|
Overview
The threat
of a dollar crisis and rolling financial breakdown continues
to dominate the financial pages. This issue, like the last two,
focuses on the reasons for this concern and related developments
around the world. Our intent is to keep you informed so that
you might position yourself ahead of Mr. Buffett's "stampede"
as referenced above. In my more than 30 years in the gold business,
I cannot recall a time when there has been more legitimate justification
for concern about the financial system matched by a more widespread
complacency on the part of the general public. In many of the
articles I read preparing for this issue, I kept running into
this sense of foreboding among market professionals. One American
analyst said it best: "There
is a sense of unease. But no one can put their finger on it and
say 'here is the problem.'"
Gold
 If you were in the gold market as a buyer
this past week, it was a good one to get your business done.
On three different occasions the price dropped below the $420
mark. All three drops were greeted with fairly strong volumes
at USAGOLD- Centennial Precious Metals. World bullion markets
reported a similar response to the dips. On the other side of
the coin, if you were already a gold owner, you could take solace
in the fact that nothing seems to be doing well in the investment
markets these days except for the dollar. Even those gains however
may be fleeting when you factor in the overall economic environment
of stagnant stock and bond markets, inflation, disinflation and
the negative real rate of return on almost all dollar-based investment
vehicles. Why invest in stocks at 21 times earnings? Why invest
in real estate in a rising interest rate environment? Why buy
a ten year bond with a 4.25% rate of return when the inflation
rate is 6%? Gold still attracts investment capital worldwide
simply because it is the most undervalued and thus attractive
of the major asset groupings. Given the field, a balanced portfolio
seems the only worthwhile approach and at current prices gold,
because it is the one asset that is not simultaneously another's
liability, should be a part of that balance.
The dollar
 While some news reports point to the improving
U.S. economy for the strong showing of the dollar in recent weeks
(at a seven month high against the euro), the all-important French
and Dutch referenda on the European constitution seem a more
likely provocateur. Bloomberg reports that polls have the Constitution
failing in France by a narrow margin. If the "No's"
carry the day, it could signal serious problems for the future
of the euro. Julian Callow, an economist at Barclays Bank put
it this way: "Investors are recognizing that the euro does
not have a happy set of fundamentals supporting it. The economic
news is crumbling and political tensions are rising." Thinking
like this drives fund manager sentiment and that sentiment for
the moment has deposited itself in the dollar. Thus, capital
flowed to the dollar not so much because of stellar news for
the American economy, but because it benefited from the euro
fret. Let's just say that though the dollar now stands as the
king of the hill in the world currency wars, it's legs are a
bit wobbly.
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 |
Three under-reported
gold/dollar events from the past week worth noting
 (1)
Though seemingly failing to garner a response in the forex and
bond markets, the Treasury Department now confirms that central
banks, led by China and Japan, have begun reducing their U.S.
dollar holdings. Net capital in flows to the United States from
overseas nearly halved in February. It appears that the long
awaited international dollar liquidation has actually begun.
The United States needs nearly $2 billion per day in foreign
capital to fund its trade deficit. Where will the capital come
from to finance these deficits if foreign investment dries up?
In times past, the Federal Reserve cranked up the printing presses
when foreign capital dried up. We will see what the Fed does
this time around.
(2) Last week
European banks agreed to a "full-scale simulation"
of a European financial crisis involving the collapse of a major
bank and a cross-border, rolling systemic breakdown. Meanwhile
the London Telegraph's Hamish McRae tells us that "the London-based Centre for Economics
and Business Research predicted that "1,600 hedge funds
would go bust over the next two years and cheerfully suggested
people put their money on the horses instead." The Guardian reported
this past weekend that "According
to US analysts, this is what has made the markets so nervous;
no hedge fund has so far admitted to being close to collapse,
but it is feared that a series of mini-blowups is coming."
Recent statements
from central bankers, including the Fed's Alan Greenspan and
Germany's Jurgen Stark, warned that the hedge funds could be
the cigarette out the window which ignites a wider, systemic
fire storm.
(3) On Tuesday,
the United States Treasury Department, responding to Congressional
pressure, gave China a six month deadline to revalue its currency.
There were no details as to what the United States might do should
China refuse to meet the deadline, but the threat was made nevertheless.
The stepped-up pressure puts a new spin on the problem we have
discussed for several weeks on these pages. When China does revalue,
it will open the door to stronger currencies in Japan, South
Korea and most of the Pacific Rim. Dollar devaluation proponents
will have taken out the last roadblock to a much lower dollar.
Related
Gold-specific special considerations to ponder
- Though the
dollar seems to be fully valued as a beneficiary of the European
vote, gold has yet to react. With the dollar's problems only
getting worse, and the euro going to the ropes (should the French
and Dutch votes fail), gold would likely become a major beneficiary
as hot money looks for a safe haven. Because of the current connection
between gold and the euro, gold might strongly benefit from a
"yes" vote on the constitution.
- The worldwide
property run-up seems to be getting long in the tooth. We have
had an increasing number of high-end clientele tell us that they
are unloading their real estate investments and parking the money
in gold. We have had a succession of sector bubbles, according
to this group of investors. First, it was stocks. Then real estate.
Next, it will be gold.
- Most of the
investors calling the firm in this period are not all that wrapped
up in day to day gold market minutiae. They are big picture investors
interested in holding on to what they have earned elsewhere either
professionally or in their investments. This tells me that the
gold that is being purchased is going into strong hands. These
people are the polar opposite of the hedge fund operators. Short
term market fluctuations are meaningless to these investors,
unless they happen to present a buying opportunity like gold
did last week. And they are unlikely to sell if the market goes
against them in the short term. These investors have an investment
philosophy that is not easily shaken.
**Speculation: The Return of the gold carry trade?
**
 The
last two weeks have produced a gold deja-vu that long time gold
owners and advocates will recognize. While reports filtered through
financial markets that the hedge funds were liquidating dollar-funded
carry trades last week thus pressuring the dollar higher, the
gold market action was reminiscent of the old gold carry trade
days when rallies were snuffed before they got started and the
market trended sideways to down for extended periods of time.
Besides the suspect gold market action itself, gold and silver
lease rates have begun to move higher -- a sure sign that something
might be afoot. This comes at a time when mining companies are
dehedging and thus unlikely culprits.
It could be,
and I emphasize the "could be," that the hedge funds
and bank trading desks, looking around for a new carry trade,
have gone to borrowing gold to finance some of their highly speculative
investment operations. If so, it wouldn't be the first time.
LTCM was widely suspected to have been involved in the gold market
prior to its blow-up in 1998.
In a typical
gold carry trade, gold is borrowed from a bullion bank (which
has the gold on deposit usually from a central bank) then sells
it in the open market thus driving down the price. They then
reinvest the proceeds in whatever scheme they perceive to be
potentially profitable.
When the mining
companies borrow gold, it's one thing. They have the capacity
to pay the metal back through their mining operations. When a
hedge fund borrows gold, it must eventually return to the market
as a buyer to pay it back. That could create as much pressure
to the upside as it did to the downside. In the event of a default
though, it could set off a scrramble for physical metal to repay
depositors. The hedge funds necessarily will be on a short leash
in their gold borrowing operations given the current atmosphere.
I do not expect the volumes to suddenly shoot upward. However,
if they are using the gold carry trade, it could add enormously
to future gold volatility. MK
A solemn crowd gathers outside
the New York Stock Exchange, October, 1929 |
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
__
"The possession
of gold has ruined fewer men than the lack of it."
Thomas Bailey Aldrich
|
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 |
Short
& Sweet.
. . . . .
"Despite the recent carnage
[in precious metals]," says Bill Fleckenstein, "I
continue to be very constructive on the outlook for the metals,
especially given that the Federal Reserve is trapped. Short interest
rates are now a whopping 3%, and folks can see the amount of
pain that's already occurred in the financial community -- and
we're not even close yet to the underlying rate of inflation.Consequently,
no matter how I approach the process, I keep coming back to the
same point: Eventually, all roads will lead to higher metal
prices." . . . . . . . . . .That word - contagion
- has started cropping up again. "Fears of a credit
crunch are plaguing financial markets once again, " says
Morgan Stanley's Richard Berner. "Wider credit spreads and
losses in credit derivatives have triggered concerns that the
contagion will spread to other rungs of the credit ladder,
spawning worries about a credit crunch that at a minimum would
further dislocate markets and at worst derail already-slower
economic growth." . . . . .And this from Stephen Roach's
latest: "It was bound to happen. Cycles of fear and greed
are as old as financial markets themselves. When asset prices
go to excess, we always hear the same refrain, 'This time
it's different.' That was the spin on tulips in the 17th century,
equities in the summer of 1987, the Nikkei in 1989, fixed income
markets in 1993, and, of course, Nasdaq in 2000. Chastened
by the inevitable post-bubble carnage, speculators, regulators,
and policy makers always promise, 'Never again.' Yet memories
are short, and as day follows night, so do cycles of greed and
fear - and the proverbial next time. Such is the case with the
wrenching unwinding that is now occurring in a broad array of
so-called structured credit products. The possibility of contagion
to other spread markets - namely, high-yield and emerging-market
debt, as well as investment-grade corporates - cannot be ruled
out." . . . . . . . .Bill Gross, who manages the Pimco - America's
pre-eminent bond fund, says bonds will yield in the 3% to
4.25% range over the next three to five years and that primary
driver in the economy will be disinflation. He says most markets
have had their run and that only "bonds and certain commodities
in limited supply" will fare well . . . . . . . . .
. . . As the French prepare for the Constitutional vote on May
29, economic growth has slowed sharply further fueling the "No"
vote. . . . . . .Seems incomprehensible that Europe would come
so far over so many years only to have the existence of the Union
threatened by a single vote one day in May, 2005. . . . . . .
. Either way the vote could be a plus for gold. If the
constitution goes down, it could set off a wave of gold buying
in Europe. If it passes, the euro is likely to rally and, if
the past is an indicator, take gold with it. . . . . . . The
Bank for International Settlements says that gold derivatives
grew 16% in the last six months of 2004 to $369 billion. Though
the volumes fall short of record highs, this is still a big number
. . . . . . . . . .Alan Caruba writing for the Intellectual Conservative
says what's on the mind of many Republicans: "After forty years as the minority party,
those who led the GOP had become more like Democrats than Republicans,
despite the effort led by Senator Barry Goldwater. Today,
the GOP has become the big-spenders they decried when the Democrats
were in control. People are beginning to notice. . . . .
. . "The Republican product, these days" he continues,
" is a government
that won't stop spending on failed programs including the Department
of Education that its icon, Ronald Reagan, proposed to shut down.
Countless failed programs go merrily along wasting billions of
taxpayer dollars." . . . . . . . . . Corporate governance,
following the Enron, Tyco, AIG scandals et al, is one of primary
issues of the times. But what about central bank governance?
At least as far as the smaller, poor country central banks go,
the record is less than stellar. Central Bank Insider says: "So,
having opened the bonnet and looked inside, can the Fund [International
Monetary Fund] tell us how central bank financial reporting is
working? Yes they can, and it isn't. The Fund took a look
at 36 borrower central banks. They found 86% lacked robust accounting
standards, 83% suffered from deficiencies in internal audit,
and more than half (64%) did not perform an external audit."
. . . . . . . . . . . . Forbes magazine's Jack Adamo says: "[M]y
fondness for gold isn't based on only short-term indicators.
Even though the Federal Reserve Board has been gradually raising
interest rates, it has, at the same time, been goosing the money
supply, negating the effect. In the decade prior to 2000, money
supply growth (M-3) had approximately equaled gross domestic
product growth. Since 2000, the growth rate of M-3 has been double
the rate of GDP growth. Cheap money means expensive gold sooner
or later. I don't see the Fed tightening M-3. There is too
much governmental and private debt out there to try to pay off
with tight money. Incidentally, when China finally widens the
band in which it allows the yuan to trade against the greenback,
gold should have a nice pop. That should come this year."
. . . . . . . That's it for now. Happy Trails, my friends. More
Short & Sweet next time. MK
Nuggets:
US investors seek a hedge
against hedge funds
by Edward Helmore/The
Guardian
As one well-known British fund-of-funds manager points out darkly,
the hedge fund business, which remained small and highly profitable
for many years, has now attracted every kind of shyster and conman
trying to pull off the oldest financial scams in the book.
Wall Street research reports
are for the first time adding 'hedge fund insolvencies' to their
lists of market concerns. The headline on a report by Lipper
Research reads: 'What Equity Investors Need: A Hedge Against
Hedge Funds.' The Securities and Exchange Commission's chairman,
William Donaldson, warns of possible 'disaster'. According to
US analysts, this is what has made the markets so nervous; no
hedge fund has so far admitted to being close to collapse, but
it is feared that a series of mini-blowups is coming.
Full
article
Tipping Points
by Jim puplava/Financial Sense
There are a number of issues, which the United States faces today.
Each one looms larger as the year progresses. Whether it will
be one or a combination of issues that tip the balance is hard
to say. But I believe the following tipping points should be
red flags to the investor as we head closer to the cliff, leading
to a fall...
1. Leveraged Carry Trade
2. Growing Trade Deficit
3. U. S. Consumer Debt
4. Banking Crisis
5. Reliance on Foreign Investment
6. The Rogue Wave
Full article
Are the horses a better
bet than hedge funds?
by Hamish McCrae/The London Telegaph
Besides, it is not Rumsfeld's
"known unknowns" that are likely to unseat the markets,
but the "unknown unknowns". I had a discouraging conversation
with a banker a couple of months back who pointed out that every
period of very cheap money ended with some kind of financial
crisis. Zero or negative real interest rates encourage bad lending
decisions, and the world as a whole (although not so much the
UK) has had a long period of these. In this banker's own institution,
credit standards had dropped because of pressure to boost lending
and he felt other banks had been even less responsible.
If, however, you ask anyone
in the City where the crash will come, the answer at the top
of the list will be hedge funds. Today the London-based Centre
for Economics and Business Research predicted that 1,600 hedge
funds would go bust over the next two years and cheerfully suggested
people put their money on the horses instead.
Full article
Ayn Rand: A Legacy of Reason
and Freedom
by Michael S. Berliner
Despite being outside the cultural
mainstream, her novels became best-sellers and her books sell
more today than ever before -- half a million copies per year.
There is a reason that Atlas Shrugged placed second in
a Library of Congress survey about most influential books. There
is a reason that her works are considered life-altering by so
many readers. She had an exalted view of man and created inspiring
fictional heroes.
Full article
How Japan financed global
reflation
by Richard Duncan
In 2003 and the first quarter of 2004, Japan carried out a remarkable
experiment in monetary policy remarkable in the impact
it had on the global economy and equally remarkable in that it
went almost entirely unnoticed in the financial press. Over those
15 months, monetary authorities in Japan created ¥35 trillion.
To put that into perspective, ¥35 trillion is approximately
1% of the world's annual economic output. It is roughly the size
of Japan's annual tax revenue base or nearly as large as the
loan book of UFJ, one of Japan's four largest banks. ¥35
trillion amounts to the equivalent of $2,500 for every person
in Japan and, in fact, would amount to $50 per person if distributed
equally among the entire population of the planet. In short,
it was money creation on a scale never before attempted during
peacetime.
Full article
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 |
An ABCs
of Gold Investing UPDATE
C is for
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
Mention
you received this Market Update and ask about our special offers.
Better Business Bureau certificate
for 10+ years membership
--About us--
Archives
 NEW Disturbing Trends: Is Now the Right Time
for Gold?
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 5/16/05 - The madness of crowds can pop up anytime, anywhere.
No era is immune; no individual beyond its unflinching grasp.
And crowd madness pays no heed to intelligence or experience.
In 1841, Charles MacKay wrote an important book titled "Extraordinary
Popular Delusions and the Madness of Crowds -- the book that
Bernard Baruch called the secret to his incredible wealth. In
it MacKay points out that Roger Bacon, "by far the most
learned man of his age" believed that the philosopher's
stone could turn lead to gold. (Book
link provided)
MarketUpdate 5/09/05 - Last
week systemic risk was in the air. General Motors and Ford's
bonds reduced to junk status. Rumors of at least one hedge fund
and possibly others on the ropes. Talk of several major American
corporations in financial trouble. Amidst all of this, the Chairman
of the Fed raised the specter of systemic risk citing Adam Smith's
"invisible hand" and the forces of chaos and creative
destruction in the market.
MarketUpdate
5/02/05 - The brief history outlined
in this week's masthead quote speaks volumes why gold makes sense
for the average investor. The graph to your immediate right supports
Mr. Bonner's reference to the "5¢ dollar." Modern
nation states have a way of running their currencies into the
ground. Germany, Turkey, Argentina, Mexico, Brazil, Russia, Poland,
Greece, Hungary, China, Austria, Thailand, Chile and Yugoslavia
(just to name a few) experienced wipe-out inflationary episodes
in the 20th century. The damage was significant enough to leave
an indelible mark on the indigenous population for generations
to come.
MarketUpdate 4/25/05 - 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.
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."
* * *
|
