Aug 22

Any Growth in Gold?

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Physical gold looks like the best option according to this:

Gold Mining stocks face a slow, long-term decline in output…

PORTFOLIO Joe Foster calls himself a “stock picker”, says the Gold Report – and he’s pretty good at it.

Class A shareholders in Van Eck Global‘s International Investors Gold Fund have seen an average return of almost 25% for 10 straight years under his care. “I’m looking for the gold companies that are going to outperform the indexes, my peers and gold,” Joe says in this exclusive interview with The Gold Report…

The Gold Report: Joe, in your view, what are the catalysts that will push gold to the next level?

Joe Foster: Well, there could be a range of catalysts, any one of which could rear its ugly head.

TGR: Which ones are most likely?

Joe Foster: The financial system has not yet recovered from the shock of the credit crisis. We’re in the midst of a historic credit contraction that could turn into a deflationary credit contraction. As the Fed and the economy deal with this, there is a range of possibilities that could create a catalyst.

One would be further implementation of quantitative easing, where the Fed steps in and buys securities in order to prop up the financial system. A second is the housing market, which looks like it’s weakening again. If we see a double dip in the housing market, it could create the financial stress that provides a catalyst.

The sovereign debt issues are something that, to me, will be on the table for quite some time. They could flare up again in Europe and elsewhere. State and municipalities’ finances are in very difficult shape right now. We could see some form of stress in the municipal bond market that could cause some sort of a catalyst for gold, as well.

So there’s a range of catalysts that could come into the market over the next year or two that drive it higher.

TGR: The Fed may look at more quantitative easing, but it doesn’t really have a lot of room to operate as far as interest rates go. What sort of economic policy does America need at this point?

Joe Foster: I think our monetary system needs an overhaul. I guess some sort of stimulus, whether it be quantitative easing or some more fiscal stimulus, might be necessary to keep the economy from going into a deeper recession. But I think plans to create a more sound monetary system would go a long way toward boosting confidence in the government’s ability to handle these crises in the future or to prevent them from happening.

TGR: Do you think what is happening now will ultimately result in a new currency down the road? Perhaps even a global currency?

Joe Foster: A global currency would be very difficult. Just to have a sound Dollar again would create a lot of stability around the world. Many other countries still peg their currencies to the Dollar, so proper management of the Dollar would, in effect, create a sound global currency. The Dollar is still the world’s reserve currency. I’m calling for some sound money policies that we haven’t seen since the Dollar was floated back in the 1970s.

TGR: In a June commentary on gold you said, “states across the country are undertaking austerity measures to counter gapping budget deficits.” Could a state, or states, defaulting on loans or even declaring bankruptcy be the next leg down that turns the recession into something worse?

Joe Foster: Well, I doubt it would go as far as a state actually declaring bankruptcy. Congress looks like it’s going to approve another round of state aid to keep the states afloat. I think you would see the federal government step in before we saw a bankruptcy. But states like New York and California and others around the country are in serious financial trouble. We’ll have to see if the austerity measures that they’re implementing will keep them out of bankruptcy. I think this is more of a slow burn. I don’t see it as being the catalyst for the next leg in the gold market. I think we’ll reach the next leg in the gold market before any state reaches such a desperate situation.

TGR: How high do you see gold getting by the end of this year and through the end of 2011?

Joe Foster: I’m looking for it to make new highs as we trend into 2011, moving through the fall of 2010. The high was around $1,265 in June. We’ve been on a steady trend higher. There’s a lot of volatility in the gold market, but I would expect that trend to continue. It wouldn’t surprise me if it moved through the $1,400 level sometime during 2011.

TGR: You said that you believe that the government would step in and prevent a state from declaring bankruptcy or becoming insolvent. Do you believe the government is, to some extent, manipulating the gold market?

Joe Foster: I think that’s speculation. I haven’t seen solid evidence that the government is manipulating the gold market one way or the other. Even if they are, I think the market will determine where the Gold Price goes in the longer term.

TGR: You have managed assets for investors since 1998. In the post-2008 era, are you managing your gold fund the same way you did in the pre-2008 era?

Joe Foster: Well, we’re using the same strategies or similar strategies now that we have since this bull market began in 2001. Relative to our peers, we’re probably overweight in juniors and mid-cap companies and underweight in the large-cap companies. Some of the fundamental strategies that we use remain in place.

I would say that the big difference is that, prior to the credit crisis, we spent a lot of time explaining to investors why they should invest in gold as a hedge against financial stress. Since the credit crisis we don’t spend much time explaining why you should invest in gold because investors get it. Everybody gets it now that gold functions as a sound currency and as a financial hedge in times of turmoil.

I spend more time describing how we construct our portfolio and manage the fund because investors are now asking: “How do I invest in gold? Do I want Gold Bullion? Do I want a Gold ETF? Do I want a managed fund? Do I want an equity ETF?” Those are the questions that investors are asking now that we weren’t hearing prior to the crisis.

TGR: That’s noteworthy. But your asset allocation must’ve changed some since the crisis. You said it’s heavier than your competitors on juniors and mid caps.

Joe Foster: I’ve got an entire range. I’ve got companies from juniors all the way up to the largest producers in the fund. We play the whole spectrum of gold companies. It’s just that I’ve got a higher weighting in juniors and midtiers than I do in the large-cap companies. We’re stock pickers, we’re bottom-up, fundamentals-driven stock pickers. I’m looking for the gold companies that are going to outperform the indexes, my peers and gold.

TGR: You’ve certainly done a good job. Over the last 10 years, Class A shares in your International Investors Gold Fund are up almost 25%. Does gold’s steady climb upward provide a greater margin for error in gold fund management?

Joe Foster: Not really. When you look at Gold Mining, gold production peaked in 2001 and it’s been on a slow decline ever since. In an industry that’s in decline, you know you’re going to have winners and losers. The market likes companies that can provide growth. But in a declining industry those types of companies become fewer and farther between. And there are lots of gold companies that have underperformed gold in this cycle. So stock picking becomes very important. It’s not always easy to outperform gold in this type of an industry environment.

TGR: How do you go about picking stocks? What are you looking for?

Joe Foster: We look for growth. Companies that can develop properties at reasonable cost and that can increase their margins. The best kind of growth is organic growth, where companies discover deposits and develop them. That’s the first thing we look for, organic growth. The second thing would be growth through acquisitions. We look for management that can identify creative acquisitions and grow that way.

TGR: Is it still cheaper for companies to go out and raise money and drill for organic growth versus acquiring assets through M&A?

Joe Foster: It’s very difficult to do. For most of the industry, it’s almost impossible. The reason gold production isn’t increasing globally is that all the easy stuff has already been found. The prolific gold fields of South Africa, Nevada and Western Australia are all mature areas that are in decline. The industry hasn’t found another prolific gold area like Nevada. Instead, they have to look all over the world and into remote areas. There are new discoveries being made; it’s just not at the pace that we saw 20 years ago when Nevada and Western Australia were emerging.

TGR: You mentioned Nevada. When I was looking at your fact sheet on the International Investors Gold Fund, only about 10% of your holdings are based in the US Does America need more gold mines?

Joe Foster: The US is still one among the top-five gold producers in the world. It’s still a substantial gold producer. I don’t know if we need more gold mines. It’s a function of geology. Probably 90% of the gold production in the US comes out of Nevada. As I said earlier, Nevada is past its prime; it’s a region wherein production is in decline.

TGR: But California has banned new Gold Mining projects, and Montana has banned heap leaching as a form of gold extraction. We’re seeing some exploration success in places like Wyoming and Idaho. The US is still the fourth-largest country in the world by area, so you would think there are lots of areas that remain unexplored.

Joe Foster: Well, if the United States was more mining friendly, there’s no doubt it could be a much larger gold producer than it is; but, in all practicality, that’s not going to happen. Mining is such a miniscule part of the US economy that it’s not politically feasible to revise the mining laws in states like California and Oregon. It’s a bit much to ask in places like that.

TGR: Do you have some parting thoughts for us?

Joe Foster: Well, we talked about the gold market more in the near term, but this gold market’s been in bull mode for almost 10 years now. As far as we can tell, it could go on for another 10 years. Who knows? I think the actions we’re seeing among the monetary and fiscal authorities around the world are setting up a situation wherein we could see another inflationary cycle once we get through this credit contraction. I think in the longer term, the risk of an inflationary cycle is going to be with us for quite some time. That’s going to be the ultimate driver of this gold bull market.

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Aug 20

Gold prices rise as USD weakens

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Early week gains for gold bolstered by India festival season.

The price of gold was up again Tuesday as the US dollar weakened and investors expected more interest from physical buyers of gold for jewelry as India‘s festival season approached, while prices for platinum and palladium were higher on a report that US industrial production expanded more than expected in July.
December gold added $2.10 to [...]

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Aug 20

Gold Prices Gearing Up for September Rally

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Will there be a Gold rally soon? this article brings up some important points to consider.

By Melissa Pistilli—Exclusive to Gold Investing News

After a slight dip on profit-taking and a brief pause in trading action, COMEX gold prices climbed to a 7-week high of $1233.90 an ounce in mid-session Wednesday.  Posting a third straight day of gains, the yellow metal closed at $1230.50 an ounce in New York.

Tuesday, SPDR Gold Trust (NYSE:GLD), the top gold-backed ETF fund, reported its first rise in holdings in nearly a week, from 1,286 metric tons to 1,294 metric tons.

The Fear Factor has returned to the gold market this week as a drop in global equity markets and ongoing concerns over global economic health reawakened safe haven sentiments.

“With gold prices managing to forge higher in the face of a weakening global economic outlook and a weaker US Dollar, it would appear that the flight to quality crowd is back on its feet again,” commented Jaime Greenough, Futures Representative at Global Securities, in a note Tuesday.

Deflation vs. Inflation

The big debate amongst gold market analysts recently revolves around the diverging possibilities of deflation and inflation. Those in the inflationist camp see the quantitative easing measures of recession-gripped governments such as the US as naturally leading to the serious devaluation of currencies (such as the dollar) and eventually skyrocketing inflation. Others argue that deflation is a much more likely scenario, and in fact, may already be taking shape. The fear of gold investors in a deflationary environment is that many will rush to liquidate assets, including gold, for cash, bringing down the yellow metal’s price significantly.

As for signals that inflation is rolling this way, inflationists this week pointed to wholesale producer prices increasing for the first time since April and reports that hedge fund Eton Park Capital Management staked a rather large position, about 6.6 million shares, in SPDR Gold Trust ETF in June.

However, those holding the contrary opinion tried to burst the gold bug bubble this week, including MarketWatch columnist Nick Godt and The Wall Street Journal’s Brett Arends.

Despite all the attention given to the threat of inflation, “the bond market, the ultimate barometer of such things, has been telling another story,” quips Godt. “Yields on benchmark 10-year Treasurys, which rise along with inflation expectations as bond prices drop, did rise Tuesday. But the move comes after yields on Treasurys Monday slumped to their lowest level since at least April 2009, just about when hedge funds and conservative pundits began to warn about deficits and inflation.”

According to Godt, concerns of slow growth in the US economy and the rising risk of deflation is what prompted the Fed to buy bonds on Tuesday. He also points out that while Eton Park may have “boosted its holdings,” one of the world’s largest hedge funds and the largest holder of the SPDR Gold Trust, Paulson & Co., has left its stake in the ETF unchanged since March at 31.5 million shares.

“You’ll hear plenty of voices on Wall Street telling you there’s no serious chance of deflation,” says WSJ columnist Brett Arends, who is not impressed by the arguments used to deny the risk of deflation. “Trouble is, they have a terrible track record of predicting these big, paradigm shifts. Over the past decade, few predicted the bear market, the housing collapse or the financial crisis. Their assurances need to be taken with a fistful of salt.”

Arends cites some distressing labor and housing statistics as signs that “deflation may already be here.” Consumer prices haven’t moved since May, hourly wages have fallen 0.7 percent, with a 2 percent drop in the manufacturing sector, from Q1 to Q2, and housing prices have “been steeped in deflation for years.” While other numbers, such as the Federal Reserve Bank of Cleveland’s median inflation index shows underlying inflation near zero.

Fall Season Just Around the Corner

For now, the outlook for gold going into the 4Q 2010 remains positive with many analysts calling for prices well into the $1300 an ounce range.

The Hindu festival of Raksha Bandhan on August 24th will usher in the buying season in India, the world’s leading gold consumer. Gold prices traditionally rally off the summer lows in September as many players come back to the market. And if this year holds true to that seasonality, says Mineweb’s Laurence Williams, “we could expect to see gold’s high point for the year threatened and surpassed” in what might turn out to be “a good September.”

The Street’s Alix Steel notes that prices for the precious metal have “historically [risen] as much as 2.5 [percent] in September, which would push prices towards their intraday high of $1,264 an ounce.”

Matt Zeman, an analyst at LaSalle Futures Group in Chicago, anticipates gold climbing to fresh highs over the upcoming weeks, all that’s needed is more gloomy global economic reports, which shouldn’t be too much of a stretch.

Ashraf Laidi, chief market strategist at CMC Markets, pegs gold at $1,330 an ounce by the middle of the 4Q on rising economic woes, further quantitative easing measures, lower risk appetite, and escalating tensions in the Middle East.

Despite these positive forecasts, some see little real support for higher gold prices. “As long as you see continued U.S. dollar strength I think gold will remain in a corrective/consolidated phase,” says Atyant Capital managing director, Pratik Sharma, who anticipates the yellow metal remaining rangebound between $1,160 and $1,250 an ounce over the coming months.

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Aug 20

What’s Driving Gold Right Now?

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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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Aug 20

Gold Investment Outlook

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Look at the investment outlook for gold. must read article:

Gold Investment has soared in recent years, but looks set to rise further…

MANAGING DIRECTOR for investment at the World Gold Council in New York, Jason Toussaint here speaks to Hard Assets Investor about why institutions are Buying Gold for their portfolios today…

Hard Assets Investor: I’m really happy to have you here, the World Gold Council is a very important organization, representing the gold industry.

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

We do that across a number of primary sectors, four sectors to be precise. We have an investment sector, which I manage on a global basis, which is informing and educating the investment public about the merits of gold in portfolio construction and long-term diversification. We have a government affairs division, which works with central banks, many of them around the world, to understand gold as a reserve asset.

We have an industrial sector, which is dealing with semiconductor manufacturers, etc., to increase and find more uses for gold in the industrial segment. And then, of course, last but not least, the jewelry sector, which is the most important and has the largest demand.

HAI: You work with the Gold Investment area. Is it only recently that we’ve seen larger investors, institutional investors, taking sizable positions, and owning gold as a real asset class?

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

HAI: We should just state that the World Gold Council created the GLD, the very popular Gold ETF that is currently out there right now, and has really taken off among investors.

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

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

HAI: What percentage of gold demand, prior to the ETF, was represented by investor demand? And, what percentage, let’s say, was jewelry fabrication?

Jason Toussaint: Before the ETFs, investment demand was roughly probably 15% of aggregate gold demand. Now it’s upwards of…depending on quarter to quarter…20 to 30%. It’s pretty much doubled.

HAI: So, the biggest component of overall demand, the most important, is the investment side now?

Jason Toussaint: Right. And I think, kind of coming back to the access vehicle, looking at SPDR Gold Shares and, frankly, other Gold ETFs backed by physical bullion available in the world, has really made gold investable for the first time, for many classes of investors.

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

HAI: So we’ve seen a doubling in investment demand – you definitely see that growing further?

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

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

Jason Toussaint: Six trillion Dollars.

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

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

HAI: Well, we’re out of time right now. I want to thank Jason for stopping by.

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Aug 19

Goldman’s Gold

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Interesting article on Goldman and Gold.

Goldman Sachs is bullish on Gold Prices. Reason to worry…?

If GOLDMAN SACHS is publicly bullish on gold, is that a good thing or bad thing for gold bulls? asks Dan Denning in his Daily Reckoning Australia.

Wall Street’s notorious trading house published a report on gold last week setting a price target of US$1300 in the next six months. The report cited several factors. But before we get into them, we’ll confess it made us a bit nervous. Whenever a broker is saying one thing, you have to wonder if they’re actually doing the opposite.

That said, Goldman did make a point that is true of an asset in a bull market: it requires corrections to shake out the speculators and weak hands from time to time. Following the June high north of $1250 the net speculative long positions declined. Traders took profits. And so did momentum players in the exchange traded funds market.

But then something happened that naysayers such as Michael Pascoe and Rory Robertson did not expect. The gold bubble did not pop. Because it’s not a bubble. The momentum players departed and the price found plenty of support. It’s now around US$1220.

Goldman says the big catalyst for a further move higher (other than its announcement leading to a stampede of money into gold short-term) is a repricing of US growth expectations for the rest of this year and all of next. Maybe it’s a fear trade, or just bearishness on US corporate profits when unemployment keeps rising.

Either way, about the only dubious chart we saw in the whole report is the one showing lower US real interest rates and the Gold Price (exhibit five). As those cool cats in statistics say, correlation is not causation. Its possible low rates give speculators fuel to play in the gold market. But it’s more likely, we reckon, that US rates are low because the bond market is pricing in a deflationary scenario.

So why would gold rise in a deflationary scenario? Good question! It brings us full circle to the argument fund-manager David Einhorn made when we announced his gold position: you Buy Gold when you think monetary and fiscal policy are bad (we’re paraphrasing). Whether it’s inflation or deflation matters less than the fact that something unconventional and bad is going down. Gold does well in that environment, what with it being real money and all.

Take a look at the Aussie Gold Price chart below. It shows you that gold is much closer to making a new high in US Dollar terms than it is in Aussie Dollar terms. For Aussie gold to match the greenback gain, you’d need a much stronger greenback or a much weaker Aussie. It’s worth noting that following the Fed’s announcement that it would sort of begin quantitative easing part two, the Aussie made the second-largest declines against the greenback, trailing only the dreaded Esperanto currency, the Euro…

As we have banged on about gold for years now, we won’t test your patience much longer. But last week’s news that the Aussie unemployment went rate up in July wouldn’t be Aussie Dollar bullish, would it?

Maybe the Aussie will get a boost when this miserable Federal election nonsense is over. When thinking about the election we recall the phrase, “Don’t vote! It only encourages them.” Of course voting in Australia is compulsory. But it might be a fine worth copping if you can say you weren’t an accessory to “the advanced auction of stolen goods,” as Mark Twain once put it.

Seriously. If anything is clear so far about the difference between the two major parties, it’s that both treat Australians as chattel. We are but tax slaves who exist to fund the government’s spending pleasures. And the Greens? More like the Reds!

But that’s all politics. Financial independence is the only real defense against this kind of relentless State encroachment from all sides. Get it. Keep it. Defend it. And whether you like it or not, more and more governments across the world are spending out of an empty pocket. They’re spending to give people money that’ve lost jobs as a result of the structural shift in the labor markets. That shift came from globalization. The money might keep people above water for awhile, but it’s no replacement for a real job making real things.

More and more spending is going to simply pay the interest on previously borrowed money. This is probably the most dangerous aspect of a credit bubble. You borrow and spend all that money and, and the end of the day, you have nothing to show for it…no bridges…no roads…no factories…no real increase in the capital stock. Just a lot of over-priced residential housing that suddenly isn’t in such short supply as you thought. And now Australia finds itself at an interesting crossroads.

Just a little debt didn’t seem like such a bad idea at the height of the global financial crisis. Both Australia’s major political parties now promise to pay it off quickly, with all the bounty from mineral and energy royalties. Both will increase spending too, but in different places, cutting other spending priorities.

But should the housing bubble pop sooner rather than later, and should Aussie banks find themselves last in the queue for global capital in another phase of the Great Correction, the temptation for more government borrowing will be nigh irresistible.

Why? Well, our stance against government debt may seem dogmatic. But if it is, it’s because the modern State always abuses the power to borrow. Always. Whether it’s to fund politically popular but economically unproductive projects, or whether it’ just a way of putting off tough choices about actually reducing government spending and, thus, the reach of the State into private life, it’s always easier to borrow and kick the can down the road.

Debt is the health of the State in the same way that liquor is the health of the alcoholic. The relationship is inherently destructive. But we reckon that in the face of so much unproductive debt (household and sovereign) the only politically palatable policy response will be to monetise that debt: pay it off or buy it from bank with new money. The deflationists can enjoy their moment in the sun while it lasts. But it won’t last for long at this rate.

Buying Gold today? “If there’s an easier way, I’ve yet to find it,” says one BullionVault user…

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Aug 18

Gold gains on disappointing data

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Looks like all this bad news is driving gold higher. Here’s an interesting article.

The price of gold rose to its highest close in New York since late June as the US dollar weakened and disappointing data brought out risk-averse buyers who wanted a safe place to put their cash.
December gold added $9.60 to $1,226.20 per troy ounce in New York markets.
Among the disappointing data was the New York [...]

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Aug 16

Gold gains but remains under $1,190 per troy ounce

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The $1,200 dollar has not been broken out. Check out the analysis below.

The price of gold was up for the fifth trading day in a row Tuesday after hitting a three-month low last week.
December gold was up $2.10 to $1,187.50 per troy ounce in New York an a weaker US dollar, and on new data from the US Commerce Department on personal income, spending and savings.
The new [...]

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Apr 02

Relationship Between Gold and USD

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Interesting history lesson on the relationship between gold and the US Dollar.

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