May 28, 2022

Gold’s Next Big Move Is Up – Every Bull Market Has Pullbacks

gold generalBy: GE Christenson

Gold peaked in August of 2011 and fell erratically into December 2013.

Was that the end of the collapse, or is there more downside coming in gold prices?

Bearish Scenario: Listen to the banks who are forecasting weak prices in 2014 and thereafter. “Nothing to see here folks, the dollar has weakened drastically since 1971, gold sells for 30 times its 1971 price, but it’s all good. Just move on and pretend… Gold will drop below $1000 before you can say 2016 elections…”

I’m not a fan of:

The bearish gold scenario when decades of Federal Reserve “printing” and US government budget deficits have all but guaranteed continued destruction of the purchasing power of the dollar.

Belief that even though dollar debasement practices have accelerated since the 2008 crash, gold prices will fall because bankers say so.

Propaganda that gold is useless and that unbacked debt based fiat currencies are solid and stable.

Large High Frequency Trading companies that short the gold market, loudly proclaim that gold prices will fall, dump a huge number of paper contracts on the Comex, quietly cover their shorts after the gold price crash, book huge profits, and then reverse the process as they push prices up. These traders are in the business of making profits so none of this is surprising.

Instead of listening to self-serving banker opinions, let’s examine the data. The following chart shows monthly prices for gold since 2000. Note that highs and lows as listed in the monthly data are slightly different from actual hourly highs and lows. For this analysis over 14 years, the differences are immaterial.

This table shows the price and approximate number of years.

table3102014

Summary: The price of gold bottomed in 2001, rallied for 3.0 years, fell for 1.1 years, rallied for 2.8 years, fell for 0.6 years, rallied for 2.8 years, and fell for 2.4 years. Lows were about 4 years apart, highs were about 3.5 years apart, and the rallies lasted, on average, about 3 years.

Gold in December of 2013 had dropped to the lower logarithmic
trend line after falling for 2.4 years. The patterns suggest that the next move should be a rally that lasts approximately 3 years to new highs near the top of the trend channel well above $3,500.

roosevelt

But there is more: (If you distrust Technical Analysis, skip this section.)

  • Gold prices made a double-bottom in June and December 2013 thereby indicating a successful test of the lows formed in June.
  • The MACD – a technical indicator (first chart) which tracks the difference between two moving averages – registered a very low reading in December 2013. Further, the moving averages in the indicator have turned up. This is strongly supportive of the analysis that December marked a major low in gold prices.
  • The TDI-Trade-Signal line – another technical indicator (first chart) – registered its lowest reading in 15 years at the June 2013 low and has also turned up. This is another strong indication that gold bottomed in December.
  • The RSI – Relative Strength Index – as shown on the second chart was at a 15 year low at the June 2013 gold price lows. It has turned upward.
  • The disparity index, which is simply the deviation between the monthly prices and the 12 month simple moving average (second chart), was at a 30 year low and flashing a buy signal after the June 2013 gold price lows.

For those who have no faith in technical analysis:

Consider this GEM – Gold Equilibrium Model (thanks to Nick Migliaccio for the name). I summarized the model in this short article. The model is based on three variables and calculates the equilibrium gold price with no reference to oscillators or technical indicators. The GEM model projects a “fair” or equilibrium price for gold in March 2014 of approximately $1,580. Gold prices, based on this long-term model, are currently low and are likely to move much higher over the next several years. This long-term model produced an excellent statistical correlation with the smoothed price of gold over the 42 years from 1971 – 2013.

Conclusions

  • The GEM indicates that, over the next several years, gold prices are headed much higher.
  • The chart of gold prices since the year 2000 (log scale) shows a “megaphone pattern” of higher lows and higher highs. Currently the gold price is near the bottom of the exponentially up-trending pattern.
  • Technical oscillators indicate important bottoms in June and December – at levels not seen in more than a decade.
  • The disparity index shows that gold prices in June were well below the 12 month moving average. Similarly daily and weekly prices were well below their moving averages. Prices tend to regress to the mean – another indication that prices are likely to rise from the deep lows in June and December.
  • Short term prices could rise or fall a little from here – I’m offering no opinion – but gold prices should be much higher in 2015 and 2016.
  • Gold is for savings and investing, not trading. Dollars buy groceries while gold buys safety, insurance, and peace of mind.
  • As Darryl Robert Schoon always says, “Buy gold, buy silver, have faith.” It is good advice.

GE Christenson, aka Deviant Investor

Gold Bear Forecasts $500 Price Plunge Even as Gold Prices Climb

Physical-GoldWhen gold was hitting new highs during 2011 the mainstream media was full of articles with “experts” predicting further price gains but the exact opposite happened.

As speculators, short term traders, and price manipulators  took the price of gold down by over $600 an ounce the experts switched their tune and the chorus of gold bears grew steadily.  By the end of 2013 when declining prices had shaken out all the weak hands in the gold market and all the experts were bearish, prices had nowhere to go but up.

With the start of the new year gold ignored the bears and has been on a tear in 2014.  Two months into the new year with gold bullion and gold stocks far outpacing the gains in stocks and bonds, the “experts” still insist that it’s time to bail out of gold before prices collapse.

Gold vs stocks and bonds

Courtesy: yahoo finance

The Top Two Gold Forecasters selected by Bloomberg remain steadfast in their views that gold is undergoing a dead cat bounce that will soon run out of steam.

“I just see this as a corrective move,” said Robin Bhar, the head of metals research at Societe Generale SA in London and the most-accurate forecaster tracked by Bloomberg in the past two years. “We would still want to be bearish gold,” said Bhar, who expects a fourth-quarter average of $1,050.

“Haven demand plays well when gold is cheap, but it’s no longer cheap,” said Justin Smirk, a senior economist in Sydney at Westpac Banking Corp. and the second most-accurate forecaster tracked by Bloomberg in the past two years. “I’m a little surprised by the volatility in the market, but it really doesn’t change my overall view,” said Smirk, who expects a slide through the year to a fourth-quarter average of $1,020.

Barron’s took note this week of The Gold Rally’s Fatal Flaws forecasting that a tighter Fed policy, low inflation along with an easing of investment demand from China and India will send gold prices lower.

Another concern is that gold prices are already up so much that investors in China and India are suffering sticker shock. The two nations together account for roughly half of the world’s gold demand, buying gold gifts to celebrate weddings, birthdays, and religious festivals. These regular purchases help create a floor for the market and were instrumental in stemming the violent sell-offs that gold suffered last year.

BUT WHILE SOME Indian and Chinese buyers felt they were getting gold on sale in December, when prices dipped below $1,200 an ounce, this is no longer the case. “For gold, physical demand keeps slipping as the price moves up,” says Walter de Wet, head of commodity strategy at Standard Bank.

Even more bearish was commentary by respected analyst Mark Hulbert who notes that the sentiment among short term gold market timers has soared to the bullish side in the past month, typically a contrary bearish omen.

Even more wildly bearish is Claude Erb, a professor at Duke University interviewed by Hulbert who is forecasting a major crash in the price of gold.

 

Erb, along with Duke University finance professor Campbell Harvey, was the co-author of a January 2013 study published by the National Bureau of Economic Research — which I featured in a February 2013 column for Barron’s on the price of gold. The study suggested that gold remained significantly overvalued, even though its bear market at that point was already 16 months old. By the end of the year gold had shed nearly $500 an ounce.

Unfortunately for the gold bulls, Erb’s and Harvey’s study suggests gold is still overvalued. One valuation indicator they point to is equivalent to a stock’s price/earnings ratio: It is the ratio of gold’s price to the Consumer Price Index. According to their calculations, and given the historical average level for this gold/CPI ratio and where the CPI index currently stands, gold’s “fair value” today is around $820 an ounce — about $500 lower than where it now trades.

The reasons articulated above for being bearish on gold and silver have already been well advertised and discounted by the markets which is probably why gold and silver have been soaring this year.  It wouldn’t be surprising if the “experts” are wrong and gold and silver turn out to be the best place to keep your money this year.

The Ultimate Irony – Gold Bullion Is a Poor Investment According to “Too Big To Fail Banks”

coinAnalysts at the “Too Big To Fail” banks are unanimously predicting lower gold prices and telling their clients to dump gold.

On January 12, 2013 Goldman Sachs predicted that gold could fall to as low as $1,000 this year due to a less expansive monetary policy by the Federal Reserve.

In a report to clients this week Morgan Stanley analysts cut their price targets on gold for both 2014 and 2015 citing a strong global economy, rising interest rates and a reduced need for safe haven assets.

Not wanting to miss out on the “gold is dead party” Wells Fargo chimed in this week with their opinion that investors should eliminate their gold exposure on any rallies.

banks gone wild

The irony of the herd mentality on gold by the Too Big To Fail banks is beyond incredible.  Yes, these are the same “Too Big To Fail” banks who were selling billions of A rated mortgage backed securities to clients in 2007 that suddenly all defaulted in 2008.  Cynical types who remember the financial meltdown in housing of a few years back may also recall that the same banks now advising clients to dump gold were telling home buyers with shit credit and no income that, yes, you can afford that $800,000 house.

The big banks analysts seem to be engaging in a major group think exercise that justifies their dire predictions for future gold prices based on nothing more than an extrapolation of the gold price over the past two years.  We won’t even get into the part about how everyone at the big banks that almost blew up the financial world wound up getting bonuses instead of jail terms.

bankers

In any event there are many people who are ignoring the sage advice of the “Too Big To Fail” banks and buying gold anyways.

Japanese investors, who are growing increasingly alarmed by the concerted efforts of Prime Minister Abe to put Japan back on the “right track” by creating inflation with printing press money, are buying gold at a frenetic pace.

Gold sales by Japan’s biggest bullion retailer surged 63 percent to a five-year high as prices slumped and investors sought refuge from Prime Minister ShinzoAbe’s campaign to stoke inflation and weaken the yen.

Sales of bars to local investors by Tanaka Kikinzoku Kogyo K.K. soared to 37.3 metric tons in 2013, from 22.9 tons a year earlier, the Tokyo-based company said in a statement today. Sales exceeded purchases for the first time since 2004.

Demand for physical gold in China is also exploding as investors seek a safe haven asset that cannot be produced in infinite supply by the central banks of over indebted nations.

Increased demand in China, which probably overtook India as the world’s largest consumer last year, helped gold rebound from a six-month low of $1,182.52 on Dec. 31. China imported 1,017 tons of gold from Hong Kong in the first 11 months of 2013, almost double 2012’s total, Hong Kong government data show.

With the universally bearish outlook for gold by big money managers don’t be surprised if gold outperforms all other assets classes in 2014.

14 Tough Questions Gold Investors Have for the Federal Reserve

Liberty-EagleBy: GE Christenson

“Those who cannot remember the past, are condemned to repeat it.” George Santayana.

1. What mistakes from the past are we condemned to repeat?

2. Since unbacked paper currency systems have always failed in the past, why have bankers and economists promoted an unbacked paper currency system since 1971?

3. Would the Federal Reserve, which is owned by private banks, seek to enrich its member banks and the financial elite by implementing monetary policies such as QE that purchase distressed bank assets and boost the stock and bond markets?

4. Janet Yellen is the new leader of the Fed and new leaders are almost always confronted with a financial crisis early in their term. What should we expect during the next 18 months?

economic collapse

5. ALL paper money systems have eventually failed due to excessive “printing” of the paper currency. How many years of “printing” $85 Billion per month qualifies as excessive “printing”?

6. Human nature changes very slowly if at all. Politicians have lied to most of the people most of the time during the past several thousand years to serve their own self-interest. Are politicians currently lying about ObamaCare, strength of the economy, employment, the NSA, big banks, the IRS, Syria, and so much more?

7. Why does gasoline currently sell for approximately $3.50 per gallon even though it cost only $0.15 per gallon about 50 years ago? Why does a cup of restaurant coffee no longer sell for $0.10? Why do $20 gold coins containing nearly an ounce of gold now sell for over $1,250?

8. The S&P 500 Index is trading near an all-time high and is by most measures and sentiment severely over-bought on a weekly and monthly basis. Is it ready to correct downward?

9. Why is the official unemployment rate falling even though fewer Americans are working and the labor participation rate is at 30 year lows?

10. The Federal Reserve has been levitating the stock market and bailing out banks. Is it possible the Fed policies will backfire and those policies will eventually accomplish the opposite of what the Fed wants?

11. If the national debt of $17 Trillion can never be repaid, and if the U.S. government must borrow to pay the interest every year, and if the Federal Reserve must “print” those dollars, what is the real value of that debt? Is it $17 Trillion or perhaps a great deal less? The economist Hyman Minsky called this “Ponzi Finance” – the final stage of a debt based economic system when payments on the debt must be made from additional borrowing.

money printing

12. If a soaring gold price encouraged people to question the value of the U.S. dollar, and if the U.S. government had the means to suppress the price of gold, would the U.S. government manipulate the price of gold lower?

13. Germany requested their gold be returned from the NY Federal Reserve vaults about a year ago. It has NOT been returned. What happened to the German gold? Further, how much, if any, of the gold supposedly stored in Fort Knox is physically there and not “leased” or otherwise encumbered?

14. Gold has been money – a store of value, divisible, a medium of exchange, a unit of accounting, and intrinsically valuable – for 5,000 years. Paper money has usually been little more than a politician’s promise of integrity and responsibility. Which do you trust – gold or a politician’s promise?

These questions and their answers suggest that:

Drastic restructuring of the current monetary system seems inevitable, whether or not it is imminent.

Before the system resets it seems likely that governments around the world will scramble to locate and nationalize assets in order to maintain their power for a while longer. Capital controls and financial repression via artificially lowered interest rates are already in place. Pension plans, savings accounts, and IRA and 401(k) plans seem vulnerable to partial confiscation, bail-ins, or mandatory investment in government bonds. Such confiscations and bail-ins have already occurred in other parts of the world and could easily happen in the United States.

toned-morgan-dollar

Gold and silver have protected purchasing power and assets for 5,000 years. In this twilight period of the current debt based monetary system it seems likely gold and silver will increasingly be necessary for protection of purchasing power and assets. Are you prepared?

GE Christenson

aka Deviant Investor

U.S. Marches Down the Road to Financial Perdition – No One Cares Until It Matters

american-gold-eagleBy: GE Christenson

The reality is relatively simple even though the appearance is complicated and confusing. What are we talking about?

  • Wars that are hugely profitable for a few individuals and businesses
  • Unauditable Pentagon accounting
  • Government debt that will never be repaid
  • Levitation of S&P and bond markets
  • Gold price suppression
  • So much more

We all know “something is wrong” but we keep riding the same corrupt “gravy train” because it works for many powerful people. Consider the interlocking complicity involved in the following:

Iraq and Other Wars

The previous administration produced “evidence” that Iraq had weapons of mass destruction and then claimed it was necessary to invade Iraq, distribute oil contracts to American and British oil companies, initiate “no-bid” contracts to politically connected American military contractors, massively increase government debt, and create huge profits for selected companies and industries. Those profits flowed back to the financial elite, agreeable congressmen, others in government, and to many American workers.

Even though it is now generally agreed that Iraq had no weapons of mass destruction and no means of launching those non-existent weapons against the United States, a great many connected people and businesses benefited financially from the Iraq War. Interlocking complicity worked well to promote the war and to profit from it.

Pentagon Accounting

About 12 years ago, Secretary of Defense, Donald Rumsfeld revealed that $2.3 Trillion was “missing” from the Pentagon books. (“War Racket Update” by acting-man.com – site down temporarily)

“A number of knowledgeable observers admitted that the Pentagon’s ‘books are cooked’ and that in essence, a giant cover-up was going on. A mixture of waste and theft on a truly breathtaking scale was and still is underway.”

It has been my experience that bad or fraudulent accounting is enabled, encouraged, or actively created by management. We can safely assume that the many highly intelligent people who work at the Pentagon could more accurately and transparently manage their operations if they wanted to do so. Hence, fraud and theft exist because management wants it – many people benefit while accountability is neither encouraged nor beneficial to those who are actually in charge. The powers-that-be, congress, the administration, and military contractors are complicit in working the system so that all parties benefit, other people pay the costs, there is minimal accountability, and the necessary payoffs are made. Interlocking complicity works well for those in charge of Pentagon funds and for those receiving the funds.

money printing

Government Debt

Congress has not passed a budget in five years and has been deficit spending for decades. The shortfall between revenues and expenses is borrowed with the understanding that the debts will never be paid – just “rolled over.” The financial and political elite benefit, government pays out massive amounts for military contracts, health care, prescription drugs, retirement programs, Social Security payments, Medicare, unemployment, aid to states, and it goes on and on. That explains how the U.S. government is officially in debt over $17 Trillion and has accrued another $100 – $200 Trillion in liabilities that have been promised but are not currently funded. Since most Americans are benefitting from one or more of these government distributions, most Americans are complicit in this giant borrow, spend and print Ponzi scheme. Because so many people benefit, few individuals or businesses want the process materially changed. Of course many people talk about balancing the budget, cutting spending, and fiscal accountability, but it is only talk. Because Congress has been unable to pass a budget in five years and must borrow a $Trillion or so each year there will be no accountability or budget cutting anytime in the near future. Interlocking complicity rules while we ride the giant government gravy train.

mart1

QE and the Levitation of Stock and Bond Markets

Even a quick glance at the last five years of market prices shows that QE has been a huge benefit to the stock and bond markets and that much of the funny money being “created out of thin air” by the Fed finds its way into those markets. Hence the stock and bond markets have been levitated while “main street” and the bottom 90% (those who have little of their net worth in stocks and bonds) have derived minimal or no benefit from QE. However, most of us realize that the US government cannot limit spending to only the revenue it collects, and that QE greatly benefits the financial and political elite. Interlocking complicity dictates that QE will continue as long as possible, even though “printing money” and debasing the currency have never successfully worked throughout history.

mart2

Central Banks and Gold Price Suppression

Central Banks (Bank of England, Federal Reserve, ECB) have sold or “leased” gold into the market, via bullion banks, to suppress the price of gold and to promote the idea of Pound, Dollar and Euro strength. Since central banking rules allow them to claim that gold is still their asset, even though it is physically gone, this process can work until the central banks are unwilling or unable to sell or “lease” additional gold. The Chinese, Indians, and Russians have purchased the gold directly from bullion banks, or taken delivery on futures contracts, shipped the gold to Switzerland where it has been melted down into kilo bars, and then moved it to the Eastern countries. A huge amount of gold has left the west where it is undervalued and now is vaulted in the East where it is better appreciated.

During the past several years the Chinese have vastly increased their gold holdings at favorable prices while dumping some of their depreciating dollars. The Western central banks further the illusion of value in unbacked debt based paper money while claiming gold is in a bubble, gold and the gold standard are barbarous relics, and enabling paper currencies to survive for a while longer. Interlocking complicity in the gold leasing and gold price suppression scheme currently benefits both the eastern and western countries.

Summary

The Pentagon cannot account for $Trillions. Since there is little incentive to stop the fraud, waste, and phony accounting, and since there is a large incentive for it to continue, expect the graft, corruption, black budget items, and payoffs to continue. Interlocking complicity works especially well at the Pentagon.

The US government does not want to cut spending and has a limited ability to increase revenues. Expect borrow and spend politics to dominate until a “reset” occurs and then expect a crisis and many speeches from important politicians who just noticed what has been obvious for decades. Interlocking complicity works well for congressional payoffs, reelection speeches, increasing power to the administrative branch, and, of course, massive profits to the industries that benefit the most from deficit spending, such as military contractors, banking, health care, pharmaceuticals and others.

Gold price suppression benefits western governments and central banks while the Chinese and Russians benefit by purchasing valuable gold with increasingly devalued dollars. Expect gold price suppression to continue until the west runs out of gold that can be melted down and shipped east. However, demand for physical gold is quite strong while supply is limited. Expect gold to trade MUCH higher in the next few years.

Interlocking complicity produces a degree of stability as it helps maintain the status quo, which is very important to the powers-that-be. Interlocking complicity ensures that accountability, oversight, and ethical practices are low priorities, while payoffs and no-bid contracts will maintain their important role in government operations. Interlocking complicity ensures that little change will occur until it is forced upon us.

Ask yourself

  • Are you prepared for a reset of our financial and social systems?
  • The Chinese are trading increasingly less valuable dollars for increasingly more valuable gold and silver. Should you do likewise?
  • Can a government spend more than it collects in revenue – forever?
  • Debasing the currency has never worked well in the past. Will this time be different for Japan, Europe and the United States?
  • Will Wall Street, Congress, military contractors and the pharmaceutical industry lobby for what is good for you or for them?

GE Christenson
aka Deviant Investor

November Gold Drop of 5.5% Worst in 35 Years as “Unidentified Sellers” Continue to Dump Gold

tenth oz gold-eaglesNovember was a miserable month for gold investors as prices dropped by 5.5% for the Worst November in 35 Years.  Adding to the misery, gold is almost certain to have its first yearly decline after rising 12 years in a row.

NEW YORK—Gold prices logged their worst November since 1978 as a brighter economic landscape fanned fears of reduced stimulus efforts by the Federal Reserve.

Gold prices dropped 5.5% in November. The declines help put gold on track to end 2013 in negative territory, disrupting a 12-year winning streak that saw the precious metal set price records.

“Nothing goes up forever,” said Frank McGhee, a senior precious-metals dealer with Integrated Brokerage Services LLC. in Chicago.

“You’ve got the beginning of an economic pickup without any inflationary signs…[and] you have the specter of the end of easy money, and that’s bearish for gold,” Mr. McGhee said.

A record-breaking rally in U.S. equities also lured many traders away from the precious-metals market. On Friday, the S&P 500 touched a record high of 1813.

Gold’s losses haven’t been limited to the futures market, analysts at Barclays PLC said. Exchange-traded funds backed by physical gold, which take the hassle out of purchasing and storing physical gold for individual investors, have seen their holdings drop 38.4 metric tons through Nov. 26 as sales picked up from the prior month.

Still, November is far from the worst month for the precious metal—gold prices fell 12% this June and nearly 18% in October 2008.

Investors in both gold and silver are looking at losses as precious metal prices decline despite record demand for physical gold and silver.

money printing

Exactly who is causing the price of gold to drop by indiscriminately dumping gold  remains an intriguing mystery that the major news organizations have essentially ignored.   Zero Hedge recently questioned why a rational seller would dump large amounts of gold at odd hours into illiquid markets unless they were deliberately trying to drive the price of gold down.

Shortly after 1amET this morning, someone with no apparent fiduciary duty to their client’s for best execution or any apparent trade allocation expertise decided it was time to dump 1500 contracts into an entirely illiquid gold futures market. The 150,000 ounce notional sell order ($184.5 million), captured graphically by Nanex, sent the price down $10 instaneously, tripped the exchange’s circuit breakers and halted the market’s trading for 20 seconds (once again). This is now the 4th market halt in the past 3 months (and this time on no news whatsoever), as the manipulative monkey-hammerings from who knows whom (BIS?) is becoming increasingly obvious.

Via Nanex,

This sort of thing is happening far too often: see also the drops on April 12, 2013, September 12, 2013, October 11, 2013 and November 20, 2013 which also resulted in trading halts.

Will the mystery of who hates gold ever be solved?

gold-buffalo

As documented many times by the Gold Anti-Trust Action Committee (GATA), the “fat finger” on the gold manipulation button seems to have its origins at the highest levels of government and central banks; this being the case, no one should hold their breath waiting for an honest explanation of the mystery of pricing in the gold market.

Why Gold Stocks Are Not a Substitute for Gold

gold & barAn investor who was correctly bullish on gold in late 2004 had three basic investment options to capitalize on an increase in the price of gold:

  1. Invest in physical gold
  2. Invest in a proxy for physical gold such as the SPDR Gold Shares (GLD)
  3. Invest in gold mining companies

The investor who picked option three does not have a lot to be cheerful about even after gold’s historic increase in value since 2004.  Why did gold stocks do so poorly in spite of a 500% increase in the price of gold bullion?  Merk Investment takes a look at gold versus gold stocks and explains why Gold Stocks Ain’t Gold.

A frequent mistake made by investors
is to invest in gold mining companies
(both juniors and majors) as a substitute
for gold. There are a couple of reasons
why this may be a mistake. Firstly, gold
mining company’s stock price does not
precisely track the price of gold. That’s
because lots of other factors influence the
share price of a company: management,
cost pressures, mining diversification,
stage of the mining process, to name just
a few.

This problem is generally more
acute for juniors than majors, because
juniors often have yet to “strike gold,”
therefore the stock price often trades more
like an option. Moreover, many mining
companies don’t only mine gold, many
also mine silver, palladium, diamonds
etc.

This dynamic also holds for baskets
of mining companies – baskets of miners
have significantly underperformed the
price of gold over recent years.  Some investors believe gold mining stocks may provide more attractive
investment exposure to gold than gold
itself. The investment thesis is as follows:
gold mining companies are able to take
advantage of an increase in the price
of gold through enhanced operational
leverage; as the gold price goes up, mining companies’ margins widen, ultimately increasing the bottom line.

However, this theory is predicated on fixed costs staying
relatively constant. Unfortunately, recent
performance does not support this
investment idea. Indeed, gold mining
stocks, on aggregate, have significantly
underperformed the price of gold.

The reality is that mining is a highly energy-
intensive undertaking, and therefore
many of the costs are closely linked to
energy prices, such as oil, which has also
experienced significant increases in price.
As a result, many mining companies
have not produced the anticipated
high level of profits. Additionally,
governments may demand higher taxes
and employees higher wages from mining
companies should profitability increase,
further limiting the upside potential for
shareholders.

The results for each investment option are shown below for physical gold, the GLD and the Vanguard Precious Metal and Mining Fund (VGPMX) used as a stock proxy.  Note that despite the horrible long term performance, a nimble investor in the VGPMX could have reaped  considerable gains by selling in early 2008 and then getting back into gold stocks after the crash of 2008.

PHYSICAL GOLD

PHYSICAL GOLD

SPDR GOLD SHARES TRUST (GLD)

GLD

VANGUARD PRECIOUS METALS FUND (VGPMX)

VGPMX

Gold and Silver Are the Answer to Endless Fed Printing

gold-buffaloBy: GE Christenson

THE SETUP

A century ago bankers created the plan for a U.S. central bank, bought enough votes to get it passed into law, encouraged deficit spending, government debt, and extracting the interest payments from taxpayers. The process has worked well for the bankers.

After several expensive wars and the expansion of social programs the U.S. had created considerable debt. In fact, debt and the money supply had increased so much that inflation became a serious problem in the 1960s. Further, the U.S. trading partners no longer wanted dollars but wanted gold instead since they could see that dollars were being created indiscriminately and were losing their value. Nixon (August 15, 1971) did what was good for the financial industry, severed the remaining connection between the dollar and gold, allowed the money supply and debt to increase to never-seen-before levels, and planted the seeds of self-destruction for the dollar and the US economy.

THE CRASH

The process continued until 2008 when the debt and derivatives bubbles had grown so massive that the economy could no longer sustain them. The economy and stock market crashed and financial and political leaders stared “into the abyss” of deflationary collapse, reduced Wall Street income and bonuses, loss of votes, and did what they perceived as necessary: printing money, Quantitative Easing (QE), injecting liquidity, bond monetization, extend and pretend, and so on.

Courtesy: coinupdate.com

Courtesy: coinupdate.com

THE “SOLUTION”

The choice was made to “solve” an excessive debt problem by creating more debt – Quantitative Easing (QE) and increased deficit spending. Deficits were increased to a $Trillion or so per year while the government bailed out the bankers and politicians and the public watched Reality TV. It appeared to work, somewhat, for a while.

So the economy (financial industry) and government are desperate for QE, and similar to being hooked on “meth,” they find it difficult to kick the habit and get off the “drugs” of QE, money printing, and central banking. As Gold Stock Bull says,

The economy is addicted to QE and reliant on central bank stimulus to stay afloat. The world now understands that the FED cannot end the bond-buying program and has no intention of doing so anytime soon. If anything, we are likely to see increased quantitative easing in the future, just as a drug addict must up their dosage in order to have the same impact. This monetization of debt increases the bullish outlook on gold, as the gold price has historically trended higher along with the FED balance sheet.

Marc Faber and Deepcaster:

“The question is not tapering. The question is at what point will they increase the asset purchases to say $150 [billion], $200 [billion], a trillion dollars a month…”

“The Fed has boxed itself into a position where there is no exit strategy (and created) a colossal asset bubble…”

Continue QE and you get hyperinflation…”

“Halt, or even taper, QE and the markets crash.”

The picture, sans Fed propaganda, is increasingly clear. QE is necessary to supplement the financial industry and the voracious appetite of the U.S. government for more spending. Merely slowing QE will probably cause markets to crash, interest rates to rise, the government’s expense for interest on past debt will increase while tax revenues decline, and consequently the government needs more, not less, QE.

US debt to gdp

Of course there is always a way out – the “nuclear” option – let it crash and burn! But no one wants a crash as everyone will be hurt by that choice. Consequently the Fed and the U.S. government (the powers that be – TPTB) scramble desperately. What are the options?

  • More QE buys time. Less QE might well cause a crash. So TPTB choose more QE.
  • More spending keeps the big corporations (who make LARGE donations to congress) happy. If the government spends less, “everyone” complains. So TPTB choose more spending, more deficits, and more QE.
  • Higher interest rates mean that the interest expense for the U.S. government increases. More interest expense means larger deficits and so TPTB are forced to choose more QE.
  • Foreign purchases (China, Japan, Russia, etc.) of newly issued U.S. treasury debt are decreasing while some countries are actually reducing their current holdings of treasury debt. This forces the Fed to be the “buyer of last resort” and purchase, via more QE, the debt that normally would have been purchased by China, Japan, Russia and others. Fewer foreign purchases necessitate more QE.
  • A weaker economy and fewer people employed means less economic activity, diminished tax receipts and larger deficits. Those larger deficits guarantee more borrowing and more QE.
  • Obamacare will create more government expenses and less disposable income for average Americans, which means less consumer spending and therefore less tax revenue for federal, state, and local governments. There is no choice here – it is already law and we are going DOWN that road to much higher consumer costs, lower government revenue, and more government control. The result will be a government desperate for more revenue and more QE.

It does indeed look like a “QE trap.” So ask yourself:

  • More QE will weaken the dollar, on average, because more supply indicates less value for each dollar. What will that do to consumer prices for food and energy when the inevitable inflation works its way into the consumer economy?
  • What will happen to the prices for gold and silver when the realization finally hits the populace that interest rates are rising, QE is here forever, congress will never balance the budget, and the dollar will continue to weaken. (Hint: There is no fever like gold fever.)
  • It is clear that other countries increasingly dislike the U.S. dollar, U.S. treasury debt, and the current policies of the U.S. administration. How much will the prices for imported oil, gold, and silver increase as a consequence of the above?
  • What will a dollar collapse do to the prices of gold and silver?
  • Knowing the policies of the Fed, the congress, the administration, and the inevitability of QE, do you own enough gold, silver, platinum, land, diamonds, collectible art and other non-paper assets such that you can sleep well at night?

CONCLUSIONS

The U.S. government has spent itself into the “no-win” position whereby more QE is both necessary and dangerous. Most current policies, such as congressional gridlock, inability to pass a budget for five years, Obamacare, weakening economy and tax receipts, declining relations with foreign nations, massive deficits, declining total employment, inability to reduce spending, ongoing wars, probability of future wars, and more, suggest that QE must continue and probably increase.

Stocks may protect you  but gold and silver are the safer choice given the inevitability of more QE and a potential dollar collapse.

You decide!

GE Christenson
aka Deviant Investor (see full article here)

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.