gold price possibly spiking in the second quarter, I’m very concerned about how the new Congress will work with the White House. There’s an awful lot of stuff coming up in the first half that makes me very nervous. I don’t know how it’s going to turn out, and I have little confidence that it will be much more than political posturing with an eye to the 2012 Presidential election. I just know that I’m very nervous.

TGR: What advice would you offer under such circumstances?

IM: Don’t get carried away by recently rising prices. In this climate, take some money off the table. Put your house in order, i.e., reduce debt. Don’t get yourself in a situation where a sudden move in the market can cause margin calls that might blow up your portfolio. Don’t buy into all the hype about quantitative easing, expecting to see money that’s not being absorbed in the economy to be sloshing around the financial markets.

People also have to know who they are and what they are. Someone will tell me, "Oh, I bought gold because the world’s going to hell and it will ultimately go to $5,000." Then he’ll turn around and say, "Gee, I have so much gold in my account and the 10-day moving average just crossed the 50-day moving average." I’m saying, "So?" They say, "It’s going to pull back $100 or $200." I say, "So? You bought it because it’s going to $5,000, and now you’re worried about a $100 or $200 (10% or 15%) setback during a prospective 300% run?" Are you a trader or an investor? You’re unlikely to be successful at both. Some people "get it" when I ask if they cancel the fire insurance on their house because they haven’t had a fire lately…

TGR: But with the market going sideways for 17 to 20 years after a boom, as you mentioned earlier, don’t you have to be a trader on some level?

IM: You should be an investor with a cyclical focus. When I talk about going sideways, I don’t think the four-year cycle rhythm is going to go away. We had very good bottoms in 2003, and had a very good bottom in the spring of 2009. But you’ve already had 18 months to bounce back from that bottom. If you reach another bottom, it doesn’t mean that the S&P is somehow going to blow up and go away. There will be good bottoms. The harsh part of the 2009 bottom was that it happened almost too fast.

TGR: Right.

IM: That was partly due to all the bailouts and the amount of money being thrown in. Maybe that’s something we’ll have to learn to live with—but by the time I was comfortable with that bottom, it was practically over. I’m not one to get out there and start catching falling knives, so I missed a good part of that bottom because the whole thing was over way too fast. But then again, a really good bottom never gives you a second chance. It just keeps on going.

TGR: Because you’re known for your predictions, Ian, are you telling investors that we might be near a top in this market rebound from that bottom?

IM: Yes. I tell people that for $3.5 trillion in new debt for your grandchildren to worry about, "they" bought a pretty good rebound that’s about 20 months old, and running out of gas.

TGR: And then have another pullback?

IM: Yes. I don’t think you’ll see the October 2007 high on the S&P, though. Not again for several years.

TGR: Will we go down to the 2009 bottom?

IM: Yes, I expect to see it tested, and possibly even be broken. If you think in terms of the broad range of 700 to 1,500 over past decade on the S&P, we’re currently around 1,200. We’re more likely to be in the 700 area rather than adding another couple of hundred from here. Think in terms of 300 points or less upside potential versus 500 or more points of downside risk. I think we’re much closer to a top as we enter 2011. And I really do worry about the risk of making a lower low than the March 2009 low—but that is a risk factor rather than a prediction.

TGR: So your general feeling is that we’ll pull back the economy in the U.S. particularly. . .

IM: Waves of fear will be coming up, because for $3.5 trillion they bought a hell of a bounce. But most of that bounce is behind us at this stage. And somehow when something people own is actually down 50%, they tend to think of that as something more than a pullback. I’ve often referred to it as a point in the market cycle that calls for a national diaper change.

The reported "advance" GDP growth of 2.0% for the latest quarter was the smallest positive number since the March 2009 lows. Seven of the last ten "Advance" GDP estimates have been revised lower as they progressed to a final reading. I think the economy is slowing a lost faster than people realize. Few ask what changed from early last summer when Bernanke was talking about withdrawing the quantitative easing liquidity, and only a few months later he’s done a 180 and is pouring in another round of it.

TGR: Ian, this has certainly been informative. Thanks for your time.

Buying Gold today…?

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Nov 02

Good News for Long-Term Gold Investors

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Both Gold Investment AND jewelry demand are rising…

WHEN LAST we looked at the fundamentals of gold supply and demand back in August, we commented that "the third quarter is traditionally a good one for gold demand (2009 aside)," writes Julian Murdoch at Hard Assets Investor.

"Perhaps higher demand – and higher prices – lie ahead."

For the moment, all evidence points to that trend continuing, albeit at a modest pace. In the July-Sept. quarter of 2010, Spot Gold rose from $1242 per ounce to $1308. Since then, in just a month, gold has gone up another 4.7% to hit a high of $1369 per ounce. And although prices have since eased off a bit, the rise still suggests an acceleration of demand.

But why is gold back on such a tear, and why right now? Clearly, macroeconomic issues are at play; the Fed’s inevitable impending round of QE2, not the least among them. But is there more to the story here?

Last week, the World Gold Council released its quarterly digest of Gold Investment news, providing exactly the under-the-hood look gold investors need. While updated supply and demand numbers won’t be published for another few weeks, this investment report usually gives us a sneak preview of what the data dump will contain.

To see how gold demand has evolved from last quarter, a natural first step is to look at exchange-traded trust-fund demand, as precious metals ETFs (like GLTR, the new precious metals basket from ETF Securities) make it easier than ever to access the physical space.

Gold ETF investment may be up, but notice how purchasing flatlined last quarter. This contrasts with previous periods (like Q1 2009), which saw huge spikes in gold purchases from ETFs. But for last quarter, at least, that buying seems to have been quite modest, at 28.3 tonnes (bringing the total ETF holdings to 2,070.1 tonnes at September 30).

In fact, it doesn’t seem that the October rally has been spurred by ETF demand. Based on our calculations, last month, ETFs worldwide actually sold just under 8 tonnes of gold from their vaults.

But gold’s rising price must mean demand coming from somewhere. Our bet? Jewelry demand is traditionally a huge driver of Gold Prices, ranging on either side of 50% in any given year or month. And of that demand, India remains king

Considered some of the savviest buyers in the market, Indian consumers drive anywhere from 10% (in a bad quarter) to over a third of global jewelry demand. Still, entering the quarter, buying looked a little light in India, with year-over-year demand in the country actually slightly negative. But any slack had been more than made up for by other Asian countries, including Hong Kong, Japan and Russia:

While we don’t have hard numbers on how exactly the classic September-October pre-festival buying season panned out in India, we do have this nugget from the World Gold Council’s report…

"The first half of Q3 2010 witnessed robust sales in both rural and urban markets, supported by a normal monsoon season. However, with prices staying above the Rs 1,775.00/g (approx. Rs 57,000 per ounce) level for most of the third quarter, jeweler sales seem to have contracted in September. The WGC expects demand to pick-up further in the fourth quarter with the commencement of the main festive season from early October until November (Diwali-Dhanteras festival)."

It’s easy to miss the subtlety here. September usually marks the pickup in Indian demand, but a surge doesn’t always happen. In 2007, for example, Q3 Indian demand crashed along with the regional economy, while in 2008, Indian buying made a major resurgence ahead of the wedding and festival season. In 2009, the first half of the quarter started weak, as Gold Prices remained extremely high, but then demand surged in late September and into October.

But it’s worth noting that while much of the rest of the world’s economies are struggling with stagnation, 2010 has been a very good year in India. Its economy has grown at nearly 9%, and both inflation and government deficits are under control.

For gold bulls, this demand shift away from predominantly US Gold ETFs and back towards jewelry is, I think, a good sign. If Gold Prices can remain high on the back of declining ETF demand, then should significant QE2-driven inflation fears revive ETF demand again, that would just pile US fear on top of Indian exuberance.

In which case, get out of the way of that charging bovine.

The caveat, of course, is that ETF demand has proven fickle, and prices remain at all-time record highs. On an inflation-adjusted basis, you’d have to go back to the Carter administration to find prices like this. And remember, back then investors faced a Fed funds target rate of 20%, and an inflation rate of 14%.

If that’s enough to temper the bull – well, we just calls ‘em like we sees ‘em.

Buying Gold amid the worst real returns to cash savings since the late ’70s…? Start with a free gram of fine gold at BullionVault now…

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Oct 19

"More Inflation Needed"

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Fed policy is creating a surge across raw material prices, not just in gold and silver…

SO MOST INVESTORS know that the Federal Reserve’s "easy money" policy is creating an enormous amount of new credit and new money, write Porter Stansberry and Braden Copeland at Stansberry & Associates.

And most people know this policy has created an explosion in the prices of gold and silver.

But most people have no idea where the bulk of the Fed’s new money is actually finding its home: in Asia. This has enormous implications for you as an investor, which I’ll show you in a moment…

According to Bill Gross, who manages the world’s largest pile of fixed-income assets at Pimco, the Federal Reserve is going to resume large-scale quantitative easing at the rate of $100 billion per month. News of this plan has been leaking out for the last two months following an important speech Bernanke gave in Jackson Hole, Wyoming this summer. He said, essentially, we needed a lot more inflation.

If the Fed does resume quantitative easing at the $100 billion-per-month range, it would be buying the equivalent of all of the new debt the US Treasury is issuing – all of it. This represents an increase of roughly 30% to the money supply in the first year…an extraordinary amount of new cash.

Trade and capital flows are transferring most of the inflation the Fed is creating to the Chinese economy. US politicians continue to stimulate consumption in the US, while most of the production to meet this demand comes from China. We borrow and spend. They produce and profit. Hopefully, you understand printing more money and buying government bonds won’t change this dynamic. It simply results in still more money being sent to China.

What will China do with the flood of capital? Lots of things. But one thing it will certainly do is build more coal-fired power plants. Coal-fired plants produce 80% of the electricity in China, and demand for electricity is growing roughly 9% a year. It’s hard to comprehend how fast demand for coal is growing in China, but consider these facts…

China is now the world’s second-largest consumer of electricity, after the United States. A decade ago, China’s installed generation base was only 315 gigawatts. Today, it’s 900 gigawatts – and 78% of its production is still coal-based.

Today, China consumes three times more coal than the US – more than three billion tons. But China only has about half of the US’s coal reserves. And that means it must import a lot of coal.

At current growth rates, China would exhaust its current reserves in only 16 years. Obviously that’s not going to happen – more mines will be dug. But just as obviously, it will take a long time to build the mines and lay the railroad infrastructure required. In the meantime, China will need a lot of coal.

Current market surveys show China will import 150 million tons of coal this year. That’s only 5% of China’s total coal demand, but it represents 15% of the total US demand. Right now, almost all of this coal comes from Australia, where China takes up about 60% of the export supply of coal.

And here’s the crucial fact: China’s coal imports doubled in the last year.

We know total power production in China is scheduled to double over the next eight years. It’s building a new coal-fired plant nearly every week. The United States has built only 12 new coal-fired power plants since 1990. Assuming China’s coal imports double again (and they will), Chinese demand will exhaust Australia’s export capacity. And when China’s import demand doubles again after that (to 600 million tons per year), it will exhaust the world’s total export supply.

China’s not the only problem…Don’t forget about India.

India’s installed power base exceeds 600 gigawatts, and demand is growing at about the same pace as in China. India also relies on coal for most of its power (70%). It currently burns 500 metric tons of coal a year, mostly from domestic sources. But Vinay Kumar Singh, the CEO of India’s Northern Coalfields, says the country will need to import at least 250 million tons of coal a year by 2020. India’s imports of coal from South Africa rose 74% last year.

It’s no exaggeration to say China and India’s demand for electricity is the future of global power. Already China’s coal production represents more than twice the amount of energy produced from all of Saudi Arabia’s oilfields.

What’s fueling all of this demand for coal-fired power plants? Huge urban populations in China and India. Consider these figures. In America, the baby boomers – the 50 million Americans born in the years after World War II – produced the demand for vast amounts of new infrastructure in America.

There are 300 million newly urban Chinese people. And 300 million newly urban Indians. That’s 600 million people moving out of the Stone Age and into the modern world – a group 12 times bigger than the baby boomers. While it’s true these people will want to buy lots of things – from Cokes to Buicks – the thing they need most is electricity.

Americans don’t yet realize the Fed’s attempts to paper over our debts come with serious consequences. As our money loses its purchasing power, costs will rise – especially power costs. Undoubtedly, our politicians will blame "speculators" for the soaring price of coal. But the truth is, the paper that will push prices higher came from the Federal Reserve, not from any hedge fund.

Whether we realize it or not, we compete with other nations around the world for resources. Historically, our currency – as the world’s reserve currency – has given us an enormous advantage. Coal, for example, is priced in Dollars. But we stand on the verge of losing that advantage…and the consequences will be drastic. We will face higher prices for coal, among other sources of energy.

To hedge yourself from this coming Fed disaster, buy coal stocks is our advice. They’re going to go much higher in the coming years.

Get the safest gold at the lowest prices – go to BullionVault now…

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Oct 11

Gold Investment Demand: Tight Supplies Ahead?

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Gold investors wanting coins and small bars might be surprised if another "crisis" hits the markets…

WE’VE GOT IT pretty easy right now, writes Jeff Clark of Doug Casey’s Gold & Resource Report.

Click or call, and you can quickly and conveniently own a Gold Coin or small bar to keep at home. But if global concerns cause another panic – or the Dollar breaks down – you could find yourself standing in a line at the local coin shop or getting a busy signal from a larger coin dealer.

Simply, for reasons I’ll discuss here, you may find it very difficult to buy physical gold when that time comes.

It’s happened before. Though there were no precious metal ETFs in 1980, the demand for physical gold was so great that you literally had to wait in line at a coin shop to buy, with plenty of occasions when you would have been turned away due to lack of inventory. And you’ll recall we saw serious shortages, unexpected delays, and soaring premiums for retail investment products in late 2008.

Given the fragile state of global affairs and the waiting-in-the-wings crisis for the US Dollar, I’ll be surprised if we don’t see another panic into physical gold. And the question is, will there be enough metal to go around when the public – 95% of which own none – wakes up and wants to buy it?

Answer: No.

Contrary to some claims, it isn’t because we’re about to run out of supply. While global mine production peaked in 1999 at 82.1 million ounces and has trended down since, take a look at the second largest source of supply – scrap. As you would expect, bad economic times and the surge in Gold Prices have triggered an increase in supplies from that source.

In fact, since 1999, as the price of gold climbed, the scrap supply nearly doubled. (Scrap comes mostly from jewelry, 75% of which derives from India, East/Southeast Asia, and the Middle East.)

So when you examine the total supply of gold coming to the market, it’s actually nudged up for three consecutive years, hitting 116.6 million ounces in 2009, a modest 8% increase over 1999. In the greater scheme of things, the total supply of gold to market has changed very little.

So what’s the problem?

First, you’d think a higher price would lead to rising mine production – but that’s not happening. From 1999 through 2009, the average annual Gold Price rose 248%, yet gold production fell 6.6%.

This means that as gold continues higher, we cannot count on miners producing more yellow metal for us to buy. This concern will become increasingly obvious as more buyers enter the market.

Second, although scrap has more than supplemented the fall in mine production, as I’ll show you in a moment, it’s still not enough to fully satisfy current demand, let alone any increase in buying.

Meanwhile, the third major source of gold supply is reversing trend. Until last year, central banks around the world had been selling gold, adding a reliable tributary to the flow of metal year after year. This has stopped. As recently as 2007, 17 million ounces came to market from central banks; last year they acquired 7 million ounces. The era of central banks as large net gold sellers has likely ended.

The conclusion we can draw from these signals is clear: known gold supply conduits will not deliver any significant new supply in the future. This will have serious repercussions. While it’s certainly bullish for the price, I think many investors have overlooked a critical angle:

If more and more people want to Buy Gold and the supply doesn’t increase, what happens to your ability to get it? You can’t turn a profit if you can’t own it. Realistically, though, how much more demand can we expect?

One way to estimate this is to compare today’s percentage of global assets in gold to the last great bull market…

While gold’s share of the global financial landscape has grown since 2001, a whopping 385% leap is needed to equal its 1980 peak.

Certainly some of that percentage could result from a decrease in the value of other assets. For example, residential and commercial real estate values will continue to fall as bad loans are unwound, and stock markets will adjust lower as global economies slow from cutbacks in government spending. But the gap is so enormous that investment in gold could easily increase significantly before this bull market is over.

Another way to measure potential future demand for Gold Investment is to look at today’s bar and coin demand compared to the last bull market. The following chart first looks at what portion investment in gold comprises of the total uses for gold (i.e., including jewelry and industrial uses). Then we look at the percentage coin buying represents today vs. the peak in 1979. The point is to see if we’ve already reached high investment levels in gold similar to the last bull market peak – or if there’s room for more.

When Gold Investment demand – whether for physical metal or bank buying etc – peaked in 1979, it represented 54% of all uses for gold that year, a far cry from last year’s 32%.

Of course, this is just arithmetic; lower jewelry demand could make investment demand look bigger as a share of total demand. But this data makes clear that an increase in investors wanting more gold could rise dramatically.

The picture is more striking when we look at Gold Coin demand. Coin buyers represented 36% of all gold investments in 1979; today it’s barely 14%. Coin demand would have to grow by 157% to match the last bull market peak. Yes, gold ETFs have and will continue to replace some of the demand for physical metal, but this shows there remains tremendous room for growth for investors wanting more Gold Coins.

Based on this data, I believe that despite the strong demand for gold investments we see today, it can go much, much higher in the coming years.

Here are some examples of coin demand straining current supply that you may find surprising…

  • The Rand Refinery in South Africa, the world’s largest, forecasts it’ll sell 1 million Krugerrands this year. Sounds like a lot – until you consider that from 1974 to 1984, they sold 2.6 million ounces per year. And that was when the world’s population was roughly 35% lower than today;
  • The US Mint has had difficulty meeting heightened demand when annual sales are only slightly above historical averages;
  • So far this year, Gold Mining production in world No.1 China is up 5%, but demand for physical gold in the world’s No.2 market is up 30%;
  • During two tense weeks of the Greek crisis in April/May, the Austrian Mint, one of the world’s five largest, sold a quarter-million ounces, an amount that exceeded all of first-quarter sales. And Pro-Aurum, one of Europe’s largest online precious metals traders, had to temporarily suspend sales due to a backlog of orders and insufficient supply. If Greek-style sovereign debt fears spread to other nations – something looking all but assured – rolling bullion shortages could resurface.

While all this is bullish for the price of gold, it’s alarming what it suggests might happen to the availability of physical gold.

So my question is this: if the Dollar is collapsing and gold is screaming to $5,000 an ounce, will you feel like you own enough?

Better get some now while you still can.

Quit paying retail and get into the deepest, safest and most cost-effective Gold Bullion market – the professional wholesale trade – using world No.1 BullionVault…

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Oct 07

Gold Price: "Never See $1000 Again"

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Gold Prices are set to hit $1500 sooner, not later, says this senior advisor and analyst…

SO GOLD broke through a new record earlier last week and this, topping $1300 an ounce for the first time before rising still further, says Hard Assets Investor.

Psychologically, that $1300 level was important – it appears to have pumped more steam into the gold rally and transformed even the most dedicated gold bears into bulls. But the uptrend shows no signs of reversal anytime soon, says Jeffrey Nichols, senior economic adviser to Rosland Capital and the managing director of American Precious Metals Advisors.

A widely recognized expert in precious metals, Nichols has worked with everyone from mints to Gold Mining companies to develop financing and investor relations. Here he tells Hard Assets editor Lara Crigger about whether gold’s nearing bubble territory, why food prices affect gold, and why $1500 gold by year end is just the beginning.

Hard Assets Investor: Gold just broke $1300 per ounce earlier this week, and you’ve publicly stated you believe it could go as high as $1500 per ounce by the end of the year. Why is $1300 such an important level? And why do you see $1500 in our near future?

Jeffrey Nichols: $1300 is an important level mostly for psychological reasons, because it’s a round number. People love round numbers, particularly technically oriented traders. So that’s one reason. The other is, it worked hard the last couple of months to finally break through. And now that it has, it seems to be establishing a new floor above or around $1300. So, from a technical point of view, it looks to me like it’s gathering steam for another effort at moving higher from these levels.

I’m optimistic about the $1500 per ounce forecast by year end, which, incidentally, is the forecast that we’ve had for a year or longer. In the next couple of months, gold has a variety of factors going for it. First and most simply, seasonal demand.

HAI: Right. We’re getting into the holiday season, all across the world.

Jeffrey Nichols: That’s probably what pushed us over $1300. In the Western world, jewelry manufacturers start gearing up and building inventory for the Christmas season, so that brings Christmas forward for jewelry manufacturers and that’s just now beginning to kick in.

But gold demand for jewelry and small investment items in India also has a very strong seasonal aspect to it. Some of it is because of festivals and the marriage season; some of it is because the beginning of September is harvest time for many of the farm communities in India.

This year, harvests will be quite good, because we’ve had, from the Indian point of view, a very good monsoon. Unfortunately, in Pakistan, the same storm caused all that havoc, but India got none of the problems, only the benefits. So agrarian income will be good this year, and some of that income naturally finds its way into gold.

One of the important things about Southeast Asian demand, in general, and Middle Eastern demand, is that it doesn’t require economic crises to do well. What it requires is good growth in personal income. From India to China, to Malaysia, Thailand, Vietnam, the Philippines – all these countries are enjoying very strong economic growth. People in these regions Buy Gold for a variety of reasons, one of which is as a form of savings. So when incomes are strong, some portion will go into gold.

HAI: Now as gold moves higher, are we starting to near bubble territory?

Jeffrey Nichols: I don’t think that at all. In fact, over the last couple of years, there have been several episodes where analysts and investors have either said we’re in a gold bubble, or worried that soon we’d be in a bubble. I don’t think that’s the case.

First of all, participation in the gold market may be more than ever before, but it’s still fairly limited in terms of Western investment demand. For investors in Europe and the US, their participation in gold is still relatively small scale compared to their holdings of stocks and bonds.

Also, we haven’t seen a rush into gold. It’s been orderly, and it’s been for good reasons. Now, come back to me in three years or whenever we’re nearing the top of the Gold Price cycle, and I might give you a different answer, because when you get to a top, you often get that type of action. In 1980, you could say we were in a bubble. All that activity and demand for gold compressed into a very small period of time. In the matter of literally a few days, gold just went through the roof.

HAI: Right. Now we often overlook the effect of the commodity markets on gold, but gold is a commodity, first and foremost, and what happens in those markets does make an impact. You’ve said we’ll see higher food prices in the future; how do rising food prices impact the price of gold?

Jeffrey Nichols: Rising food prices are an element of overall inflation. When we go to the supermarket, we see tighter prices for foodstuffs across the board. It’s not just one or two items that are out of whack. It’s agricultural commodities in general, and we can literally see and feel that effect on our household budget. People don’t see the consumer price index when they go shopping; there’s no shelf that says Consumer Price Inflation.

But on the shelves are all sorts of things where prices are higher from week to week: cocoa prices, given poor harvests; coffee prices are very high. Beef prices are rising, not only because feed stocks are more expensive, but also because of changing dietary patterns in what was once the developing world.

One of the things I’ve always loved about being a gold analyst is the fact that so many things around the world – whether it’s politics, economics, food prices, oil prices, currency markets, monetary policy in the US, monetary policy in Europe, developments in China and India – come to play in the gold market. And it makes it very interesting as an analyst.

HAI: When you invest in gold, you have to take a holistic sort of approach, right?

Jeffrey Nichols: Absolutely, and I think the mistake that many people make when they’re looking at the gold market is the focus on one or two things, which tends to be US monetary policy and what’s happening to the Dollar. That’s very important, and that’s playing a role in this whole bull market, at least over the last couple of years and for the next year or two, probably.

But it’s not the only factor and many people talk about it as if it were. They’re missing out on what’s happening in China and India, what’s happening with central banks, the stagnation in mine supply, the introduction and development and expansion of new gold investment products, or what I call the "Gold Investment infrastructure"…

HAI: Right. Gold ETFs opened up the space for new investors.

Jeffrey Nichols: That, in combination with other factors, has had a phenomenal influence on the price, and will continue to do so. ETFs have made gold investing easier and more accessible to more investors around the world, both individual investors and institutional investors. Many of the institutions now Buying Gold would not be in the market were it not for these new instruments.

And for other institutions, it’s just made it easier. They don’t have to deal with gold dealers who they’re not familiar with, haven’t done business with. They don’t have to deal with understanding how the physical markets trade. They don’t have to deal with transportation, storage and insurance issues. They Buy Gold and can sell gold just like they would sell any equity.

HAI: In some ways, I think the physical market is almost like the Wild West. There are certainly a lot of very reputable places to get your bullion, but there’s a heck of a lot of places looking to screw you, too.

Jeffrey Nichols: There are. And it’s difficult for somebody who’s not in the industry to discern one from the other sometimes.

And it’s not just that we have one or a few ETFs here in the United States. ETFs are springing up, and will continue to do so, in other important geographic markets. We have ETFs in India, Europe, Switzerland and the UK.

HAI: How does central bank buying factor into the Gold Price? Certainly we’ve seen massive uptake on their end recently, particularly in China.

Jeffrey Nichols: The central bank, I believe, continues to Buy Gold surreptitiously and does not report its regular purchases of gold. You read the newspapers and it says what central banks this year bought, but whatever the analyst says in the article, you can imagine that it’s actually a good deal more, because of unreported purchases. And it’s probably by more central banks than just the Chinese.

The Chinese announced in April of 2009 that in the prior six years, they had bought many hundreds of tons. And since then, there’s been no increase in reported reserves. I can’t possibly imagine that suddenly they just stopped buying. The impetus and rationale for buying was to diversify their official reserves and reduce dependency on the US Dollar, and both have grown in importance.

HAI: Right. Now gold production has begun to slow down, and mine activity is on the decline. Do you think we’ve hit "peak gold"?

Jeffrey Nichols: It’s hard to say. I don’t think we’re going to see any big increase in gold mined supply at least for several years – probably five or 10 years, if we have a new wave of gold mine exploration and development. But it takes years and years to move from exploration to significant production.

There is exploration going on, and there is new mine development and new production from mines, some of which did not exist a few years ago. But it’s merely offsetting the erosion in production and the depletion of existing mines.

A lot of South Africa is that way: South Africa went from the world’s biggest producer of gold to way down on the list. And it’s going to continue shrinking. Because in South Africa, you have not only a depletion of ore reserves and the need to go deeper and deeper, which makes it more expensive, but you also have labor issues. You have rising electricity and energy costs, and actually insufficient supplies of electricity for the mining industry. The country hasn’t kept pace in developing power sources, so there are periodical electrical shortages and outages. Unions which have much greater power than ever before are demanding higher and higher wages and other benefits – maybe rightly so, but it makes every ounce of gold that much more expensive to mine.

HAI: Meaning miners will just go elsewhere instead.

Jeffrey Nichols: So I think at best, gold’s primary supply – mining production – will plateau over the next few years. Maybe it will go up a little bit, but not enough to matter from a world market supply-and-demand point of view. But it’s possible that we’ll see big discoveries. It’s possible that those big discoveries five or 10 or 15 years from now will result in significant increases in mine production, but not for many years.

But to say that we’re never going to see big increases again I think is a mistake. For one thing, I expect much higher Gold Prices in the future. Not just $1500, but multiples of that. I think in the future the average of the notional long-term Gold Price is going to be much higher than anybody imagined. I don’t think we’re ever going to see gold below $1000 again.

And those higher Gold Prices will make gold mining more effective than it has been in the recent past years.

Buying Gold – now easy, safe and cost-effective at world No.1 BullionVault…

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Oct 02

LBMA 2010: Part II

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Forget mining and
central banks. Here’s the single most important gold supply issue today…

SO IT WAS TOUGH yet
again to meet any gold "bears" at the London Bullion Market
Association’s annual conference last week, this year hosted in Berlin’s Hotel
Adlon.

The bullish arguments you know already no doubt. Low-to-zero
Western interest rates…plus a growing clamor to buy gold amongst Chinese
households (the Middle Kingdom’s demographics are more bullish still, as
Mitsubishi’s Matthew
Turner showed)…make a compelling case for rising gold investment demand,
even without the risk of government-bond defaults, rising inflation or
continued losses on "mainstream" financial assets.

The Berlin conference had plenty more to say on those
stories too, as we’ll see below (and as you can see on the slides now freely published
on the LBMA’s
website). But first, what of supply?

Well, all the gold ever produced in history came from a
mine, as Paul Burton of GFMS World Analyst
reminded the conference. But in the last decade, gold mining has failed so spectacularly
to meet the surge in demand, he could only question its "relevance" to
the market’s net outlook. Dollar gold prices quadrupled from
2000 to 2009, another speaker noted, yet annual mine output rose just 1%. And allowing
for the intervening slide in output, said Burton, gold mining output is now so
price inelastic, it took eight years of rising prices to produce any meaningful
blip in output (2009′s year-on-year increase of 7%).

Further output gains look unlikely, Burton went on, thanks
to the gold mining
sector’s "production lag" – both because of an "exploration
lag" (new investment only turned higher in 2003) and because new
discoveries of 1-million ounce deposits have collapsed regardless. The five
years to 2009 saw record-high levels of exploration spending, perhaps totaling
the previous 12 years added together (at least on BullionVault‘s skew-eyed reading of
Burton’s chart from the conference floor. See what you make of it on page 9 here). Yet
all told, GFMS’s best forecast is now for annual gold mining production to
decline by 13% between 2012 and 2019.

That other constant drip-drip of gold supply – the
"official sector" of central banks and outfits like the International
Monetary Fund (IMF) – also looks irrelevant for now, as Burton’s GFMS colleague
Philip Klapwijk
showed in his speech. European states are now holding, not selling their
reserves, but emerging markets (for now) remain mere ankle-biters compared to
the weight of private investment or jewelry demand each year. So net-net, said
the GFMS chairman, central bank activity looks "neutral", despite the
bullish picture for emerging-market demand he also laid out. More notably, and
"something we haven’t seen before", private-sector investment
holdings now outweigh central-bank gold reserves overall. Making investor
sentiment a key plank of any longer-term forecast.

Even without the end of central-bank sales, however, or the
failure of mine output to rise, "The single most important gold supply
issue is scrap," as John Reade of Paulson Europe said in his conference
summary. Re-selling unwanted jewelry "has gone mainstream" noted Jeffrey Rhodes,
CEO of INTL Commodities DMCC, becoming "socially acceptable" in a way
that using pawnbrokers to raise cash never was. Throw in gold coins, dental
bridges, bonding wire from microchips and any other supply "not from a
primary [ie mining] source", and scrap gold matched more than one fifth of
global gold mine output last year, up from just 7% a decade ago. Turkey has
overtaken India as the No.1 source of scrap gold supplies (217 tonnes in 2009,
equal to almost a tenth of world mining supply), but the most dramatic change
has come in the developed West, where "sophisticated electronic assay
equipment has seen the captain’s ball at your local golf club replaced with
gold buying parties," as Rhodes said.

Since 2005 alone, US scrap supply has more than doubled
according to data from GFMS Gold Survey, taking United States’ re-sales from fifth
to second position worldwide in 2009 with 124 tonnes. Italy’s re-sale market
moved from seventh to sixth with a tripling to 78 tonnes of scrap, and the UK
& Ireland have leapt 1505% from virtually nothing a decade ago to nearly 60
tonnes in 2009, bagging the world No.6 slot in the first-half of this year.
Throw in Germany and France, and four European nations make the top 10 scrap
supply nations by growth since 2000. In the first six months of this year,
scrap supplies from each of the US, Italy and UK & Ireland had all outpaced
India (the former No.1, remember), enabling scrap to become the "only
credible counter to investment buying." But should these massive supplies
of scrap in fact be overwhelming investment pressure on prices?

Since "investment buyers and scrap sellers are driven
by the same motivation of price expectations" as Rhodes reminded the LBMA
conference, this price-elastic source of supply could threaten "a perfect
storm of selling once sentiment changes," he believes. But first, that
would require higher prices again, because (for now) even scrap-gold merchants
have turned bullish, he reported, capping flows to refineries in anticipation
of stronger gains ahead. And second (and more critically given the source of
the last few years’ real jump in scrap supplies), "Is the drawer
empty?" as Paulson Europe’s John Reade
wondered in his quick-fire recap before the conference adjourned.

Cash-strapped households, remember, can only sell their
unwanted gold bracelets once. How high would prices need to go before more
cherished pieces could be sent to the smelters? Apply the same question to
private gold investments in fact (ETF holdings have proven notably
"sticky", if not yet as "long-term means forever" as gold
coins), and you get to the nub of the "bubble or boom?" debate.
Because at some point, according to pretty much every speaker, the circumstances
now boosting global investment demand will recede – and with them, therefore,
the gold price will fall back as well. As we’ve already seen (in Part I),
the bubblicious frenzy needed to mark the top of spike remains plainly absent.
Leaving only the circumstances behind this current boom to consider.

"The current bull market has much deeper roots than the
credit crisis," the LBMA was reminded by former Blackrock head of natural
resources Graham
Birch (now a farmer). Pointing to gold’s nadir of 1999, "continuous
disinvestment" was needed to keep prices down, and when Europe’s big
central banks agreed to cap their sales that September, it marked the start of
this rise. Roll on 11 years and 350%, however, and "Just because gold’s a
safe haven doesn’t mean it’s a cheap safe haven," Birch warned Berlin.
Which raises the question of cost and utility for new buyers today.

"I think people long gold should not be concerned
reading this slide," said John Reade in his summary, pointing to slide 14
of William White’s opening
keynote speech. Chairman of the OECD’s Economic & Development Review
Committee, White had prefaced his 20 minutes of gloom-and-doom (salted with
uncertainty, fear and doubt) by saying that the OECD itself would certainly
disagree with everything he was about to say. Reade reminded the delegates that
White’s copyrighted sales-line should be "Scaring investors since
2003," as he accurately picked the shape of the bubble well ahead of
schedule, and hasn’t been proven wrong yet.

"Investors should be positioning for ‘tail
events’," White concluded. "But which ones?" Somewhere between
deflation, slow growth, de-coupling of Asia from the West, or a lurch into
rapid hyperinflation or a new series of bubbles fed by ultra-loose monetary
policy, "Is there room for gold in a world like this?" asked the former
Bank for International Settlements forecaster.

"The answer has got to be yes. But quite what
role…well, that’s for you to decide!"

A handful of private investors have begun to make that
decision, as Wolfgang
Wrzesniok-Rossbach of the Heraeus refinery showed in detail. But the real
weight of money – the institutional mandates caring for your insurance and
pension savings – has scarcely bothered to buy gold ’til now, a point made at
length by both Shayne McGuire and Graham Birch on Monday morning. Across in
Asia, "People don’t need convincing on gold," said David Gornall of
Natixis, noting that 81% of global "bar hoarding" demand comes from
Asia, with buying amongst the "traditional buy-side countries" such
as India and Thailand – as well as the fast-growing world No.2 for gold demand,
China – continuing to grow despite record-high gold prices.
Even there, "the emergence of retail physical gold investors has resulted
in structural changes in distribution, product and buying behavior," as
Sunil Kashyap, managing director of Bank of Nova Scotia-ScotiaMocatta
explained. Yet all told (and absent the "bubble" idea which the
conference demolished time and again), what looks like a new paradigm might in
fact mean more a return to old patterns – globally – of gold buying and
hoarding…with a little "mobilization" thrown in by the scrap market
when times get tough.

India and Turkey, after all, have long been both top buyers
and scrap suppliers to the international gold market. Rising investment demand
here in the "rich West" (which, to repeat, remains well off a
"bubble" today) represents a simpler, unleveraged way of retaining
your savings than most Western households have grown used to. But gold was a
core chunk of private wealth holdings not so long ago, back before the
debt-fuelled boom we’ve enjoyed since WWII began – a boom which must now end
with "rebalancing" between the world’s debtors and creditors, as George Magnus of
UBS made plain Monday morning. The kind of dislocation required won’t be much
fun for either, which again looks good for gold demand, if not necessarily
prices.

All told today – and seeing the world’s fastest-growing
economies continue to buy and hold ever more gold as their wealth increases –
maybe US and European savers are only just getting back to the future. Either
way, that "bubble in gold" doesn’t exist. Not by a long way just yet.


The safest gold at the lowest prices – start with a free gram of Zurich bullion right now at BullionVault…

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Sep 30

Gold Jilts Oil

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Might you miss the biggest stories by watching gold too closely…?

So the TWO BIGGEST members of the former Communist/Red/Central Planning club yesterday finalized a deal yesterday to send 300,000 barrels a day of Russian oil to the Chinese city of Daqing for the next twenty years, writes Dan Denning in his Daily Reckoning Australia.

It’s a $26 billion loan-for-oil agreement that comes with an actual oil pipeline between eastern Siberia and north-east China. So why wasn’t this story front page news? Because gold is making new highs and oil is not, that’s why.

Oil is a jilted commodity at the moment. Traders remember what it did to them in 2008 after the bubble popped. But if you’re a contrarian, you want to pay attention to the stories that are not making headlines. Hence, oil.

But like everyone else trying to get ahead of the game, we’d rather focus on gold. Late last night, wide awake from the jet lag, we puzzled over whether now is the right time to Buy Gold in Australia (and whether coins and/or bullion and/or shares). The strong Australian Dollar mentioned yesterday has capped gold’s rise when denominated in Aussies. And should 2008 repeat itself in some way, the USD would rally against the Aussie…and the Aussie Gold Price should approach its high of just over A$1,500.

But will that happen? It’s a known unknown. If you haven’t sorted out whether gold shares or Gold Coins or Gold Bullion should be part of your investment strategy, you still have time to think about it and do something, if that’s what you decide. One reason you have time is that one of the strength’s of gold’s current move is that central banks are buying it instead of selling it.

This was something we mentioned in our remarks at the Gold Standard Institute show last year; the remonetization of gold in the world’s financial system. In fact, in January of 2009 we wrote the following:

"It’s not rash speculation to suggest that central banks will prefer to hold on to their gold this year – rather like the increasing (if small) number of private individuals – instead of selling it. As competitive currency devaluations sweep the globe in an all-out effort to fight asset deflation and recession, we think gold will become much more desirable as a reserve asset worth owning, not selling for cash."

Fast forward to Sept. 2010, and "European Central Banks Halt Gold Sales," reports the Financial Times. The article referred to the European Central Gold Bank Agreement (the same agreement we discussed in 2009). That agreement was designed to control the amount of gold being sold onto the market by European central banks. The ceiling for annual sales between September of 2009 and September of 2010 was 400 tonnes of gold.

Last year’s agreement expired last week. But Europe’s central banks sold only 6.2 tonnes of their gold. Sales fell by 92% from last year. Banks know what real money is. And they’re not selling their gold anymore. They’re buying it.

Maybe central bankers are Buying Gold because their respective finance ministers are actively trashing local cash. "We’re in the midst of an international currency war, a general weakening of currency," says Brazil’s Finance Minister Guido Mantega. Exporting nations are trying to boost competitiveness by keeping their currencies cheap and the price of their exports low.

It’s a strange old world when you improve your economic strength by weakening your currency. Japan and other Asian exporters (dependant on credit-financed consumption in North America) have been doing it for years. But maybe not everyone got the memo from the stock market in 2008 than the global credit bubble has popped.

You have to wonder if the strong Aussie Dollar will hurt the competitiveness of Aussie exporters. It will probably hurt some a lot more than others. By "others" we mean commodity exporters. For now, any rebound in global mining investment has not led to a huge new production increases in the key commodities produced by Australia (iron ore and coal). The strong Dollar isn’t hurting a bit.

But Chris Richardson from Access Economics warns us not to take the high terms of trade and commodity boom for granted. "Australia’s fiscal finances, both short and long term, are hostage to the fate of commodity prices, and hence to China’s strength,’" he recently wrote. He added that Australia’s Federal budget depends on high commodity prices to end the deficit.

"The return to surplus trumpeted in the official forecasts is a pure punt that China and India will keep growing faster than the world’s miners will keep digging deeper," Richardson says. "The budget used to be stodgy and boring and responding to a whole range of economic indicators. Now its health or otherwise is very narrowly based on coal or iron ore prices, and that’s a very fickle thing to rely on for fiscal health."

Yes it is.

Get the safest gold at the lowest prices at BullionVault now…

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Sep 30

Why Did Gold Prices Rise?

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Gold Prices turned higher a decade ago, and haven’t stopped since. Why…?

HINDSIGHT is always a satisfying exercise, because you have all the facts, you know what happened eventually and you simply have to find the reasoning now established by history, writes Julian Phillips in his Gold Forecaster.

Forecasters can be thus judged efficiently as to whether they were right or wrong only in the light of history after the event. Whereas forecasting at the time is an entirely different matter, because you have no facts from the future. What you do have is the past and the present. Now you have to extrapolate these forward to construct tomorrow’s picture.

Forecasting requires giving each present fact its due portion in that future and its correct weighting together with a good dash of insight. Hopefully you will do the job well and be correct. This may sound simple but it isn’t. To help you look forward we look at the last decade in the gold market.

Take the Gold Price. From 1985 despite all the good pointers to higher prices, few foresaw the vigor of the attack by the world’s monetary authorities on gold and yet that was the prime influence on the Gold Price.

When 1999 came most believed the all the world’s central banks were keen to sell all the gold they had to get this barbarous relic out of their vaults. Then came the "Washington Agreement". On the surface looked as though it followed the line of thought that central banks would continue to be unrestrained sellers. Britain appeared to confirm that picture as it sold half its reserves at the lowest price seen since then. This point in time and price is affectionately known as the "Brown Bottom" of gold, after the then-Chancellor of the Exchequer, Gordon Brown. What seemed an innocuous agreement simply limited the volume of sales per annum to 400 tonnes from all the signatories put together.

What was understood only later was that this cap on sales removed the fear of unlimited sales. The signatories felt that this limitation would protect gold producers from seeing a lower Gold Price and deter future gold production. But significantly, this limitation on "Official" supplies went further than this, it reassured the market that not only was the Gold Price underpinned but "Official" supplies were capped. The intention of the Agreement was to hold the market steady at those prices.

A further look at the demand / supply numbers showed that if demand rose, total supply would not increase. Traders demonstrated this when they went long and took the Gold Price from just over $300 to $390 and then took it back down again to $326. This was enough to scare the Gold Mining companies that had hedged their future gold sales. They soon realized how quickly the hedges they had could become very unprofitable as the Gold Price rose. Suddenly gold miners themselves saw that the Gold Price would fall no further so there was no point in continuing to hold them.

De-hedging started and the miners went to the market to buy back their hedges. This allowed them to make money as the Gold Price rose. Cutting these hedged positions realized profits there and removed potential losses. This was done in such high volumes, right through to 2010, that it accounted for almost the entire amount of gold sold by the signatories to the Washington Agreement and its successor, the Central Bank Gold Agreement – around 400 tonnes per annum.

So supply was limited to newly mined gold, which could not rise quickly for the easily mined deposits had gone. It takes around 5 years from the discovery of gold in the ground to taking that gold out of the ground and to market.

Over the years the Gold Price slowly rose on the back of the traditional demand such as India and the jewelry trade. Then came the accelerant, the gold Exchange Traded Fund (conceived by the World Gold Council’s James Burton). This allowed various types of funds to Buy Gold via the shares of the ETF, which bought gold with the proceeds of the sale of these shares, and thus directly impacted the Gold Price, while avoiding the corporate risks attendant on mining companies. Funds such as these had not been allowed to hold bullion itself, until then. These were brand new investors bringing a new type of gold demand to the market from the States. Until then traditional investors in gold bought bullion direct from the London gold market, had the costs and difficulties in storing bullion, which precluded other types of investors from being in the market. So great was the impact of this new demand that these funds in total now hold more than the central banks of Switzerland and China do.

Nevertheless the market was still focused on traditional demand as being the mainstay of the gold market and controlling the Gold Price. They still do today. It is a commonly held belief that investment demand will vanish as quickly as it came. Then we will see the Gold Price turn back to India and jewelry demand at prices well below today’s price.

But investment demand extended from primarily US fund demand to a much wider type of investment demand. The reason was because of an underestimated fundamental that most commentators ignored and rejected. As in 1999 the precipitant turned out to be the European central banks. The second European central bank gold agreement saw the ceiling of 500 tonnes hit only once or twice during its 5 year life.

In the last years of the agreement the sales started to drop quickly. In the last year of the agreement the sales tailed off steadily in the first and second quarter of that year until in the last quarter hardly any gold was sold by them whatsoever. In the first year of the Third Agreement, sales have been close to zero (with 6.2 tonnes sold for coinage – not in the spirit of the agreement). What should we learn from this? The sales had done their job of supporting the advent of the Euro on the world’s foreign exchanges, obviating the need for further sales. The first clause of all the Agreements stated that "gold would remain an important reserve asset". Gold would remain in the firm grip of central banks from then onwards in Europe. In itself it reassured investors that when the dark days arrived gold would have a use in the monetary world.

Now came another shot in the arm for gold. Asian central banks and Russia started to Buy Gold and seriously. The implication was that gold would have a use in times of monetary stress. In itself this meant little, but once the US Dollar started to weaken against the Euro, confidence in the world’s leading reserve currency began to falter. Currency values had become vulnerable to falling. Gold rose when currencies fell and the safety of ones wealth came under pressure.

For eighteen months gold had difficulties in rising beyond $1,200 for a variety of reasons. But then the transition of gold from a ‘commodity’, an industrial metal, a piece of non-corroding decorative jewelry, to an investment people with money buy, came about.

The falling Dollar, the various Sovereign debt crises, future currency crises, deflation, potential inflation or even hyperinflation appeared on the horizon, each persuading investors that gold was a good place to keep hold of one’s wealth. The days of monetary stress have arrived.

From now on gold’s evolution will be the most vigorous of its several stages of development. We are on the edge of a whole new way of looking at gold and its relevance in the global economy.

Buying Gold? Get the physical metal at rock-bottom prices using world No.1 BullionVault…

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Sep 30

Mine’s Bigger Than Yours

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Currency wars over who’s got the most money to burn are fuelling the Gold Price rally…

AS THE Gold Price moves through yet another major milestone – $1300 per ounce – some heavy hitters in the marketplace are beginning to wonder if the yellow metal’s rally is getting a bit too frothy, or even worse, writes Gary Dorsch, editor of the Global Money Trends newsletter.

Is a speculative bubble brewing – and one which might ultimately deflate under its own weight, leading to a sharp correction? On Sept 15th, famed hedge fund trader George Soros said that Gold Prices might continue to rise, but warned that that gold is the "ultimate bubble"…

"Gold is the only actual bull market currently. It just made a new high yesterday. In the present circumstances that may continue. I call gold the ultimate bubble, which means it might go higher. But it’s certainly not safe and it’s not going to last forever."

Soros has been bullish on gold in a big way, and as of June 30th, the Soros fund held 5.24 million shares of the SPDR Gold Trust GLD, a stake worth about $650 million today.

Soros’s fund also held equity holdings in Gold Mining corporations, plus other minerals, worth almost $250 million.

Over the past two months, there’s been a global stampede into precious metals, with investors of many different stripes, and from many countries, scurrying to Buy Gold and silver in both the physical market and through exchange traded funds.

The World Gold Council reported that the demand for gold worldwide surged 36% in the second quarter of 2010, swelling to 1,050 tonnes. The Greek debt crisis, instability in Irish and Portuguese bonds, and expectations the Fed would unleash "Quantitative Easing" (aka QEII) – flooding the world with a new tidal wave of freshly printed US Dollars – has supported the historic bull run. Europe accounted for more than 35% of the retail purchases of Gold Coins during the second quarter.

The latest surge in gold and Silver Prices was sparked in July, following comments from Fed officials signaling that QEII could be around the corner. On July 22nd, Fed chief Ben "Bubbles" Bernanke reassured congressional lawmakers the central bank is prepared to print more Dollars if the US jobless rate continues to hover around 10%.

"We are ready and will act if the economy does not continue to improve, if we don’t see the kind of improvements in the labor market that we are hoping for and expecting. Unemployment is the most important problem that we have right now. What we can do is make financial conditions as supportive of growth as we can and we certainly are doing that…"

On August 19th, St Louis Fed chief James Bullard was more explicit, signaling his backing for further monetization of the US government’s debt.

"Should economic developments suggest increased disinflation risk, purchases of Treasury securities in excess of those required to keep the size of the balance sheet constant may be warranted. Any additional Treasury buying should be undertaken in a measured, deliberate manner, commensurate with the magnitude of the deflation threat."


The Fed’s propaganda artists are operating behind a veil of "smoke-and mirrors", trying to instill the fear of consumer-price deflation amongst bondholders in order to justify another big round of stealth monetization of the US government’s debt.

The Fed’s first go-around with QE, totaling $1.75 trillion, combined with the Bank of England’s £200bn QE-scheme and the Bank of Japan’s ¥21 trillion QE-scheme, fueled a powerful rally in key commodity markets in 2009, lifting the Dow Jones Commodity Index (DJCI) from deep in negative territory, and onto the positive side, thus warding off the threat of deflation in the global economy.

However, since the Fed completed its 12-month buying spree in Treasury bonds and mortgage-backed bonds in March 2010, the year-over-year rate of increase in both the DJCI and the US Producer Price Index have petered out. Last November, the DJCI was hanging around the 135-level, just a shade below the 138.40-level that prevails today. If the DJCI stays stagnant or turns lower in the months ahead, it could knock the US-PPI into negative territory by year’s end, signaling the onset of another bout of deflationary pressures, and triggering a second round of the Fed’s QE.

Thus, on Sept 1st, Philadelphia Fed chief Charles Plosser said the Fed would embark upon further monetary easing if faced with a dangerous downward price spiral.

"If we do need to act, if fears of deflation were to become real, then we would need every ounce of credibility we can muster to convince markets we are not going to let deflation happen…

"I would certainly entertain the solution if I feared deflation, and if I feared that expectations were coming unglued in that direction – then we would have to take actions," he warned.


Interestingly enough, amid all this gloomy talk by Fed officials about the bogeyman of deflation, the demand for precious metals – traditional hedges against inflation and currency devaluations – is booming.

Why? Traders realize that the Fed’s magic elixir for fighting the scourge of deflation is more money printing – otherwise known as the nuclear QE-scheme. US bond dealers, who trade directly with the Fed, aren’t questioning whether QEII is on the table, but are rather taking bets on the size of the next tranche, with estimates ranging between $300 billion and $1 trillion.

Speculation that the Fed would unleash QEII soon has already spearheaded a new round of currency wars across the globe. Central bankers in Brazil, China, Chile, Japan, Russia, South Korea and Thailand have all stepped up their interventions, by injecting large sums of paper into the currency markets, while trying to prevent a precipitous decline in the value of the US Dollar versus their own currencies.

The amount of foreign currency reserves stashed away in the coffers of the Bank of Korea have climbed by $76 billion since April 2009, to a record high of $286 billion – and becoming the world’s sixth-largest after China, Japan, Russia, Taiwan and India. The BoK’s currency reserves are an indicator of the approximate size of its interventions in the foreign-exchange market, utilized to artificially hold down the value of the Korean Won vs. the US Dollar.

The value of the US Dollar is critical to Seoul, since Beijing pegs the Chinese Yuan to the US Dollar, and China is the biggest customer for Korean exporters. Thus, the BoK aims to protect its exporters in both the Chinese and US markets. However, the BoK hasn’t been able to turn the bearish tide against the US Dollar. It’s been overwhelmed by the ideas that the Fed would unleash nuclear QEII. Now the BoK can only try to stem the bleeding – engineering an orderly retreat for the greenback.

The Bank of Korea would of course be much wealthier if it had judged the Gold Price more correctly. The BoK holds only 14 tonnes of Gold Bullion, equivalent to just 0.03% of its total reserves. On Dec 9th, 2009, the BoK’s FX-chief, Lee Eung Baek argued:

"There’s an illusion in gold. Out of more than 200 nations, how many have bought Gold Bullion? Like other central banks, we have been increasing the types of currency reserves outside the Dollar. Gold offers little value, with no cash returns. Since India and Russia with large reserves bought gold, there’s speculation that Korea might buy it too. But we are not classified in the same category. There’s a slim chance that we will Buy Gold from the IMF…"

This was when the yellow metal was changing hands at $1226 an ounce, almost $100 below today’s price.

On Sept 16th, Tokyo’s financial warlords also intervened in world currency markets to drive down the exchange rate of the Yen.

The Bank of Japan sold an estimated ¥2 trillion ($23 billion) to buy up US Dollars. The first such intervention by Japan in more than six years, this was also the biggest ever one-day currency action, and breached a tacit agreement among the Group-of-Seven industrial powers (G7) to avoid unilateral currency interventions.

But Japan had threatened such action for more than six weeks, after the value of the US Dollar declined by 10% from May to a 15-year low of ¥83. The Japanese Yen also climbed sharply in relation to the Euro and the Chinese Yuan…meaning that Japan’s multinationals, listed on the Nikkei 225 index – and heavily dependent on exports – were suffering. The Dollar’s value had declined far below their average break-even point of ¥93, and threatens their ability to compete in selling goods abroad.

Japan’s foray into the currency markets triggered a short squeeze on over-zealous US Dollar bears, and lifted the Dollar as high as ¥86 in short order. However, the Dollar’s one-day rally quickly stalled, as speculators began to bet that the size of the Fed’s QEII would exceed the size of the Bank of Japan’s devaluation schemes. Earlier, the Bank of Japan boosted the size of excess Yen sitting in deposits held by Japanese banks to ¥30 trillion ($350 billion), in an effort to put a floor under the Dollar at ¥84.

Despite the massive size of the Bank of Japan’s injections of Yen into the local banking system, it hasn’t been able to turn the US Dollar’s bearish tide.

That’s because currency traders expect the Fed’s next round of QEII to trump the size of the Bank of Japan’s interventions. Also, US Treasury yields could resume falling further than comparable Japanese bond yields, thus narrowing the US Dollar’s interest-rate advantage over the Yen. In the current round of competitive currency devaluations, the Fed holds the trump card over the Bank of Japan.

Most interesting, Japanese 10-year bond yields are flirting with the psychological 1% level, despite the ballooning of the size of Japan’s public debt, now at ¥909 trillion ($10.5 trillion). Japan’s bond yields are falling, even though its debt-to-GDP ratio is about 180%, which on the surface is worse than 115% for Greece. Yet although public attention tends to focus on Japan’s gross debt, which has soared to ¥909 trillion, the government also owns about ¥700 trillion in assets.

That ¥700 trillion in assets includes roughly ¥180 trillion in real assets, such as public office buildings, and ¥520 trillion in financial assets, including stakes in special corporations. The government can sell these assets and use the proceeds to pay down debt. Thus, Japan’s net debt is about ¥200 trillion, or about 40% of its nominal GDP, which is over ¥500 trillion per year. Perhaps, this is why Beijing hasn’t been afraid to buy ¥1.7 trillion of Japanese government bonds in the first seven months of 2010.

Still, at yields of 1% or less for 10-year Japanese bonds, the only buyers would be short-term gamblers, or those who are convinced that Japan’s economy would be snared in the deflation trap for year’s to come.

Buying JGB’s at yields of 1% or less could lead to large losses over the longer-term. Thus, the more sensible investment for Japanese investors is to Buy Gold against the Japanese Yen. Priced in Tokyo’s money, gold has more than doubled over the past five years, and served as a good hedge against the Bank of Japan’s printing schemes.

Already, the Bank of Japan is monetizing half of Tokyo’s annual budget deficit of ¥44 trillion this fiscal year, and there’s pressure on the central bank to buy more government bonds to weaken the Yen. Although some traders might view the Bank of Japan’s bond-buying operations as a buy signal for JGBs, investors in Tokyo gold have profited more handsomely. Tokyo gold has been tracking the size of Japan’s outstanding debt, since Tokyo’s ruling elite prefer to pressure the central bank to monetize its debts, rather than sell-off state owned assets to finance budget shortfalls.

Gold’s not just tracking Tokyo’s monetary problems, either…

Bank Rossii, Russia’s central bank, manages the Ruble against a basket of Dollars and Euros to limit currency swings that may hurt it exporters. In August, Bank Rossii bought $1.1 billion and €136 million, trying to keep the Ruble within a floating range against the Euro-Dollar’s basket.

This summer’s agricultural drought, the worst in decades, has already shrunk Russia’s trade surplus to $8.3 billion in August, or 29% less than a year ago, and has slowed its economy’s growth rate to 2.4%, with 60% of the fall attributed to the agricultural sector. Thus, Bank Rossi is liable to start increasing the supply of Rubles in the money markets to limit further damage from adverse exchange rates moves to its economy.

The Kremlin earns most of its foreign currency from the sale of Urals blend crude oil, natural gas, and other natural resources, such as timber, platinum, and nickel. Along with rebounding energy and metals markets, Russia’s FX reserves have been replenished to around $478 billion today, from as low as $380 billion in March 2009. Moscow is keen to diversify some of its FX stash into gold, and last May, added 1.1 million ounces equaling 16% of monthly global mining output.

Overall, the Russian central bank bought gold at an average rate of 250,000 ounces per month for the past three years, and now holds an estimated 23.6 million ounces. As of the first quarter of 2010, Saudi Arabia said it had more than doubled its gold holdings from 143 tonnes in Q1 2008 to 323 tonnes this spring, for an average increase of 241,000 ounces a month, or about the same as Russia’s purchases.

Thus, gold traders will keep a close eye on the FX reserves of these two key oil producers.

Brazil has also ramped-up its intervention efforts in the foreign currency markets, buying US Dollars twice each day in order to prevent the greenback from falling below its latest defense line at 1.70 Reals.

Largely due to its super strong currency, Brazil’s trade surplus fell 44% to $7.9 billion in the first half of 2010, down from $13.9 billion a year ago, as imports grew nearly twice as fast as its exports. Four years ago, the Bank of Brazil (BoB) tried to prevent the US Dollar from falling below 2.10 Reals, but failed in its $100 billion intervention effort.

Currently, the BoB is trying to draw a red-line in the sand for the US Dollar at 1.70 Reals, but Brazil’s high short term interest rates, offered at 10.75%, are simply too irresistible to yield hungry investors from around the globe. Foreign inflows of cash into Brazil in the first ten-days of September alone was $2.14 billion. As a result of its relentless intervention efforts, trade surpluses, and foreign direct investment, Brazil’s FX stash has grown to $250 billion, and it’s the fifth largest lender to the US Treasury.

On Sept 15th, Brazil’s Finance chief Guido Mantega vowed to defend the country’s exporters, joining other governments worldwide that seek to weaken their currencies as a way of speeding up an economic recovery.

"We will not sit on the sidelines watching the game, while other countries weaken their currencies at the expense of Brazil. We’re going to take appropriate measures to stop the real from appreciating," he declared in Rio de Janeiro.


Under conditions of slowing growth in the US economy, there’s been an eruption of currency wars worldwide, with an increasing number of governments seeking to secure their share of export markets through outright intervention in the currency markets.

At the heart of the problem, US Senate Banking Committee chairman Christopher Dodd declared China a currency manipulator last week, and said its "economic and trade policies present roadblocks to our recovery." He accused Beijing of stealing intellectual property, violating international trade agreements and dumping goods. Since then, the US Dollar tumbled 1.2% to 6.7035 Yuan.

US Treasury chief Tim Geithner suggested that China should raise the Yuan’s exchange rate by at least 20% and issued a thinly veiled threat, noting that "China has a very substantial economic stake in access to the US market." Meaning, the biggest beneficiary of the growing currency trade wars is the precious metals – silver and Gold Investment – now basking in the growing supply of freshly printed paper currency worldwide.

The prospect of QEII by the Fed is prompting other central bankers to counter with currency devaluations of their own. Yes, some central banks such as Banco de Chile, the Bank of Australia, and the Bank of India are going the opposite way – lifting their interest rates, and their currencies have become magnets for foreign capital. But the Fed has concluded that the only expedient weapon in its arsenal to speed-up the US economy is to inject another tidal wave of US Dollars into the banking system, while aiming to artificially inflate the US stock market higher, and thus, create the illusion of greater wealth and better times ahead.

However, when seen through the lens of gold, or in "hard money" terms, the Dow-to-Gold ratio is still trapped near its lows of Q2 2009, highlighting the notion that the US-economic recovery has been mostly limited to Wall Street and US multinationals. Meanwhile, the divide between rich and poor in the US is getting wider. The Dow Industrials’ 3,800-point rally from the low of March 2009 was a monetary illusion, and Gold Bullion is still best way to preserve wealth.

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Sep 30

Gold Investment Keeps Growing

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The World Gold Council explains what’s happening with Gold Investment today…

MANAGING DIRECTOR of investments at marketing and research group the World Gold Council in New York, Jason Toussaint here speaks with Hard Assets Investor about the metal’s rise – and why he sees it set to continue.

Hard Assets Investor: The World Gold Council is a very important organization, representing the gold industry. Tell us a little bit about it…

Jason Toussaint: The World Gold Council is a market development organization that is owned by the largest Gold Mining companies in the world. Back in the ’80s, they decided to pool their resources into one organization, which we now know as the World Gold Council. And our goal…our mission in life, if you will…is to create and sustain demand for gold.

We do that across a number of primary sectors, four sectors to be precise. We have a Gold Investment sector, which I manage on a global basis, informing and educating the public about the merits of gold in portfolio construction and long-term diversification. We have a government affairs division, which works with central banks, many of them around the world, to understand gold as a reserve asset. We have an industrial sector, which is dealing with semiconductor manufacturers, etc., to increase and find more uses for gold in the industrial segment. And then, of course, last but not least, the jewelry sector, which is the most important and has the largest demand.

HAI: In the Gold Investment area, I suspect your job has gotten a lot easier in the past several years.

Jason Toussaint: The biggest shift that took place – and I would call it a paradigm shift in this market – is not necessarily the merits of Gold Investment, because those have been around for quite some time, and we’ll discuss those, but the access. When we launched the SPDR Gold Shares here in the US in 2004, having an exchange-traded product with all the guaranteed two-way markets – infinite liquidity, if you will – of trading on the market, it overcame a lot of the issues that investors have had in the past with accumulating gold.

HAI: We should just state that the World Gold Council created the GLD, the very popular Gold ETF that has really taken off among investors.

Jason Toussaint: Correct. We sponsored, through a subsidiary based in New York – World Gold Trust Services – the SPDR Gold Shares, GLD. It’s now valued at just below $50 billion, and we are the second-largest ETF in the world. What is very interesting, if we look back to when we launched the product in November 2004, it surpassed $1 billion in assets under management in its fourth trading day. So, we were absolutely tapping into latent demand by investors who wanted to start Gold Investing, but didn’t necessarily know how.

Before the ETFs, if you wanted to invest in gold, it was buying Gold Bars and coins, primarily, which is fraught with issues such as price discovery, where do I purchase these things, and so on. And then, of course, costs associated with transport insurance and storage.

HAI: Put a number on it – what percentage of gold demand, prior to the ETF, was represented by investor demand?

Jason Toussaint: Before the exchange-traded funds, Gold Investment demand was roughly 15% of aggregate gold demand. Now it’s upwards of 20 to 30%, pretty much doubled. And I think, kind of coming back to the access vehicle, looking at SPDR Gold Shares and, frankly, other Gold ETFs backed by physical bullion available in the world, has really made gold investable for the first time, for many classes of investors.

Take, for instance, you mentioned pension funds. Pension funds are absolutely asking about the merits. We work with them closely now, about why they should Buy Gold. And then, more importantly, how they do it. Because you can imagine, if a pension fund wanted to buy a billion Dollars’ worth of gold previously, then they would need to worry about, "Well, where do we store it? How is this valued? How do we trade it?" etc. And, trading gold is quite specialized. By putting it on exchange, it is now part of the professional investment process.

HAI: So we’ve seen a doubling in investment demand – but it’s probably not going to double again in a short period of time?

Jason Toussaint: We absolutely do see Gold Investment demand continuing. Even at $50 billion, I like to tell people we’re just barely scratching the surface now. There is a vast market out there that does not hold gold.

HAI: How large is the total capitalization of the gold market, roughly?

Jason Toussaint: Six trillion Dollars.

HAI: Six trillion? So, in the scheme of things, it’s not really all that big – global GDP, what, $60-$70 trillion?

Jason Toussaint: Right.

HAI: You talk about maybe a large investment manager like BlackRock running $3 trillion. But $50 billion, compared to $6 trillion – you definitely see that there’s more room to grow in there.

Jason Toussaint: Absolutely. But then, we need to also understand that the primary driver is jewelry. And the primary buyers of gold jewelry, the largest markets, if you will, are the Middle East, India and China. And looking at continued demand, and the relative balance between jewelry and investment, I think what we will see is a continued increasing demand for jewelry in those markets. Because, if you think of their domestic growth rate, and the fact that in the case of China and India, most importantly, the creation of a new middle class, new wealth and an affinity towards gold, that is, I think, a very, very long-term structural shift in gold demand, which I think is often overlooked.

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