Why There Is No Upside Limit for Gold and Silver Prices

The past decade has seen a virtually nonstop advance in the price of gold.  Silver, which lagged gold until last year,  recently hit a 31 year price high.  Gold and silver, both used as currency for thousands of years, have gained broad investor appeal as a hedge against paper currencies.

The increase in the value of gold and silver is due to the fiscal and monetary policies of nations struggling to deal with massive levels of debt - policies that virtually guarantee a continued rise in the price of gold and silver.

Central banks, having exhausted all conventional means of monetary easing, have moved on to the last resort option of quantitative easing and currency debasement.  Federal Reserve Chairman Bernanke has twice resorted to the printing presses, and then shamelessly explained the "virtues" of his money printing policy (in convoluted terms) to a gullible public on national television.  The subsequent absence of broad public opposition to a policy that is certain to ultimately destroy the financial well being of most Americans seems based on ignorance and/or indifference.

One American who is not ignorant or indifferent to the Fed's policy of printing money issued a dire warning this week on the dangerous path the Federal Reserve has taken.  The reason we should all pay great attention to this warning is because it was issued by a powerful policy maker at the Federal Reserve.

According to Reuters, Richard Fisher, President of the Dallas Federal Reserve stated in a speech that the debt situation in the U.S. is at a "tipping point." He is quoted as saying, "If we continue down on the path on which the fiscal authorities put us, we will become insolvent.  The question is when".   Bank President Fisher further said that no additional extraordinary measures should be taken when the current round of money printing ends in June of this year.

We shall see what happens comes mid year when QE2 is scheduled to end.  The problem facing the Fed is that they are out of conventional policy bullets to ease credit conditions with rates already at zero.  The ease and apparent lack of consequences in printing money has made additional quantitative easing a very seductive method of  allowing huge deficit spending by the government.  QE2 is a thinly disguised monetization of the Federal deficit in which the Federal Reserve purchases government debt from the primary dealers after they purchase the debt at Treasury auctions.

Government officials argue that unprecedented deficit spending and quantitative easing are necessary to stimulate economic  growth, but this theory has not worked in the real world.  Despite trillions in stimulus spending,  job creation and economic growth have been extremely weak and are likely to remain so according to economists Kenneth Rogoff and Carmen Reinhart who wrote This Time Is Different: Eight Centuries of Financial Folly.  According to Rogoff and Reinhart, economic growth is subpar when public sector debt exceeds 90% of GPD which the U.S. and many other developed nations have already surpassed.  In addition, a recovery of the job and housing markets after a financial crisis take many years due to the burden of excessive levels of debt.  Ultimately, Rogoff and Reinhart predict that austerity measures will need to be imposed along with some type of debt restructuring.

Is the U.S. capable of reducing spending and  instituting austerity measures? Cutting deficits means cutting payments to a long list of incomeless recipients who really don't care where the entitlement money comes from.  Those still actually paying taxes will object strongly to any proposed tax increase to fund government spending.  Unable to cut spending or raise taxes leaves the Government with one bad option - print more money.

Politicians, who value getting elected above all else, are likely to strong arm the reliably compliant Federal Reserve Chairman Ben Bernanke to "come to the rescue" again with QE3.   In the minds of politicians and Federal Reserve officials, there will always be very compelling reasons to continue borrowing and money printing.  With the expected retirement of Federal Reserve Bank of Kansas President Thomas Hoenig this October, the Federal Reserve will be dominated by dovish members who favor the easy money policies of Fed Chairman Bernanke.  President Hoenig is one of the few Fed members who oppose continued zero interest rates and quantitative easing.

The correlation between parabolic increases in government debt and the price of gold is clear.   Since 2000 both government borrowing and the price of gold have been closely correlated as seen below.  The increased value of gold directly reflects the decreasing value of paper money.

A nation that has reached the limits on taxation and borrowing has few viable policy options other than a continuing series of quantitative easing programs.  Current government policies, if left unchanged, virtually guarantee a continued increase in the price of precious metals.

TOTAL PUBLIC DEBT

GOLD PRICE - COURTESY KITCO.COM

Why GOLD is the biggest opportunity in your life time!!!!! don't wait.

The Last Stage of Gold Bull Market: Mania 

Every major gold bull market in modern history has exhibited the same three basic stages:

1. Currency Deflation Stage
2. Investment Demand Stage
3. Mania Stage 

The result:

A gradual, constant rise in gold prices at the beginning...

Followed by a sudden and dramatic spike towards the end.

Take a look at the 1970s gold bull market chart below, as an example of this phenomenon:

So far in today's gold bull market, we've seen the first two stages...

During the first stage of a gold bull market, gold prices go up because the value of the dollar goes down.

We've already experienced this very phenomenon over the last nine years — in the form of a 33% drop of the US Dollar Index between the summer of 2001 and spring of 2011.

In the second stage, gold prices continue to grow due to increased investment demand. Seeking to protect their wealth by getting rid of devaluating dollars, and attracted by the modest gains of the first stage of the gold bull market...

Investors start to load up on gold, which further snowballs the price of higher still.

This is already happening.

With the introduction of the popular gold ETFs and other securities, investment demand has had incredible strength since the beginning of this gold bull market, growing in terms of both tonnage and dollar value.

And it continues to increase steadily...

Again, the first and second stages of a gold bull market generally return considerable gains.

Gold prices in this bull market, in fact, have increased as much as 449%.

But it's the third and final stage of a gold bull market that can turn everyday investors into instant millionaires.

Stage Three: MANIA

During the third stage of a bull market, full-on buying mania turns the gradual ascent into a sudden explosion.

To see how something like this might look today, here's what the 1970s pattern I showed you up above looks like when applied to the modern gold market:

A sudden spike in demand, the beginning symptoms of which we're already starting to see today, could multiply gold prices by 100, 200, 300, as much as 400% from today's levels in the next 30 months.

And this isn't just me making these observations.

No matter where you look, experts in this field tend to agree...

Now, if you think that these predictions are shocking...

Or that the theory is controversial...

You couldn't be more wrong.

In fact, because it's always been a hedge against inflation, and a universally-accepted method of storing wealth...

Gold prices have followed one of the most predictable patterns known to economics.

So what happened in the 1970s, while dramatic, wasn't unusual or even surprising.

And it's exactly the same set of circumstances we're looking at today.

Devaluation of currency... increased investor demand...

Only this time around, there's one factor we have to consider that wasn't even on the horizon back during the last gold boom of 30 years ago.

And this factor is big and powerful enough to turn this into the biggest bull market in history.

China's Gold Fever

 You hear about this raging economic powerhouse almost everyday in the news...

But what most people don't know is that despite all their cash, despite their vast manufacturing capacity...

The Chinese lack the single asset that they need to provide stability to their economy, confidence to their regime, and ultimately, achieve parity with the West.

They lack the single asset that governments have depended on for centuries to ride out recessions and cushion the effects of years of inflation on reserve currencies...

The Chinese lack gold.

Just look at this table to see what I mean:

World Official Gold Holdings: December 2009

Compared to the established Asian, European, and North American economies, China sorely lacks in the one area that may be most important to them in the coming years.

Looking closely at their foreign reserves, you'll see that they would have to multiply their gold holdings by a factor of 45 just to catch up to the United States.

And as you read this, that's exactly what they're doing.

China is working overtime to even out the gap separating them from the world's old-guard economic leaders.

And it's not just giant government-operated financial institutions that have flooded into this newly opened market...

The biggest single segment of buyers may prove to come from the emerging pool of China's private investors.

You see, Chinese families save between 30% and 40% of their annual earnings (on average).

That's up to eight times the rate at which their American counterparts save.

And yet — up until now — the Chinese domestic gold markets still lagged behind the United States and Europe by a factor of five.

But just like their respective banking institutions, these individual investors are rapidly closing the "gold gap."

Since last year, domestic demand for net gold investments in China has increased by121%.

According to UBS, the world's second largest manager of private wealth assets:

"The international gold market is now paying a lot more attention to China's gold demand, not just from an official reserve asset perspective, but also private demand..."    

                            

All this activity from two of the world's second biggest economy has contributed to recent rises in gold prices.

The real explosion in gold value, however, is yet to come... And mostly likely, it will be of a magnitude never seen before.

Just think about this:

If China's domestic gold consumption were to match U.S. levels, the world would have to produce an extra 12.4 million ounces of gold.

That's more than China itself  — the world's single biggest producer — turns out in a year.

And considering that world gold production has dropped 8 out of the past 10 years, producing an extra 12 million ounces of gold per year to meet the demand will prove difficult, if not impossible.

Such a milestone would push prices higher than ever.

So, no matter who you listen to...

The conclusion is almost always the same:

It's highly unlikely that you'll be looking at a bull market like this one ever again in your lifetime.

             will the history repeat itself?
                       better be prepare

When is the Best Time to Buy Gold?

I bet you don’t own enough gold. 

Before you tell me I’m wrong, let me ask it this way...

•    If inflation returns, or even hyperinflation... 
•   If the economic crisis persists and gets worse... 
•   If uncertainty and fear continue, and chaos and rioting  
    begin... 
•   If stock markets languish or suffer another meltdown... 
•   If the recovery spending of the world’s governments 
    proves futile...  
•   If government interference in the economy continues 
    to increase... 
•   If the value of the U.S. dollar takes a major fall... 
•   If world recovery from the current 
    recession/depression takes years... 
•   If you’re still wondering whether you have enough 
   “safe” money... 

...would you feel you own enough gold? 

If all those things come to pass, I suspect many of us, including myself, would wish we had a few extra gold coins or bars stashed away. 

So let’s assume you answered “No” to my question and need to add some ounces to your collection... is now a good time to buy?

The Best Time to Buy Gold?

Before glancing at the chart below, if you had to pick the month with the weakest average gold price, which would you select?



In our current 8-year bull market, June has seen the lowest return for gold. In other words, it’s been, on average, one of the best times to buy. 

How does this compare to the bull market of the 1970s? 



In the last great bull market, summer also was a good time to buy gold (although April was even better.) 

What about gold stocks?



Since 2001, July and October have been the weakest months for gold stocks, as measured by the AMEX Gold Bugs Index, and the best times to buy. 

However, keep in mind that these are price tendencies and not certainties. There were Junes when gold was up, and some Julys when gold stocks were up. Meaning, avoid using this chart for trading purposes or in anticipation of an immediate gain. Instead, use it to prepare for possible gold price weakness ahead. And if the weakness shows up, treat it as a buying opportunity and add to your holdings to position yourself for the next leg up in the bull market. Consider that this summer could be the last chance to buy gold for three figures.

Don’t lose sight of where we are at this point in the recession – in an intermission in the bad economic news. When it becomes apparent that the good ole days aren’t coming back, sentiment – and markets – could move rapidly. And gold is one of the best forms of capital that can protect you in a financial Armageddon. That gold was up in 2008 is a reminder of its protective power. 

How much gold should you have? Continue to accumulate physical gold until you can honestly say you don’t care how many dollars Ben Bernanke prints.  

source:http://www.caseyresearch.com/articles/when-best-time-buy-gold

Silver Pops; Gold Hit another record

Silver Pops; Gold Hits Record on Inflation Worries

NEW YORK (TheStreet ) -- Gold prices were hitting highs while silver prices were moving higher Thursday as investors bought the metals against a weak dollar and higher inflation expectations.

Gold for June delivery was jumping $10.20 to $1,527.30 an ounce at the Comex division of the New York Mercantile Exchange. The gold price soared to a record intra-day level of $1,535.10 an ounce while the spot gold price was less aggressive rising $1.10, according to Kitco's gold index.

Silver prices were soaring $2.30 to $48.26 an ounce, just slightly shy of their intra-day high of $49.82. The U.S. dollar index was sinking 0.12% to $73.23.

Thursday's rally was carry over from Wednesday, when gold and silver popped 1% and 2%, respectively and rose even higher in after-hours trading. Federal Reserve chairman, Ben Bernanke, can be thanked for the rally. The unanimous decision by the Fed to keep interest rates at 0-0.25% until at least the fall as well as keeping its balance sheet the same size after quantitative easing ends in June meant more cheap money for longer.

The Fed will reinvest its profits from its current $600 billion bond buying program back into the market not adding extra cash but not taking any away either. Inflation forecasts were also below the Fed's 2% target, which means the central bank would want more inflation. Some experts are calling this QE 2.5 and say that this leaves the door open to a third round of quantitative easing, or QE3.

This is "adding quite a bit of pressure to the dollar index and investors are going to be searching for those hard assets to protect themselves," says Phil Streible, senior market strategist at Lind-Waldock. "[I am looking] at the long side of both [gold and silver]." Streible would be buying if gold sunk to $1,505-$1,510 level and if silver breaks south of $46.

Streible says the rally was even stronger because speculators who were washed out in the recent selloff could get back into the market as well as those who missed the rally the first time. His forecast for 2011 is $1,650 for gold and $60 for silver.

It's not just the U.S. The bank of Japan left interest rates unchanged at its latest central bank policy meeting and lowered growth forecasts estimating a recession. On the flip side, the IMF has said that Asia needs to tighten more and faster to fight rising inflation. This balancing act escalates the likelihood of negative real interest rates, at least for the medium-term.

"The prospect of low interest rates and higher inflation expectations in the U.S., coupled with ongoing issues such as increasing Eurozone debt concern and [Middle East-North Africa] unrest continue to create a bullish environment for bullion as investors look to hedge against negative real-interest rates and rising inflation," says James Moore, research analyst at FastMarkets.com.

Monday on the Comex, trading of silver futures popped to a record 319,204 contracts. Adding to potential volatility is the end of April, where traders must either roll over their existing contracts or let them expire. This could also account for the price discrepancy between the futures market and spot (physical) market.The recent rally doesn't make gold and silver any less crowded, however, meaning that there are a lot more people in the market who could sell or take profits, especially in silver.

In the latest commitment of traders report for the week ending April 19th, gold speculative longs rose 5%, while short contracts were down 0.5%. Silver, however, was a different story, with long positions up 4.3% and shorts up 7%, pointing to fiercer rallies in silver but also more volatility.

Where next for GOLD and SILVER?

Gordon Pape

FORBES CANADA REPORT

PERSONAL FINANCE

in

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Gold closed on April 27 at an all-time high of $1,517.10 an ounce. But despite all the buzz about bullion recently, that represents an increase of only 6.8 per cent from the 2010 year-end price of $1,420.78.

Silver finished at $45.96 an ounce. That’s not an all-time high – silver hit US$55 an ounce in 1980 when the Hunt brothers tried to corner the market. But it’s a huge jump of 49.6 per cent from the price of $30.72 that prevailed as we entered this year. Gold may have the glamor but silver has the momentum right now.

The dilemma for investors is how high can precious metals prices go from here? How high the moon?

There are two diametrically opposing views on this. One is that gold and silver are in a classic bubble phase and that both are overdue for a major price correction. The other is that with inflation on the rise, there is a lot of upside potential remaining for both. The real answer may be somewhere in between.

It’s important to remember that although gold and silver are often viewed in tandem, the forces that drive their spot prices are actually quite different. Silver is primarily an industrial metal, with about 60 per cent of consumption used in the manufacture of a wide range of products.

A report released in March by the Washington D.C.-based Silver Institute, a non-profit international association of miners, refiners, wholesalers, and manufacturers, focuses specifically on the industrial side of the silver business. Prepared by GFMS Ltd., a highly respected London-based precious metals consultancy firm, the report says that 47 million ounces of silver were used by the photo voltaic industry in 2010, 36 million ounces by the automotive sector, 22 million ounces in the production of computers, and 13 million ounces in cell phones.

Silver is also used in a variety of products that may surprise readers including face creams, washing machines, flat screen TV sets, water purification, food packaging, and, believe it or not, socks. GFMS believes that overall industrial demand will increase by 180 million ounces between now and 2015 at which time it will reach 665.9 million ounces.

You would logically conclude from this that the price of silver will continue to rise. That’s true in the short term says GFMS, which predicts prices will remain high through 2012 with the average for 2011 “comfortably eclipsing the 1980 record high” in nominal terms (but not inflation-adjusted terms). But once this run is over, prices will start to drift lower “in reflection of less robust investment in the silver market”. The report also notes that as the metal becomes more expensive, manufacturers will look for cheaper alternatives.

Investors should pay close attention to this report, which is the most comprehensive and analytical study I could find on the prospects for silver. The implication is that there is still more upside in the metal, and the shares of the companies that produce it, but don’t overplay the hand. Within 18 months or so, this party will be over.

Gold consumption follows a very different pattern. GFMS released its annual gold survey on April 13 and it showed that 52 per cent of existing above-ground gold is held in the form of jewelery, 19 per cent by private investors, 16 per cent by central banks, 11 per cent in “other fabrications”, and 2 per cent “lost and unaccounted”. So unlike silver, gold is used mainly as a store of value and for decorative purposes.

The report predicts that gold production will increase by 6 per cent this year compared to only 0.4 per cent in 2010, which would normally have a depressing effect on the price. However, demand will be strong, especially from investors and governments, due to rising inflation expectations and the on-going sovereign debt crisis in Europe which, says GFMS, will eventually spread to the U.S. and Japan (this report came out before Standard & Poor’s downgraded the U.S. debt rating). The result “will further undermine faith in government paper,” says GFMS.

Looking ahead, the report warns that we could see a retracement in the gold price to the high $1,300s range in the next three months, which will bring out the bargain hunters. After that, investors will drive bullion prices higher “with a breach of $1,600 in the second half still a strong possibility”. (Coincidentally, that is the price I set as my 2011 target in my January predictions.)

This forecast may help to explain why gold stocks have been laggards this year, despite the rise of bullion to a record high. As of the close of trading on April 27, the S&P/TSX Global Gold Index was down 4 per cent year-to-date. Many precious metals funds are in a loss position year-to-date, especially those that are heavily weighted to gold.

If GFMS is correct, expect the prices of gold stocks and funds to drift lower over the summer. Use that as an opportunity to add to your positions so that you will be able to profit from the rebound that should begin in August or September.

Of course, international events could change this outlook. However, based on what we know right now, silver looks like a strong buy while gold is a hold/buy on weakness.

source:http://blogs.forbes.com/gordonpape/2011/04/27/where-next-for-gold-and-silver/

Silver is not yet in bubble. Here's why....

This essay will attempt to address the question of whether or not silver prices are in a bubble, or possibly may be turning into a bubble and if so what trading strategies may be suited to the situation. This article will hopefully provide another string to the readers bow in attempting to identify bubbles and being able to protect one’s portfolio and even potentially profit from them. For the record we feel it is prudent to state our view upfront, we do not think silver is in a bubble at this point in time. However we think that it is likely that it will become a bubble in the future, but we cannot say when or at what price?

Asset price bubbles have occurred since the beginning of financial markets and will continue to do so as long as there remains a marketplace for assets to be traded. A key property of a bubble is that is it near impossible to identify with certainty before it pops, but once it does pop the bubble is apparently obvious to everyone. In our opinion, only those who risk capital and profit betting against a bubble can claim to have correctly identified one.

A casual glance at the chart could leave an impression that history is going to repeat itself and silver prices are about to crash. However in order to not only successfully indentify bubbles but also profit from them, one will need to know the tipping point. This is the point at which the bubble is unsustainable and begins to breakdown.

There are many factors which contribute to the emergence of bubbles and one would need to look at a myriad of factors to determine when a bubble may pop. We will focus on just one in this article, momentum. In finance, momentum is the empirically observed tendency for rising asset prices to continue to rise. We are attempting to gauge when silver may run out of momentum and when this bull market will turn into a bubble and ultimately pop.

Whilst some may consider it crude to study momentum as opposed to fundamentals such as supply and demand, we feel that it is vitally important from both a psychological and technical standpoint. Psychologically if investors are used to silver prices increasing 30% per year and then silver prices only increase at a rate of say 15% for one year, psychologically this return looks poor on a relative basis, even though it is still positive and normally would leave many investors satisfied. Therefore there is a greater incentive to sell silver since it is not performing as well as it was in the past. Technically once a bubble is fully underway prices begin to rise in a parabolic or exponential fashion. If the price ceases to rise in an exponential fashion, selling will commence, even if the price is still rising, since investors will have extrapolated the exponential rise and so anything short of parabolic will not meet their expectations.

The most recent example of this was in the housing bubble. Prices didn’t actually have to fall at all to trigger a crash, all they had to do was plateau or rise sluggishly and this would spark selling by people who had bet on prices continuing to rise. Without continually rising prices real estate investors could not refinance and borrow more against their properties to buy additional properties or other assets, so the buying stopped and the selling began. This was when the bubble popped; this was the tipping point before the actual crash that many investors strive to identify.

So how does this relate to silver? Although we believe that silver does indeed have strong fundamentals, we do think it is likely that the metal will become drastically overvalued in the future as a result of speculative buying by the masses. In an attempt to measure the momentum behind silver and when this momentum will run out, we have analyzed the rate of silver prices increases over the last 50 years or so, since 1968.

The chart below shows the rolling 100 day percentage change in the silver price. This is not a perfect measure of momentum, but it’s a start.

As you can see, during the blow off in 1980, silver prices were increasing at a rate of roughly 400% per 100 trading days. This compares with a current rate of increase of approximately 73% per 100 trading days. So if you think silver’s current rally is going at a nose bleed pace, in the 1980 blow of silver prices were increasing 5.47 times faster than they are at the moment.

So far it appears that the rate of increase in silver prices at present is still below the relative rate of increase in 1980, therefore implying there is further upside. However this analysis doesn’t take into account that the Bunker-Hunt brothers were attempting to corner the market for physical silver in the late 70s, a buying force which is not present today. Therefore one should err on the side of caution when using this barometer for trading purposes as it may not reach 1980 levels. But at present the barometer isn’t even close, so we do not think silver is in bubble at the moment.

The chart below best shows how silver is far from in a bubble yet. We have smoothed the 100 day percentage change and overlaid the nominal silver price.

As shown by the blue line still being relatively low in contrast with 1980, there is still a great deal of upside potential for not only the silver price itself, but the rate at which silver prices are increasing. When both the blue and red lines are parabolic, then a bubble argument can be made.

source:http://www.kitco.com/ind/Kirtley_Sam/apr262011.html

Advantages of silver over gold

Advantages of Silver Over Gold

The average person can’t afford to buy gold, so it is most suitable for wealthy people for investment and central banks.

With silver being so much cheaper, the average person can go to his local coin dealer and buy some.

The advantages of silver over gold as an inflation hedge are numerous and need to be considered:

1. The silver market is much smaller, and it doesn’t take as much money moving into silver as an investment to move the market up. Silver has outperformed gold dramatically over the last few years, going from $3 an ounce to over $40 an ounce.
2. Silver is also a very important industrial metal with over 3,000 industrial uses.
3. The government has never seized silver, although they have seized gold. If that worries you (it doesn’t worry me much), you would feel safer with silver rather than gold.
4. The government actually has no stockpile of silver to unload. There is now more gold above ground than silver because of the silver industrial usage.
5. I look upon silver as money. Throughout history more silver has been used more for money than gold. Historically, silver coins became the common denominator for money in more places and more times than gold.

If you are wealthy and can afford to buy some gold, be my guest. I think you will do just fine. However, silver will outperform gold about three to one. When I receive income from my business, I set aside enough cash to take care of my normal business affairs because paper money is still a means of exchange, although it is no longer a store of value. As a means of exchange, you can conduct your normal affairs. If I have any left over, I go to my local coin dealer and buy silver.

What kind of silver should you buy?

There are American silver eagles, junk silver, and foreign silver coins that can be bought from any coin dealer, and they are also easy to sell. The price fluctuates not only daily, but hourly. So there is always a place you could sell it.

But why would you want to sell it if the government is still inflating the currency? Hang on to your silver.

How far will silver go? Darned if I know; that’s above my pay grade. All I know is that we are in a bull market, and we ain’t seen nothin yet.
I don’t expect it to retreat. When I buy silver, I am just buying another form of money that I believe will prevail over paper.

Where will you keep it? Any place that thieves won’t be able to find it or get to it. Concealment is probably the best strategy. I wouldn’t keep it in my bank safe-deposit box, just in case the government decided to change its position on silver. Right now, silver is just treated as another commodity.

The government is even manufacturing and selling silver coins. But they have no stockpile, so they have to buy on the open market just like you do.

There are more people in the world who can afford to buy some silver than can afford to buy gold; thus, smaller volume will move the market up and up, and up.

Who cares about that? I don’t care if it goes up. I won’t sell it any time soon. This bull market will not end until the world changes its attitudes towards paper money. There is no sign of that.

Some day you might want to give it to your children or build your estate for them to inherit it. They will thank you and call your name blessed.

By Howard Ruff
The Ruff Times