This page archives the August 2010 links to gold articles featured in our popular NewsGroup e-mail service.

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USAGOLD Comment: In this September issue of USAGOLD News, Commentary and Analysis Michael J. Kosares talks about the perils of unmitigated positive thinking and "What's going on in Washington?" -- a worry being expressed by a growing number of analysts and investors alike.

An assessment of the inflation vs deflation quandary reveals government's preference for the inflationary path because deflation is perceived as more destructive to the banking system and the economy. James Bullard, President of the Federal Reserve Bank of St. Louis, lately expressed favor for a policy prescription of more quantitative easing via monetization of government debt (i.e., Fed purchasing Treasury securities). As confidence wanes in the outlook for the American economy and its currency, gold stands to gain as the key beneficiary of resultant safe haven investment flows occurring both domestically and abroad.

8/02/2010

Gold moving toward its strongest season

True to form, June and July have once again provided a volatile (yet at the same time largely uneventful) transitionary period for the gold market -- in which it typically shrugs off the tourists and hobbyists to lighten the load ahead of the usual August springboard into its most dynamic time of the year...

Time to accumulate metals and mining stocks, says UBS
By Dorothy Kosich, Mineweb; July 26, 2010

UBS Investment Research advises investors to accumulate metals and mining stocks, but also to take their time accumulating, "using the inherent volatility of the market to maximize the risk/reward of their investment."

... "We believe that ongoing pressure on sovereign debt markets, combined with persistent concerns over private sector credit contraction will raise the spectre of debt monetization repeatedly over the next few years," the analysts advised.

... "The fear of further debasement of fiat currencies follows closely," they said. "And in turn we expect the fear trade-very apparent through heightened physical demand for small bars and coins and rising ETF creations-will escalate in H2 2010 and into 2011."

... In their analysis, UBS noted, "A new trend in 2010 is the movement towards fully allocated physical gold. In H2 and 2011, we expect this type of gold exposure will deepen as new and existing investors diversify a portion of their gold reserves to purely allocated form. Quite simply, such customers are limiting their weight of paper gold exposure. In essence, this is diversification within diversification."

USAGOLD Comment: That "new trend" toward fully allocated physical gold is indeed an important element in the behavior of increasingly knowledgeable investors and its impact on the evolution of the commercial gold market. Put simply, the shift away from pooled deposits works to arrest the artificial creation of the "paper gold" supply that has in modern times been diluting the price-discovery mechanism of the gold market. Our next article serves to shed light on some of the liberties commercial banks (their bullion banking departments and subsidiaries) will take with deposits of gold that have not been otherwise safely sequestered in private deposit boxes or in private allocated accounts.

Light shed on BIS gold swaps
By Jack Farchy and Javier Blas, Financial Times; July 29, 2010

Three big banks -- HSBC, Société Générale and BNP Paribas -- were among more than 10 based in Europe that swapped gold with the Bank for International Settlements in a series of unusual deals that caused confusion in the gold market and left traders scratching their heads.

... two central bank officials said some of the commercial banks [...] needed the US dollar funding and were keen to act as a counterparty with the BIS. The gold swaps began in December and surged in January, when the Greek debt crisis erupted and European commercial banks were facing funding problems.

... Investors have bought physical gold in record amounts during the past two years and deposited it in commercial banks. European financial institutions are awash with bullion and some are trying to pledge gold as a guarantee.

George Milling-Stanley, managing director for government affairs at the industry-backed World Gold Council, said: "The gold swaps commercial banks carried out with the BIS demonstrate the effectiveness of gold as an asset class, because even in the depths of the worst liquidity crisis in living memory, institutions with access to gold were able to make use of it to generate dollar liquidity.

"The issue also feeds right into the current debate among Asian central banks about the lack of assets suitable for use as cross-border collateral."

USAGOLD Comment: Speaking of which, U.S. Treasuries have enjoyed a good reputation as a viable cross-border asset for many decades now, but with federal debt on the rise, and monetization of that debt looming ever larger (see next article), we have to be asking ourselves how much longer can the U.S. bond (a debt instrument) hold its prime position, especially as physical gold (a true asset) stands as a superior alternative.

Fed should resume treasury purchases if deflation risk grows, Bullard says
By Steve Matthews and Scott Lanman, Bloomberg; July 29, 2010

Federal Reserve Bank of St. Louis President James Bullard said the central bank should resume purchases of Treasury securities if the economy slows and prices fall rather than maintain a pledge to keep rates near zero.

"The U.S. is closer to a Japanese-style outcome today than at any time in recent history," Bullard said, warning in a research paper released yesterday about the possibility of deflation. "A better policy response to a negative shock is to expand the quantitative easing program through the purchase of Treasury securities."

Bullard's stance increases the odds the Fed will make such a move and reject other options should the economy weaken further, former Fed Governor Lyle Gramley said. ... "Having Jim Bullard on the side of doing that could, I think, be the straw that broke the camel's back."

... Bullard said he wrote the paper after private-sector economists reacted to the European debt crisis by assuming the Fed would extend its extended-period rate pledge further, raising a risk of deflation. An additional shock, such as a terrorist attack or weakness in Asia, would require a different policy, he said. "... we need a sharper departure from interest-rate targeting if we are going to get out of this problem."

USAGOLD Comment: There's no reason to look as far away as Asia for signs of economic weakness when they're knocking at your own door...

Gold rises as US growth data disappoints
By Reuters; July 30, 2010

Gold prices rose to session highs above $1175 an ounce in Europe on Friday after US growth data disappointed investors, knocking stock markets lower and lifting bullion's appeal as a haven from risk. Data released by the US Commerce Department showed that economic growth slowed in the second quarter to 2.4%, after revised 3.7% growth rate in the first three months of the year.

... "The problems in the US had moved completely to the background, and they are starting to emerge now more and more," said Bank of America-Merrill Lynch analyst Michael Widmer. "If you are getting into an environment where the Fed thinks more about how it can support the economy through monetary policy, for instance, you could see gold prices moving up."

Bleaker economic outlook forecast for 2011
By Jeannine Aversa, The Associated Press; July 29, 2010

The latest quarterly AP Economy Survey shows economists have turned gloomier in the past three months. They foresee weaker growth and higher unemployment than they did before. As a result, the economists think the Federal Reserve will keep interest rates near zero until at least next spring.

... State budget shortfalls pose a "significant" or "severe" risk to the national economy. The loss of tax revenue has forced state and local governments to cut services and lay off workers.

... Nearly two-thirds of the economists view the states' budget crises as a significant or severe threat to the rebound.

The economists have turned more pessimistic since the recovery hit turbulence in May. Europe's debt crisis sent tremors through Wall Street, causing stocks to tumble and raising doubts about the durability of the rebound.

USAGOLD Comment: Weakness and doubts which seem sure to nudge Bullard and Bernanke and the rest of the Federal Reserve into additional stimulus via the aforementioned quantitative easing (monetization of the federal debt). No surprise, the following article...

The death of paper money
By Ambrose Evans-Pritchard, Telegraph.co.uk; July 25, 2010

As they prepare for holiday reading in Tuscany, City bankers are buying up rare copies of an obscure book on the mechanics of Weimar inflation published in 1974. Ebay is offering a well-thumbed volume of "Dying of Money: Lessons of the Great German and American Inflations" at a starting bid of $699....

The crucial passage comes in Chapter 17 entitled "Velocity". Each big inflation -- whether the early 1920s in Germany, or the Korean and Vietnam wars in the US -- starts with a passive expansion of the quantity money. This sits inert for a surprisingly long time. Asset prices may go up, but latent price inflation is disguised. The effect is much like lighter fuel on a camp fire before the match is struck.

... Across the Atlantic, Fed critics say the rise in the US monetary base from $871bn to $2,024bn in just two years is an incendiary pyre that will ignite as soon as US money velocity returns to normal. Morgan Stanley expects bond carnage as this catches up with the Fed....

USAGOLD Comment: Forward thinking and proactive investors have seen this all unfolding from miles away (it's been a trainwreck in the making for several decades now), all of whom have been in the vanguard of gold's relentless march in defiance of the institutional critics and their derivative minefields...

Gold best performing asset class over 6 months, 1, 3, 5 and 10 years
By Rhona O'Connell, Media; July 29, 2010

Over the past ten years gold's annual return has been 14.3% in sterling terms, compared with 5.9% pa from bonds, 1.6% in cash and just 1.2% in real estate. Equity returns were negative.

... At a recent presentation the senior analyst at ETF Securities produced a series of analyses that underpin gold's role as a hedge against risk and he was able to show that, not only has it been a hedge against risk in the recent- and medium term- past, it has for much of the time been the strongest performing asset class.

... Over the past ten years, gold has outperformed the next best asset class by a factor of just over two. Its outperformance against equities has been consistent over past one, three, five and ten years and for that matter gold has also been the least volatile asset class.

... One of the quotes that ETF Securities likes to use regularly is this from Federal Reserve Chairman Bernanke:

"Like gold, U.S. dollars have value only to the extent that they are strictly limited in supply. But the U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars it wishes at essentially no cost".

This is seen as particularly relevant recently given the problems in the euro zone and the argument is given further strength by the fact that the official sector appears to be voting with its feet.

USAGOLD Comment: Ten years running, and then well beyond that according to a well-respected industry executive in our final article. Not only is the official sector voting with its feet, wealthy intelligent investors are also in the race, voting with their wallets.

Pierre Lassonde: Very bullish on long term gold price
By Geoff Candy, Mineweb; July 28, 2010

Pierre Lassonde, Chairman of Franco Nevada, speaking on Mineweb.com's Gold Weekly podcast: "We're still early in the pick up phase of what it means for gold -- the place of gold as an investment in the spectrum of asset class and when you look at the money in circulation, when you look at the bond market which is in the trillions -- 40 to 50 trillion -- when you look at the equity market, another 30 trillion and when you look at how much gold represents out of all of that, we are almost at an historic low compared to the 1970s and 1980s. So my view is that there's still a lot of legroom left in terms of the size that the gold market will fulfil in the investment spectrum.

... "First and foremost because the investors of the world -- people who have money -- have figured out that most of the governments -- whether it's in the US or in Europe or in Japan -- are going to debase their currencies because of the massive debt load that the countries have acquired over the last 20 years and that is translated into the purchasing of the gold ETFs, purchasing of gold jewellery (but as investment) in China and India."

... "Long term I am very bullish. When I look at the amount of debt accumulated by the United States in particular because the gold price is quoted in US dollar, the US politicians have absolutely no guts for another depression and they will always allow the printing press to run to answer their problem and therefore when I look at the long term gold price -- very bullish."

USAGOLD Comment: Bravo. And with July now behind us, we can look forward to what has traditionally been the happiest time of the year for gold investors...

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