WHAT DOES THE EUROPEAN COLLAPSE MEAN FOR GOLD INVESTMENTS?

May 31, 2012

Lately the price of gold has been in a steep correction caused by appreciation in the US dollar, the world’s reserve currency of choice.

The dollar has experienced unexpected demand from investors and institutions exiting the euro, the common currency of the 17 nations of the European Union.

The euro is in freefall and in danger of disintegrating altogether because of a severe economic and financial crisis which has gripped Europe. That crisis was originally caused by an acute and chronic fiscal disaster. European nations have been spending themselves into oblivion and running up unsustainable debt levels. Now, Greece, Spain, Portugal, Italy and Ireland are all in various stages of recession or outright depression. (In Spain the unemployment rate is 24% and in Greece unemployment for those under 25 is an astonishing 51%.)

For now the dollar has been the beneficiary of all this crisis as investors vacate the euro and replace their euro assets with dollar assets. As the value of the dollar increases, the price of gold has fallen.

But can this situation last?

We don’t think that it can.

First of all, the European crisis is likely to get worse and it will eventually begin to impact the US economy and financial markets in earnest. This is inevitable because of the counterparty risk associated with economic and financial globalization. Banks and financial institutions are no longer national, they’re international. They have operations overseas and relationships with foreign financial institutions, including big banks in Europe. There is simply no way that the US economy and financial markets can escape the impact of this still brewing crisis. When our economy and markets begin to suffer, the dollar will start to falter as demand for dollars will inevitably fall back down to earth.

After all, the same fiscal woes that have contributed mightily to this crisis in Europe certainly exist in the US—except our fiscal woes are actually worse in some cases. Our debt and deficits are larger to be sure. There is simply no way that the dollar can be considered a safe haven from a world debt crisis with America being the world’s largest debtor nation.

When this reality sets in in the not-too-distant future, investors will move into gold as the ultimate form of safe money. Gold has been trusted for 5,000 years as a secure store of value and medium of exchange.

Those who had the foresight to buy gold investments BEFORE the crisis in Europe migrated across the Atlantic Ocean will be rewarded particularly handsomely.

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IS THE PRICE OF GOLD TOO HIGH?

May 30, 2012

Gold has been on a “tear” for a decade. The price of gold has literally risen in each of the past 10 years. This has resulted in gold outperforming most other investment categories during this period of time.

Despite this excellent long-term momentum many investors have taken to sitting on the sidelines, rather than buy gold investments because they fear that gold may “have had its day.” Some observers even claim that gold is a “bubble,” getting ready to burst.

The available evidence suggests that gold is still vital to a properly diversified investment portfolio because (i) the macroeconomic and geopolitical environment is still conducive to higher gold prices going forward and (ii) in real terms, the price of gold isn’t all that high.

The Macroeconomic and Geopolitical Environment

 Before assuming that gold has finished its run, investors should ask themselves, “What has changed in the macroeconomic and geopolitical environment to keep the price of gold down over the long-term going forward?”

The answer of course is the macroeconomic/geopolitical environment is actually supportive of higher gold prices over the long-term. For evidence, one need go no further than America’s national debt and ongoing federal budget deficits.

The national debt continues to grow, it is now well over $15 trillion. Meanwhile, the federal government keeps spending and is running an annual deficit of some $1 trillion, an amount that essentially gets added to the national debt each year.

This situation ensures that the US dollar will continue its long-term decline and likely means that the US will have no choice but to turn to a hyperinflationary monetary policy at some point down the road. Why? Because that debt must be repaid and the only way the US Treasury will be able to live up to its obligations is by paying back creditors, such as China, with dollars cheapened by inflation.

In other words, it is inevitable that the Federal Reserve will fire up the printing presses like never before to pay off the debt.

This is the reality that overrides all other factors in the economy and the political realm and it is one for which investors must be prepared. Gold investments are uniquely qualified to protect wealth from the ravages of the high inflation that will eventually come.

But is the price of gold really that high?

As we sit down to write this article, the price of gold is trading at $1,550 per ounce. This is NOT lofty by any measure.

Consider that the all-time high for gold was over $1,920 per ounce. That means that just to get to its previous high, gold would have to rise by nearly $400 per ounce. That is hardly an overvalued investment. Also, consider that in real terms, compared to other financial assets, such as the stock market, the price of gold is still very low.

In 1980, the price of gold reached around $800 per ounce. In the same year, the Dow Jones Industrial Average peaked at around 1,000.

Consider today that gold is less than twice the level that it was in 1980, yet the Dow is trading at over 12,000, a dozen times the level of 1980. Despite this, gold has actually outperformed stocks over the past 10 years, yet gold still seems undervalued compared to the stock market.


THE STATE OF THE ECONOMY AND HARD ASSETS

May 29, 2012

Investment markets are ultimately driven by the direction and condition of the economy.

The problem for investors is that it is not always so straightforward what the current condition of the economy is, much less the all-important future direction of the economy.

Right now many investors believe that the US economy is improving and they have taken this to mean that they should not buy hard assets, such as rare coins and precious metals.

Investors who follow this philosophy are making two mistakes:

  1.  The economy is still very weak and storm clouds are gathering on the horizon.
  2. Hard assets have a role to play in a properly diversified investment portfolio in all economic environments.

A Great Deal of Uncertainty 

At the present time, the US economy is actually dominated by an overwhelming climate of uncertainty. In some areas the economy is improving. In other areas it is not. In still some other areas, what looks like improvement isn’t actual improvement after all.

An area of improvement that can definitely be pointed to is energy prices. Despite most forecasts, oil and gas prices have declined, perhaps saving the economy from the onset of stagflation—a combination of inflation and a stagnant economy.  The problem, of course, is that we’ve just entered the summer driving season, so the jury is still out on this one.

The economy is clearly not improving in the real estate sector as an example. The US real estate market is in an outright depression and most historians maintain that there has never been a robust economic recovery without a recovery in real estate. That isn’t happening right now and it doesn’t appear to be in the cards any time soon.

Some pundits are looking at the unemployment figures and proclaiming that the US economy is improving. But only a superficial analysis of the statistics leads to that conclusion. While the unemployment rate has declined slowly over the past year, it is still high and, most importantly, the overall employment situation is still very poor because many people have simply given up on finding a new job and have exited the workforce. This artificially lowers the unemployment rate but it is not a sign of an improving economy—just the opposite in fact.

What all this adds up to is a great deal of uncertainty. The future direction of the economy remains a mystery at this point. Diversification is more important than ever in such uncertain conditions because different types of investments react differently to different economic situations. Without proper diversification, an investor can get caught in a trap if the economy moves in an unexpected direction.

Hard assets, such as rare coins and precious metals, are especially useful in this regard since they have historically not had a close correlation with financial assets. This makes them the perfect holding to provide balance to a portfolio of stocks, bonds and cash.

Just as hard assets are key to the effective diversification of an overall investment portfolio, it is just as vital that investors exercise proper diversification within their hard asset holdings. This is because different hard assets (the various precious metals and different sectors of the rare coin market) provide different sets of benefits in different stages of the economic cycle.

Some hard assets provide security during recession and even depression. Others excel during periods of high inflation. Still others perform best during periods of economic growth and prosperity.

It is imperative you accumulate a diversified portfolio of hard assets that will serve you well in all phases of the economy, during good times and bad.


CNBC – Yoshikami: Four Things You Need to Know About Gold Now

May 25, 2012
Published: Friday, 25 May 2012 | 10:26 AM ET
Michael Yoshikami
CEO, Founder & Chairman, Destination Wealth Management

Gold is negative for the year and has caused some to say it is time to abandon this metal as an investment. After all, isn’t gold supposed to rise consistently every year and always rise when equity markets drop?

Since the price of gold [GCCV1  1571.90    14.40 (+0.92%)   ] has not ratcheted up in this latest Europe driven downturn, some say surely that must mean that the wisdom of owning gold is now null and void.

I disagree; gold should still be a part of your investment plan.

Here are a few thoughts to keep in mind as you consider investing in gold for your portfolio strategy.

1. Recognize that investing in gold is not a guaranteed positive return investment every year; gold can and will lag other asset groups depending on the current environment. This is particularly the case when liquidity becomes a concern in global markets and gold is sold to raise cash. Remember, this asset will rise and fall in value like any other asset; a longer-term time horizon is required when buying this precious metal.

2. Central banks will continue to diversify out of US dollars and European currency. Having just returned fromAsiathis week, it never ceases to amaze me the level of skepticism that businesses and governments have regarding the fiscal prudence of US and European leaders. The bottom line is they simply don’t believe that responsible decision-making will occur leading to currency stability. For that reason, central bankers around the world will continue to buy gold as a substitute for unstable currencies.

3.India andChina will continue to consume record amounts of gold as affluence rises. One only needs to spend time in Macau orBombay orShanghai to see that the demand for gold has never been higher as emerging countries continue to increase wealth. inIndia andChina, gold is symbolic of good luck, affluence, and status. Despite the bumps thatIndia andChina might encounter in their economies, gold consumption will continue to accelerate.

4. One day inflation will emerge. And when inflation does rise, tangible assets will provide some level of inflation protection. Given the incredible stimulus policies around the world, it’s hard to imagine that pent-up inflation is not bubbling below the surface in global economies.

Assets such as commodities and other tangible goods tend to do well in inflationary environments. Gold is no exception to this trend.

While it is tempting to be shortsighted when investing in any asset, it is critical that one analyze the role of each position in a portfolio strategy. This analysis is required to assure that a plan for investment factors in not only what might go right with an investment plan, but also what might go wrong as well.

When inserting gold into your strategy, make sure it is part of an overall plan. Do not get caught up in short-term price movements when building a long-term investment allocation. There have been many times in the past when gold has underperformed other capital assets only to see valuations roar back. Don’t get left behind when gold makes its latest recovery.

And be prepared to increase your position when inflation begins to emerge. Be tactical but long-term in perspective and make gold part of your offensive and defensive investment strategy.


China’s Lesson from The Fed: When in Doubt Print More Money

May 24, 2012

When you see China heading down the same path as Bernanke & the Fed manipulating the economy to meet artificial economic expectations it makes one wonder. The second largest economy is not recovering as fast as the manipulators would like to see, so out come the printing presses.

As investors in rare coins & precious metals it should give you encouragement to acquire more Silver & Gold during the current dip. 2008 saw a retraction in prices before this last run that took metals to new & near high levels. As you read below we could see a mini repeat of 2008 from Europe & China. This further proves that the underlying trends in the economy are shaky at best! Read more:

CNBC: China Seen Launching ‘Aggressive Stimulus’ as Growth Slows Further

Beijing to launch aggressive stimulus measures in order to prevent a further deterioration of growth like the expansion in the eastern part of the city.

Published: Thursday, 24 May 2012 | 6:34 AM ET
By: Ansuya Harjani 
Assistant Producer, CNBC Asia

Continued weakness in China’s economic data, as well as growing risks of aGreek exit from the euro zone, will drive Beijing to launch aggressive stimulus measures in order to prevent a further deterioration of growth in the world’s second largest economy, economists and strategists tell CNBC.

On Thursday, the HSBC Flash Purchasing Managers Index (PMI), the earliest indicator ofChina’s industrial activity, fell to 48.7 in May from a final reading of 49.3 in April. It marked the seventh straight month that the HSBC PMI has been below 50, indicating contraction.

“All signs point to the fact that the slowdown is not letting up as fast as authorities had expected, partly because of challenging external conditions and partly because of the fact their tightening last year was too effective,” Donna Kwok, HSBC, Greater China economist, told CNBC Asia’s “Cash Flow.”

“We are going to have to see more active support being directed directly to consumer and business rather than through the monetary system via the banks,” Kwok added.

China, which began to tighten its monetary policy in late 2009 to stem risinginflation  , is now facing a sharp slowdown in the economic activity, raising fears of a hard landing for the economy.

In a sign the government is already growing worried about the slowdown, a state-backed newspaper reported on Tuesday that China will fast-track approvals for infrastructure investment.

Dariusz Kowalczyk, senior economist and strategist, Asiaex-Japan, at Credit Agricole, said the weak HSBC Flash PMI data strengthen the case for easing and he expects more fiscal stimulus.

“The focus of the stimulus is likely to be on the fiscal side, probably as a ‘mini-Lehman crisis’ package of state-directed lending for investments in infrastructure, because this is the fastest way to boost aggregate demand,” he said in a note to clients.

While Kowalczyk believes monetary policy is unlikely to be used as aggressively, he expects a push towards quantitative easing through “pressuring” banks to lend more via further reductions in the reserve requirement ratio (RRR).

Chinahas cut the RRR three times since November 2011, with the last move on May 18, and Kowalczyk expects up to 150 basis points in RRR cuts and 50 basis points in interest-rate cuts this year.

‘Grexit’ Scenario

In addition to a deterioration of domestic economic indicators, headwinds from Europe’s debt crisis, particularly risks surrounding a Greek exit from the euro zone, are growing a concern and could trigger “massive” stimulus measures, said Peng Wensheng, chief economist at state-owned investment bank China International Capital Corp.

According to Wensheng, ifGreecewere to leave the currency bloc,Chinawould need a 600 billion yuan ($94.7 billion) stimulus package to shield the economy from any fallout by the exit and meet its 7.5 percent growth target.

A Greek exit, which would hurtChina’s exports and result in large capital outflows, could drag economic growth in the mainland down to 6.4 percent in 2012, he said.

“Assuming a Greek euro exit drags down global economic growth by half as much as the 2008-2009 global financial crisis did, China’s economic growth would fall to 6.4 percent in 2012, 1.7 percentage points lower than our baseline forecast of 8.1 percent,” he said in a research note.

Undershooting Growth Target

Sean Darby, Hong Kong-based chief global equity strategist at brokerage Jefferies, said that according to many ‘on-the-ground’ measures of economic growth, gross domestic product  in China is running at 5 percent, which is much below the government’s 7.5 percent target.

“A number of them such as inventory growth, working capital loans, and letters of credit issued in Taiwan (a major trading partner) are on a similar trajectory experienced through the first half of 2008,” Darby said.

A large reason for this is that recent tightening measures have lessened the availability of working capital — an important component for the country’s manufacturing sector, which accounts for more than one-third ofChina’s GDP, he said.

“Working capital is the lifeblood of developing economies, since it is the oil that lubricates the flow of money internally,” Darby said. “If it gets ‘stuck’ or glued, economic growth can slip far below trend.”

“Chinese authorities are clearly behind the curve if they wish to support their economic growth anywhere close to the desired 8 to 7.5 percent target. It is working capital that needs to grow in the economy,” he said.

By CNBC Asia’s Ansuya Harjani

© 2012 CNBC.com


China Acquires 436 Tonnes of Gold in Eight Months

May 23, 2012

China has now imported 436 tonnes of gold through Hong Kong over the past 8 months, compared with only 57 tonnes over the same 8 month-period a year earlier.

We recently saw a video last month that discussed China’s belief in a version of Manifest Destiny by taking their self-proclaimed rightful place as the #1 economic titan in the world.  It also made an interesting point about China using the West’s economic policies & regulatory loop-holes to strengthen their economic position globally.

This should strike fear in every investor knowing that the Chinese can so easily manipulate and influence our markets. Even when they acquire large quantities of gold, as mentioned in the article below, it is to benefit their long term goals  of global financial domination.

While you may not be able to stop our own governments from hurtling us head-long off the oncoming economic cliff;  you sure can build your personal Tangible Asset Portfolio to provide a safety-net for you and your family. Read on here:

Daily Reckoning: China Buys Gold…No Matter Who’s Selling

By Eric Fry

05/04/12 Laguna Beach, California– Someone is selling in size…Someone is buying in size. That’s what makes markets, as the saying goes. But that’s also what makes market manipulations, according to the bloggers at Zero Hedge.

The seller in this case is very large and very sloppy, perhaps intentionally so. The buyer is also very large, but very patient and methodical. Trapped between these two powerful opposing market participants we find a “range-bound” gold market. Let’s take a closer peek at the curious goings-on…

Last Monday, a large early-morning sell order in the gold market whacked the price of the precious metal by about $15 in a matter of seconds.

“The CME Group Inc.’s Comex division recorded an unusually large transaction of 7,500 gold futures during one minute of trading at 8:31 a.m.,” The Wall Street Journal reported. “The sale took out blocks of bids as large as 84 contracts in one fell swoop and cut prices down to $1,648.80 a troy ounce [from $1,663.00]. The overall transaction was worth more than $1.24 billion.

“Gold traders buzzed with speculation that the transaction was an input error — a so-called ‘fat finger’ trade,” the Journal continued. “‘Or a Gold Finger as it might be known in the bullion market,’ traders at Citi joked in a note to clients.

“Still, not everyone agreed Monday’s slip in gold was caused by a keystroke error,” said the Journal. “Chuck Retzky, director of futures sales for Mizuho Securities USA, said that silver prices suffered a similar leg down at the same time as gold, tumbling 35 cents to $30.805 a troy ounce, but other markets like Treasurys, currencies and stocks were unperturbed. ‘To do it both in gold and silver tells me that it wasn’t a trade done in error,’ Retzky said.”

A second trader chimed in, “No one who has the account size and the money to trade thousands of gold contracts would do it in one transaction, that’s just stupid.”

Or maybe this “stupidity” was intentional, as the folks at ZeroHedge suspect. Again yesterday, a large 3,000-plus lot gold sell order hit the Comex overnight trading system around 1:30 AM,Chicagotime — causing the gold price to quickly fall more than $5. “Volume that size is unusual for that time of the day on the COMEX,” ZeroHedge remarks.

A few hours later, shortly after the Comex opened the gold pits for the regular daytime trading, a couple of very large sell orders knocked $10 off the gold price in a matter of minutes.

These large, sloppy sell orders are no accident, ZeroHedge insists. They are simply some of the most flagrant examples of what could be market manipulation by Western central banks. ZeroHedge does not point fingers at any particular “fat finger,” but it does wonder aloud if the Bank for International Settlements (BIS) may be involved.

“[A few weeks ago],” says ZeroHedge, “somewhat tongue-in-cheekly, we presented the ‘people bringing you currency manipulation on a daily basis,’ or in other words, the BIS execution team for Europe’s central banks, which is most directly engaged in FX and precious metals ‘interventions’ when needed.

“The execution chain we presented was headed by one Richard Austin Jones, head of central bank services at BIS, Basel, yet more importantly the actual trader at the bottom of the totem pole was a Mikaël Charozé, whose various tasks included the ‘management of the liquidity for big amounts’ primarily interventions and portfolio diversification, as well as ‘holding and managing proprietary positions on all currencies including gold.’

“We posted this observation on April 5,” reports ZeroHedge. “Funny then that just 10 days later, one would never know that Mikaël no longer counts ‘holding and managing proprietary positions on all currencies including gold’ among his duties as well as task of ‘management of liquidity for big amounts including interventions.’ [I.e. the BIS Website removed all of this language from Mikaël’s job description]. In fact his entire profile, since our little humorous exposés, appears to have been rather completely altered. Inquiring minds would love to know: why?”

Why, indeed?

Many gold-market participants have long-suspected that Western central banks (and other agencies of currency debasement) conspire to suppress the gold price. According to this conspiracy theory, the central banks periodically pound on the gold price in order to prop up the value of the paper currencies they print.

But despite the anecdotal evidence supporting the conspiracy theory, no one has ever caught one of the conspirators in the act. Like Sasquatch, the conspirators leave lots of great, big footprints, but no one ever manages to trap them in their caves.

So maybe there are no conspirators, just lots of really stupid and sloppy gold sellers.

Meanwhile, the buy side of the gold market is much less mysterious.

“Earlier this month it was revealed that Hong Kong gold imports into China totaled nearly 40 tonnes in the month of February, representing a 13-fold increase over the same month last year.” Sprott Asset Management observes in its April letter. “China has now imported 436 tonnes of gold through Hong Kong over the past 8 months, compared with only 57 tonnes over the same 8 month-period a year earlier (July 2010-February 2011).”

In other words, on the other side of every sloppy gold sale by a BIS trader (or whomever) you are likely to find an eager Chinese buyer. The recent surge in Chinese buying represents a whopping 25% increase in total global investment demand for gold.

“There isn’t a physical market on earth that can withstand that type of demand increase without higher prices over the long run,” Sprott declares, “and the gold market is no different. There are no sellers of physical gold that we know of who can satiate that scale of new demand, and global gold mine supply has been virtually flat for over the last 10 years…Where is the gold going to come from? We ask because we don’t actually know.”

So there you have it…The invisible “fat fingers” are selling gold. The very visible Chinese are buying it. Place your bets!

Eric Fry
for The Daily Reckoning


Forbes: Herman Cain’s Path To A 21st Century Gold Standard

May 22, 2012

Herman Cain was a candidate for the 2012 Republican presidential nomination, creating a revolutionary tax reform plan known as 9-9-9.

Charles Kadlec, Contributor
I cover economic/political issues with liberty as my polar star.
OP/ED|5/21/2012 @ 2:16PM

Herman Cain’s greatest contribution to the Republican primaries was his call for policies that would lead to economic growth by increasing the economic freedom of the American people.  He rose to the top of the polls by matching that rhetoric with his bold plan to replace the current corrupt and inefficient tax system with his now famous 9-9-9 tax reform plan.

Now, in his new book: 9-9-9 An Army of Davids,Cain, along with his Senior Economic Advisor and co-author, Rich Lowrie go beyond 9-9-9 and provide a compelling case and full elaboration on his bold plan to restore economic growth by reforming the tax system, the regulatory state, and the monetary system.  The combination of these reforms, in the words of the authors, would “fundamentally transformWashington.”

The case for 9-9-9 and regulatory reform are fairly well known.  Where Cain breaks new ground is his call for a “21st Century Gold Standard.”  Just as important, he offers a concrete, step-by-step path to make the dollar once again as good as gold, and a new set of operating procedures for the Federal Reserve that would avoid the errors of the past.

The timing of Cain’s book is propitious.  Rep. Kevin Brady (R-TX) and Sen. Mike Lee (R-UT) have each introduced bills in their respective chambers that would take the first steps toward restoring a sound dollar.  By showing that an orderly return to a gold standard is possible, Cain joins Lewis Lehrman, noted financier, monetary authority, and author of The True Gold Standard, in debunking those who claim there is no escape from the paper dollar status quo.

Cain brings to the case for monetary reform his experience as the Chairman of the Federal Reserve Bank of Kansas City, and the work of a team of economic advisors that supported his campaign co-chaired by Mr. Lowrie, this columnist, Brian Domitrovic and Paul Hoffmeister.

In one of the most entertaining parts of the book, the authors capture the craziness of the current floating, paper dollar by asking the reader to imagine what the world would be like if the government could change daily the number of minutes in an hour.  Life would be chaotic. But soon, the private sector would create an entire “chaos industry” to help us cope with the uncertainty of time, just as we now must cope with the uncertainty of the value of the paper dollar.  Before you know it, established media and intellectuals would be “singing the praises of a floating hour and opine on the downright restrictive nature of the old barbaric system” under which people would be expected to arrive to meetings on time!

In a more serious vain, the benefits of a dollar as good as gold are reported:  Higher economic growth, lower unemployment, stable prices, rising real wages and living standards, a less cyclical economy, and virtually no financial crises.  The myths used by the defenders of the paper dollar also are dispelled, most importantly including the charges that the gold standard “caused” the Great Depression, that it would restrict the ability of the economy to grow, and empower Wall Street and financiers to the disadvantage of Main Street and American families.

The historical evidence is clear:  the paper dollar that we have lived under since 1971 has underperformed the gold standard on every important economic variable, and must treated for what it is, an experiment that has completely failed to increase employment and minimize recessions by giving twelve men and women on the Federal Reserve’s Open Market Committee the power to manipulate the value of our money and interest rates.

Six principles are offered to guide the transition to the 21st Century Gold Standard:

1)      Overall prices should remain near today’s levels, including no forced reduction in wages.

2)      The process for establishing the new link between the dollar and gold must be transparent, making use of markets to establish the value of the dollar in terms of gold.

3)      The transition must be gradual, but the path must be clear.  This will permit as smooth an adjustment process as possible.

CONTINUED ON PG2