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Gold
Market Overview
Day to day
we sometimes get lost in the heat of the daily market battle
only to lose sight of our progress with respect to the war. This
short essay is about the progress of the war.
In another
era (back in 1996-1997) we were among the first to speak out
against the widespread practice of mine company forward sales
seeing it as a type of slow industrial suicide. The mine companies,
we argued, were their own best enemies killing the value of gold
by selling many years' production forward at the going rate.
A small band of critics (consisting of bullion brokers, mutual
fund managers, newsletter writers and traders and including Mr.
Julian Baring quoted in our masthead this week) who made this
argument were widely criticized as not understanding the gold
business and attempting to take away the very balance sheet tactic
that made gold mining a profitable business.
 It wasn't long thereafter
that gold company shareholders began to pick up on the folly
of the hedging strategy. In one stockholder meeting after another,
they put heavy pressure on mine company executives to reverse
their hedges and give gold the opportunity to rise. Whether or
not a gold mining company was a "hedger" became a litmus
test. Ultimately, the combination of stockholder pressure and
rock bottom interest rates (which made the 'gold carry trade'
unprofitable) forced the hand of the hedged mining companies.
As a group,
producers not only began to unwind their hedge books; they became
buyers to square previous hedge positions. Hedging went from
a supply item on the fundamentals' table to a demand item --
and that has made all the difference.
As you can
see by the charts to your immediate left, our claims have been
vindicated. No sooner had mine company hedging become dehedging
than the price began to rise and continued to rise.
Some say that
hedging will be back as the gold price rises and profit returns
to the gold carry trade, but the price has risen and there
is a fair spread between the gold lease rate and Treasuries.
Hedging though remains in the descendant. As it turns out, stockholder
pressure seems to have come down as the primary motivator for
the de-hedging phenomena. Though there is sure to be forward
selling in the future, I don't see it as becoming the same dominant
factor it was in the 1990s for some time to come.
At this juncture,
I believe we can safely chock this one up in the victory column
for gold owners, shareholders and advocates. To a lesser degree,
I see the decision by the U.S. government to oppose the sale
of International Monetary Fund gold as in the same analytical
genre (with potentially the same long term result), but we will
leave that discussion for another day. Sometimes, you just have
to stop and smell the roses. After all, it's spring.
* * *
Gold's
annualized returns:
2002:
+ 14.4%
2003: + 17.3%
2004: + 12.6%
2005: + 1.6%
(through
4/22/05) |
* * *
Short
& Sweet
Those annualized
gold returns just above leave one with the impression that we
may be due for a fairly strong spring-summer rally . . . . .
. . . . . . .In the be careful what you wish for category, the
Bush administration is putting the full court press on China
to revalue its yuan higher against the dollar. The hope is that
a weaker dollar will increase U.S.exports to China and offset
some of the enormous trade imbalance with that country. . . .
. . . . But there two sides to the China revaluation coin: The
stronger yuan could also jack up prices on America's Chinese
imports. That in turn will flow into the already energized consumer
price index (up .6% -- 7.2% annualized). The negative real rates
of return on the dollar will expand. Investors will flee the
dollar . . . . .In other words, to make a long story short,
a yuan revaluation is likely to be INFLATIONARY and wreak
havoc in the U.S. stock market. . . . . . . . . . . . . . Of
course you never hear the Bush administration or Alan Greenspan
allude to that probability. More important to calm the wave of
negativity toward China building in the Congress. . . . . . .
. .At the end of March I pointed out: "With the inflation rate in the United States
bumping up against 5% and average yields in the vicinity of 3%
before taxes, the dollar is still some distance from being
the capital magnet it once was. And prices, the other side
of the real rate of return equation, cannot be expected to stand
still under the circumstances. Imports -- formerly the restraining
factor in the inflation scenario -- are now getting pricier." Now, consumer prices
hover at 7.2% annualized (if you accept the Department of Labor
numbers). The general consensus is that a .5% interest rate increase
at the next Fed meeting is out of the question. The real rate
of return on the dollar begins to look abysmal. Watch for a potential
strong spike downward in the greenback sometime soon. The gap
widens . . . . . . . . . Jim Puplava, proprietor of the important
Financial Sense website, writes this in his highly recommended
fiction/reality account, The Day after Tomorrow (Linked
here):
"A trade war was heating
up in Washington with Congress ready to slap tariffs against
China. The Chinese were threatening to retaliate. The idiots
in Congress didn't realize the consequences to the bond market,
if the Chinese stopped buying Treasuries-or even worse-started
dumping their hoard of Treasury bonds." . . . . . . .That
possibility -- the wholesale, or even gradual, liquidation of
foreign U.S. Treasuries holdings -- is one of the strongest arguments
for gold ownership . . . . . . . As we have said here many times
before, in the current financial environment gold serves an important
portfolio function because it is the only primary asset that
is not simultaneously someone else's liability. That is the
crucial distinction which lies at the heart of gold ownership
-- a distinction which when fully understood needs no further
elaboration. . . . . . . . . . . .Last week, Mark Hulbert (Hulbert's
Financial Digest) says, something strange happened on the way
to roller coaster stock market ride on Friday (DJIA down at one
point near 150 only to close at down just 60). What happened
was that his sentiment indices in both the gold and bond market
hit record lows simultaneously. To Hulbert such a low in either
one would signal a strong buy based on contrarian impetus. But,
he says, bond and gold are on opposite ends of the investment
spectrum. So how could they both be throwing off buy signals
at the same time? Says Hulbert, "The most straightforward
interpretation, it seems to me, is that a crisis is imminent
in which the viability of the financial markets is called into
question -- one in which there is a flight to quality (such as
government bonds) as well to hard assets (such as gold)."
. . . He goes on to reference the recent work of Richard Russell
(who is quoted frequently on these pages) who sees the world
financial system as so precarious that the monetary authorities
must "inflate or die." Russell says the Fed may not
succeed in inflating. The "die" part is a devastating
deflation wherein gold becomes the asset of last resort -- the
last repository of wealth left standing in a rolling financial
system default. . . . . . . . . . . . .Hulbert says Russell is
no "chicken little" advising perennially that the sky
is falling. To the contrary, "His stock market timing performance
over the past 25 years is one of the best of any of the newsletters
monitored by the Hulbert Financial Digest.". . . . . . .
. . . .The Aden Sisters usually confine themselves to technical
analysis. Here (sorry for the longish entry) they step out by
saying: "PROTECT YOURSELF -- Basically, we're living
in amazing historical times. We're in a new investment era and
we need to understand what's happening and protect ourselves.
The best way to do that is by holding gold, other precious
metals and foreign currencies, which will continue to rise as
the dollar heads lower. Sure, there will be ups and downs. In
the past three months, for instance, the markets haven't done
much but the long-term trends remain intact and that's what's
most important. As our long time subscribers know, we haven't
always been so keen on gold, but we have been in recent years
due to the mega investment shift that happened in 2000 and the
events since then. Remember, gold is the ultimate currency and
it always has been. Throughout history, paper currencies have
come and gone but gold is real money and it's maintained its
value over the centuries. It has a 5000 year track record,
which no other investment can claim. If nothing else, think of
gold as an insurance policy. During these volatile and
uncertain times, we don't believe you'll regret it." . .
. . . . . . . . . . . . .
Perhaps
the most disturbing trend of them all
"[U]nder the placid surface,
there are disturbing trends: huge imbalances, disequilibria,
risks -- call them what you will. Altogether the circumstances
seem to me as dangerous and intractable as any I can remember,
and I can remember quite a lot. What really concerns me is that
there seems to be so little willingness or capacity to do much
about it."
Paul Volcker
One wonders if Mr. Volcker
has been reading "The ABCs of Gold Investing: How to Protect
and Build Your Wealth with Gold." Those who have read the
book will recall the Disturbing Trends table (shown below)
as central to the theme of the book -- that theme being that
the United States and the world economy are headed on a course
that will come to an inevitable conclusion against which the
portfolio planner would find gold the best defense. This table
represents a snapshot of the American economy since the industrialized
world switched to a pure fiat money system in the early 1970s.
Since the book was published some of these trends have worsened
-- most notably the trade deficit and national debt (which now
stands at an astonishing $7.763 trillion. The 1970 dollar has
also experienced further erosion -- now worth about 19.5¢
(based on the U.S. Department of Labor's consumer price index).
One of the most troubling disturbing
trends not included the table above is the rapid build-up of
the derivative tsunami. This was the subject of an article by
Financial Risk Management's Ed McCarthy published at Prudent
Bear last week titled "Global Conspiracy of Fools? Perhaps".
The article caused something of a stir and I received several
calls on it last week.
McCarthy's hypothesis -- and
we go along with it -- boils down to this:
"Again, there is criminality
aplenty but also plentiful further evidence of inability of supposedly
astute "leaders" and observers to unravel what seemingly
are relatively complex but not insuperably difficult frauds and
misuses. More recently, the burgeoning AIG scandal, the shocking
GM cash flow reversal and the ongoing flow of announcements from
the Citi's and BofA's confirm the following thesis: Market and
corporate growth have expanded beyond the ability of those in
charge to be aware of and comprehend the incredibly rapidly growing
risks, both business and ethical/integrity, assumed in this growth."
In other words, in the immortal
words of Alan Greenspan some years ago: "We don't know what's
going in the American economy."
Before the advent of the huge
derivative pool, if a bank were to get into trouble, the Federal
Reserve and/or the Federal Deposit Insurance Corporation would
come to its rescue and the economy would move along as though
nothing had happened. The risk to the system as a whole would
have been mitigated.
Today's highly leveraged derivative
risks impose a whole new set of circumstances similar to that
posed by bank runs at the turn of the century when the Fed did
not exist and there was no formal structure for dealing with
systemic risks. After several panics of varying magnitude and
innumerable bank failures, bankers got together under the guidance
of J.P. Morgan and created (with the government) the Federal
Reserve System. It's primary function was to act as a lender
of last resort before a poorly run banking institution was assailed
by its depositors.
Now roughly 100 years later,
we are faced with a new kind of risk -- derivatives' exposure
-- which transcends the auspices of the Federal Reserve. Like
the problem with bank runs at the turn of the 20th century, there
is no real institutional frame work in place to deal with it.
Derivative risk, as McCarthy rightly points out, goes in directions
and to depths no one truly understands. If the financial system
of 1907 was dealing with a relatively simplistic Newtonian view
of the world -- what goes up must come down; for every action
there is an equal and opposite reaction, etc., the financial
system of 2005 operates more in the complexity of Einstein's
physics.
In other words, if/when the
derivative system reaches critical mass, it will be the financial
market equivalent of Alamagordo -- an uncontrolled crisis spreading
from one trading desk to the next at the speed of light. Until
the first atomic explosion occurred in 1945, nobody knew what
it would look like, what devastation it would wreak, or what
the long term effects would be. Likewise,
no one knows what a derivative melt-down might impose on the
modern financial system.
The central bank and federal
government are ill-equipped to deal with a real derivative crisis.
The markets will probably be shut down if one were to occur and
the damage would be international in scope with no international
authority to mitigate the problem. To reduce all of this to an
essence, in the event of a derivative meltdown investors could
be faced with a situation very much like the one in 1907. In
a nutshell, we could see a modern version of the age-old financial
panic. MK
Theater poster depicting "Panic of 1907"
Financial Panics
and Stock Market Crashes in U.S. History
1819
1832
1837
1857
1869
1873
1893
1901
1907
1916-17
1919-21
1929
1937-38
1939-42
1973-74
1987
2000-2002
And some ask why Wall
Street hates gold and Main Street loves it.
Please
call our Trading Desk for quotes and assistance buying gold coins
and bullion.
1-800-869-5115 Extension #100
4:00am - 7:00pm MT |
* * *
The Coming
Gold and Silver Confiscation
This is a subject of rather
heated debate between precious metals investors. Will the government
seize gold and silver? Will they outlaw the possession of them
in various forms? The reason it raises the hackles is because
some see it as a marketing ploy to persuade investors to buy
numismatic coins of high value. After all, why pay $100 for a
coin with $5 silver content? I agree that makes no sense at all
from a silver or gold investment point of view. One is buying
rarity not metal which may be a good idea, but it has nothing
to do with precious metals investing. Nevertheless, New Era Investor
holds to the view that such an event will happen in the years
ahead as monetary crisis eventually envelopes the fiat system
of world central banking.
New
Era Investor
Editor's Note: The main premise of the monograph
"How You Can Survive a Potential Gold Confiscation"
published by USAGOLD-Centennial Precious Metals is that those
concerned with the possibility of another gold call-in can hedge
with pre-1933 European gold coins which sell at low premiums
to the gold price. You do not have to buy high-priced numismatic
coins to gain the same protection. The reasons why are much too
lengthy to publish here.
We
invite you to request a free copy of the monograph by contacting
us: 1-800-869-5115 Ext. #106
admin@usagold.com
* * *
Snip
& Link
The Gold, Oil Dollar Relationship
(Howe Street.com, 4/24/05)Over the last 50 years or so, gold
and oil have generally moved together in terms of price, with
a positive price correlation of over 80 percent. During this
time, the price of oil in gold ounces has averaged about 15 barrels
per ounce. However, with recent soaring oil prices, the relationship
has strayed far from this average. While oil prices recently
set an all-time high of $56 per barrel, gold prices have not
kept pace and the oil:gold ratio fell to an all-time low of 7.5:1.
At US$56 per barrel oil, the gold price should be in excess of
US$840 per ounce. Some experts are suggesting that, in two or
three years, US$100 per barrel oil is very possible. At that
price gold should be US$1500 per ounce.
Full
article
Hong Kong's top financial
newspaper suggests pegging the yuan to gold
(The China Standard,
4/17/05) - A peg to gold would immediately inject flexible market
dynamics into the yuan's exchange rate with the dollar without
risking the political and practical repercussions of conventional
currency adjustment alternatives. All that is required is for
policy-makers to choose a yuan ratio that equals the current
exchange rate of 8.28 against the dollar at the prevailing gold
price. For argument's sake, let us assume gold is US$420. In
that case, a ratio of 3,478 yuan to an ounce of gold, would result
in an exchange rate that exactly matches the current pegged rate
of 8.28.
Full
article
Harry Schultz says get ready
for "Hot Inflation Meteorites"
Oil is also political,
poses constant disruption threat. Don't put a ceiling on the
price! ··Inflation is boosted by the competition
between the big nations for all the commodities. Eg, the US is
locked out of some oil mkts by bids from India & China. ··Gold,
of course, is considered the world's thermometer for monetary
stability as well as an inflation reflector. Gold has been rising
for several years with the pace escalating. Efforts by govts
& Central Banks to restrain the price (as they did with London
Gold Pool in 1970's - which failed) have been unable to do more
recently than slow the pace, thus revealing the power of this
inflation wave, as well as the weakness of the US$ & the
inherent value of gold.
Full article
* * *
Archives
2005
Gold Market Forecast
- "I foresee two
potential scenarios for the gold market in 2005. One involves
a see-saw market which culminates with a roughly 20% gain on
the year in keeping with the average over the last three years.
This would take gold to the $525 level. The other involves a
substantial price spike resulting from an uncontrolled deterioration
in the value of the dollar. In that scenario, gold would threaten
and probably exceed the $600 level."
MarketUpdate 4/18/05 - "Perhaps
the reality is that the current crop of problems defy easy answers
and short term solutions and when all is said and done, that
is probably the real message delivered by last week's stock market
plunge. If the down trend gathers momentum in the weeks ahead,
2005 could turn out to be a more harrowing year for investors
than most anticipated."
MarketUpdate
4/11/05 - "This past week was a quiet one
for gold, but it could very well have been the calm before the
storm. A vanguard of highly
regarded analysts have begun to voice concerns that there is
too much complacency in the face of some of the most far-reaching
threats to stock market stability in memory."
MarketUpdate
4/4/05 - "Europe doesn't have a huge balance-of-payments
problem as the United States does. It's not at war. Europe doesn't
have a lack of currency reserves to tap for foreign payments.
So why liquidate gold when the dollar is in severe trouble and
gold is on the rise?"
MarketUpdate
3/28/05 - "The old school will tell you
that inflation needs to be weighed in a larger context -- one
that encompasses real rate of return. (A yield bearing
asset shows a real rate of return when its interest rate exceeds
the inflation rate after taxes.) Currencies with a positive real
rate of return attract investment capital, and they rise. Currencies
with a negative real rate of return experience an exodus, and
they fall."
MarketUpdate
3/19/05 - "This is a good starting point
for those of you who are new to the gold market. The current
bull market trend began in late 1999 when Europe's primary central
banks signed an accord limiting gold sales and leases of the
yellow metal. This proved to have a liberating effect."
* * *
An ABCs
of Gold Investing UPDATE - Choosing a gold firm
With oil moving higher and
stocks in trouble, we are receiving a steady stream of inquiries
on buying gold. First-time buyers need to be careful in choosing
a gold firm. In talking with a number of clients who are in contact
with some of our competitors, we are hearing stories of aggressive
telephone sales tactics and item pricing. Long ago, we decided
to keep our staff small, our pricing competitive and our relationship
with prospective clientele more laid back. You can contact us
without worrying about being put on a call list. We are happy
to answer questions and discuss your gold purchase in full, but
we leave the ball in your court with respect to the follow-up.
That might cost us a client now and then, but those who become
clients do so in their own time and without being constantly
bothered by one of our brokers. By this they become better clients
who tend to stay with the firm for many years. (We have clients
who started with us in the 1970s.) Most of our clientele are
business and professional people fully capable of making up their
own minds. They tend to gravitate to us because they find out
we know what we are doing in the gold market and can apply that
expertise to their gold portfolio. Contact us and discover the
difference. And don't be like some who have caved in to the pressure
and found out later that the great deal they thought they had
wasn't so good after all. We have been a part of the gold business
for over 30 years. We were just certified by the Better Business
Bureau for over ten years of membership. Our volumes are large;
our clientele well positioned based on their needs and goals.
We look forward to working with you.
1-800-869-5115
Trading Desk
Extension #100
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