Oct 29

Don’t Get Bullish on Gold Below $1350

Gold Price Comments Off on Don’t Get Bullish on Gold Below $1350
This month’s “triple bottom” is not, repeat NOT, confirmed says this technical analyst…
 

WAYNE KAUFMAN is chief market analyst at Phoenix Financial in New York.
 
Regularly quoted in the media and interviewed on Fox, CNBC and the BBC, Kaufman produces a daily report for Phoenix, is a member of the Market Technicians Association, and has taught level 3 of the MTA’s three-level online course for Chartered Market Technician candidates.
 
Here Kaufman speaks to Mike Norman on behalf of Hard Assets Investor about how he sees the big picture right now…
 
Hard Assets Investor: We’ve seen some crazy gyrations in gold, in the Dollar, in oil, even in stocks. Summarize how it looks to you.
 
Wayne Kaufman: In terms of US equities, we’ve been watching a deterioration of underlying market breadth, that hasn’t shown up, or had not shown up in the major indexes until the last couple of weeks. But for the last three or four months, we’ve been watching small-caps get decimated. And then the midcaps followed. And then the large-caps, S&P 500, had a peak recently. But the breadth was terrible.
 
And now the stocks have rolled over. It’s to the point where you’ve only got about 18% of S&P 1500 stocks over their own 50-day moving average, less than one in five. About one in three are still over their 200-day moving average. So that underlying deterioration came through and pulled down the majors.
 
HAI: Now with small stocks weak like that, wouldn’t that suggest general economic weakness, or at least a tipoff to that effect, that we’re seeing basically small, medium-sized businesses not doing very well?
 
Kaufman: Definitely. You’re right. You’re talking about changes taking place. The question in the mind of investors right now is, we’re seeing the weakness in China, in Europe, in Germany suddenly rolling over. You’ve got the price of oil. It’s all of these things that are turning dramatically. Is this a long-term trend change? Or is this just going to be short term? Is it just typical October stuff, in the case of equities? That’s what we’re going to find out over the next few weeks.
 
HAI: But is there really a downside, when people know the central banks are going to be there, push comes to shove?
 
Kaufman: There, at a point, is only going to be so much that the central banks can do. I was recently asked by a news outlet to give my projections for the S&P, and my reasoning. My No. 1 reason for being bullish is central banks around the world will do everything possible to prevent a global recession. Are they really able to do much more? We know they’ll try. Are they going to wait too long before they do? How effective can they be?
 
HAI: Last time you were here, you were negative on gold. And that play worked out pretty well. How do you see things panning out from this point?
 
Kaufman: I see short-term, over-sold and over-bearish sentiment. So a bounce is definitely in the cards, especially if there’s some short covering by people who are short the futures. But when I was here last time, I said I couldn’t get bullish unless gold broke $1400 or so. Now that number is a little lower.
 
HAI: Where is it?
 
Kaufman: $1300. I need to see $1350 at least, because you do have a potential triple bottom. A lot of people say, “Oh, triple bottom.” It’s a potential triple bottom that doesn’t get confirmed until you break unimportant resistance. Unless we can get above $1350, I’m not going to start thinking about getting bullish, except for oversold, over-bearish bounces.
 
HAI: We had a guest recently talking about the death of gold. Reminds me of the death of equities back on the infamous 1979 Business Weekcover. What do you make of that?
 
Kaufman: I agree. That’s why I’m saying I could see a bounce here, because it’s oversold, and it’s over-pessimistic. Levels of pessimism are extreme. And when you see that, that’s a good time to take the other side of that trade. The question is, how much staying power? You’re talking about commodities going down. The Dollar has been strong, which is a little too much bullishness in the Dollar. That certainly can be capped here.
 
But oil is just amazing. For years, you always said that the Saudis controlled the price of oil. You were 100% right. Because they’re the only country that really has significant excess capacity. Right now, are the Saudis purposely trying to drive the price of oil down, so that they can try and put a cap on fracking and energy exploration and production here in the States?
 
HAI: The shale guys, the shale producers.
 
Kaufman: Potentially an amazing tactical war going on between the Saudis and the US, in terms of oil production.
 
HAI: I saw an example of that back in the ’80s, when I was an oil trader on the floor of this very exchange, when they crashed the price down. That was a message sent to the non-Opec producers, the North Sea guys in particular. So I think you’re absolutely right. 
 
You mentioned the Dollar. That was a surprise to most people, because we had this narrative, for a long time, about money printing, and central banks, and quantitative easing, and hyperinflation and the Fed doing all this. Yet, look at the Dollar.
 
Kaufman: I don’t want to seem like I’m complimenting you because you’re the host, but you said this a long time ago.
 
HAI: Don’t hold back…
 
Kaufman: You said a long time ago, all the inflation guys, that they were wrong, they were going to be wrong. You were 100% right. So it was a big surprise. Now, as a technician, I called the Dollar going up at a point when I saw it giving me buy signals. I don’t do it the intuitive or the economist way. It’s extremely overbought. And it’s extremely over-bullish. It has been taking a pause. I think it’ll continue to pause here. It’s just too many people on that side of the trade at this point.
 
HAI: We heard comments recently from New York Fed President William Dudley, to the effect that a Dollar that’s too strong might hinder our ability to achieve our goals. Hint, hint, a little bit of code words there…
 
Kaufman: You’re right. But the problem they have is that the strong Dollar is going to hurt exports, obviously. But you’ve got S&P 500 companies due in the neighborhood of 40% of revenues, 50% of profits overseas. So, whether it’s from the strong Dollar or just because the economies overseas are very weak right now, no matter how you go on that, it’s going to be a problem. And the world economy needs to clear up. We’re not an island unto ourselves; it will affect us. And I think that’s what equities are starting to show.
 
HAI: Good points. Wayne, always great to have you here. Thanks very much.
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Oct 21

Swiss Gold Vote: Should You Be Worried?

Gold Price Comments Off on Swiss Gold Vote: Should You Be Worried?
Switzerland’s gold referendum will force the SNB central bank to buy more than it sold in 2000-2008…
 

The SWISS GOLD VOTE in November – “Should I be worried?” asks a BullionVault user owning metal in Zurich, writes Adrian Ash at the world-leading physical gold and silver exchange online.
 
It’s no idle question. Governments do nasty things when they need to buy or keep hold of an asset.
 
Witness the United States’ compulsory gold purchase of April 1933 for instance…and its ban on hoarding, exporting or trading gold. 
 
Big difference here is that the Swiss public gets to vote on what drives such measures. Thanks to their petition system, the country’s junkies get junk on prescription…while minarets are banned. The changes proposed for 30 November would compel the Swiss National Bank to:
  • hold all its gold reserves in Switzerland; 
  • raise gold holdings to 20% of the SNB’s total assets; 
  • never sell gold ever again. 
This is a Swiss decision, and with the Franc effectively “backed” by gold again if this passes, it’s really not for us British turkeys…earning and holding British Pounds Sterling…to say whether or not a foreign nation should vote for Christmas.
 
But personally speaking, I’m no fan of central-bank gold hoarding. It tends to mark dark times, and still darker plans on the part of government.
 
The Swiss government is in fact pitted against this new gold plan. But still, it’s better by far to let gold circulate freely, I believe…outside state vaults and in private hands…just like the truly classical Gold Standard worked.
 
But let’s put my hopeless idealism, and the economic wisdom (or otherwise) of this 1930s-style Gold Standard proposal aside (for that is what it is). Just how desperate might the Swiss authorities become if the vote passes? Put another way, what impact might it have on the supply/demand balance worldwide, and hence prices?
 
First, the security of gold property held in Zurich or Bern, under the tarmac at Kloten or beneath the Gotthard mountains. Switzerland is a highly open economy, with financial services earning a huge portion of its tax revenues and employing nearly 6% of the working age population. Its banking reputation may have been dented in recent years (and its hard-won bank secrecy laws look set to be crushed by the European Union kowtowing to the US juggernaut). But physical gold storage, alongside refining imported gold bullion for export, continues to be a crucial industry.
 
By our reckoning, the world’s investors added 1,400 tonnes of gold to private and bank vaults in Switzerland between 2009 and 2013. For non-bank storage of physical property, it remains by far the most popular choice amongst BullionVault users, holding nearly 75% of the current record-high levels of client gold. To the best of our knowledge, no country enjoying such revenue – nor any state enjoying such confidence from foreign wealth – has ever turned it away. 
 
Even during the UK’s balance of payments’ crisis of the 1970s, foreign-owned bullion was allowed to enter and leave freely, sidestepping both VAT sales tax and the exchange controls blocking private British ownership of gold. London of course remains the centre of bullion dealing worldwide, just as Switzerland remains the No.1 choice for investment storage. It’s very hard indeed to see Switzerland attempting any kind of expropriation, compulsory purchase, exchange controls or punitive taxation – most especially of foreign-owned gold. 
 
So, with theft highly unlikely (especially against the popular pro-gold backdrop of a successful referendum), might the SNB rush to buy gold in December after the 30th November vote? Complicating factors start with the referendum process itself. Next month’s question gives no time limit for completing the extra gold buying, nor for repatriation of existing stock from foreign central-bank care. But if voters look harder (and they’ll be urged to think hard by the pro-gold billboard campaign set to start mid-November), then supporting documents set a deadline of 2 years for bringing the current gold home, and 5 years for reaching that 20% target. However, the clock will start running from the date of “acceptance”. But is that acceptance by voters (ie, November 30th) or by parliament and thus the regional cantons (ie, into Swiss law)?
 
This matters, because Swiss referenda, when approved by the public, can take up to 3 years to become law. So the whole process…if the SNB accepts its fate and doesn’t work with the government to refuse, reject or somehow revoke the Swiss public’s decision…could last up to 8 years.
 
Expect delays. SNB president Jordan has long spoken against the vote, and vice-chair Danthine did so this month (invoking the threat of deflation and Euro-led recession). Those policymakers are unelected, so Switzerland’s referendum pits popular, if not populist will against the technocrats. But elected politicians also oppose the move (and by a wide margin). Even if passed, in short, the spirit of the new rules will likely be hampered by those people charged with enshrining and then enacting them. 
 
The SNB is also a signatory to the fourth Central Bank Gold Agreement. Running for 5 years from 27 Sept. this year, it obliges the 22 central banks involved to “continue to coordinate their gold transactions so as to avoid market disturbances.” The expected transactions were of course sales (the first CBGA was signed after the UK’s sudden and clumsy gold sales announcement of mid-1999), but this treaty only offers further cover for delaying, going slow, or otherwise tempering the impact of buying.
 
An object lesson in central-bank recaltricance is the repatriation of Germany’s gold. Wanting some 300 tonnes from New York and 374 from Paris, the Bundesbank’s plan announced in January 2013 is scheduled for completion in 2020. Yet last year, only 5% of that total was shipped, barely one-third the average run rate required. Whatever the reasons, there really isn’t any hurry, not for the central bankers involved at either end of the transfer.
 
As for retrieving Switzerland’s current overseas gold holdings, we’re given to believe the Bank of England can “dig out” a 20-tonne shipment every two days. So if 20% of the SNB’s metal is still there in London, it could expect to get back the UK holdings inside 1 month. But only if the Bank of England devotes its entire vault staff to that task alone (it holds another 5,000 or so tonnes belonging to other customers besides the UK Treasury), and only if central-banking’s “old world” handshakes and winks are thrown over to appease public opinion.
 
Again, don’t bet on it. Central bankers have fat brass necks when it comes to defending themselves under cover of mutual independence from national governments and their voting publics. So might history offer some clues to the timing of Swiss buying?
 
Sucking in foreign money around WWII, and with exchange controls blocking many citizens abroad from buying investment bullion, Switzerland’s own gold reserves grew from 450 tonnes to 1,940 between 1940 and 1960. The sales starting 2000 took eight years to dispose of that much again, this time into a bullish free market (and again, after a public vote). Now something around 220 tonnes per year might be wanted – sizeable quantities to be sure, but in line with recent sources of demand like gold miners buying back the huge forward sales they’d made to insure against lower prices at the turn of the century (dehedging averaged 260 tonnes per year between 2000 and 2012) or the growth rate of new Chinese consumer demand (100 tonnes per year 2004 to 2013).
 
That extra demand, however, came during a strong bull market in prices. Miner dehedging in particular put a strong bid in the market, helping drive prices higher both mechanically (see the spike of early 2006 for instance) and psychologically (if gold-miner hedging had been bad for investor sentiment, then de-hedging could only be good). Many people now believe that forcing the SNB to hold 20% of its assets as gold will clearly drive market prices higher. Added to the repatriation of all Switzerland’s existing gold reserves…which could catch the cosy world of central banking asleep as Swiss law demands the gold is returned…it is expected to spark a huge squeeze on physical supplies worldwide.
 
We’re not so sure. Heavy central-bank gold sales during the 1990s are widely held to have pushed gold prices down. But those sales continued until the financial crisis began. By then, gold prices were 3 times higher from their lows of 2001, replaying what happened in the late 1970s, when the US Treasury was a big seller. Relatively heavy purchases – this time by emerging-market states – then coincided with the 2011 peak. But again, those purchases have continued as prices fell steeply.
 
Yes, back in 1998-2000, the Swiss gold sales discussed and then begun at the turn of this century helped drive the final nails into gold’s coffin-lid. But sandbagging the price, and dismaying dealers (as well as “bitter end” investors enduring the two-decade bear market starting with 1980’s peak at $850 per ounce), those huge sales in fact laid the floor for the 12-year bull market which followed.
 
Free from central-bank vaults like no time since before the First World War, gold rose and kept rising as private Western households, then Asian consumers, money managers and emerging-market central banks joined the gold miners themselves in buying bullion.
 
Gold is nearly as rich in irony as it is in politics. If the Swiss pro-gold campaign is trying to gerrymander a price-rise by forcing the SNB to turn buyer, history may yet – we fear – have the last laugh.
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Oct 13

FT’s Martin Wolf in "Not Wrong" Shocker

Gold Price Comments Off on FT’s Martin Wolf in "Not Wrong" Shocker
Today’s debt bubble is a real problem, says a key cheerleader…
 

AS WE predicted, volatility is rising. Investors are beginning to squirm, writes Bill Bonner in his Diary of a Rogue Economist.
 
Why?
 
The Fed is ending QE. And it could hike short-term interest rates as soon as next year. The EZ money is getting scarce.
“We are trapped in a cycle of credit booms,” writes Martin Wolf in the Financial Times.
Wolf is wrong about most things. But he is not wrong about this.
“On the whole,” he writes, “there has been no aggregate deleveraging since 2008.”
Wolf does not mention his supporting role in this failure. When the financial world went into a tailspin, caused by too much debt, in 2008, he joined the panic – urging the authorities to take action!
 
As a faithful and long-suffering reader of the FT, we recall how Wolf howled against “austerity” in all its forms.
 
His solution to the debt crisis?
 
Bailouts! Stimulus! Deficits! In short, more debt!
 
Since then, only America’s household and financial sectors have deleveraged…and only slightly. Businesses and government have added to their debt.
 
Overall, the world has much more debt than it did six years ago – more than $100 trillion worth.
 
Wolf has come to realize where his own misguided policy suggestions lead.
 
As a recent paper by banking think tank the International Center for Monetary and Banking Studies put it, fighting a debt crisis with more debt leads to a “poisonous combination of higher and higher debt and slow and slowing real growth.”
 
That is the world we live in. Thanks a lot, Martin.
 
The future is a blank slate. It whacks us all – but differently, depending on how exposed we are. What can we do but try to protect our backs…and squint, peering through the glass darkly ahead.
“These credit booms did not come out of nowhere,” writes Wolf. “They are the outcome of previous policies adopted to sustain demand as previous bubbles collapsed.”
Why sustain unsustainable demand? Why not just let the bubble collapse?
 
Under oath in a New York courtroom, two former US secretaries of the Treasury have told us why.
 
Not bailing out AIG would have been “catastrophic,” said Hank Paulson on Monday. A failure of AIG would have led to “mass panic,” chimed in Timothy Geithner on Tuesday.
 
At least they had their story straight. But it is not hard to connect the dots. When a credit bubble pops, it causes fear and panic. The authorities take action to stop it.
 
What can they do?
 
Whatever it takes, is their answer.
 
What does it take to stop a deflating credit bubble?
 
More money! More credit! More debt!
“We need to escape this grim and apparently relentless cycle,” Wolf concludes.
Meanwhile, “IMF warns of third Euro-zone recession since financial crisis,” reports the FT elsewhere.
 
The IMF also downgraded its forecast for world GDP growth to 3.3%.
 
High debt. Slow growth. And another colossal crisis coming.
 
No wonder investors are nervous.
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Sep 18

Bad News for Gold from the Strong Dollar

Gold Price Comments Off on Bad News for Gold from the Strong Dollar
Expect a drop to $1200 near-term, says a man who called the bull market in 2001…
 

ERIC COFFIN is the editor of the HRA (Hard Rock Analyst) family of publications.
 
With a degree in corporate and investment finance, plus extensive experience in merger and acquisitions and small-company financing and promotion, Coffin has for many years tracked the financial performance and funding of all exchange-listed Canadian mining companies, and has helped with the formation of several successful exploration ventures.
 
One of the first analysts to point out the disastrous effects of gold hedging and gold loan-capital financing in 1997, he also predicted the start of the current secular bull market in commodities based on the movement of the US Dollar in 2001 and the acceleration of growth in Asia and India. 
 
Now Coffin tells The Gold Report how the continuing strength of the US Dollar is bad news for the price of gold, and believes that in the short term a price of $1200 per ounce is possible, though there is room now for an oversold bounce…
 
The Gold Report: You told us last year you were “neutral” on the state of the US economy. Since then, the headline unemployment number has improved. Even so, as David Stockman, former director of the Office of Management and Budget, says, there have been no net new jobs created since July 2000, and jobs paying over $50,000 per year have disappeared by 18,000 per month since 2000. What is your view of the health of the US economy?
 
Eric Coffin: I’m more positive than neutral these days, but I do agree somewhat with Stockman. As unemployment falls toward 6%, we would expect an increase in wage gains. But we’re just not seeing that. And five years into the latest expansion, we’re not seeing the economic growth spurts that tend to occur coming out of a really bad recession. I don’t see how the US economy keeps reproducing the 4% growth of Q2 2014 if we don’t see higher wage gains and higher paying jobs created.
 
TGR: You’ve used the term “smack down” with regard to the recent falls in the gold price. What do you mean by this?
 
Eric Coffin: It’s a wrestling term and means being thrown to the mat. This is what has happened to gold time after time, after every uptrend. The current smack down is due more to strength in the US Dollar than anything else. Gold does trade as a currency sometimes and for the past few weeks it has held a strong inverse correlation to the US Dollar. I think physical demand will ultimately determine the price level, but ultimately it can be a long time when you’re trading.
 
TGR: Why isn’t physical demand determining the price now?
 
Eric Coffin: It’s because of trading in the futures market. When somebody dumps 500 tons there, gold has to drop $200 per ounce. The futures market can overwhelm the physical market in terms of volume and often does. Most traders in the futures market (NYMEX or COMEX) are not buying gold and taking delivery. They are trading as a hedge, or just trading. The physical market, the place where people actually buy bullion, coins and bars, is not predominantly in London or New York but rather in China and India. And because of the smuggling that has arisen in India to circumvent increased tariffs, and imports moving to cities that do not release import statistics in China, it is difficult to know how much bullion Asia is buying right now.
 
TGR: Large short-term trades in paper gold could be used to manipulate the market, and an increasing number of people believe gold is being manipulated downward in this manner. Do you agree?
 
Eric Coffin: I’m not really a conspiracy guy. That said, when we see things like the sale in August of 400 tons in about 10 minutes, we have to wonder what’s going on. Again, when Germany requests its gold from the US and is told delivery will take seven years, it makes you wonder how much of that gold has been hedged or lent already.
 
TGR: Where do you see gold going for the rest of the year?
 
Eric Coffin: I think we are going to be trapped in this currency trade cycle for a little while. The European Central Bank (ECB) cut its rates. One of its deposit rates is now negative. Mario Draghi, the president of the ECB, is talking about starting up quantitative easing. If that happens, or if traders believe it will, the Euro, which has already fallen from $1.40 to about $1.28 to the Dollar, could fall to $1.20 or $1.10. And this strengthening of the Dollar is not good for gold.
 
The other factor of gold being traded on a currency basis is the possibility of Scottish independence, fear of which has already resulted in a significant decline in the British Pound.
 
TGR: Will $1250 per ounce gold lead to gold miners suspending production?
 
Eric Coffin: If gold stays at $1200-1250 per ounce for an extended period, there will be mine closures. Obviously, not all mines have the same costs, but the average all-in cost per ounce for gold miners is about $1200 per ounce. Already, some mines are high-grading to keep profit margins up.
 
Most of the large miners have already cut exploration budgets pretty significantly. We can assume that the pipeline is going to get smaller and smaller when it comes to new projects, even high-quality projects.
 
TGR: How badly will this gold price decline hurt the junior explorers?
 
Eric Coffin: It’s hurt a lot of them already. It’s much more difficult to raise money than it was two or three years ago, although it’s probably slightly better now than early this year. That could change on a dime, of course, if the gold price falls to $1200 per ounce or rises back through $1300 per ounce. Already, quite a few companies are keeping the lights on but not much else. We desperately need a few good discoveries – companies going from $0.20 to $5/share and getting taken out. 
 
TGR: You’ve been visiting mine sites in the Yukon. What do you like about this jurisdiction?
 
Eric Coffin: It’s a great area geologically, but it has some challenges. It can be an expensive place to work, so being close to infrastructure or designing an operation that doesn’t require a huge amount of nearby infrastructure is critical. Power costs are a big item. There’s no end of places in the Yukon where hydropower could be generated fairly cheaply, but that is not going to happen on a large scale unless the federal government steps up, and that would be nice to see.
 
TGR: How does Alaska compare to the Yukon as a mining jurisdiction?
 
Eric Coffin: They’re similar in many ways. Alaska, like the Yukon, is not low-cost, but it is mining friendly and even farther down the road when it comes to settling aboriginal issues. The key to success in Alaska is being close to the coast or major population centers or infrastructure.
 
TGR: How do you rate copper’s prospects?
 
Eric Coffin: There are several large producers that have either recently come onstream or will come onstream in the next few months. So copper is probably going to be in at least a small surplus for the next year or two. The price could fall back to $2.50-2.75/pound ($2.50-2.75/lb). I’m not terribly concerned about that. Copper should be fine in the long term and a good copper operation can make plenty of money at those prices.
 
TGR: The bear market in the juniors is now 3.5 years old. Should investors expect a general upturn any time soon?
 
Eric Coffin: I doubt it if you mean a broad market rise that lifts all boats. My expectation at the start of this year, which is looking fairly dodgy right now admittedly, was for a 30% TSX Venture Exchange gain for 2014. That is possible with only a small subset of companies doing very well, which is my expectation. Investors always want to look for the tenbaggers. It doesn’t matter what the market is like and, obviously, potential tenbaggers often turn into actual one and a half or two baggers, which is just fine. You want to find the projects with the highest potential for resource growth or new discovery and management teams that know how to explore them and finance them on the best possible terms. That is the combination that gives you the potential biggest wins.
 
TGR: Eric, thank you for your time and your insights.
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Sep 18

US Dollar Index Still Rising

Gold Price Comments Off on US Dollar Index Still Rising
When the you-know-what hits the you-know-where, people buy what the…? 
 

“WE CONTINUE to believe that we are moving into a ‘strong US Dollar world’,” wrote Louis-Vincent Gave, the investment strategist, in a recent note to his investors, says Chris Mayer in The Daily Reckoning.
“This makes for a very different set of winners and losers, and very different portfolios, than what most investors have been used to over the past decade or so.”
I think there is a good case for a strong US Dollar for the rest of this year and into next. We’ll look into the argument here and what its chief effect is likely to be.
 
Gave’s comments inspired me to set down my own. In his note, Gave shared a chart showing the Dollar Index since circa 1985. The Dollar Index measures the value of the Dollar against a basket of foreign currencies. The Euro makes up more than half the index (and European currencies did before the creation of the Euro). The Yen, Pound and Canadian Dollar fill out the bulk of the rest of the basket.
 
I share the chart because I think the pattern shown might surprise you. After all, didn’t the US government run widening deficits after the crisis? Didn’t the central bank engage in “money printing”? And wouldn’t you expect these would drive the Dollar lower?
 
You might’ve. Plenty of people did. And they were (and are still) wrong. “As things stand,” Gave wrote, “we are basically trading roughly at the same levels that have prevailed for most of the post-2008 crisis period.”
 
 
I think there is a good case for a strong US Dollar for the rest of this year and into next.
 
In fact, the US Dollar Index recently put in an 11-month high. There are a few reasons I’d point to for that strength against foreign currencies to continue.
 
First, the US trade deficit continues to shrink. According to the latest readings in June, the deficit shrank by 7%. When the trade deficit shrinks, that means fewer net Dollars flow overseas. Hold that thought.
 
Second, the federal deficit is also shrinking. For the fiscal year ending September 2014, the deficit will be around $500 billion. That’s less than one-third of what it was in 2009 – the recent peak. Lower deficits means fewer Dollars injected into the system.
 
Now put the two together. You know basic economics. What happens when the supply of something gets tighter? Its value rises, assuming demand stays the same.
 
Aye, what about Dollar demand? There is steady demand for US Dollars from abroad, because it is the world’s reserve currency. Meaning just about everyone uses it to settle up international trade.
 
As Gave writes in his book, Too Different for Comfort, it’s not easy to unseat a reserve currency. After running through some history, Gave concludes:
“A reserve currency is thus a bit like a computer operating system – it pays to use the one that everyone else is using, and the more people use one system, the less incentive there is to switch. Once a reserve currency gets entrenched, therefore, it is exceedingly difficult to dislodge, because the benefits of the new currency have to outweigh those of the old one, not by a little, but by a lot.”
Of course, the Dollar’s standing won’t last forever. But I think we can safely say the US will remain the standard for years yet. There is simply no competitor on the near horizon. Not even one that’s close. True, a variety of emerging markets and other countries have learned to use other currencies to settle transactions. That’s just good sense. They’ve been caught short of Dollars before and had to endure a crisis of some sort as a result. But these transactions are small in the scheme of things.
 
Meanwhile, those foreign markets are growing and the demand for Dollars ought to remain at least stable. Thus, the Dollar Index is putting in that 11-month high.
 
Part of the US Dollar strength also comes from the fact that there are lots of attractive assets in the US that foreigners like to buy and own. They have to pay for them in Dollars. Gave makes this point in his book, too. When the US Dollar gets cheap, Brazilians rush in to buy condos in Miami. Canadians pick up second properties in Arizona. Russians buy New York condos. Foreign pension funds buy up US debt, stocks and real estate.
 
And whenever there is a crisis, what do people do? They go to cash, and that means US Dollars. They buy US T-bills. When the you-know-what hits the fan, it is still the Dollar they retreat to. They’re not buying Chinese Yuan. Gold is another asset seen as a safe haven, but the gold market is tiny and off the radar of the big pools of money out there. When a big fund wants safety, it turns to cash – US Dollars.
 
So let’s say the Dollar stays strong. What effect could it have?
 
It could drive US interest rates even lower. If you look at the 10-year securities of the big EU countries, Japan, Canada and other developed nations, you find that interest rates are all lower than in the US But as Gave asks, “Why own 10-year bonds yielding 1%, or Japanese government bonds yielding 0.5% in falling currencies, when you can own 10-year US Treasuries denominated in a rising Dollar yielding 2.5%?”
 
This is the question the market will be asking itself soon, especially as/if that Dollar Index continues to make highs. Then you can expect to see US Treasury yields falling to levels where these other developed markets already sit.
 
All is to say that if you are looking to get out of the US Dollar, cool your jets. As long as the trends above are in place, the Dollar Index might be on the verge of a bigger rally.
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Sep 02

Gold Investment Positive, But Only Just

Gold Price Comments Off on Gold Investment Positive, But Only Just
Summer 2014 sees larger accounts adding gold, but “safe haven” demand still missing…
 

GOLD INVESTMENT demand held positive last month, but only just, writes Adrian Ash at BullionVault.
 
Geopolitics has nothing to do with it. The lesser-spotted “safe haven” demand for gold is notable by its absence, despite the unholy mess in Ukraine, Gaza and Iraq.
 
Who says? Real investor activity does. Bullionvault is the world’s largest gold and silver exchange online. Our Gold Investor Index measures the number of people using BullionVault to grow their gold holdings over those who cut or sold entirely during the last month.
 
The index isn’t a survey of intentions or plans. It is calculated solely from real investment activity in physical gold bullion.
 
A reading of 50.0 would signal a perfect balance of net buyers and net sellers across the month. The peak to date was at 71.7 in September 2011. And in August 2014, the Gold Investor Index edged back to 51.7 from July’s rise to 51.9 – the first rise since February, and only a little above June’s 4.5-year low at 51.2.
Bullionvault's Gold Investor Index
 
Gold investment also stayed positive last month by weight. Indeed, BullionVault customers as a group added gold for the third month in succession – the longest such stretch since New Year 2013.
 
But while the quantity of client gold grew (with Far East storage the stand-out choice), it grew by only 50 kilograms. That took the aggregate across London, New York, Singapore, Toronto and Zurich to a new record for our 10-year old business of 33.1 tonnes.
 
So private investors do continue to grow their holdings. Coupled with that low reading on the Gold Investor Index however, it’s clear that larger accounts are leading – just as they did in June and July. The mass of private investment cash is leaving gold by the wayside, and continues to opt for equities at record or near-record prices instead.
 
Yes, concerns over the equity market are growing. Eurozone investors tell us they’re also increasingly anxious about the shift to money-printing QE set to start in Frankfurt this autumn. But contrary to newswire journalists (or rather, their headlining editors), both prices and gold investment demand remain unmoved by today’s geopolitics.
 
Argentina’s default, the death toll in Gaza, LOL jihadis in Iraq…nothing shook gold from its summer slumber. In case you missed it – because you passed out with boredeom – this is how tedious precious metals became in August 2014…
  • Gold traded in the narrowest monthly price range for five years, a mere $40 per ounce;
  • The monthly average price of $1296 was almost precisely the average gold price of the previous 12 months ($1297.50);
  • Speculators and commercial traders both cut their holdings of Comex futures & options. In fact, open interest (ie, the number of contracts now open) fell to a series of 5-year lows;
  • Investment funds also shrugged and took to the beach. The giant SPDR Gold Trust (NYSEArca:GLD) shrank by 6 tonnes, reversing July’s addition and erasing all 2014 growth so far at 795 tonnes – a 5-year low when first hit this January.
Why no gold investing surge on summer 2014’s geopolitical headlines?
 
History shows gold offers you financial insurance, not a speculation on other people’s troubles. So it’s worth noting that – while gold priced in Dollars ended August unchanged from July at $1285 per ounce – it rose 1.6% for Euro investors and 1.8% against the British Pound.
 
Trouble ahead for the UK and Europe? If only gold investment were that simple. But with geopolitics leaving prices and demand unmoved, longer-term investors…wanting to book a little of that financial insurance for their own savings…do continue to quietly and steadily accumulate metal.
 
That insurance is one-third cheaper now that it was at the peak of the financial crisis (2011 in Dollars and Sterling, 2012 for the Euro). Gold has been flat for the last year. A small group of investors are choosing to make their own decisions…instead of relying on headlines of death and destruction elsewhere for their cue.
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Aug 29

Mines Management to Participate in the 4th Annual Global Investment Conference in New York

Gold Price Comments Off on Mines Management to Participate in the 4th Annual Global Investment Conference in New York

Mines Management, Inc. (TSX:MGT,NYSEMKT:MGN) is set to participate in the Global Investment Conference in New York on Tuesday, September 9, 2014.

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Aug 05

Gold Investment Sentiment Rises 1st Time Since Feb

Gold Price Comments Off on Gold Investment Sentiment Rises 1st Time Since Feb
Record-high gold investment jars with near 5-year low in gold sentiment…
 

GOLD INVESTMENT is boring right now – at least according to the mass of public opinion, writes Adrian Ash at Bullionvault.
 
Larger private investors beg to differ, however.
 
On BullionVault‘s Gold Investor Index, which measures the number of people buying gold versus those selling across the month, sentiment improved in July from June’s 52-month low. But not much.
 
The index rose only to 51.9 from 51.2 in midsummer. It was the first upturn in gold sentiment amongst the self-directed investing public since February.
 
Yet gold investment holdings through Bullionvault rose in contrast to new all-time highs by weight. Because while the balance of buyers over sellers was small, those buyers were busy.
 
Bullionvault’s total client holdings by weight rose to a new record at 33.0 tonnes in July…greater than the gold reserves of Hong Kong, Ireland, Qatar and the Czech Republic combined. All that investment-grade bullion is privately owned and vaulted in specialist non-bank custody in 5 global locations.BullionVault's Gold Investor Index, July 2014
 
Based solely on investor activity, rather than surveyed intentions, BullionVault‘s Gold Investor Index – calculated from the world’s largest pool of real-time physical gold investing decisions online (Fear, Delusion & the Gold Investor Index) – peaked at 71.7 when the metal hit $1900 per ounce in September 2011. A reading of 50.0 would indicate an equal number of buyers and sellers across the month.
 
So as you can see, comparing the index with BullionVault‘s total client holdings, gold continues to see a return of larger allocations, but the broader public remains shy of investing despite this year’s jump in geopolitical risk.
 
People using BullionVault to trade gold have now bought back what was sold during 2013’s price crash. Fewer big sellers last year outweighed demand from new investors. This year has seen the reverse so far.
 
For investors wanting to diversify risk by location as well as asset, Zurich remains the stand-out choice among BullionVault users, but Singapore continues to grow fast.
 
Zurich trading and storage was opened when BullionVault launched in April 2005. The Swiss location now holds 24.3 tonnes of gold – around 73% of client gold property, but still below its record 25.0 tonnes of March 2013.
 
Far Eastern storage was launched in March 2013, vaulting inside the Singapore Freeport. It now holds 1.0 tonne of physical gold belonging to BullionVault users (some 3% of client gold). Holdings in both New York (2%) and London (20%) have slipped in 2014 so far. Toronto storage was added in August last year, and now holds 0.3 tonnes (1%).
 
Starting from a then-record total of 32.9 tonnes at the end of March 2013, Bullionvault users liquidated 1.2 tonnes net over the following three months as prices fell 25% to hit a three-year low of $1180 – a level seen again at New Year.
 
So what’s going on? Why are larger gold BullionVault accounts adding metal while the broader investing public stands aside? The price-crash of 2013 gave a hard lesson in how gold can move when other asset classes do well. Yet by the same token, investment gold prices ended July 2014 at $1285 per ounce, beating all other major asset classes for 2014 so far but erasing half of June’s 5% gain.
 
Moreover, and while other financial markets also continue to ignore ceaseless headlines of death and destruction in the Middle East and Western-Russian saber-rattling over Ukraine, BullionVault users are increasingly worried by geopolitical risk. That’s what they tell us when we speak directly, and also what they said in a recent survey we conducted.
 
More details on that to come. For now, larger customers of Bullionvault are pointing against the risk oblivion of professional fund managers. That latter group, like the mass of public opinion, just isn’t interested in gold. Not yet. Straw in the wind, perhaps. But larger private allocations too gold investing led the bull market starting 2001 and accelerating through the Iraq Invasion to the financial crisis. A growing handful of larger investors are buying gold early and often again in summer 2014.
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Aug 03

War Coming in Europe

Gold Price Comments Off on War Coming in Europe
So says a Moscow insider dismissing the $50bn Yukos Oil fine…
 

ONE HUNDRED years ago a feisty little Bosnian Serb, Gavrilo Princip, shot and killed the Archduke of Austria, Franz Ferdinand, and his wife Sophie in the city of Sarajevo, writes Greg Canavan in The Daily Reckoning Australia.
 
It was the “shot that rang out across the world”. A month later, the world was at war.
 
While historians have subsequently shown that the war was a long time coming – the result of rising imperialism of the great powers and the faltering old Austro Hungarian and Ottoman Empires – no one saw it at the time.
 
Take this contemporary account from Austrian novelist and playwright, Stefan Zweig, recounted in his memoir, The World of Yesterday. In the days following the assassination, Zweig was holidaying in the Belgian seaside resort of Le Coq…
“The happy vacationists lay under their coloured tents on the beach or went in bathing, children were flying kites, and the young people were dancing in front of the cafes on the digue (a bank or dike). All nationalities were peaceably assembled together, and one heard a good deal of German in particular…The only disturbance came from the newsboy who, to stimulate business, shouted the threatening captions in the Parisian papers: L’Autriche provoque la Russie, L’Allemange prepare la mobilisation.
 
“We could see the faces of those who bought copies grow gloomy, but only for a few minutes. After all, we had been familiar with these diplomatic conflicts for years; they were always happily settled at the last minute, before things grew too serious. Why not this time as well? A half hour later, one saw the same people splashing about in the water, the kites soared aloft, the gulls fluttered about and the sun laughed warm and clear over the peaceful land.”
Within a few days, Belgian soldiers arrived on the beach, with machine guns and dogs pulling carts. Then Austria declared war on Serbia. The resort town become deserted. Zweig quickly booked a train back to Austria.
 
Early in the journey, the train stopped in the middle of an open field. It was dark, but Zweig saw freight trains – open cars covered with tarpaulins – heading in the opposite direction. They were full of German artillery heading for Belgium. The war was underway.
 
What’s the point of recounting this story? Well, there’s the regional conflict in Ukraine that’s heating up. But the main point is that no one knows what the future holds.
 
In early 1914, the (Western) world had experienced a long period of economic expansion and freedom. Zweig travelled freely around the world without needing a passport or ‘papers’. Capital and labour mobility were high. There was virtually no income tax (nor was there a welfare state), the Federal Reserve had only just come into existence, and government involvement in all areas of life was minimal.
 
But that all changed with the Great War. It led to the rise of larger governments, the welfare state, and the unions. It led to greater state control of financial markets and it led to systematic inflation.
 
The world changed massively in 1914, and no one at the time would have picked the direction it was heading. Even after the war started, the general consensus was that it would be over by Christmas. As it turned out, it endured nearly to Christmas 1918.
 
These days, people seem pretty certain that the Fed has things under control. That interest rates will stay low for many, many years, stocks won’t have a meaningful decline. They seem confident in China’s ability to manage an historic credit boom, and confident that Australia’s 25 year property bull market will keep on giving. That could well be true. No one knows.
 
But history tells you that things change…often dramatically. It tells you that bear markets follow bull markets…that cheap prices follow expensive prices. That you can’t see the catalyst doesn’t mean it won’t happen. And just because governments and central banks around the world are trying desperately to levitate markets, doesn’t mean they will succeed.
 
And who would’ve thought that 100 years after the peak of the British Empire, the Commonwealth Games would still be going, or more unbelievably, that people still care? Seriously, what a strange little tournament it is.
 
Getting back to the 1914/2014 parallels (which may be a little closer than you think), last week the Permanent Court of Arbitration in The Hague awarded former shareholders in Yukos Oil US$50 billion in damages for having their assets taken from them by the Russian state.
 
Will Russia pay? It’s unlikely. They’ll just see this as a Western attempt to apply further economic sanctions over the standoff in Ukraine. As the Financial Times reported:
“But if Russian state businesses find themselves hit both by western sanctions and attempts to seize assets by Yukos shareholders, relations between the Kremlin and the West could sour further.
 
“One person close to Mr Putin said the Yukos ruling was insignificant in light of the bigger geopolitical stand-off over Ukraine. ‘There is a war coming in Europe,’ he said. ‘Do you really think this matters?’…”
Maybe that’s just a bluff. But economic sanctions are often a path to war. Russia is an energy powerhouse and can inflict great damage on Europe if it wants to.
 
The repercussions for investors are obvious. It all comes down to confidence. When confidence (the belief that, y’know, everything will be fine) evaporates, so does liquidity. And it can go very quickly.
 
In 1914, the two largest exchanges in the world – the London and New York Stock Exchanges – closed for the first time in their history on July 31 to stop capital flight. New York remained closed for four months, London five months. At the time, no one thought such an occurrence possible.
 
That’s the problem. People, even experts, lack imagination during important historical turning points. Following the global financial crisis, the Queen asked a bunch of experts how no one saw this crisis coming. The response was along the lines of, ‘It was a failure of imagination.’
 
Hubris and overconfidence often inhibit the imagination. And if you look around markets and investors today, well, hubris and overconfidence are leaking out all over the place.
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Aug 03

Time to Wake Up to Gold-Diggers

Gold Price Comments Off on Time to Wake Up to Gold-Diggers
Gold mining stocks have been outperforming bullion for the first time in a while…
 

For the FIRST TIME in at least a couple of years, gold mining stock returns have been outpacing those of the yellow metal itself, writes Frank Holmes at US Global Investors.
 
As you can see in the chart below, the New York-listed Gold Bugs Index (NYSEArca:HUI) has returned 22.31% year-to-date (YTD), whereas gold has delivered 7.74%.
 
NYSE Arca Gold BUGS Index (HUI)
 
This is good news for both gold equities and gold bullion. When miners are doing well, gold tends to follow suit. Indeed, since the beginning of the year, spot gold has seen steady growth following a lackluster 2013. As I noted earlier in July, it’s been one of the best-performing commodities of the year so far, a mere nugget’s throw behind nickel and palladium.
 
Gold mining, to be sure, is a tough gig. When gold prices are between $1,000 and $1,200 an ounce, miners barely break even in terms of cash flow.
 
Last year was particularly brutal. The metal plunged 28% – from $1,675 to about $1,200 – which was the largest annual drop since 1981.
 
To reduce risk, many companies have cut costs in several ways. Some have decreased capital spending. Others have sold off assets. Others still have placed exploration on standby.
 
Case in point: One young mining company which we own in our Gold and Precious Metals Fund (USERX) has managed to shrink operating expenses from $4.4 million this time last year to $3.8 million, mostly by lowering legal and advisory expenses. Other realized annual savings have come from administration and staff reductions.
 
Another equity has performed exceptionally well this year, even after gaining 28% in 2013 as the Market Vectors Junior Gold Miners Index was down 61%. It’s currently up 30% YTD and is targeting free cash flow (FCF) by the end of the year.
“This is a great story,” as our fund manager Ralph Aldis explained in a recent interview. “Most people haven’t woken up to it yet.”
Royalty companies are thriving as well. They provide upfront capital to miners in exchange for a stake in future output. Since royalty companies avoid the costly rigmaroles gold miners must deal with on a regular basis – securing permits and building infrastructure, among others – they often receive a healthy return on their investments.
 
Gold might have taken a minor hit last week, but autumn is right around the corner, when the gold jewelry industry traditionally replenishes its stock. And with unrest in Ukraine and the Middle East continuing to drive the fear trade, as unfortunate as these events are, gold prices appear buoyant.
 
This bodes well not only for investors in bullion but also mining companies, which will likely proceed with cost-cutting initiatives to maintain or expand margins.
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