Oct 31

Tea Leaves & $2000 Gold

Gold Price Comments Off on Tea Leaves & $2000 Gold
Yes, some people are still forecasting $2000 gold by year’s end…

BOB and BARB Moriarty launched 321gold.com over 10 years ago, adding 321energy.com the better to cover oil, natural gas, gasoline, coal, solar, wind and nuclear energy as well as precious metals.
Previously a US Marine fighter pilot, and holding 14 international aviation records, Bob Moriarty here tells The Gold Report why he’s 100% certain that a market crash is looming… 
The Gold Report: Bob, in our last interview in February, we had currency devaluation in Argentina and Venezuela, interest rate hikes in Turkey and South America, and a cotton and federal bond-buying program. Just eight months later in October, we’ve got Ebola, ISIS and Russia annexing Crimea plus a rising US Dollar Index. We’ve also got pullbacks in gold, silver and pretty much all commodity prices. With all this news, what, in your view, should people really be focusing in on?
Bob Moriarty: There is a flock of black swans overhead, any one of which could be catastrophic. The fundamental problems with the world’s debt crisis and banking crisis have never been solved. The fundamental issues with the Euro have never been solved. The world is a lot closer to the edge of the cliff today than it was back in February.
About ISIS, I think I was six years old when my parents pointed out a hornet’s nest. They said, “Whatever you do, don’t swat the hornets’ nest.” Of course, being six years old, I took stick and went up there and swatted the hornets’ nest, which really pissed off the hornets. I learned my lesson.
We swatted the hornets’ nest when we invaded Iraq and Afghanistan. What we did is we empowered every religious fruitcake in the world. We said, “Okay, here’s your gun, go shoot somebody. We’ll plant flowers.” We are reaping what we sowed. What we need to do is leave them to their own devices and let them figure out what they want to do. It’s our presence in the Middle East that is creating a problem.
TGR: Will stepping back allow the Middle East to heal itself, or will there be continued civil wars that threaten the world?
Bob Moriarty: We are the catalyst in the Middle East. We have been the catalyst under the theory that we are the world’s policemen and that we’re better and smarter than everybody else and rich enough to afford to fight war after war. None of those beliefs are true. The idea that America is exceptional is hogwash. We’re not smarter. We’re not better. We’re certainly not effective policemen.
The Congress of the United States has been bought and paid for by special interest groups: part of it is Wall Street, part of it is the banks and part of it is Israel. We’re just trying to do things that we can’t do. What the US needs to do is mind its own business.
TGR: You’ve commented recently that you’re expecting a stock market crash soon. Can you elaborate on that?
Bob Moriarty: We have two giant elephants in the room fighting it out. One is the inflation elephant and one is the deflation elephant. The deflation elephant is the $710 trillion worth of derivatives, which is $100,000 per man, woman and child on earth. Those derivatives have to blow up and crash. That’s going to be deflationary.
At the same time, we’ve got the world awash in debt, more debt than we’ve ever had in history, and it’s been inflationary in terms of energy and the stock market. When the stock and bond markets implode, as we know they’re going to, we’re going to see some really scary things. We’ll go to quantitative easing infinity, and we’re going to see the price of gold go through the roof. It’s going to go to the moon when everything else crashes.
TGR: How are you looking at the crash – short term, before the end of this year? How imminent are we?
Bob Moriarty: Soon. But I’m in the market. Not in the general market, but I’m in resources. There’s a triangle of value created by a guy named John Exter: Exter’s Pyramid. It’s an inverted pyramid. At the top there are derivatives, and then there are miscellaneous assets going down: securitized debt and stocks, broad currency and physical notes. At the very bottom – the single most valuable asset at the end of time – is gold. When the derivatives, bonds, currencies and stock markets crash, the last man standing is going to be gold.
TGR: So the last man standing is the actual commodity, not the stocks?
Bob Moriarty: Not necessarily. The stocks represent fractional ownership of a real commodity. There are some really wonderful companies out there with wonderful assets that are selling for peanuts.
TGR: In one of your recent articles, “Black Swans and Brown Snakes“, you were tracking the US Dollar Index as it climbed 12 weeks in a row, and you discussed the influence of the Yen, the Euro, the British Pound. Can you explain the US Dollar Index and the impact it has on silver and gold?
Bob Moriarty: First of all, when people talk about the US Dollar Index, they think it has something to do with the Dollar and it does not. It is made up of the Euro, the Yen, the Mexican Peso, the British Pound and some other currencies. When the Euro goes down, the Dollar Index goes up. When the Yen goes down, the Dollar Index goes up. The Dollar, as measured by the Dollar Index, got way too expensive. It was up 12 weeks in a row. On Oct. 3, it was up 1.33% in one day, and that’s a blow-off top. It’s very obvious in hindsight. I took a look at the charts for silver and gold – if you took a mirror to the Dollar Index, you saw the charts for silver and gold inversely. When people talk about gold going down and silver going down, that’s not true. The Euro went down. The Yen went down. The Pound went down and the value of gold and silver didn’t change. It only changed in reference to the US Dollar. In every currency except the Dollar, gold and silver haven’t changed in value at all since July.
The US Dollar Index got irrationally exuberant, and it’s due for a crash. When it crashes, it’s going to take the stock market with it and perhaps the bond market. If you see QE increase, head for your bunker.
TGR: Should I conclude that gold and silver will escalate?
Bob Moriarty: Yes. There was an enormous flow of money from China, Japan, England, Europe in general into the stock and bond markets. What happened from July was the equivalent of the water flowing out before a tsunami hits. It’s not the water coming in that signals a tsunami, it’s the water going out. Nobody paid attention because everybody was looking at it in terms of silver or gold or platinum or oil, and they were not looking at the big picture. You’ve got to look at the big picture. A financial crash is coming. I’m not going to beat around the bush. I’m not saying there’s a 99% chance. There’s a 100% chance.
TGR: Why does it have to crash? Why can’t it just correct?
Bob Moriarty: Because the world’s financial system is in such disequilibrium that it can’t gradually go down. It has to crash. The term for it in physics is called entropy. When you spin a top, at first it is very smooth and regular. As it slows down, it becomes more and more unstable and eventually it simply crashes. The financial system is doing the same thing. It’s becoming more and more unstable every day.
TGR: You spoke at the Cambridge House International 2014 Silver Summit Oct. 23-24. Bo Polny also spoke. He predicts that gold will be the greatest trade in history. He’s calling for $2000 per ounce gold before the end of this year. We’re moving into the third seven-year cycle of a 21-year bull cycle. Do you agree with him?
Bob Moriarty: I’ve seen several interviews with Bo. The only problem with his cycles theory is you can’t logically or factually see his argument. Now if you look at my comments about silver, gold and the stock market, factually we know the US Dollar Index went up 12 weeks in a row. That’s not an opinion; that’s a fact. I’m using both facts and logic to make a point.
When a person walks in and says, okay, my tea leaves say that gold is going to be $2000 by the end of the year, you are forced to either believe or disbelieve him based on voodoo. I don’t predict price; I don’t know anybody who can. If Bo actually can, he’s going to be very popular and very rich.
TGR: Many people have predicted a significant crash for a number of years. How do you even begin to time this thing? A lot of people who have been speculating on this have lost money.
Bob Moriarty: That’s a really good point. People have been betting against the Yen for years. That’s been one of the most expensive things you can bet against. Likewise, people have been betting on gold and silver and they’ve lost a lot of money. I haven’t made the money that I wish I’d made over the last three years, but I’ve taken a fairly conservative approach and I don’t think I’m in bad shape.
TGR: Describe your conservative approach.
Bob Moriarty: The way to make money in any market is to buy when things are cheap and sell when they’re dear. It’s as simple as that. Markets go up and markets go down. There is no magic to anything.
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Sep 16

The Most Important Chart Right Now

Gold Price Comments Off on The Most Important Chart Right Now
Dollar up, everything down. And the end of QE means it probably isn’t done yet…

I WANT to show you the most important chart in the investing world right now. It’s affecting the price of just about everything else, writes Greg Canavan in The Daily Reckoning Australia.
If the United States’ superpower status is on the decline, you wouldn’t know it by looking at the chart below – the US Dollar index. As you can see, it’s moved sharply higher over the past few months.
The momentum indicators at the top and bottom of the chart are severely ‘overbought’, and the index itself is well above the moving averages. This suggests a correction is imminent, but for now, everything denominated in US Dollars is weak.
The Aussie Dollar, gold, copper, oil and most other commodities have all been under pressure lately. And it’s why share markets around the world are struggling to push mindlessly higher…as they’ve been doing ever since late 2012 when Ben Bernanke and Co. got jiggy with it on the QE front.
But next month, it all changes. For a short time at least, global share markets will experience life without Federal Reserve QE for the first time since 2011.
In short, the market is having another ‘taper tantrum’ as the end of QE draws closer. The last such episode was back in June 2013. As you can see in the chart above, that was when the US Dollar last spiked to its current level.
Being the world’s reserve currency, US monetary policy is essentially global monetary policy. As the US Federal Reservewinds down QE, you can see the knock on effects starting to emerge.
US Dollar strength is just the most notable. Its strength since bottoming in May this year indicates tightening global liquidity. But until recently, the effects of this haven’t been all that obvious.
Emerging markets are usually most vulnerable to a strengthening Dollar. But that vulnerability only began to show in the past week or so, as you can see in the emerging markets index chart below…
Emerging markets rallied to new highs this year despite the strengthening Dollar. Until recently that is – when sharp falls took place, especially in markets like Turkey and Brazil. The Bank for International Settlements warned in its just-released quarterly report that these markets are particularly vulnerable because of increased US Dollar borrowing over the past few years.
As you know, borrowing in a strong currency while revenues and earnings are in a weaker currency doesn’t usually work out well. It places greater pressure on a company to service its debts, leaving less left over for shareholders.
You’ll have to wait and see whether emerging market resilience can continue, or whether the end of QE will finally have a more definitive impact on these peripheral economies.
I don’t know what the outcome will be. But I can say that markets often ignore issues for months on end and then all of a sudden worry about them acutely. Maybe this is just the start of an intense worry phase.
Whatever it is, Australia is a part of it. Our stock market and currency are under the pump, thanks to weaker commodities and a weaker iron ore price in particular. That, in turn, is because of a slowing Chinese economy, which, as it turns out, imports US monetary policy through a partially pegged exchange rate.
The US Dollar’s tentacles have a wide reach. And it touched China on the weekend with the Middle Kingdom announcing weaker than expected industrial production, fixed asset investment and retail sales growth.
The slowdown comes amid a deteriorating property market in China, which for years was the engine of growth for the country. But that engine is sputtering as China’s leaders grapple with trying to rebalance the economy without crashing it. It’s a tough task.
Which is why you can expect to hear calls for ‘more stimulus’ from China grow louder this week, because ‘more stimulus’ always works. If only we had done ‘more stimulus’ sooner rather than later, we’d not be in the position of needing ‘more stimulus’ now.
Economics really is that simple. Money may not grow on trees but it does lay dormant and abundant inside the computers of our heroic central bankers. (In case you need me to say it, yes…I’m being sarcastic.)
For that reason, all eyes will be on the Federal Reserve this week. They gather for a two-day meeting on the 16th and 17th, and boss Janet Yellen gets a chance to move markets with an accompanying press conference at the conclusion of the meeting.
Usually, the Federal Reserve provides soothing words about how interest rates won’t go up for ages and everyone can keep punting without any need to worry. That’s worked well for the past few years.
But the time is approaching where the Fed will actually start having to do something on the interest rate front. Or at least they’ll have to stop pretending they’ll keep interest rates low forever.
In other words, there are fewer rabbits in the hat. Or maybe there are no rabbits left at all?
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Aug 13

Risk? What Risk?

Gold Price Comments Off on Risk? What Risk?
US stock markets, like junk bond prices, are sitting near record highs…

PARTY LIKE it’s 1986 people! urges Dan Denning in The Daily Reckoning Australia.
The S&P 500 is just a few pips off its all-time closing high, hit a month ago on July 3rd at 1,985 points.
‘Unrestricted warfare’ in the skies of Ukraine? So what! Ultra-low global interest rates producing anaemic real growth? So what! Geopolitics as a factor in stock market valuations? So what!
Markets are treating risk like its cotton candy. Emerging market sovereign debt issuance was up 54% in the first six months of this year compared to last year, according to data from Thomson Reuters. Led by the likes of Mexico, Slovenia, and Turkey, governments in emerging markets are taking advantage of low interest rates to stock up on cash. Global investors have scooped up almost $70 billion in emerging market sovereign bonds so far this year.
Is this the new frontier of investing our colleague Kris Sayce is talking about? I doubt it.
Kenya’s government issued $2 billion worth of bonds in June. The offering was over-subscribed. Ecuador – a country that defaulted on its sovereign debt in 2008 – sold $2 billion worth of bonds in June as well. That offering was also over-subscribed.
It’s not just emerging market sovereigns either. The so-called developed markets issued $157 billion in new debt in the first half of the year. And that number doesn’t even include Chinese government debt, which is not yet traded in international markets.
Are you starting to get the picture? A low interest rate world leads to risk-taking behaviour by investors. That’s exactly what you’re seeing right now in the S&P 500’s performance and the demand for emerging market bonds. I’d tell you to be alarmed. But don’t take my word for it.
Billionaire investor Jeremy Grantham says the next bust will be ‘unlike any other’. He told the New York Times that US Federal Reserve Chairwoman Janet Yellen is ‘ignorant’. He’s preparing for the crash. Yellen’s rally may lead to new highs in the US. But from there?
Even Reserve Bank of Australia governor Glenn Stevens concedes there is only so much you can do with low interest rates. You can blow an asset bubble. But you can’t make a business borrow. “If people simply don’t wish to take on new business risks, monetary policy can’t make them,” Stevens told a gathering last month.
Stevens also suggested that the RBA’s next rate move could be a cut. That’s if the non-mining part of the Australian economy doesn’t get off its lazy backside, increase productivity, and start creating jobs and profits. A rate cut might take the steam out of the Aussie Dollar. But it barely budged in reaction to Stevens’ comments.
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Aug 08

The Dollar, Gold & Middle East Oil

Gold Price Comments Off on The Dollar, Gold & Middle East Oil
Prospects for gold and oil as the Middle East sectarianism rises…

In the LAST FEW WEEKS the story of Iraq has faded from the headlines to be replaced by the story on the Ukraine, Gaza and on the business front the tumble of the Dow on the New York Stock Exchange, writes Julian D.W.Phillips in this article first shared with subscribers to The GoldForecaster.
But right now in the world we are watching many structural changes taking place quietly but completely. One is the shift of wealth and power to the east, the rise of the Yuan and its use in a growing number of global transactions in the place of the US Dollar. At the moment Russia is turning its economic head towards China and the developed world doing its best to do so too. And still the east is gaining ground and its share of global cash flow has doubled from 20% to 40% since the beginning of the century. This is set to continue strongly. 
These developments are sending warning signals to us not just that the developed world’s share is waning, but the grip on the world’s currencies by the US Dollar has to weaken over time. Not only is the threat to the Dollar’s hegemony growing from the Yuan, but key to that role, its dominance over the oil price, is in danger.
Of comfort to the US is its rapid rise to oil self-sufficiency, shrinking the threat from the future oil market to the Dollar oil price. But this is extremely critical to the US because it has to retain Dollar hegemony primarily because it runs a constant Trade deficit. If it is required to pay for goods in currencies other than the Dollar it is in trouble. The Dollar’s loss of its role as the sole global reserve currency will happen, but of more importance will be the loss of its power over global financial markets.
As it is the US Dollar has lost its power over China. With $4 trillion in its reserves and its growing ability to trade in the Yuan and not the Dollar it seems secure from any US action to curb its financial power in the world. The only recourse the US has over China will be over that $4 trillion and we wonder if its actions to prevent BNP Parisbas using the US Dollar could possibly be considered by the US under some circumstances? 
Apart from that, the US considers the Middle East oil supplies as part of its ‘vital interests’ in terms of its global power and the power of the Dollar. Ask yourself, if most nations were able to pay Opec in any currency, what importance would the US Dollar hold. Its critical use would be limited to trade with the US The liquidity of the US Dollar market does prevent the easy use of ‘softer’ currencies but the liquidity of the Euro, Sterling, the Swiss Franc and then Yen, together with the arrival of the Yuan on the global scene would provide sufficient liquidity in place of the Dollar. Then where would all those excess Dollars go and what would be their value?
So it is in this context that the importance of the situation in Iraq now becomes of disproportionate importance to the monetary world. 
In trying to extrapolate what will happen there we have to look at the Middle East with eyes that are neither geographical nor political. We have to look at the religious battles going on there and see where they are going to see what will happen to the oil price and in what currency it will be traded.
As a glimpse of the importance of these issues, the seizure of an oil tanker sent to the US for the sale of oil by the Kurds of Iraq, by the US last week has caught our attention.
With the declaration of a new country straddling the borders of Syria in the west and Iraq in the east, the scene is set for the full disintegration of Iraq into three countries along sectarian lines. We now look at what countries lie ahead in the region.
Religious & ethnic groups in Iraq
Each of the borders to these countries will be embroiled in war against each other. The sectarian issues have overwhelmed any political issues, which are being swamped in the process. 
Even the US has lost its influence with the exception of supplying arms to the government it instituted before it left. This government’s history of corruption and prejudice against Sunnis is where the war will become centered.
We see the most northerly ‘country’ being Kurdistan (in cream on the, map), unlikely to want to give up its autonomy rapidly becoming sovereignty and so consolidating its hold on the oilfields of Kirkuk. 
The second ‘country’ is the new ‘caliphate’ under the Sunnis (in light brown on the map), again, because of bitter experience of its treatment under an integrated government in Bagdad, unlikely to want to merge into a future integrated government even if moderate Sunnis win out over ISIS (most unlikely). The third ‘country’ will be in the south (in the darker green) under the Shi’ites, in command of the bulk of the nation’s oil (3 million barrels per day) and export terminal at Basra.
While we see this as the outcome, the cost to the country is likely to be extraordinarily high as the polarization of the two sides of Islam, which will, no doubt, come, will leave the rest of Iraq facing religious ‘cleansing’ because of the many remaining mixed areas of the country, including Baghdad (in light green on the map), where blood baths have and will surely ensue as different groups tried to establish their dominance in these ‘undefined’ areas, as you can see on the map here and chase those not of their religion out of those areas.
With Iran, their historic enemy, now lining up drones and other military supplies to help the government of Prime Minister Nuri Kamal al-Maliki retake the north and protect the south, many Sunnis are becoming become further alienated from the state. But we do not see the current ‘support’ of the American instituted government in Bagdad, by Iran, as being committed to that government, but certainly committed to the Shi’ites in the country. This is not about secular government, or simple geography, it is about religion and oil.
The rapid invasion of Iraq by the Islamic State in Iraq and Syria, which supplied the shock troops of the assault on Mosul, has made vigorous efforts to inculcate a new identity for those living within its growing transnational sphere, setting up Shariah courts and publicizing videos in which its fighters burn their passports. Recently, the group issued an eight-page report denouncing the Middle Eastern border system as a colonialist imposition, and included photographs of its fighters destroying what it called “crusader partitions” between Iraq and Syria.
Across the border in Syria, a Kurdish region in the country’s north is also effectively independent of Damascus, with its own military and provisional government. And Turkey, which in the past strongly opposed an independent Kurdish state on its border, now sees the Kurds as a stable buffer between itself and the extremists of ISIS.
In Iraq, it has long been assumed that the Shi’ite heartland of southern Iraq, where the major oil fields are, would give the Shi’ites a tremendous advantage, leaving the Sunnis with only the vast landlocked deserts to the north and west. But northern Iraq also controls both of the country’s major rivers, the Tigris and Euphrates, which flow southward toward Basra. 
The prospect of a more formal partition in Iraq or Syria would also lead to mass migrations and further turmoil, judging by some recent examples of state partition, like the division of Sudan in 2011, or that of India and Pakistan in 1947. Those breakups were the result of long struggles and led to terrible violence.
While exports from the terminal at Basra are trying hard to make up for lost exports in the north and the oil price has only hit $115, should the conflict see ISIS try to attack the south-west of Iraq and Bagdad, we do see speculators pushing oil prices up to $140. 
We also see Iran taking far more aggressive actions by sending in troops overtly or covertly (which they are doing now) to secure the Shia ‘country’. If the current government collapses (looking very likely right now), we see Iran’s moves to protect the Shi’ites as certainly including controlling Basra. 
They would, we feel try to pacify the US and the oil world by maintaining the current production levels. A failure to work with Iran, no matter the political compromise involved, would see oil prices move up over $140 to the detriment of every economy on this globe!
But would Iran be paid in Dollars? Or as we see Iran, currently under the control of the US vis-a-vis its oil exports (until the nuclear issue is resolved), having these controls lifted. 
Already it supplies China and will have the option of doing so with Iraqi oil too. With the punishment of BNP Parisbas in mind, we would expect Iran to be happy to receive Yuan (Renimbi) in payment of its oil. This would weaken Dollar hegemony and blaze a trail for other nations to move away from the Dollar (as it is now more overtly political). This will directly impact the global monetary system and Dollar hegemony.
As to gold, three factors emerge: 
  • The forecasts of the World Gold Council’s report from OMFIF come onto center stage;
  • The actions of the Iraqi government in buying 90 tonnes of gold can now be seen in context as its currency begins to lose all credibility, as ISIS robs the banks it invades taking the management of that currency to untenable levels;
  • With the Middle East responsible for 20% of the world’s physical gold demand last year, we expect their demand to jump not simply at retail levels but at central bank levels. Whenever war comes into the picture, one of the first casualties is the local currency. The Ukraine is a recent example of this. Even though the country is not at full scale war levels, their currency has fallen 45% this year already.
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Jul 22

Pilot Gold Announces 1.59 g/t Gold and 0.48 Percent Copper Over 130.9 Meters From Surface at Valley Porphyry Discovery

Gold Price Comments Off on Pilot Gold Announces 1.59 g/t Gold and 0.48 Percent Copper Over 130.9 Meters From Surface at Valley Porphyry Discovery

Pilot Gold Inc. (TSX:PLG) reported results from the first five follow-up holes on the new Valley Porphyry discovery in northwest Turkey. All holes returned long runs of copper and gold mineralization beginning at surface.

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Jul 02

Aegean Metals Group Enters into Option Agreement for Turkey Copper-Gold Prospect

Gold Price Comments Off on Aegean Metals Group Enters into Option Agreement for Turkey Copper-Gold Prospect

Aegean Metals Group Inc. (TSXV:AGN,FWB:A91) has entered into an Option Agreement with Lidya Madencilik Sanayi ve Ticaret A.S., a Turkish exploration company. Under the terms of the agreement, Lidya may earn a 70 percent interest in Aegean’s Hot Maden gold-copper prospect located in Artvin Province, Eastern Turkey.

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Jun 17

Gold, Global Interest Rates & the Fed Funds Cycle

Gold Price Comments Off on Gold, Global Interest Rates & the Fed Funds Cycle
US interest-rate phases move gold prices. So does the E7 of emerging economies…

WE RECENTLY welcomed Doug Peta, an economist from BCA research, to our offices, writes Frank Holmes, CEO and chief investment officer at US Global Investors.
He presented some interesting research regarding the Fed Funds Rate Cycle, and in turn, what that research could mean for gold. I wanted to share points from his presentation, as well as our own in-house research, to help you understand the positivity we see for the precious metal looking towards 2015.
Where are we now? Below is a chart from BCA showing the Fed Funds Rate Cycle. In essence, this chart neatly illustrates what the interest rate cycle imposed by the US Federal Reserve looks like. The red circle indicates where we are right now: Phase IV, also known as the “easing” phase of the monetary policy that was enacted in 2008 in the US, better known as quantitative easing (QE).
As we know, the Fed enacted QE to stimulate our nation’s economy. Right now we’re benefitting from our placement in Phase IV of this cycle because it is in this phase that the Fed is able to keep interest rates low, keep reserve requirements low and continue printing money. Similarly, when money is “easy”, businesses can find funding for projects and consumers have easier access to credit.
Historically, Phase IV (as well as the shift towards Phase I) are the best for equity investors because stocks usually rise during these two positions in the cycle.
We have been in Phase IV of the Fed Funds Rate Cycle for a few years now, and are expected to remain here into 2015. Eventually the Fed will have to start tightening again and raise rates, although the numbers should remain relatively low for a while. Once this begins, we will move into Phase I.
When it comes to the performance of gold and gold stocks, history indicates good times are ahead based on where we are in the cycle. Take a look at the tables below showing median returns during the cycle dating back to 1970 and 1971. You’ll see that for gold and gold stocks, Phase IV and Phase I both show the highest median returns.
The reason for the high returns during these two phases is because of “easy money.” Tight money, which is what Phase II and III are based upon, is typically bad for gold investors. When money is tight, we don’t have inflation, and investors don’t need to turn to gold as a hedge against inflation. Without inflation there is no need to hedge.
Another reason we’ve traditionally seen gold investors benefitting during Phases IV and I of the cycle is that when money is easy, interest rates are low, meaning less opportunity cost for holding the precious metal. To help illustrate, imagine putting your money in a savings account and earning 5% on it. Well, the opportunity cost of keeping gold under your mattress would be giving up that 5% that you could be earning elsewhere. When your savings account yields next to nothing, some reason, why not just buy some gold?
This pattern is worldwide; the trends we see in the Fed Funds Rate Cycle are not only US specific. This same idea carries through to the stimulative policies of the European Central Bank and Japan. More countries around the world are applying monetary stimulus programs much like the US, while moving away from more restrictive policies.
Remember, restrictive policies relate to tightening, which is bad for gold prices, and stimulative policies relate to easing, which is good for gold.
Right now, gold could use a pick-me-up, and here’s why. Over the last several years we’ve seen slowing money supply growth in many E7 countries. E7 refers to seven countries with emerging economies including China, India, Brazil, Mexico, Russia, Indonesia and Turkey. It’s these countries that drive the Love Trade for gold, primarily China and India, which purchase the metal for religious and cultural celebrations.
With less money being spent or borrowed, not only did the Love Trade begin to slow, global GDP growth also began to slow as you can see below.
The good news is, as we see various countries applying monetary stimulus, including emerging markets, we can expect this to contribute to global GDP growth. In 2014, global GDP is expected to grow by 3.2%, according to the World Bank’s latest projections.
Similarly, the money supply of the United States has been a steady grower and the money supply in the E7 countries is also expected to reverse course; right now it is growing again but at a slower rate. The US data suggests that a new easing cycle is starting in Europe, Japan and emerging markets.  A pickup in economic activity in the E7, especially the big gold consumers, is yet another positive sign for the yellow metal.
Real interest rates are headed lower for most of the world as well. As money supply grows, countries eventually feel inflationary pressures. This will hold true in the US as we move into 2015 and back into Phase I. All of these changes can lead to a declining confidence in paper money, yet another good sign for gold.
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May 20

Gold Bar & Coin Demand Hits 4-Year Low

Gold Price Comments Off on Gold Bar & Coin Demand Hits 4-Year Low
Gold bar investing fell hard in Q1, ETFs flatlines, jewelry hit 9-year high…

GOLD BAR and coin demand amongst private investors globally fell to its lowest level since early 2010 during the first quarter of this year, says the latest report from market authority the World Gold Council.
Global gold jewelry demand, in contrast, rose to its greatest Q1 weight since 2005, the new Gold Demand Trends says, as “Consumers generally made the most” of the intervening drop in world prices, down 30% across 2013 as a whole and losing 25% in spring last year alone.
“A strengthening economic environment,” says the World Gold Council, “was further supportive for [jewelry] demand.”
Gold investing was “significantly weaker” than early 2013’s elevated levels, reports the mining-owned market development organization, which says the drop in gold bar and coin demand amongst private households came thanks to disappointment that world prices didn’t fall further from New Year’s dip below $1200, plus local currency weakness in some major demand cenetrs.
Bar and coin demand in No.1 gold buyer China and No.2 India – where import restrictions to try and boost the Rupee’s value have forced inflows to the less visible “grey market” – more than halved in Q1 2014, dropping 54% and 55% by weight respectively and falling well over 60% by value from Q1 2013.
India’s year-on-year drop in legal gold imports then worsened in April, notes the latest Precious Metals Update from gold bar refining giant Heraeus, dropping 74% from 2013’s record levels, sparked last spring by the 2013 crash in world gold prices and finally leading the Congress-led government – defeated by a landslide in this month’s national elections – to impose a de facto gold import ban from July.
No.3 consumer the United States saw Q1 gold bar and other retail investment purchases fall one-third by weight and some 45% by value. Turkey’s weak Lira currency pushed local gold prices higher, with the fourth largest consumer market losing 59% of household bar and coin demand year-on-year by weight, down two-thirds in Dollar equivalent terms.
Professional investor demand was meantime neutral, with holdings amongst exchange-traded trust funds steadying after 2013’s liquidation. ETF stocks of large wholesale gold bullion bars, vaulted with major bullion banks to back the value of the trusts’ shares, were flat in Q1 2014.
That compares to outflows of 177 tonnes in the first quarter of last year.
“Flows of gold from Western vaults to satisfy the demand of eastern consumers,” says the World Gold Council, “have slowed as global gold markets have gradually returned to a more ‘normal’ state of affairs” – evidenced by the drop in Asian gold premiums over and above London’s prevailing large-bar price, taken as the benchmark by bullion dealers worldwide.
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May 06

Chinese Tungsten and the REE Quandary

Gold Price Comments Off on Chinese Tungsten and the REE Quandary
“Mine more, lose profits” is a risk for byproduct output of rare earth elements…

CHRISTOPHER ECCLESTONE is a principal and mining strategist at Hallgarten & Company in New York, as well as director of Mediterranean Resources, a gold mining company listed on the Toronto Stock Exchange, with properties in Turkey.
Holding a degree from the Royal Melbourne Institute of Technology, and formerly an economic think-tank, Argentine equity and corporate finance analyst, Ecclestone is now focused on rare earth elements (REEs), targeting what he believes are the right-sized projects with the right REEs, as he tells The Gold Report here…
The Gold Report: In a March Hallgarten & Co. research report, you noted that rare earth elements (REEs) had “come out of hibernation”. Did they wake up happy or grumpy?
Chris Ecclestone: The REEs have run hot and cold since 2009. They had a run for about a year, went off the boil, then had another run.
This all coincided with the worst overall mining equity market in 10-15 years. Thus, REE stocks were doubly out of favor.
Beginning this year, there’s been a better vibe in the mining markets in general. REEs have started to pick themselves up off the floor. They look like a viable investment alternative again. However, I believe that we need at most 20 REE stories. Right now, two are in production. Another four or five will get into production over the next few years. We probably don’t need the rest. There will be a race to get into production. If you can’t win that race, you might as well pack up your tent and go home.
TGR: Do you see higher REE prices? Has the sector bottomed?
Chris Ecclestone: Prices have bottomed, yes. Some people remain bearish on lanthanum and cerium, which are in massive oversupply. Those prices may go lower. However, I believe it’s not in the Chinese interest to see those two metals go lower. Lanthanum and cerium make up the bulk of what China produces in the REE space, but they’re not the value-added metals. Metals like Europium may enjoy better prices, but they’re a small part of the whole REE complex.
China’s bread and butter comes from Bayan Obo, which is not a rare earth mine at all. It’s an iron ore mine that produces REEs as a byproduct. The Chinese can’t stop producing REEs at Bayan Obo because they’d have to stop producing the iron ore as well.
One of the intriguing things about REEs is that you can’t just take the ones you want and leave the others behind. You have to go through the whole chemical extraction process to get those with the biggest market or the best price. You can’t send a metal into the tailings pond because it doesn’t have a good price today. You have to do them all.
You’re stuck in a reverse economy of scale; the more you process, the more unprofitable it could be.
TGR: Given the margins on producing a concentrate or even an oxide, is vertical integration the only way to make money in the REE space?
Chris Ecclestone: The ideal scenario is to be vertically integrated. That is a bit of a challenge for some of the juniors.
Like silicon technology, the mining is not the sexy part of the REE business. No one would say that digging silica out of the ground is the quality end of the tech business. The quality is at Intel’s factory, where the silicon chip is put on the circuit board. The mere insertion of the word “rare” in the name was a marketer’s dream and has ended up being an investor’s nightmare. They’re not rare; they’re as common as dirt.
TGR: The World Trade Organization (WTO) recently ruled in favor of the US in a trade dispute over Chinese exports of REEs, tungsten and molybdenum. Does that change the playing field for junior REE development companies?
Chris Ecclestone: No, because it won’t have much effect on the REE market. I recently attended an antimony conference, where we heard about China’s quota on antimony exports and the fact that it never reaches its quota. Yet, according to the official statistics of individual European countries, their individual imports of antimony from China are higher than the entire Chinese export quota. Chinese export quotas do not affect daily life in the REE sector. They will be smuggled out; they will be walked across the border and become Vietnamese REEs.
I think the Chinese are more interested in controlling the prices of REEs than the supply. Call me conspiratorial, but I think that the Chinese sunk the REE prices in 2011 after having pumped it up. They did that because there was a sudden proliferation of REE properties out of nowhere in the west. The Chinese thought, oops, we’ve shot ourselves in the foot here by attracting all these additional mines. If we let them run down the track with these high prices, five years from now there will be massive overproduction. At that point, the Chinese sunk the prices.
The REE market is easy for the Chinese to manipulate because they have the stockpiles. In 2011, the Chinese released a deluge of product. That sank the price and 75% of the listed REE equities into oblivion. I think the Chinese want to see the prices rise again, but only when they can be confident higher prices won’t trigger another surge of new REE companies.
TGR: How is China’s role today different from its role in 2010-2011, when the sector exploded?
Chris Ecclestone: It plays essentially the same role now. In 2011, China was pretty much the only game in town. India, Malaysia and Brazil had small amounts of production. 
TGR: If China is the kingmaker and in control, why would an investor wade into these waters?
Chris Ecclestone: There are niche categories. One of them is strategic metals. In 2010, you heard a lot about the perception that the West had made itself too vulnerable to Chinese supply of the strategic metals that the western defense establishment needs. Here we are four years later. China is as threatening or as non-threatening as it was back then.
Will the US do anything about it? So far, not much has happened. The US needs to say, “We need a big stockpile of yttrium, of terbium and samarium and other scarce REEs.” Ironically, when you’re talking about rare earths used for, say, night vision goggles, the US defense establishment is probably buying the rare earth oxides that go into those from Japan or China. Meanwhile, Japanese are dependent upon the Chinese. Many of the Japanese plants for processing REEs are being forced to move to China because the Chinese have said, “You’re not getting it unless you move your plant over here.” They’re almost like captives of the Chinese and the Japanese don’t like that. The US doesn’t seem to care.
TGR: Is ilmenite your favorite mineralization to host REEs?
Chris Ecclestone: Ilmenite is not my favorite. It is a titanium-driven product. If the price of titanium goes to hell in a hand basket, some ilmenite projects would follow. The danger some face is dependence on what happens with titanium demand; the REEs are only a byproduct.
I love xenotime because you get yttrium along with it. I like yttrium because of its high-tech uses in anything that must be coated to protect them from very high heat, like jet engines. It’s a very interesting strategic metal.
TGR: The WTO ruling also covered Chinese tungsten. Can you update our readers on the supply/demand equation for tungsten and your investment thesis?
Chris Ecclestone: One of the main uses for tungsten is the filaments in electrical light bulbs. The shift toward low energy-consuming bulbs reduces tungsten demand in that industry.
It’s also used for hardening, including machine tools. China wants to muscle in on the traditional European strength in machine tools. That means using more tungsten, which is what led to the Chinese export quotas on tungsten. Those quotas frightened a number of European companies that depended on Chinese tungsten.
TGR: What should investors expect in 2014 and beyond in the REE space?
Chris Ecclestone: I compare the REE space to a science-fiction movie, where the spacecraft crew is cryogenically frozen. Some of the crew will defrost the way they’re supposed to, but others will be lost.
In the REE space, it will become clearer over the next 12 months which five or six projects are most likely to survive. Many of the other REE companies will change their names and become totally different companies seeking other metals in other countries.
I don’t think there will be a second wave of new REE stocks. This is the universe we have, and it’s getting smaller, not bigger.
TGR: What’s your advice to investors Chris?
Chris Ecclestone: Diversify. If you want to take on REE stocks, buy two or three to mitigate risk.
TGR: Chris, thanks for your time and your insights.
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Apr 15

Gold Price Consolidation

Gold Price Comments Off on Gold Price Consolidation
Gold prices are stabilizing here, says CPM Group analyst Rohit Savant…

ROHIT SAVANT is chief commodity analyst at CPM Group, the New York-based precious metals and commodities consultancy.
Here he tells Mike Norman at HardAssetsInvestor how he sees gold prices consolidating now and rising later in 2014.
Hard Assets Investor: Looking at gold prices, are we locked into this trading range now for a while?
Rohit Savant: We expect prices to sort of consolidate around $1300 over the second and third quarter. Then potentially rise as we head into the fourth quarter and through 2015. We think there was a lot of optimism toward gold in the first quarter. Because I think 2014 started with a lot of optimism about the global economy and things being in extremely good shape.
They probably weren’t in as good shape as the markets were making it out to be. Markets overreact on either side. So they jumped out of equities and moved into gold, pushing gold prices up, which brought in a lot of short-term investors.
Another thing, prices come back down again. So we think basically in the next couple of quarters, you’ll probably see a sort of sideways movement in gold prices before they go up again.
HAI: So the gold price responds positively to weakness in the economy? Because most people look at it as an inflation hedge.
Rohit Savant: Right. Inflation is definitely something that has helped gold prices. But I don’t think inflation is an issue any time in the next two or three years, at least, if not more. And so buying it as an inflation hedge, I think the market’s kind of priced in the potential for inflation back in late 2010 and 2011, and now they’re kind of backing off from that.
HAI: So sort of built into your scenario is a view that we’re going to see a slowdown in economic activity globally?
Rohit Savant: It’s not really a slowdown in economic activity. I think what we’re going to see, in terms of the global economy, is just muddling through. Muddling through for the next several years. No real strong growth. And there’s still a lot of structural problems with the global economy. You still have huge government deficits, trade imbalances. And these things take a lot of time to get results. I think investors know that.
You’re probably going to see value investors campaigning to add to their gold holdings every time prices come off, which is why we don’t expect gold prices to collapse, we think consolidated to a relatively high level. It’s the shorter-term investors who really can push gold prices up strongly. I think when they see that gold prices have consolidated, they’ve reached close to the bottom, you might start seeing them come back into the market.
HAI: We’ve seen lots of demand in recent years from China, India and central banks such as Russia. Are those factors still there, or have they curtailed their buying?
Rohit Savant: Physical buying by China and India would continue, we think. China would continue to buy gold in large volumes, at least this year. The rate of growth, we think, would be much slower than what we’ve seen in the past couple of years. But they would continue to buy gold.
There is a possibility that maybe a couple of years out, you might not see this kind of strong growth out of China. You might even see a decline. It’s typical of any market to show weakness. And that could potentially hurt gold prices, because a lot of investment demand in the West is based on this strong Chinese demand. But in the short to medium term, we think Chinese would continue buying slower growth rate than before.
HAI: We’ve seen the RMB drop to about a 14-month low against the Dollar. Is this decline in the Chinese currency a factor, in any way, in demand for gold?
Rohit Savant: I guess, to some extent, the currency definitely plays a role in demand for gold, a weakening of domestic currency would typically increase the cost of imports into the country. So that would, to some extent, hurt demand. But that said, I think, in the case of China, be less of an issue than, say, in the case of India, where the currency has been hit a lot more strongly.
HAI: It’s coming back though…
Rohit Savant: It’s coming back. But it was badly handled. It’s still off quite a bit. But it has improved. So in the case of a country like India, that probably pays a much, much larger role. For example, you saw imports in Turkey during the first two months of this year literally collapse compared to, if I’m not wrong, I think they were off by about 75%. So there was like a strong decline in imports from Turkey, which is also a major consumer of gold, and doesn’t get as much attention because of this weakness in currency.
HAI: As emerging economies modernize, as their monetary systems become more mature, do you think we’ll start to see some pullback in gold demand from these places?
Rohit Savant: I think in the case of countries like China and India, yes, you might see an increase in demand for paper assets as those economies become more developed. But I also think it’s culturally engrained for people in these countries to buy and hold at least some amount of gold. And that’s an extremely huge rule of populations in both these countries, where at least they’re not going to have access or advisors to give them advice to invest in paper assets.
So in most of these cases, what they tend to do is convert their savings into gold. That’s what you’re seeing, even today. Most of the gold buying comes out of the ruling leaders in these countries.
HAI: How does the mining situation look?
Rohit Savant: Mine supply actually grew last year. It’s growing this year, which comes as a surprise to some people, because prices have come off. Typically, mine supply does not get affected immediately. It usually takes a few years before mine supply starts getting affected. So we have mine supply growing this year as well as next. A lot of new projects came on-stream in the past couple of years. Those projects are going to be ramping up. So mine supply’s in good shape.
It’s secondary supply [aka scrap gold] which is a lot more price-sensitive. We have that coming off. It came off about 17% last year. Would have been much stronger if it weren’t for India, where India, secondary supply grew, because the import restrictions used the available supply. And so that was being met by secondary supply. We continue to see a secondary supply decline this year as well. And maybe over the next couple of years, it sort of stabilizes.
HAI: All right. Rohit, thanks very much.
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