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.

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Oct 25

Bernanke: A Hole in the Air

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Lies, central banking, and George Orwell…

On FRIDAY, 15 October 2010, Federal Reserve Chairman Ben S. Bernanke delivered a dishonest speech, writes Fred Sheehan in The Daily Reckoning.

What follows is not a critique of the talk, Monetary Policy Tools and Objectives in a Low-Inflation Environment, since that would be redundant. Please see one of my recent articles "Exploiting Bernanke" (September 21, 2010), which discussed the anticipated speech of October 15, 2010.

Bernanke’s mendacious speech confirmed my general investment advice:

"Courses of protection include buying farms (including machinery companies, grain commodity funds, water rights, and desalinization companies), as well as precious metals, mining and drilling companies, and freeze-dried food."

As a guess, Bernanke’s current intention (this will change, and change often) is to add a trillion Dollars to the economy. Such a wild, mad experiment has never been attempted before, outside of Argentina, Zimbabwe, and such.

The reason last Friday’s speech could be analyzed three weeks before it was delivered is Bernanke’s predictability. He will do nothing that veers from the course he found convenient for personal advancement three decades ago. He has neither said nor would dare process a thought that deviates from his doctoral thesis.

Even the title of his latest speech is a lie or stupid, as you wish – broadcasting as he did our "Low-Inflation Environment". Inflation is practically everywhere that counts: food, insurance premiums, utility bills, tuitions. ("Where it counts" does not include the deflation of what really counts: wages, net wealth, house prices. This is why the "inflation vs. deflation" question is false.) Commodity prices keep rising, partially because there is greater demand than supply; partially because we are used to seeing oil and corn quoted in Dollars. Producer and consumer prices generally lag commodity prices. The length of the lag differs. Anywhere from three months to one year captures most instances, under normal conditions. (When further depreciation of the Dollar against commodities is anticipated, the lag will be compressed.) The Dollar has fallen against a basket of currencies by 13% over the past 18 weeks. It is prudent to at least hedge for a contraction of this lag.

Bernanke’s speech was characteristic. He turned logic on its head and ignored the most debilitating consequences of his past actions. The Fed chairman used official government numbers to claim inflation was too low. Homage to government inflation calculations should have, alone, been enough for the media to ignore anything else he said. Of course, he was dutifully quoted and taken at his word.

It was not that long ago when an economist who claimed inflation was too low would have lost credibility. Bernanke stated "that FOMC participants generally judge the mandate-consistent inflation rate to be about 2 percent or a bit below." The FOMC is the Federal Open Market Committee – the body that has absolute authority to act upon such inverted thinking as 2% inflation being good for the country.

A step back, to 1957: This was a time when academic economists were learning that theories manipulated to satisfy politicians could put themselves in positions of power. Most from this guild never dreamt anyone outside a college classroom noticed their existence. They miscalculated, as is the rule for these humbugs.

Politicians want money and credit to fulfill their constituents’ every wish. A Harvard economist told Congress that the US needed a 2% rate of inflation to defeat communism. Washington loved him.

On August 13, 1957, William McChesney Martin, the Federal Reserve chairman at the time (and not an economist – he had been a Latin scholar at Yale, so understood that shortcuts destroy empires), lectured the Senate Banking Committee on the specific topic of the Federal Reserve "targeting" (Bernanke’s word – not Martin’s) a 2% rate of inflation:

"Consumers are encouraged to postpone saving and instead purchase goods which they do not immediately need, and the incentive to strive for efficiency no longer governs business decisions…and speculative influences impair reliance upon business judgment."

Of utmost importance, groups struggle to insulate themselves from the loss of purchasing power, then "fundamental faith in the fairness of our institutions and our government deteriorates."

The Bernanke Fed has stated its current policy is to chase consumers out of savings and into speculative ventures. That is exactly the recipe for the Fed to accelerate its impoverishment of the American people. Alan Greenspan, of course, was the master at jumbling a few words to distract attention from this long-running plan to prevent the Fed’s extinction. Bernanke also resorts to nonsense. From his October 15, 2010, speech: a 2% rate of inflation is to "attain…price stability" and to "bring the unemployment rate down significantly." He is doing exactly the opposite of what he pretends

George Orwell wrote about "[t]his lunatic world in which opposites are turned into one another." That was not lunacy for lunacy’s sake, nor is it today.

In 1940, Orwell wrote of World War II: "After 1936, of course, the thing was obvious to anyone except an idiot." He was not erasing his own past, as was common with many others and is universal among "experts" today. (See the first paragraph of Ben Bernanke’s October 15, 2010, speech.) In 1938, upon returning to England from continental Europe, Orwell had written about the…

"familiar streets, the posters telling of cricket matches and Royal weddings, the men in bowler hats, the pigeons in Trafalgar Square, the red busses, the blue policemen – all sleeping the deep, deep sleep of England, from which I sometimes fear that we shall never wake till we are jerked out of it by the roar of bombs."

The bombs flattened London in 1940.

The British institutions in the 1930s were in the same condition that the Federal Reserve, other government manipulators, the so-called economics profession, and the revered think tanks are in today. Orwell wrote of Neville Chamberlain, British Prime Minister from 1937 to 1940:

"He was merely a stupid old man doing his best according to his very dim lights. It is difficult otherwise to explain the contradictions of his policy, his failure to grasp any of the courses that were open to him. Like the mass of the people, he did not want to pay the price either of peace or of war."

At another point:

"Tossed to and fro between their incomes and their principles, it was impossible that men like Chamberlain should do anything but make the worst of both worlds."

This is an apt summation of the desiccated American hierarchy today. It is withering into dust.

Chamberlain had trusted Hitler, as had his predecessor, Stanley Baldwin. As prime minister, Baldwin had suppressed information about Hitler’s rearmament, sleeping, as was his wish, the deep, deep sleep of England. Orwell wrote:

"One could not even dignify [Baldwin] with the name of stuffed shirt. He was simply a hole in the air."

Baldwin did everything he could to prevent any disruption to the exact relations that existed among the social and political institutions of the day.

Winston Churchill, not in office but a nuisance to the established order, knew the proportions of Nazi rearmament and gave speeches in Parliament with uncomfortable details. Baldwin’s cabinet voted to ban "independent views" from the BBC. Sir John Reith, dictator of the BBC, prevented Churchill from speaking. CNBC does much the same today, as does the print media.

Geoffrey Dawson, editor of The Times of London, suppressed Churchill’s views as well as those from Times reporters whose dispatches from Europe might upset Hitler. In 1935, Dawson wrote, "I do my utmost, night after night, to keep out of the paper anything that might hurt their [Nazi] susceptibilities." He wrote this letter because he could not understand the Fuhrer’s ingratitude after, in the words of William Manchester, "five years of jumping through Hitler’s hoops."

Dawson was not a Nazi but a dense, frightened old man who wanted the world to stand still. We can see the same combinations of dis-enlightenment that keep the American public in the dark today. An example is the coordination among government agencies (their data dissemination propaganda) and the Federal Reserve’s contorted views as expressed through the country’s news collection agencies.

The Associated Press released the following on October 14, 2010, a day ahead of Bernanke’s speech:

"Wholesale prices tame beyond volatile food, energy

"(AP) Wholesale inflation stayed tame last month outside of a sharp rise in food and energy prices. Moderate price inflation allows the Federal Reserve to keep the short-term interest rate it controls at a record low of nearly zero, where it has been since December 2008."

With that, the AP assured its access to the Fed chairman.

In 1952, Bernard Iddings Bell wrote Crowd Culture, in which he discussed a wartime incident:

"When Russia was Hitler’s ally in World War II, the American people were told by the papers, and believed, that the Russians were little short of fiends. Suddenly Russia changed sides…[S]he became our ally.

"At a dinner in New York at that time, I sat next to a high-up officer of one of the great news-collecting agencies. ‘I suppose,’ I ventured, ‘now that the Muscovites are on our side, the American people will have to be indoctrinated so as to stop thinking of them as devils and begin to regard them as noble fellows.’ ‘Of course,’ he replied. ‘We know what our job is in respect to that. We in the working press will bring about a complete and almost unanimous volte face in the belief of the Common Man about the Russians. We shall do it in three weeks.’ He was right about it. The papers, fed by the news agencies, did just that."

On March 29, 1943, Life magazine published a "Special Issue USSR". On the front cover is a portrait of Uncle Joe Stalin, beaming downward, as if the dictator is looking upon his 3-year-old nephew who just counted to 10 for the first time. Over 100 pages of the issue describe the Soviet Union’s wholesome leaders and their obliging peasantry.

Among the wholesome leaders is Vladimir Ilyich Ulyanov (Lenin), with a similar, avuncular portrait, as if he’s looking at the same nephew who just counted to 20. The article, "The Father of Modern Russia", starts off "Perhaps the greatest man of modern times was Vladimir IIyich Ulyanov." It goes uphill – or downhill – from there, depending on one’s view.

Flipping through the issue, the article "Collective Farms Feed the Nation" is worth a look. Pictures of the peasants are inspiring. They were a happy lot. The story starts off: "Although Russia was always overwhelmingly an agricultural country, most Russians used to go hungry."

Later in article: "Whatever the cost of farm collectivization, in terms of human life and individual liberty, the historic fact is it worked." The cost of farm collectivization included several million Ukrainians who had been starved to death in the early-1930s.

"Collective Farms" could be written by an economist – then or now – without irony or conscience. Such a contortion of reality would do wonders for a rising academic or Federal Reserve staffer.

Orwell was harsh in his criticism of the intelligentsia, whose loyalties were as fickle as their abstractions. He did not confuse the term, intelligentsia, with intelligence. It was a collection of layabouts who, in a "desire for psychological escape" indulge in "chauvinistic sentiments that would be totally impossible if you recognized them for what they were." Such a person is "capable of the most flagrant dishonesty, but also – since he is conscious of serving something bigger than himself – unshakably certain of being right."

In their world: "Material facts are suppressed, dates altered, quotations removed from their context and doctored to alter their meaning." Communism was an outpost for many of the intelligentsia in the 1930s. John Reed, author of Ten Days That Shook the World (about the Russian Revolution), had willed the publication rights of his book to the British Communist Party. Reed died in 1920. The British Communist Party did exactly what Moscow wanted: it published an edition that excised Leon Trotsky’s role in the revolution and deleted an introduction by Lenin.

Orwell wrote: "Events which, it is felt, ought not to have happened are left unmentioned, and ultimately denied." British Communists were badly shaken by the Russo-Nazi pact (Molotov-Ribbentrop) in 1939, an eventuality not difficult to forecast by a party whose subservience to Moscow should have animated its consciousness towards Russian self-interest.

Bernanke, the Fed, and the other weary institutions fall within Orwell’s description of Chamberlain and his circle:

"What is to be expected of them is not treachery or physical cowardice, but stupidity, unconscious sabotage, an infallible instinct for doing the wrong thing. They are not wicked, or not altogether wicked; they are merely unteachable. Only when their money and power are gone will the younger among them begin to grasp what century they are living in."

Of Bernanke today, he is a combination of both the establishment and the regimented intelligentsia that has acquired power. Orwell wrote of the intelligentsia:

"Clearly there was only one escape for them – into stupidity. They could keep society in its existing shape only by being unable to grasp that any improvement was necessary"

After a time, which looks like it will be after Bernanke and his comrades have done their worst, a leader, looking at the world as it is, may state:

"Difficulties began to build up in the economy in the 1970s, with the rates of economic growth declining visibly…A lag ensued in the material base of science and education, health protection, culture and everyday services. Though efforts have been made of late, we have not succeeded in fully remedying the situation. There are serious lags…in the improvement of the people’s standard of living."

Thus spoke Mikhail Gorbachev in his 1986 speech to the 27th Communist Party Congress when he effectively declared the institutions which had colluded to bankrupt the nation’s economy and spirit were dead.

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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.

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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.

Get the safest gold at the lowest prices by using London bullion-market member, the World Gold Council-backed and Queen’s Award-winning BullionVault…

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Aug 20

What’s Driving Gold Right Now?

Gold Price No Comments »

It’s important to understand the underlying driving force for gold. Here is an interesting article that highlights this.

The key factors driving Gold Prices, plus those less-important elements…

RIGHT NOW, it appears that the Gold Price is being linked to the state of global economic growth or lack thereof, writes Julian Phillips of The Gold Forecaster.

Is it? Or are there other factors that contribute to the rise in the demand for gold? A look at the different types of demand gives us perspective on the real influences on the Gold Price.

Start with China’s contribution to the Gold Price, because this week saw an announcement that China is now the second largest economy in the world as well as being the world’s largest exporter. This is a landmark announcement as this country is headed fast to be the world’s largest economy with the world’s largest foreign exchange reserves.

As a nation, we do believe China is Buying Gold, eventually for their reserves, from local production as well as in the market. Additionally, the government and its institutions are encouraging the rapidly swelling numbers of newly enriched middle classes to Buy Gold. It is hard to give you an accurate number on this because such growth has never been seen before.

But there is a brake on the relationship of the growth of this class as regards gold. The Chinese are savers and because of their skepticism, recent experience of being poor and inexperience, they are not quick to change from the simplest of saving-account deposits to other investments. But overall they are happy with gold as an investment and are moving across to it, particularly as they understand the benefits of a rising price. Their obedience to government directives is helping the process. They have the lowest per capita holding of gold in Asia. We attribute this firstly to the long history of hardly any disposable per capita in the country. This is changing fast.

The demand is not seasonal except that it reaches a high point at the Chinese New Year, a time for people to celebrate and give presents. After New York closes, Asian demand kicks in at the start of their day pointing towards Indian, Indonesian, etc. demand, including that from China. Watching the market right through to before London opens, also gives on insight into demand from there.

Please note, this demand does not take note of the state of European or US economic growth. Most Chinese gold buyers are not aware of Western economics, but want financial security through savings in Yuan and gold.

Chinese demand is going to be large enough to be a major Gold Price driver in 2010 and 2011 and beyond.

Indian demand is also crucial. The monsoon this year (south of Pakistan) has been plentiful and expectations are that the harvest will be a good one. As 70% of gold purchases used to come from the agricultural sector, this time of the year is significant still. But as India urbanizes, the seasonality of gold buying there is lessening. Because the disposable income of Indians in the countryside is limited, the tonnage of actual gold purchased by them is falling. On the other hand, the numbers of the middle class is increasing and so is their disposable income.

To a growing extent this is making up the volumes that could be bought. The volume purchased per annum has been as high as 850 tonnes but can fall to 400 tonnes a year. The monsoon has had as much to do with that alongside rapidly rising prices. Please note that this difference is the same as de-hedging demand from the major Gold Mining companies was at its height.

Although India is growing at 8% per annum, the Indian middle classes are not growing as fast as China’s middle class. The main restraint on Indian gold buying is the fear that the Gold Price will fall after they have bought it. This year we do expect them to be more enthusiastic because the Gold Price has been stable over the last year and more at around $1,200.

They usually start to buy just before or after the beginning of September. That’s in two weeks time. Indian demand goes on through the year to May of next year.

Indian demand has been a major gold demand sources and is going to be a growing force, in line with Asian growth in 2010 and for years to come. As with China, western economic growth or lack thereof, does not affect Indian demand.

Developed world jewelry demand will also play a role. With the northern hemisphere and developed world holidays slowing down to early September, manufacturers of gold jewelry there start to gear up for the year end festivities. They Buy Gold for this time in September so that it can be in the shops in November or earlier. This has, in the past been the largest source of demand for gold.

Developed world demand relates directly to developed world levels of disposable income. These are not good this year, so we expect no increase in demand from that source. Disposable income has been well down since the start of the housing crisis, which began towards the end of 2007. We don’t expect them to rise for at least one year. But the buying that will take place will begin round about the beginning of September and last through to November before it slows to the steady flow up to May of next year.

If the Gold Price does not rise by much this demand will rise in significance, but we feel that it will again be sidelined by rising prices soon.

Industrial demand, in contrast, doesn’t matter so much for Gold Prices. Intel’s recent results and following comments showed us that electronics have now joined the category of ‘necessary’ items for households and businesses. As electronics are the main use for gold in industry, we do not expect there to be any significant drop in demand from industry. Overall, industrial demand is not seasonal, but such demand is not a major factor in the Gold Price.

As for demand from Central Banks, we are of the opinion that the turn in the market, by central banks from seller to buyers, overall is a trend that has barely begun. Russia, China, Saudi Arabia, the Philippines and no doubt to be joined by others in the future, are buyers of gold. Previous sellers have now taken a firm grip on their remaining holdings. Last year central bank buying equaled over 400 tonnes.

The monetary crises that lie ahead in the next year or two will, we believe, will incite much more buying by central banks as confidence in the monetary system continues to decline.

The International Monetary Fund’s sale falls out of this category, but is a supplier at the moment. Of its 413 tonnes there remains around 150 tonnes. We expect to see this absorbed completely within one year. Once this has gone prices will rise to the point where dishoarding begins, so providing the market with supply.

Again this demand is non-seasonal. However, it not only leads investment demand, it has the capacity to absorb all available supplies. Further, once its persistent visibility is accepted, it will incite considerably more institutional investment demand. Central bank demand these days is aimed at giving central banks liquidity when its nation faces international monetary credibility problems. We expect to see this demand rise in 2010 and 2011.

Finally, Gold Investment demand. Apart from the huge demand we have seen for the shares of gold Exchange Traded Funds enormous demand for physical gold bullion has been present in the market place. It is persistent and large. However, it will not chase prices. It is professional and aims at buying certain amounts at particular prices. It ranges from small wealthy individuals through to institutions to Sovereign Wealth funds. You need to know how all these demand forces come together and impact the Gold Price!

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