The advantages of investing in gold, the real money

“Betting against gold is the same as betting on governments.
He who bets on governments and government money bets against
6,000 years of recorded human history.”
--Charles de Gaulle

There is much confusion today over the role of gold. It is viewed as a commodity, as an investment, as a position to be traded. But if we set aside these preconceived notions and examine why gold and precious metals are resuming their historical role as money the world over, if we establish a gold mindset, we will see that their real value lies in forming the foundation of an investment portfolio, because precious metals provide the ultimate in wealth protection.

While gold is a commodity that has multiple industrial uses in the fields of electronics, engineering and medicine to name a few, it is much more than that. Quite simply, gold is money. Throughout history there have been many forms of money, from salt to grain to shells to the fiat (paper) currency that is used today. Most don’t stand the test of time. Gold, however, has endured as money for over 3,000 years. This is because it meets all the criteria for money, where others have failed.

To satisfy the functions of money, an item must be a unit of account, a medium of exchange and a store of value. Gold is all of these things; it is durable, portable, divisible, consistent, intrinsically valuable and, of crucial relevance today, it cannot be created by central banks. Gold is a tangible asset; fiat currency is merely printed paper created by government decree. It is only the promise written on the paper that gives it any value. Paper money is not a store of value; both the US dollar and the Canadian dollar have lost over 82 percent of their value since 1971.

Gold is traded on the currency desks of banks, not the commodity desks. The financial institutions of the world understand gold is money. The daily turnover in gold at the London Bullion Market Association is over $20 billion, but the actual volume traded is estimated at five to seven times that amount. This isn’t jewelry being traded, this is money. Central banks hold gold as part of their reserves, they understand gold is money, and since 2009 have become net buyers of gold for the first time in decades.

The financial debt situation in the US has become unsustainable. In 2010, US federal revenue was $2.16 trillion. Today, total outstanding public debt is $14.3 trillion and growing at a rate that nearly equals revenues. However, if we include unfunded liabilities such as Medicare obligations, Social Security obligations and military and civil servant pension obligations, the real total amount is over $120 trillion. It is not remotely realistic to assume that the US can support or repay $120 trillion of debt with $2 trillion of revenue. Is this situation being taken seriously? The answer is no, the US is driving past the stop sign and through the red light. This year, the US has distinguished itself by being the only advanced economy to increase its underlying budget deficit in 2011.

If we take into account over-the-counter (OTC) derivatives, the situation is even more dire. Total OTC derivatives – conservatively estimated - amount to $600 trillion (several sources say it is closer to $1 quadrillion). This is an incomprehensible number considering that world GDP is only $60 trillion. How is this possible? Using the conservative number of $600 trillion, the entire world’s GDP is swallowed if 10 percent of the $600 trillion fails and requires a bailout. Renowned gold commentator Jim Sinclair describes the characteristics of OTC derivatives and I’ll paraphrase. OTC derivatives are:

1.Without regulation;
2.Without listing on a public exchange, there is no open market for bid/ask;
3.Not transparent;
4.Dealt in private treaty negotiations;
5.Unfunded without financial guarantee of any kind;
6.Ability to pay dependent on balance sheet of the loser;
7.Evaluated by computer assumptions that assume all markets return to normal relationships regardless of disruptions;
8.Notional value becomes real value when the agreement is forced to be sold;
9.85 percent of OTC derivatives are interest-rate sensitive.
Does the fact that there is a minimum of $600 billion of these “weapons of mass financial destruction” (Warren Buffett) concern anyone?

So, is it remotely realistic to assume that the US can support or repay $120 trillion of debt with $2 trillion of revenue? The answer is no. The debt, the unfunded liabilities and the potential/probable percentage of further OTC derivative failure bailouts cannot be supported without resorting to QE3, 4, 5 and so on.

The US is “cash flow insolvent,” as they can no longer meet their debt obligations on time as they become due. If it were not for their ability to monetize trillions in debt and bailouts via the printing press, this saga would have been over many years ago. The debt has been kicked down the road and it will only get worse as time goes on. Accept the pain now and it will hurt. Delay it and it will be extraordinarily painful.

While the rate of increase in money supply is increasing, the concept is nothing new. The Federal Reserve has expanded money supply since 1971, when the US came off the gold standard, from $776.6 billion to $13.937 trillion as of December 2010. The increase of currency has become exponential and is already leading to inflation sweeping throughout the economy. This ‘scheme for the confiscation of wealth,’ as former Federal Reserve Chairman Alan Greenspan described inflation in 1966, has been devouring purchasing power ever since the gold standard was cut.

 In fact, as the rate of money supply increases, so does the devaluation. All the world’s major currencies have lost between 70 and 80 percent of their value compared to gold in the last decade alone. Gold, meanwhile, has gone up nearly 4,000 percent since 1971. In truth, it is not only gold that is rising, it is currencies that are depreciating compared to gold.

In a magnificently researched book, This Time is Different: Eight Centuries of Financial Folly, Carmen M. Reinhart and Kenneth S. Rogoff found that serial default on external debt – that is, repeated sovereign default ¬– is the norm throughout nearly every region in the world, including Asia and Europe. Default is likely to be accompanied by a currency crash and a spurt of inflation and, historically, significant waves of increased capital mobility are often followed by string of domestic banking crises. These crises tend to occur in clusters and one type can easily trigger another. Real estate bubbles invariably give way to banking crises. Losses in the financial sector are followed by a sharp deterioration in government finances amid bailouts and decreased tax revenue. The decline in economic output that follows the bust is sharp, but the recovery tends to be slow and protracted. The situation is especially dire when the crisis is geographically widespread.

Someone once said that there are no new things, just the same things happening to new people. This time is not different, yet it seems like many of us are blissfully unaware of the severity of the issues and not adequately preparing to benefit from this crisis. Yes, I said “benefit”. The investment winds are always blowing in some direction and we have to set our sails accordingly. Inflation lies ahead and history shows that, under inflationary circumstances, allocating to precious metals is a wise move.

When we consider that total global financial assets are estimated at over $200 trillion, but total global above-ground investment gold is a modest $3 trillion, and only growing by approximately 2,400 tonnes a year, we can see that once a shift towards gold occurs, there will be too much fiat currency chasing too little gold. This will continue to have a profound effect on the price of gold.

Embracing a gold mindset, however, can be difficult. People have preconceived ideas concerning gold that prevent them from evaluating it with an open mind. If we look at the most common gold myths, we will see they do not stand up to scrutiny.

Gold does not pay dividends
Gold is money, not an investment. No money pays dividends or interest until you put it at risk. Unlike stocks or bonds, gold cannot go to zero and unlike fiat currency, gold maintains its purchasing power.

Gold is a bad investment
Since 1971, when the gold standard was cut, gold is up nearly 4,000 percent. The Dow is up 1,412 percent. Even over the last decade, gold is up 378 percent while the Dow is up just 1.33 percent. During the financial crisis of 2008, gold outperformed equity indices in every major country in the world.

Gold is a risky investment
If we look at volatility, which is a measure of risk, we see gold has higher returns and lower risk and volatility than every single Dow component. Gold is the most negatively correlated asset class. A portfolio with only positively correlated assets such as stocks, bonds and cash cannot be diversified or be considered lower risk than a portfolio with a negatively correlated asset class.

An appropriate allocation
We have seen that once preconceived ideas are abandoned and a gold mindset is embraced, it becomes clear that gold should form the foundation of an investment portfolio. The question then becomes, how much gold should be allocated?

According to a 2005 Ibbotson Associates study, a 7 percent allocation to gold is needed in a mainly conservative portfolio, and a 16 to 17 percent allocation is required for an aggressive portfolio. That’s simply to have a balanced diversified portfolio, or what may also be known as strategic allocation.

From a tactical allocation standpoint, Wainwright Economics looks to gold as being a leading indicator of future inflation. When you have a high inflation environment, which the ongoing creation of fiat currency around the world all but guarantees, their conclusion is that you need 17 percent in a bond portfolio, and 40 percent in an equity portfolio, just to break even against inflation.

There are three dominant short-term trends that will drive the gold price this year and beyond: central bank buying, movement away from the US dollar, and the China effect. We have already seen how fiat currencies are losing value and being debased. In November 2010, China and Russia decided to renounce the US dollar and resort to using their own currencies for bilateral trade; the days of the dollar being the world’s reserve currency are numbered. In 2009, central banks became net buyers of gold for the first time in two decades. They understand the issues facing fiat currencies and are moving to protect their countries’ wealth. They understand that gold is money. The Chinese are one step ahead in terms of gold. They have already adopted a gold mindset. In the first two months of 2011, the Chinese imported 200 tonnes of gold, as much as the entire previous year. This was just individual investor demand, not central bank demand, which we know is also growing.

There are also three long-term trends that will support the price of gold for decades: an aging population, outsourcing and peak oil. For a full analysis of these long-term trends, as well as more information on the short-term trends, open-minded readers can read the BMG article, “Gold Outlook 2011: Irreversible Upward Pressures and the China Effect”, free of charge, at www.bmgbullion.com/document/806.

“The gold standard, in one form or another,will prevail long after the present rash of national fiats
is forgotten or remembered only in currency museums.”
--Hans F. Sennholz

It is only a matter of time until gold becomes universally recognized as money, and appreciated for its wealth preservation qualities. As this occurs, demand will surge. Savvy investors can benefit now by protecting their portfolios and their wealth and allocating to real money – gold.

Six Myths of the "Gold Bubble"

Anyone calling gold a bubble is talking through their hat or worse... A number of myths associated with ‘bubble theory' for gold are exploded here.

LONDON (BULLIONVAULT.COM)

Yes, growth in global gold demand is rapid. No, another decade of quintupling prices isn't nailed on. But neither of those facts make gold a "bubble" today.

In fact, anyone calling gold a bubble right now is talking through their hat - at best. Take these jokers, for instance, all holding forth in the last month...

MYTH #1. "GOLD IS A CROWDED TRADE"

The finance pages are packed with gold headlines, but actual investment levels remain low. In the early 1980s, private-bank clients were expected to hold 3% of their wealth in gold, many times the 0.5% allocation seen across the finance industry today. Even in the bullion market itself, three-quarters of the 500-plus analysts and traders attending last autumn's LBMA conference in Berlin said they held as little as nothing ("Between 0% and 10%") of their savings in precious metals. Saturation is a long way off.

MYTH #2. "GOLD HAS MADLY RUSHED TO $1500 WITHOUT A CORRECTION"

Compared with undeniable bubbles, gold's recent climb just isn't steep enough. Gold prices rose 70% for Dollar investors in the last 3 years, but US stocks rose 160% in that length of time in the 1920s, and Germany's Neuer Markt rose over 1600% starting in 1997. London's South Sea Bubble of 1720 rose 9-fold in 5 months! What makes gold remarkable today is the longevity, not speed, of its bull market - now delivering positive, inflation-beating returns to US and UK savers every year since 2001.

MYTH #3. "GOLD WILL FALL HARD WHEN INTEREST RATES RISE"

Only if interest rates outpace inflation, and what are the chances of that? People turn to gold when cash - its major (and otherwise better) competitor as a store of wealth - loses value. Sub-zero real US rates have already cost cash savers over 3% of their spending power in the last 18 months. Rates currently lag inflation by the widest margin since the summer of 1980. Back then, however, the cost of living was rising at double-digits, and could not be talked away.

MYTH #4. "INFLATION IS SET TO FALL BACK"

How, exactly? The cost of living is hurting earners, savers and seniors alike, but mostly because their incomes aren't growing. On the official data, the Consumer Price Index has risen barely 11% from five years ago, its weakest long-term rise since 1967. Anything lower, and QE3 looks certain, thanks to the Fed's anti-deflation fixation. If US inflation is headed anywhere from here, it's not down.

MYTH #5. "GOLD'S NOT AN INVESTMENT, BECAUSE IT DOESN'T PAY INTEREST"

A desperate claim which is at least true - true a decade ago at $260, and true evermore unless an investment bank sells you a structured derivative. Gold's lack of income means it has no promises to break, setting it apart from all other asset classes, most notably debt. It's hard to accuse gold buyers of "over-optimism " (Charles Kindleberger's definition of bubble), but this market would only move into "irrational exuberance" (Robert Shiller's phrase) if it kept rising after monetary policy switched from weak to strong.

MYTH #6. "GOLD WILL BURST WHEN THE WORLD ECONOMY SETTLES DOWN"

You've got to love that "when". But beyond its impact on policy rates, however, economic growth has little to do with gold prices. Gold fell vs. the Dollar during the US recessions of 1980 and 1990, only to triple during the go-go years of 2003-2007. Across the last four decades, in fact, gold shows a negative but statistically insignificant correlation with quarterly US GDP of minus 0.11 year-over-year. Quarterly GDP in China (the world's second-biggest buyers) shows a negligible 0.08 correlation since 2005. Rupee gold prices since 1996 show only a 0.32 correlation with Indian GDP.

People started saying gold was a bubble in early 2008 at $1000, then at $1200 and $1300 in 2009 and 2010, and now at $1500 and above in 2011. Yet still nothing has changed to the core case for gold. If anything, in fact, the fundamental reasons for private savings going to buy gold have grown stronger.

Ultra-loose money is locked in by record peace-time debts and deficits. Central-bank and private-Asian gold buying continue to grow as economic power moves East.

Everything else is just noise - the one excess to which gold investing is prone right now.

Greenspan Says Greece Default ‘Almost Certain,’ May Trigger U.S. Recession

Alan Greenspan, former Federal Reserve chairman, said a default by Greece is “almost certain” and could help drive the U.S. economy into recession.

“The problem you have is that it’s extremely unlikely the political system will work” in a way that solves Greece’s crisis, Greenspan, 85, said in an interview today with Charlie Rose in New York. “The chances of Greece not defaulting are very small.”

Greek government bonds slumped, pushing the yield on the two-year note above 30 percent for the first time, as Prime Minister George Papandreou’s failure to win support for more austerity fueled speculation the European country will fail to meet its obligations. More than 20,000 people protested in Athens this week against wage reductions and tax increases, with police using tear gas on crowds and strikes paralyzing ports, banks, hospitals and state-run companies.

The chances of Greece defaulting are “so high that you almost have to say there’s no way out,” said Greenspan, who ran the central bank from 1987 to 2006. That may leave some U.S. banks “up against the wall.”

Greece’s debt crisis has the potential to push the U.S. into another recession, Greenspan said. Without the Greek issue, “the probability is quite low” of a U.S. recession, he said.

“There’s no momentum in the system that suggests to me that we are about to go into a double-dip,” Greenspan said.

Economic data released today show confidence in the expansion eroding among Americans and businesses, as unemployment remains above 9 percent.

U.S. Debt Limit

The U.S. recovery is being hindered by apprehension among businesses over the long-term outlook, and there’s nothing more for Fed policy makers to do, Greenspan said.

U.S. lawmakers are wrangling over spending cuts and budget reforms as they seek an agreement to increase the $14.3 trillion debt limit before Aug. 2, the date on which the Treasury Department said it will have exhausted its borrowing authority.

The U.S. debt issue is becoming “horrendously dangerous,” said Greenspan, who added he doubts lawmakers have another year or two to solve it.

After leaving the Fed, the former chairman founded the consulting firm Greenspan Associates and became a consultant or adviser to Deutsche Bank AG, Pacific Investment Management Co. and Paulson & Co., a hedge-fund firm that profited from the collapse of the U.S. subprime-mortgage market.

Greenspan, appointed Fed chairman by Republican President Ronald Reagan, was once described as “the greatest central banker who ever lived” by economist Alan Blinder, the central bank’s former vice chairman.

He has since been blamed for contributing to the U.S. financial crisis by keeping interest rateslow for too long and failing to regulate the mortgage market, according to critics including Allan Meltzer, a professor at Carnegie Mellon University in Pittsburgh, and members of the Financial Crisis Inquiry Commission.

THE BEAR IS BACK AND THIS TIME IT WILL BE MUCH WORSE

THE BEAR IS BACK AND THIS TIME IT WILL BE MUCH WORSE

Don't let the perma bulls fool you, this is not a normal correction, and it has nothing to do with Greece or Spain. This is the beginnings of the next leg down in the secular bear market and the start of the next economic recession/depression. And this time it's going to be much much worse than it was in `08.

For months now I've been warning investors to get out of the general stock market. I was confident that once the dollar put in its three year cycle low the next deflationary period would begin and stocks would enter the third leg down in the secular bear market.

Well, the dollar did put in the major three year cycle bottom in May and stocks almost immediately started to head down.This won't end until stocks drop down into the four year cycle low due sometime in mid to late 2012. 

Let me explain to you what is unfolding so you don't listen to Wall Street or CNBC and get sucked down into the next bear market.  

In a healthy bull market intermediate degree corrections hold well above the prior cycle troughs. Higher highs and higher lows. When that pattern of higher highs and higher lows on an intermediate time frame gets violated it is almost always a sign that the market is topping. We are at that stage now as the market is moving down to test the March intermediate cycle low.

Oil has already violated it's intermediate bottom. Energy stocks are a big part of the S&P and they are going to be a big drag on the index going forward.

In a healthy bull market we shouldn't even come close to testing the March low. Actually this market hasn't been healthy since last summer. That was the point at which I recognized the large megaphone topping pattern that was being driven by a double dose of QE.

Last year the market was able to push higher for almost a month on momentum after QE1 ended. This market has already rolled over even though QE2 isn't scheduled to stop until the end of June. The conclusion is that the market is much weaker now than it was when QE1 ended. We all know what happened last year when the money pumps were shut off. It led to the flash crash and a severe stock market correction. It would have led to a new bear market except Bernanke quickly started QE2.

Actually QE is the reason the market is in trouble. Just like I said over two years ago, all QE did was give us a brief reprieve and temporarily reflated asset markets. I knew all along it wouldn't create jobs and it didn't. (Well I guess a few bankers got to keep their jobs and pay themselves some big bonuses, but the general population was never going to prosper from QE).

As a matter of fact just as I said it would, QE ultimately spiked commodity inflation, and just as I knew it would commodity inflation has now poisoned the global economy, crushed discretionary spending, squeezed profit margins, and is sending the world down into the next recession. 

Unfortunately we are entering this recession in a much weaker state than we went into the last one. Real unemployment is somewhere around 12-15%. It is going to get much, much worse. I often wonder how in the world we could appoint such fools to run our monetary policy. I mean seriously, how many times must they make the same mistake before they figure out they are the cause of our problems? 

Ok enough of the Fed ranting, back to the market. 

Not only do we have a market that is testing the prior intermediate cycle low when it shouldn't be, but we also have a clear topping pattern in place. Just like in `07 the market managed a marginal breakout to new highs in May that failed to follow through. You can see the same thing occurred in October of `07. This is quite often how markets top...or bottom for that matter. A technical level is breached, technicians either buy the breakout or sell the breakdown. Smart money fades the move and the market reverses. This is exactly how the `07 top was formed. It's also how the market bottomed in `02. And now the cyclical bull has topped with that exact same reversal pattern in 2011.

This isn't the only warning sign unfortunately. The banks and housing have been diverging from the rest of the market for some time. These two sectors are still impaired and will remain so no matter how much money the Fed throws at them. They led the market down into the last bear and they are leading it into the next bear.

Here is what I expect to happen over the next two months. We should soon test the 1249 intermediate cycle low. Actually I think we will probably marginally break below that level. As most of you probably know by now breakdowns and breakouts almost always fail to follow through. So I expect we will see a violent counter trend rally once the March low is penetrated. That should wipe out all the technicians who sell into the breakdown.

However the rally, although I'm sure it will be convincing, will almost certainly be a counter trend affair that will quickly fail. The problem is that the current daily cycle is only on day 12. That cycle on average runs 35-45 days trough to trough. So once the counter trend rally has run it's course we should have another leg down. And that leg down will almost certainly cause tremendous damage to the global stock markets.

Once the market penetrates the coming low it shouldn't be long before traders recognize that something is terribly wrong. At that point everyone is going to head for the exits at the same time which should lead to some kind of waterfall decline bottoming around the middle of August. This is when I expect Bernanke to freak out and initiate QE3. I have no doubt the market will rally violently on the news as traders have become conditioned to expect QE to drive stocks higher. I expect we will see the market test and maybe even penetrate the 200 day moving average during the fall rally.

However this too will only be a counter trend affair. QE is the cause of our problems and more of it isn't going to make things better, it will only make them worse as it will start to spike commodity prices again into a rapidly weakening economy. Remember spiking commodity inflation is what caused this in the first place. Doing it again as the economy rolls over into recession is only going to guarantee that this turns into a depression instead of just a severe recession.

Traders and investors need to start preparing for what's ahead. If you ignored me previously and are still invested in the general stock market, exit, either now, or into the rally that should come off the March lows in the next week or two. Don't get fooled by the analysts who will be telling you the correction is over, it won't be. This won't be over until late July or early August. 

Get back into dollar denominated assets as the dollar will continue to rally and gain purchasing power in a deflationary environment. 

Once it's appropriate we will transfer assets back into gold and precious metals, but it's still too early for that. Gold needs to move down into an intermediate cycle low before we want to buy. My best guess is gold will dip down to somewhere around $1400 over the next 4-5 weeks. I am monitoring not only the stock market but also the gold cycle in the premium newsletter and will let subscribers know when I think it's time to get back into precious for the next ride up. 

source: http://goldscents.blogspot.com/2011/06/bear-is-back-and-this-time-it-will-be.html

conclusion: based on gold price history 2008-2009. as stock market crash, investor going out from stock therefore increase the value of dollar thus decrease value of gold. analyst  expected gold will dip below $1500 level temporarily( current greece economic crisis will provide counter balance to gold price not to drag down too much) and its provide huge buying opportunity to get gold because gold price will shoot back up very quickly as FED will have to launch QE3 therefore gold is expecting to break  $1600 level by the end of this year. 

6 Reasons Gold Could Go Higher

The price of gold has some investors shouting, "can you believe it?" Gold is trading close to $1,540 an ounce, 24% above the June 30, 2010 price of $1,244 an ounce and not far off the record high of $1,575 an ounce attained in early May. The big question on many peoples' minds at this point: Will gold get back to record levels and go on to achieve even greater heights?

It's certainly possible, especially after all the disappointing economic news we've heard recently. Only 54,000 new jobs were added and unemployment inched back up to 9.1% in May - and those are just the sorts of things that push gold prices higher. They make investors want to put their money into something that they feel can shield them from a worsening economy - like gold. There are plenty of other reasons the "yellow metal" could soar; here are six of them.

Stocks Have Been on a Losing Streak
Since peaking at 12,811 in late April, the Dow Jones Industrial Average (DJIA) has fallen nearly 6%. The Standard & Poors 500, a much broader measure of stock market performance, has dipped more than 6.5% during that time, from a peak of 1,364. The recent slide in stocks may be big enough to trigger painful memories of the financial crisis that prompt investors to buy more gold for its perceived safety.

The Dollar Isn't At Its Best
The dollar has been on a losing streak, just like stocks. Since peaking at just over 86 in late June 2010, the U.S. dollar index - which measures the strength of the dollar against a basket of other currencies - has fallen to just below 74. That's nearly a 14% decline. Investors have always viewed gold as a hedge against a falling dollar, and there's no reason to believe they won't this time around.

High Inflation May Be Just Around the Corner
As you may know, the Federal Reserve pumped large amounts of new money into the financial system to stimulate the economy during and after the financial crisis. Such a dramatic increase in the money supply has historically triggered high inflation by rapidly devaluing the dollar. Many economy watchers are worried high inflation may soon be upon us again due to the latest stimulus program. If they're right, investors seeking an inflation hedge will flock to gold and the price will skyrocket.

Global Demand for Gold Is High
Private investors in foreign countries have long been hoarding gold, and they'll probably keep buying large amounts. China is just one example. According to Reuters, "Demand in China for physical gold and gold-related investments is growing at an 'explosive' pace and its appetite for the yellow metal is poised to remain robust amid inflation concerns."

Indeed, demand in China has grown by double digits for the past 10 years and is projected to rise by 10-15% again in 2011. Analysts estimate that China may overtake India as the world's largest gold buyer sometime this year.

Central Banks Have Been Buying Gold
Central banks around the world have been buying gold to reduce their reliance on the weakening U.S. dollar as a reserve currency, and this trend is expected to continue. Whereas central banks were net sellers of gold a decade ago, they're now becoming net buyers - and that's a very bullish sign for gold.

How High Will Gold Go?
There are a lot of compelling signs that the bull market in gold will continue, but they certainly aren't guarantees. With any investment there's a risk things won't work out as expected. At this point, though, many investors believe gold still has room to run. Some are even projecting a 30% price spike to $2,000 an ounce by the end of 2011. More conservative estimates call for year-end values closer to $1,600 an ounce, barely 4% higher than current prices. Investors will need to do their own homework and decide for themselves where they think gold is headed.

Tidal wave of gold demand coming: WGC

The euro has fallen on international markets as the European sovereign debt crisis is deepening and appears to be reaching a dangerous denouement. European stock markets are also weaker due to serious divisions in Greece and in the EU as to how to resolve the Eurozone debt crisis and prevent contagion.

Moody's has placed three large French banks on negative review based on their exposure to Greece. The problem looks increasingly intractable meaning that contagion appears more likely every day.

Gold is higher against the euro, pound and Swiss franc and lower against the U.S. dollar, the yen, Kiwi and Aussie dollar. Demand continues to be very strong especially from China and India where the World Gold Council said that there is a “tidal wave” of “gold demand coming”.

The dollar is firmer despite yesterday’s stern warning from Bernanke that America’s credit rating is at risk. Bernanke urged policy makers to again increase the debt ceiling – this time to over $14.3 trillion – in the hope that this will prevent a U.S. downgrade.

U.S. Worse than Greece Due to $14.3 Trillion National Debt and $61.6 Trillion in Unfunded Liabilities
The humungous size of the real U.S. national debt including unfunded liabilities is now some $75.9 trillion ($14.3 trillion and $61.6 trillion) which means that the finances of the U.S. are not much better than that of insolvent Greece.

The $61.6 trillion in unfunded obligations (money guaranteed for Medicare, Medicaid and Social Security) amounts to $534,000 per household, more than five times what Americans borrowed for expenditures such as mortgages, car loans and other debt.

The U.S. is also confronted with the significant debts incurred in the programs related to the bailout of Wall Street banks following the crisis of 2008 and 2009.

Thus, the U.S. is in a worse financial position than Greece and is inching closer towards default every day.

This has obvious ramifications for financial markets and especially currency markets. It could see further sharp falls in the value of the dollar and would likely result in selling of U.S. dollar denominated assets which will likely see U.S. equities and bonds come under pressure which would likely result in an increase in interest rates.

Rising interest rates will bullish for gold as they were in the 1970’s (see above) and it is only towards the end of the interest rate tightening cycle when positive real interest rates are achieved that gold will become vulnerable to a bear market.

Gold remains below its inflation adjusted high from 1980 and the conditions today are as favourable if not more so than those of the 1970’s when gold rose 24 times in 9 years.

The U.S. was the largest creditor nation in the world in 1980 today it is the largest debtor nation. In the late 1970’s there was stagflation and geopolitical risk but there were no developing world sovereign nations on the verge of bankruptcy.

Nor were there major “too big to fail” western banks that were seriously exposed to sovereign debt risk and a shadow banking system with over $600 trillion in derivatives and all the risk attendant with that.

Today there is significant geopolitical risk in the world, more than even in the late 1970’s and governments internationally are debasing their currencies in a manner not seen in modern history.

The deepening sovereign debt crisis in the EU and potentially soon in the U.S. is a fundamental reason that the majority of retail investors and savers should have an allocation to gold bullion.

Gold bullion will protect, preserve and grow wealth in the coming years as it has done in uncertain times throughout history.

Gold to Reach $5,000 Due to Supply Shortage: CNBC Report

An exhaustive report by Standard Chartered predicts that gold [GCCV1  1530.30   4.10  (+0.27%)   ] will more than triple to $5,000 an ounce because of a lack of supply, not just because of a surge in demand that most bullion bugs cite in their bullish calls.

AP

“There are very few large gold mines set to commence operation in the next five years,” said Standard’s analyst Yan Chen in a report Monday. “The limited new supply comes at a time when central banks have turned from being net sellers to significant net buyers of gold. The result, in our view, will be a gold market in deficit, even assuming flat growth in demand. With the supply-demand balance so out of kilter, we see the gold price potentially going to US$5,000/oz.”

The London-based firm is among the first to focus on the supply-side of the gold equation amid the many bullish forecasts out there on the metal. After analyzing 345 gold mines and 30 copper/base metal gold mines around the globe, the team estimates annual gold production will be just 3.6 percent over the next five years.

100 OZ GOLD AUG1 (GCCV1) 1530.30     4.10  (+0.27%%) CEC:Commodities Exchange Centre

“They make a pretty compelling argument, especially when it comes to mine supply,” said Brian Kelly, head of Brian Kelly Capital and a ‘Fast Money’ trader. “Most analysis focuses on demand from China and India, which of course can disappear as quickly as it materialized.”

But that’s unlikely to happen over the next five years as central banks look to further diversify their holdings of U.S. dollars and as emerging countries buy more gold in the aftermath of the global paper currency crisis.

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“Currently, only 1.8 percent of China’s foreign exchange reserves is in gold,” wrote Chen and the Standard team in the 68-page report. “If the country were to bring this proportion in line with the global average of 11 percent, it would have to buy 6,000 more tonnes of gold, equivalent to more than 2 years of gold production.”

The bold call is among the most bullish out there. In a Bank of America/Merrill Lynch survey of global money managers released Tuesday, just about a third of money managers felt gold was overvalued. However, that is the highest reading in that survey in more than a year.

Standard Chartered recommends that clients buy shares of smaller gold miners to get the most upside from its prediction but also said clients could buy physical gold and gold exchange-traded funds.

Investing in Gold & Silver During Inflation, Stagflation and Deflation?

In this piece we are looking at some critical fundamental features of precious metals that are rarely considered or accepted in the developed world markets. Expert investors like Warren Buffet look at inactive, buried gold with amazement, because he is focused on companies that produce things and earn money. And most of us wish we had his skill and money behind us.  

George Soros and the like invested in gold as an anti-deflationary measure. Most analysts appreciate the anti-inflationary value of gold and silver. The protection of gold and silver in stagflationary environments are a combination of both abilities.

But why are gold and silver capable of giving such protection in bad times as well as good times?

They have certain qualities that shine forward at times when other investments fail.  

The Limitations of Cash

In times of monetary stability and soundness, safely-stored cash never fails. Most consider cash in the bank to be the safest conservative investment, and in the distant past, the days of our grandfathers, this was largely true.

But that horrible word, inflation, came into being where prices kept on rising and cash saved would buy less-and-less. Interest rates compensated for this inflation, but then interest rates stopped rising. When interest rates did rise, it was at a slower pace than inflation. Cash lost its buying power as time went by. Bank charges would eat away any gains that might be made. At first inflation would occur one country at a time, and the exchange rate on those currencies fell, hurting international buying power even more. Today inflation is a global phenomenon.

Investors would have to move out of cash and into businesses or other investments that offset the cost of inflation.   This was not easy unless inflation happened while growth was vibrant. And this benefitted those middle classes that enjoyed such growth. The poor, whose income rises slower than inflation, feel the pinch.

Suddenly, booms turn into busts and businesses don’t do well. The value of businesses and its shares fall, losing investors money. Even self-managed businesses fall in value, putting rich people into bankruptcy. This is deflation, a monetary mood that causes values to shrink. In deflation the value of cash grows as prices fall.  

Those who believe they are skilled investors answer, sell, then cheaply buy back. We look at that timeless story of an investor who did that just before the Wall Street Crash. His friend did not do so well selling only when the fall was half way down. But our hero who sold at the top, overwhelmed by his own skill bought back in, when the fall was half way down. His friend did not buy back in, but stayed in cash. It’s not so easy!

Then you get a situation when the bust happened and all of the markets plummet because forced selling drives investors out. Interest rates fall to negative levels. If cycles are consistent, there should have followed a boom period. But growth was so anemic that stagnation set in. Businesses and the economy struggle to find small amounts of growth and some cut back, turning over at survival level.

Suddenly, something that shouldn’t happen in a downturn happened. It was inflation, driven by factors no government can control. It came from energy and food and became uncontrollable. This type of inflation is deflationary. Businesses covering expenses suddenly found their costs ate away at profits much the same as deflation and inflation would have done. This is ‘stagflation’, a climate where stress levels steadily eat away at sanity.  

Surely bills and bonds are a way out of the hole, as they pay an interest rate, while being almost like cash?
The trouble with this thinking is that interest rates have fallen so low that the bill and bond markets are so high as to be heading for a fall, far worse than any Wall Street Crash.

Next interest rates rise to stop negative interest rates from rising higher. Then the prices of fixed interest securities have to fall, while their yield rises. Investors rush to exit those markets the moment that happens.

Surely there is no escape from these three economic ailments?
Well, there is….

For a long time, our Asian friends have suffered through poverty, hard times, government corruption and mismanagement. They have found refuge in good times and bad times. They want financial security and their investments to last for more than one generation. Correctly invested, their savings provide financial security for many generations.

You would have thought that Europe in particular would have learned the same lessons with their history of currency collapses and wars.

Why Precious Metals?

Gold (and to a lesser extent, silver) is more than a barbarous relic from yesteryear. Its rising price is telling us that it is a very modern investment preference because

It is both cash and an asset.

In the long term, it outperforms cash because of these qualities…

• It has all the features that makes cash valuable, even capable of earning an income(when lent out).
  
• It is an enhanced version of cash, in that it is not subject to the vagaries of interest rates solely dictated by central banks and banks.
  
• It carries no national obligations. It does not rely on nations to supply collateral to honor payment. If you ask the Fed to honor the value of your dollar, they will simply exchange it for another. 
  
• It is not dependant on the creditworthiness of the nation issuing money.
  
• It has the same value in Mongolia as it has in the U.S. or Europe.  
  
• It is collateral in any transaction and of greater value than the price it can be exchanged at.
  
• It cannot be issued at will, with the intention of being withdrawn from the system later.
  
• It does not decline when an individual currency declines (and does not rise when that currency rises in value). It is a ‘counter to currencies’. 
  
• This century it has moved away from the control of the U.S. and Europe to global control. In the years to come, rising Asian demand will dwarf demand from the developed world, making it a fully internationally-valued asset again.
  
• In a deflating global economy (just as cash is a national protection) gold is better than cash even when local currencies are not deflating.
  
• In an inflating global economy, gold acts as an asset, when currencies are cheapening. There are no other currencies that are deemed as assets, like gold.
  
• In a stagflationary economic environment, gold acts both as cash and an asset.

How will Gold and Silver Behave in the Dark Days Ahead?