November 27, 2022

The Hard Facts About Gold, the Fed, and the U.S. Government

gold & barLet’s back away from the “smaller” questions like:

  • Will the Fed taper or not?
  • Is Obamacare a disaster or just a huge problem?
  • Is the S&P 500 index due for a correction?
  • Is the U.S. economy improving?
  • Why is most of the rest of the world angry with the U.S.?
  • If inflation is so low, why are my expenses increasing so rapidly?
  • Is the NSA spying on everyone’s cell phone and computer?

Let’s look at the really big picture!

  • The Fed wants higher stock prices. The Fed serves the needs of the wealthy and the wealthy have a large chunk of their wealth invested in stocks.
  • The Fed wants low interest rates, which keep bond prices high, because the wealthy are heavily invested in bonds.
  • The Fed and the U.S. government need low interest rates so the U.S. government’s debt service costs remain low, real estate is attractive, credit is inexpensive, and investors are forced to reach for yield, buy stocks, and maintain the bond and dollar bubbles.
  • The U.S. government wants to spend money, lots of money, and avoid the consequences. Congress lives to buy votes, increase their power, and collect “contributions.” Lobbyists want a piece of the action for themselves. Corporations want to “influence” legislation to increase their profits. Business as usual. Spend. Spend. Spend!
  • Central banks, especially the Fed, and western governments want lower gold prices, so their unbacked paper money still appears valuable, so the U.S. dollar retains relative value against other currencies, and so the world will continue sending goods and commodities to the U.S. in exchange for paper dollars and T-bonds.

Can the Fed and the U.S. government manage the markets to achieve low interest rates, higher stocks, low inflation, low gold prices, and a strong dollar, all while spending much more than revenues support and thereby running the national debt up to insane levels? My assessment is NO!

What does the data indicate?

  1. Assume that the world changed around the 9th month of 2001. Stocks had peaked and crashed, the Twin Towers came down, government expanded, and the U.S. declared a War on Terror. There were bubbles to be inflated, massive debts to be incurred, no-bid contracts to be awarded, huge profits to be generated, and stories to tell.
  2. Assume that the spending, increasing debt, bubble blowing, and military-industrial profit generating machine have been operating more intensely since 2001.
  3. Assume that “this time is NOT different” and that our current fiscal and monetary trends will continue for several more years.

Gold and the S&P 500 Index

american-gold-eagle

Graph 1 shows 25 years of the smoothed* monthly price of gold divided by the smoothed value of the S&P 500 index. The ratio went down from the 1980s to about 2001 and rose thereafter. Until 2001 investors wanted financial assets more than real assets like gold and silver. Since then the price of gold has risen more rapidly than the S&P 500 index. The Fed wants the S&P to keep rising and so we should expect QE will continue in the hope that it will levitate the stock markets. Unless this time is different, gold will continue to rise.

Gold and the National Debt

Graph 2 shows 25 years of the smoothed* monthly price of gold divided by the official national debt in tens of $Billions. The ratio went down from the 1980s to about 2001 and then started rising. Even though debt has been increasing rapidly since 9-11, the price of gold has increased even more rapidly since its bear market lows in 1999/2001. Knowing that politicians, corporations, and banks need the spending and debt to continue increasing, we should expect massive deficits and ever-increasing national debt – growing about 10 – 12% per year. Unless this time is different, gold will also continue to rise.

Gold and the Dollar Index

Graph 3 shows 25 years of the dollar index multiplied by smoothed monthly gold prices. In broad terms a higher dollar usually goes with lower gold prices (when priced in dollars) and vice-versa. The product removes most of the currency variation and shows the big picture trend for gold. Since about 2001 the trend has been upward. Unless this time is different, gold will continue to rise.

The Fed has incentive to continue QE – to levitate the stock and bond markets and keep interest rates low. But QE will eventually weaken the dollar with excess supply, reduced demand and reduced value. Expect gold to rise in price.

The politicians want to spend money, lots of money, and will borrow and print until they can’t. The national debt and the price of gold will increase.

Summary

Unless the financial world has materially changed, we can expect that an increasing S&P index will correlate with higher gold prices, and an increasing national debt will correlate with higher gold prices. Similarly, continued QE will correlate with a lower dollar and higher gold prices.

They say “don’t fight the Fed” and “don’t fight the administration.” Even if it looks like a train wreck during amateur hour, the incentives motivating both the Fed and the government all align with higher gold prices.

Maybe the Fed and the politicians can’t get everything they want, but we expect they will be happy with strong bond prices, higher stock prices, and more spending. Those conditions will co-exist with higher gold prices. Consequently we expect the Fed and the politicians understand that the price of gold must go much higher. Sacrifices, such as higher gold prices, must be made to maintain the “full steam ahead” status of our national train wreck in progress – deficit spending, ever-increasing debt, QE-forever, more wars and currency debasement.

Do you own a sufficient quantity of physical gold and silver?

More Thoughts:
Created Currencies…Are NOT GOLD

GE Christenson
aka Deviant Investor

U.S. Mint Gold Coin Sales Soar 273% in October

gold-bullionAlthough sales totals vary from month to month, annual sales of the U.S. Mint American Eagle gold bullion coins are running at triple the levels prior to 2008 when the wheels came off the world financial system and central banks began an orgy of money printing.

From 2000 to 2007 the average yearly purchases of the American Eagle gold bullion coins totaled 341,500 ounces per year.  From 2008 to 2013 annual purchases of the gold coins have spiked by 300% to an average annual rate of 1,011,000 ounces.

After lackluster sales of gold coins in the slow months of August and September sales soared in October as investor demand for physical gold surged.  Total sales of the American Eagle gold coins for October 2013 came in at 48,500 ounces, an increase of 273% over the September total of 13,000 ounces.   October sales of gold bullion coins for the comparable prior year period totaled 59,000.

The U.S. Mint American Eagle gold bullion coins remain the premier method of building wealth through periodic purchases.  The American public can’t seem to get enough of the bullion coins and the desperate actions of global central banks to keep the financial system afloat with a deluge of paper money can only cause more financial anxiety and more gold purchases going forward.

2013 sales through October 2013

With two months still remaining in 2013, investors have already purchased almost the same amount of gold bullion coins that were sold for all of 2012.   Year to date sales of the American Eagle through October total 752,500 ounces compared to 753,000 ounces for all of 2012.

 

Gold Bullion U.S. Mint Sales Since 2000
         Year                           Total Ounces
2000 164,500
2001 325,000
2002 315,000
2003 484,500
2004 536,000
2005 449,000
2006 261,000
2007 198,500
2008 860,500
2009 1,435,000
2010 1,220,500
2011 1,000,000
2012 753,000
2013 752,500
 TOTAL                               8,755,000
(above 2013 totals through October 2013)

The American Eagle gold bullion coins cannot be purchased by individuals directly from the U.S Mint.  The coins are sold only to the Mint’s network of authorized purchasers who buy the coins in bulk based on the market value of gold and a markup by the U.S. Mint.  The authorized purchasers sell the gold coins to coin dealers, other bullion dealers and the public.  The Mint’s rationale for using authorized purchasers is that this method makes the coins widely available to the public with reasonable transaction costs.

gold-buffalo

The public is allowed to purchases numismatic versions of gold coins directly from the U.S. Mint.   One of the most popular numismatic gold coins is the American Buffalo, available in both one ounce gold reverse proof and one ounce gold proof.

Gold’s Bad Luck With the Number 13

red deerGold has been on a rampage since the early 2000’s with yearly gains for 12 years in a row. Nothing lasts forever and the number 13 is starting to look very unlucky for gold. Barring a major upset in the world financial system, it looks increasing likely that gold will decline in the 13th year of its long rally in the year 2013.

Bloomberg’s Julie Hyman and Michael Purves, chief global strategist at Weeden & Co. take an interesting look at the factors impacting gold prices on Bloomberg Television.

Mr. Purves notes that the “flash crash” of gold in April correlated to a stronger dollar in the first half.  The strong dollar in the first half of the year has reversed and we have seen a weaker dollar so far in the second half of the year with a rebound and stabilization in gold prices.

Further evidence of healthy consolidation in gold prices can be seen by gold’s refusal to break to new lows as was widely predicted by consensus analysts.  Mr. Purves expects that the current consolidation in gold prices is building a base for a future advance.  As to the impact of a more restrained Federal Reserve monetary policy, Mr. Purves expects any tapering to be “measured and conditional.”

A strategy recommended by Mr. Purves to take advantage of expected continued volatility in gold prices is the option strategy of selling a November 127 put on the GLD and buying the 133 call.

The consensus opinion for gold remains one of bearishness or guarded optimism – and everyone knows that when the crowd is leaning in one direction, don’t be surprised if the consensus turns out to be wrong.

Courtesy: kitco.com

Courtesy: kitco.com

Marc Faber’s Surprising Gold Forecast

remembranceIn an interview with Barron’s, Marc Faber, editor of The Gloom, Boom & Doom report gives his take on where the gold market is headed and why certain investments related to gold might be very risky.

Marc Faber, never at a loss for a good soundbite, says gold is “in a correction mode” but seemed at a loss to explain why gold has dropped by over $400 per ounce over the past two years.

Faber talks about the paradox of weak physical gold prices even as demand for physical gold remains robust.  Although gold has declined in price and commentary on the gold market is extremely bearish, Faber notes that countries such as China is buying 2,600 tons of gold per year “which exceeds annual production.”  The gold market is currently in a “bottoming out process” and gold will see higher prices in the future according to Faber.

Courtesy: kitco.com

Courtesy: kitco.com

Many of the senior gold mining stocks represent good values but in a surprising comment Faber warns investors that many exploration companies “won’t make it so buy companies with cash reserves.”  Current gold prices mean that “few projects will get done.”  Faber’s bearish commentary on the smaller exploration companies seems to imply that he does not foresee a rapid short term recovery in the price of gold.

With central banks printing money at a rate that would have been unimaginable five years ago and huge demand for physical gold in Asia, the price of gold may recover to new highs faster than Faber expects.

Global Debt Bubble Will Push Gold and Silver Prices Higher

money printingBy: GE Christenson

To paraphrase William Shakespeare, “the debt ceiling drama is a tale told by idiots, full of sound and political fury, signifying nothing.” We now have a reprieve for three months – the 11th hour deal, complete with payoffs and the usual corruption, will keep the world safe for more ineptitude, deficit spending, administrative hypocrisy and the guarantee of a sequel. All is well! Celebration! Champagne! Cut to a prime-time commercial promoting big government and Obamacare…

And back in the real world where people work and support their families, life goes on, few noticed the lack of government “services,” and in three months we will be blessed with another episode of our “Congressional Reality Show.”

Gold, Silver, and National Debt

Examine the following graph. It is a graph of smoothed* annual gold and silver prices and the official U.S. national debt since 1971 when the dollar lost all gold backing and was “temporarily” allowed to float against all other unbacked debt based currencies. All values start at 1.0 in 1971.

The legend does not show which line represents gold, silver, or the national debt. Why? Because it hardly matters! Government spends too much money to perform a few essential services and to buy votes, wars, and welfare, and thereby increases its debt almost every year, while gold and silver prices, on average, match the increases in accumulated national debt.

Our 435 representatives, 100 senators, and the administration listened to their corporate backers and chose to increase the debt ceiling, continue spending as usual, not “rock the boat,” and carry on with the serious business of politics and payoffs for another three months. It is safe to say that, on average, gold and silver will continue rising, along with the national debt, as they all have for the past 42 years. Further, like the national debt, both gold and silver (and probably most consumer prices) will increase substantially from here, until some traumatic “reset” occurs. What sort of reset?

  • A “black swan” event that is unpredictable, by definition.
  • Middle East war escalation.
  • Derivative melt-down.
  • A dollar collapse when foreigners say “enough” to the dollar debasement policies pursued by the Fed and the US government.
  • A collapse of the Euro or Yen for any number of reasons.
  • A banker admits that most of the official gold supposedly held in New York, London, and Fort Knox is gone and has been sold to China, India, and Russia.
  • You name the false flag operation.

My guess: Gold and silver prices will rise gradually for a while, and then quite rapidly after one of the above “financial icebergs” smashes into our “Titanic” world monetary system. Further, we will have difficulty locating physical gold available for sale after such an event occurs, even at much higher prices. Now would be a good time to purchase physical gold and silver for storage in a secure storage facility. Paper gold will not be safe…

Congress has acted. The President has spoken. The Federal Reserve will continue “printing” dollars to increase banker profitability, fund the government, and fight the forces of deflation. This is business as usual – as it has been for the past 42 years.

Here is the second version of the graph with gold, silver, and national debt labeled. Note how relatively undervalued silver is at the present time! Dashed lines indicate guesses for the future normalized values for gold, silver, and the national debt.

The debt ceiling drama and “Congressional Reality Show” will return to prime time in January and February, right after “Dancing with the Senators” and just before “House Wives of Salt Lake City.” Expect sound and fury signifying nothing.

Further commentary on the case for gold and silver:

The Reality of Gold and the Nightmare of Paper Silver: The Noise is Deafening
GE Christenson
aka Deviant Investor

* Gold and silver prices were smoothed by taking monthly closing prices and a 24 month simple moving average. Annual prices graphed are the average of the 12 average monthly prices per year.

In Four Years the Amount of Money Printed By the Fed Will Exceed the Value of All Gold Ever Mined

paper moneyMost people can’t begin to comprehend how much a trillion dollars is.

Try asking someone how much $1,000,000,000,000 (one trillion) is and you are likely to get a blank stare.

To put things into perspective, when the government spends one trillion dollars and pays for it with taxes, the government would have to seize the entire wealth of one million millionaires.  Since the government would very soon run out of millionaires, government spending has become largely financed through borrowings and printed money.

Money printing or QE as the Fed likes to call it has reached levels that bring back visions of the Weimar Republic and unlike the average citizen, the Fed has no problem dealing with dollars in the trillions.

Money printing by the Federal Reserve has gotten so out of hand that within four short years (probably less) the amount of dollars conjured out of thin air will exceed the value of all gold ever mined in human history.

The world’s entire gold stock is about 170,000 metric tons currently valued at about $7.7 trillion.  The Fed is currently holding $3.7 trillion of securities purchased with printed money and the run rate of $85 billion per month weighs in at another $1.02 trillion dollars per year.  If the economy tanks, expect the monthly money printing to really ramp up.

gold-demandFed’s money printing to date stands at $3.7 trillion.  Another four years of money printing at the current rate would pile up another $4.1 trillion for a total of $7.8 trillion printed dollars compared to the value of all gold at $7.7 trillion.

When all of this starts to sink into the public consciousness, the safe bet is that people will start to avoid dollars (which the Fed is manufacturing in almost unlimited quantities) and turn to gold which has been used as a currency and store of value since the dawn of human history.  Another safe bet is to ignore short term price corrections in gold and use the opportunity to increase positions.

Physical Gold Bar and Coin Sales Soar 78% To All Time High

1988-olympic-goldPurchases of physical gold have been hitting new all time records.  Demand has been fueled by the recent pullback in gold prices and the massive amount of money printing being conducted by central banks in Europe, Japan and the United States.  The recent decision by the Federal Reserve to postpone any curtailment of its $85 billion per month of money printing could mark the end of the correction in gold and silver.  The Fed’s refusal to reduce the ongoing program of securities purchases signals that QE has morphed from an emergency measure to a permanent Fed policy.

The demand for gold has been particularly intense in Asia as Thai Gold Buyer Doubles Imports After Bear Slump.

YLG Bullion International, Thailand’s biggest domestic gold importer, expects to more than double purchases this year after the bear market in prices spurred a surge in demand for physical metal.

The company may import as much as 200 metric tons in 2013, from 92 tons last year, Chief Executive Officer Pawan Nawawattanasub said in an interview yesterday. First-half shipments advanced to 112 tons, accounting for 60 percent of the country’s total, she said. A ton is valued at $42.6 million.

Gold tumbled 21 percent this year, heading for the first annual retreat since 2000, as some investors lost faith in the metal as a store of wealth. With prices now 32 percent below the record reached in September 2011, the rout is boosting demand for bullion bars and coins, global sales of which surged 78 percent to an all-time high in the second quarter, according to the London-based World Gold Council.

“Cheaper prices are attracting customers to buy bullion bars as they see it as money better spent than on something like a Hermes bag,” said Pawan, whose Bangkok-based company supplies retailers and investors in Southeast Asia’s second-biggest economy. “Demand in Thailand can continue to grow, partly because collecting gold is in our culture.”

Golden Buddha of Bangkok, World’s Largest Gold Statue -estimated gold value $250 million

Gold demand in Thailand is exceeded only by China and India.  Total gold demand in China and India in the form of jewelry, bars and coins is expected to reach 1,000 tons this year and gold demand in Thailand should reach 200 tons.  Total Asian gold demand from China, India and Thailand could amount to half of total world gold production of approximately 2,400 tons in 2013.

Even more astonishing is the fact that the entire world’s production of gold this year will be purchased by only three sources.  According to King World News, total gold buying by central banks, China and India is “almost equivalent to the annualized gold production of the entire world.”  It is only  a matter of time before a shortage of physical gold based on huge demand results in significantly higher prices.

Gold and Silver Soar As Fed Rejects Tapering and Revs Up The Printing Presses

Physical-GoldThe months long guessing game on whether or not the Fed would start tapering its $85 billion per month of treasuries and mortgage securities came to a conclusion today as the Fed promised to keep the printing presses going full blast.

Many analysts had come to the conclusion that the economy had strengthened enough for the Fed to begin reducing monetary stimulus but they were wrong as Fed, in Surprise Move, Leaves Bond-Buying Intact.

The Federal Reserve postponed any retreat from its long-running stimulus campaign Wednesday, saying that it would continue to buy $85 billion a month in bonds to encourage job creation and economic growth.

As Congressional Republicans and the White House hurtle toward another showdown over federal spending, the Fed said it was concerned that fiscal policy once again “is restraining economic growth,” threatening to undermine what the Fed had described just months ago as a recovery gaining strength.

Proponents of aggressive asset purchases, including Mr. Bernanke, also face mounting pressure from internal critics who argue that the modest benefits of bond-buying are increasingly outweighed by the risk that the Fed is encouraging excessive speculation or interfering with normal market function.

Some critics inside and outside the Fed have even begun to argue that the central bank’s bond-buying is preventing a return to normalcy.

“The economy is positioned to benefit from modestly higher longer-term interest rates,” Ms. George said earlier this month. She noted that higher rates could increase the income of retirees and bolster bank profits without a commensurate increase in risk-taking.

Despite the growing criticism of his securities purchase program the Fed decided that the time was not yet right for reducing the one trillion dollar securities purchase program which is financed by the Fed’s money presses.  According to the FRB press release:

Taking into account the extent of federal fiscal retrenchment, the Committee sees the improvement in economic activity and labor market conditions since it began its asset purchase program a year ago as consistent with growing underlying strength in the broader economy. However, the Committee decided to await more evidence that progress will be sustained before adjusting the pace of its purchases. Accordingly, the Committee decided to continue purchasing additional agency mortgage-backed securities at a pace of $40 billion per month and longer-term Treasury securities at a pace of $45 billion per month.

The Fed has already blown up its balance sheet to $4 trillion and the federal government has almost tripled its debt load to $17 trillion from $6 trillion in 2002.  After this massive stimulus of $15 trillion into the economy, the Fed now tells us that more is needed.

US Debt

Today’s actions tell us that the Fed will never find an opportune time to reduce its money creation and the gold  and silver markets reacted accordingly.  After the Fed’s announcement gold skyrocketed by over $50 per ounce and silver shot up by almost $1.50 per ounce.

The reasons for holding gold and silver have never been stronger despite the recent pullback in prices and today’s announcement by the Fed serves to further prove this assertion.

gold soars

silver soars

Does The Decline In Gold Signal An Imminent Financial Collapse?

GOLD COINBy: GE Christenson

Unsustainable trends can survive much longer than most people anticipate, but they do end when their “time is up” – at the culmination of their time cycles. Examples of these trends include deficit spending, exponential debt increases, overpriced bond markets, and unbacked paper currencies, to name a few. For perspective on how and when these trends could change direction, we analyzed more than 20 different cycles. They nearly unanimously point to tectonic shifts in the months and years ahead. We have been warned!

At this point, we have enough confirmation to accept that the precious metals crash – starting in April of 2013 – was the first warning of what is coming globally.

Financial crashes and economic collapses are not inevitable, but they seem more likely in the next few years, starting later this summer. Preparation might appear to be a waste of time and resources, but lack of preparation could result in the loss of wealth, incomes, jobs, and lives. Perhaps our leaders will guide the world economies through some upcoming hard times, but they might also aggravate those hard times by following policies that benefit the political and financial elite at the expense of the middle class and the poorer classes. Look at current trends in government and banking, and decide for yourself!

The remainder of this decade is likely to be quite problematic for most of the world’s population, particularly the poor. People who have the majority of their assets in stocks, bonds, and paper debt may also be hurt as the currencies are inflated and purchasing power declines sharply.

We have presented a summary of cycles for stocks and bonds, war, gold and silver. We show the source of the cyclic information, the relevant timing, and some commentary.

Summary

There are many cycles that suggest a stock market correction or crash is near. That correction/crash will probably be accompanied by a correction in the bond market that reverses much of the bullish action of the past 30 years. (Signs of a bond bear market are already visible.) Gold and silver should rally substantially as their cycles are turning up while money flees the stock and bond markets and attempts to find safety in an increasingly dangerous world. Financially and socially, many cycles have turned downward; and many will not bottom until later in this decade. Much can go badly wrong during the next seven years. Now is NOT the time for complacency or procrastination.

Along with the decline in equities, bonds, and the value of paper money will come – probably – more social unrest, considerably higher consumer prices for food and energy, bankrupt local, state and national governments, more debt defaults, higher unemployment, possible monetary and/or economic collapse, and a likely escalation in regional and global wars.

A gradual cooling (NOT warming) will reduce crop yields and drive already expensive food prices much higher. The world’s poor will suffer. Hungry people are inclined to rebel and threaten governments. Hence governments will become more repressive and will increase their information gathering on all those viewed as potentially threatening to the status quo.

(Read entire article here.)

GE Christenson

aka Deviant Investor

Will John Paulson Cut His Losses On Gold?

gold1Hedge fund investor John Paulson, who made billions shorting mortgage securities ahead of the financial crash, lost 13% on his gold holdings in May after taking a blood bath in April. 

Billionaire John Paulson, the hedge-fund manager trying to recover from losses related to bullion this year, posted a 13 percent decline in his Gold Fund last month, according to a letter to investors.

The drop brings losses in the strategy to 54 percent since the start of the year, the firm said in the letter, a copy of which was obtained by Bloomberg News. The Gold Fund is the smallest strategy of the $19 billion money manager, with about $360 million, or 2 percent of assets, most of it Paulson’s own money.

Gold fell 5.4 percent and gold equities declined 3 percent in May on speculation the Federal Reserve will scale back its bond purchases, reducing the attractiveness of bullion and related securities as a hedge against inflation.

Paulson holds most of his massive gold positions in the SPDR Gold Trust (GLD) and had increased his position in mid 2012, bringing his total holdings to 21.8 million shares.  The  April 2013 gold crash resulted in losses on Paulson’s gold positions of over $600 million.   Even as other large hedge fund traders such as George Soros  liquidated large gold positions, Paulson remained committed to his gold positions and has told investors to remain invested in gold since current valuations provide a “significant upside.”

At December 31, 2012, Paulson’s position of 21.8 million shares in the GLD was valued at $3.4 billion.  Based on yesterday’s closing price of $133.25, the value of Paulson’s GLD shares would be worth $2.9 billion for a decline of $500 million, a serious loss even for a billionaire.

Seasoned stock traders know that “cutting your losses short”  is the most important rule of investing and often the toughest rule to follow.  Does Paulson know something about the gold market that no one else knows or will he wind up closing his gold positions to avoid further losses?   Since Paulson is the largest investor in the SPDR Gold Trust with an ownership position of 6.5%, liquidation of such a large position is almost certain to put additional downward pressure on the price of gold.

Maybe gold investors should hope that Paulson dumps his entire position in the SPDR Gold Trust.  Even brilliant investors like John Paulson can pull the trigger at exactly the wrong time.  After holding a massive position in both Bank of America and Citigroup for almost two years, Paulson liquidate his entire position in the stocks at the end of 2011 right before both stocks soared.  Since the end of 2011 Bank of America is up almost 300% and Citigroup is up around 100%.  Bottoms are made when the last seller capitulates.  Since gold is incredibly oversold at this point, a Paulson capitulation could be the trigger for an explosive move up in the SPDR Gold Trust.

gld

Courtesy yahoo finance