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Wednesday, September 21, 2011

How Far Can Gold and Silver Climb?


By Jeff Clark, Casey Research
With gold a stone’s throw away from $2,000 and already up 27% on the year, the objective investor might begin wondering how much higher both it and silver can climb. After all, gold is nearing its inflation-adjusted 1980 high – and that peak was a spike that lasted only one day.
So, how much return can we realistically expect in each metal at this point? And is one a better buy than the other? There are dozens of ways to calculate price projections, but I’m going to use data based strictly on past price behavior from the 1970s bull market.
First, let’s measure what today’s inflation-adjusted price would be if each metal matched their respective 1980 highs, along with the return needed to reach those levels:
Returns Needed to Match Inflation-Adjusted Price
MetalInflation-Adjusted
Price
Percent Climb to
Match 1980 High
Gold$2,33030%
Silver$136246%
As of 9-19-11
Based on the CPI-U (the government’s broadest measure of inflation), gold is a couple of jumps away from matching its 1980 high of $850. Silver, meanwhile, has much further to climb and would return over three times our money if it reached its former peak.
But the CPI is a poor measure of real inflation. Let’s use John Williams’ Shadow Government Statistics calculations. His data are much closer to the real world, and the statistics are calculated the way they were during the Carter administration, stripped of later manipulations.
Check out how high gold and silver would soar if they adjust to this level of inflation:

Returns Needed to Match ShadowStats Alternate CPI
MetalPrice to Match
ShadowStats CPI
Percent Climb to
Match ShadowStats
Gold$15,234755%
Silver$348785%
As of 9-19-11
Clearly, both metals would hand us an extraordinary return from current prices. Those are some admittedly high numbers, but keep in mind that’s what the CPI figures above would register if government officials had never changed the formulas. What’s tantalizing about these levels is that we’re not even halfway to reaching them.
Let’s look at one more measure. I think another valid gauge would be to apply the same percentage gain that occurred in the 1970s. From their 1971 lows to January 1980 highs, gold rose 2,333%, while silver advanced an incredible 3,646%. The following table applies those gains to our 2001 lows and shows the prospective returns from current prices:
Returns Needed to Match 1970s Total Percent Gain
MetalPrice to Match
1970s Total % Return
Percent Climb to
Match '70s Return
Gold$6,227249%
Silver$160307%
As of 9-19-11
Gold would fetch us two-and-a-half times our money, while silver would provide a quadruple return.
Regardless of which measure is used, it’s clear that if gold and silver come anywhere close to mimicking the performance of the last great bull market, tremendous upside remains.
One might be skeptical because these projections are based on past performance, and nothing says they must hit these levels. That’s a valid point. But I would argue that we’re in uncharted territory with our debt load and money creation – and neither shows any sign of ending. We had a lot of problems in the 1970s, but our current fiscal and monetary abuse dwarfs what was taking place then. The need to protect one’s assets gets more pressing each day, not less so. That to me is the key signaling this bull market is far from over.
One may also be skeptical because the media continue to claim gold is in a bubble. To date their proclamations have been nothing but a great fake-out, every time. Want to know when we’ll really be in a bubble? When they stop saying it’s one and actually start buying and recommending gold. When they begin running 15-minute updates on the latest gold stock. When you are sought out relentlessly by your friends and relatives because they know you know something about all this “gold and silver stuff.”
All told, I think the baked-in-the-cake inflation – rooted in insane debt levels and deficit spending – will be one of the primary drivers for rising precious metals this decade. This means the masses will look for a store of value against a plunging loss of purchasing power. Enter gold and silver.
The current correction may not be over, and we can count on further pullbacks along the way. But the data here suggest the upside in gold and silver is much bigger than any short-term gyration – or any worry that may accompany it.
[There’s another way to get into gold on the cheap, and without worrying about your timing lining up with a correction. Read this free report to learn how the big investment funds are buying gold at a fraction of its current price… and you can, too.]
Source: http://news.goldseek.com/GoldSeek/1316466572.php

Are you ready for the annual Christmas Rally in Gold and Silver?

During 18 of the last 22 years, gold has rallied between US Labor Day and Christmas.  Will the pattern this year follow the historical pattern? We will analyze the fundamentals, look at some charts and try to draw a conclusion.  The charts in this report are courtesy Stockcharts.com unless indicated.
·         First a quote by President Andrew Jackson:  “Gentlemen, I have had men watching you for a long time, and I am convinced that you have used the funds of the bank to speculate in breadstuffs of the country.  When you won, you divided the profits among yourselves, and when you lost, you charged it to the bank.  You tell me that if I take the deposits from the bank and annul its charter, I shall ruin ten thousand families.  That may be true, but that is your sin!  Should I let you go on, you will ruin fifty thousand families, and that would be my sin!  You are a den of vipers and thieves.  I intend to rout you out and by the Eternal God, I will rout you out.” (Spoken to a delegation of bankers requesting the extension of the 1832 Bank Renewal Act).

Several news items during the past ten days were very bullish for gold.  The first was an announcement by the Swiss National Bank that they were planning to buy Euros with Swiss Francs.  This action effectively removes the Swiss Franc as a convenient alternative to gold, and it moves the SNB into the camp of the money printers.

The second item concerns an announcement by five major central banks (FED, ECB, SNB, BOJ and BOE), to provide dollar liquidity for a number of European banks that suffer from exposure to Greek banks.

This dollar liquidity operation will last until the end of the year and will enable dollar funding for European banks, which were struggling.  It shows that the Federal Reserve, the ECB and also British, Swiss and Japanese banks have the will and the ability to cooperate at sensitive times, whenever they feel the system needs a ‘nudge’.

Another factor that is very bullish for gold is the current ‘negative real interest rate’ environment.  Regardless of whether we believe the ‘official’ CPI numbers, or the more realistic numbers provided by Shadowstats.com, anyone with money in the bank, or holding short-term Treasury notes, is losing money to price inflation.
10-year Treasuries are paying a miserly two percent. With inflation at 4.8%, these ‘so-called investments’  are losing 2.8% of their value over 12 months.
According to J. M. Keynes, and many other economists, whenever ‘real interest rates’ turn negative, gold will rise.  Keynes called this “Gibson’s Paradox”, and stated that there are no exceptions.
Finally, the most bullish facilitator of rising gold and silver prices is the supply of money (see chart below).

This chart courtesy Mises.org shows the True Money Supply continues to rise exponentially.  A rising money supply is bullish for gold and silver, as it increases the amount of money available for the purchase of precious metals.  As long as the Central Banks keep the banking system supplied with money, the banking system will survive.  This principle is far more important to the Central Banks than the integrity of the currency.
Historically, ‘monetary inflation’ always causes ‘price inflation’.   The U.S. consumer-price index (CPI) increased 0.4% in August. That’s an annual inflation rate of 4.8%!
The TMS chart also shows that, according to the people as Mises.org, the recession is ongoing (grey area).  During recessions, there is less money coming in to government, while expenses such as unemployment benefits, food stamps, welfare payments etc. increase.  This in turn causes deficits to rise, and deficits provide energy for gold prices to rise.

Featured is the daily gold chart.  Price is carving out a bullish pennant.  The supporting indicators are at levels where they have found support many times in the past.  The fact that the 50DMA is in positive alignment to the 200DMA (green oval), while both are rising, is bullish.  A breakout at the blue arrow will mark the beginning of the next rally.  
According to the weekly Kitco survey of gold analysts, a minority 32.1% of the analysts are bullish for this week, 53.6% are bearish and 14.3% neutral.  From a contrarian point of view that is bullish for gold!                                                                                                 

This chart courtesy Cotpricecharts.com shows commercial traders reduced their ‘net short’ position to 215,000 from 228,000 last week.  The ‘up-to-date number’ will likely be even lower since the gold price dropped for two days since data for the report was compiled.  At 215,000 the commercial traders are at the lowest level since July 8th.  On that date gold traded at $1544 and over the next few months price rose up to $1924.

  
Featured is the GDX gold producers ETF.  Price broke out from beneath the 64 resistance level last week (blue arrow), and since then a test of the breakout is the result as the bears press their case.  Price appears ready to try again and a close above the green arrow will confirm the breakout and thereby turn the trend bullish.  The SIs are positive.  The fact that GDX outperformed GLD on Friday is bullish.

Featured is the weekly silver chart.  Price is carving out a bullish pennant.  The supporting indicators (green lines) are positive with a lot of room on the upside.  A breakout at the blue arrow sets up a target at the green arrow.  The 50WMA is in positive alignment to the 200WMA (green oval) while both are rising.

Summary:  Gold and silver are less expensive today than they were in 1980 due to the fact that there is far more paper and digital money in existence today than was the case in 1980.  According to the inflation calculator provided at USinflationcalculator.com (using data supplied by the US government), the price of gold would need to rise to $2336, to match the inflation adjusted price of $850 (the 1980 peak).  In the case of silver the price would need to rise to $137 to match the inflation adjusted price of $50 (the 1980 peak).
The most bullish fundamental for gold and silver is the fact that there are now 2.5 billion people who were not around in 1980.  Most of these people live in China and India.  By coincidence these people live in a country where the economy is growing and furthermore they love silver and gold!
Conclusion:  Based on the observations presented in this report the expectation is that the annual Christmas rally in gold and silver is ‘right on course’.
Source: http://news.goldseek.com/GoldSeek/1316453532.php

Is the US Monetary System on the Verge of Collapse?


By David Galland, Casey Research
Tune into CNBC or click onto any of the dozens of mainstream financial news sites, and you’ll find an endless array of opinions on the latest wiggle in equity, bond and commodities markets. As often as not, you'll find those opinions nestled side by side with authoritative analysis on the outlook for the economy, complete with the author’s carefully studied judgment on the best way forward.
Lost in all the noise, however, is any recognition that the US monetary system – and by extension, that of much of the developed world – may very well be on the verge of collapse. Falling back on metaphor, while the world’s many financial experts and economists sit around arguing about the direction of the ship of state, most are missing the point that the ship has already hit an iceberg and is taking on water fast.
Yet if you were to raise your hand to ask 99% of the financial intelligentsia whether we might be on the verge of a failure of the dollar-based world monetary system, the response would be thinly veiled derision. Because, as we all know, such a thing is unimaginable!
Think again.

Monetary Madness

Honestly describing the current monetary system of the United States in just a few words, you could do far worse than stating that it is “money from nothing, cash ex nihilo.”
That’s because for the last 40 years – since Nixon canceled the dollar’s gold convertibility in 1971 – the global monetary system has been based on nothing more tangible than politicians' promises not to print too much.
Unconstrained, the politicians used the gift of being able to create money out of nothing to launch a parade of politically popular programs, each employing fresh brigades of bureaucrats, with no regard to affordability. 
Such programs invariably surged during political campaigns and on downward slopes in the business cycle when politicians hearing the cries of the constituency to “do something” tossed any concern about balancing budgets out the window of expediency. After all, the power to print up the funds for debt service whenever needed makes moot any concern over deficit spending.
Former VP Cheney, who fashions himself a fiscal conservative, let the mask drop when, in 2002, he stated that “Reagan proved deficits don’t matter.”
Those words were echoed just a few weeks ago, when both former Fed Chairman Alan Greenspan and Obama economic advisor Larry Summers, in separate interviews, said almost the same, paraphrased as, “There is no chance of the US defaulting on its bonds, not when our government can borrow dollars and print new dollars to meet any future obligations.”
Of course, Greenspan and Summers were referring to an overt default – of just not paying – and not to a covert default engineered by inflation. Unfortunately, like virtually all of the power elite, both miss the point that the mountain of debt that has been heaped up since 1971 is fast reaching the point of collapsing like a too-big tailings pile and taking the monetary system down with it.
Importantly, the debt shown in this chart whistles past the government's unfunded liabilities, in particular for the Social Security and Medicare systems. Adding those would more than triple the US government’s acknowledged obligations – to over $60 trillion.
Given the role the US dollar plays as the world’s de facto reserve currency – with all major commodities priced in dollars, and dollars forming the bulk of reserves held by foreign central banks – the dismal shape of the US monetary system spells trouble for the global monetary system.
Making matters worse, following the lead of the United States, governments around the world long ago adopted similar fiat monetary systems. You can see the deficit contagion in this next chart. It is worth noting that the dire condition of the United States now leaves it in the same muddy wallow as Europe’s desperate PIIGS. 
In a recent article in The Telegraph, Ambrose Evans-Pritchard referenced a paper out of the BIS that paints the picture using appropriately stark terms.
Stephen Cecchetti and his team at the Bank for International Settlements have written the definitive paper rebutting the pied pipers of ever-escalating credit.
“The debt problems facing advanced economies are even worse than we thought.”
The basic facts are that combined debt in the rich club has risen from 165pc of GDP thirty years ago to 310pc today, led by Japan at 456pc and Portugal at 363pc.
“Debt is rising to points that are above anything we have seen, except during major wars. Public debt ratios are currently on an explosive path in a number of countries. These countries will need to implement drastic policy changes. Stabilization might not be enough.”
Viewing the situation from another perspective, we turn to the work of Carmen Reinhart and Ken Rogoff, who studied the factors contributing to 29 past sovereign defaults. They found that default or debt restructuring occurred, on average, when external debt reached 73% of gross national product (GNP) and 239% of exports. Using the Reinhart/Rogoff findings, Casey Research Chief Economist Bud Conrad prepared the following chart showing that the US government is already far along on the path to bankruptcy.  
It’s hard to argue against the contention that the situation is, to be polite, precarious. Given that the obligations of the US government, as well as most of the world’s other large economies, are now impossible to repay and that their reserves are just IOUs backed by nothing, the stage is set for a highly disruptive but entirely necessary do-over of the fiat monetary system.
“Preposterous!” say the lords of finance and masters of all.
Is it?
Of course, these very same mavens completely missed the looming housing crash and the depth and duration of the subsequent crisis – a crisis that is still far from over. In other words, listen to them at your peril, because in our view it’s essential in calibrating your financial affairs to understand that, if history is any guide, we are now well down the road to a collapse in the monetary system.
In fact, over its relatively short history, the US monetary system has come unglued time and time again thanks to politically expedient attempts to interfere with the workings of a free market in order to reward constituents or kick the can on the economic problems of the day down the road.
Thus it is our contention that while the mainstream media focus on the daily gyrations of equity markets or the futile political charade that is Washington, they overlook powerful tectonic rumblings indicating the world’s prevailing monetary system is about to fracture. 

A Brief Timeline of US Monetary System Failures

Here’s a brief history of past disruptions here in the United States. Importantly, with the US dollar now the de facto reserve currency of the world, this time around it’s global.
1861 – When the Civil War begins, the dollar is convertible into gold and silver.
1862 – Congress passes the Legal Tender Act and authorizes the issuance of non-redeemable "Greenback" currency. Convertibility into gold and silver is suspended for all US currency.
1863 – National Banking Act authorizes the chartering of banks by the federal government.
1865 – A 10% tax is levied on the issuance of bank notes by state-chartered banks, effectively ending that practice.
1879 – The US Treasury resumes redeeming dollars for gold and silver.
1900 – Passage of the Gold Standard Act, adopting the gold standard by the United States and demonetizing silver.
Specifically, the act provided for "...the dollar consisting of twenty-five and eight-tenths grains (1.67 g) of gold nine-tenths fine, as established by section thirty-five hundred and eleven of the Revised Statutes of the United States, shall be the standard unit of value, and all forms of money issued or coined by the United States shall be maintained at a parity of value with this standard..."
But 33 years later, to gain the power to inflate the currency and collect the profit from doing so…
1933 – By executive order, Franklin Roosevelt prohibits the private ownership of gold. Congress passes the Gold Reserve Act, which enacts Roosevelt's executive order, abrogates all gold clauses in all contracts public or private, past or future (which cancels the convertibility of Federal Reserve notes into gold), though it confirms the convertibility of US Treasury notes held by foreigners into gold. Eleven years later, the US government takes its show on the road…
1944 – Bretton Woods system adopted with signature countries agreeing to tie the exchange rates of their currencies to the US dollar, which itself is linked to a fixed price of gold. Foreign trading partners retained the right to swap dollars for gold, imposing a de facto restraint on printing more dollars. For all intents and purposes, the US dollar becomes the world’s reserve currency. But 27 years later…
1971 – Nixon abruptly closes the “gold window,” unilaterally reneging on the Treasury's  promise to allow foreign governments to redeem dollars for gold. Bretton Woods collapses. With no remaining tie to a tangible, the dollar is reduced to a paper token. The transition to a global fiat monetary system is complete.
Until 40 years go by and the inevitable consequences of giving politicians free rein over money creation become untenable…
Present day – Sovereign debt crisis. Desperate, debt-laden governments around the globe – the bulk of their reserves composed of fiat US dollars and euros at risk of going up in smoke –  turn to the only thing they know, printing more money and issuing yet more debt. The global monetary system cracks and heads toward failure with no workable alternative on the horizon.
Governments, corporations and investors alike are caught unprepared in the downward spiral of failing fiat currencies and are wiped out by a combination of frantic currency debasements, higher taxation, exchange controls and worse. Social unrest spreads, with the public paradoxically demanding that governments do more, not less.
That’s because all the world’s major currencies are at risk, simultaneously, as the issuers engage in a dangerous race to the bottom. As the monetary system moves inexorably toward terminal debasement and collapse, the results will be catastrophic for the unprepared.
Importantly, while the list of historical attempts to re-jigger the US monetary system have, to this point, more or less succeeded in kicking the can a bit further down the road, the sheer scale of today’s government obligations has driven us into a box canyon, with no way out. As the government’s debt and spending obligations are mathematically impossible to resolve, it is now a certainty that a lot of people are going to wake up one morning to the reality that they are a lot poorer than they thought.
Fortunately for those now paying attention, the collapse of a monetary system doesn't happen in a flash. It is a progression, like the spiral of water down a drain. Thus, while no one can predict exactly when the downward spiral will accelerate out of control, there is still time to prepare.
Dark though the lens may be, this is the lens through which we here at Casey Research view all our investments. Simply, being right or wrong about your investment decisions in the years just ahead will be insignificant if the currencies underpinning those investments shrivel to just a fraction of their current values.
The dismal state of the US economy and out-of-control government spending affects every American’s life and wealth. In our free online event, The American Debt Crisis – How Big? How Bad? How to Protect Yourself, five Casey Research experts were joined by guests John Mauldin, Mike Maloney and Lew Rockwell to discuss the potential for a breakdown in the monetary system, and specific ways to protect and build your assets. Watch the video now.
Source: http://news.goldseek.com/GoldSeek/1316555720.php