MONEY CALL-Durable Gold's Hold For Long-Term Investors

NEW YORK, June 2 | Thu Jun 2, 2011 4:33pm EDT

(Reuters) - Gold has hit record highs this year at a time when a double-dip recession threatens the global economy and governments everywhere are pulling back from the spending binges used to blunt the 2008 financial crisis.

Austerity and economic slowdown hardly seem like strong arguments for buying an inflation-sensitive precious metal.

Still, gold bugs are bullish as ever. And some are predicting the metal will rise to $2,000 an ounce over the next year, nearly a third above the present level.

"The reasons for buying gold haven't diminished," said Jeff Clark, the Sacramento, California-based senior precious metals analyst for Casey Research. "Unless we change course of how we handle the debt and deficits, there is a good reason to buy gold."

The pervasive bullishness stems from lessons learned in the financial crises of the past decade.

Gold does have staying power during big fiscal dramas and financial meltdowns. Discredited as a serious investment during the stock market boom years, it's regained its shine at the worst of times over the past decade. It's especially attractive when the dollar declines, as it has been wont to do in the current era of fiscal imbalances.

But even if it has earned a place in portfolios, gold poses challenges: What form should you buy it in? And when should you buy it?

THE LONG RISE

Skeptics have called for a pullback at regular intervals -- and still it stands tall: Gold has appreciated 500 percent since mid-2001, a 17.5 percent annualized return. The top-performing U.S. mutual funds of the past decade had invested directly or indirectly in the metal which Cortes carried back from the New World by the boatload.

A deepening budget crisis in Washington has gold sailing high again in some buyers' dreams. The reason? A budget crisis could trim the currency further. Gold's strength comes largely from the erosion of the dollar, which has lost 37 percent of its value since its last peak in mid-2001.

And investors haven't missed the boat.

"Definitely still time and there always will be 'still time'" to buy gold, says Al Korelin, chairman of AB Korelin and Associates in Semiahmoo, Washington. "You buy gold as insurance and not necessarily as a short term investment."

Spot gold was last at $1,532.99 an ounce XAU=, down but not far off the May 2 record high of $1,575.79 an ounce, according to Reuters data. It fell later that day after news of the death of al Qaeda leader Osama Bin Laden.

HOW SOON TO $2,000?

Commodities often hesitate at key price points, owing to the heavy use of leverage in futures accounts and heavy reliance on stop-loss orders linked to key price points. Which begs the question: When might gold rise from its current peak to the next lofty level?

"Gold will eventually go up to $2,000 an ounce," said Mike Frawley, global head of metals at the Newedge Group in New York, though "probably not much before early next year."

Frawley said the price of the currency now has backing based on supply and demand fundamentals. But the currency factor could swing back into play.

"The value of the dollar vis-a-vis other major world currencies is considerably important," he said. "Global demand (for gold) is still strong from Asia Pacific, India and China in particular."

CitiFX Technicals, a note from Citigroup, said gold could test an all-time high in the weeks ahead, top $1,700 this year and rally to more than $2,000.

Todd Horwitz; the Chicago-based chief strategist for the Adam Mesh Trading Group is waiting for the metal to top technical resistance. "I would not become bullish on gold until it made new highs over $1580."

BULLION VS MINING SHARES

For investors who think gold is heading on another run, the pure play, bullion, is an option. The physical product is not hard to acquire.

Casey Research's Clark said investors should avoid gold bars, half ounce bullion coins or rare gold coins and stick to the well-known one ounce gold coins like the American Eagle or Buffalo, the Canadian Gold Maple Leaf or the South African Krugerrand. Better-known gold instruments are better to have when it comes time to sell, Clark says.

Buying the metal, as opposed to the shares or producers, has distinct advantages, Clark says. That's because companies carry the risk of bad management, inaccurate accounts of deposits and the costly pitfalls of mining.

On the other hand, buying bullion will entail storage and security costs whether you hold it at home, in a safety deposit box or at a managed storage facility.

However, others say buying the shares of producers is more productive.

"You should put up to 10 percent of your capital in the bullion, 55 percent in the senior producers and the remaining 35 percent in the smaller companies," says AB Korelin's Korelin.

His suggested senior producers are Goldcorp Inc. (G.TO), Newmont Mining Corp. (NEM.N) and Kinross Gold Corp. (K.TO).

Two favorite junior companies are International Tower Hill Mines Ltd (ITH.TO) and Extorre Gold Mines Ltd (XG.TO).

BUYING GOLD BELOW THE SURFACE

Bill O'Neill, partner of commodities investment firm LOGIC Advisors in Upper Saddle River, New Jersey with $200 million in total assets, says he is cautiously optimistic on gold.

The firm continues to be heavily involved in the producers as gold in the ground is cheaper than the spot price for bullion, he says.

Given the associated costs to store and secure the bullion, he said LOGIC isn't a big advocate of bullion, instead favoring the low cost scenario of ETFs such as Blackrock's iShares Gold Trust (IAU.P) and the SPDR Gold Trust (GLD.P), the world's largest gold-backed exchange-traded fund.

Buying the physical metal would only be to protect against a global monetary system collapse, he said.

But whether waiting for a strong technical signal, the dollar to fall further or U.S. political gridlock on deficit reduction to signal further gains ahead, the overwhelming consensus is that gold is going higher.

"Look at what the Chinese are doing in buying more precious metals," says AB Korelin's Korelin. Are they stupid?" (Reporting by Nick Olivari; Editing by Richard Satran and Bernadette Baum)

Source: http://www.reuters.com/article/2011/06/02/moneycall-gold-idUSN2315092920110602

3 Things to Learn from the Silver Selloff

Silver’s correction from nearly-$50 to $34 was wild; it was the kind of market movement that hardly allowed investors to digest what was coming as it happened.  A month after wild market activity, investors who have taken the time to uncover what happened in the market may have realized three key elements of the selloff.

The three elements driving silver market activity:

1. Dynamic relationship with gold – While silver hasn’t been tied to gold in any “official” capacity for decades, and centuries in some parts of the world, gold and silver are still tied together unofficially by market actors.  In the recent silver correction, silver dropped by 33%, gold was virtually unchanged, having lost only 7% from top to bottom.  The gold to silver ratio now stands at a reasonable 40:1.  Of course, there is a very obvious case for long-term decoupling as silver gains from evolving industrial demand, but in the short-term, the irrationality of the markets weighs as heavily as anything else.
   
2. Financialized silver still important – Leading up to the silver correction were several key events.  First, the build-up in investment interest in financialized silver, that which is bought and sold on markets and in intangible form, combined with the a mini-panic short covering just before the drop.  Prices at your local coin shop are still set by the spot price, which is engineered first by the Comex, and secondly by the major institutional investors who bully prices for most financial products.
   
3. Miners matter – Wall Street, which is largely a game of who is smarter than who, is still on the hunt for cash flow, not protection of wealth.   In the silver correction, traders were swapping bullion—at least supposed future delivery of bullion—for shares in silver miners, which produce cash, not silver.  The short-silver, long-miners trade helped to balance out relatively low valuations for miners, which are to Wall Street future cash flows from silver production, not silver.

In realizing these three realities of the silver market, investors should be patient enough to know that nowhere in the above three lessons to be learned is that silver is a bad investment.  Instead, silver makes an excellent investment for those who have the liquidity to ride out the market’s irrationality.

The short-term is still dominated by cash because even today, cash is still part of everyday life.  Silver is not yet accepted at your local convenience store, and Wall Street still values the modern, non-backed dollar more than it values the element which has historically given it value.

Investors should use this opportunity to make long-term entry points out of short-term corrections.  The bull run in silver will not be over until budgets are balanced, interest rates rise, and industrial manufacturers find a replacement for what is one of the most useful elements known to man.  The small quantities of silver, which make it so attractive in money and industry, are unfortunately working against the recent market entrant.  However, in the long-term, all markets find efficiency and normalcy—and that means significantly higher values for silver bullion.

Dr. Jeff Lewis

Gold as Collateral - Major Step for the Gold Market

If gold were generally accepted as collateral in global monetary dealings, would we see it used as such? Strangely enough –No! In certain transactions, however, where no other collateral –whether currencies, government bonds and the like—is used, gold may be used, as a last resort. There has been a very long history of gold being sought as collateral, but only the most desperate of debtors has allowed their gold to be used as such. Government bonds are easier to produce and are limited only by market confidence. Moreover they remain in the jurisdiction of the issuer, leaving the issuer in control of them. Gold is different and can only be used once, held outside of the owner’s jurisdiction. Control is therefore lost. It cannot be printed and becomes a complete commitment by the owner to honor his obligations.

So why is gold as collateral such an important step for gold in the global monetary system?

The Latest Moves

Last week, the European Parliament’s Committee on Economic and Monetary Affairs agreed to allow central counterparties to accept gold as collateral. Once ratified, we would see gold redefined as a highly liquid asset under the Capital Requirements IV Directive, due in June from the European Commission. This is not the first time gold has been accepted as collateral. Late in 2010 ICE Clear Europe, a leading European derivatives clearing house became the first clearing house in Europe to accept gold as collateral. In February of this year JP Morgan became the first bank to accept gold bullion as collateral. The Chicago Mercantile Exchange is now accepting gold as collateral for certain trades and the London-based clearing house LCH Clearnet has said it also plans to start accepting gold as collateral later this year subject to regulatory approval.

Why now?

Despite comforting words from the U.S. the Eurozone, government debt is being regarded with somewhat less enthusiasm than in the past. Both monetary zones are experiencing awful problems regarding their debt, particularly on the international front. A look at the Mediterranean members of the E.U. shows nations either unable to repay their debts or on the brink. This makes their debt dubious collateral. The sight of the E.U. wanting to control taxation –sell state owned assets on condition that more funds are poured into the country—is really what happens when an individual is liquidated (sequestrated). It’s nothing short of that. Will Greece accept this without some dramatic moves? If Greece had lost a war, then this is what the spoils would be. That is certainly how the Greek people will see it.

Are debtor obligations more important than national sovereignty?  

The answer to this big question is not as apparent as it seems….

If they are at the very least social unrest is likely, which in turn will further damage one of their main sources of revenues, tourism. But Greek voters are aware (as much as their government is aware) that Greece retains jurisdiction over Greek assets in Greece. It is their decision, not the E.U.’s.

Other potential reactions may include…

• A refusal to accept anything but a 50% write-off of debt and leave the banks to sort themselves out.  

• Leave the E.U. with the obligations unmet or a massive extension to the maturity dates made by the Greek government.

• The reinstatement of the Drachma and make holidays in Greece very cheap, as inflation takes off, euro prices drop and Greece experiences a boom in Tourism.

No doubt the Greeks are weighing up all these options and will do what serves Greek interest best in the end.   Let’s glance at the dominant principles that will guide the process in the days and weeks ahead.

On the banking side, the concept of debt re-scheduling is unacceptable because it would reduce the asset base of the banks and undermine their solvency. The extension of debt and lowering of interest rates would overcome that problem, but it is paramount that the debt be repaid eventually, in a manner that an impoverished Greece can bear. The sell-off of state-owned assets will reduce state revenues and likely cause a tremendous amount of employment cutting (as the operations are made profitable) which will exacerbate the situation. The severity of a new debt package will hurt Greece and ensure that its economic woes last for up to a generation.

On the Greek side the principles of democracy demand that Greek populations act in the interest of the voting public. This means that they must assess whether the solutions are acceptable to the Greek public. If they lead to the nation’s impoverishment for a generation then the Greek public will not accept them. A pragmatic assessment of the worst of the two situations must be made, an onerous set of repayments, or

The loss of financial credibility in the E.U. and the ejection of Greece from the E.U. (might be the lesser evil)

Such an isolation of the country may raise employment and improve tourism just as sanctions in relatively developed nations often produce a boom. Whatever the outcome you can be sure that politicians will follow voter’s first, ahead of banking requirements.

Whatever happens, it will prove very bad for the E.U. and the euro. Would you accept their debt as collateral? Unlikely! What’s worse is that any attempt to seize Greek assets without their approval may see Greece take itself out of the Eurozone. Would the E.U. actually invade to take Greek assets in payment of unpaid debts? A write-off of a good portion of what’s owed may be a disaster, but it may well be the only option left.  

This may well prove to be a battle of ‘bankers’ against democracy!

Greek Gold

Of critical interest to the gold markets is the sight of Greek gold. Greece currently owns 111.5 tonnes of gold in its reserves [79.3% of its reserves] which can be taken out of its reach and into the hands of creditors. The sale of its government-owned assets to private hands under the pressure of distressed finances may well not achieve anywhere near their value. Would the Greek government pay the proceeds across to creditors immediately? Their gold has far more value than its current market price.  

Already gone?

But has it already been used as collateral in a Bank of International Settlement deal where it was swapped for foreign currencies? Last year the B.I.S. undertook many gold/currency swaps in mysterious, undisclosed situations. Were they tied to the bailouts? There will be no more devastating a blow to Greece’s financial credibility than a disclosure that the gold has already gone. It’s equivalent to the family jewels being sold off. And that is gold’s value, not its market price!

The current gold price is irrelevant to the repayment of debt. 111.5 tonnes is worth only $5.5 billion, which barely scratches the surface of Greece’s $350 billion debt. In a situation where monetary values are collapsing (the U.N. has just issued a report in which they state their fears of a U.S. dollar collapse) the gold price will leap to levels where national debt becomes relatively easy to repay and certainly worth all the promises a government can make at that time. Gold in extreme situations adds considerable credibility and value to any debt situations, way beyond its market price.

If the gold is there, then Greece would feel that it is the one asset which they can use when all credibility is lost. That’s why central banks hold so much gold in the first place! If Greece were to leave the Eurozone then Greece might have a chance, with their gold, to transition into a more prosperous country.

Other Countries in Distress

A look at the other debt-distressed nations that have received a bailout or may want a bailout…

• Ireland has only 6 tonnes of gold in its reserves, which (in current prices) is worth only $296 million.   Ireland needs far more to solve its debt problems. The gold would be symbolic of the nation’s family jewels. The cleverest move Ireland has made was to insist on its low Corporation Taxes being maintained because this will allow much higher revenues to be achieved.

• Portugal is in a different category. It has 382.5 tonnes of gold in its reserves which has a current market value of $18.9 billion, which would make a significant contribution to their debt situation.

• Spain has 281.6 tonnes, whose value at current prices is worth $13.9 billion which again would make a significant contribution to its debt repayment.

• Belgium has 227.5 tonnes with a current market value of $11.2 billion.  

• The U.K. has 310.3 tonnes of gold remaining in its vaults. This is worth $15.3 billion.

• Italy which has just come under the ratings agency’s spotlight holds 2,541.8 tonnes of gold in its reserves.   This is worth $121 billion at current values.

• With the U.N. placing the U.S. dollar in the potential collapse category a glance at the published level of gold reserves shows that it holds 8,133.5 tonnes of gold, worth $4.01 trillion at current prices.

• What if the crisis spread and the E.U. gold reserves at the E.C.B. came under threat? Its gold is 502.1 tonnes valued at today’s prices at $24.78 billion.  

Having showed these figures to you, we must stress that such gold reserves will only be used if there are no alternatives. It is a last resort asset, which when gone leaves the nation (almost) out of the international arena and in an (almost) isolated position. In some cases this may prove a good thing. An extreme example of this was seen when Rhodesia had international sanctions placed against it. It thrived, as all the imports had to be substituted for the local equivalents. South Africa, in the face of sanctions, also thrived. So you can be sure that some nations will be tempted to default rather than sacrifice their gold reserves.

Hyperinflation by 2014

Current developments in the United States and globally make hyperinflation almost a certainty, but you can protect yourself from it and even profit.

$1,500 Gold and $30 Silver are just harbingers of things to come and should the US suffer hyperinflation these numbers could triple.

I have written "U.S. Hyperinflation Is Coming Soon," a 24-page, 13,000 word analysis of economic, historic and social factors and suggested plan of action for investors.  In it, I conclude that   if your assets are stored primarily in U.S. Dollars, you need to act now to protect your family, wealth and future.

In April 2004 I wrote “The Perfect Golden Storm,” which described the forces driving gold toward and beyond its 1980 peak of $850. In April 2008, with gold already having reached $1,000, I wrote “Gold: $2011 by 2011,” which predicted that the bull market in gold would continue. By April 2011 gold had reached $1,500.

The current gold bull market is still in Phase I. Phase I involves gradual increases in the price of gold; Phase II, steeper increases; Phase III, a near vertical increase, followed by a sharp fall.

In Phase I of the 1977-1980 gold bull market, the price increased 25.8% the first year, 33.6% the second year, and 22.8% in the next six months (45.6% annualized). In Phase II, the price went up 84.5% in the next six months (169% annualized). Phase III lasted 20 days, during which the price spiked 66% (1,204% annualized)>

The current bull market, which has already lasted 10 years, is still in Phase I, with average annual increases of 20.3%. 

In Phase II we are likely to see 50% annual increases over a period of about two years, taking gold to around $3,000. The complete Hyperinflation study explains Phase III, which would have gold reaching $5,000 or more with three or four months. I believe Phase III will occur by 2014. A US government decision to adopt a gold standard or start a gold confiscation program would accelerate this timetable.

The 1977-1980 gold bull market ended without hyperinflation. Very high interest rates and wage and price freezes sent the country into a recession and gold into a bear market. The U.S. is in a different place today, facing stiffer global competition and higher federal deficits and national debt, and committed to stimulating the economy through low interest rates.

During the 20th Century, 30 countries experienced hyperinflation. In every case, horrifying price increases that quickly wiped out the value of savings and of most forms of investment took people by surprise.

Economist Phillip Cagan famously defined hyperinflation as an average monthly price increase of 50% or more. At that rate, a $10 item costs $1,946 one year later. Most of the 30 nations that suffered from hyperinflation in the 20th Century followed the Cagan model.

Many of the factors that have led to hyperinflation in the past are present in the United States today. They include fiat currency, financing wars through debt, government bailouts of financial institutions, rapid increase in national debt, increased creation of money, and monetizing of national the debt (through Fed purchases of Treasury notes), wage freezes, and social turmoil.

U.S. federal debt is going up, with no end in sight. Standard & Poor’s changed its outlook rating on US sovereign debt from “Stable” to “Negative.” Bill Gross’s PIMCO Total Return Fund sold all the T-Bills in the fund. State and municipal budget deficits compound the problem, as do growing trade deficits.

The federal government claims inflation is running at about 2%. If the CPI were still calculated as it was in 1980, inflation would be running at just under 10%. The index of all commodity prices is up 230% in 10 years. The US Dollar Index is calculated against a basket of six other fiat currencies that have lost purchasing power. Nevertheless, from a high of 160, the USD has recently tracked in the 72-74 area. Governments that are in denial about inflation continue to feed inflation until it grows into hyperinflation.

In November 2010, President Obama froze the wages of 2.1 civilian federal employees for two years. Many states and municipalities are following suit. Tens of thousands of workers and students demonstrated in Madison, WI and even briefly occupied the State House to protest the termination of collective bargaining rights. Similar protests have taken place in Montana, Illinois, and Indiana. In California, New York, and other states, thousands of college students, faculty, and employees have demonstrated against cuts to education budgets.

Social unrest makes governments leery of taking economic measures, such as raising interest rates and tightening up on credit that might create more unemployment and generate more protests. Often, it drives them toward papering over the problems with money, bringing on hyperinflation and even more social unrest.

My   study covers the history and possibility of US. Government Confiscating Gold or what is happening right now that could lead our country to creating a Gold Standard, and backing our currency with Gold.

Steve Forbes Pushes Modern Gold Standard

A "true" gold standard where every U.S. dollar in circulation is backed by gold is literally impossible. The amount of money in circulation is almost $9 trillion. That's counting cash, deposits, traveler's checks, savings and money-market deposits. The amount of gold the United States holds, using a $1,500 per ounce gold price, is $400 billion. So a true gold standard would require the gold price to hit $5,000 and for the government to remove $8 trillion in paper currency from circulation. That or we buy all the bullion in the world -- 82,500 tons which would still only equal $4 trillion -- and cut our money supply in half.

Forbes acknowledges that this way of operating isn't realistic and proposes a different kind of gold standard. He proposes to set the U.S. dollar to a fixed rate in gold, say $1,500, when the price rises above that level the Federal Reserve must raise rates and when it falls below the Fed can loosen monetary policy. Gold, in essence, would act as a check for the central bank and help regulate the U.S. dollar.

"We don't need to own one ounce of gold," says Forbes in an exclusive interview withTheStreet, "you just keep it in a narrow range. Forbes calls this gold standard modern. "I think this is the realistic one for the world to have today."

The typical gold standard takes a lot of heat with critics who cry that it would potentially lead the United States into a catastrophic recession as the Fed would lose all its monetary power. "Once you remove the central bank's ability to shape monetary policy by basically tying it to gold and only to gold, you've got a problem," argues Jon Nadler, senior analyst at Kitco.com, who thinks an economic contraction would result from a gold standard and also questions its past successes.

The United States has been on a gold standard several times with the most recent being the Bretton Woods system between 1945-1971. During that time there were limited banking crises as world currencies were linked to the dollar, which was linked to gold, but then the U.S. economy faltered during the Vietnam War. The United States didn't have enough money to pay for the war and President Nixon dissolved the gold standard in 1971 in favor of floating currency rates and the possibility of creating more cash.

The United States has, since then, adopted a more Keynesian approach, working off the theory that pumping money into the economy will stave off recessions. But with the U.S. government butting up against its debt ceiling, the national debt topping $14 trillion, and the U.S. dollar down 13.21% since the start of 2009, many experts think something's gotta give.

"The gold standard we are going to get in the next 5 years is going to be very different than the past," says Forbes. "You get realistic interest rates, you can invest again, you don't have to speculate in commodities. What's not to like?" 

U.S. Debt Train Could Drive Gold Higher And Higher - Mineweb

Continued concerns about the debt crisis in Europe have given gold prices a lift but, it is important to keep an eye on what is happening both in Asia and the US

Author: Geoff Candy

GRONINGEN - 

Gold prices are currently flirting with a four week high in dollar terms largely on continued fears that the crisis in Greece could lead to some kind of contagion in markets across Europe and, potentially even further.

Indeed, the events within the euro zone have done well to take people's attention away from the two other big macro economic stories ongoing in the world - the terrifying growth of U.S. debt and the continued growth of China and India.

Speaking to Mineweb's Metals Weekly podcast, Michael Power, Investec investment strategist, said of the ongoing crisis, "The sentiment effect is that it probably acts as a bit of a dampener especially to traders who are often coming out of the west.  They tend to pay a lot of attention - indeed I would argue too much attention - to the macro data that's coming out of the US and Europe, somewhat underestimating the power of the macro data that continues to come out of Asia."

For commodities investors, the big question would have to be whether or not demand from Asia is able to continue to support growth as the West continues to flounder in a morass of debt. According to Power, for the time being anyway, Asia seems to be doing just that, despite a very little bit of softness raising its head in China.

But, he adds, that the pattern is a well established one where China does indeed touch the brakes to slow itself down somewhat before accelerating again. And, he says, "If they do have to accelerate, if they've over touched the brakes and things carry on getting even soggier, they have an enormous amount of capability to actually start speeding things up again.  They could lower interest rates, lower reserve ratios and even, because their budget is in such good shape, increase fiscal spending.  So I'm not too worried about the Asian story."

In light of this, the outlook for precious metals remains good especially when, as Power points out, between them India and China consumed over half of the new mine supply in the first part of this year.

"We are beginning to see them really become very big players and the more people focus on what's happening in the west to the detriment of not really focusing on what's happening in the east, the less they're likely to get the overall picture right."

That said, there is reason to be concerned not just about what is going on in Europe but, also the developing situation in the US.

According to Power, the biggest question in the global economy at the moment, albeit not the most immediate one is what is likely to happen to U.S. debt.

He says, "Someone this morning likened it to a Charlie Chaplinesque cartoon where you see a guy tied to a railway track and the engine is coming from afar and you can hear it coming and they're lying on the track looking at you and saying help me get out of this. I don't think that the Americans have quite realised yet that the debt train is coming and its big and at some point they're going to need something to do about it."

He adds, "At the moment most members of Congress generally speaking, don't see it as a particular problem - they're in denial.  They think: 'we're the United States so we can afford to get away with big numbers'. And when we see now that China is no longer the main owner of US treasury bills, a far more frightening person is - and that is the Federal Reserve itself - you start to realise that this dog isn't just chasing its tail - it's starting to eat its tail. Eventually this is going to end up in tears  We've seen with austerity in Greece over the weekend what the electorate thinks of that. Well we ain't seen nothing yet, because the Americans I suspect are going to be even more vocal than their Greek friends."

But, if one looks at what has been happening to precious metals prices during this latest crisis, one can only imagine what will happen if the US takes to the streets

Source: http://www.mineweb.com/mineweb/view/mineweb/en/page33?oid=128300&sn=Detail&pid=102055

Why Gold Is Going Higher

While there are many reasons that gold and silver are going to keep moving higher as the fiat currencies trend lower, at our recent Casey Research Summit in Boca Raton, faculty member Mike Maloney pointed out a fact that, while obvious in hindsight, I had never heard mentioned previously.

Namely that during the last major precious metals bull market in the 1970s, only about 10% of the world could own gold – either due to legal restrictions or a lack of liquid capital.

Today, few countries prohibit gold ownership, and a far higher percentage of the world’s population has transitioned out of poverty.

China provides the most germane example, having legalized gold and silver ownership for private citizens in 2004, and through the explosive growth in national GDP that has caused Chinese gold purchases to skyrocket.

Confirming the point, the following is an excerpt from a recent Wall Street Journal article:

Chinese investors are snapping up gold bars and coins, buying more than ever before in the first quarter of 2011 and overtaking Indian buyers as the world's biggest purchasers of the metal.

A growing middle-class in China is raising the appetite for gold there.

China's investment demand for gold more than doubled to 90.9 metric tons in the first three months of the year, outpacing India's modest rise to 85.6 tons, the World Gold Council said in its quarterly report on Thursday. China now accounts for 25% of gold investment demand, compared with India's 23%.

The report underscores the rising appetite for gold among the growing middle-class in China. Fears of the country's soaring inflation, as well as a search for new investments, is luring investors to gold, and marketing of the precious metal has also increased in recent months.

"I think people will be surprised by the strength in the Chinese demand, but we think this is a trend that is set to continue," said Eily Ong, an investment research manager at the gold council.

Notoriously active savers, stashing away on the order of 50% of their income, the Chinese are increasingly opting for gold over the renminbi to stash their wealth.

For those wondering just how big a development this is, consider that in 2007, just before investing in gold became “the thing to do,” gold demand in India was 61% of the world’s total while China’s gold demand was only 9%.

In other words, India is no longer the only elephant in the gold vault. And they are not alone – investors around the world are now able, and willing, to buy gold as a way of protecting their wealth from the inevitable decline of the fading fiat currencies.

I still don’t think we are out of the woods on a commodities correction, but there are so many black swans floating overhead that literally anything can happen, at any time. Thus buying in tranches on pullbacks over the next four to six months still makes a lot of sense.

But in the longer term, gold has almost nowhere to go but up.

Gold and Silver on the move

GOLD

SILVER

USD

Roy Martens
Chief Technical Analyst
Resource Fortunes LLC

Comparing 1980 GOLD bull market with today huge potential even more

Featured is the weekly gold chart.  (These charts courtesy Stockcharts.com unless indicated). The bull market that started in 2002 is beginning to take on a greater urgency.  In percentage terms the price rise is still in its infancy (the 1980 bull market rose from 35.00 to 850.00 for a 24-fold increase).  The current bull market has just passed the 5-fold increase level.  However in chart form the shape of the bull market is beginning to resemble the money supply chart.  See next chart.

“Because China needs gold, there will never by ‘Peak Gold.”  …. VRONSKY.

This chart courtesy Mises.org shows the True Money Supply (USA) up to the moment.  Since the 2008 credit crunch, the US dollar money supply has begun to move up exponentially.  When you add on all of the Euros, Yen, Yuans, Francs and Pounds, it becomes obvious why gold is beginning to rise exponentially as well.

“You have a choice between the natural stability of gold and the honesty and intelligence of the members of government. And with all due respect for those gentlemen, I advise you, as long as the capitalist system lasts, vote for gold." …George Bernard Shaw.

This chart courtesy Greshams-law.com shows the ‘real’ Fed Funds Rate, from data supplied by the Federal Reserve.  It shows ‘real rates’ to be negative (-3%), and heading lower.  According to Gibson’s Paradox whenever ‘real rates’ are negative, gold is accumulated by those who are interested in wealth preservation.    It should be noted that the data supplied by the Federal Reserve is ‘massaged’ for the best possible outcome.  If we were to use data supplied by John Williams at Shadowstats.com the ‘real rate’ would be negative -8%.  This means that anyone with money in the bank at 2% is losing 6% while paying tax on the 2%!  Now that is not smart.

When silver rose to nearly 50.00 in late April the ‘top pickers’ were out in force.  They began to recommend selling while silver was trading at 37.00.  Those of you who listened and sold out must be wondering what to do now.  Here are a few things to keep in mind while you contemplate your next move:

•  In order for silver to reach $50.00 in 1980 dollars adjusted for inflation, the price would have to rise to $136.47 (using the calculator at www.bls.gov).  John Williams at Shadowstats.com uses a formula that was used by the government up to 1980 and his calculation shows silver would need to be priced at nearly $400.00 to match the purchasing power of $50.00 in 1980.

• According to the CPM Group (Commodity Experts), in 1950 the above ground stockpiles of silver totaled 10 billion ounces.

• By 1980 the stockpiles had shrunk to 3.5 billion dollars.

• Today the amount of silver in stockpiles around the globe has dwindled to about 300 million ounces.

• 97% of all the silver that was available in 1950 is gone!  The majority of silver applications are in amounts too small to make recycling economic.

• Barely 3% of that 1950 silver is all that is still available for use in the manufacturing of computers, cell phones, iPads, TVs, refrigerators, smart weaponry, satellites, medicinal applications, water filter systems, RFID chips and solar panels  (the solar panel industry is a very big silver user – thousands of tonnes of silver).

• Since 1980 the number of consumers for these products has increased by several BILLION people!  Please let this sink in!  Most of these people were born into the very countries that have an affinity for gold and silver – China and India!

• The thriving economies of China and India are producing thousands of millionaires, even billionaires!

• The mismanagement of economies by Keynesians (in 1971 President Nixon said:  “We’re all Keynesians now)”, guarantees that the monetary inflation that is now above 10% per year will continue to provide the liquidity for gold and silver prices to continue to rise.

• Historically, once the leaders of a country decide to use the printing press to pay for the daily expenses of running a country, instead of relying strictly on taxes and user fees, the end has ALWAYS been the destruction of the monetary unit.  There are no exceptions.

• Silver in the ground is becoming scarce.  The easy silver has already been found. 

• Gold and silver are becoming more expensive to dig up.  It takes fuel to turn the drill bit, to build the mine and to run the mine.  ‘Peak oil’ is here and cheap oil is history.   Chris Martenson (Chrismartenson.com), is on record as predicting oil at $200 a barrel within the next few years.  John Hoffmeister, the former CEO of Shell Oil has predicted oil at $150 a barrel by the end of 2012. 

• A few years ago some stupid people working for several large banks thought it might be a good idea to ‘sell silver short’.  They did this at the commodity exchanges by selling contracts to deliver silver they did not own.  For a while the game worked out well for them.  Authorities at the Comex winked at the fact that these banks would drive the silver price down by selling large numbers of contracts at predetermined times and then buying the contracts back from hedge funds and small speculators who sold to cover margin calls.  Although this practice is immoral at best and illegal at worst, it continues to this day.  For a blatant example, think back to Sunday evening May 1st.    The problem these banks now face is that there is not nearly enough silver in the Comex approved warehouses to cover the several hundred million ounces that have been sold short.  Every time someone buys a silver contract and takes delivery of the silver, it reduces the amount of silver that is left for future delivery.

• During the 1970’s the Hunt Brothers came to the conclusion that many of you have arrived at:  ‘silver is underpriced.’  They decided to use their resources to buy as much silver as possible.  They bought futures contracts at the commodity exchange and took delivery of the silver.  Some of the people who held short positions at the COMEX also sat on the board that made the rules.  When the Hunts kept on buying silver, these people with their short positions were beginning to ‘feel some pain’.  In January 1980 they changed the rules.  Anyone who was short silver (these rascals) could operate on margin, but anyone who was long silver (like the Hunts), would have to come up with 100% margin.  The result was instant multi-million dollar margin calls for the Hunt brothers.  They had to sell some of their silver and the price began to drop.

• I met Nelson Bunker Hunt at a Jim Blanchard convention in New Orleans shortly afterward and asked him where he thought the gold to silver ratio would end up.  His answer was: ‘10 to 1.’

• Today we look at a totally opposite situation to the one faced by the Hunts.  Whereas in early 1980 the market was suddenly faced with a lot of silver coming into the market, today we are faced with a shortage of silver to cover the millions of ounces that some devious bankers have sold short.  This has never happened before and may never happen again!

• Those of you who are mining executives with cash in the bank, why not hold silver or gold in storage instead of cash in the bank?  Your shareholders will be impressed and you will improve your bottom line as the silver and gold you store, rises in value.  Your bottom line will grow!

• Those of you who are investing in silver and gold substitutes such as SLV and GLD might instead consider buying and storing physical metal, or buying shares in a ‘trust’ where the metal is audited and you are sure that you own a piece of the ‘real thing’.

• Those of you who think your portfolio is too small to make a difference in the grand scheme of things should remember that every time you buy an ounce of silver, whether it is a bar or an Eagle or a Maple Leaf, and store it away, you are making sure that the world has a future source of silver and you are taking ounces away from the cabal that is trying to keep your investment from rising to its rightful value.

• “Nothing will unnerve the ‘paper shorts’ more quickly and do more to undercut their confidence than to strip them of the real metal and force them to come up with more hard bullion to make good on deliveries.  “Stand and Deliver or Go Home” should be the rallying cry of the gold and silver longs to the ‘paper shorts.”  …Trader Dan Norcini.

“Freedom is a fragile thing, which is never more than one generation away from extinction.  Yet it is not ours by heritage, but it must be fought for and defended constantly by each generation, for it comes only once to a people.  Those who have known freedom, and then lost it, have never known it again.”  President Ronald Reagan.

Featured is the daily silver chart.  The green arrow accentuates the rising trend.  The RSI and MACD are turning positive from oversold levels (green lines).  The blue arrow points to the area where my subscribers and I took partial profits while leaving our core position intact.  The black arrow points to the spot where we finished loading up again.  Generally speaking, if you draw a line through the center of any rising stock or commodity and buy below it and sell above it, you’ll come out ahead.  The important thing is to study the fundamentals, keep your eye on your end goal, and avoid being influenced by the ‘top pickers’.

"Back in the 1970s when I liked silver over gold, there was ten times as much silver above ground as there was gold. Despite that, we made twice as much money on silver as we did on gold. Now that ratio has changed. Industrial use has so depleted our silver inventory that the US government now owns no silver at all! There is six times more gold above ground than silver, which is by far the scarcer of the two metals. So why is gold many times more expensive than silver? Because 99.9% of the people in the world think gold is much rarer than silver. But they are wrong, dead wrong. Sooner or later the supply/demand equation will favor silver and narrow the pricing gap between the two metals."  …Howard RUFF.

Summary:  The ‘negative thinkers’ will soon be telling you that the investment climate for gold and silver during the summer all but guarantees lower prices.  While no one but God knows the future, we do have the ability to analyze trends.  The trend during the summer months is for the jewelry trade to slow down their buying of silver and gold.  Another trend however is for the monetary authorities to continue to destroy the purchasing power of the various monetary units, causing anxiety among investors.  The tug of war between these two trends will determine whether prices rise, fall or move sideways between now and Labor Day, (the usual starting point of the annual Christmas Rally).

On my website www.pdegraaf.com is an article:  “The Making of a Successful Investor.” In that article I cover the success or failure of people who apply ‘sell in May and go away’ to gold and silver.  The conclusion reached in that article is that most of the time it is better to ‘sit and hold’ than to ‘trade out’ and try to get back in.