3 Drivers, 2 Months, 1 Gold Rally?

Federal Reserve Chairman Ben Bernanke announced last week that the Federal funds rate will stay near zero for now. He reasoned that the “low rates of resource utilization and a subdued outlook for inflation over the medium run” would likely “warrant exceptionally low levels for the federal funds rate at least through mid-2013.”

This will likely translate to the real interest rate (which is the rate of interest an investor can receive on a U.S. Treasury bill after allowing for inflation) remaining negative for at least another year and a half.

For gold investors, a low-to-negative interest rate has been associated with a powerful historical trend. Going back four decades, gold has experienced positive higher year-over-year returns whenever the real interest rate tipped below 2 percent.  And the lower the rates drop, the stronger gold tends to perform.

Marc Faber, editor of the Gloom Boom & Doom Report, believes the Fed will keep rates near zero even longer than 2013. In his November commentary, he points to the opinion of Chicago Federal Reserve Bank President Charles Evans, who wants the Fed to “commit itself to keep short-term rates at zero until the unemployment rate falls below 7 percent or the outlook for inflation over the medium term goes above 3 percent.” If Evans has his way, Dr. Faber extrapolates that rates could “stay at zero for five or even 10 years (and negative in real terms).” Based on Dr. Doom’s prediction, one could infer that gold could continue its bull run for several years to come.

This rate-cutting trend is not only an American phenomenon, as other countries have been slashing their interest rates. In surprise moves, the central banks of Europe, Brazil, Indonesia and Turkey have all recently cut rates. This week, the European Central Bank surprised markets when it cut its key interest rate by 0.25 percent. Brazil has cut rates twice over the past two months, and Turkey cut its benchmark interest rate a few months back as part of an unorthodox move to keep its economy from overheating.

Many investors follow the Fed’s decisions, but to see countries’ rate changes in action over the years, The Wall Street Journal put together an interesting interactive showing how countries around the world have increased or decreased their interest rates over the past several years.Check it out now.

The other strong action central banks have been taking is loading up on gold. In “Perfect Storm Creates Tidal Wave of Gold Demand,” we discussed how the trend of gold buying by central banks in the East has been increasing while the Western central banks have ceased selling their gold. Now Turkey’s central bank is trying to manage liquidity in the banking system by allowing banks to keep up to 10 percent of their required reserves against lira liabilities in gold.

Bloomberg News reported that if Turkish banks fully allocate that 10 percent, it will free up $3.1 billion in liquidity.

This has followed a similar move by Turkey’s central bank to allow private banks to hold an increased percentage of their reserves against foreign-currency liabilities. Since that change, 21.6 tons of gold were added. According to Bloomberg News, another 55 tons of gold could be added after the new adjustment goes into effect on November 11. This would bring the total gold reserves in the Turkish central bank to a value of $10 billion.

‘Tis the Season for Gold

Combine the central bank purchases of gold with the fact that we are now entering the strongest months of the year for gold. The chart from Bank of America Merrill Lynch (BofA) below shows how gold and gold equities have performed on an average monthly basis over the past 10 years. While the spot gold price has differed from the S&P/TSX Composite Index of gold equities during the first 10 months of the year, their historical pattern is very similar during the last two months. November has historically been the strongest month of the year for gold equities, with mining stocks increasing 8.1 percent.

Combined with equity valuations at historically low levels, BofA believes, “gold equities could follow the historical pattern in late 2011.”

The argument for a rally in gold and gold equities this time of year is strengthened when we compare the seasonal patterns over different time frames. I often show gold’s historical patterns when I present my Goldwatcher Presentation to emphasize how strong these last months of the year have been over every time period.

The 5-year pattern has strayed from the longer-term historical patterns, particularly before the October timeframe. For the past five years, the gold price has started the year weak, and then moved considerably higher than its 15- and 30-year historical average from February through September.

However, over the 5-, 15- and 30-year patterns, the trends in November and December have mimicked each other.

BofA says a key driver of this late-year gold trend has been increased jewelry demand for the Christmas buying season. We agree wholeheartedly, as the gift giving season around Christmas drives many consumers to purchase gold jewelry for their loved ones. And despite consumer sentiment remaining near a record low, the National Retail Federation anticipates holiday sales rising a modest 2.8 percent this November and December.

In India and China, people are especially amorous of the metal and buy gold out of love. It is customary in most developing countries to give gold as a gift to friends and relatives for birthdays, weddings and to celebrate religious holidays. And this time of year, gift giving in the form of gold is especially strong in India. Indians recently celebrated Diwali, which spurs gold buying during a five-day celebration of good over evil, light over darkness, and knowledge over ignorance (Read the Frank Talk post on Diwali). Diwali is followed by the main Indian wedding season where many Indians will be buying golden gifts for the bride and the groom. In China, 2012 is the “Year of the Dragon” and retailers expect to sell gifts in the form of gold dragon jewelry, pendants, statues and coins.

Gold investors should remember that volatility swings both ways. If you look at 10 years of data, gold bullion has had 10 percent price swings about 7 percent of the time. These ten percent swings are more common for gold equities, as the NYSE Arca Gold BUGS Index has had 10 percent swings over 20 trading days about a third of the time.

With three drivers—1) negative real interest rates propelling investors to seek gold for it’s perceived “safe haven” qualities, 2) the Love Trade in full bloom, and 3) central banks increasing their holdings in the yellow metal—happening over the next two months, gold is one commodity that could benefit.

When will Gold Stocks Reach the Bubble Phase?

Gold is in a bull market and so are the gold stocks despite their struggle as a group to outperform Gold. This is nothing new though. We’ve written about this in the past and Steve Saville has before us. Nevertheless, the miners are in a secular bull market and investors need to pick better stocks and ignore the hundreds of losers. The bull market is moving forward but is nowhere close to a bubble nor the speculative zeal we saw in 2006-2007. Thus, it begs the question of what lies ahead and when can we expect the initial stages of a bubble.

In order to figure this out we first need to get an idea of how long the bull market will last.

Below is a great chart from Cycle Pro Outlook. It uses John Williams ’CPI, which is consistent over time. Interestingly, Steven Williams of Cycle Pro has found a 17.6 year cycle between equity bull and bear markets. It fits fairly well with the alternation between equity and commodity bull markets.

In nominal terms the last two commodity bull markets lasted about 15 years and 18 years. Gold stocks were in a bull market from 1960 to 1980 while Homestake Mining (a proxy for the ancient past) was in a bull market from 1923 to 1937.

So are we looking at something closer to 15 or 20 years?

The following chart should answer that. This is the Barrons Gold Mining Index, courtesy of sharelynx.com. There isn’t much data available on gold stocks but what is available shows that the 1980 high is roughly equivalent to the 2008 high. The gold stocks broke to a new all-time high but it won’t be confirmed until they sustain the breakout and make new highs. Eventually the breakout will be confirmed with the next leg higher. The point here is do not expect this secular bull market to end four or five years after a major multi-decade breakout. That is too soon.

Moving along, let’s take a look at the Nasdaq because there are some similarities. The Nasdaq had its initial rise from 1982 to 1987. Following 1987, it would be four years until the market was able to breakout to sustained new highs. That was nine years into the bull market. The bubble began just before the 13th year of the bull market, in 1995. The circle shows where I think we are now based on various indices which includes my proprietary gold and silver indices.

The early conclusion is that the start of the bubble is at least a few years away. Based on the price action we are likely to have a major breakout and a few years of strength which will set the stage for the start of a bubble perhaps in 2014. As you can see in the chart below, the gold stocks while in the 11th year of their bull market have not sustained a new all-time high for quite a while. The gold stocks are ripe for a breakout and a powerful move higher.

The gold stocks are soon to begin the 12th year of their bull market. As we know, most bull markets last 15 to 20 years and end in an accelerated fashion. Based on our research we believe this bull market will end close to 2020 (say 2018). The gold stocks are slowly moving closer and closer to a major breakout which would likely produce a multi-year acceleration that would set the stage for the birth of a bubble. In our premium service we manage short-term volatility and risks while keeping our eyes on the big picture which could be extremely promising in 2012 and 2013

'Gold to hit $3,000, silver $50 by March 2013'

A war-mongering U.S. government could be less than 18 months away from decimating the last 5% of value left in the dollar, says Richard Maybury, the author of the U.S. & World Early Warning Report. Until some new exchange-traded-fund-like basket of natural resources provides a store of value, this "juris naturalist" has some advice about how to protect your wealth during the coming collapse.

The Gold Report: Richard, last month, you made a presentation at the Casey Research/Sprott Inc. "When Money Dies" Summit entitled "The War that Will Kill the Dollar." You explained that the corrupting influence of power had sent our country's leaders shopping for war, disregarding Westphalian respect for sovereignty and hastening the collapse of society. What are the signs that we are reaching a critical point? And, is there any way we can change course?

Richard Maybury: You can see the signs very clearly in the Middle East and North Africa. The Federal government is involved in several wars there that have nothing to do with America. One of the best examples is Libya. U.S. officials are taking credit for Moammar Gadhafi's death just a year after they were bragging about having tamed the threat. Now Libya is a mess. It will very likely be taken over by some sort of Islamic government that isn't going to be very friendly to America.

TGR: Why do we, as a country, do this? If it's not going to end well for us, what's the economic or political reason to get involved?

RM: The U.S. government gets into wars in far corners of the world that have nothing to do with America because the leaders like getting into wars. That is how presidents achieve greatness in the history books. A president has no prayer of going down in history as great unless he has won a war. Look at Mount Rushmore. All four presidents featured there won wars. That seems to be the number one criteria historians use for deciding whether someone is a great president. It constitutes an automatic incentive to go out looking for wars.

TGR: What is the incentive for the American people to go war shopping?

RM: Nothing. It's absurd. During the First Gulf War, people had a tremendous good feeling about going to war with Iraq. They would come home from work, order a pizza, sit in front of their TV sets and watch the war like it was a football game. War became a form of entertainment.

TGR: Is there anything we could do to incentivize our presidents to act peacefully?

RM: I doubt it very much. People go into politics because they seek political power. Once they get the power, they naturally want to use it on somebody. What is the point of having power if you can't use it? So, no matter what kinds of controls you put on, future presidents will find a way around it.

The ideal situation would be one where war is used as a last resort. Westphalian sovereignty, a set of agreements dating back in the 1600s, established the precedent that the European powers would only go to war in self-defense. You had to have a clear and present danger before you could go to war. And, even then, it was supposed to be the last resort. That was the basis of international law up until this year. That isn't to say that the Westphalia treaties weren't violated a lot of times, but they helped. After Iraq, Serbia and now Libya, it is pretty clear that the policy is we can just go out and hit anybody we want for any reason we want as long as we believe the other guy is up to no good.

TGR: If this is the new reality, then let's talk about some of the economics around it. War is expensive. You have pointed out that since the Federal Reserve was created in 1913, the dollar has lost 95% of its buying power. You said, "War destroys currencies." It usually leads to governments printing more dollars to pay for guns and tanks. How much debt and overprinting can the country take before the velocity of economics, which is something that you also talked about in association with how quickly dollars are exchanged, catches up with reality and the dollar loses that last 5% of its value?

RM: Velocity refers to the speed at which money changes hands, and it is a measure of money demand. When people don't really want the money, they start trading it away faster, trying to get their hands on things they do want, things that have value that they trust. The cost of this war in the Islamic world will continue going up. At some point, it's going to be a major contributor to people losing what confidence is left in the dollar and people all over the world will start dumping it. This is a psychological thing. It's about emotions, so it is hard to pinpoint when they will lose all confidence in the dollar.

TGR: What would it look like if that last 5% were gone? Are we talking about hyperinflation? Are we talking about banks collapsing? Are we talking about bartering? What would it look like?

RM: We are talking about all of that. It would be chaos. We saw it in Zimbabwe when the Zimbabwean dollar became worthless because the government printed so many that people wouldn't accept them anymore. The country experienced enormous runaway inflation where prices were rising 50% a day before the Zimbabwe dollar collapsed.

It would probably start with someone somewhere in the world selling off his dollars and begin trading them for whatever it was he had confidence in. The foreign exchange value of the dollar would fall. Other people would notice; they would get scared and start selling their dollars. The foreign exchange value of the dollar would drop more. This process would continue until you have panic around the world to get out of dollars.

Americans would be the last ones to get involved. We are always the last to know what is happening to America. Suddenly Americans would wake up one morning and find that a gallon of milk that cost $4 the day before costs $6 today. The next day they would find that it costs $12. And the next day they would find that it costs $36. That is when Americans would realize that they are in deep trouble; their dollars are about to become worthless.

TGR: Of course the Fed wants to avoid that scenario. You describe yourself as a follower of Austrian economics made famous by the Nobel laureates Friedrich Hayek and Ludwig von Mises. They describe financial systems as complex processes run by billions of constantly changing individuals rather than something that can be manipulated from a central point, which seems to be what is being attempted right now. If that is the case, what will be the outcome if the central government tries to force a more Keynesian control of the flow of money?

RM: They will mess it up even worse than they already have. The world has been living under Keynesian economics since 1971 when Nixon took the dollar off the Gold standard. John Maynard Keynes was a semi-socialist. He believed that the way to fix the economy was to print a whole bunch of dollars and dump them out there. This has been standard procedure for the past 40 years.

All currencies have been dropping in value during that time. Another round of quantitative easing (QE) could further speed the rate at which the money circulates, something that has the same effect as increasing the supply of dollars, creating a larger demand for goods and services and having an inflationary effect. I think Fed officials are dropping hints about the next QE because they are trying to cause velocity to rise, a secret QE if you will.

TGR: What if the stealth QE campaign doesn't work? What form might a real QE3 take?

RM: It is hard to tell what they will do. One of the myths that everyone is taught is that the government has some sort of tremendous understanding of economics and the ability to make adjustments to economic activity. The term fine-tuning is used sometimes. Actually, we are talking about a group of human beings who don't know much more about real economics than anybody else. They think they do, but they don't. They just bounce around from one attempt to control things to the next, making a mess of the country. The economy is not a machine. It is people, human beings. It is a biological system, not a mechanical system. But, the government treats it like a mechanical system, so they are always making mistakes.

TGR: If war and hyperinflation are the inevitable future, how can investors survive or maybe even thrive during a time like this? What are the opportunities? Natural resources? Commodity equities? Where can we be safe other than putting that $100 bill under the bed?

RM: Well, I wouldn't put $100 under the mattress, at least not for very long, because it will soon become worthless. But commodities, stocks of raw materials firms, gold and Silver and Platinum coins have value. Generally, I try to see the world in terms of two kinds of investments: dollars and non-dollars. You definitely want non-dollars, things that do not have their value tied to the value of the dollar. An example of a dollar asset is something like a bond or bank CD. Their values are tied directly to the value of the dollar. If the dollar falls, then their values fall.

Gold is a non-dollar asset. When the dollar falls, usually gold rises. The same is true with silver and oil. All of these things have values that are not tied to the dollar. My advice is to invest in non-dollar assets. Gold would be at the top of the list, silver and platinum and then oil.

TGR: In your Early Warning Report Newsletter, you predicted that Gold will top $3,000/ounce (oz), Silverwill hit $50/oz and oil will exceed $300/barrel. Gasoline will go to $9/gallon. When will we see these rises? And what will be the catalysts that take them there?

RM: The next QE, which I expect to come along no later than March, could set off a flight from dollars. Then we could see those predictions realized within 18 months.

TGR: You said that once we have had this loss of the entire value of the dollar and people are looking for another way to trade, money could be based on some collection of metals with currency acting as a receipt for the tangible gold, silver, Platinum and whatever else happens to be in that basket. What would that transition look like? How painful would that be? How would it be orchestrated?

RM: It doesn't have to be painful. The markets are moving in that direction. People trade exchange-traded funds (ETFs) for practically everything now. I can envision a mutual fund or an ETF that is a collection of various things. It could be gold, silver and platinum. It could have oil in there. It might include Swiss francs. It could even have various patches of real estate. The ETF itself would then become a currency, not because anybody has it planned that way, but because the markets will see that there will be a demand for something that is a non-dollar asset that is easily tradable and seen as a store of value. There would probably be hundreds of these baskets of assets at the start. Some would work better than others would; the less workable ones would shake out. You might wind up with maybe a half dozen ETFs or mutual funds that are baskets of various assets circulating in the world. They would essentially become the currencies.

TGR: Would investing in ETFs now be a good way to prepare?

RM: No. I don't know of any that are arranged that way. It may be a while until somebody catches the idea and decides to give it a try.

TGR: What about the precious metal equities? Would that be a good way to prepare?

RM: Yes. There are lots of good precious metal stocks. I own quite a few. That is another way to protect yourself. However, be sure to deal with a broker who really knows natural resources. You have to have some skill in picking those stocks. It's not like going down and buying a gold coin where you just walk into the coin dealer and tell him I want a handful of American Eagles or Canadian Maple Leaves. You really have to know what you are doing when you are buying gold stocks.

TGR: Any final thoughts you want to leave with The Gold Report readers?

RM: The world has changed. When you look at the news and you say to yourself, "My God, America isn't what it was; the world isn't what it was," have the confidence to know you are right. We are probably not going back to what America or the world was anytime in my lifetime. Therefore, you want to start learning everything you possibly can about this new condition and adapt to it.

TGR: Thank you for sharing your thoughts.

RM: Thank you, JT. I appreciate being here

The biggest risk in Gold investment you might not be aware of

By Jeff Clark (Casey Research)
As with most things in life, making a Silver or Gold Investment is not without risk. But what do you suppose is the biggest risk we face? Another 2008-style sell-off?Gold Mining stocks never breaking out of their funk? Maybe a depression that slams our standard of living?

Though those things are possible, we at Casey Research don't see that as your greatest threat:

"Your biggest risk is not that gold or silver may fall in price. Nor is it that gold stocks could take longer to catch fire than we think. Not even the prospect of the Greater Depression. No,your biggest risk is political. As bankrupt governments get increasingly desperate for revenue, any monetary asset held domestically could be a target. It is absolutely essential that every investor diversify themselves politically. In fact, at this point, it is the one action that should be taken before anything else." – Doug Casey, September 2011

I know many reading this are prudent investors. You own gold and silver as solid protection against currency debasement, inflation, and faltering economies. You set aside cash for emergencies. You have strong exposure to gold stocks, both producers and juniors, positioned ahead of what is likely the next-favored asset class. You feel protected and poised to profit.

Yet, despite all this preparation, you remain exposed to one of the biggest risks.

Similar to holding a diversified portfolio at a bank without checking the institution's solvency, many investors keep their entire stash of precious metals inside one political system without considering the potential trap they've set for themselves. While storing some of your gold outside your home country is not a panacea, it does offer one important thing: another layer of protection.

Consider the exposure of the typical US investor: 1) systemic risk, because both the bank and broker are US domiciled; 2) currency risk, as virtually every transaction is made in US Dollars; 3) political risk, because they are left totally exposed to the whims of a single government; and, 4) economic risk, by being vulnerable to the breakdown of a single economy.

Viewed in this context, the average US investor has minimal diversification.

The remedy is to internationalize the storage of some of your precious metals. This act reduces four primary risks:

Confiscation: We don't know the likelihood of another gold confiscation. But we do know that things are working against us – particularly for US citizens. With $14.7 trillion of debt and $115 trillion of unfunded liabilities, the US government will likely pursue heavy-handed solutions. Under the 1933 FDR "gold confiscation" in the US (the executive order was actually a forced delivery of citizens' Gold in exchange for cash), foreign-held gold was exempted.

Capital Controls: Many Casey editors think some form of capital controls lie ahead, limiting or eliminating a citizen's ability to carry or send money abroad. If enacted, all your capital would be trapped inside the US and at the mercy of whatever taxing and regulating schemes the government might concoct. Although you might be able to leave the country, your assets could not travel with you.

Administrative Action: There are plenty of horror stories of asset seizure by a government agency without any notice or due process, possibly leaving the victim without the means to mount a legal defense. Having some gold or Silver stored elsewhere provides what could be your only available source of funds in such a scenario.

Lack of Personal Control: Having gold and silver stored elsewhere adds to your options. You will have a source of funds available for business, entrepreneurial pursuits, investment, or pleasure.

Notice above we said these risks can be reduced, not eliminated. There is no perfect solution; US persons could, for example, be compelled to pay a "wealth tax" on assets held worldwide, or even repatriate them in a worst-case scenario. Absent a crystal ball, the political diversity of asset location is an essential strategy against an uncertain future.

Foreign-held assets also require greater awareness and planning:

Access to your metal or sale proceeds may not be quick. Therefore, this option is for those with some gold and silver stored at or near home. We do not recommend storing all your precious metals overseas; that defeats one of its purposes, to have it handy for an emergency.

While we think the US poses the greatest threat, a foreign government could move to control certain assets as well. The risk varies by country and is generally greater within the banking system than with private vaulting facilities.

Understanding and complying with reporting requirements is essential.

The bottom line, though, is that foreign-held precious metals can mitigate risk and give you more options. And as your metal holdings grows, diversification becomes more crucial.

Given our current rapacious climate, it's likely that simply Buying Gold won't be enough. We strongly suggest every investor diversify one's bullion storage outside their current political regime. The option may not be available someday, leaving you vulnerable without a secondary source of bullion.

We advise taking advantage of the opportunity before it is gone

Silver Price: “10-bagger” from here

Cazenove Capital’s Robin Griffiths believes that when the ‘big reset’ finally comes to the global financial system, the price of silver in today’s dollars could reach a ten to twenty “bagger”—that’s 10 to 20 times from $34, or $340 to $680 per the ounce. 

“I believe going forward that silver will be a ten or twenty bagger, one just has to tolerate the short-term volatility,” Griffiths told King World News.

Griffiths suggested that today’s price for silver reflects a continued lack of awareness among the general investor public of its safe haven status and store of wealth, especially when widely-quoted exchange rates don’t reflect the carefully orchestrated currency devaluations among central banks.

The lessons of drastic changes in currency crosses leading up to the 1987 stock market crash and Asian currency crisis of 1997 must remain fresh in the minds of policymakers.  In hindsight, the G-5 Plaza Accord and the rapid rise of capital flows into the ‘Asian Tigers’ destabilized the global financial system, respectively, resulting in market convulsions, bankruptcies and unprecedented (at that time) central bank interventions.

Big swings in currencies and in the proxies for those currencies, debt markets, bring on sudden bankruptcies to highly levered participants, such as a Dexia and MF Global as well as the temporarily hidden losses between counter parties of the two entities.  In those two cases, the lesser-understood sovereign debt market crisis was the culprit and overshadowed any sizable swings in the dollar-euro cross.

That may explain, to a rather limited degree, why demand for precious metals remains remarkably low in the U.S., still, among the vast majority of American investors who’ve had little to no experience coping with the fallout of a grossly mismanaged currency.  The knee-jerk reaction to a financial crisis for many is to run to cash—not gold and silver, as many investors still believe in the integrity of the US Treasury market.

“There is no euphoria in the gold market at the moment,” said Griffiths.  “It’s not an over-owned trade. There are still a few gold bugs and prudent people who are using gold as a hedge against paper money being overprinted, but we are nowhere near the exponential, runaway move yet.”

Those above the age of 60-years were probably old enough to remember high inflation and high unemployment of the 1970s—a time of rapidly deteriorating dollar value overseas, and wealth, domestically.  Both inflation and sluggish consumer demand can coexist.  Gold preserved wealth, while holders of Treasuries were decimated in purchasing power.

At this stage of the financial crisis, it feels more like 1974 all over again.  The threat of deflation (according to the Fed and commentators) grips the markets, as was the case in 1974, corralling investors into Treasuries—a move that famed commodities trader Jim Rogers said is “the wrong thing to do.”  Rogers made his first fortune getting it right in the turbulent 1970s.

Moving into cash, Griffiths believes, will be the trade in the coming months as the European mess gets even messier.  That means a rally in the USDX, according to him.

“The dollar should go higher than 81 and I could see it running up into the high 90s on the DXY.  That would be a significant dollar run,” Griffiths speculated.

“People are still worried, and the dollar, still, for the moment, is the world’s leading currency,” he added.  “Once they go into cash that’s what they go into.  So I think we are in a period, from now until the beginning of the year, where you should be long the U.S. dollar.”

In a way, Griffiths sees the world as FX Concepts John Taylor sees it, parting, however, from Taylor on the outlook for gold during a hypothetical dollar rally.  Griffiths envisions a higher dollar and higher gold prices.

When KWN’s Eric King asked Griffiths if his outlook for the dollar meant lower gold prices, Griffiths said, “Not necessarily, when you are worried you buy a bit of both don’t you?”

On the other hand, FX’s Taylor expects gold to drop to $1,000 before jettisoning to new highs—similarly to gold’s plunge from its nearly $200 all-time high in 1974 before dropping back to $100 during an 18-months sell off period—which lasted until 1976.  The yellow metal, then, made its big move to eventually reaching a high of $850 in Jan. 1980.  In disbelief, most investors were left behind until the very last moment of the end to the trade.  Taylor, presumably, believes gold will be sold to satisfy redemptions among hedge funds.

Euro Pacific Capital’s Peter Schiff has a different take from both men.  He believes the move down in the dollar to its last bastion of major support at the USDX 72 level is imminent and will fail that support, leading to a panic out of the dollar in coming months.  He said investors will be shocked by the contrarian move in the dollar.

So what to do among the disparate opinions from some of the smartest in finance?  As Dow Theory Letter’s famed author Richard Russell puts it, just buy enough gold as an “insurance policy” and “forget about it.”  But if investors seeking leverage to the gold price, they should buy more silver.  That’s the advice of nearly all hard money advocates, including the latest to come aboard the silver train, Gerald Celente.

How Much Disaster Can Gold Hedge?

Lying somewhere between meme and cliché is the idea that when the going gets tough, the smart buy gold. Gold has had a special hold on the minds of many investors for centuries, if not millennia, offering the promise of being the one asset that will never go to zero, and the one medium of exchange that other people will always accept in trade. While these notions are basically true, investors would do well to consider just how much disaster they can really hedge by buying gold.

TUTORIAL: Commodities: Gold

Forget InflationWhenever it is time to debate the merits of gold, it is only a matter of time before someone mentions the iffy correlation between gold and inflation. The history of gold versus inflation looks a lot like a bungee cord - years and years go by and nothing seems to be happening, until there's a point of release and the price of gold rockets up.

For instance, it took 28 years for the prior peak price in gold to be re-attained. Gold spent most of the '80s and '90s declining even though inflation was technically continuing to increase. Likewise, there is now the growing belief that gold's current price is already pricing in decades of inflation to come (suggesting that the price of gold would be flat or down).

To be fair, this argument has a few flaws. First, the CPI is the most common inflation proxy used in comparison to gold and it has some significant flaws. Also, it is not constructed to be a forward-looking indicator. Second, the end of the gold standard 1971 is an important detail - it reduces the amount of truly comparable data available and makes post-1971 conclusions somewhat risky as there have been really just two major economic panics in that time. (For related reading, see Gold: The Other Currency.)

How Valuable Is It in a Real Disaster?Take the fears of the most extreme gold bugs all the way to "10" and the virtues of gold do not really hold up very well. First of all, one of the reasons to buy gold is that it has "real value" in a time when paper money could be rendered worthless, but how many people out there are capable of assaying gold? Gold has been debased and counterfeited for millennia and fake gold is not worth much more than defaulted paper money.

Investors should also remember that governments around the world have seized the gold of their citizens in times of crisis. Those who think that it couldn't happen in the U.S. or it would be over their dead bodies should refer to Gold Reserve Act of 1934 - the act that gave the U.S. government the power to seize gold at a value determined by the people doing the seizing. (For related reading, see What Was The Gold Reserve Act?)

To be even more catty, gold has a few major problems when it comes to real crisis - it is heavy, it cannot be eaten, it cannot be worn and it cannot be used as shelter. As far as using it as a medium of exchange once the government - and law and order - has collapsed doesn't work. If the government collapses and there's widespread chaos, gold is not going to be worth much absent the willpower and hardware to defend it. In other words, if I have a gun and you have gold, I'll soon have my gun and your gold. The value of gold to the regular person in a situation of total disaster is very much uncertain - the idea of people calmly going about their business and buying goods and services with gold coins presumes quite a bit of order and infrastructure staying in place.

What Gold Is Good ForJust because gold is not a perfect inflation hedge, nor an insurance policy against disaster, does not mean that it has no value and no use. Gold has inherent value in that it does not simultaneously represent one party's asset and another's liability. It also happens to be an excellent trade on fear. While gold's movements are very unpredictable over short periods of time, outperformance seems to correlate strongly with people feeling bad or nervous about economic and political conditions in their country.

It may not be widely remembered now, but in addition to major inflation issues in the late 1970s and early 1980s, there was quite a lot of fear about the state of the U.S., the quality of its leadership and competitiveness, and whether the country could continue to pay it bills. If that sounds familiar, it's no coincidence. Then as now, people did not have confidence in the U.S. government and could not envision how the U.S. would stay globally competitive. Consequently, many people dumped stocks and bonds in favor of gold. Gold set record prices that have only recently been surmounted.

Banks can fail and governments can run the printing presses all day and night, but there is only so much gold in the world. That is a powerful security blanket to hold onto while waiting for the next economic turnaround and the next technological revolution.

The Bottom LineFor investors who understand the psychology of the fear trade, and who can appreciate that gold is one of the only financial assets that becomes more attractive as people feel worse about the economy, gold is a great investment vehicle. For investors who believe that gold is a no-brainer hedge against inflation or proof that they can survive the collapse of Western Civilization, gold is a pretty lousy instrument.

Like any other financial asset, gold is worth most when there is an orderly market of willing buyers and sellers. Disasters are infamous for being decidedly disorderly and, as political collapses in recent decades have shown all too well, the rule of the gun is more common than the rule of the gold when the center no longer holds.

There are plenty of reasons to be skeptical and disillusioned with western governments today, and it is all but certain that there is a day of reckoning to come as debts, unfunded obligations, overextended money supplies and insufficient tax bases all come home to roost. Investors should ask how much the current situation already resembles the early 1980s. While fear is an incredibly powerful short-term market force, it, like gold bubbles, does not last forever. (Think the value of gold is unshakable? For more, see The Gold Standard Revisited.)

Read more: http://financialedge.investopedia.com/financial-edge/0911/How-Much-Disaster-Can-Gold-Hedge.aspx#ixzz1dDeMB8pc

Jim Rogers on US economy: 2002 was bad, 2008 worse, 2012 to be terrible

NEW YORK (Commodity Online): The 2008 economic crisis will be a piece of cake when compared to what awaits the US economy in 2012-13, believes market guru and investment expert Jim Rogers. US is now hiding behind the European problems but when you dig deeper, the US economy looks far inferior to Europe.

“We still have serious problems throughout the world. The U.S. is in fact in worse shape than Europe. Europe is getting the press these days because the debts are coming due but America is the largest debtor nation in the history of the world.The next time we have an economic slowdown it will be terrible. And it will be sooner than we all had hoped. I would expect it to be around 2012 or 2013,” Rogers said in a Fox Business interview

“Every 4-6 years throughout history we've had an economic slowdown, so it will happen in 2012 or 2013. And we will be in even more debt! We are overdue”, he added

He also warned about potential problems facing the agriculture industry in the next 10 years arguing thatthe average age of farmers in America is 58, Japan 66 and Australia 56!

Gold may rise further than the year-end target of $1900

The political shenanigans played out by the Greek Prime Minister this week renewed worries about the health of the European financial system. Mr. Papandreou initially called for a referendum which could have led to Greece rejecting the debt plan agreed to just a few days ago. This could have triggered an unruly default which would have had serious consequences for the Euro area and beyond.

In the end the referendum was scrapped after other European leaders in no uncertain terms told Greece that it was not going to get any more money if the referendum passed and it would effectively amount to a decision on whether Greece would remain in the Euro zone.

In a spectacular resemblance to 2008 the European Central Bank under the new President Draghi slashed official rates by one quarter of a percent, just a few short months after having raised them. All previous rate changes in the ECB’s twelve-year history have all been “pre-announced” while this one came out of the blue highlighting the worries about downside risks to growth, which are now taking hold within the region.

Traders across all asset classes struggled to make heads or tails of all the headlines and events of the week with volatility staying at elevated levels making trading increasingly difficult. The decision to scrap the Greek referendum, the ongoing G20 meeting and the ECB rate cut however all helped risk sentiment ahead of the weekend with stocks and commodities winning back some of what was lost earlier.



Against this backdrop commodities gave back some of the gains from the previous couple of weeks with the Reuters Jeffries CRB index losing 0.7 percent. The dollar recovered sharply as euphoria turned to despair thereby removing the support commodities normally receive from this adverse relation. The soft sector, especially cotton, Sugar and coffee, was knocked back while Gold having fully recovered from the September onslaught regained some of its safe haven status, while some geopolitical tension supported oil.

Gold receives fundamental and technical boost
Gold received a boost from renewed worries about the stability of the Eurozone and the Euro. Some analysts raised the possibility that the European Central Bank, much against the wish of some of its members, could begin some sort of quantitative easing in order to help pull the Eurozone out of the deep freezer. Real bond yields (adjusted for inflation) remain negative in more than half of the G20 nations thereby supporting non interest/dividend paying assets like gold.

Having spent the last month recovering from the sell-off during September this week saw a move back above 1,700 dollars which pleased both technical and fundamental traders with most now believing the worst is behind us. During the previous two major corrections since 2008 it took 6 1/2 and 5 months respectively to climb back to a new high. Considering the latest correction was the greatest of the three we would therefore be surprised to see a new high before year end. Further consolidation seems to be in order ahead of our year-end target of 1,900 with gold already showing an impressive 24 percent return on the year.