Euro bounces back and gold slides but, the long term trend in gold remains very much intact.
Last week the Euro surged on the back of a massive wave of short covering on the first trading day of July and a day before US employment data was released. This action in the euro was predominantly sparked by the news that the ECB is going to grant 78 banks EUR 111.2 billion of funds for six days to assist them with the expiry of its 12-month loans in which banks needed to repay 442 billion euros worth of debt by July 01. As the euro rallied, the gold price dropped below EUR 1000/oz for the first time since June 17.
This rebound in the euro was hardly the reason for the price of the yellow metal to drop from $1,262/oz on Monday to its low of $1198/oz on Thursday but, it may have precipitated a chain of events that led to the drop in the gold price in particular action taken by the bullion banks that use COMEX gold futures to manipulate the price of gold.
Also, I doubt that this rally is a reversal in trend for the euro, especially when the issue of sovereign debt and massive budget deficits still remain very much in focus. One of the problems is going to be the ability of countries in the Eurozone to raise finance. Spain’s recent 3.5 billion euro auction drew weak demand (1.7 times the offer) and a higher yield (cost for the government). With weak GDP growth, high unemployment, high national debt and high budget deficits, the future of the euro does not look very promising. And, investors worried about this scenario will continue to do the prudent thing and diversify some of their assets into gold.
Economic news coming out of the US, in particular the employment report didn’t offer any real positive news and private employers added fewer workers to payrolls in June than forecast, reinforcing concerns the recovery will weaken as Americans curtail spending. Overall payrolls declined by 125,000 last month as the government cut 225,000 temporary workers conducting the 2010 census. Economists projected a decline of 130,000 payrolls, according to the median forecast in the Bloomberg survey. The unemployment rate declined to 9.5% from 9.7% in May.
Soon after the report was released, US stocks declined, with the Standard & Poor’s 500 Index falling 0.5 percent to 1,022 at 4 p.m. in New York, its lowest close since Sept. 4. The dollar weakened to $1.2549 to the euro from $1.2527 late yesterday. And, gold was up just over $10/oz.
As the UK government together with their European counterparts implement new austerity plans, the problem of sovereign debt is not going to disappear. “Governments all over the world are debasing money at a rapid rate and that has always led to higher prices for real assets throughout history and it will this time too,” Rogers told thestreet.com. Investor, Jim Rogers, a well-known, leading expert on commodities, expects gold will go much, much higher over the next decade.
“Rates are going to go much, much, much higher,’ Rogers says. “I'm judging the world as it goes. I see that actions by governments all over the world are making it worse. So I presume that will continue and gold will go that much higher over the decade.”
It seems that even the International Monetary Fund has recognized this problem and in their report prepared for the G-20 meeting in Toronto, they stated that with high and rising debt, fiscal consolidation is a key priority for the advanced economies. It would also benefit developing countries. Debt-GDP ratios in advanced economies are expected by the IMF to exceed 100 percent of GDP in the next 2-3 years, some 35 percentage points higher than before the crisis. Sovereign debt issuance by the G-3 alone exceeded $2.5 trillion in 2009 more than 7 times total net capital flows to developing countries.
In their report, the World Bank listed a few priorities required to maximize the global benefit. In their report they state that with continuing sovereign debt market stress, fiscal consolidation in advanced economies, based on high-quality measures of sufficient magnitude to restore debt ratios to prudent levels, should be a priority. In the downside, reactive policy action would be less effective and unable to access the full benefits associated with the upside. Thus, avoiding the downside scenario would be crucial.
Firstly, if any of my readers understand what this means, please give me a call. But, if I am correct, I think what they are trying to say is that there is a problem of sovereign debt; something I have alluded to many times over several months.
So, as long as western countries have huge sovereign debt to finance, the currency markets will continue to be volatile and we can expect to see further deterioration in the value of the major currencies. This will continue to drive the price of gold higher and we will look back at this latest sell-off as nothing more than a short-term correction prompted by the US bullion banks in particular JP Morgan.
The US Mint reported that their June sales of gold eagles in various sizes reached 151, 500 ounces and sales of the gold buffaloes were 33, 500. Year-to-date 673,000 ounces of gold eagles have been sold and 160, 500 ounces of gold buffaloes. Sales of the Austrian Mint’s Vienna Philharmonic gold coins in May were up six-fold year-on-year, to 238,000 oz.
Even though the price of gold has breached the 50 day moving average, I believe that this is going to be nothing more than a false break to the downside. However, the price of gold now needs to make a convincing break above $1260/oz for the upward trend to resume. We may see some sideways action before this happens.
The recent drop in silver prices was due mainly to the manipulative tactics of the US bullion banks.
As can be seen by the price action of silver in the last week, prices of this metal can be very volatile. But, this is the nature of silver. And, this is one reason why I believe the upside in this metal is going to be quite spectacular.
Silver prices peaked in 2008 and thereafter have lagged gold. However, the fundamentals for silver are looking better every month, and I believe that as investors continue to diversify some of their assets into precious metals, silver will become a major beneficiary of this trend. As the price of gold becomes more expensive, investors are going to look to add silver to their portfolios.
Recently, I believed that the price of silver had finally broken through a key resistance of $19/oz. Almost, as soon as I mentioned this, the price dropped back to below $18/oz. While this looks as if the break above $19 has been a false break to the upside, I stick to my guns and remain confident that the price will soon trade above this level. The recent sell-off in silver has been primarily due the bullion banks, especially JP Morgan, who continually attempt to suppress the price of this metal. Currently, these bullion banks hold a large open short position on the US futures markets. This does not in any way reflect the true position in the silver market and it is a matter of time before this disconnect between the physical and the futures adjusts. And, when it does, prices are going to move higher; a lot higher.
Demand for silver is also coming in the form of coins and bars. For the month of June, the U.S. Mint sold 3,001,000 silver eagles, and year-to-date sales of this coin have been 18,168,500 silver eagles!
Investors’ demand for silver is also being reflected in equities. Fresnillo has increased by 30 percent this year which is one of the best performing shares on London’s FTSE 100 Index. Pan American, the fourth-largest producer, has advanced 13 percent this year on the Toronto stock exchange.
There are many ways investors can participate in the silver market. They can by silver bullion bars, coins, rounds, equities and silver exchange traded funds. However, I strongly recommend accumulating the physical before looking at the other investment instruments.
Here is the link to an interesting article as well as an interview with Jim Rogers.
The price of silver is still stuck in a range between $17.50/oz and $19/oz. It seems to me that each time it trades at the high, selling comes in, and when it hits the lows of this range we see buying. The break above $19/oz seems to have been a false break to the upside. However, prices at the bottom end of this range offer buying opportunities, and I believe that we will soon the break above the $19/oz. And, once the price has breached $19.50/oz then prices are set to trade towards $21/oz and then $25/oz.
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The fundamentals driving the price of gold higher have not changed and will continue to push prices higher in the long- term.
Recently, while reading the “Special Report Gold” from Erste bank, I noted a saying from Charles de Gaulle. And, I found it most appropriate. Evidently he said, “Betting against gold is the same as betting on governments. He who bets on governments and government money bets against 6000 years of recorded human history.”
It occurred to me that most investors do not really know what government money is. All they know is that money is a medium of exchange, and the word fiat money has little relevance. However, when you understand that the current monetary system used by governments has no intrinsic value and is not backed by reserves, then perhaps this will prompt you to know more. Governments around the world have declared their currencies as legal tender and the value of this is simply established through a network of currency traders around the world. As fiat money is not linked to physical reserves, it risks becoming worthless due to hyperinflation. This occurs when governments rescue themselves with the printing press, making their currency worth less and gold worth more. Gold has always risen the most when confidence in government is at its lowest. In the end when people lose faith in a nation's paper currency, the money will no longer hold any value.
Historically, all systems of fiat currencies have ended in total failure, and this is one of the main reasons why we have seen the price of gold move upwards over the last nine years. Gold has always protected people’s wealth when their country’s monetary system has failed. As these fiat monies depreciate, it requires an ever increasing amount of monetary units to buy one ounce of gold. In the end, gold becomes the ultimate currency. When the price of gold increases, it acts like a barometer, measuring the relative value of global currencies. If the price of gold rises in dollars or euros, you can pretty much bet on there being some underlying problems with these currencies.
Central banks and governments do not like this as they need strong currencies to reflect a picture of strength. This was the case with the US dollar for years. Holding US treasuries yielded good annual returns. And, as most of the commodities were traded in dollars, people had to buy dollars to buy these commodities. The dollar was king. But, this scenario is changing and prudent investors who understand these dynamics are protecting their wealth by diversifying into gold.
Gold has often been called the "crisis commodity" because it tends to outperform other investments during periods of world tensions. The very same factors that cause other investments to suffer cause the price of gold to rise. A bad economy can sink poorly run banks. Bad banks can sink an entire economy. And, perhaps most importantly to the rest of the world, the integration of the global economy has made it possible for banking and economic failures to destabilize the world economy.
Another major reason investors look to gold as an asset class is because it will always maintain an intrinsic value. Gold will not get lost in an accounting scandal or a market collapse. Economist Stephen Harmston of Bannock Consulting had this to say in a 1998 report for the World Gold Council, “…although the gold price may fluctuate, over the very long run gold has consistently reverted to its historic purchasing power parity against other commodities and intermediate products. Historically, gold has proved to be an effective preserver of wealth. It has also proved to be a safe haven in times of economic and social instability. In a period of a long bull run in equities, with low inflation and relative stability in foreign exchange markets, it is tempting for investors to expect continual high rates of return on investments. It sometimes takes a period of falling stock prices and market turmoil to focus the mind on the fact that it may be important to invest part of one’s portfolio in an asset that will, at least, hold its value.”
Today is the scenario that the World Gold Council report was referring to in 1998.
In addition to the abovementioned factors, we have also seen a change of attitude of many central banks around the world, and for the first time in twenty years they have become net buyers of gold instead of net sellers. During the month of June the central banks of Russia, Venezuela and the Phillipines added gold to their reserves.
My point is, even though we may see frequent drops in the price of gold we have to bear in mind that this is normal market function. As the price of gold is influenced by so many different factors, it will always fluctuate. But, as governments create (print) more money during the next few years we are going to see a further debasement of their currencies and this will push the price of gold higher. And, the eventual consequence of all this money creation is going to be inflation and probably hyperinflation. When this happens the price of gold will be propelled into another level.
The price of gold seems locked in a trading range between $1180 and $1220 per ounce. It is showing signs of support at the $1200 level, although a break above $1220/$1230 an ounce is needed to set the stages for much higher gains. Prices will probably remain relatively flat over the next several weeks as the seasonally slow summer doldrums drag on.
Major US bullion banks continue to cap the price of silver
Silver prices have been on a roller-coaster since moving above $17.50/oz in March this year. Each rally has met with an equal sell-off. Each time the price of silver has moved above the $18.50/oz level, it has been capped by the bullion banks in the USA, especially J.P Morgan. They have done this repeatedly in spite of the bullish fundamental for silver. However, the supply side of silver is getting tighter and this could result in a shortage of the physical metal. Although it is almost impossible to predict a specific date when the price of silver will begin to reflect the strong fundamentals, I think it is going to happen much sooner than most would expect.
Throughout history, gold has not been the only monetary metal. Silver has always played a role alongside gold. In fact, up until the beginning of the 20th Century, more people used silver as money than they did gold. Beginning in the last quarter of the 19th century, the major economic powers of the US and Great Britain, systematically de-monetised silver. Historically, silver has been viewed as an effective hedge against a decrease in the value of the U.S. dollar and inflation. Silver, as with gold, has maintained its long-term value, as measured by purchasing power, more effectively than most currencies and fixed assets. As silver prices have generally increased during times of U.S. dollar decline and during inflationary periods, silver may provide a hedge against money creation and purchasing power erosion.
During the last parabolic phase for silver in 1979/80 silver went from a low of $5.94 on January 2nd, 1979 to trade above $50/oz in early January, 1980 which represented an increase of 732.5% in just over one year. Such a percentage increase from the current price for silver would represent a future parabolic top price of $135. Frankly, while I don’t see prices going so high, there are many analysts who believe that the price of silver is going to trade above the $100/oz level.
Since 2003 investment demand for silver has increased steadily. The most significant demand has been through silver ETFs and bullion funds. The emergence of silver ETFs and silver bullion funds has increased the ease of purchasing bullion for investors, who traditionally had to rely on purchasing coins and silver bullion directly.
The view of silver as a store of value in times of uncertainty and inflation has served as a catalyst for investment demand and growth of these relatively new investment vehicles. And, now there is a new silver fund which was established June 30, 2010 under the laws of the Province of Ontario, Canada. It is the Sprott Physical Silver Trust. According to the prospectus, the Trust was created to invest and hold substantially all of its assets in physical silver bullion. The Trust intends to invest primarily in long-term holdings of unencumbered, fully allocated, physical silver bullion and will not speculate with regard to short-term changes in silver prices. The units may be bought and sold on the NYSE Arca and the TSX like any other exchange-listed securities.
The way I see it, the Sprott Silver Trust is going to take even more physical silver off the market which in turn will ultimately boost prices. No matter which way you look at silver, prices are bound to move much higher.
Since April this year the price of silver has struggled to break above the $18.50/oz level. And whenever it has breached this level, it has been sold off and fallen back to around $17.50/oz. The trading range between $17.50/oz and $18.50/oz is now clearly defined. Even though there was a break to the upside in June, the prices were clearly capped and pushed downwards. The market appears to have established good support around $17.50/oz and this should be used to accumulate the metal.
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Even though there was a lot of bullish news for gold last week, trading in the yellow metal remained mostly muted.
The first bit of news that should have had a bullish impact on gold was the news at the beginning of the week. It was the announcement that Moody's had downgraded Ireland's sovereign debt rating from Aa1 to Aa2. And, then the EU and IMF suspended talks with Hungary. They urged the country to do more to cut the budget deficit before resuming the use of the bailout funds. The breakdown in talks means that Hungary will not have access to remaining funds of about 5.5 billion euros (US$7.1 billion) in its 20 billion euro financing deal until the review is completed. Strangely, this news didn’t do much to the value of the Euro or the price of gold.
Then, two days later during Federal Reserve Chairman Ben Bernanke’s testimony to the Senate Banking Committee which began in Washington on Wednesday he said central bankers “remain prepared” to act as needed to aid growth and “we also recognize that the economic outlook remains unusually uncertain.” Bernanke also said. “We will continue to carefully assess ongoing financial and economic developments, and we remain prepared to take further policy actions as needed to foster a return to full utilization of our nation’s productive potential in a context of price stability.” It is widely expected that the Fed will increase monetary stimulus in a bid to keep the economy growing and reduce a jobless rate from close to a 26-year high.
Many analysts believe that this is a message that the Fed will engage in further “quantitative easing,” which is a new word for printing more money. Even if the US government has no other choice, the consequence of this is going to be a further debasement of the US dollar which will boost gold prices. But, there was little to no reaction in the gold market to the statements made by the Fed Chairman.
Perhaps the lack of response from the gold market was due to the widely awaited results of the stress tests conducted on 91 European banks. When the results were finally released, the reaction from the market was extremely muted. Seven of 91 European Union banks subject to the stress tests failed with a combined capital shortfall of 3.5 billion euros ($4.5 billion). These banks are Diada (Spain), Espiga (Spain), Unnim (Spain), Banca Civica (Spain), Cajasur (Spain), ATEBank (Greece) and Hypo Real Estate (Germany).
Another reason why the markets hardly reacted to the news is perhaps partly due to the fact that the report was not released until after the European markets were closed when liquidity was significantly reduced. Also, many analysts claim that the tests were far from being stressful. One other problem now surfacing in regards to the stress test is that many analysts are not convinced that this was a real test.
The seven banks that fell short are already in some way supported by the government, and therefore pose little threat. The next concern is over the methodology of the tests themselves. The scenarios don’t account for a sovereign default or a particularly significant regional crisis. Shortly after the disclosure, the euro tumbled to $1.28 from $1.30, but it crept back to $1.29 after the results were released. The prices of August gold finally closed down $7.80/oz at $1,187.80/oz on the Comex division of the NYMEX.
During June, the Russian Central Bank (RCB) purchased another 200,000 ounces of gold. Their total gold reserves now stand at 22.8 million troy ounces... which is 709.2 tons. So far this year, the RCB has purchased 2.1 million ounces for their reserves. In the second quarter of this year, the central banks of Venezuela and the Philippines also bought gold.
Holdings in the world’s largest gold backed exchange traded fund, SPDR Gold Trust (GLD) have fallen from 1320.436 tons on June 30 to 1302.046 tons on July 23.
In an article published by Bloomberg on July 21, gold trading in London declined in June as average daily volumes fell 16 percent, according to the London Bullion Market Association. An average of 20.8 million ounces of gold traded daily, down from 24.7 million in May, the LBMA said in an e- mailed statement.
From the end of June, the price of gold has been stuck in a two-tier trading range. The higher level is set between $1200/oz to $1220/oz and the lower level is trading between $1180/oz and $1200/oz. In the short-term it is possible to see prices retreat towards the 200 day MA which is now at $1144/oz, but I favour more sideways action. The price of $1180/oz also represents a 38.2% Fibonacci retracement of the move that began in February this year and which peaked in June.
With the new Financial Regulatory Bill in the USA now in place, and with strong fundamentals, prices of silver are likely to increase substantially.
In a recent report from the VM Group, the consultancy expects prices of silver to remain firm and possibly advance going into Q4. The report mentions that Chinese imports of silver, have risen year-on-year in each month since November 2009, although the figures are skewed because of the deep recession that year. May's imports were 482.9 tons, up 72% on the same month in 2009. They are also up on the same month in 2008 - before the full extent of the financial crisis became apparent. China's imports serve both industrial and jewellery demand and ought to be price supportive. The same holds true for Indian silver imports, which were US$309.8 million in June 2010, up 854% on the year. And, in the first six months of 2010 they are up 579%, at $1.69 billion.
Even though there is an increase in demand for physical silver, the prices remain suppressed. One of the main reasons for this has been the constant manipulation of the silver prices by the bullion banks especially JP Morgan. These banks use the US futures markets to create an “artificial supply” of silver by using massive short positions. In the Commitment of Traders reports (COT), it is clear that less than 8 bullion banks (commercials) hold the greatest percentage of open short positions. And, whenever the price rallies, they cap the price by selling into the market. While analysts such as Ted Butler have accused these banks of price manipulation, the regulatory body has tended to ignore his allegations. But, thanks to people such as Ted Butler, the authorities may be finally listening. Recently, the Commissioner of the CFTC, Bart Chiltern spoke about the Financial Regulatory Reform Bill. In his speech he made mention of the imposition of trading limits. Here is the link his speech:
If the CFTC follows through with this, it will ultimately prevent the likes of JP Morgan and the other bullion banks from holding such massive short positions in silver. They may even find themselves having to close some of these short positions. If this happens, we could see prices adjust to more realistic price levels.
Historically, gold and silver have traded lower during the northern hemisphere summer months hitting the lows in August. It this cycle repeats this year, then, I believe silver prices could move substantially higher during the second half of the year. With less price suppression from the bullion banks, increasing demand both from investors and industrial users and tightening supplies, there is only one way for silver to go and that is upwards.
While silver remains trapped in a trading range between $17.50/oz and $18.50/oz, I believe that as we approach the cyclical lows which normally end during August, we are likely to see a break to the upside. The price of silver has been well supported at $17.50/oz and should continue to hold.
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During July, the price of gold fell 5 percent trading as low as $1156/oz on July 28. This price drop in July is the first monthly decline since March, and gold has fallen 6.5 percent from its June 21 record of $1,266.50. Holdings in the SPDR Gold Trust (GLD), the biggest exchange-traded fund backed by bullion, declined 1.5 percent last week, heading for the biggest weekly drop since April 2009. As of July 30 holdings of the US (GLD) were 1282.279 tons which is up by more than 13% since the beginning of the year. However, during July, holdings in GLD lost just over 38 tons. At the end of June the holdings were 1320.436 tons. While this liquidation may represent a change in the sentiment of a few investors, it is hardly indicative of a panic sell-off or a major switch out of the yellow metal.
Suddenly, just because the price of gold has fallen from its historical highs the bears have come out of hibernation. And, the number of e-mails I have received in the last week has been astounding. These bears send their messages advising me that the price of the yellow metal is going to plunge to $1100 and then to $900/oz. While I thank these readers for their opinions, I can’t agree with them, and frankly, I think it takes a very bold individual to suggest the price of gold is going to drop to $900/oz!
These bears were the same individuals who did not believe that gold would cross the $1000/oz never mind the $1200/oz. And, to suggest that this current bull market is driven mainly by speculators is clear evidence that they have no understanding of what is going on in this market. Believe it or not, I have seen an analyst maintain that the price of gold is driven by the whims of a few housewives in India! (I just can’t wait to hear what he has got to say about silver). Then, there are those so called “experts” who attribute the rise in the price of gold to “fears of inflation.” What inflation are they talking about? With flat to contracting GDP growth in most industrialized countries, if anything, at the moment we are in a deflationary environment. But, inflation is imminent. However, it is still going to take some time before we see this. And, then there are those “students” of economics who fail to see gold as a store of value despite the fact that since 2001 it has risen in “value” between 250% and 400% no matter what part of the world you live in. And, then there are those commentators who repeatedly state that gold is a useless investment because it does not pay any interest.
According to my calculations if you invested in fixed interest bearing instruments such as bonds and you were lucky to get say 5% per annum, on a compounded basis it would take 15 years to double your money. My mathematics tells me that even though gold does not pay interest, I would ultimately be better off investing in gold than in bonds.
At the moment the yields for 10 year UK gilts are paying 3.32%. Australian 10 year paper is paying 5.2%, Switzerland 1.48%, US 2.91%, Germany 2.66% and France 2.95%. Of course there are government bonds that pay more than 5% pa, such as the Greek 10 year bonds that are currently 10.31%, but then you face the possibility of default. I cannot see the price of gold going to zero.
Of course, past performance is no guarantee of future performance, but when you consider the instability of global economies, and the fact that we are in a global currency crisis that is being patched up by the intervention of the major world central banks, burgeoning global sovereign debt, massive budget deficits of most major western governments, all of which influence the price of gold, I cannot see the price of gold plummeting any day soon. The reason for me mentioning this is because, I maintain there are many advisors in the main stream media who comment on gold but who actually don’t have a clue about the gold market. They deal with equities and should not confuse gold shares with gold, the precious metal.
While I do not claim to have any special powers of prediction nor do I claim that my view on gold is the correct view, however, based on my analysis, I believe that this market has a very long way to go before peaking, and that, corrections of 6% or even 15% should be of no concern to long-term investors. And, for those investors who have not yet diversified some of their assets into gold, these dips should be viewed as buying opportunities.
As I have stated, many times in the past, investing is not the same as trading. Trading is a short-term thing. You enter a position with the expectation of exiting it quickly. That can be anywhere from 30 seconds to 3 months depending on your strategy. Investing is a longer-term process, generally lasting years. In order to trade successfully you need a trading plan. You need to know your entry and exit levels as well as your stop-loss levels. And, you must understand the arithmetic of trading. So when the price of gold drops as we have seen recently, as an investor, I do not see it as a bubble that has burst, but as a pull back in a bull market which is a very normal phenomena in any market.
Although the price of gold can be volatile in the short-term, gold has maintained its value over the long-term, serving as a hedge against the erosion of the purchasing power of paper money. Gold is an important part of a diversified investment portfolio because its price increases in response to events that erode the value of traditional paper investments like currencies, stocks and bonds.
Even though the price of gold has been trading below its medium-term 50 day moving average, it has held above the long-term 200 day moving average. Also, there was a good rebound in prices over the last three sessions as indicated by the black arrow, and as long as prices can remain above $1155/oz - $1160/oz, then we can expect to see higher prices over the next few weeks. However, a decisive break above $1210/oz and $1220/oz would be required to indicate the resumption of the up trend.
During July, silver prices were severely tested for support. And, even though the long-term 200 day moving average as well as the key support level at $17.50/oz were both breached a few times, the price of silver managed to crawl back above this level and close the month at above $18/oz level. On numerous occasions I have mentioned that even though I am extremely bullish on silver, prices can be very volatile as the silver market is prone to manipulation by the US bullion banks (large commercials).
Long-time silver investors are well aware that there a tendency for the prices of precious metals such as gold and silver to trade sideways to lower, hitting bottoms by mid-August. And, as we have seen prices plunge over the past few weeks I am certain many silver investors have cause for concern as they see this sideways pattern in price continue. However, there are many analysts who will tell you that August is the perfect time of year to bargain shop for physical holdings. And, once we enter the northern hemisphere Autumn months, the prices of gold and silver should recover from their lows as the buying season resumes in many regions of the world in particular India.
On July 23, the Wall Street Journal published an article about Wall-Mart Inc. According to the article, Wal-Mart Stores Inc. plans to roll out sophisticated electronic ID tags to track individual pairs of jeans and underwear, the first step in a system that advocates say better controls inventory but some critics say raises privacy concerns. Starting next month, the retailer will place removable "smart tags" on individual garments that can be read by a hand-held scanner. If successful, the radio-frequency ID tags will be rolled out on other products at Wal-Mart's more than 3,750 U.S. stores.
Wal-Mart's broad adoption would be the largest in the world, and proponents predict it would lead other retailers to start using the electronic product codes, which remain costly. Wal-Mart has climbed to the top of the retailing world by continuously squeezing costs out of its operations and then passing on the savings to shoppers at the checkout counter. Its methods are widely adopted by its suppliers and in turn become standard practice at other retail chains. Each RFID tags (radio frequency identification), contains silver.
In July sales of the US Silver Eagles were 2,981,000 making the total for the year 21,149,500. And, the Perth Mint is going to increase the annual mintage of its popular 1oz Australian Kookaburra silver bullion coin. A mintage ceiling of 500,000 has been set for the 2011 release following the sell out of all 300,000 2010-dated coins. The coin also sold out in each of the preceding two years.
Investors should also be aware that the Commodity Futures Trading Commission (CFTC), intend to introduce position limits on all metals including gold an silver. This will stop them from suppressing the silver prices and according to, Ted Butler, JP Morgan, the biggest culprit of this scam is scrambling to cover their short positions. Here is a link to Ted Butlers’ interview with Eric King and is worth listening to:
As can be seen by the circle in the above chart, each time the price of silver has breached the 200 day moving average it is bounced back above the line. While the price remains sandwiched between $17.50/oz and $18.50/oz I believe that as we head towards the cyclical lows we should see a break above the 50 day moving average, and the key resistance level of $18.50/oz.
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During last week the US dollar staged a strong rebound following the FOMC monetary policy meeting statement in which it did say the U.S. economy's growth track will be more modest than the Fed had expected in recent months. “The pace of economic recovery is likely to be more modest in the near term than had been anticipated,” the Federal Open Market Committee said in a statement after meeting today in Washington. “To help support the economic recovery in a context of price stability, the Committee will keep constant the Federal Reserve’s holdings of securities at their current level.” The Fed retained a commitment to keep its benchmark interest rate close to zero for an “extended period.”
The sell off in US equities intensified following a string of disappointing data and the DJI fell 3.3% by the end of the week. After hitting a major support level of 80, the US Dollar Index rallied strongly, possibly due to short covering initiated at this level. Even though the US dollar rose almost 3% on the week, gold prices remained firm. The Japanese yen hit a 15 year high against dollar, following the sharp dive in treasury yields. However, the yen then weakened sharply on intervention talk which triggered yen long positions squaring.
In spite of exceptionally strong GDP data from Germany, the euro lost ground against the US dollar and was weakest currency last week. German Q2 GDP showed spectacular 2.2% growth, way above expectation of 1.3%. This was the strongest number since the reunification two decades ago. However, overall Eurozone Q2 GDP growth was much lower at 1.0%. Greece is still in recession with a -1.5% contraction, while the 0.2% growth in Spain and 0.4% in Italy were only modest. The gap between the fastest and slowest economies’ performance was much larger in the second quarter than in the previous periods. Germany, France, Italy and Spain were all within 0.4% of growth in the first quarter. There were fresh concerns that these imbalances will only intensify on austerity measures in peripheral Eurozone countries.
According to a report by Lloyds Bank, precious metals such as gold were the best performing asset class of the first half of the year Of the nine asset classes analysed, five – precious metals, UK commercial property, UK bonds, international bonds and cash – delivered a positive return for investors. They rose in value by an average of 9.7%, with gold turning in the best performance thanks to a rise of 13.5%. Four lost money: UK residential property, commodities, UK equities and international equities. International equities were the worst assets to hold over the period, falling by 6.8%.
As I have alluded to several times in the past, the northern hemisphere summer doldrums are normally a weak time for gold, and if history is any guide, we can expect to see higher prices over the next few months. Historically, the gold price has risen in September. This is the time of the year when gold jewelers usually have their best months as they stock up ahead of some major holidays and festivals including Ramadan, India’s wedding season and Diwali one of India’s most important festivals. Then, jewellers stock up in advance of the Christmas shopping season. In addition to an increase in demand from the jewellery sector, I believe that as the price of gold increases over the coming months, more investors will add gold to their portfolios.
But, gold still remains a very small percentage of global financial assets. According to hedge fund Paulson & Co, if you added up all the money invested in gold ETFs, it would total $78.3 billion (at $1,200 gold). The amount of money currently sitting in U.S. money market funds, on the other hand, comes to $2.849 trillion. In other words, all the money invested in gold ETFs represents just 2.7% of what is sitting in cash. There is no need for me to tell you what would happen to the price of the yellow metal if just a small percentage of this money moved into gold.
During the past ten years investment demand for gold has increased 250% and sales of the American Gold Eagle have increased more than 600% since 2007. And, in China, sales of gold bars and coins increased by 40 % in the past six months according to the China National Gold Group Corp., the country's largest state-owned gold producer. And, with the introduction of the new liberalized trading rules recently introduced in China, eventually hundreds of millions of Chinese citizens will have access to gold-linked investment products. China is the world's largest gold producer. The country is expected to increase mine production by 5% this year to 330 tons, again solidifying the nation's position as the world's number one producer.
Gold has now rebounded $60 since its recent low made towards the end of July. In the last week the price consolidated above $1200/oz (red circle), and it looks set to break above the 50 day MA. I believe that the prices will soon test the $1220/oz level.
Much of what applies to gold also applies to silver. And, as I have mentioned in previous editions of this report, silver is also a monetary metal whose price is influenced by similar factors that influence the gold price. Invariably, the price of silver mirrors that of gold and more often than not, its moves are greater in percentage terms than the moves in gold. So if the price of gold moves 1% silver can be expected to move between 2-3%. With the price of silver being so undervalued at the moment, the percentage moves we can expect to see in the future are going to be quite spectacular.
According to World Silver Survey2010 released in May by The Silver Institute, silver has continued to make gains as the European sovereign debt crises continues. “Silver’s status as a precious metal was unequivocally reaffirmed last year by investors who purchased it not only as a speculative commodity-play on economic recovery but also as a safe haven asset, particularly at a time when the global financial crisis was raging,” the Survey noted.
The report also stated that much of 2009’s strength in investment can be attributed to soaring demand for silver exchange traded funds (ETFs) as well as physical retail investment. This occurred on the heels of 2008’s previous record ETF inflow of 265.3 million ounces of silver. Total ETF holdings rose by 132.5 million ounces over the course of 2009, ending the year at 397.8 million ounces as new funds entered the marketplace from Australia and the United States.
Coins and medals fabrication rose by 21 percent to post a new record of 78.7 million ounces, driven by a jump in retail demand principally in the United States, although western European demand was also stronger in 2009. In the United States, the increase in bullion coin sales was also accompanied by a surge in bar demand. Demand for the US Silver Eagle bullion coin reached record highs in 2009, with over 28 million Eagles sold. Over the 1986-2008 period, US Eagle minting averaged 7.7 million ounces annually. This year sales of the one ounce silver coins have already reached 22,092,000. If sales continue at the current pace, sales may even hit 40 million ounces for the year which is equivalent to the total annual US production of silver.
Since April this year, with the exception of two false breaks to the upside, whenever the price of silver has hit $18.50, which has been seven times, it has then been sold down to around $17.50/oz. All this action has taken place on Comex, and since there has not been any change in the fundamentals, particularly on the supply side, it is obvious that this range has been a pure speculative play by the bullion banks. However, if the CFTC do what they say they are going to do, then these banks will soon find it difficult to use their “phony” exemptions, which will put a stop to the their huge short positions. When this price suppression stops I believe that we will see the price of silver make a decisive break above $18.50/oz and a rapid move to $21/oz. Thereafter, it should challenge the $25/oz level. It is also my firm belief that silver is going to be one of best performing assets during the next five years.
The trading range between $17.50 and $18.50 is very clear. The price of silver has managed to remain above the long-term 200 day MA, and it now looks set to break through the medium-term 50 day MA. I believe that we will see this shortly and then we will see a break through the key resistance of $18.50.
One of the best ways to invest in silver is to own the physical metal. This can be done by purchasing silver bullion bars, bullion coins and silver bullion rounds.
For investors living in South Africa, at the moment, the most cost effective way to own physical silver is the 1000 gram (1 kilo) silver bars.
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A little over a week ago, U.S. Treasury Secretary Timothy Geithner wrote an article for the New York Times entitled Welcome To The Recovery in which he touted the great strides that the U.S. economy was making. But, with unemployment still dangerously high, foreclosures and personal bankruptcies continuing to set all-time records, shrinking manufacturing, burgeoning national debt, massive budget deficits, I can’t see any recovery at all. Don’t get me wrong, I am not attacking Geithner as I would not like his job for all the gold in Fort Knox, if indeed there is any really left, but, I think all the economic rescue package did was to save a few financial institutions from becoming extinct. “Panicked by the collapse in demand and financing and fearing a prolonged slump, the private sector cut payrolls and investment savagely. The rate of job loss worsened with time: by early last year, 750,000 jobs vanished every month. The economic collapse drove tax revenue down, pushing the annual deficit up to $1.3 trillion by last January. The economic rescue package that President Obama put in place was essential to turning the economy around. The combined effect of government actions taken over the past two years — the stimulus package, the stress tests and recapitalization of the banks, the restructuring of the American car industry and the many steps taken by the Federal Reserve — were extremely effective in stopping the freefall and restarting the economy,” Geithner stated in his article.
What I find fascinating is how most people have “blind faith” in what they are told by their governments. If some government official says everything is fine, they believe it to be so. However, no matter the rhetoric the facts speak for themselves and the truth is that the numbers don't lie, and statistic after statistic shows that the economic fundamentals continue to get progressively worse in the United States. Even though I do not believe that we are heading for a total global monetary collapse or a major depression, I sincerely believe things are not as great as they are made out to be, and that now more so than ever before investors should take steps to preserve their wealth and the best way to do that is by investing in gold and silver.
A new analysis of the U.S. economy shows that since 2007, the private sector has lost 10.5 million jobs while the public sector has added 720,000 jobs. The study comes from The Free Enterprise Nation a nonpartisan national membership/advocacy organization for individuals and businesses that make up the private sector. The analysis was done using statistics about employment data from the U.S. Bureau of Labor Statistics.
According to data released by the US Department of the Treasury, China’s holdings of Treasuries fell 6 percent in the first half to $843.7 billion… down almost $100 billion in the past year. China more than doubled South Korean debt holdings this year, spurring the notes’ longest rally in more than three years, as policy makers shifted part of the world’s largest foreign-exchange reserves out of dollars.
The amount of Korean Treasury bonds held by Chinese investors rose 111 percent to 3.99 trillion won ($3.4 billion) in the first half of the year, according to data released from the Seoul-based Financial Supervisory Service. China’s holdings of South Korean notes account for little more than 0.1 percent of its $2.45 trillion reserves.
The central banks of Hong Kong, Russia, and Saudi Arabia also appear to be actively diversifying out of US Treasuries. While, none of these banks have made any public statement as to what they are diversifying into, judging by their increase in gold holdings, one can assume that gold is one asset that they have chosen. In this year alone the central banks of China, Saudi Arabia and Russia have all increased their gold holdings. During the month of July, the Central Bank of the Russian Federation added another 500,000 ounces to their gold holdings bringing their total holdings to date up to 23.3 million ounces... or 724.7 tons. In the last seven months their holdings have increased by 2.8 million ounces which is over 10% of their entire holdings.
The U.S. debt has grown rapidly with the economic downturn and government spending for the Wall Street bailout, the wars in Afghanistan and Iraq and the economic stimulus. The total U.S. debt includes obligations to the Social Security retirement program and other government trust funds. The amount of debt held by investors, which include China and other countries as well as individuals and pension funds, will rise to an estimated $14 trillion this year and to an estimated $19.6 trillion by 2015.
A decline in foreign demand for US Treasuries would lead to higher interest rates in the United States as yields tend to rise when fewer people invest in them. This would result in the US government having to pay more interest on its $13.3 trillion national debt. And, consumers would have to pay more on their mortgages and auto loans and other borrowings from banks.
The editor of "Gloom, Boom & Doom Report" Marc Faber recently told a CPA Association meeting in Abu Dhabi that gold is his asset class of choice for the next 10 years. Faber said that holding cash and bonds exposes investors to more dangers than holding equities, though he believes that equities are unlikely to make money given coming inflation. Faber said earlier in the year that investors should by some gold, every month, forever.
The link to this interview is here:
And, recently Jim Cramer had this to say about gold. “I am an unabashed believer in gold,” he says. “Gold can go to $2,000 in the next few years, and I’m not talking about 2020.” The “most bullish factor” for gold is that “we’re running out,” says Cramer. “There are no more big discoveries in the world,” says Cramer, adding that the next two months are traditionally bullish for gold because of jewelry demand in India and China.
While I disagree that the most bullish factor gold is that we are running out and maintain that the real reason behind this move is the declining values of the major fiat currencies, I do agree that supplies are getting tighter. And, even if a new major deposit was discovered, it would take between 7 and 10 years to get the correct mining infrastructure in place.
At the moment given the fact that gold represents less than 1% of all global financial assets, as more people wake up and diversify into the yellow metal, prices will head much higher. In the long run, gold has always maintained its value unlike the value of fiat currencies that historically end in total failure. In 1933 when gold was confiscated from US citizens, they were paid $20.67 for each ounce they turned over to the government. Now imagine if you were not beguiled by your government into surrendering your gold, today you would be getting over $1200 an ounce for each ounce! Instead, you are getting less than $2 for the $20.67 you had in 1933.
The primary trend for gold remains very much intact and upward. The recent drop in price from the historical high of $1265 to $1155 looks to have been nothing more than a small correction in the bigger picture. However, I expect to see some formidable resistance at $1250 level. But, I believe that this level will be breached and we will soon see a new historical high for the gold price.
Last week, the price of silver tested the key resistance level of $18.50/oz but, failed to penetrate this level. Once again, the bullion banks seemed to put a cap on the price at this level. According to the latest Commitment Of Traders (COT) report, the four or less largest traders (Commercials or bullion banks such as JP Morgan and HSBC) are currently short 225,484, 000 ounces of a total net current short position of 268, 720, 000 ounces. This means that 83.9% of the total net short position is currently held by four or less traders. And, probably most of these short positions are held by JP Morgan. How is possible that one firm can hold such a concentrated position? Well I leave it to your imagination. Can you imagine what the regulators would be saying if this position was reversed and held on the long side and prices were being pushed upwards? In fact this is precisely what happened with the Hunt brothers in 1980. They were accused of attempting to corner the silver market and forced to liquidate their long positions, causing the price of silver to plummet from it highs. However, once the CFTC regulators impose new laws to prevent this type of action, further price suppression will be difficult and the price of silver should adjust to a more realistic level.
While industrial demand for silver is increasing, so is monetary demand. More and more investors are turning to silver as a way to protect the purchasing power of their savings. This can be seen by the increased demand for silver bullion bars and bullion coins in particular the one ounce US Silver Eagles which are experiencing record sales this year. This year alone, sales of the one ounce silver eagles have reached 22, 255, 500 compared with sales of 28,766,000 for the entire year 2009. In addition, new investment vehicles such as silver ETFs have come along, taking several million ounces of silver out of the marketplace.
As I have often mentioned, the fundamentals for silver are very bullish. Basically, it is simple economics… the higher demand and the lower the supplies, the higher price. Yet, you can still buy silver for less than a third of its previous high in 1980 while gold by comparison has reached and way past its previous all-time high which was reached in 1980 at $850/oz. Today, with gold around $1200 an ounce and silver hovering around $18 an ounce, the gold-silver ratio has climbed back to around 65 to 1.
While silver was one of the best-performing assets last year, it is nowhere near its all-time highs of more than $50 an ounce. Silver would have to triple from here just to match its previous highs, and in inflation-adjusted dollars it would have to go up almost ten times.
From April this year, we can see that the level of around $18.50 has been a key level of resistance for silver. Each time, the price breaches this level, it is sold off. While the charts do not explain the reason and merely show price action, we know this is mainly due to continual price suppression by the major bullion banks.
However, once the real demand/supply dynamics are allowed to function normally, we will see a price break above $18.50.
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Each day it is estimated that the foreign exchange market (often called forex or FX market) trades an estimated US$4 trillion. Up and until now and in spite of the introduction of the euro on January 01, 1999, the US dollar has remained the world’s reserve currency. However, it has lost more than 30% of its value since 2001. And, since the creation of the Federal Reserve, the dollar has lost more than 96% of its value. But, what is amazing is how few investors understand what determines the value of currencies.
Every country has its own currency to facilitate international trade and domestic business. However, when Nixon abolished the gold standard in 1971, he removed any intrinsic value to the US dollar. And, in 1973 the IMF officially abolished gold as part of the monetary system. One of the problems of having a currency backed by gold is that this system restricts monetary expansion and as a consequence restricts economic growth. But, on the other hand when currencies are no longer backed by gold or silver for that matter, they become what is known as fiat currencies. A fiat currency is a medium of exchange composed of some intrinsically valueless substance which the issuer does not promise to redeem in a commodity or a fiduciary money. And, because a fiat currency has no direct legal connection to a commodity money (in terms of redemption) and, therefore, no real economic cost to its production, the supply of a fiat money can never be self-limiting.
The value of these currencies really depends on the economic health a country as well as the perception of stability and confidence in the political climate in those countries. As conditions change currency values fluctuate to reflect the new perceived value. Changes in currency valuations have a significant impact on governments, corporations, financial institutions and ultimately the individual.
Unlike equities and bonds, which tend to be traded locally during the business day in their own time zone, currencies trade practically twenty four hours a day almost seven days a week. Yet, no market is islolated in today’s global financial system. For example, US Treasuries have an effect on the value of the dollar which in turn has an effect on forex markets, equities and commodities. And of course as the US dollar is still the world’s reserve currency, any change in the value of the dollar can have ripple effects through the global monetary system. But, this is not a one way street and certain global changes can in turn have an effect on the US dollar. This circular cause and effect dynamic has major implications. It effects changes in interest rates, corporate earnings growth rates, stock prices, forex prices and inflationary expectations.
Over the years, central banks have tried in vain to get rid of their gold as they did not see it as a worthwhile asset. From 1980 to 2001 it declined in value and while declining it did not pay any interest.
Most investment advisors, stock brokers and financial planners who are in their thirties or even forties, were brought up in a world where gold had no importance. All they knew were the boom days caused primarily by an unprecedented and uninterrupted massive credit expansion that begun in the US in 1980. Suddenly, as we all know, this all came to an abrupt halt in August 2007.
As a result of this tragic economic disaster, countries around the world were sent into recession and governments were compelled to spend trillions of dollars in attempt to prevent a total meltdown of the monetary system as we know it. The problem is, someone has to pay for all this monetary expansion. While those investment advisors in their thirties and forties who have never heard of gold, search for high yielding investments finally realize that in times like this, it is more important to simply protect your wealth they evidently believe that the single safest place to be is in government bonds in particular US Treasuries. But, most Treasury bonds are at record low-interest rates. The long 30 year T-bond now yields 3.77%. and the 10 year T-bond yields a ridiculously low 2.63%.
The national debt of the US is approaching USD14 trillion and soon government debt to GDP will be more than 100%. Gross government debt in the U.S. stood at 85% of GDP in 2009 and will reach 108% of GDP by 2014, according to IMF projections. The U.K.’s gross government debt stood at 69% of GDP in 2009 and is expected to reach 98% of GDP by 2013. With slow GDP growth, high levels of unemployment which will result in a smaller tax bill, governments will experience difficulty funding all this debt. And, as a consequence, they will continue to increase money supply which will ultimately debase their currencies even further. This will cause the value of gold to rise. Since 2001 as the US dollar has lost more than 30% of its value gold in dollar terms has increased more than fourfold.
On August 25, according to Reuters, the Federal Reserve asked a U.S. appeals court to delay implementing a ruling that would force the central bank to disclose details of its emergency lending programs to banks during the financial crisis. The Fed programs were designed to shore up the financial markets, and more than doubled the central bank's balance sheet to well over $2 trillion, especially after the September 2008 collapse of Lehman Brothers Holdings Inc. Wednesday's emergency request for a 90-day delay came after the U.S. Second Circuit Court of Appeals on August 20 denied a motion by the Fed to rehear the case, which had been brought by Bloomberg LP, the parent of Bloomberg News, and News Corp's Fox News Network. In March, the Second Circuit ordered the Fed to disclose information, including the names of bailout recipients and amounts received, that the news media had requested under the federal Freedom of Information Act. The Fed argued that allowing disclosure could stigmatize banks, causing a loss of confidence that could lead to deposit runs, bank failures and damage to the economy.
This non disclosure of information by the US government reminds me of the continual requests to do an audit on the US gold reserves which are supposedly around 8,000 tons. As unbelievable as it seems the last audit done of the gold inside Ft Knox was done in January of 1953. The years after 1953 saw hundreds of millions of ounces of gold fly out of the US. On August 24 in an exclusive interview with Kitco’s Daniela Cambone, Ron Paul called for an audit of the US gold reserves. “If there was no question about the gold being there, you think they would be anxious to prove gold is there,” Paul said of Federal Reserve. Now, why won’t the US government allow an independent company to conduct an audit on gold? The answer is pretty obvious. Because they don’t have the gold they claim to have. And, in today’s economic climate, if the US suddenly stated that they have only a fraction of the gold that they claim to have, can you imagine what would happen to the greenback?
My point is, if you look at the problem of global sovereign debt, slow economic growth which translates into weak corporate profits, high unemployment, low interest rates, devaluing values of major currencies, and then add to the mix the potential of a much lower figure of gold held in the US reserves what do we have? We have a recipe for a major calamity. While I cannot see the total collapse of the US dollar the current economic scenario is frightening and if you simply choose to ignore it, you will be financially destroyed over the next several years. And, the only way to protect yourself against this trend is to hold real assets including metallic money such as gold and silver.
Even though the price of gold has been very robust since its previous lows made in July, it seems to be stalling at current levels between $1220/oz and $1240/oz. However, I firmly believe that it will soon break the previous high of $1265/oz but, before the price of gold sets a new historic high we first need to see it break through the key resistance levels of $1240/oz and then $1260/oz.
Silver prices surged during the later part of week after reversing a potential 23-cent loss into a 35-cent gain on Tuesday. This was followed through with a 56-cent advance on Wednesday. And, for the week silver soared USD $1.07, an advance of 5.9%, strongly outperforming its larger cousin gold, which added $10.15 to $1,237.88, up 0.8%. Silver for immediate delivery climbed to $19.11 an ounce, the highest price since June 28.
This action is very interesting as the move to the upside coincided with the expiration of the August options and futures contracts. In the past, and almost without fail, as these contacts expire, the large bullion banks have used their CFTC-granted position limit exemptions to overwhelm the buyers and keep prices suppressed. By doing this they can guarantee that most of the call options they sold, expire worthless. And, at the same time, they can cash in the premiums. But, in addition to this, silver is soaring because investors are realizing this is a hard asset, it is money and it is historically cheap compared to gold.
Remember, as I have often mentioned, silver is significantly below all time highs while gold has already broken into new highs. Silver has outperformed the yellow metal since Aug. 23, gaining 6 percent compared with gold’s 1.4 percent gain, as investors bought the white metal because of its relative cheapness to gold.
Silver is unique in that it is both a precious metal as well as an industrial metal. The metal is a store of value for investors concerned about the economy and is also a raw material for a wide range of industrial applications.
According to Dick Poon, a Hong Kong based manager of the precious metals trading division of Heraeus Ltd., “Silver is looking cheap and we’re seeing strong investment demand for small ingots, as well as good industrial demand from solar-panel makers.” The solar industry will consume up to 1,500 metric tons (48 million ounces) this year, Poon estimates.
Here is an interesting interview with Eric King and James Turk and I urge you to listen to it.
While I have never recommended to investors to put all their money into silver, I certainly suggest that they have a reasonable exposure to this metal. And, I would definitely recommend accumulating the physical metal over and above the other instruments.
Since April this year, the price of silver has battled to stay above the US$18.50/oz level. And, each time the price has broken through this key resistance, it soon traded back down to around US$17.50/oz. As silver can be volatile, I am going to wait about 7 more days before I declare this to be a break through the key resistance of $18.50/oz. However, this time I believe we will see that break and the beginning of an explosive move to the upside will soon follow.
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The US dollar was broadly lower last week. On Friday the monthly non-farm payroll figures were released and showed a solid expansion of 67,000 jobs in the private job market even though the payrolls number showed a contraction of 54,000. Both figures were better than expectations. In addition, ISM manufacturing index showed unexpected improvement in August to 56.3. Pending home sales also posted strong rise by 5.2% mom in July.
There were numerous important announcements during the week including the emergency meeting held on Monday by the Bank of Japan. The BoJ announced additional easing measures to boost Japan's economic recovery. Then, there was Thursday's announcement by ECB President Trichet to provide unlimited liquidity at least until mid-January 2011. And, of course there were Friday’s non-farm payroll figures.
In the meantime, the price of gold remained firm for most of the week and closed up a few dollars compared with the previous week.
It seems that people are still very skeptical about any market advance, which is not surprising considering the recent data that shows that the US economy is not growing as fast as predicted, and many fear a double dip recession. Even if the economy is able to grow, it might not translate into higher prices for stock index futures. The economy seems to be weaker now than earlier in the year and earnings could disappoint investors.
At the same time yields on government bonds are at record low levels, and we are still in the midst of a global currency crisis. While there are numerous skeptics out there talking about a potential gold bubble let me state once again and as I have in the past, the only bubble out there is in bonds.
Even though only a small percentage of people around the world own gold, it is a global currency. It can be bought and sold 24/7 in almost every country around the world.
While gold demand in China is up 40% this year, gold demand in Vietnam is also set to increase. The government devalued its dong last week in order to boost exports and shore up the nation's trade deficit. Local gold prices jumped to a record 29.95 million dong per tael on Aug. 25, the Thanh Nien newspaper reported recently referring to the unit that is about 1.2 ounces.
"People will switch to gold as a shelter," said Le Xuan Nghia, vice chairman of the National Financial Supervision Commission, which advises Prime Minister Nguyen Tan Dung. "The current situation with the dong will spur people to increase their gold holdings."
"The dong's depreciation, which has been about 5 percent already this year, plus declines in stocks and uncertainty in the property market, will prompt investors to put their money in gold," said Dinh Nho Bang, chairman of Vietnam Gold Traders' Association, which has more than 100 members. "We've seen some economic growth, but it's still not certain enough."
As I have mentioned numerous times in the last few years, the debasement of currencies have been and will remain the main driving force behind the strong gold prices. But, there are a slew of reasons why the gold price is poised to move higher over the coming months and years for that matter.
One other reason why the gold price is headed higher is the China story. According to a report published in the official newspaper the China Securities Journal, The Chinese Government holds the largest stockpile of currency reserves at $2.45 trillion, with 65% held in dollars, 26% in euros, 5% in pounds, and 3% in yen. Until now the allocation of China's foreign exchange reserves was considered a state secret. While China also remains the biggest single holder of US Government bonds, recent statements made by the Chinese authorities suggest that any further significant diversification away from dollar assets in the short-term was unlikely. While China cannot dump its holdings in US Treasuries as this will cause a huge drop in the value of their holdings, I believe that China will slowly diversify into other assets, and gold will be one of these. A vice governor of the People’s Bank of China, Hu Xiaolian, warned that depreciation was a risk for the foreign exchange reserves held by developing countries.
"Once a reserve currency's value becomes unstable, there will be quite large depreciation risks for assets," she wrote in an article that appeared in the latest issue of China Finance, a central bank magazine. "The outbreak and spread of the global financial crisis has highlighted the inherent deficiencies and systemic risks in the current international currency system," she said. "A diversified international currency system will be more conducive to international economic and financial stability," she added, calling for greater cross-border use of the yuan.
Currently, China's gold holdings amount to only $37 billion, or only 1.5% of its $2.45 trillion foreign exchange reserves. And, as the world's second largest and fastest growing economy liberalizes gold ownership by individuals, the demand for gold from Chinese citizens can only increase.
Another reason why gold prices are going to move higher is investor demand, especially in the gold exchange traded funds (ETF’s), bullion bars and bullion coins. Even though holdings in the main ETF (GLD) are down from their all time highs investor demand for gold bars in Europe and China increased substantially this year.
Then, we must also bear in mind that the major gold producers are no longer hedging their production. Barrick Gold, the world’s largest producer of the metal, spent almost $5 billion last year to end its hedges against lower prices. This action will tend to take off some of the selling pressure of the gold prices. After all, it is in the interest of these mining companies to obtain the highest possible prices for their gold and the only reason why these companies are no longer hedging is that they believe that prices in the future are going to be higher.
As we have seen in Vietnam, currency devaluations are protected by the yellow metal. In this economic climate it is important for investors to take appropriate action to protect their wealth and gold has proven to be one of the most effective ways to do this. Therefore, it is advisable to diversify some of your assets into physical gold. And the best way to do this is buy accumulating gold bullion and gold bullion coins.
For the last week or so, the price of gold has traded above $1240/oz which was previously a key level of resistance. As it slowly becomes a new support level, the price of the yellow metal will continue to trade higher and I believe that it will make a new historic high very soon.
Last week the price of silver was extremely robust, and at one time it almost touched the $20/oz level. The price is now up more than 14% since its previous low of $17.50/oz and it has managed to hold above the former key resistance level of $18.50/oz.
As there are no new changes regarding the fundamentals on silver that would account for this move, I believe that investors are slowly realizing the potential in silver and that the grey metal is much undervalued and supplies are getting tighter. What was of particular interest last week was the price of silver moved higher despite the fact that the large bullion banks increased their net short position obviously in an attempt to suppress the price once again.
While industrial demand for silver is increasing, so is monetary demand. More and more investors are turning to silver as a way to protect the purchasing power of their savings. Like gold, silver has been proven to be an effective way of protecting your wealth. However, unlike gold, silver is hardly ever quoted in the main stream media. But, as the prices begin to move upwards, no doubt it will be noticed and more and more investors will take advantage of the current low prices. Silver bullion bars and silver bullion coins such as the silver Eagles manufactured by the U.S. Mint have become hugely popular with investors. So too are silver rounds which are practically the same as the silver coins except they are not classified as legal tender.
In addition, new investment vehicles such as silver exchange traded funds (ETFs) have taken several million ounces of silver out of the marketplace. While there is a lot of controversy going on at the moment about the actual physical holdings of some of these silver ETF’s there is no doubt that they are having some effect on the supply and demand dynamics.
While demand for silver is increasing around the world, supplies are actually declining. Traditionally, there have only been three sources for silver. These include the output from mining companies, the sales from recycling, and government sales. In recent years though, sales from government stockpiles have shrunk to almost nothing and there has not been any major new discovery for silver in years.
As the current global currency crisis continues, investors will diversify into hard assets including precious metals such as gold and silver. But, silver has probably the highest potential for profit out of all the precious metals. It is for this reason that the metal should become part of your investment portfolio.
Here is an interview with Mike Maloney and David Morgan that I urge you to watch. Here is the link: http://www.youtube.com/watch?v=0UEYa3y7SsE
Also here is the link to my recent discussion with Simon Brown on JSE Direct.
The action in silver prices has been very positive. The price has punched through the key resistance level of $18.50/oz and is set to make a new high since May of this year. While a short-term correction is possible, I believe that silver prices will remain in a positive bias.
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Suddenly, as the price of gold is showing signs of strength again, analysts from many major financial institutions are talking about prices going to $1300 per ounce and higher. Yet, a few weeks ago, when the gold price was trading down, they were talking about lower prices in gold. Being able to correctly predict future prices of any commodity is one thing, giving a commentary on the current trend is another. As far as I am concerned I don’t know who these analysts are and don’t much care either. They all seem confused and unable to see that the primary trend is upwards and that there are certain fundamental reasons why this happening.
Many individuals still have the misconception that gold is used only for jewellery, and have forgotten that gold is also a monetary metal as well as a global currency. It is not a barbaric relic as it is often referred to by analysts who don’t understand this metal.
Gold has always had value to humans, even before it was money. This is demonstrated by the extraordinary efforts made to obtain it. Prospecting for gold was a worldwide effort going back thousands of years, even before the first money in the form of gold coins appeared about 700 B.C. The first pure gold coins were struck by King Croesus of Lydia (present-day Turkey) during his reign between 560 and 547 BC and gold coins have continued as legal tender ever since. It changed the world of commerce as the yellow metal became a currency – a medium of exchange with a definite value – replacing barter and other commodities as money.
By the early 1970s, as the costs of the Vietnam War and increased domestic spending accelerated inflation, the U.S. was running a balance of payments deficit and a trade deficit, the first in the 20th century. By 1971 and as a result of the US government printing more dollars, holders of the greenback began to lose faith in the dollar and in the U.S. government’s ability to cut its budget and trade deficits. And, because of the excess printed dollars, and the negative U.S. trade balance, other nations began demanding fulfillment of America’s “promise to pay” - that is, the redemption of their dollars for gold. Switzerland redeemed $50 million of paper for gold in July. France acquired $191 million in gold, further depleting the gold reserves of the U.S. And, the dollar continued to drop in value against the European currencies.
To stabilize the economy and combat runaway inflation, on August 15, 1971, President Nixon imposed a 90-day wage and price freeze, a 10 percent import surcharge, and, most importantly, “closed the gold window”, ending convertibility between US dollars and gold. The President and fifteen advisors made that decision without consulting the members of the international monetary system, so the international community informally named it the Nixon shock. Thus ended the Bretton Woods dollar-gold convertibility and the introduction of a currency system known as fiat currencies whereby the value of currencies, the US dollar in particular, was no longer based on gold but instead on projected future value that was predominately dependent on interest paying financial transactions.
The current world monetary system assigns no special role to gold and the US Federal Reserve is not obliged to tie the dollar to anything. It can print as much or as little money as it deems appropriate and the Fed is free to respond to actual or threatened recessions by applying the appropriate monetary policy.
Monetary policy is the process by which the monetary authority (usually the central bank) of a country controls the supply of money, often targeting a rate of interest. Monetary policy is usually used to maintain growth, stability, low unemployment and stable prices of the economy. An expansionary policy is traditionally used to stimulate economic growth and to combat high levels of unemployment in a recession.
An expansionary policy can be implemented by increasing the money supply (printing more money). It may also be implemented by allowing banks to hold a lower proportion of their total assets in reserve. Banks only maintain a small portion of their assets as cash available for immediate withdrawal; the rest is invested in illiquid assets like mortgages and loans. By requiring a lower proportion of total assets to be held as liquid cash the Federal Reserve increases the availability of loans. This acts as an increase in the money supply. And, the expansion of the monetary supply can be achieved indirectly by decreasing the nominal interest rates.
Now you don’t have to be a rocket scientist to see that in today’s economic climate, it is very unlikely that banks are going to be allowed to hold smaller reserves and that it is going to be difficult to reduce interest rates for much longer as they are already close to zero. Therefore, central banks will have no option apart from printing more money. And, the consequence of this is going to be a debasement of their national currency as well as an era of high inflation.
It has been proven that in times such as these precious metals such as gold and silver are the best ways to protect ones wealth and that is why it is important to allocate a portion of your funds to these metals. Gold has always been and will continue to be the asset of last resort. While national currencies have come and gone, gold’s value has remained remarkably stable. Gold is an asset which does not depend upon any government’s promise to pay. It is not directly affected by the policy actions of any individual country and it cannot taken away or frozen as in the case of many other assets.
Gold is amoung the most liquid assets in the world. It can be readily bought or sold 24 hours a day in one or more markets around the world. Market makers, bullion dealers, coins dealers, as well as some banks trade gold with each other as well as with their clients. The main centers of the gold market are London, New York, Zurich with other smaller centers in Singapore, Hong Kong, India, and Dubai. Each day, mining companies, central banks, jeweler manufacturers, refineries as well investors and speculators do transactions through these centres. The typical deal size for a gold transaction between market makers will be between 5,000 and 10, 000 ounces so unless you are able to do transactions for these amounts don’t quibble about the premium you pay when you buy one Krugerrand.
Then, of course there are the futures markets. Although these markets are “paper-markets,” as only a very small percentage of deals ever get settled by physical delivery, the volumes far exceed those traded on the physical markets and therefore have a huge impact on the spot prices. The largest of the gold futures exchanges are the Comex division or the New York Mercantile Exchange, the Chicago Board of Trade or CBOT, the Tokyo Commodity Exchange (TOCOM), The Multi Commodity Exchange of India (MCX), The Dubai Gold and Commodity Exchange (DGCX), The Chinese Gold and Silver Exchange Society in Hong Kong, The Istanbul Gold Exchange and The Shanghai Gold Exchange.
We are in very uncertain economic times at the moment, and while I don’t see a complete collapse in the current fiat system of currencies, I do believe that we are going to see further devaluations in these currencies in particular the US dollar and the euro. The problem with this is that since the US dollar is the world’s reserve currency, the ramifications of a declining dollar will be felt globally. And, as this happens the price of gold is going to move higher. In addition to being a global currency, it is also a barometer of the macro economic climate which at the moment is not very good.
It is therefore prudent to take precautionary measures against what may happen over the coming years, and one way to do this is to accumulate gold. And, the best way to do this is to own physical gold in the form of bullion bars and bullion coins.
The price of gold has had an impressive move to the upside since the end of July trading from $1155/oz to just over $1260/oz. After this move of 9% the price may consolidate between $1240/oz and $1260/oz before it breaches the key resistance level of $1265/oz to establish a new historic high.
Many analysts believe both demand from investors and industrial uses has helped to bolster silver prices this year, which have increased by 18%, compared to gold’s 14%, since the start of 2010. Industrial demand has increased especially demand from the electrical industry which has ballooned by nearly 25 percent in the past year alone. Holdings in global silver exchange-traded products, which are tracked by Barclays Capital, hit a fresh record last Tuesday. They climbed 10 metric tons to 13,124, Barclays reports.
Last week the price for spot silver traded above $20/oz and the bullion banks increased their net short position to an almighty 61,798 contracts, or 309.0 million ounces of silver. The '4 or less' traders are short 256.0 million ounces. That means that for every ten cent increase in the silver price they incur a “paper loss” of $25,600,000!
This surge in investor demand for silver signifies a resurgence of the importance of silver as a store of value. Silver was recognized as more precious than gold when bartering in ancient Egypt. Silver’s use as money in coin form began around 2600 years ago. The Lydian (present day Turkey) Trite is considered by many experts to be one of the first coins used as money. It was made of “Electrum”, a silver and gold mixture. Egyptian silver in coin form began appearing around 300BC.
Silver and gold have stood the test of time, as a medium of exchange, a store of value and a safe haven in times of turmoil while the history of fiat money has always been one of failure. Every fiat currency since the Romans started diluting the silver content of their Denarius has ended in devaluation and eventual collapse of both the currency and of that particular economy.
For the very first time in our history, all money, all currencies, are now fiat. The Federal Reserve first issued its debt based paper money in 1913. Since then the US dollar has lost 95% of its value.
While India is traditionally viewed as the center of the world as far as physical gold demand is concerned, it is quickly becoming recognized for its strong role in the silver market as well. Rising gold prices are good for silver in this region of the world as would-be purchasers of gold jewelry and bullion turn to the grey metal as a cheaper alternative during the festival and wedding season. Of the 4,000 tons that India used to import annually, around 2,600 tons was used to make jewellery and ornaments.
More than 60% of India's silver demand comes from farmers, who store their savings in silver bangles and coins. Due to one of the worst monsoon seasons in more than forty years, the demand for silver last year fell dramatically. But this year, thanks to a good rainy season the situation has changed completely. India’s demand for silver has also been boosted because gold has become more expensive at current prices. According to official data, India's silver imports in the first six months of 2010 are up 579%, at $1.69 billion.
After being trapped in a trading range between $17.50/oz and $18.50/oz, silver has broken out to the upside and in less than 3 weeks the price has moved close to 15%. It would be quite normal to see the price consolidate at these levels before making another move to higher levels.
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Gold hit a record high on Friday for the third time this week as poor U.S. consumer confidence and market talk of more quantitative easing helped the yellow metal score its biggest weekly gain since May. On Friday the gold price hit a new all time high of $1,280.80 an ounce at 3:00 p.m. in Singapore, on course for a 2.9-percent rise from a week earlier, the sharpest in more than 3 months. Gold futures for December delivery rose $4, or 0.3 percent, to $1,277.80 an ounce at 11:45 a.m. on the Comex in New York, after touching a record $1,284.40.
The euro gained ground last week in a highly volatile forex market. The Basel Committee on Banking Supervision reached a compromise last weekend and agreed that banks will be required to hold top-quality capital totaling 7 percent of their risk-bearing assets, including a 2.5 percent buffer to withstand future stress. That's more than three times the current requirement of 2 percent. However, banks were given ample time to meet this requirement. There will be less than five years to comply with the minimum requirement and until January 1, 2019 to meet the buffer requirements.
The US dollar was sold off sharply last week as markets speculated that the US Fed will announce another massive quantitative easing program by the end of the year, and Japan finally intervened in the currency markets for the first time since 2004, a day after Prime minister Naoto Kan won party leadership election. The Swiss Franc tumbled after SNB left rates unchanged and lowered its inflation forecast and the New Zealand dollar weakened after RBNZ left rates unchanged at 3.00% as widely expected.
The lesson to take from this is that the relative values of all these fiat currencies can change on the smallest bit of news. And, as these currencies fluctuate, the price of gold is going to move higher as prudent investors sense that the current fiat system of currencies is faltering. Gold acts as a barometer for the state of global currencies and the higher it goes, the greater the problems in global currencies.
As investors turn to gold to protect their wealth, it seems that central banks that were formerly keen sellers of the yellow metal are now reluctant sellers and also keen to add more gold to their reserves. Recently, Thailand raised its gold holdings by a fifth in July through open-market purchases, joining a growing list of Asian nations diversifying into gold amid volatility in other markets.
Thailand increased its gold holdings to 3.2 million ounces in July from 2.7 million ounces in June, according to financial data published by the International Monetary Fund. Russia, China, Saudi Arabia, India, Mauritius have all increased their holdings in gold in the last year.
On September 09 The International Monetary Fund (IMF) announced the sale of 10 metric tons of gold to the Bangladesh Bank, the central bank of Bangladesh. The sale was conducted on the basis of market prices prevailing on September 7, 2010 with proceeds equivalent to US$403 million (SDR 266 million).
This transaction as well as the sale of gold to Thailand and other countries is part of the total sales of 403.3 metric tons approved by the Executive Board in September 2009 and it adds to the total sales to official holders of 212 metric tons made to the Reserve Bank of India, the Bank of Mauritius, and the Central Bank of Sri Lanka. As of end July 2010, a further 88.3 metric tons had been sold under the on-market sales announced in February 2010).
Almost one year ago, on September 18, 2009 The Executive Board of the International Monetary Fund (IMF) approved gold sales in a volume strictly limited to 403.3 metric tons, with these sales to be conducted under modalities that safeguard against disruption of the gold market. “I am delighted that the Executive Board has given its overwhelming backing to a strictly limited sale of Fund gold to put the financing of the IMF on a sound long-term footing, and enable us to step up much-needed concessional lending to the poorest countries,” Managing Director Mr. Dominique Strauss-Kahn stated. “These sales will be conducted in a responsible and transparent manner that avoids disruption of the gold market. Most importantly, the sales are strictly limited to 403.3 metric tons, which is one-eighth of the Fund’s total holdings, so the IMF will continue to hold a relatively large amount of its assets in gold.”
The Second Amendment to the Articles of Agreement of the IMF in April 1978 fundamentally changed the role of gold in the international monetary system by eliminating the use of gold as the common denominator of the post-World War II exchange rate system and as the basis of the value of the Special Drawing Rights (SDR). It also abolished the official price of gold and ended the obligatory use of gold in transactions between the IMF and its member countries. It furthermore required that the IMF, when dealing in gold, avoid managing its price or establishing a fixed price.
Following the Second Amendment, the Articles of Agreement limit the use of gold in the IMF's operations and transactions. The IMF may sell gold outright on the basis of prevailing market prices, and may accept gold in the discharge of a member country's obligations (loan repayment) at an agreed price, based on market prices at the time of acceptance. The IMF does not have the authority under its Articles to engage in any other gold transactions—such as loans, leases, swaps, or use of gold as collateral—nor does it have the authority to buy gold.
The IMF acquired the majority of its gold holdings prior to the Second Amendment through four main types of transactions. First, when the IMF was founded in 1944 it was decided that 25 percent of initial quota subscriptions and subsequent quota increases were to be paid in gold. This represents the largest source of the IMF's gold. Second, all payments of charges (interest on member countries' use of IMF credit) were normally made in gold. Third, a member wishing to acquire the currency of another member could do so by selling gold to the IMF. The major use of this provision was sales of gold to the IMF by South Africa in 1970–71. And finally, member countries could use gold to repay the IMF for credit previously extended.
The IMF held 96.6 million ounces (3,005.3 metric tons) of gold at designated depositories at end January 2010, making it the third largest holder of gold in the world. The United States holds the largest gold reserve in the world which is estimated at some 8,133.5 tons. However, since there has not been an independent audit of this gold for decades and as there seems to be something sinister in the way the government continually refuses to allow an audit, I believe that the actual US gold holdings are only a fraction of this amount. (If this is correct, I doubt the US government will admit this because it would have huge damaging effects on the value of their current reserves).
With some 3143 tons, The Deutsche Bundesbank, Germany's central bank, holds the second most gold in the world. It is followed by the IMF then the by the Italian National Bank, Banca D'Italia, that has approximately 2,451.8 tons of gold in reserve,
With the fifth largest gold reserve in the world, The Banque De France is responsible for France's gold holdings, which have been reported at about 2,450.7 tons. The sixth largest gold holdings in the world are held in SPDR Gold Shares a gold exchange traded fund that was introduced on the New York Stock Exchange some six years ago. The world's most populous country also has the world's seventh largest gold reserve. China which has some 1054 tons in their reserves had practically no gold some twenty years ago. The Chinese gold accounts for only 1.8% of the nation's total foreign reserves.
The Swiss National Bank (SNB) has the next largest holdings of gold estimated at 1,040 tons of gold. In ninth position is Japan with 765 tons, and in the number ten slot is the central bank of the Netherlans, De Nederlandsche Bank which has some 612 tons of gold.
The gold price seems to have broken out to the upside of an ascending triangle formation. As long as the price holds above $1260, then we could expect to see the price test $1300 and then $1350.
Silver has been on fire in the last few weeks and the price has moved from $17.50 to a hair above $21/oz in six weeks. That is an increase of 20%! Not bad if you have been long, too bad if you have been short. Last Monday, not only did the grey metal break the psychologically important $20 an ounce level, it remained above $20 for most of the week sending prices of this precious metal to a 30-month high. At the moment there is a lot of momentum in silver as investors snap up bullion bars, bullion coins while funds add silver to their positions, and it seems that there is still some steam left in this current move that may take prices above $21 before we see a pull-back. While I admit that the price of silver looks a little overbought at these levels, the action in the last few weeks is a strong signal to investors that it is time to add this metal to their portfolios.
Even if the price corrects in the short-term, as an investor these short term movements should not be of any concern. Silver is still grossly undervalued and still less than 50% of it’s previous all time high of around $50/oz in 1980. When it comes to the price action of silver, and as many analysts have pointed out, the silver market has been subject to manipulation for many years now. The commercials or bullion banks in particular, JP Morgan, have been known to hold a huge concentrated short position on Comex. If this position which is sometimes equivalent to more than 90% of the net short position was held in long positions, I am sure there will be something said about it.
According to the latest COT report, these bullion banks are trying once again to keep the prices down. The COT report for close of trading on Tuesday, September 14th shows that the net short position of the commercials (bullion banks) has increased to 325.3 million ounces of silver compared to last week’s net short position of 309 million ounces. The '4 or less' bullion banks are now short 258.5 million ounces compared to 256 million ounces the previous week. According to my calculations, in the last week, as silver jumped another $1/oz these bullion banks must have incurred a “paper loss” of $256 million. But, this is chump change for them, and I wonder how much more they are prepared to lose before they begin to cut their losses. Or do they plan to keep on adding to their net short position in a futile attempt to bring the price of silver lower. No matter what their strategy, the action in the silver market over the last few weeks has been extremely positive and I have little doubt that we will see higher prices in the future.
Long time investors are generally aware of the reason for such manipulation. A rapid rise in the price of gold and silver signals trouble in the currency markets. These metals act as warning bells alerting individuals that their wealth (i.e. the purchasing power of their currency) is being eroded by the monetary policies of bankers.
The long awaited break above the former key resistance level of $18.50 gave an extremely positive sign to silver bulls. It gave a clear signal that the price of silver was set to go higher. However, the momentum of the move we have seen in the last few weeks has been more than what I anticipated. The price blew through $19.50 and then $20. As it now challenges the $21 level, I would expect to see some consolidation, but the price could well move higher before this happens.
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As the US dollar, the reserve currency of the world, continues to weaken, the price of gold as well as the relative value of other currencies will continue to increase. Only last week, the price of gold made another historic high as it traded above $1300 an ounce for the first time ever.
The US dollar index dropped 0.91% to $79.39 while the euro rallied 1.24% to $1.34 vs. the dollar. The US dollar index which measures the relative value of the US dollar against a basket of six currencies broke a key support level of 80 and at one time traded as low as 79.36. The EUR/USD broke the key resistance of 1.3330 which indicates that the low was posted around the beginning of June at 1.1875. In the short-term we should see a further rally to 1.4500. The USD/CHF recently traded below parity, and since the beginning of the month, the Australian dollar, the best performer of the 16 most traded currencies, has jumped 6.4 percent against the dollar, while the South African Rand has gained almost 6 percent. The Brazilian real has gained 1.7 percent and the New Zealand and Canadian dollars are up 4.4 percent and 3.6 percent respectively.
For several years now, I have advised investors to accumulate physical gold as it has been my belief that the current global financial and currency system is faltering. However, I never expected an all out global currency war. This will lead to further devaluations in several currencies in particular those whose economies are dependent on exports. The problem is, as a currency is debased, the piece of paper that the currency is printed on becomes worth less. And, in order to preserve the value of your wealth, it is necessary to own gold. Right now, gold is merely performing its traditional role as a hedge against the declining values of currencies.
Traditionally, portfolio managers have invested in bonds as a means of diversifying their equity portfolios and thus they have developed a culture where dividend and yield are paramount. However, in today’s economic climate I believe that such an allocation no longer represents an effective strategy and that gold is a much more effective way to diversify ones investment portfolio.
So the question is what does an individual do to participate in the current bull market in gold. It is my firm belief that it is absolutely imperative to first create a core holding of the physical metal. This can be done by acquiring bullion bars and bullion coins. But, it is important to stick to bullion and not be beguiled by unscrupulous dealers who try to convince individuals that certain so called “rare” coins offer better potential. All they are trying to do is to sell you a more expensive product that usually has a huge premium, in an attempt to make more money….for themselves. These so called ‘rare” coins are not numismatic coins, but are usually commemorative and inaugural medallions as well as limited edition medallions.
You cannot create rarity by simply restricting the number of medallions you decide to mint. Rarity is determined by the number of coins left out of an original mintage. There is nothing special about limited edition medallions. Usually, they are introduced into the market (commemorating some event or some well known person) at exhorbitant premiums, sometimes a few hundred percent above the spot price of gold.
The reason why I prefer owning physical bullion is because it is yours. If you have it in your possession, it is yours and it does not incur any third party liability. Another reason why I prefer to own my own physical gold bullion is because I don’t trust a lot of the financial institutions. I recall when a prestigious company such as Morgan Stanley agreed to pay $4.4 million to settle a class-action lawsuit with brokerage clients who bought precious metals and paid storage fees, when in fact it was alleged that Morgan Stanley wasn't physically storing their gold and silver at all.
Once you have accumulated some physical gold, then you may investigate the other gold related investment products available. Of course the one that comes to mind immediately are the gold exchange traded funds (ETF’s). These offer investors a convenient way to own bullion as they don’t have to worry about storage. In the meantime their investment tracks the price of gold in their respective national currency.
Traditionally, gold shares out-performed the gold price and were, therefore, included in almost every portfolio tracking gold. But, in recent times we have seen that some of these shares lag behind the gold price in particular the South African gold mining companies. In some instances some of these shares are way below their all time highs despite the fact that the price of gold in US dollar terms is at an historic high, and that the price of gold in Rand terms is just a touch below its all time highs. Either, there is something seriously wrong with these companies, or they are trading at incredible valuations.
Gold funds are another way an investor can partake in this bull market. By doing this, the individual is leaving the management of their funds to a market professional who is dealing with precious metals.
And, for those investors who are prepared to take some risk in trying to make the real big money, then there are futures and options. However, in the case of futures contracts since these are leveraged instruments, you had better be prepared to stomach some sleepless nights along the way as the short-term movements can scare the living daylights out of you. However, if you have huge funds and especially if they are not your own then riding these short-term movements won’t feel so bad. But, in any event it is not that easy to be a successful trader. And, there are options. The problem with options is what is known as “time decay.” Unless the market moves in your favour before the expiry date, your premiums will disappear into the hands of the market maker who sold you the option. A large percentage of options usually expire worthless and only a small percentage of individuals make money speculating on the futures markets. I therefore always advocate going for the long haul and simply accumulate the physical metal as often as you can. This market has a long way to go before peaking.
When the price of gold broke through the key resistance level of $1260 an ounce, it suggested that it finally broke out of a trading range between $1160 - $1260. This indicates that the upside of this particular move could see gold test $1350/oz.
It was only a little more than a week ago when analysts were wondering if the price of silver was going to break above $20 an ounce. Not only did it blast through this level of resistance, it continued upwards through $21 an ounce.
Like gold, silver is a monetary metal and can be traded around the world. And, like gold, silver has proven itself, time and again, to be a safe haven for investors during times of economic uncertainty. While it is a lot more volatile than gold, it is the one precious metal that I believe will ultimately yield the greatest return compared to gold, platinum and palladium. Even though the price has touched a 30 month high, it is still way below its all time high. If adjusted for inflation and using the previous high of $50 an ounce achieved in 1980, the price of silver today should be around $130 an ounce.
During the last 25 years the gold/silver ratio has been around 46.
If we use this figure and apply it to the current price of gold we get a price for silver around $28 an ounce. While I do not see the ratio falling to this level any time soon, it has come off it recent highs when it was trading close to 70. It is now a fraction below 62.
Recently, a client asked if this move in silver was prompted by the unwinding of the open shot positions on Comex currently held by the bullion banks. Actually, up and until last week these “super traders” were adding to their short positions. According the latest COT reports the current open short position held by these bullion banks increased only marginally. Since the price of silver has traded above the $20/oz level I estimate that the “paper” loss incurred by the 4 or less bullion banks must be close to $400 million. This of course does not include losses they must have sustained when the price was below $20 an ounce.
Like I have mentioned, I believe that this price movement was long overdue and have been writing and talking about it for months. I believe that is driven by prudent investors who have seen the potential of this metal and who have also seen how undervalued it has been. I did hear some rumours about some large company based in Germany coming onto the market to buy a large quantity of physical silver, but I have not had this story confirmed. In the meantime, silver still remains way undervalued and should be included in investment portfolios.
For almost 100 years there was a law in South Africa that made it illegal for any individual to buy or hold any form of bullion. But, this was finally amended last year and individuals can now own bullion. However, as this is never mentioned on the main stream media, many investors in South Africa are still not aware that they can own bullion bars. I am extremely concerned about this as it means that there are many investors who may miss out on this incredible opportunity to own silver bullion. Silver bullion bars and bullion coins should be included in every investors’ portfolio.
This week I have two interesting radio interviews. The first one is with James Turk who is talking about silver going to $30/oz. The link is here:
The other interview is my latest discussion with Simon Brown on JSE Direct. Here is the link:
Even though the indicators such as the RSI, Stochastics and MACD indicate that this current move is over-bought, one must bear in mind that prices can continue to move higher for some time even though these indicators remain in overbought territory. The momentum in silver has been very strong and I would not be surprised to see prices test $23/oz before we see some consolidation.
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Last week the price of gold recorded yet another record high with the spot price spiking to $1321.80 an ounce. As the price of the yellow metal continues its upward trajectory, there are analysts out there still wondering why gold is trading at these levels and talking about an impending correction.
Recently Dennis Gartman of the Gartman Letter said “. . .we shall urge the greatest of caution upon everyone, everywhere regarding gold. It is not just over-extended to the upside; it is hyper-extended. It is not just overbought; it is hyper-overbought. We cannot strongly enough urge everyone to avoid buying gold here and we shall go so far as to suggest that those who are long begin the process of quietly heading for the exits and to reduce their positions to the most minimal ‘insurance’ positions possible. Everyone should have perhaps 5% of their liquid assets in gold, but at this point anything beyond that level is excessive.”
Yes, perhaps the price of gold may appear to be overbought, but the gold price is hardly making new highs on account of nothing. And, while there are many reasons why the price is going higher, the main driving force behind this rise in price is because the major currencies of the world are debasing and the rising price of gold reflects that fact. Another way to look at this situation is to look at the value of the major currencies and then one may conclude that gold is not really rising - it's that fiat currencies are falling. And, at the moment gold is now being treated as money, and as such it is being valued according to its relationship with other currencies. And, unless there is something drastic about to happen that will reverse the current trend in currencies, don’t expect too see the price of gold collapse. This is not the same scenario as 1980 when the price of gold ran upwards to over $800 an ounce and then almost as quickly as it ran upwards, it came back down. This time around we have not seen any parabolic rises in the price of the yellow metal, and the price of gold is merely fulfilling its traditional role as a hedge against the declining values of the major currencies, in particular the US dollar and the Euro.
As the economies of the US and most European countries remain depressed, central banks are going to try various expansionary monetary policies to re-start their economies. However, no matter what they try central bankers and politicians can't repeal the laws of economics. And, the consequence of their actions is going to lead to printing more money that will cause these currencies to become worth even less, and make gold become worth more.
The Fed's actions may have temporarily averted a crash in the US financial markets, and the European Central Bank's interventions may have postponed a string of defaults by indebted governments, but these measures will merely push back the inevitable day of reckoning. Within the next 12 months, the U.S. Treasury will have to deal with refinancing $2 trillion in short term debt. And, that's not counting any additional deficit spending, which is estimated to be around $1.5 trillion. Add to this is the cost of the wars in Iraq and Afghanistan. How in the world can the Treasury possibly borrow $3.5 trillion in only one year - an amount that equals nearly 30% of the US GDP?
Any guesses where the money to cover this will come from? Printing more money of course or more “quantitative easing,” as it is now more commonly referred to.
As the US dollar weakens, other currencies strengthen. This puts pressure on these countries as their exports become more expensive and as in the case of Japan, these countries will be forced to devalue their currencies in order to maintain a competitive edge. As a result we can expect to see these countries engage in a competitive race of currency devaluation to increase exports. While we will never see or hear any declaration of a global currency war, we have now entered a period when the entire global monetary system is under stress and the battle of currencies has already begun.
On September 15 former Federal Reserve Chairman Alan Greenspan made a speech to the Council on Foreign Relations. Some very interesting comments he made with respect to gold in response to a question were reported in an editorial in the New York Sun, "Greenspan's Warning on Gold". According to the article Greenspan did not mince his words and said, "Fiat money has no place to go but gold."
As I have mentioned many times in the past, the history of fiat money has been one of failure. It works well when economies are expanding, and have high levels of employment as well as strong GDP growth. But, when economic growth is contracting and central banks try to stimulate economies by pumping money into the system, the result of this action will lead to the debasement of the national currency and ultimately a period of hyperinflation. The most recent example of this was Zimbabwe. Not only did Mugabe’s policies manage to debase the currency to the point where it became totally worthless, there was a shortage of the most basic essentials such as bread and clean water. Now, Zimbabwe does not even have a national currency and all domestic transactions are paid for in US dollars or South African Rands. While the collapse of the Zimbabwe dollar only impacted on that country, a collapse in the US dollar will have global ramifications.
While I do not see a total collapse in the US dollar or the euro, and of course I am not attempting to compare these major economic power houses with an insignificant country such as Zimbabwe, there are still lesson to be learnt. What happened in Zimbabwe has many consistencies with what happened in other countries where the national currencies collapsed. Unless the problems of massive sovereign debt, burgeoning government budget deficits, low GDP growth, high unemployment are resolved, the current scenario is unlikely to change. As more and more investors as well as central banks themselves know that the possible conclusion could be a sever drop in the value of their national currencies, they are going to diversify into other assets including gold.
As a potential global currency crisis looms, it makes sense to protect at least some of what you have by investing in gold.
As the gold price continues to make record highs practically on a daily basis, the break to the upside of the ascending triangle projects a possible short-term target of $1360. No matter the depth of any future corrections the momentum remains strong and the primary upward trend remains intact.
In the same time that the price of gold has moved from its recent lows of $1155 to a new record high, a hair above $1315; an increase of 14% the price of silver has moved from $17.50 to $22; an increase of 26%.
In The Delaire Report issue number 24, I clearly stated that “we will see the price of silver make a decisive break above $18.50/oz and a rapid move to $21/oz. Thereafter, it should challenge the $25/oz level. It is also my firm belief that silver is going to be one of best performing assets during the next five years.”
During the last six weeks the performance of silver has been exceptionally stellar and to be frank, it has surpassed my expectations. By that I mean the price has got to a level in a shorter time frame than I expected. But, the price level does not surprise me, nor does the percentage move. On many occasions I have written about the percentage moves in silver and how they are generally much greater than those in gold.
Like gold silver is effected by the global currency crisis and as the dollar continues to weaken, silver prices will continue to increase. As the price of silver trades at a 30 year high and as the price has increased by 26% in less than six weeks, everyone is asking if there is going to be a correction. Well, of course there will be a correction, but I am not sure if we will see it occur at these levels or if we will see it once the price of silver hits $25. But, as long-term investor who cares? I am not in the business of trying to time every move in the market and believe that it is impossible to do that. However, the longer term bullish trend is very much intact and the price has a long way to go before it peaks. As the price of gold gets more expensive some investors may prefer silver to gold because it is less expensive and because it is still very much undervalued.
“Wealth preservation are the key words… We expect silver to keep trading in parallel or stronger than gold, but with higher volatility as recovering industrial demand and even stronger investor demand gives the metal an extra boost,” stated Filip Petersson of SEB Commodity Research in an article in The Wall Street Journal.
In India, the world’s largest importer of gold, there is a growing sentiment that silver is replacing the yellow metal. For the first half of 2010, silver imports in India have risen 579 percent, for a total of $1.69 billion. Many analysts see the momentum in India rising through the festival/holiday buying season.
Last week the United States Mint raised their wholesale pricing above spot on American Silver Eagles to all authorized dealers from $1.50 to $2.00, an increase of a whopping 33%. This year will go down as a record year for Silver Eagle sales, as the United States Mint has already sold more than 25 million coins year-to-date.
The forecast for silver is overwhelmingly positive, and I still urge investors to buy some of the physical metal. Buy bullion bars and bullion coins no matter the premiums. In a few years time the prices that you pay now are going to look very cheap in comparison to prices you are going to have to pay in the future.
The recent move in silver has been very strong as evidenced by the number of bullish candlesticks. A market with such momentum seldom collapses overnight. It is possible for the price of silver to move higher before we see a correction and some consolidation.
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During the last few months I have given you many reasons why I believe the price of gold is headed higher. There have also been other excellent commentaries on this subject. Yet, still only a small percentage of investors own gold. And, when I mention gold I don’t mean gold shares or gold exchange traded funds; I mean physical gold…gold bullion or gold bullion coins.
According to Financial Research Corp., a Boston firm, total net investment in gold from the beginning of the year through to the end of July was $2.7 billion. Yet, during the same period, investors poured $22 billion into emerging markets mutual funds, and some $155 billion into bond funds. Compared to these figures, the amount invested into gold is minimal. According to GFMS, Ltd., the London-based consultancy, U.S. investors bought about 45 metric tons of gold bars and coins in the first half of this year. This is less than they bought last year.
I find it amazing that most investors continue to ignore gold as part of their investment portfolio, but then on the other hand I am not surprised especially when I see what the majority of analysts on the main stream media in particular those in South Africa have to say about gold. Most of them are clueless when it comes to gold and silver, and practically all them have denigrated gold as an investment ever since it was around $300 an ounce! The fact that gold has been one of the best performing assets of the decade seems to escape their attention. And, you cannot measure the performance of physical gold by looking at the performance of gold shares. The South African gold shares have performed miserably over the last few years which makes me believe that there is something seriously wrong with these companies or that they are very much undervalued. Yet, recently the price of the Krugerrands tested the previous all-time highs in spite of an exceptionally strong Rand.
For months I have warned investors of an impending currency devaluation in particular with regards to the majors- especially the US dollar and the euro. In the case of the US dollar, and because it is the reserve currency of the world, as the US Fed continues to depreciate the dollar by printing so much more of it, investors have shied away from the greenback in favor of other currencies, including the euro, yen, franc, Aussie dollar, Canadian dollar, etc. Now the Canadian and Australian dollars are essentially at parity with the USD, and the Swiss franc actually surpassed the US dollar. Meanwhile, the Japanese yen is at a 15-year high, and the euro has enjoyed a 17% surge since its low in May. Obviously in countries where the national currency has appreciated against the dollar, the performance of gold in those respective currencies is not as impressive as it is in US dollars, but it is still prudent to diversify some assets into gold no matter where you live.
A weaker dollar is great for US exporters, but not great for countries such as Japan, Korea, China, Brazil etc., whose economies depend mainly on exports.
This will ultimately force policymakers to devalue their national currencies and before you know it, and despite of government rhetoric, there will be a race to see who can debase their currency faster, and this has implications for us all. As the dollar continues to weaken, it is likely to see other major currencies, like the euro, pound, and yen devalue. As such, investors will be forced to choose gold as a safe store of value. Gold and silver are probably the only safe haven investment because they are not like the fiat currencies of the current monetary system. As James Turk recently said, “Back in the 1970s, when there were problems with the dollar, you could go to the Deutschemark or the Swiss franc. The Deutschemark doesn’t exist anymore, the euro has its own problems, and the Swiss franc is being tied to the euro. The only safe-haven currency today is gold.”
As currencies lose value, gold and silver will continue to fulfil their traditional role as hedges against the declining values of these currencies and will therefore increase in price. Gold has also proved to be a long-term store of value simply meaning that in years to come it will be worth more than it is worth now. When you have gold in your hand you are not merely holding a piece of jewellery, you are holding a highly valuable asset, as well as a global currency. Try to sell your holdings in global equities to someone who lives in another country and see what happens. But, you will have no problem in finding a buyer for your gold in practically any country. Gold is easily recognizable and acceptable as a form of payment all around the world.
No matter your investment approach, the yellow metal can play a vital role in diversifying your portfolio. Typically, investors select stocks and bonds and ignore physical metals. Yet, by holding physical metals such as gold bullion you can be sure that your investment won’t disappear in some accounting scandal or default.
Even though we have seen record high gold prices in recent weeks, this upward trend is far from over as countries such as the USA as well as those in the Eurozone struggle to get out of the recession and as the confidence in fiat currencies wanes.
Right now, the price of gold is looking a tad overbought, and I bet that the usual suspects who have continually knocked gold as an investment will then interpret it as a reversal and no doubt predict that prices of the yellow metal will head back down to $1100 an ounce. I recall when gold last pulled back to $1155 and when I recommend buying at that level, I received countless e-mails from some of these “geniuses” who insisted that the price was headed much lower. One of these “super-stars” was the Chief Investment Strategist of some investment company who was adamant that the price was headed to $1035/$935! While everyone is entitled to their opinion, my point is, I believe that these analysts do not really understand the fundamentals of gold nor do they understand the potential dangers inherent in a faltering fiat currency system.
Jim Rogers recently said that “Gold is going to go a lot higher over the next decade. It may slow down for a while because it’s run up so dramatically here in the last few weeks. But gold’s going to be much higher,” Rogers said. “Adjusted for inflation it should be well over $2,000 now. When I say something like it’s going to 2,000 in 10 years it’s not a very dramatic statement given the state of the world. I’m sure it’s a given.” Rogers said one reason gold will continue to gain is because of what he called the failed policies of the Federal Reserve, its Chairman Ben Bernanke, as well as Treasury Secretary Geithner and other government officials. He said their efforts to prop up the economy have made things worse, not better. “They’ve all been dead wrong, totally unadulterated wrong,” he said. “Unemployment is higher now than it was before. Everything is worse instead of better. Let people go bankrupt. Let the system clean out and start over.”
While the primary uptrend for gold remains very much intact, a short-term correction and a period of consolidation is possible.
In 1980, the price of silver exploded upwards and traded above $50 an ounce. I recall this very clearly because I was trading silver through the London Metals Exchange (LME). In those days, the contract offered by the LME was 10,000 ounces, and the price was quoted in pounds, shillings and pence! While it takes more than a few words to explain why the prices went parabolic in 1980, suffice to mention that many investors had no idea what was going on or how they could participate in the silver explosion. I mention this because the scenario we see with silver now reminds me of what we saw 30 years ago. I do not mean that the driving forces behind the prices now are the same as those in 1980. Absolutely not. But, once again many investors have no idea about silver, what is going on in the market and how they can participate.
Silver is an amazing metal as it is both a monetary as well as an industrial precious metal. And, the demand for silver in industrial applications is extremely price inelastic.
Despite the fact that there is a large open short position which is held by the 4 or less large commercials trading via Comex, silver is benefiting from both general optimism on industrial production in emerging markets, and the investor interest in safe-haven assets like gold. Barclays capital recently reported that the holdings of global silver exchange traded products it tracks has topped 14,000 metric tons for the first time. “indeed, inflows in october have already hit 311 (metric tons), surpassing total inflows for the whole of august and almost half of september’s 702 (metric tons),” Barclays says.
In 1980 individuals in South Africa were not allowed to hold offshore funds, and they were prohibited from owning any bullion. Now, even that these draconian laws have been ammended, the number of investors in South Africa and probably worldwide who own any silver is minuscule. Yet, silver has been one of the best performing assets over the last few years, and I believe that it will continue to out perform most other asset classes over the next 5 years.
Unlike gold, platinum and palladium, silver still remains well below its all time high in spite of a developing shortage of supply. One of the reasons for this is been the alleged price manipulation by large traders such as the bullion banks that have sold massive amounts of silver on the futures markets to keep prices down. Currently, the open short position held by these banks is equivalent to roughly a little more than the annual global mining supply of silver.
Now US regulators have been urged to reveal the results of a two-year-long investigation into silver and gold price manipulation allegations. Recently, Bart Chilton, a commissioner at the US Commodities Futures Trading Commission (CFTC) which is investigating the claims, said: ‘I think the public deserves some answers in the very near future.’ He also added. “I expect the CFTC to say something on our silver investigation within weeks. I can’t pre-judge what that will be. I can’t even guarantee that the agency will speak. That said, if the agency remain silent for much longer, I intend to speak out on the matter in an appropriate fashion.”
No matter the results of the investigation, the prices of silver still remain very undervalued and should be added to ones investment portfolio, especially as this time around there are many instruments available to investors unlike 1980. But, I would recommend that investors accumulate the physical metal in the form of silver bullion before investing in the other silver or silver related investment instruments.
The price of silver has moved from (A) $17.50/oz at the end of July to(B) $23.35/oz last week. This price move of more than 33% has put silver into a new into a new range of trading. While the angle of ascent is not parabolic it is at an angle that suggests that it may run into some resistance. I suspect this to be between $23 and $25 an ounce.
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Ten years ago when gold was trading below $300 an ounce the universal manta was, “sell gold.” Central banks were selling or leasing their gold in an attempt to get rid of their gold holdings and convert the money into bonds. Gordon Brown the then Chancellor of the Exchequer a role akin to the posts of Minister of Finance or Secretary of the Treasury in other nations managed to sell most of the British gold holdings at the low. At the same time some of the major gold mining corporations completely mistimed the market and hedged their output at the lows. But, this is hardly surprising as most of the major mining giants are run by people who are brilliant engineers and metallurgists, who know how to mine and produce, but who do not necessarily know much about market action. Then, when the price moved to $500 the mantra was the same except it got louder. And, then this happened again when gold hit $700, $900, $1000, $1100, and $1200. Now everyone is waiting for a large correction in gold price.
Luckily for some of us, these calls were ignored, and by investing in gold, some investors have managed to preserve their wealth. Gold has been in a bull market for ten years, and yet some of these “super-stars” still fail to see what is happening. As I have mentioned on many occasions the main driving force behind the gold price has been the declining value of the US dollar the world’s reserve currency. It has been on a downward spiral since 2001 when the dollar index was 120. It then traded down to a low of around 70 in April 2008, and after rallying a few times is once again back on the slippery slope downwards
A quarter century of uninterrupted and unprecedented credit expansion begun by the US in the 1980s, came to an abrupt halt years later in August 2007 when global credit markets froze, precipitating an economic crisis the severity of which surprised all except those who expected it. And, in order to prevent a collapse of our financial system, central banks were forced to bail out numerous financial institutions. Since all modern day currencies do not have any intrinsic backing, central banks can do this by simply printing more money. This is known as the fiat system of currencies.
A fiat currency is a medium of exchange composed of some intrinsically valueless substance which the issuer does not promise to redeem in a commodity or a fiduciary money. And, because a fiat currency has no direct legal connection to a commodity money (in terms of redemption) and, therefore, no real economic cost to its production, the supply of a fiat money can never be self-limiting. The value of these currencies really depends on the economic health of a country as well as the perception of stability and confidence in the political climate in those countries. As conditions change currency values fluctuate to reflect the new perceived value. Changes in currency valuations have a significant impact on governments, corporations, financial institutions and ultimately the individual. Right now, we are seeing the result of these changes in currency valuations and the actions governments are taking to remedy these imbalances.
As the US dollar continues to lose value, other global currencies gain in value. The consequence of a stronger currency is that the cost of goods and services become uncompetitive, and this can severely hamper the growth of economies that are export orientated.
A currency war is spreading as the dollar's value against major world currencies has continued to decline in recent days. Some developed countries have begun to intervene in their exchange rates. The recovery of the global economy will suffer a negative impact if this trend is not checked. On Friday, Brazil's finance minister said that the government wanted to see if the nation's currency stabilizes before taking further measures to curb its appreciation.
Brazil has doubled the tax on foreign investments and made heavy purchases of U.S. dollars to weaken its currency amid a surge in its value against the greenback. Finance Minister Guido Mantega says if these steps don't weaken the currency, the real, the government will adopt new ones. He did not provide details. The U.S. dollar has lost 30 percent of its value against the real this year. Two weeks ago, the Japanese government intervened in the currency market in an attempt to weaken the yen as it made a 15 year high against the dollar. The Bank of Japan cut its interest rates to zero so that foreigners would stop buying the yen. Last week Thailand imposed a 15 per cent withholding tax on capital gains and interest payments for government and state-owned company bonds, in an attempt to curb destabilising capital inflows amid fears of a global currency war. A surge of money into Thailand has driven the baht to its highest against the dollar since just before the Asian crisis of 1997-1998.
The Turkish Prime Minister Recep Tayyip Erdogan and the Chinese Premier Wen Jiabao recently stated that their two countries would from now on trade using their own currencies, effectively excluding the U.S. dollar. The two leaders also pledged to triple trade between China and Turkey to $50 billion within five years and to $100 billion by 2020, speaking at a joint news conference in Ankara that marked the final stop of Mr. Wen's European tour. The announcement on trading currencies was just the latest in a series of similar agreements Beijing has made as it seeks to increase use of the yuan around the globe. In late September, China supported a Russian proposal to start direct trading between the yuan and the ruble. It has brokered a similar deal with Brazil.
In the meantime, the value of the yuan has become a growing point of friction between China and the U.S. as well as with the EU -- by far China's two biggest trading partners. U.S. Treasury Secretary Timothy Geithner in a speech on Wednesday warned of a potential downward spiral of competitive currency devaluations. Referring to China, he said: "When large economies with undervalued exchange rates act to keep the currency from appreciating, it encourages other countries to do the same." How come Geithner did not say anything about the effects a declining dollar has on other currencies? Many of these currencies are not appreciating because their economies are in such great shape, but are merely gaining strength on account of the weaker dollar. This is what happens when you have a fiat system of currencies. Right now, countries around the world are manipulating their currencies downwards. When the US Federal Reserve prints money and cuts interest rates, the dollar falls in value. This pushes the fast money to places with a strong currency — places like Brazil, India, and Canada and South Africa.
The implications of this currency war are going to be that we will see more volatility and uncertainty. It could also lead to lead to trade wars, slow economic growth and increasing unemployment.
In the midst of all this chaos, there is one sure bet. It is the asset of last resort. It is gold. Throughout history, national currencies have come and gone, but the value of gold has remained remarkably stable. Gold is one asset that does not depend upon any government’s promise to pay.
While I do not know how the current global currency crisis is going to be resolved, I do know that in times like this it is advisable to have some gold. As an investor one must realise that gold is a long-term store of value. And, even if the price does correct, I sincerely believe that we can expect to see much higher prices in the future.
When gold finally broke above the $1000 level almost this time last year, it was a break to the upside of an inverse head and shoulders pattern. This pattern suggests an upside target (T #1) of between $1350 and $1400 an ounce.
Since the end of July, the price of silver has had a spectacular move surging from $17.50 an ounce to almost $25.50/oz… a move of 45%. During this time there were no changes in any of the known supply/demand dynamics, but it is obvious that the price of silver was reacting to the global currency crisis and in particular the weakening US dollar in the same manner that gold does. After all, like gold silver is also a monetary metal.
Since the price of silver has moved from $20 an ounce to $25 an ounce the net short position of silver held by the 4 or less commercials or bullion banks remained much unchanged at around 260 million ounces. This means that the recent $5 move cost these banks some $1.3 billion in paper loss. At the time of writing, the price of silver has retreated slightly and was trading around $24.30 an ounce. So, the paper loss has dropped but still remains above $1 billion. However, this does not include the losses they have sustained prior to the price of silver being above $20 an ounce. The important thing to note from this, is sooner or later, these bullion banks will have to buy back some of these short positions unless they think that the prices are going to head all the way back down again. But, this time around, I don’t think so. I believe that once this correction is complete silver is headed much higher, the next stop being $27 an ounce. If I am correct, we may see some huge moves in the price of silver as these bullion banks scramble to cut some of their shorts.
According the Silver Institute in 2009, silver production in Peru reached 123.9 million ounces of silver, compared to 709.6 million ounces produces worldwide for the year. With an 18 percent share of total global production, Peru ranks number one in silver production followed by Mexico, China, Australia and Bolivia. Four of the world’s top producing mines call Peru home including: Buenaventura’s Uchucchacua—produced 10.56 million ounces in 2009; Hochschild Mining’s Arcata—produced 9.54 million ounces in 2009; Hochschild Mining’s Pallancata—produced 8.42 million ounces in 2009; and Pan American Silver Corp.’s Huaron—produced 3.46 million ounces in 2009.
Silver has benefited from increased demand from investors, particularly in the United States where the white metal has historically had a higher profile as an investment metal than in Europe. Holdings in global silver exchange-traded products climbed to a record 13,867 tons according to Barclays Capital.
Robert Kiyosaki, a successful real estate investor who gained fame by writing the "Rich Dad" series of books is now more interested in precious metals than in real estate. In a recent statement he said, "As much as I love real estate, I believe the biggest opportunity today is in silver. I think this precious metal is about to become the most spectacular investment in recent history." He also added. “Silver is the biggest opportunity I have ever seen. Bigger than real estate, bigger than anything else."
As I have mentioned many times in the past, the price of silver is still undervalued and should be included in your investment portfolios.
Since the end of July the price of silver has appreciated by more than 40%. Even though, the move suggests that a correction is due, both the long-term trend and medium-term trends remain very positive. I believe that this market has a long way to go in both time and price.
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Every single day as the values of currencies, bonds, equities, commodities and gold fluctuate, investors try to determine which sector is going to yield the best returns over the next 3- 5 years. While past performance is no guarantee of future performance, gold has been one of the best performing assets over the last decade, and if one considers the fundamentals driving the gold price, it is reasonable to assume that this trend is going to continue in the foreseeable future.
The gold price is determined by many different factors such as basic supply and demand dynamics, geo-political events, values of currencies….in particular the US dollar, and central bank activity. It does not trade in isolation, and the price fluctuates as does the prices of the various currencies. Since the US dollar peaked in 2001, the relative values of global currencies especially the US dollar have been the main driving force behind the higher gold prices.
Markets such as equities or financials tend to be traded locally during the business day in their own time. For example, Hong Kong traders focus primarily on Chinese stocks while European traders focus on European stocks and US traders on US stocks and financials. While most of these traders keep a sharp eye on what is happening elsewhere as nowadays many of the global markets are integrated, an event is Brazil that directly affects Brazilian stocks may not have the same effect in the USA. Global currencies or the forex market on the other hand is an asset class that is truly global reflecting every economic development on this planet. Whatever has an influence on currencies in say Tokyo will have an effect on what happens to currencies in London or New York. And, as the values of these currencies change so does the value of gold. It is clear that there is an inter-market relationships amoung currencies and gold.
Each country has its own currency to facilitate its business and trade. The value of one currency as compared to another depends on the economic health of the nations involved as well as the perception of stability and confidence in the political climate in those currencies. As conditions change, currency values also change to reflect the new situation. Changes in these currency valuations have a significant impact on governments, corporations, financial institutions as well as individuals. The forex market probably has a more pervasive influence on worldwide economic conditions than any other market. And, gold acts as a barometer for these changes. It is an alternative currency one can hold instead of holding “paper money,” or “fiat money,” as it is commonly referred to. While gold’s value is influenced by the value of the other currencies, it still has an intrinsic value and will never be worth nothing which could happen to any one of these fiat currencies.
Currency prices are effected by a variety of economic and political conditions, and many government reports and other actions have an impact on these markets, some more directly than others. These reports include the Federal Open Market Committee (FOMC) Meetings and the Feds subsequent actions, the Beige Book, GDP figures, Balance of Payments, Employment reports. The US non-farm payrolls released on the first Friday of each month has perhaps the biggest single impact on financial markets. Other data includes inflation, CPI and PPI, consumer confidence, retail sales, Housing starts, Durable Goods Orders, Institute of Supply Management (ISM) index and Business Inventories. Sometimes governments actually participate in the forex market to influence the value of their currencies. They do this either by flooding the market with their domestic currency in attempt to lower the price or, conversely, buying in order to raise the price. Although this is known as central bank intervention, it is nothing other than manipulation.
In the last few weeks we have seen a resurgence of central bank intervention and as the G20 meet in Korea, and despite the rhetoric from finance ministers and central bank governors, I have no doubt that in the future we will see more intervention in the forex market. With this on the horizon, investors can expect to see the value of their currencies alter dramatically and quickly in the foreseeable future.
Since 2008, and in addition to the usual economic data impacting the values of global currencies, new factors have entered the equation. They include issues of global sovereign debt as well as government budget deficits. Recently, U.S. Treasury Secretary Timothy Geithner said, "It is very important for people to understand that the United States of America and no country around the world can devalue its way to prosperity, to (be) competitive," Geithner added. "It is not a viable, feasible strategy and we will not engage in it." I think it is very important for Geithner to understand that as the Fed continues to debase the US dollar with its program of quantative easing, the dollar will weaken and not strengthen. This will cause other currencies to rise in value and that may prompt the other countries to take the appropriate action to prevent their currencies from rising any further. A strong currency for an export orientated nation can harmful consequences on exports.
Historically, but not always, the correlation between the price of gold and the US dollar is inverse. So, when the US dollar declines, not only do foreign currencies rise but gold prices also rise. On the other hand, the value of EUR/USD versus gold prices shows a high positive correlation. In other words the value of the euro and gold often move in the same direction suggesting that these markets are both beneficiaries when funds are flowing away from the US dollar. Gold prices act as a barometer for the forex market. As already mentioned, there is a clear inter-market relationship and it is important to see what is going on in one market to determine the likely trend in another.
My point is, no matter what your local politician tells you, the world is in a shambles. Most industrialized countries have slow GDP growth, high unemployment, huge sovereign debt as well as major budget deficits and interest rates at practically zero. Furthermore, around the world we are seeing rising commodity prices and major currency fluctuations. All this is going to lead to further currency debasement, and possibly both collective and unilateral government intervention in the forex market. We are seeing capital controls already being imposed in various countries and there is a looming threat of a major trade war. The once almost perfect monetary system is now falling apart.
Unfortunately, I can’t see things improving. In fact I think they are going to get worse before they get better. Under this scenario, it is imperative to own some gold. Be warned, if you are a US citizen, the IRS needs you and wants you as they are short of money. And, even though after spending practically a trillion dollars in military expenses and with the best surveillance equipment in the world, and with the capability of putting a cruise missile through your ear, the US military have been unable to find Osama ben Ladin after searching for almost ten years. Yet, if you make mistake on your taxes, the IRS will find you no matter where you are. It is time to do something for yourself in order to protect your wealth. Buy some gold. And, if I were living in the USA, I would open an offshore account and have some gold stashed out of the country before new legislation renders this utterly impossible.
After having broken out convincingly into new all-time highs, the price of gold is finally taking a breather. The market action during the week indicated that there is good underlying strength, and I believe that at $1300 (S1) we will see good support.
As the price of silver backs off from its recent high of $25, it offers investors another amazing opportunity to buy the precious metal. In the past month silver has bounced back to prices not seen since the 1980’s, and even though the price of silver has had a spectacular move since the end of July - surging from $17.50 an ounce to almost $25.50/oz… a move of 45%, the price is still terribly undervalued. As mentioned in my previous newsletter, there have not been any significant changes in any of the known supply/demand dynamics that have caused this run up in the price, but the price is being driven by surging investor demand as investors shy away from paper assets and turn to commodities.
Investors in silver, also known as "poor man's gold," have driven the silver price higher for the same reasons they have purchased gold; the prospect of a global "currency war" in which central banks race to devalue their currencies to support domestic growth and the belief that a second round of emergency monetary easing by the Federal Reserve could eventually lead to a sharp jump in inflation. The increase in demand for silver can be seen in the increased holdings of the silver exchange traded funds (ETF’s) and silver bullion coins. Holdings in silver ETF’s increased by more than 1,500 tons in the past two months alone. That is more than 5 per cent of total annual silver supplies. Sales of silver bullion coins are set to make record sales this year. David Madge, director of bullion sales at the Royal Canadian Mint, says it has already sold in excess of 30 per cent more of its popular silver Maple Leaf coin than last year's record 10 million ounces. The US Mint has sold 27.5 million ounces of silver American Eagles so far this year. Total sales for last year reached a record of 28.8m ounces.
Recently, in an article published by Bloomberg on Oct. 19, silver exports from China may drop about 40% this year as domestic demand from industry and investors climbs, according to Beijing Antaike Information Development Co. China is the world’s third largest producer after Peru and Mexico. Shipments may decline from about 3,500 metric tons in 2009, said Feng Juncong, chief analyst at the state-owned Antaike. Customs data show exports plunged almost 60 percent to 970 tons in the first eight months. This means that the amount of silver coming to the global marketplace this year will drop by more than 70 million ounces. This represents roughly 8% of total annual global supply from 2009.
“There is huge demand in China this year and that has affected exports, which were already hurt after the tax rebate was abolished,” said Ng Cheng Thye, head of bullion at Standard Bank Asia. “The demand is coming from all areas, including jewellery, investment and fabrication and this has resulted in a physical market shortage in the Far East.” In August 2008 China revoked export rebates for silver in order to curb use of natural resources. “China may sharply reduce its silver exports this year following the scrapping of the rebate and as domestic demand picked up amid expectations for higher inflation,” Feng said. This year’s 5,100-ton quota is unlikely to be fully used, she said. Feng also mentioned that there is strong demand for silver from Chinese investors. “There are Chinese investors now hoarding silver, along with other resources, amid anticipation of higher inflation,” Feng said. “China is short of resources so these investors believe the metals will be more valuable in the future.”
On September 25, Bart Chilton, a commissioner at the U.S. futures regulator said “"There have been fraudulent efforts to persuade and deviously control that price." Chilton’s comments were made before a Commodity Futures Trading Commission meeting. Chilton said he could not pre-judge the outcome of the CFTC's on-going investigation of the silver markets, but said public deserves some answers to their concerns. Chilton’s statement confirms the allegations made over the years by numerous analysts, in particular Ted Butler. Now we will have to wait ao see what action the CFTC is going to take to prevent further price manipulation.
The scenario for silver just keeps on getting better and better. With rising demand, lower supplies and hopefully a stop to price suppression, the price of silver has only one way to go and that is up.
The price of silver has increased by $8 in the move that began towards the end of July. As prices seem to be consolidating at the moment, a Fibonacci retracement of 38.2% would see the price pull-back to S1 at $22.50. This would present another great buying opportunity.
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Gold prices bounced back firmly on Friday and were close to testing the $1360 an ounce level. Recently, the price of the yellow metal made a new historical level of $1387 an ounce. While the amount is not yet known, it seems certain that the US Federal Reserve will implement its program of further quantitative easing citing high unemployment and low inflation as the cause. In order to prevent any further deterioration in unemployment in the US, the economy needs to have a steady GDP growth of at least 2%. Personally, I doubt that this new round of monetary expansion is going to have any major effect on the high unemployment rate in the US, but I am certain that this action will lead to the further debasement of the world’s reserve currency. And, as this happens, we can expect to see further dollar weakness which will certainly be highly supportive for gold.
Gold is an international currency and it is amoung the most liquid assets in the world. It can be readily bought or sold 24 hours a day in one or more markets around the world. And, the price is very transparent and can be seen anytime no matter where you are.
We are now entering a golden era as people begin to lose faith in their own currencies. When this happens, they turn to gold as well as silver because these precious metals are the only currencies with an intrinsic value. This mistrust of these fiat currencies are the first signs that the global currency system is faltering and if the current currency system collapses, no matter how much “paper” money you have in your bank, it can all become worthless. But, gold has an intrinsic value, and in the last 5000 years, it has never become worthless. While I sincerely hope we do not see such a collapse, I think it wise to take some precautionary measures such as owning gold. When individuals become disdainful of their own currencies and everyone else’s they turn to gold.
We live in times of tumultuous change. We have seen huge financial institutions collapse, equity markets soar and plummet, oil prices sky-rocket and fall, geo political instability, sovereign debt, government budget deficits as well as government invasion into the privacy of individuals. As I have stated on numerous occasions, a quarter century of uninterrupted and unprecedented credit expansion begun by the US in the 1980s, came to an abrupt halt years later in August 2007 when global credit markets froze, precipitating an economic crisis the severity of which surprised all except those who expected it. And, in order to prevent a collapse of our financial system, central banks were forced to bail out numerous financial institutions. The consequence of this is going to be further monetary expansion on behalf of many central banks and this in turn will lead to more currency turmoil.
In a fiat monetary system, as long as the balance between credit and debt is properly maintained, the system has a good chance of survival. As long as you can service the debt on outstanding credit, you can extend even more credit. But, when the accrued debt becomes so large that it overwhelms the capacity of credit to contain and service it, then the system will falter and if the problem is not addressed, the system could even collapse. We are at that time now.
The problem is particularly serious for the USA simply because the size of their national debt has become so huge the US now owes so much money that only by borrowing more can it pay what it owes. But, not only does the US owe so much money, it is suffering from low GDP growth, and high unemployment.
Perhaps a new round of “quantitative easing” will give the economy a very small boost but, the problem of sovereign debt will not be resolved. So, while one problem is temporarily resolved, another old problem re-emerges. I expect to see further debasement of the US dollar as this is a strategy available to the US regarding its unpayable debt. The US could pay down its massive debt obligations by debasing their currency, a strategy wherein the US would pay its creditors with increasingly worthless US dollars. And, as the reserve currency of the world continues to lose value, gold as well as a range of other commodities are going to become more expensive.
Former Fed chief Alan Greenspan said the U.S. fiscal deficit is “scary” and the federal government needs to cut spending on entitlements. “We’re involved in a dangerous game,” Greenspan said Oct. 6. “We’re increasing the debt held by the public at a pace that is closing” the gap between our debt and “any measure of borrowing capacity,” Greenspan said. “That cushion is growing very narrow.”
At the beginning of the year when I predicted that gold would to would go to $1350 by year end many industry players including certain well known precious metals consultancies and major financial institutions thought my analysis was very bold, but now I see they are all revising their outlook for the gold price. Many of them are now scrambling to revise their price forecasts upward and suddenly are talking about gold going to $1400 an ounce.
With two months left in this year, there is a good chance of gold going to $1400 an ounce. But, this is not the point. The price of gold is set to go much higher over the coming years and right now while it is relatively easy to buy gold, I strongly urge all individuals to have some in their investment portfolios. If the dollar does collapse you could find yourself standing in a very long line at your local coin shop or bullion dealer. I have seen this happen before and in 2008 there were serious shortages and unexpected delays of bullion products in the US which led to soaring premiums. And, this happened again earlier this year in Greece.
When this happens there are certain dealers who use this scenario to persuade you to buy limited edition medallions that they sell at ridiculous premiums. Their claim is that these limited edition medallions have greater potential than bullion coins because these medallions have been minted with the face of some famous personality. And, they will also tell you that the mintages are going to be limited. Usually these “limited edition” medallions come in fancy boxes with a “certificate of authenticity.” One important lesson here is that you cannot create rarity and no matter how many of these medallions they mint, they are not rare coins in any manner whatsoever. Rarity is determined by a coin’s surviving population from the original mintage. And, the other thing to realise is that these items are not numismatic coins. If a dealer claims these “rare coins” are a better investment than bullion, I suggest you find another dealer. All they are trying to do is sell you a more expensive product which has a huge mark-up leading to an inflated price. But they want you to buy these items because this is how they make more money for themselves. It is important not to be beguiled by these dealers and stick to bullion or bullion coins.
Gold prices were volatile for most of last week, but the push back above $1350 indicates that the prices are likely to trade with an upward bias.
For many years numerous analysts have accused some of the large bullion banks of manipulating the price of silver by using futures contracts offered by Comex. In simple terms they have created an artificial supply of silver by maintaining an oversized short position which they have rolled over month after month, or increased whenever the prices have moved upwards. The position held by four or less of these bullion banks has at times been equivalent to more than fifty percent of the annual production of silver. The effect of this short position has been to suppress the price of silver despite the extremely bullish fundamentals for this metal. However, while this short position has managed to cap the prices of silver for a long time, when these shorts are bought back or covered, the price effect of going short is reversed and it becomes bullish.
After an investigation that has taken the best part of two years, on Tuesday, Oct 26, Bart Chilton, a commissioner at the U.S. CFTC said there had been repeated attempts to influence prices in silver markets. The Commodity Futures Trading Commission began probing allegations of price manipulation in the silver futures market in September 2008. At a hearing in Washington on Oct. 27, CFTC Commissioner Bart Chilton said there have been "fraudulent efforts to persuade and deviously control" silver prices and that violators should be prosecuted.
According to an article published on Bloomberg on Oct. 28, both JP Morgan and HSBC Holdings have been accused in an investor's lawsuit of placing "spoof" trading orders to manipulate silver futures and options prices in violation of U.S. antitrust law. The investor alleges that starting in March 2008, the banks colluded to suppress silver futures so that call would decline, and put options would increase, according to the complaint filed in a federal court in Manhattan. The collusion was also intended to maintain prices at levels at which some options would expire as worthless. The banks placed so-called spoof trading orders, or the "submission of a large order which is not executed but influences prices and is then withdrawn before it reasonably can be executed," according to the complaint.
JPMorgan and HSBC declined to comment on any aspect of the investigation.
As far as I am concerned, these banks have done individuals a favour. They have kept the price suppressed and thereby have given us the opportunity to buy this precious metal at prices that are totally undervalued. But, this scenario is about to change and so, I urge investors to take advantage of these low prices in silver and add silver bullion to their portfolios.
The price of silver seems to have reversed its recent downtrend and it looks as if this move that began around the middle of October was simply a short-term correction. I expect prices to test the recent highs of $25/oz and make new highs before the end of the year.
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The price of gold surged sharply last week and traded close to the $1400 an ounce level. The yellow metal climbed by 3% in New York on Thursday as the dollar slumped a day after the Federal Reserve unleashed a second round of monetary easing. Even though the week was filled with news that would usually have some influence on gold prices, the main driving force behind gold’s surge in prices was the announcement made by the US Federal Reserve.
The upsurge in gold prices followed a volatile Wednesday as investors awaited the Fed’s news. On Wednesday, the Fed announced its plan to buy $600 billion of U.S. government debt over the next eight months in a bid to stimulate the struggling U.S. economy.
Last week the US mid-term elections had practically no impact on the markets nor did any of the decisions taken by various central banks. The ECB left the main refinancing rate unchanged at 1%. The RBA unexpectedly raised the cash rate by +25 bps to 4.75%, and despite numerous rumours that the BOJ would accelerate easing measures after it brought forward the date of the November meeting, policymakers only disclosed more details on how it will invest money in an asset-buying program announced in October. BOJ's inaction to Fed's $600B QE plan indicates policymakers are not worried about its impact on Japanese yen.
The US non-farm payrolls released on Friday showed that non-farm payrolls rose by a greater-than-expected 151,000 last month. In addition, September numbers were revised to show that payrolls fell just 41,000, far less than the forecast of 95,000 job losses. However, despite these positives, the unemployment rate failed to move down and remains at 9.6%.
Often I have spoken about the global monetary and currency crisis we are currently in the midst of despite government rhetoric to the contrary. And, it is my firm belief that these expansionary monetary policies are not going to help unemployment nor are they going to resolve the current crisis. Instead what will happen is that they will debase the values of currencies, in particular the US dollar. And, as this happens, the value of gold will continue to increase.
Recently, Felix Zulauf, Zulauf Asset Management president, in a Barron’s interview said. “The dollar is going to be debased in a major way, and that’s reflected in a rising gold price. ... If it remains within conventional boundaries, then I think $2,500 within the next two, three years is possible. Most likely it will eventually get outside of conventional boundaries when the situation worsens, and then it can go much higher in terms of U.S. dollars.”
In a recent interview with Reuters, Bill Gross, the manager of the world's largest mutual fund said that the dollar is in danger of losing 20% of its value over the next few years if the Federal Reserve continues its unconventional monetary easing. "I think a 20% decline in the dollar is possible," Gross said, adding the pace of the currency's decline was also an important consideration for investors. "When a central bank prints trillions of dollars of checks, which is not necessarily what (a second round of quantitative easing) will do in terms of the amount, but if it gets into that territory—that is a debasement of the dollar in terms of the supply of dollars on a global basis."
If Gross is correct and I am inclined to agree with him, then I think that if the US dollar loses another 10% from its current value, we could expect to see the price of gold trade over $1700 an ounce. But, I don’t think it will take a few years. I see it happening next year.
The current financial crisis will lead to an increase of national debt no matter what remedies the various governments take. Unemployment and bailouts will cause public debt to explode, which will lead to drastic cost cutting programs or the introduction of new taxes or even increases in current tax rates which will in turn only perpetuate this downward cycle. And, as the debt gets larger, and governments become unable to fund their debt, the monetary system will implode. When this happens anyone sitting on a pile of cash will suddenly be left with a pile of pieces of worthless paper. In Zimbabwe the government issued a one hundred trillion dollar note that could not even buy you a decent size loaf of bread. People who had saved their entire lives to enjoy a comfortable retirement were totally wiped out, while Mugabe the person responsible for the demise of the Zimbabwe dollar remains unaffected. I sincerely hope that this does not happen in the USA.
In the fiat monetary system the national currencies of countries have no intrinsic value as they are backed by nothing unless you consider political promises as being a "tangible."
Governments around the world are bankrupt and politicians are out of ideas and are quickly running out of time in dealing with the massive amounts of sovereign debt hanging over the global economy. As governments and central banks continue the cycle of printing more money, the purchasing power of their currencies is constantly being degraded. And, as in the case of Zimbabwe, this inflation eventually wipes out the savings and earnings of the people, who have very limited options for protecting themselves against these ravages. One option is to convert their fiat currency into something out of reach of central banks and government spending, such as gold or silver.
Politicians will never admit to a default on sovereign debt because it would send the country's interest rates soaring, causing the cost of servicing the debt to spiral upwards and ultimately become impossible to finance. However, the issue of debt issue will eventually have to be resolved as it does not merely disappear. And, when governments can’t finance their debt the only remaining option is to depreciate the currency in which the debt is ultimately paid back. The effect of this will be to decrease your wealth. For example, in 2001 if you had $100,000 in your bank account, today it is worth around $65,000 in terms of purchasing power. If on the hand in 2001 you had invested your $100,000 into gold, today it would be worth around $560,000. Simple mathematics tells me that I would rather be in gold than in cash.
Look for gold to outlive the dollar, writes Tocqueville Asset Management managing director John Hathaway in an article for Bloomberg:
"The world's monetary system is in the process of melting down. We have entered the endgame for the dollar as the dominant reserve currency, but most investors and policy makers are unaware of the implications. “
In many of my previous writings I have warned investors of such a scenario, but I have also stated that I do not see a total collapse in the monetary system as we currently know it. In any event, the situation is dire and the result could be similar to what happened in Zimbabwe. In contrast to what the Keynesian economists might have to say about gold, in such a scenario it is important to use the right asset class in order to protect your wealth. Gold is not a typical investment. It is a defence against the predictable behaviour of governments to debase a fiat currency, and historically investing in gold has been proven to be one of the best ways to protect your wealth. If you do not yet own any gold, once again I urge you to add some gold bullion to your investment portfolios.
The primary long-term trend, as well as the medium and short-term trends, are all positive. The price of gold has now established good support at $1320/oz (S2) and is in the process of building support at $1360/oz (S1). The price is now in uncharted territory, but it seems as if the next level of resistance is $1400/oz.
Many investors are probably not even aware that silver has out-performed gold since 2000 and is one of the best performing asset classes this year. Gold prices have risen from $256 in 2000 to $1,398; a rise of 546% while silver has gone from $4.00/oz to $27/oz, arise of 675%. This year alone the price of silver has increased by 60% in US dollar terms and in South African Rands, it is up by almost 50%.
Since CFTC Commissioner Bart Chilton released an official statement in which he said, “there have been repeated attempts to influence prices in the silver markets”, in the ensuing 7 trading days, the price of silver rose by an impressive 12%! CFTC Commissioner Bart Chilton, also said that he believes there had been "fraudulent efforts to persuade and deviously control" silver prices. However, I don’t believe that it was the statement made by Chilton that moved the price of silver. I believe that silver like gold reacted to the Fed’s decision to pump more money into the system.
The two main culprits in the ongoing silver manipulation saga, JPMorgan Chase & Co and HSBC Holdings Plc, were recently hit by two law suits from traders accusing the banks of conspiring to drive down silver prices. They claimed that the firms reaped up to hundreds of millions of dollars of illegal profits.
A point of interest is the latest Commitment of Traders (COT) report shows that the bullion banks have not really reduced their open short position and the total net short position has remained at around 300 million ounces since the price of silver traded above $20 an ounce. The fact that these banks remain short, tells me that they are not particularly concerned about their current “paper loss,” which must now run into several billion dollars. Perhaps they are waiting for some divine intervention in the way of a massive sell-off in the market. I can’t see that happening and what I think will happen is that, since actual delivery is out of the question, these banks will eventually capitulate and be forced to cut their losses. But, at what price will they buy back hundreds of millions of silver ounces? While there is no way to determine when they will cover, they must try, at some point, to buy back and cover the silver they can’t possibly deliver.
I believe that there is only one way for silver prices to go over the coming months and years, and that will be upward. As the dollar continues to lose value, more investors will plough funds into this precious metal. China is going to cut back on their exports of silver and there is a potentially explosive situation in the futures markets that could be the catalyst to propel the price of silver to much higher levels. With so many bullish factors it does not make sense to ignore this market.
Since the end of August the price of silver has had a very strong move to the upside. Prices seem to be targeting $29/oz.
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In his speech entitled Rebalancing the Global Recovery, Bernanke not only defended his latest QE2 program, but he also attacked the monetary policy of China, which happens to be the largest holder of US debt.
In his speech Bernanke said the failure of some emerging market economies with trade surpluses to allow their currencies to appreciate was making the problems those countries face worse. "Currency undervaluation by surplus countries is inhibiting needed international adjustment and creating spill-over effects that would not exist if exchange rates better reflected market fundamentals," he said, without explicitly pointing to China. He also went on to say that inflexible currencies were preventing a needed rebalancing of global growth and could end up destabilizing the world economy. "For large, systemically important countries with persistent current account surpluses, the pursuit of export-led growth cannot ultimately succeed if the implications of that strategy for global growth and stability are not taken into account," he said.
Bernanke said sluggish U.S. growth, falling inflation and an unemployment rate that has hovered near 10% for months convinced Fed policymakers they needed to pump in more stimulus. "On its current economic trajectory, the United States runs the risk of seeing millions of workers unemployed or underemployed for many years," he said in his speech. "As a society, we should find that unacceptable."
In defending his monetary policy, Bernanke stated that the Federal Open Market Committee (FMOC), were fully aware of the important role of the dollar in the international monetary and financial system and that by purchasing additional Treasury securities, the Fed seeks to support the economic recovery, promote a faster pace of job creation, and reduce the risk of a further decline in inflation that would prove damaging to the recovery.
Personally, I maintain that the Fed’s action has nothing to do with the interests of the global recovery and has everything to do with the exclusive interests of the United States. Furthermore, if anything, these actions will only cause the currency war to worsen. And, while many are taking delight in China “bashing,” they have forgotten that as China is the largest holder of US debt totalling more than $900 billion, a stronger yuan will cause losses to China since these Treasuries are denominated in dollars. And, the fact that the Chinese seem to have a better understanding of both monetary and fiscal policy than their US counterparts should not be interpreted as a reason to blame them for the mistakes made by the US policy makers. And, finally, I fail to see how the purchase of additional US Treasuries is going to stimulate employment.
The euro recovered against the dollar and Europe’s bourses rallied on hopes that the Irish crisis and fate of Irish bank debt was close on being resolved. Credit default swaps on Irish, Greek, Portuguese and Spanish debt continued to hover at high levels amid confusion over the contagion risk. Irish bond yields soared in recent weeks on mounting worries about the government’s ability to meet the cost of rescuing its crippled banking sector. European officials upped the pressure on Ireland to apply for a rescue as turmoil spread to other peripheral bond markets, pushing up borrowing costs for Portugal and, to a lesser degree, Spain. And, any deal between the Irish government and the European Union and International Monetary Fund is ultimately aimed at reducing the turmoil in sovereign bond markets that policy makers fear could one day price Portugal or even Spain out of global credit markets.
An article in Market Watch on Friday November 19 highlighted the waning confidence of Irish bank customers. According to the article, Allied Irish Banks have had to access a range of liquidity facilities from central banks, adding that its customers withdrew 13 billion euros ($17.8 billion) from their accounts since the start of the year.
As I continue to repeat myself once again, these are the kind of events that lead to volatility in the global currency market and will result in the further debasement of the world’s major currencies which will then drive the price of gold higher. And, as I have stated countless times, gold is merely fulfilling its traditional role as a hedge against the declining value of these currencies in particular the US dollar.
In order to take advantage of this scenario, one must include gold in one’s investment portfolio. While there are many different investment instruments available including gold bullion, gold bullion coins, equities, gold exchange traded funds, gold funds, futures and options I have long advocated accumulating a core holding of the physical metal. This does not include medallions or numismatic items. While many investors have done exceptionally well with numismatic items, it is an area that requires special knowledge. Just because a coin is old doesn’t necessarily mean it is going to be worth a fortune. There are literally thousands of numismatic coins available around the world, and thus making a decision on the correct coin is not an easy decision. Basically a coins value depends on its rarity (the rarer the coin, the higher the premium) and the quality. But, in addition to this one has to determine what coins are in demand and what coins aren’t. For me buying bullion coins is a whole lot easier. All you really have to know is the current price of gold, and that is not difficult to do no matter where you are in the world.
Even though many world mints as well as numerous coin dealers offer a range of medallions, as far as I am concerned, these have no investor appeal whatsoever and should be considered only as collector items. Simply because they may have an image of some famous personality stamped into the obverse and reverse sides of the coins, and are presented in well-crafted velvet lined wooden boxes, does not mean that they offer better investment potential. Invariably dealers who sell these medallions tout them as being “rare” simply because they are limited in edition, and tell you they will increase many fold in years to come. Let me state, that you cannot create rarity just by minting a limited edition. Maybe they will become rare, maybe they won’t. Rarity is determined by the remaining number of coins from the original mintage and not because a mint/dealer decides to mint a limited number of pieces. In fact, if a dealer claims these limited edition medallions are a better investment than bullion walk away or simply hang up All they are trying to do is to sell you a more expensive item which invariably has a huge mark-up in an attempt to make themselves some good commission. And, for sure, many of these “limited edition medallions” are new releases with no price track record. And, so how can you determine what the real value of these are. Gold bullion coins on the other hand have a long price history. All you need to look at the gold price over the last 10 years or so. Like I have just mentioned, stick to bullion.
The price of gold is building a new support level at around $1325/oz which also coincides with the medium-term support level of the 50 day MA I expect to see the price of the yellow metal to continue to trade with an upward bias.
Since, Bart Chilton, the Commissioner at the CFTC, acknowledged that there has been price manipulation in the silver market, the price of silver has held relatively firm above the $25 an ounce level. However, I believe that the current price action, has little to do to with the commissioner’s statement, and is merely reacting to current market conditions. And, as far as I am concerned, the main driving force for the rising prices of silver is due to increased investor demand.
Global investment, including coins, is set to rise to record levels this year, with the net value reaching roughly $4 billion. According to the US Mint, sales of US silver Eagles in November are already a whopping 3,775,000 ounces, bringing the total of silver eagles sold this year to 32,405,500 silver eagles. The total number of silver eagles sold last year was 28,766,500. The Royal Canadian Mint recently said that silver-coin sales will jump more than 50 percent this year. The Perth Mint may match that gain, according to Ron Currie the sales and marketing director. “There seems to be more upside with silver than gold right now,” said Currie. According to the Perth Mint Silver-coin sales will climb as investors seek to protect their wealth from weakening currencies.
Even though it is sometimes referred to as “the poor man’s gold,” I believe that, over the next few years, silver will make more money than gold for people prudent enough to own some.
Of all the silver mined over the past 5,000 years, more than 90% of it has been used up. It’s gone forever. For many years, the U.S. government maintained a stockpile of silver. It held hundreds of millions of ounces in its inventory as one time silver was used to back up the US currency. Now they don’t have one ounce and the number of silver eagles minted this year is approaching the level of all the silver produced in the USA. And, unlike gold, silver has a myriad of industrial applications.
Simple demand/supply dynamics of this market suggest that the price of silver should go much higher. Recently, world renowned silver expert, David Morgan in an interview with James Turk said. “We are so tight in the silver supply right now, almost every commercial bar that exists is held for one reason and for one reason only and that is investment purposes, not commercial use.” According to Morgan any new demand for silver for commercial use, could really force prices higher due to the shortage of silver. “So any commercial use that comes on top of the investment purposes that already exist, is going to force the price not only higher, but it is going to force it higher now, because it is required for industry.”
Recently, we have seen the gold/silver ratio drop from 68:1 in August this year to 52:1 by the beginning of November. As you know I have often referred to this ratio and while it is not a set formula we have seen it drop to more reasonable levels. However, I believe that we will soon see this ratio trade at 45:1. James Turk whose long-term view is that by 2013 to 2015 gold is going to be$ 8,000 an ounce and that the ratio is going to fall and go below 20. This would put the price of silver at $400 an ounce!
Personally, at this time, I have a more conservative outlook towards the silver price, but based on historic ratios, silver could easily triple from here and still be undervalued compared to gold. And, if silver simply matched its previous highs in inflation-adjusted dollars, it would be over $130 an ounce now.
I have long advocated accumulating physical gold and physical silver, because that's where you really want to be. You have exposure to the price and you also have money that hasn't got any counterparty risk, so you're not putting your money at risk at some promise of a bank, a central bank or something of that nature. But, do not be beguiled into believing that limited edition medallions offer better investment potential than bullion.
Here is the link to my last interview with Simon Brown on JSE Direct November 16.
I believe that the price of silver is consolidating between $25/oz and $29/oz., and that the upward momentum will continue.
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Finally, after weeks of denial and the usual political rhetoric, the details of the bailout package for Ireland have been released. On Sunday, EU governments finally approved an €85 billion ($113 billion) bailout deal for Ireland. A statement issued said the International Monetary Fund, the 16 Eurozone nations and the European Commission will be involved. Britain, Sweden and Denmark will offer bilateral loans. The interest rate that Ireland will pay is going to be 5.8% which is higher than the 5.2% that Greece is paying on its bailout. The European Commission also granted Ireland an extra year to bring down its deficit to within the EU limit of 3%.
After the news was announced, the euro hardly reacted, but then later in the day, it fell to the lowest level in more than two months against the dollar as Ireland's agreement to receive 85 billion euros ($112 billion) in aid failed to stem concern that Europe's sovereign-debt crisis will deepen. The question now is whether Sunday's agreements will relieve the pressure in the markets, or whether the markets are going to keep pushing Portuguese and Spanish risk measures higher and force a near-term bailout of at least Portugal and perhaps Spain. Credit default swap prices on Monday rose by 23 bps for Spain and by 40 bps for Portugal. By looking at these record high rates, one can assume that investors are not reassured that the current crisis is anywhere near resolved and there is talk that Spain will require around 350 billion euros in aid.
Last Friday, Ireland's banks suffered a string of credit downgrades on Friday. The New York based Standard & Poor's credit ratings agency said it was lowering Anglo Irish Bank six notches to a junk-bond B grade. It also cut the ratings on Bank of Ireland one notch to BBB+, and downgraded both Allied Irish Banks and Irish Life & Permanent one notch to BBB. The agency said bonds issued by Anglo are particularly at risk of being discounted as part of an €85 billion, or $113 billion, loan to Ireland by the European Union and the International Monetary Fund. It says Ireland "may be forced to reconsider its current supportive stance toward Anglo's unguaranteed debt." Anglo Irish was nationalized last year and represents a bill to the taxpayer of at least €29 billion. Shortly afterwards, another ratings agency, Fitch in London, said each Irish bank soon "could face negative rating action" depending on whether Ireland's deal with EU and IMF negotiators seeks to inflict sacrifices on senior bondholders. Fitch trimmed its ratings on the lowest-level securities issued by Bank of Ireland and Allied Irish Banks to various grades of junk. Fitch said it "believes that the prospects of enforced burden sharing for (subordinated) debt holders is much more likely, although still not certain."
In addition to the countries of Ireland, Portugal, Greece and Spain, Belgium faces an important test as it aims to sell between 1.5 billion euros ($1.9 billion) and 2.5 billion euros worth of bonds in an auction that will indicate the level of investor confidence in the nation plagued by political turmoil and high levels of debt. Since the June elections, politicians have struggled to form a new government and the prospect of new elections is looming. If Belgium does not succeed in forming a government soon to reduce the budget deficit through fiscal austerity and bring down its debt, the country could end up in the same situation as the PIIGS nations. Last week, credit default swaps linked to Belgian debt – indicating the cost of insuring Belgian debt against default - rose to a record high this week.
In its latest report on Belgium, rating agency Standard & Poor’s wrote that its AA+ rating on the country’s long-term debt – the second-highest rating at the agency – could come under downward pressure if a continued political stalemate were to diminish the authorities' capacity to address the “outstanding challenges”.
With no federal government in place to draw up a new budget, S&P fears the country will not be able to reduce its deficit through a series of austerity measures and bring down its debt. Public debt is just under 100% of gross domestic product, the third-highest in the European Union, with only Italy and Greece preceding it, EU data showed.
In the meantime, renewed political tensions in the Korean peninsula are adding to the support of gold. Analysts believe that prices for the yellow metal are likely to remain highly volatile as tensions on the Korean peninsula drive the dollar to a two-month high, eroding demand for the metal. Last week Korea fired over 200 artillery shells at a South Korean island and there was an exchange of fire. Later in the week, North Korea warned that they're "greatly enraged at the provocation" from South Korea, and any "escalated confrontation", including planned US-South Korea naval exercises, would bring the peninsula closer to war.
Personally I doubt that we will see any escalation of the current scenario even though we will hear an increase in verbal accusations and threats from various government officials. Once again, investors rushed back into the US dollar as a safe haven investment and the greenback broke through a key resistance of 80 that indicates that a near-term bottom has been posted at 75.60. However, I am not optimistic about the dollar and even if we see the dollar rally higher, I believe it will ultimately resume its downward move to my medium-term target of 72. Once again, and as I have reiterated many times in the past, this flood into dollars is senseless. There is nothing strong about the dollar at the moment and as far as I am concerned, even though it is the world’s reserve currency, it is faltering. And, it will continue to decline in value during the course of 2011.
Last Tuesday, China and Russia renounced the US dollar and have agreed to use their own currencies for bilateral trade. Premier Wen Jiabao and his Russian counterpart Vladimir Putin announced this when they met for 15th time. The Chinese yuan has already started trading against the Russian rouble on the Chinese Interbank market and the yuan will begin to trade on the Russian forex market this December. While it is unlikely that the move will have little impact on the dollar, it does go to show how major economies are losing faith in the world’s reserve.
For several years I have been talking about the coming currency crisis which has already begun and the effect that this is going to have on the price of gold. While we are all entitled to our own opinions, I can’t see any improvement in the debt crisis plaguing the Eurozone, and as a consequence, I expect to see a further decline in the Euro. Then, I expect to see further declines in the US dollar once the current rally comes to an end. This will push the price of gold higher and through the previous high of $1425 an ounce. I have also long advocated that investors should have a portion of their investment portfolios in physical metals, in particular gold. If you do not own some gold bullion, I suggest you begin to accumulate some of this metal as soon as possible.
The upward trend in gold prices remain intact and well above the long-term 200 day MA. I believe prices are consolidating above $1325 (S1) and we will soon see an upward surge to retest the historical high. Although some people are suggesting that the price pattern is looking very much like a head-and-shoulders pattern, I would like to say that there is no point in trying to predict a possible pattern. Prices could easily pull-back and then move upwards before such a pattern forms.
Only less than 3 months ago, few investors believed that silver had the potential to move to $25 an ounce let alone $29 an ounce. Silver prices have soared around 64% this year, peaking at $29.36 an ounce in November, the highest price since September 1980. It has out-performed gold’s 24% increase this year. Gold traded at a record $1,424.60 an ounce on Nov. 9.
As mentioned in the past, silver remains my favorite precious metal and the one that I think has the best potential to net investors some very good returns. The fundamentals of this market remain very bullish and the price still appears to be very much undervalued. And, as I have alluded to in the past, the price of silver has been driven primarily by a huge increase in investor demand.
The demand for silver bullion and silver bullion coins is set to rise to record levels this year. Sales of the US eagles have broken new records and as at the end of November, sales for the year so far have reached 32,890,500. Total sales for 2009 were 28,766,500.
According to David Madge, the director of sales at the Royal Canadian Mint, sales of silver coins will jump more than 50 percent this year and will continue to climb in 2011. “Sales of silver coins for 2010 are very strong and we expect them to be at least 50 percent higher,” Madge said. In October, the mint increased its premium on coins to $2 per ounce, from $1.50. “We have not seen a decline in demand,” after the premiums increased for Silver Maple Leaf coins, Madge said.
Silver-coin sales will climb according to the Perth Mint. “There seems to be more upside with silver than gold right now,” said Ron Currie, sales and marketing director.
Current holdings of the silver exchange traded funds (ETF’s) are close to 15,000 tons. As these ETFs continue to accumulate silver stockpiles to support demand for their shares, this will provide good support to the price. Since 2006, the holdings of physical silver of iShares Silver Trust (SLV) has increased by more than 15 times!
Net silver investment increased by a staggering 184% to 136.9 million ounces last year, reaching its highest level in 20 years. And, net investment demand for silver is up over 600% since just 200. Also, silver’s fundamental demand excluding investment should rise next year, mainly due to gains in industrial uses. Silver is used in a myriad of applications including batteries, bearings, brazing and soldering, catalysts, various electronics, medical applications, mirrors and reflective coatings, and more. It is also used in solar energy and in water purification. What is important to realise is that unlike investing where silver is bought and held, the quantity of silver used in these industrial applications cannot be recycled and thus taken off the market for ever.
For years, I have been urging investors to accumulate silver to protect their wealth, and even though we are seeing higher prices, it is all relative. I believe that the prices in 6 months’ time will be substantially higher than the prices of today. So, rather than wait, get started with your silver bullion portfolio as soon as possible.
The price of silver appears to be building strong support above $25 an ounce. And, as it consolidates between $25/oz and $29/oz I would recommend adding to your positions because the next move could push the price to $32/oz in the medium-term.
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Only a few weeks ago, members of the G-20 met to resolve the worlds’ currency problems. After the G20 failed to reach any consensus on currency issues and trade imbalances, President Obama accused China of deliberately keeping its currency undervalued saying the renminbi "is undervalued ... and China spends enormous amounts of money intervening in the market to keep it undervalued." However nothing was said about the US Fed’s $600 billion “quantitative easing” plan which according to Bernanke has nothing to do with monetizing debt and the purpose is to bring down interest rates which are already close to zero.
Even before the start of the G20, Germany's finance minister, Wolfgang Schauble called U.S. policy "clueless," while foreign ministers from China and France (among others) questioned the wisdom of QE2. And, aadding fuel to an already heated debate over the U.S. Federal Reserve's bond-buying spree to revive the economy, former Fed Chairman Alan Greenspan said the United States was pursuing a policy of weakening the dollar.
Frankly I don’t think the US has a case when it comes to debating the debasement of currencies. And, in a recent GATA publication, Michael Pento, senior economist at Euro Pacific Capital, said. "The U.S. is the No. 1 currency manipulator on the planet." He also said. "We print up a lot of dollars" and "we can consume more than we produce because of that." But that policy makes for a "chronically weak" dollar and puts America at the mercy of its foreign creditors, Pento says, restating a warning about the risks of a true dollar crash and skyrocketing interest rates if we don't change course, soon.
It won't happen overnight, but China is plotting its own exit strategy by slowing rolling its Treasury holdings into the short end of the curve, he says, suggesting other foreign investors will follow suit.
Once again the G-20 meeting was probably nothing more than a waste of time as efforts to resolve currency and trade imbalances floundered. China rejected policy prescriptions that fault its exchange rate regime and directed criticism at monetary easing in the U.S. “Don’t make other people take the medicine for your disease,” Yu Jianhua, a director general at China’s Ministry of Commerce, told reporters in Seoul late yesterday. “Quantitative easing will have a very big impact on developing countries including China.”
“The Chinese can’t help but think this is just a way of continuing to point the finger at China,” said Neil Mackinnon, an economist at VTB Capital Inc. in London and a former Treasury official. “It doesn’t look as if we’re going to see anything specific or substantive that will address global imbalances.”
The Group of Twenty (G-20, G20, Group of Twenty) is a group of finance ministers and central bank governors from 20 economies: 19 countries plus the European Union, which is represented by the President of the European Council and by the European Central Bank. Their heads of government have also periodically attended the summits since their initial meeting in 2008. Collectively, the G-20 economies comprise 85% of global gross national product, 80% of world trade (including EU intra-trade) and two-thirds of the world population.
The G-20 was proposed by former Canadian Finance Minister Paul Martin (later, Prime Minister) for cooperation and consultation on matters pertaining to the international financial system. It studies, reviews, and promotes discussion (among key industrial and emerging market countries) of policy issues pertaining to the promotion of international financial stability, and seeks to address issues that go beyond the responsibilities of any one organization.
On September 25, 2009 the G-20 leaders announced that the group will replace the G8 as the main economic council of wealthy nations. The Group of Eight (G8, and formerly the G6 or Group of Six and also the G7 or Group of Seven) was a forum, created by France in 1975, for governments of six countries in the world: France, Germany, Italy, Japan, USA and UK. In 1976, Canada joined the group (thus creating the G7). In 1997, the group added Russia thus becoming the G8. In addition, the European Union is represented within the G8, but cannot host or chair.
Current members of the G20 include Argentina, Australia, Brazil, Canada, China, European Union, France, Germany, India, Indonesia, Italy, Japan, Mexico, Russia, Saudi Arabia, South Africa, South Korea, Turkey, United Kingdom and the United States.
During the last two weeks as borrowing costs for Ireland, Portugal and Spain soared, spreads on Italian and Belgian bonds jumped to a post-EMU. Monday November 29, was the worst single day since the launch of monetary union. The euro fell sharply to a two-month low of 1.3064 against the dollar. Yields on 10-year Italian bonds jumped 21 basis points to 4.61%, threatening to shift the crisis to a new level. Italy's public debt is more than 2 trillion euros, the worlds’ third-largest after the United States and Japan.
"Unless the fiscally-strained euro area countries can convince markets that they will be on a sustainable fiscal path by 2013 -- which looks unlikely to us -- peripheral bond markets are likely to remain under strain, in particular Portugal," was the view from Citi European Economics.
Economic and Monetary Affairs Commissioner Olli Rehn warned that "the turbulence in sovereign debt markets (highlights) the need for robust policy action" -- the morning after Ireland became the second joint EU-International Monetary Fund Eurozone bailout of the year.
The Commission also trimmed its forecast for Spain's economic growth next year to 0.7% from 0.8%. That is barely half the 1.3% growth Madrid hopes to record after a contraction of 0.2% according to the Commission's latest forecast. Slower growth makes managing deficits much more difficult and unlikely to trim the high levels of unemployment. Currently the rate of unemployment in Spain is above 20%.
Spain's economy is larger than those of Ireland, Greece and Portugal combined, and if it spirals into a debt crisis despite progress in trimming its budget deficit, a bailout would strain the European Union's safety net. And, another source of concern is Spain’s large exposure to Portugal, which is seen as the next euro zone trouble spot. Spanish banks had a $108 billion exposure to Portugal at the end of March, according to Bank of International Settlements data.
Spain's government faces a bond redemption at the end of April of 15.5 billion euros in competition with the banks, which are also looking to refinance around 35 billion euros, according to analysts at Barclays Capital. "We are concerned that tapping the markets for more than 50 billion euros in March and April represents a substantial level of execution risk," the analysts said in a note, adding the situation would worsen in 2012.
Despite the latest quarter showing a contracting economy and a 20% unemployment, the Spanish Prime Minister, Zapatero expects Spain to see growth in the coming year. Zapatero also denied rumours of potential real estate write-downs.
"[Our banking system] is definitely healthy," Zapatero said. "It's not only healthy and well-capitalized, it's done its homework ... and on top of that, it will be one of the most attractive financial systems for investments." The moment Zapatero said this I knew the financial system in Spain is in a mess. The last time a political leader stated that all was well in his country and that a bailout was not needed, the truth soon revealed the opposite.
As I try to devise an index for these “misleading” statements made by politicians, political leaders, finance ministers and central bankers, I strongly recommend investors ignore any short-term fluctuations in the gold price and use any dips as a buying opportunity. While politicians come and go, gold’s value as a store of wealth never changes.
As you know I have been extremely bullish on silver for several years, and I have given you all my reasons in numerous editions of the The Delaire Report. I have also kept you abreast of the potentially, very explosive, position that exists only in silver and that is the huge short position that has been held by the major bullion banks in particular JP Morgan. But, even if there is no short squeeze in silver the economic axiom of supply and demand will still apply. When demand exceeds supply the price will go up. However, in the case of silver the fundamentals are so bullish that it simply has to increase several times over during the next few years.
When it comes to investor demand for silver, we have noted a massive increase. The silver exchange traded funds now hold a record 15,115 tons according to Barclays Capital. And, sales of the US silver eagle bullion coin have now reached 33, 937, 500 ounces for the year.
As Silver Keeps Rising How long are you going to stay on the fence?
Here is the link to an interview with John Stephenson of First Asset Investment Management who sees silver at $50 an ounce in the short-term:
As I cannot keep repeating myself and continually urge you to own some silver, I have decided to address two issues that I think are of importance for investors of silver bullion, or any other physical precious metal. The first is the importance of holding your own physical silver, and the second is about the value or lack thereof of limited edition medallions.
Recently, on King World, Jim Rickards, related a story about a gold investor who struggled with a Swiss bank for a month and who threatened legal action and publicity to obtain the return of $40 million in gold he had deposited there. Then, GoldMoney's James Turk also told King World News that he knew of similar cases, including that of a silver investor who for two months has been unable to induce a Swiss bank to return 20,000 ounces of silver for which the investor has been paying storage fees. Evidently, the bank suggested that he take the cash value, but he was holding out for delivery of the physical bullion.
Both these instances, and the other unquoted ones referred to by Turk, could be taken to suggest that the banks did not have the investors' specific allocated gold or silver in their vaults, despite charging fees for its ‘storage'. If these banks are not holding even the ‘allocated' bullion they say they are it can't be too long before more detailed cases come to light. And, if more clients insist on receiving delivery of their silver, this could precipitate a short squeeze to end all short squeezes….especially if holders of physical metal lose confidence in the banks which are holding their bullion.
Here is the link to the interview with James Turk:
One other issue that I find rather disturbing is the prices asked for commemorative and limited edition medallions. As far as I am concerned these have no investor appeal whatsoever and should only be bought by collectors. Recently, the Pobjoy Mint in England minted an Isle of Man 2010 Prince William Engagement Coin which is being sold at £49.32 ($78). Frankly, I have no interest in whether or not Prince William is engaged, and I most certainly won’t pay more than twice the price of silver just to celebrate his engagement. Even worse, a company in South Africa, The South African Gold Coin Exchange is marketing a one ounce silver limited edition Mandela/DeKlerk medallion for R1200 ($178)! This is almost six times the current price of silver! If you think this has value fine, but as far as I am concerned I would rather buy 4/5 silver eagles.
Released in 1986, the Silver Eagle is America’s only official investment-grade silver bullion coin. It is also the world’s only silver bullion coin whose weight, content and purity are guaranteed by the U. S. government. It is recognised all over the world, and is the best-selling silver bullion coin in the world. The silver Mandela/DeKlerk is not even legal tender and does not have any global recognition. This means that if even though you paid the equivalent of $178 for this medallion, in all probability if you were to sell them anywhere out of South Africa you would likely receive $30 for the medallion!
Here is the link to my recent interview with Simon Brown of JSE Direct in which we chatted about gold, silver and palladium:
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