News, Commentary & Analysis
Celebrating our 40th year in the gold coin & bullion business
Michael J. Kosares, Editor
January, 2013 /
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Gold 2012 - 2013
New year outlook & review

PAST - 2012 price point timeline
by Jonathan Kosares

Gold Trends Graph 2012

January 1 - Gold begins year at 1562.10
January 25 – President’s state of the union address – Fed extends low rate pledge to ‘at least 2014’.   Adopts 2% inflation target.  Gold rises $100 in two days, crossing $1700/oz.

February 20-21 – Euro-zone agrees to second Greek Bailout – 130 billion Euro.  Dow crosses 13000 for first time since pre-2008 financial crisis.  Fitch downgrades Greece to one rating above default.  Gold rises $50 and nears $1800/oz. 

February 28 - Germany approves second bailout of Greece, pushing gold to new highs for the year ($1790.55).

February 29 - Gold posts biggest one-day losses ytd (down $100/oz) as Ben Bernanke fails to announce anticipated new rounds of QE during congressional testimony.

March 22-25 - Bernanke comments that positive trends in the labor market may not last, fueling QE speculation.  Statement curbs correction from February highs.  Gold rises $65 to just shy of $1700/oz.

April 2-3 - Fed Minutes released with no immediate signal for QE.  Gold drops $70 to $1612.80.  Stocks also fall.

May 7-May 15 - Renewed escalation of the Euro zone crises fuels a steep decline in the Euro and a rally in the dollar.  Greece fails to form Coalition.  Euro drops below 1.28 for first time since January.  Gold drops $115 in a week to retest mid $1500’s, where it began the year.

May 31 - Abysmal non-farm payroll report slams stocks, erasing all gains for the year.   Dollar gets crushed.  Gold rises $85 in a day to regain $1600 level as expectation for Fed intervention increases.

June  6-7 - Speculation of bailout of Spanish banks pressures Euro, dollar rises, gold falls.  Bernanke reiterates no imminent QE at testimony before the JEC.  Erases the majority of May 31 gains.

June 19-20 – FOMC Meeting – Fed extends Operation Twist, but no further mention of renewed QE.  Gold market disappointed, drops $60 in two days,  back to mid $1500’s.

June 28 - Gold rises $55 as Europe summit releases plan to stabilize banking system. Resembles US TARP plan.

July 5-9 – This time, bad job numbers actually turn gold lower, erasing gains from previous week due to Euro bank plan.  Numbers said to ‘not be bad enough to warrant immediate Fed action, but not good enough to exclude it altogether’.

July 24/25 – Bad economic numbers from Bank of England renew speculation of QE measures from both Bank of England and the ECB.  Gold pushes $60 higher.

August 19-22 -  Gold, lead by platinum and palladium, breaks from bounded range, gains $60+ in three days.  Attributed in part to expectation of ECB response to European banking crisis.  Rally given final push by accommodative Fed minutes: "Many members judged that additional monetary accommodation would likely be warranted fairly soon unless incoming information pointed to a substantial and sustainable strengthening in the pace of the economic recovery,"

September 6 - Gold jumps $50 on ECB announcement of ‘unlimited bond buying program’. Quoting Mario Draghi, the new “Outright Market Transactions” or OMT program, “enables the ECB to address severe distortions in government bond markets which originate from, in particular, unfounded fears on the part of investors of the reversibility of the euro.”  “The OMT will allow the central bank to buy government bonds with maturities of one to three years in unlimited quantities…”

September 13 - Gold gains $55 in one day as Fed announces QE3. The central bank initiates plans to expand its holdings of long-term securities with open-ended purchases of $40 billion of mortgage debt a month, while keeping interest rates low in 2015.

October 4 - Gold touches $1795, to reach its high for the year on continued Fed policy related buying.  Fails to break through psychologically significant $1800 level, begins short-term correction.

November 6 - Barack Obama is re-elected to a second term.  Gold rises $30 the day of the election.
November 28 - Single sale of 7800 contracts (equivalent of a 24-tonne sell order) hits gold market at the open of New York trading.  Gold slides $30, reversing month-long rally following the election.

December 18 - Gold falls $40, with little to no explanation.  The fiscal cliff debate moves into focus.  Selling pressure present only in the paper market, suggesting year-end bookkeeping, similar to action seen at the end of 2011.  Physical demand picks up sharply.

December 20 - Gold falls another $35, dropping to $1635, its lowest level since August.  Selling pressure attributed to upward revision of 3rd quarter GDP growth figures, and perceived reduction in need for continued QE.

December 31 - Gold finishes year at $1671.  Recovers modestly from lows of December sell-off.  Aggregate annual gain is 7.1%.

Highlights:  One might describe 2012 as a ‘noisy’ year for gold, though one that lacked any real fireworks, as the yellow metal saw a fair amount of intra-range volatility without every really breaking out in either direction.  To the point, gold failed to eclipse the highs set in September 2011 of $1920/oz., though it also shrugged off the low end of its trading range and still managed to post modest gains for the year (7.1%).  In looking back, gold saw its biggest daily moves under two scenarios:  Language modifications/policy changes by the Federal Reserve and/or resolutions/escalations of the Euro-zone crisis.   In the end, for all the speculation surrounding Fed and ECB policy, both ultimately initiated measures for unlimited liquidity, staging a strong fundamental backdrop for the yellow metal moving forward.  This same fundamental backdrop led to another year of central bank gold accumulation and strong physical demand at the investor level.  So while the gold market may continue to be hyper-sensitive to the policy language of the Fed and ECB in 2013, such ‘noise’ may only prove a distraction if gold continues to re-assert its role in the international monetary system. 

PRESENT - $86.8 trillion in debt and living on borrowed time
by Peter Grant

Late in 2012, after the Presidential election and as the fiscal cliff debate began to really heat up, The Wall Street Journal published an article by Chris Cox and Bill Archer entitled: Why $16 Trillion Only Hints at the True U.S. Debt. The key point being: “The actual liabilities of the federal government—including Social Security, Medicare, and federal employees’ future retirement benefits—already exceed $86.8 trillion, or 550% of GDP.”

The true size of the United States’ debt burden is a harsh reality that I bring up with some regularity, but it is the 800 pound gorilla in the room that everyone in Washington seems to tiptoe around. Our $16.4 trillion national debt is plenty of cause for concern, but you heap the unfunded mandates on top of that and our level of indebtedness becomes absolutely mind-numbing. The problem of course is that much-needed and sustainable entitlement reform is the ‘third-rail’ of politics. With a rapidly aging population, politicians mess with pensions, Social Security and Medicare at their own peril.

Messrs Cox and Archer both served on President Clinton’s Bipartisan Commission on Entitlement and Tax Reform and predicted eighteen years ago that this day was coming: “In 1994 we predicted that, unless something was done to control runaway entitlement spending, Medicare and Social Security would eventually go bankrupt or confront severe benefit cuts. Eighteen years later, nothing has been done.”

Bill Gross, co-founder and managing director of bond giant PIMCO, has repeatedly raised the alarm as well. He tweeted the following in response to the Cox and Archer piece: “WSJ Op-ed confirms PIMCO thesis: U.S. debt is 5 times what it admits to. Inflation ahead.”


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In two words, Gross reveals what I too believe is the inevitable consequence of amassing such an incomprehensible amount of debt: “Inflation ahead.”

We are indeed in a massive hole, the true size of which is being purposefully concealed from the American people by allowing spending commitments associated with entitlements to reside ‘off balance sheet’. Meanwhile, our friends within the beltway quibble over nothing more than the speed of our continued digging.

Renowned investor Kyle Bass, founder and principal of Hayman Capital Management, provides some additional perspective in noting that since 1981, the U.S. increased its sovereign debt by 1,560% while its population increased by only 35%. That’s a pretty compelling statistic; illustrating that we have essentially borrowed the prosperity of the last three decades from the future. China, the financier of much of our debt in recent years, stated the obvious via it’s Xinhua news agency early in the new year, reminding everyone that the U.S. “simply cannot live on borrowed prosperity forever.” And yet we seem destined to try…

At the eleventh-hour Congress averted at least the tax hikes associated with the fiscal cliff, once again punting on the really important issues, which will be rehashed all over again in just a few short weeks as another hike to the debt ceiling is debated. Much like it was in 2011, a government shut-down, our sovereign debt rating and yes, the possibility of default, will hang in the balance.

"We can always print money. . ."

In all honesty, the latter is a rather remote possibility, as former Fed chairman Alan Greenspan reminded us during that 2011 debate in a now rather infamous Meet the Press interview. “The United States can pay any debt it has because we can always print money to do that. So there is zero probability of default,” said Greenspan, as a rather uncomfortable looking Austan Goolsbee, the chairman of the White House’s Council of Economic Advisors, looked on.

Greenspan’s assertion is certainly true, as evidenced by the Fed’s ongoing four-year campaign of quantitative easing (QE) — during a period of explosive deficit spending — attests. And I suspect our politicians would indeed prefer this status quo to be perpetuated, because it doesn’t really require them to do anything other than to silently bear witness to the subtle but steady confiscation of the wealth of America’s citizenry through inflation. However, overt statements about endless money printing by the likes of Greenspan undoubtedly cause great unease among the political class, drawing attention to the malfeasance being perpetrated in plain sight.

Sustaining the long-term downtrend in the dollar requires a complicit Fed to keep rates pegged near zero, by printing dollars and creating artificial demand for a seemingly never-ending supply of debt. Despite a modestly more hawkish tone in the latest FOMC minutes, our central bank has pledged to buy $85 bln in Treasuries and agency debt each and every month in 2013. That will add an additional $1.02 trillion to the Fed’s already massive balance sheet, bringing it close to $4 trillion.

Hawkish rumblings not withstanding, the Fed has committed to this path until the unemployment rate falls to 6.5%, or inflation rises above 2.5%. They risk further damaging their already tarnished credibility if they forsake the recent dramatic change in guidance.

Congress still divided in 2013

The bottom line is that the FOMC doves carried the day in December, with the lone dissenter remaining Richmond’s Jeffrey Lacker. By most estimates, including the Fed’s own central tendencies, the jobless rate is unlikely to reach 6.5% until 2015. The notion that the foot will come off the gas pedal any sooner seems unfounded, unless of course inflation ratchets higher, in which case you’ve got perhaps an even more compelling reason to own gold.

Super-accommodative monetary policy, moribund economic growth and political gridlock were the primary domestic themes affecting markets in 2012. There is little to suggest anything is going to change significantly on any of these fronts in 2013: The Fed, as we just discussed will continue down the ZIRP/QE path. The mini-deal on the fiscal cliff is actually expected to sap GDP growth to the tune of 1%-2%. The 113th Congress is every bit as divided as the 112th, and the opposing parties are poised for another contentious debate over the debt ceiling.

Beyond our borders, we saw similar themes repeated. The ECB, BoE, and BoJ are all maintaining very accommodative policy stances as well. The Swiss National Bank still has the franc pegged to the euro, with banks offering negative yields on franc deposits, in an effort to discourage safe-haven flows into the currency. Europe and Japan fell back into recession late in 2012. Concerns about the EU sovereign debt crisis remain considerable. These themes too are likely to be echoed in the new year.

Through it all, gold remained broadly consolidative within the range that was established in 2011. This range is defined by the 1920.74 all-time high set 06-Sep-11 and the 1522.48 corrective low from 29-Dec-11. Nonetheless, the yellow metal achieved a twelfth consecutive annual gain in 2012, rising a very respectable 7.1%.

The proliferation of paper

Looking ahead, one thing seems all but certain: the primary fundamental factor that has driven gold from less than $300 per ounce a dozen years ago to that all-time high of 1920.74 remains in place and is likely to remain in place for some time to come. I summarize this as the proliferation of paper: Paper in the form of debt, and paper in the form of fiat currency.

The U.S. and much of the rest of the industrialized world will continue to go deeper into debt for the foreseeable future, while attempting to offset that by ongoing currency debasement. Add to that the voracious demand for physical gold from emerging countries (most notably China) seeking to diversify out of devaluing fiat, and I think we can consider the fundamental underpinnings of the gold market to be sound.

As long as policymakers are not willing to risk their political careers with bold fiscal initiatives, the central banks will continue to deal with the resulting problems using the only tools at their disposal. While that may suit politicians just fine, let the rest of us recognize that monetary policy is a very blunt instrument.

Further currency debasement can have a devastating impact on individuals that fail to prepare for the eventuality. That is particularly true for those who are on (or will be on) fixed incomes, such as a pension and/or Social Security. There is no time like the present to begin — or to bolster — your hedge against such risks. You cling to the notion at your own peril that those in Washington, Brussels and Tokyo are looking out for your best interests and everything is going to work out just fine.

Future - The gold owner's guide to 2013
by Michael J. Kosares

By the time we get to the end of 2013, we will forget much of what shaped 2012. Yet, as we look back at 2012, there are some fundamentally disheartening, if not disturbing, trends that are likely to play a determining role in all financial markets for some time to come, including the gold market.

– The first is the inability of the political sector to deal with the “economic problem” on a global basis. From Jinping’s Beijing flowing west to Putin’s Moscow, from Merkel’s Berlin to Hollande’s Paris, from Cameron’s London to Obama’s D.C. and finally Abe’s Tokyo, the world’s great nation- states are locked in a web of acute and alarming political disarray. The question is no longer whether or not stability can be achieved. It is to what degree the instability can be restrained – a circumstance not unfamiliar to the student of history, but one for which the modern investor is generally unprepared and lacking in defenses.

- The second is the global predisposition to print money. Compliments of the disastrous events following the 2008 financial meltdown, vote-buying politicians globally have defeated usually conservative central bankers in the battle of the printing press. Ben Bernanke’s stewardship of the Federal Reserve has not only been emblematic of the trend, it has served as a bad example and dangerous precedent for other central bankers. You cannot slide a sheet of paper between the monetary policies of Ben Bernanke, Mario Draghi and Mervyn King (soon to be replaced with the even more dovish Mark Carney). Shinzo Abe, who was just elected Japan’s prime minister, has threatened to nationalize the Bank of Japan if it refuses to print money. It is as if John Law were reincarnated simultaneously in every major nation-state in the world.

- The third comes to us via Raoul Pal, the highly-regarded hedge fund manager who once co-managed one of the world’s largest hedge fund groups, GLG Global Macro Fund in London. It has to do with the persistent nature of the debt crisis that began in 2007 and never really went away. Pal outlined the problem at a seminar in Shanghai this past summer for other hedge fund managers — a presentation ZeroHedge called one of the “scariest ever.” In it he predicted a cascading sovereign debt collapse and default that would begin in Europe, jump the Channel to London, then move progressively through Japan, South Korea and even China. Finally, it would envelope the United States. The problem, he says, is that $70 trillion in G-10 sovereign debt is collateral for $700 trillion in derivatives.

“You have to understand,” he explains, “that a global banking collapse and massive defaults would bring about the biggest economic shock the world has ever seen. There would be no trade finance, no shipping finance, no finance for farmers, no leasing, no bond market, no nothing. The markets are at the frankly terrifying point of realizing that LTRO (long term financing operations), EFSF (European Finance Stability Facility) and QE (quantitative easing) etc. are not going to prevent this collapse.”

(Note: A synopsis of Mr. Pal’s seminar was the most popular post for 2012, and all-time, at the widely-read ZeroHedge website. Recommended.)

I do not know if Raoul Pal is correct. I don’t know if he’s even close. I can tell you that he was successful enough as a hedge fund manager to retire to Spain’s Valencia coast at 36 years of age and that he’s one of those guys like in the old commercial: When he speaks, people listen. I can also tell you that something is in the air — a sea change in investor psychology, of which we should take note. I pass this along as someone who has experienced several similar shifts in investor sentiment over the course of a forty-year career in the gold business.

In the last two months of 2012, we experienced volumes at USAGOLD not unlike those of 2008 and 2009 — and those were record volume years. The U.S. Mint confirmed our own experience by reporting that U.S. Gold Eagle sales in November and December hit their highest levels in two years. Also, demand for historic, pre-1933 gold coins surged — an important indicator because it tells us the safe-haven investor is back in the market. Since safe-haven investors tend to run ahead of the herd, this bodes well for gold demand as we move into 2013. Wholesalers tell us that the market for British sovereigns, Dutch 10 guilders, Swiss 20 francs, etc. is running very strong both in the United States and Europe. In particular, British sovereign supply has dried up. If I am reading the signs correctly (and I am big believer in letting the market speak for itself), 2013 could turn out to be a very good year for gold.


Michael J. Kosares, the editor of USAGOLD News, Commentary and Analysis, is the founder of USAGOLD and the author of "The ABCs of Gold Investing - How To Protect and Build Your Wealth With Gold."

Jonathan Kosares graduated cum laude from the University of Notre Dame with a dual major in Finance and Computer Applications. He has been with USAGOLD since 2002, and currently holds the position of Executive Vice President of Sales and Marketing. He is the moderator of the USAGOLD RoundTable series, has authored numerous articles on the gold market and manages client activity for the high net worth division as well as the USAGOLD Trading and Storage Program.

Peter Grant spent the majority of his career as a global markets analyst. He began trading IMM currency futures at the Chicago Mercantile Exchange in the mid-1980's. Pete spent twelve years with S&P - MMS, where he became the Senior Managing FX Strategist. The financial press frequently reported his personal market insights, risk evaluations and forecasts. Prior to joining USAGOLD, Mr. Grant served as VP of Operations and Chief Metals Trader for a Denver-based investment management firm.

This newsletter is distributed with the understanding that it has been prepared for informational purposes only and the Publisher or Author is not engaged in rendering legal, accounting, financial or other professional services. The information in this newsletter is not intended to create, and receipt of it does not constitute a lawyer-client relationship, accountant-client relationship, or any other type of relationship. If legal or financial advice or other expert assistance is required, the services of a competent professional person should be sought. The Author disclaims all warranties and any personal liability, loss, or risk incurred as a consequence of the use and application, either directly or indirectly, of any information presented herein. Opinions expressed by contributors are strictly their own and publication here does not represent endorsement by USAGOLD.

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