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News & Views
Forecasts, Commentary & Analysis on the Economy and Precious Metals
Celebrating our 42nd year in the gold business

July, 2012

USAGOLD's NEWS & VIEWS newsletter
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News & Views is the contemporary, web-based version of our client letter which traces its beginnings to the early 1990s as a hard-copy newsletter mailed to our clientele. The "Big Breakout of 1999" headlined in the November, 1999 issue of our newsletter moved the gold price from $250 to $325 per ounce. It was a major event.

The times have changed, but our mission has not. Simply put, it is to deliver value to our readers in the form of cutting-edge Forecasts, Commentary and Analysis on the Economy and Precious Metals. The very same mission that has been displayed in our banner for over twenty-five years.

Editor: Michael J. Kosares, founder of USAGOLD and author of The ABCs of Gold Investing - How to Protect and Build Your Wealth With Gold.


Gold still top pick among America's investors
28% rate gold tops, 20% pick real estate, 19% like stocks

Despite being in a trading range with a slight dowtrend bias for the first part of 2012, gold remains the top pick among American investors. "Investing in gold," says Gallup, "has gained in popularity in recent years as low interest rates have made traditional savings instruments less attractive, and instability in the stock and real estate markets has undermined the mass appeal of those options. Meanwhile, the rising trajectory of the price of gold over the past several years apparently offers more of the returns and stability investors seek. Although gold prices dipped in the last quarter of 2011 after hitting an all-time high of $1,924 per ounce in September, and have yet to fully recover, more Americans continue to consider gold the best long-term investment among the major options available to consumers."


Reprinted with permission

Adding to gold's appeal for Americans is the strong on-going demand from central banks and investors seeking shelter from the stubborn global sovereign debt and economic crisis. Chinese investment demand for example was up nearly 63 tonnes this February from the same month last year. Eugen Weinberg of SPDR Trust says China is already on pace to exceed last year's imports of 413 tonnes, a figure that represented roughly 15% of 2011 mine production. Indian demand is also expected to ramp up now that import restrictions have been lifted.

An interesting sidebar to the Gallup survey are the gains recorded for savings instruments since August 2011, the last time the poll was taken. At that time, 14% picked savings accounts/CDs as their preferred investment. In the April, 2012 survey that figure jumped to 19%. These findings support an earlier opinion published in this newsletter that America is becoming a nation of savers in the wake of the 2008-2009 financial crisis. Gold, as reflected in this Gallup poll, has become a major beneficiary of the change in investment psychology from risk-taking to risk aversion. Gold has posted returns of 19% or better in eight of the last ten years, and has provided a real rate of return in all but two years of the last decade.

For important details, please see "Saving Gold: Old Reliable Stands Tall in Crisis Atmosphere"

"Main Street has no love for Wall Street. Not the scruffy rabble of Occupy Wall Street but the stalwart middle class that Charlie Merrill once implored to own a piece of America. They want no part of the stock market. "Invest in Stocks? Small Players Still Smarting" That was the headline of a page one story in Tuesday's USA Today. Not on the business page, but the front page of the main section, above the fold, alongside the lead story in the right-hand column of what supposedly is The Nation's Newspaper. Middle Americans, who had once counted on stocks as the best way to build wealth, no longer want anything to do with the market, according to the USA Today story (which has a wimpier headline online, "Invest in stocks" Small player still smarting".) After the brutal bear market of 2008-09, they want nothing to do with stocks -- even after they've doubled in the recovery from their lows." -- Randall W. Forsythe, Barron's

Institutional gold demand works quietly in the background

While most of the attention in the mainstream financial press has been divided between global central bank demand and growing Chinese imports, another sector -- financial institutions and funds -- have been quietly accumulating gold in the background. George Soros is back in the market, quadrupling his holdings in the SPDR Gold Trust. Japan's Okayama Steel and Machinery, citing sovereign debt risks, recently converted 1.5% of its pension assets, $500 million, to "bullion-backed exchange traded funds," according to a Financial Times report. There are also reports that PIMCO and the Teacher Retirement System of Texas and Eton Park Capital are in the gold acquisition mode. The World Gold Council attributes the renewed interest in gold among institutional investors to the low global real rate of interest, inflationary expectations and the sovereign debt problem in Europe.

Derivatives danger knows no borders, pushes interest in gold

The $2 billion loss at JP Morgan's London treasury unit did not threaten the overall stability of the bank nor did it send tremors through Wall Street. What it did do was serve as a reminder of the danger that big bank derivatives positions impose on the financial system as a whole. It also reignited the debate on what should be done to contain it. According to the Bank for International Settlements, the total notional value of derivatives by the end of 2011 stood at a whopping $648 trillion. Four American banks -- JP Morgan ($75 trillion), Citibank ($56 trillion), Bank of America ($55 trillion) and Goldman Sachs ($46 trillion) -- account for over one-third of that total worldwide position.

I do not claim to be an expert in the complicated field of derivatives trading, so let me quote some people who are :

Thomas Hoenig, Vice-chairman Federal Deposit Insurance Corporation and former president of the Kansas City Federal Reserve

"Thomas Hoenig, a director of the Federal Deposit Insurance Corp., said there was a clear case for a strict regulatory division of banks, perhaps even beyond what is contemplated in Dodd-Frank. In his prehearing testimony, Hoenig said large banks have taken on noncore banking activities that increase their risk and create complexity, and 'that makes it more difficult for the market, bank management, and regulators to assess, monitor, and contain risk-taking that endangers the public safety net and financial stability.'" (CFO Magazine)

David Stockman, former Budget Director in the Reagan administration

"A massive amount of resources are being devoted, being allocated or being channeled into pure financial speculation that has no gain to society as a whole, has no real economic contribution to the process by which GDP is created and growth occurs. By 2007 40 percent of all the profits in the American economy were coming from finance companies. 40 percent. Historically it was 15 percent. So the financialization means that as we attracted more and more resources and capital, and we made speculation easier and easier, and we funded it with almost free overnight money, managed and manipulated by the Fed, that's how the economy got financialized. But that is a casino. Casinos — they're, you know, places for people to go if they want to speculate and wager. But they're not part of a healthy, constructive economy." (Interview with Bill Moyers)

Problem Banks List

"The Federal Reserve recently allowed Bank of America to move its massive derivative positions from the bank holding company to its banking subsidiary which is an FDIC insured depository institution. By allowing this transfer, the Federal Reserve has allowed Bank of America to shift the risk of loss on speculative derivative contracts from the non-bank affiliate. A failure of Bank of America could result in huge losses for the FDIC which would ultimately be passed on to the taxpayers."

Stein Derivatives

Richard Fisher, President, Dallas Federal Reserve Bank

"'A set of harsh, non-negotiable consequences for requesting U.S. Treasury assistance might also include 'clawbacks' to gain cash and stock bonuses paid the top management team during the prior two years, the Dallas Fed said today in a slide presentation on its website. The proposal reflects Dallas Fed President Richard Fisher's view that large U.S. banks need to be split apart because they operate with an implied government safety net that puts their risks of failure on taxpayers. The 'institutions that amplified and prolonged the recent financial crisis remain a hindrance to full economic recovery and to the very ideal of American capitalism,' Fisher said in an essay in the Dallas Fed's 2011 annual report posted online." (Bloomberg)

Sheila Bair, former chairwoman, Federal Deposit Insurance Corporation

"The potential sources of shock that now confront the system are greater than we saw in 2008. I don't want to alarm people, but I don't think we have a good sense of what would happen here if there were a large banking failure in Europe. We don't have a handle on what will happen if the eurozone breaks up and there are bank runs."

Polling tells us that the American people are opposed to bailouts and the too-big-to-fail doctrine simply because it rewards bad behavior. Sheila Bair (above) comes closest to defining the core problem. The trouble with the derivatives market -- and this is where gold enters the picture -- is that it could be difficult, if not impossible, to contain the systemic damage once a Fukushima-style derivatives meltdown begins. It could begin in Europe, or it could begin somewhere else. Derivatives danger and interlocking counterparty risk knows no borders. Europe simply represents the most immediate concern. Warren Buffett had it right when he called derivatives "financial weapons of mass destruction."

In terms of utilitarian, widely-held and traded assets, only gold carries no counterparty risk, and that is probably the primary reason institutional funds and central banks are so interested in it. The goal -- and it comes with the times -- is to own a stand-alone asset that is not on deposit in the leveraged financial system.

The most important gold market event since 1999

Consider this from a recent World Gold Council (WGC )report:

"Central banks continued to buy gold; net purchases recorded during the [first quarter, 2012] amounted to 80.8 tonnes, accounting for around 7% of global gold demand. Central banks from a diverse group of countries added to the overall holdings of the official sector, with a number of banks making sizable purchases. Diversification requirements and growth in foreign exchange reserves of a number of countries point towards a continuation of this trend."

303In keeping with this analysis, the World Gold Council moved to "incorporate official sector purchases as an element of gold demand" (my emphasis) in its fundamentals table. Previously central banks occupied a slot on the supply side of the ledger. "The net purchasing of gold by the official sector," says the Council, "is now an established trend, which is likely to remain in place for the forseeable future." More than just a symbolic change, the World Gold Council's alteration documents an important shift in gold market dynamics. In 2002, central banks contributed 545 tonnes of gold to the supply. Ten years later, in 2011, they purchased 440 tonnes -- a significant nearly 1000 tonnes swing on the fundamentals table. Just as significantly, "signatories to the third Central Bank Gold Agreement," says WGC, "have almost ceased sales of their gold."

Quite unexpectedly, except perhaps among a handful of long-time gold advocates, gold is quietly and gradually moving back to its centerpiece role in international reserves. Stretched and threatened financially, nation-states have begun accumulating gold for the same reason private individuals do -- as portfolio insurance to cover a wide assortment of economic uncertainties. What's more, this restoration has not occurred formally as a result of an international agreement as has so often the case in the past, but informally as a natural evolution in the way nation-states think about and react to the long-term value of currency reserves. As such, it suits the times and suggests an authenticity that is likely to transform the gold market at its core. In my view, this swing in the supply-demand fundamentals will come to be recognized in future years as the most important gold market event since the Central Bank Gold Agreement (CBGA) of 1999 -- the accord that many believe kicked-off the secular gold bull market. (The CBGA capped the sales and leasing of gold by its signatories, the most active central banks in the gold market at the time.)

The Asia gold call

In gold producing countries like China (the largest producer) and Russia (the fifth largest) most, if not all, domestic production is being converted directly to reserves. Other central banks, like India, Mexico, Turkey, the Philippines and a growing list of others (including some who probably would just as soon like to keep it quiet) are buying gold on the open market when it becomes available. One has dramatically reduced supply; the other has dramatically increased demand.

It took almost four years for the CBGA to affect prices, and it may take that long for the full impact of the new shift in central bank activity to render its effect on the current market. However, times have changed, and we could be on a shorter fuse. Even now, there are rumors circulating through the market that Asian central banks will make purchases on any drop into the $1500 to $1550 range -- a gold call of sorts that puts a floor under the price.

Dan Norcini, the well-known gold market analyst who plies his trade at Jim Sinclair's website JS Mineset makes the following observation:

"Every time we've gone down below $1,550 and dipped into this support level, we've had very strong, quality buying emerge. Most of the time this type of buying is associated with central bank purchases, particularly central bank buying coming out of the East. The bottom line is there was some very powerful buying that came into the gold market from some extremely strong hands. They were strong enough that they could absorb hedge fund algorithm related selling, which is significant right now across the commodity sector."

gold restore1It is precisely because of the lack of readily available physical gold in size that China and Russia have chosen to take the route of increasing their reserves through domestic production -- a strategy, by the way, from which the United States could benefit. The U.S. at present houses the largest gold reserve in the world at over 8000 tonnes and hosts the world's third largest mine production at 243 tonnes. It could begin increasing its own reserves by simply offering to purchase domestic production on a right of first refusal basis at market prices.* In addition to China purchasing its own production, there have been consistent reports of its interest in buying gold directly from foreign mining companies, particularly in Australia and Africa. As the restoration process proceeds, the price over time is likely to move progressively higher extending the length of gold's bull market beyond anything most observers have thus far contemplated, while at the same time enhancing the metal's status as a reserve asset.

* Strongly positioned mining companies with proven reserves and management that fully understands the evolving role of gold in national reserves would be obvious beneficiaries under the circumstances described. At the same time, mining companies should not be owned to the exclusion of the metal itself. It should be kept in mind that mining stocks are stocks first and a form of gold ownership second. Gold coins and bullion are wealth insurance first and an investment second. The first objective should be to secure one's portfolio. The second should be avenues for potential profit.

In case you missed it:

Extraordinary popular delusions or the madness of machines
Why gold might be setting up for a big move higher

The running conflict between rational and irrational forces has become a hallmark of the times. You see, we are increasingly giving over our thought processes in the investment marketplace to external trends governed by computers and automaton traders who have nearly unlimited capital reserves they can throw in the direction their algorithmic software is telling them. Thus, if the algorithm says that gold goes down when the dollar goes up and that the dollar goes up when the euro goes down, then that is the reality under which we all must live – no matter what our intuitions, or intellects, might be telling us. It used to be "don't fight the tape." Now it's "don't fight the algorithm." Paper, not physical, trades are executed in the marketplace quite often without the intrusion of human contact, and thus the market proceeds as it is directed.

This is a hallmark of our age. And a strange age it is. What we are all witnessing, in my view, is part and parcel of the bubble psychology that dominates our times. With a bit of nuance, it is no different than the bubble thinking that preoccupied Holland during its tulip mania, or France during its South Seas investment scheme or the long list of extraordinary delusions and crowd madness chronicled by Charles Mackay in his now famous tome. Only this time it is driven by machines, a kind of madness that we have hard-coded into software that is running amuck, and no one seems inclined to understand the process, let alone stop it. Though I do not hold out much hope for the euro and the European experiment, at this juncture I do see a bright future for gold – in the form of a breakdown in this odd, software-driven marriage between gold and the euro. This breakdown, once it occurs, will have a catapulting effect on the price, as the reality sets in that the best hedge against what is going on in Europe is not the dollar, but gold. (More)

Reader comments on "The madness of machines. . ."

"I must pause to tell you that is an absolutely stunning article you published today—not only the way you pulled so much together in the content but so beautifully written. In a word, inspired. Thank you!"

-- H.S., Philadelphia, Pennsylvania

"I've just finished your article (Extraordinary delusions or the madness of machines) on gold-eagle.com and thought you might appreciate a comment from one who has been in the gold (and silver) business since 1966, and was mentioned in both of Harry Browne's books (1971 & 1974) as someone who knew something about gold mining stocks.

In case you do care, I thought your article was most interesting (I have both books to which you referred in my library) and I've forwarded it to several friends in the hope that they might make an investment into either/both gold and silver because of the excellent information you published."

-- J.W., Scottsdale, Arizona

"As turmoil builds, investors and policy makers are being tipped into cognitive shock. In the past few decades, most investors have operated as if the world was a place in which the key variables could be plugged into a spreadsheet or computer model. Ever since the computing revolution took hold on Wall Street and the City of London in the 1970s, finance has been treated not as an art but a science - and banks have operated as if computer models could not just explain the past but predict the future, too.

Now those 'quants' and rocket scientists find themselves at sea. Computer models alone can no longer calculate meaningful probabilities about what will happen next in the eurozone. Instead, what really matters now in places ranging from Finland to Greece are non-quantitative issues such as political values, social cohesion and civic identity."

Gillian Tett, Financial Times

Editor's note: What goes around comes around. Gillian Tett does not delve into the potential "madness of machines" in her incisive analysis sticking instead to the macro-economic side of the issue as it relates to Europe. The point she makes is similar to the one I make in "Extraodinary Popular Delusions and the Madness of Machines." It is comforting to know, though, that those responsible for making decisions these days, whether they be in terms of national economic policy or how portfolios should be managed, are beginning to realize that the reliance solely on computer-based modeling has its drawbacks, and perhaps a form of madness in and of itself. I would encourage Ms. Tett to take the matter a step further and consider the possible mania that might be induced by quant, black box and other sorts of computer driven capital deployment in the markets, and their potential systemic effects. After all, it is not like we haven't had an incident or two of at least temporary madness. The Ed Stein's cartoon immediately below illustrates the problems inherent in relying on machines when human sensory perception is telling us otherwise.

Stein GPS

Kudos for the USAGOLD website from Australia

"Very good to listen and see to the conclusion [of the latest USAGOLD Video Roundtable]. I have your website as my home-page [Daily Market Report]; I find [Live Gold Price] gives me daily information regarding metals and currencies. Your section [Breaking Gold News] is a great reference. Your website is one of the best financial sites available." — H.R., Australia

Thank you, H.R. It's always good to hear that our efforts are appreciated. At the present, USAGOLD averages about 1 million unique visits monthly and as high as 100,000 on days when the market is on the move. Growth has been strong over the past three years as more and more internet users have come to rely on this site as a source for information on the gold market. They have bookmarked their favorite pages as you have. We constantly hear of visitors who have made one of our pages their home page. Our goal is to offer a website where newcomers can learn about gold ownership at their leisure and where our regular clientele can monitor the market and find meaningful and timely news and analysis — all in a gold-friendly environment. Thanks again and our best wishes to you and all of our friends Down Under.

We invite newcomers to browse our pages and make USAGOLD your home for gold market information. And please remember that it is your purchase of gold and silver from USAGOLD that nourishes these pages.

The vision of Nobel Prize laureate, Robert Mundell

I do not believe that some version of the gold standard is necessarily the best or only approach to restoring gold's place in the monetary system. Simply using gold as a reserve asset, as Nobel prize-winning economist Robert Mundell suggested many years ago, could go a long way in restoring confidence in the various currencies. Secondly, it would give the central banks somegold restore protection against beggar-thy-neighbor currency policies that tend to undermine the value of currency reserves. In other words, it would serve as a hedge. This is precisely what Mundell envisioned when he recommended that Europe use gold as a core reserve in establishing the euro.

Robert Mundell from a lecture delivered at St. Vincent College, Latrobe, Pennsylvania (1997):

"I do not think that we will see the time when either of those two great economic powers, the United States and the European Union, will ever again fix their respective currencies to gold as they have in the past. More likely, gold will be used at some point, maybe in 10 or 15 years when it has been banalized among central bankers, and they are not so timid to speak about its use as an asset that can circulate between central banks. Not necessarily at a fixed price, but a market price. . .Gold is going to be a part of the structure of the international monetary system for the 21st century, but not in the way it has been in the past. We can look upon the period of the gold standard, the free coinage gold standard, as being a period that was unique in history, when there was a balance among the powers and no single superpower dominated."

Fifteen years later, as Mundell predicted, gold is being bandied about as an important component in the monetary system of the future. Ben Steill of the Council on Foreign Relations, World Bank president Robert Zoelick, former Kansas City Federal Reserve president Thomas Hoenig, and former Fed Chairman Alan Greenspan all have spoken favorably of gold's restoration as a component of central bank reserves. In a recent essay on a formal gold revaluation, Quaintance and Brodsky offer a strategy worth contemplating: "We suggest one keep identities straight; invest with central banks, not against them; and consider the hollow rhetoric of the establishment that may temporarily suppress its paper price 'a gift.' They are working for physical gold holders, not against them." It is a long-term investment strategy worth contemplating.

Gold's coming of age in the banking system
Now at top tier of asset classes for collateral purposes

Here's something interesting from Lew Spellman, former economist at the Federal Reserve and former assistant to the chairman of the President's Council of Advisors:

"Hence, the great corollary of over indebtedness is the relative scarcity of good collateral to support the debt load outstanding. This imbalance of debt to collateral is impacting the ability of banks to make loans to their customers, for central banks to make loans to commercial banks, and for shadow banks to be funded by the overnight Repo market. Hence the growth of gold as a collateral asset to debt heavy markets is inevitably in the cards and is de facto occurring. Gold is stepping up to the plate as 'good' collateral in a world of bad collateral."

The Wall Street Journal reports that JP Morgan will begin accepting gold as collateral from other banks and hedge funds. Says WSJ, "JP Morgan is effectively saying gold is as rock solid an investment as triple-A rated Treasuries adding gold to a movement that places gold at the top tier of asset classes." Adds Carlos Sanchez of CPM Group: "It's soldifying a trend that gold is re-establishing its role as a monetary and financial asset." Similarly, LCH.Clearnet, a British derivatives clearinghouse, is now accepting gold as cover for margin liability, says Euroclear's Olivier de Schaetzen (as reported by Global Finance's Anita Hawser.)

Does this mean that your local bank may someday accept gold as collateral? I believe the answer to that question is "yes!" and perhaps sooner than many think.

What is the SCO?
What does it have to do with gold's future?

by Alasdair Macleod

(Editor's note: The answer to the question posed above is "plenty", as you will discover by reading the analysis below extracted from a larger work by Mr. Macleod, available here at the USAGOLD Gilded Opinion page.)

gold prod

This slide shows some interesting information on our subject. The combined output of the SCO (Shanghai Cooperative Organization) group is 26% of the world's total, and there is little doubt that the full gold mineral potential of Central Asia still lies untapped. The gold reserves shown here are those that have been officially declared. It is quite likely that Russia has under-declared her position, having been actively mining gold for many decades. China is certainly under-declaring her position. Her holdings here are the central bank holdings, and are not regularly updated. Furthermore, my contacts tell me that the Communist Party itself is a major holder, and it is quite possible her total holdings exceed 10,000 tonnes – perhaps even more. Furthermore, she is trying to buy gold mines in Australia and elsewhere.

We must also note that China legalised gold ownership for her citizens in 2002, and Chinese savers have rapidly become keen buyers, almost to the level of the Indian public. The central banks for Russia, China, India, Iran, Belarus and Sri Lanka have all bought gold recently. The fact that China has substantial gold interests, both at government and at individual levels, suggests that she is aiming for the yuan, backed by significant gold reserves, to be the trade settlement currency of choice for the SCO region.

We must think about the implications.

Here is an economic and political bloc that is building its combined gold reserves, and increasingly stands to benefit from a rise in the gold price. Meanwhile, we have every reason to suspect the Western central banks, including the US, have been feeding gold into the market over the last thirty years, and have either not declared these sales in their central banks' accounts, or are hiding them quite legitimately behind the sight account system. The United States and the Euro Area officially hold 18,926 tonnes. It is quite possible that much of it no longer exists as central bank reserves, given the continual attempts to de-monetise gold completely since the Nixon Shock 40 years ago. Add to that the inherent short position on the London Bullion Market, probably a further 3-4,000 tonnes, and the price potential on discovery could be spectacular.

Finally a few brief words on silver. China has gained a substantial degree of control of silver by becoming the largest refiner of rough ingots, known as silver doré. It is by all accounts a nasty polluting process, and unprofitable for Western refiners, particularly when the price was low. These were not problems for China. I have seen a figure stating they have over 40% of this market, but I cannot verify that. Whatever their share, it is large and important. This allows them to buy the rough doré either for spot or forward, and cover the commitment by selling forward, or selling futures; or alternatively just build a strategic reserve. This is why they could be behind the large short position on Comex. This gives them the means to control the silver price.

It is in their industrial interest to keep the price of silver low for their expanding manufacturing of items such as solar panels. I think this is the likely explanation for much of the apparent price manipulation in the market, but I don't actually know this for certain.

More generally and returning to China's role in the SCO, they have built up an industrial economy based on cheap exports to the West. That has given them the infrastructure to develop their own consumer economy, and to develop markets throughout the Asian continent. They have secured many of the resources to do this. They have secured the political partnership in Asia to give them a market many times larger and longer lasting that the crumbling empires of America and Europe. Every step we take, like freezing Iranian assets, or shutting down their access to the international bank transfer systems, strengthens China's position. If the cold war has been replaced by a financial war, we may have won the cold war but we are losing the financial war.

Our fiat currencies have done away with the restrictions of gold, to the temporary delight of the neo-classical economists. Paper money now depends totally on ephemeral confidence in them. As we dig deeper holes for ourselves, leading to the eventual collapse of our paper currencies, the Chinese intend to survive and have a future. Marx said that capitalism will destroy itself, and they intend to survive this destruction. They are the dominant party in the SCO. And if we as individuals are going to survive this financial maelstrom, we will do well to understand them, understand what they are doing with gold and silver, and take whatever personal action is necessary.

Reprinted with permission.
Please see "The gold bullion market" by Alasdair Macleod/FinanceAndEconomics.org

What others are saying

"As the second quarter of the year struggles into its final weeks it appears that, far from the recovery that was threatening to become a theme, at least in the United States, 'collapse' has returned to the fore. And just as we saw in the earliest days of the crisis, when Lehman Brothers went bust triggering a domino effect of failures in the banking industry and wider economy, a collapse rarely comes to the party alone. Invariably it will bring a ragtag band of hangers on and gatecrashers who will dominate events, drown out any fun you planned and leave a nasty mess to clean up in the morning."

-- James Doran, The National

"In the Middle Ages, people were always looking for alchemists who could change the substance of something into gold. This morning (6/1/12) at 8:32 AM (EST), gold converted from just another asset class, back into safe haven status. People scrambled saying, 'I'm not sure which currency, I'm not sure which continent, which area can offer me safety. Let me buy some of the yellow metal.'"

-- Art Cashin, UBS, Director of Floor Operations

Stein: In the case of Economic uncertainty

"J.P. Morgan Chase JPM -2.91% & Co. is struggling to extricate itself from disastrous wagers by traders such as the "London whale," in a sign that the size of its bets could bog down the bank's unwinding of the trades and deepen its losses by billions of dollars.The nation's largest bank has said publicly that its losses on the trades have surpassed $2 billion, and people familiar with the matter have said they could over time reach $5 billion...The company is holding derivative wagers with a face value of roughly $100 billion in a derivative index tracking the health of corporate debt, according to a person familiar with the bank's trading. These wagers include long and short positions, or bets that index will either rise or fall, from various parts of the firm."

-- Gregory Zuckerman and Scott Patterson, Wall Street Journal

"Turks' Love Trade dates back more than 5,000 years ago, when gold jewelry was produced in Anatolia. That city still holds the world's oldest jewelry art. Istanbul is the center for the production of gold jewelry and is also home to the Grand Bazaar which was constructed in 1461 and remains "the heart of the Turkish gold jewelry sector," says the World Gold Council (WGC). Similar to India and China, Turks view the precious metal as both an adornment and a traditional form of saving. From a very young age, girls learn that gold is a wealth preservation asset, which helps explain why almost a quarter of those surveyed in Turkey today chose gold as their top investment choice, says the WGC."

-- Frank Holmes, US Global Investors

Editor's note: The first gold coins were minted in Lydia in 564 BC by King Croesus, who served as archetype for the legend of Midas and the golden touch. Lydia was located in present-day Turkey.

See "History of Gold, Part One." The Visual Capitalist.

"The presence of such a huge paper gold market means that at certain times (liquidity crises) gold will sell off with all financial assets. As we've tried to explain, though, a very low gold price is not in a government's interest because physical gold would leave the system and end the paper money game. So governments simply try to control gold's rise, making sure it doesn't throw off too much of a red-alert signal. For the gold price to genuinely fall, we need to see a rise in real interest rates. In a world buckling under the weight of debt at all levels, that is just not going to happen."

-- Greg Canavan, The Daily Reckoning

"What we are sure of however is that the rationale for owning gold is better today than it was 5 and 10 years ago... and we see little prospect of that altering. The supply/demand balance remains deeply favourable and unlikely to change - and the chance that we will be back to sound money is equally unlikely for some years to come."

-- Ross Norman, Sharps-Pixley

"The all-in cost of the industry to produce an ounce of gold is probably around $1400 per ounce...that is capital expenditure, operating costs...that doesn't leave a lot of margin at $1500. We are using $1500 as a long term price because we try to structure the business around a floor price, and we think that is a good floor price, and I don't see any reason based on what we are seeing today, even though there is volatility, to change that view."

-- Nick Holland, CEO, Gold Fields

"Prominent hedge fund manager John Paulson held on to his ETF bullion holdings in the first quarter of this year, profiting from an early surge in gold prices before the market tanked, a regulatory filing by his company showed on Tuesday. . .Other major fund managers with positions in SPDR Gold, including billionaire financier George Soros, also turned positive on the ETF during the first quarter, some raising their holdings sharply. . Paulson has to date been the biggest holder of SPDR shares, using them to hedge currency exposure, while other managers such as David Einhorn and Daniel Loeb have favored more-discrete investments in physical bullion."

-- Barani Kishnan, Reuters

"It is important to recognise the fundamental difference between paper gold and physical gold, aside from the fact that paper gold enables one to take a leveraged position. With paper gold you own exposure to the gold price; you do not own real gold. Paper gold is a financial asset that comes with counterparty risk, as MF Global's customers learned. The value of their paper gold was dependent upon a financial institution's promise. In contrast, physical gold is a tangible asset, with no counterparty risk. . .[M]ake sure that your gold is not kept with a broker or bank because they are not safe, as Lehman Brothers, MF Global and the failure of other firms have made clear. Instead, always store your metal in the vault of companies who are in the business or storing, not the business of lending or trading leveraged products."

-- James Turk, GoldMoney Foundation


Michael J. Kosares is the founder of USAGOLD and the author of "The ABCs of Gold Investing - How To Protect and Build Your Wealth With Gold." He has over forty years experience in the physical gold business. He is also the editor of News & Views, the firm's newsletter which is offered free of charge and specializes in issues and opinion of importance to owners of gold coins and bullion. If you would like to register for an e-mail alert when the next issue is published, please visit this link.

Disclaimer - Opinions expressed on the USAGOLD.com website do not constitute an offer to buy or sell, or the solicitation of an offer to buy or sell any precious metals product, nor should they be viewed in any way as investment advice or advice to buy, sell or hold. USAGOLD, Inc. recommends the purchase of physical precious metals for asset preservation purposes, not speculation. Utilization of these opinions for speculative purposes is neither suggested nor advised. Commentary is strictly for educational purposes, and as such USAGOLD does not warrant or guarantee the the accuracy, timeliness or completeness of the information found here.

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