Hurricane Sandy Intermission Review

October 29, 2012

The markets closed early today due to Hurricane Sandy and trading in gold was subdued due to so many New York traders and investment houses hunkering down for the storm.

So, rather than review today’s inconsequential market results, we decided to look in our archives for articles that we might have overlooked that are particularly relevant to hard asset investors.

We think we found two from just under two weeks ago that everyone should stop and take a closer look at.

First, recently, Pimco, the parent company of the largest bond fund in the world, warned that a further downgrade of America‘s sovereign credit rating is in the cards. They think it’s inevitable and will probably happen just after the first of the year…

http://www.bloomberg.com/news/2012-10-17/u-s-to-get-downgraded-amid-fiscal-theater-pimco-says.html

Second, Mark Hulbert, esteemed editor of the Hulbert Financial Digest, one of the oldest and most respected investment newsletters out there, has pointed out that extensive academic research indicates that a 1987-like stock market crash is “inevitable.”

http://www.marketwatch.com/story/another-stock-crash-like-1987s-is-inevitable-2012-10-17?dist=afterbell

Both of these articles are relevant for investors because they should both serve as warnings that paper assets that might seem secure today, may not actually be so secure tomorrow. If US Treasuries are no longer rock solid and the stock market crashes, gold investments will likely be the most secure assets that an investor can own.

 


Gold Soars to $37 to 6-month High on News of QE3

September 13, 2012

Against a backdrop of turmoil and violence in the Middle East, the Federal Reserve today announced a new round of monetary stimulus to jump start the stagnant US economy.

As a result of this announcement the price of gold shot up $37 per ounce to a six-month high, closing at just under $1,770 per ounce.

Stocks also soared in response to the announcement in hopes that the new Fed policy would succeed better than QE and QE2 in getting the US economy humming along again. The Dow finished higher by over 206 points.

The nature of QE3 amounts to the Fed going out in the open market and buying $40 billion worth of Treasury bonds every month, thus increasing demand for US Treasury securities and injecting more dollars into circulation.

We are not at all sure that this will result in a healthier US economy, but we are sure that it will result in a weaker dollar and higher inflation. Because of that, we expect that the current bullishness in stocks will eventually expire and the bullishness in gold investments will continue. A weaker dollar and higher inflation have historically been bearish for the stock market and bullish for gold.

Flooding the world with more dollars can only mean a weaker dollar and such stimulative monetary policies have historically led to higher inflation. We expect that inflation will make itself felt in the form of higher oil and gasoline prices in the short term and in other areas down the road.

All of this should prompt investors to buy gold investments now because it appears that gold has a ways to run. And the best way to take advantage of higher gold prices is to buy rare gold coins, which have added profit potential due to their scarcity.


Central Banks Moving Into Gold

August 7, 2012

Punctuated by a sharp increase in gold holdings by South Korea’s central bank, world central banks are moving into gold, expanding their gold holdings in a major way.

What do these ultimate insiders know that the average investor doesn’t know? Central bankers have access to information and statistics that we are kept in the dark about. This makes their move into gold an important signal for the rest of us.

Do not dismiss South Korea as a minor player in the world economy and financial markets, they’re not. South Korea is an Asian economic juggernaut, with one of the fastest growing economies over the past quarter century.

More from Reuters:

South Korea buys gold; central bank purchases set to rise

South Korea boosted its gold holdings by nearly a third in July, buying 16 tonnes as
part of the central bank's efforts to diversify its massive foreign exchange reserves.

South Korea is Asia's fourth largest economy and its central bank said on Thursday that it now holds 70.4 tonnes of gold,
after paying $810 million last month for the purchase.
    
The increase barely lifted gold prices but supported expectations that central banks will remain gold's key buyer as
increased volatility in global markets and waning confidence in the U.S. dollar fuel a global drive to vary foreign reserves
away from the U.S. currency and government debt securities.
CENTRAL BANKS TO BUY MORE GOLD
    
The latest purchase was the third by the Korean central bank since June last year, when it started increasing its reserves
after leaving them unchanged for more than a decade. 

In the last 13 months, South Korea's gold reserves have grown five-fold but remain only a fraction of China's over 1,000
tonnes and Japan 765 tonnes, according to the World Gold Council (WGC).

Central banks bought 80.8 tonnes of gold in the first quarter, adding to 2011 purchase of more than 450 tonnes, the
WGC said. In recent months, a number of countries including Russia and Kazakhstan also increased their gold reserves, data
from the International Monetary Fund showed. 
"We have been of the view that we would increasingly see more diversification of reserves and investments into gold,"
said Chirag Mehta, gold fund manager at Quantum Mutual Fund in Mumbai, India. "This trend is likely to continue".

Goldman Sachs: The Fed is about to restart the money pump

June 20, 2012

Goldman Sachs is a lot of things to a lot of people. The Wall Street firm is certainly not without controversy.

But one thing critics and fans alike will admit about Goldman Sachs is that the firm has insider knowledge of the Federal Reserve. That’s because for years there has been a revolving door between Goldman Sachs and the Treasury Department.

Employees go back and forth between the Wall Street firm and government service at the Treasury Department in general and the Federal Reserve in particular.

That’s why when Goldman Sachs makes a statement about Federal Reserve monetary policy, investors need to listen carefully.

This week Goldman Sachs has issued an advisory forecasting that the Federal Reserve will soon resume an accommodative monetary policy designed to spur economic activity. The method Goldman Sachs says the Fed will use to do this will be to go out in the open market and buy US Treasuries as well as US mortgage-backed securities, such as bonds issues by GNMA, FNMA and Freddie Mac.

The idea is to inject cash into the economy and attempt to keep interest rates on Treasury and mortgage-backed issues down.

It is a theory that looks good on paper, but one which has not really worked all that well in practice. The Fed has been priming its money pump over and over for some time now and yet the US economy has remained anemic.

These types of monetary policy moves are much more likely to undermine the value of the US dollar and create new bubbles than they are to actually stimulate real economic activity.

The world is already awash in dollars. Adding more dollars at this point should meet squarely with the law of diminishing returns. All injecting more dollars into the system will do at this point is further undermine the value of the existing dollars.

It is simple supply and demand at work. If the supply of an item is increased with no corresponding increase in demand for that item, the value of that item falls.

And make no mistake, there is no increasing demand for dollars. If there was, the Fed wouldn’t have to go out on the open market and buy US Treasuries in the first place. If demand for US Treasuries was already robust, the Fed would be seeking other means to stimulate economic activity.

No doubt the markets will cheer this move by the Fed because more money swashing around in the system over the short term means more money available to invest in the stock market. And low interest rates on Treasuries means that there is less competition for those stocks from what were formerly thought of as “risk-free” government bonds. (Is it any wonder why S&P downgraded the USA‘s credit rating 10 months ago?)

But the real play here is gold. Because gold will not only benefit from the low interest rate policies over the short-term, but, unlike stocks, will also benefit from the undermining of our dollar over the long-term.

Gold serves as a counterweight to the US dollar because the US dollar is the world’s reserve currency of choice and also because gold is priced in dollars. Any decrease in the value of the dollar is usually met with an increase in the price of gold.

This week, at least according to Goldman Sachs, the Federal Reserve is planting the seeds for rising gold prices down the road.

Get your gold now while the price is still low.