Gold’s recent slump bewilders investors – MarketWatch

23 Thursday Oct 2008

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Gold’s recent slump bewilders investors – MarketWatch

Gold’s recent slump bewilders investors

World Gold Council points to fund liquidation, stronger dollar, stock markets

By Moming Zhou, MarketWatch

Last update: 9:46 a.m. EDT Oct. 23, 2008

Comments: 260

NEW YORK (MarketWatch) — Gold is often seen as an investment safe haven whose price tends to rise when the economy falls into troubles, but its recent slumps have defied conventional wisdom.

Gold futures hit a historic high above $1,000 an ounce a few days after Bear Stearns was taken over by J.P. Morgan Chase & Co. on Mar 14th. But in the recent round of crises triggered by the collapse of Lehman Brothers Holdings Inc. gold has fallen to below $700 for the first time in 13 months. The metal has so far lost more than $180 in October.

‘Investors worldwide are selling everything, including the kitchen sink, and gold is no exception.’

— Peter Grandich, Agoracom

The reason, according to analysts at the World Gold Council, is that the latest bout of the credit crisis has been deeper and more far reaching. Funds were forced to sell desired assets such as gold to meet margin calls, while weakness in European economies lifted the U.S. dollar, which then pushed dollar-denominated gold prices lower.

“The fact that gold did not head higher during the current leg of the crisis seems to reflect a combination of the rise in the dollar, deleveraging of commodity positions, sales to meet margin calls, and the unwinding of the long gold, short dollar trade,” wrote Natalie Dempster, an analyst at the WGC, in a research report released Thursday.

Unlike in March, banks and investment funds were facing an increasingly tight credit market recently. The overnight dollar London interbank offered rate, the rate banks charge each other known as Libor, hit a record high of 6.88% earlier this month. The rate was at around 3% in March.

Stocks also stood higher in March, with the Dow Jones Industrial Average trading around 12,000. The Dow has slumped to below 9,000 this month.

“The current crisis has seen much more pressure on gold as an ‘asset of last resort,’ where it has been sold to meet margin calls when there have simply been so few other viable options available,” Dempster said.

Trading in the over-the-counter gold market, where big institutions trade with each other directly in large orders, weakened in the third quarter due to the rise in counterparty risk and the lack of investment capitals, according to GFMS, a London-based precious metal consultancy.

A wave of liquidations occurred in September as funds were forced to raise cash in the face of margin calls and massive investor redemptions, according to GFMS.

The London gold-fixing price — used as a benchmark for gold’s OTC trading – has dropped $160 this month. It stood at $726 an ounce Thursday morning.

Gold trading in futures markets also went through a similar declining trend. In the two major global gold futures markets in New York and Tokyo, speculators’ buy positions have been falling, while their sell positions have been rising.

Some investment funds were forced to sell even their “most desired assets such as precious metals,” said Peter Spina, president of GoldSeek.com. There could be “more victims of the fund collapse and more forced liquidations.”

Gold futures traded on the Comex division of the New York Mercantile Exchange have fallen in 10 of the past 11 sessions since Oct. 8 and have lost more than $200 an ounce. Futures slumped 5% Thursday to below $700 for the first time since September, 2007. See Metals Stocks.

“Investors worldwide are selling everything, including the kitchen sink, and gold is no exception,” said Peter Grandich, chief commentator at Agoracom, an online marketplace for the small-cap investment community.

Dollar’s rise

The U.S. dollar also played an important role in gold prices, as the greenback and the yellow metal often move in the opposite direction.

During the Bear Stearns crisis, the dollar continued its long secular decline, with the euro trading above $1.50.

The dollar, however, has seen a steep rise since late September, with the euro trading below $1.30 Wednesday for the first time since February 2007. The British pound fell to its weakest level against the dollar in five years. See Currencies

A stronger dollar reduced gold’s appeal as an investment alternative. “Investors unwound leveraged short dollar, long gold positions, mindful of the long standing negative correlation between gold and the dollar,” said the WGC’s Dempster.

Some analysts, however, said that in the long term, the U.S. rescue plans to inject liquidity into banks will stir inflation and a devaluation of the dollar — something that would be bullish for gold prices.

“An extraordinary amount of liquidity has been pumped into the system this year,” said Peter Grant, senior analyst at USAGOLD. “I anticipate further debasement of all currencies, including the dollar, which will ultimately drive gold prices higher.”

Moming Zhou is a MarketWatch reporter, based in San Francisco.

When Inflation Erupts, Gold Will Take Off!

22 Wednesday Oct 2008

Posted by jschulmansr in commodities, deflation, Finance, gold, inflation, Investing, investments, Latest News, Markets, oil, precious metals, security, silver, Uncategorized

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Frank Holmes: “When Inflation Erupts, Gold Will

Take Off!”

Source: The Gold Report 10/21/2008

Expect short-term hesitancy in the upward movement of the gold price until liquidity returns to the markets, says Frank Holmes, CEO and chief investment officer at U. S. Global Investors and co-author of the new book “The Goldwatcher:Demystifying Gold Investing” (John Wiley & Sons). In this exclusive interview with the Gold Report, he predicts gold will go to $1,000, even $2,000, over the next two years. A growing money supply due to a change in government policies will help lift some juniors out of their misery, too. Holmes advises selective nibbling until conditions improve and names a few companies to consider.

TGR: Can you start off by telling us what’s going on?

FH: Based solely on global economic indicators, commodities should be in a cyclical bear market with no bottom in sight. But there’s intense pressure on policymakers to fill the deflationary vacuum that’s been created by both Main Street and Wall Street. Main Street’s plummeting housing prices stretched the limits of the financial system, but lawmakers in an election year will find it easier to blame Wall Street than Main Street.

TGR: Both sides are at fault.

FH: The abuse of leveraging is the biggest culprit. Mike Milken spoke at a conference I attended last week in Hong Kong. He said that at the height of his career he was leveraged 4-to-1. Goldman Sachs now is leveraged 20 times, so a 5% mistake would wipe them out. The combined impact of Sarbanes-Oxley, FAS 157 (mark-to-market regulations) and leverage abuse has cost New York its position as the world’s financial capital. No one expected this escalation of write-downs.

When Warren Buffett bought General Re Insurance in 2002 he warned about notional valuations because he tried to sell some of the derivatives, and lost billions of dollars. He called derivatives “weapons of mass financial destruction.” Everyone ignored him, and the derivative market increased 500% in five years.

TGR: Wow.

FH: If you make a 2% mistake in the $500 trillion derivative market, that’s $10 trillion. What’s $10 trillion? Well, the world’s total GDP is $50 trillion. The total amount of U. S. dollars in circulation is roughly $15 trillion. A 2% mistake wipes out 20% of the world’s GDP.

We’re actually experiencing huge deflation—in housing and on Wall Street. It’s not inflationary yet. The Paulson package is a stopgap measure that could lead to inflation. This meltdown is just like 1974 or the Depression of the 1930s, not the 1987 quick crash. It continues to destroy confidence. Another thing that propelled this meltdown to more disastrous proportions was the rule that removed the uptick rule for short-selling.

TGR: What will fix this situation?

FH: That’s a good question. Adding untested regulations is dangerous, and the law of unexpected consequences is often negative. The combination of Sarbanes-Oxley, FAS 157 and the no uptick rule for shorting basically became toxic and led to the destruction of Lehman Brothers and Bear Stearns. Also, “ideas” like printing more money and the debasement of currency do not solve the credit crisis and are not good long-term solutions.

The dollar’s not going to collapse due to loss of Asian support. All countries will support the dollar. The reason is that they can’t afford for it to fall too far because then suddenly the U. S. would be exporting products and not importing. All the currencies will slowly debase themselves against gold and keep the dollar as the currency for global trade.

It appears we are now going through that inflection point moving from deflationary forces to an inflationary cycle. We had a little bit of run-up in inflation when oil ran to $150 a barrel, which was very excessive. What didn’t make sense was the fact that gold didn’t rise along with oil. On the historic 10-to-1 ratio, gold should have gone to $1400 to $1500. That leads to suspicions that a few people were manipulating the price of oil because gold failed at $1,000 per ounce. On another note, it is important to remember policymakers will do everything in their power to create liquidity and, historically, liquidity is bullish for commodities. However, our research suggests it’ll take several quarters before this will affect commodity prices.

TGR: Will the market stagnate until this liquidity flows through and moves the commodities up?

FH: You’ll have to be a very selective buyer for another couple of quarters. The price correction should lose downward momentum and create a “U” shaped bottom as the capital markets begin to reflect the policies being implemented.

TGR: When you say the price correction will lose its downward momentum, do you mean this wholesale sell-off of everything?

FH: Right.

TGR: We saw yesterday that Goldcorp (TSX:G) (NYSE:GG) was down 16%.

FH: That downward momentum will start to slow.

TGR: When you say commodities, do you mean gold?

FH: Asian economic activity has a big influence on the purchase of gold. At the London Gold Bullion Traders Conference in Kyoto, I was amazed to find the magnitude of the shortage of gold and silver coins. In Germany, they aren’t having the crisis we’re having here, but Germans were lining up to buy gold.

TGR: Do they have supplies?

FH: No, but they have gold in the kilo bars. Everything is sold as soon as they get it.

TGR: I tried to buy some Swiss 20 Francs today and couldn’t find any.

FH: People are paying a large premium for small coins, and the purchase of safety deposit boxes is on the rise. People have been actually stuffing dollars in them, along with gold. It’s not really a 1980-style mainstream panic. People are continuing to buy. The growth of gold ETFs attests to that. Now let me try to explain some of these huge price swings in commodities, equities and emerging markets.

Your readers might be interested to know that banks all have this software called VAR, or Value At Risk. It triggers an alarm indicating a need for more capital due to escalating debt defaults. You’d think that banks would go to their prime brokerage arm and rein in hedge funds trading mortgages and de-leverage them because that’s where the risk is. Your business model says, “I have defaulting mortgages, so I need to be sure our hedge fund and prime brokers aren’t having similar problems.”

TGR: Right.

FH: Well, the banks reacted by calling every hedge fund and de-leveraging all asset classes, equities, banks and commodities. So, starting August 12, 2007, some of the S&P stocks moved 15% in a day internally. This same margin call has now taken place about four times this past year. U.S. banks in Japan yanked loans to small cap companies, so those guys were scrambling to replace those loans. Situations like that are happening everywhere and they illustrate the long reach of this credit crisis.

A lot of emerging marketing investors got their noses bloodied when the U.S. called for its loans to be repaid. They will not be so quick to repeat that mistake. This ripple effect is hurting businesses. That is a concern that I heard over and over. Fortunately, the governments of emerging markets have huge surpluses and are better equipped to handle this crisis than they were in the 1990s.

All of this is good for commodities and gold rises in step with commodities. When inflation erupts everywhere, then gold will take off on its own with a bigger move.

TGR: When will that happen exactly?

FH: Over the next two years gold will be well over a $1,000, maybe running up to $2,000. The number-one Asian analyst, Chris Wood, is advocating a 30% gold exposure to institutions. Now, this is the number-one brokerage firm in Asia and their research is excellent.

TGR: What’s the name of the firm?

FH: CLSA-Asia Pacific Markets. It recommends a portfolio allocation of 30% gold:15% gold bullion and 15% unhedged gold stocks. When an analyst of his stature advises putting 30% of your portfolio into gold, you have to take note. We tell our clients to put a maximum of 5% into bullion and no more than 5% toward gold equities.

TGR: Doug Casey’s latest missive rounded it up to 30% too.

FH: The significance here is that the institutional side is getting on board with gold. That’s a big deal.

TGR: Because the gold market is so small compared to the market caps these institutions deal with, even a small change in percentage would make a huge difference.

FH: All the brokers are getting their marching orders simultaneously. What happens is that non-correlated assets begin to correlate as people seek liquidity. So everyone’s saying, “I have to get cash.” It’s important to remember that brokers were leveraged 20 times and low-income house buyers were leveraged 99 times. This creates a chain reaction and knocks down the commodities. Several of these hedge funds have blown up, and if our holdings are similar to theirs, they’ve hurt us.

We went into this correction with a big cash position back in June, and we never expected such a huge correction, but our models were showing that it should be 20% to 25% cash. Then we start to nibble as things get clobbered, but they continue to get clobbered.

TGR: Yes.

FH: Last week the markets hammered every stock with liquidity. Many funds have been hit by this problem. Margin calls are driving this. It has nothing to do with the demand for gold or the supply and discoveries.

TGR: But that should work itself out fairly quickly by the end of the year.

FH: It was estimated that by the end of the year there would be $22 billion of resource stocks coming out.

TGR: Do you mean coming out of the hedge funds?

FH: Yes. Hedge funds have been forced to shut down. It’s really interesting to look at the TSE Venture Index. When the asset-backed paper problems happened last summer, retail sponsorship dropped dramatically. The U. S. went through something similar in February when suddenly the small caps and mid-caps started losing liquidity. What we noticed was that the auction rate paper is exactly ten times the size of Canada’s asset build paper crisis—$330 billion versus $33 billion. It was just before tax season, so a lot of American investors had to scramble for cash by redeeming their equity funds to pay their taxes.

TGR: Do you follow Richard Russell’s Dow Theory Letters?

FH: You mean regarding the relationship between the Transports and the Dow Industrials?

TGR: Yesterday both were down so Dow Theory now confirms that we are in a bear market.

FH: Yes.

TGR: What happens to gold stocks in a bear market?

FH: Whether you have big deflation or big inflation driving the bear market, gold does well. If it’s just a normal cyclical inventory recession or whenever interest rates are above the CPI rate, gold doesn’t do well. Today, the Fed’s funds are below the CPI rate and the printing presses are busy.

TGR: So, what are we in now?

FH: I think we’re at the tipping point moving from deflation to inflation.

TGR: So, we’ve been on the negative side of that.

FH: We saw gold run to $1,000 twice because of deflation, not inflation. Massive liquidations are deflationary. Collapsing housing prices are deflationary. The price of oil running up was inflationary but it was triggered by the dollar deflation and gold moved with it. In the ’30s, when you had a big deflationary cycle, gold was the best asset class. In the ’70s, when you had a big inflationary cycle, gold was the best asset class.

TGR: Right.

FH: In the ’90s when there was no big inflation or deflation, gold just meandered along.

TGR: So when do you think we will reach that tipping point from deflation to inflation?

FH: The money supply has basically been flat for the past three months. The correlation of commodity price action and emerging market money supply has an R-squared value over 80—highly correlative. We track the G-7 countries versus the E-7 (the seven most populated emerging countries in the world with available data) and track their money supply. The money supply has not been growing rapidly. We need to get the money supply up and this will happen with the $700 billion bailout. So, we’re going through a transition over the next couple of months.

TGR: When will gold respond?

FH: There’s been a six-week lag with the money supply, the same with NASDAQ. If the money supply spikes, there’s a 70% probability that within six weeks the NASDAQ will start to rise.

TGR: Why would an increase in the money supply impact NASDAQ?

FH: People have more cash to spend.

TGR: So they’re moving into the NASDAQ?

FH: Yes. The money supply has one of the highest correlations to the gold commodity as a whole. When you look at stocks individually, the number-one driver is the production per share growth. After that, it’s cash flow, and then reserves. You can eliminate 80% to 90% of all the noise by calculating production and the cash flow.

TGR: What would you tell someone who has just inherited a million dollars?

FH: I’d put 5% into gold bullion and 5% into unhedged gold stocks.

TGR: Unhedged producers?

FH: Yes, and if you want to go down to the smaller caps like Jaguar (JAG. TO), that’s where you get your biggest potential returns.

TGR: Can you share a few names on your list of unhedged gold producers?

FH: We like companies that have a royalty business, such as Royal Gold (RGLD). We also look at those with the strongest per-share-growth rates coming over the next 12 – 18 months. That list includes Agnico-Eagle Mines (TSX:AEM), Kinross Gold (KGC-NYSE; K-TSX), and Goldcorp—all of which have very healthy growth profiles relative to the Newmonts of the world. Goldcorp isn’t a pure gold play, because it also produces a high percentage of base metals. But we expect that within two years those base metals will really start taking off.

TGR: Is that prediction based on anticipated growth in China?

FH: Yes. China has structurally gone through a quiet phase, but the government has policies in place that are designed to invigorate growth. As that growth starts to pick up steam over the next six months, you’re going to see increased demand for the basic commodities. Of course, the economy is spending a lot of money for infrastructure right now, and that might put a temporary lag on commodities.

TGR: But you believe China’s growth will drive the commodities market higher?

FH: Yes. The credit crunch created by the collapse of U. S. financial institutions will slow things down for a while, but ultimately, China will grow.

TGR: What other companies do you like?

FH: Unless they have two grams of gold (per ton) or a million ounces, junior explorers have been drifting lower and lower. Historically in situ reserves have traded at one-tenth of an ounce of gold. So, if gold is $600, then your reserves are worth $60 per ounce. When gold was $300, they were worth $30. That was the model for determining a fair market cap for junior explorers. With gold at $850, these companies should be worth $85 per ounce of reserves, but they’re not. This amazes us. And when one of these companies is bought out, it’s usually paid more than the ten times ratio. But valuations are now drifting down to $40 and $35 per ounce. So the market is basically valuing a company that has 8 million ounces as if it had only 4 million ounces.

TGR: This is a short-term phenomenon, right?

FH: Yes.

TGR: So, when this situation changes, how quickly will producers and majors start buying up the juniors?

FH: That’s a different point. The seniors are going to buy only those juniors that have two grams of gold per ton or a million ounces. The other juniors will just work their way out of the system or go bankrupt.

TGR: What other criteria do you use to evaluate juniors?

FH: We ask some simple questions:Is the CEO technically competent? That is, is he a geologist? If not, that may be okay, but does he have a broad network to make up for that lack of technical knowledge? Does he know the newsletter writers, like Doug Casey, for instance? Does he know the investment bankers?

We’ve found that if the CEO does not know the Street, and doesn’t know the newsletter writers, it doesn’t matter if he’s a geologist or an engineer. There’s going to be no liquidity in the company’s stock, unless there is a multimillion ounce discovery with a grade of greater than 2 grams per ton. But if you have a company whose CEO knows lots of newsletter writers, gets lots of coverage, knows the value in the Street and gets research for it, that company is going to have a higher price-to-book valuation, which makes it a much more attractive investment.

TGR: Anything else you look for?

FH: Financing is crucial. Companies that are rapidly spending money are going to run out of cash in about six months. The market undervalues them until they have financing in place.

TGR: Can you give us a few companies on your list that meet your criteria?

FH: Moto Goldmines (TSX:MGL), which is in the Congo, is in that category, though they face geopolitical risks. The company has more than 10 million ounces and more than five grams per ton. Another one is Gabriel Resources (GBU:TO), which has a large asset in Romania.

TGR: Both of these companies have some geopolitical risks associated with them.

FH: They do. But if they satisfy the criteria, these are the ones that the big mining companies will be acquiring.

To learn more about investing in natural resources, you might want to take a look at industry veteran Frank Holmes’ new book, The Goldwatcher: Demystifying Gold Investing. Holmes is CEO and Chief Investment Officer of U.S. Global Investors, Inc., a registered investment adviser that managed more than $5 billion in 13 no-load mutual funds and for other advisory clients as of June 30, 2008. U.S. Global specializes in the natural resources, emerging markets and global infrastructure sectors. Its funds have received numerous awards and honors during Holmes’ tenure, including more than two dozen Lipper Fund Awards and certificates. Holmes is a much-sought-after keynote speaker at national and international investment conferences. He is also a regular commentator on the financial television networks CNBC and Bloomberg, and has been profiled by Fortune, Barron’s, The Financial Times and other publications. In addition, Holmes was selected as the 2006 mining fund manager of the year by Mining Journal, a leading publication for the global natural resources industry.

Is This the Gold Buying Opportunity of a Lifetime?

22 Wednesday Oct 2008

Posted by jschulmansr in deflation, Finance, gold, hard assets, inflation, Investing, investments, Latest News, Markets, precious metals, silver

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From: SeekingAlpha.com

Is The the Gold Buying Opportunity of a Lifetime?…

By: Robert Perrego StockTradingCards.com

Everyone has been saying how gold is going through the roof, right? All those predictions of massive inflation and that gold was the only safe place to hide. What happened you might ask? Why is it not working? Well, here is one answer and should it be right, this is the last best chance to catch the gold bus!

I am one of those that bet on gold and gold miners. How is it working out so far? Well, not so well. What am I doing? Buying more and this is why.

I saw the problem with the mortgages coming and the economy going south while inflation was being jacked higher by the retarded green-movement inspired ethanol subsidies and regulations that inflated the cost of food, the worldwide oil and commodity demand explosion caused by expanding populations and the entrance of the Chinese and Indian masses into the fast early economic growth stage while the worldwide printing presses were churning out more and more paper money. Does this make me a genius? No. Did this foresight even make me rich on this trade? No. What happens next and the important question is, ‘What are you going to do now?’ This is always the most important question a trader faces.

The mortgage mess did implode the financial system and the market crashed. The funny thing is that the dollar rallied, the market crashed and gold still did not break out as the inverse relationship to the dollar held it down like holding a beachball under water.

Lets start with the dollar. Gold and the dollar trade with a strong inverse relationship. This is because gold is a real asset in short supply that was the worlds first currency (and unfortunately I think someday it might be its last) and money. All currencies used to be backed by gold as a fiat currency for gold. That linkage was broken decades ago with the Bretton-Woods Agreement. Basically the more paper currency that you have in relation to something that people hold dear and real and difficult to get, the more paper money you have to trade to get it. Now lets say this ‘it’ is shiny, does not corrode or oxidize and is buried deep in the ground, and then throw on top of all this the fact that you can make things out of it that are pretty and helps a guy get the girl and people will start to value this ‘it’ a whole lot. Let’s call this ‘it’ gold.

The dollar is the world’s dominant currency. This is a result of the Marshall Plan that was launched after World War II when the United States provided Europe with a lot of dollars to rebuild. Europe’s economic infrastructure was destroyed, as was Russia’s and Japan’s. The U.K. and France were a little less blown up but I think you get the idea. The only country with factories and productive assets that were not destroyed by the bombing and warring was the United States and thus the only unit of currency that had productive assets and value behind it was the dollar. With the Bretton-Woods Agreement the dollar became a fiat currency not tied to gold but tied to the economic productivity of that country. So enter stage right Mr. King Dollar.

The world has quite a few currencies from the pound to the yen to the euro to the Dollar. If you noticed I did not capiltalize all but the Dollar as the Dollar is still King. Oil and gold are traded in dollars and for good reason – the United States still has the most productive assets and the largest economy in the world and on top of that, for a long time we have been selling debt to all the other countries that print the other currencies.

Now this selling of debt gets people all very nervous, but in reality it was and is a sneak attack. Ask yourself how much the yen would be worth if all those Dollars the Japanese are holding were worth less? Ha ha – you got it. They hold all our debt and in a perverse manner their currency is reliant on our currency staying strong or the dollar assets they hold are worth less and they are not as rich and their currency is worth less. Also, should they start selling the dollar and it goes down, the dollars they still have are worth less. We have successfully co-opted the world into our own good fortune. Now use this same logic with the Chinese yuan, the euro and the Middle Eastern petrodollars. This is not even to mention all the lovely factories Toyota (TM) built in the United States but that is a whole different subject. We go broke – you go broke. Period! Have a nice day.

But I digress…

The tech/internet bubble and resulting market crash was solved by making credit and money easy. Interest rates were slashed and every clown in the country was given access to easy money through dubious mortgage lending and government policies. The natural human desire to keep up with the Joneses and the feeling that ‘Hey, I was rich and now I am poor as that internet company I invested in that shipped fifty pound bags of dog food turned out to be a dud’ turned the populace into greedy pigs wanting more. So what did all these newly awakened traders start doing? They started trading real estate saying ‘They are not making any more land are they?’ and ‘Real estate never goes down.’ Newsflash – sand found on beach – what goes up too fast must come down too fast.

This positivity and group-think that real estate could not go down had the people dealing in it lose all trace of caution and voila! Another bubble!

How did we get out from under the rubble of the tech bubble crash? We made credit more available and printed money. How do you think we are going to get from under this one?

The United States Government just passed a $700 billion bailout plan. In actuality it was bigger, but what’s another $150 billion? The European governments have done the same. Russia even pumped its petro-rubles into its fledgling stock market as it crashed day after day. All this means is there is a whole lot more fiat currency floating around representing a not as fast growing worldwide economy and still pretty much the same amount of gold.

The dollar has rallied as the market crashed as foreign investors took the Concorde flight to safety – the safest asset on the planet – United States Treasury Bonds. In order to do this first a foreign investor has to swap out of the currency they are holding into the dollars to buy the Treasuries. This drives up the demand for dollars and the dollar goes up relative to the currencies they are selling. You ask ‘Why don’t they just use the dollars they already have?’ Well this is because these dollars are already invested in Treasuries and they want to buy more.

So the market has crashed and the dollar has run up. Now what?

That huge bailout bill money has not been pumped into the economy yet. From what I hear this will start happening this week. You getting wise yet? All that paper money the United States Government has been printing will start hitting the mainstream this week. The whole $700 billion won’t be spent on Tuesday or Wednesday but it is starting. A huge amount of the credit default swaps on Lehman Brothers came due yesterday. Events like these, a lot of times, mark reversals in various markets. I believe this to be the beginning of the bottoming process in gold.

Over the past weeks we have seen every asset class drop but Treasuries and the dollar. Stocks plunged, commodities got taken apart and corporate bonds got smoked. What has been happening is a massive deleveraging (not a real word but it is now) across the financial markets. I just read that over 350 hedge funds have gone out of business recently. When the guys are at the door to repossess the office furniture (and in the markets this is called a ‘margin call’) you sell everything – your winners, your losers – everything. This deleveraging is what has caused what was supposed to be a big winner, gold, to decline.

So what we are looking for is when will all this deleveraging end. First of all, the government pumping those $700 billions in is a good start. The Lehman settlement event will also give the market a better grip on the size of that calamity and that means less uncertainity and the market hates uncertainity. Will this be enough to slow or stop the deleveraging? Also, if the stock markets start to look better around the world, the money that ran to the safety of Treasuries will reverse flow and start back into equities. If this selling of Treasuries also causes foreign investors to decrease their exposure to the dollar that means selling in the dollar and the dollar goes down and gold goes up.

What makes me right or wrong in this matter is whether or not the world experiences deflation or inflation now. I pick inflation. The financial price deflation has done damage across most all asset classes. For a decade now every country on the planet has been running its printing presses and the world’s most voracious consumers (U.S.) have been taking on debt to buy things. The amount of paper/fiat currency has been growing at dangerous levels and I have faith that all the worldwide governments can do to get out from under this mess is to keep printing and spending.

No government wants a depression. During depressions citizens get pissed off and start thinking that whomever is running the goverment should not be. That reaction can be as extreme as a revolution or a voting revolution. Politicians certainly don’t want that – they like to keep their jobs so they can take money from lobbyists. They will run the printing presses overtime and let the inflation genie out of the bag.

Throw on top of all this the possiblity of a socialist hitting the White House with an agenda of ‘spreading the wealth around’ and that means more inflation. ‘Spreading the wealth around’ has been an economic disaster throughout the annals of history as it diverts money from productive assets to non-productive assets. One has only to look at the productivity decline of the Venezeulan and Mexican oil industries to see the latest prime examples of this ill-guided policy.

I think gold is cheap here. I think the politicians are going to inflate the economy to get out from under this mess. I think inflation is going to ramp up from here and gold is going to be the next bubble.

Want to get in early on this ride or would you like to buy the top again?

We all love bubbles until they pop in our faces.

Gold Vs Miners

21 Tuesday Oct 2008

Posted by jschulmansr in commodities, Finance, gold, hard assets, Investing, investments, Latest News, Markets, precious metals, silver

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Gold Vs. Miners

Written by Julian Murdoch

Tuesday, 21 October 2008 11:20

Page 1 of 3

In times of economic crisis – such as the plummeting stock market of fall 2008 – the idea of holding gold is attractive. But the status of the market also opens up opportunities for investment in the pick-and-shovel enterprises that bring us that gold.

If you haven’t yet read our piece, Spot, Stock Or Future, you may want to check it out before reading further. In that article, we outline the basic differences between physical ownership (or more realistically, owning physical gold through an ETF gold trust, like GLD), futures and equities. The purpose of this article is to get beneath the surface of the mining sector – pardon the pun.

Indexing Gold

The easiest way to make the miner bet is to just buy them all. But just like every other sector, you have a choice of ETFs and underlying indexes to choose from, and they’re not all identical. Amex currently sponsors two: the Amex Gold Miners Index (GDM) and the Amex Gold BUGS Index (HUI). The Philadelphia exchange has long sponsored their own version, the Gold & Silver Sector Index (XAU). While there is a lot of overlap, there are some differences.

First up, the Amex Gold Miners Index comprises public companies primarily mining gold and silver. It is a modified market-cap-weighted index that can be invested in via Market Vectors Gold Miners ETF (GDX). As of October 15, the index contained 33 companies from all over the world. A current list of constituents and their weightings can be found on Van Eck’s Index overview site. (Note: Van Eck is a sponsor of HardAssetsInvestor.com.)

Amex’s second option is their Gold BUGS Index (HUI). There are two rather enormous philosophical differences between the two. The first difference is that BUGS is a “modified equal” weight index. The quote marks are there because while the equal-weighting sounds good, Newmont, Goldcorp and Barrick are still all above 10%, with the other dozen companies each making up between 4 and 5 percent at the time of this writing. The more important difference is that HUI is made up of companies which explicitly do not use long-term hedging (defined as hedging gold prices for a period of greater than one and a half years.)

Some of the companies included do no hedging of their gold production at all, instead selling everything on the open market, or theoretically warehousing excess. Thus, they’re completely exposed to any gains or losses in the price of gold. One of the biggest examples of a nonhedger example is Newmont Mining Corp. (NYSE: NEM), which in 2007 closed its hedging book, taking a pretax loss of $531 million to get out of its futures contracts. CEO Richard O’Brien released the following statement in the press release about the strategy change:

“With the elimination of our gold hedge book, we have renewed our commitment to maximizing gold price leverage for our shareholders.”

The advantage of this type of no-hedge philosophy is the ability to take advantage of high and rising market prices. And if you believe that gold has nowhere to go but up, this strategy makes sense – after all, futures aren’t free. The other advantage of this type of strategy means that when you invest in a nonhedger, you’re investing directly in how well that company runs its primary business – getting gold out of the ground – and not its ability to hedge correctly. However, a no-hedging philosophy also leaves a company like Newmont completely exposed to downturns in gold price. And gold’s price is influenced by far more than day-to-day supply and demand. As a monetary proxy, how much gold really costs, in terms of Newmont’s bottom line, is based on the strength of the dollar, the strength of the global economy and the breeding patterns of European ferrets. It seems like pretty much anything can swing the price of gold.

There’s no quick and dirty ETF on HUI.

The Philadelphia Gold & Silver Sector Index (XAU) is another miners index, and one that often gets the quotes in mainstream newspapers. It is a capitalization-weighted collection of currently 16 companies involved in mining precious metals, hugely concentrated. At the time of this writing, over 20% of the index was in Barrick Gold, with Freeport McMoRan, Goldcorp and Newmont making up another 45%.

No quick and dirty ETF on XAU either.

One of the newest kids on the block is the NASDAQ OMX Global Gold & Precious Metals Index (QGLD), a modified market-cap-weighted index that began in just August of 2008. At the time of this writing, this index has only been in existence for two months, too short a time to see how it stacks up against the indices currently in play.

Despite these differences, the reality is that they’re all fishing from the same pond. Consequently they move almost in lockstep with each other. Even XAU, though showing lower returns, still moves in tandem with the other indices. Only gold goes on its own way. The interesting thing to note is that even though the Amex Gold BUGS Index (HUI) is made up of companies that are primarily unhedged, the index doesn’t do much better capturing gold’s return in the long term.

It doesn’t look all that different when you zoom in either:

This chart illustrates that while gold and the companies which pull it out of the ground are tied together, gold has clearly been the winner – and in fact, a safe haven when the stock market has gone south.

The Miner Conundrum

Of course, investing in mining companies brings with it some questions. Like most companies, a miner’s profits are derived from the price of goods sold minus cost to produce those goods. Companies with high profits are the ones that are able control those costs, while getting the highest price they can. There are many areas in which mining companies need to exercise cost controls, but some things can’t be skimped on: keeping the lights on, keeping your workers alive and finding new gold.

Energy

Mining is energy-intensive, using diesel fuel and electricity for most operations. It’s just a cost of doing business, subjecting mining companies, like the rest of the world, to rising costs. How directly do rising energy costs impact mining companies? In one example, Barrick Gold estimates in its 2007 MD&A report that 35% of its total energy costs can be attributed to electricity. Some they produce themselves, and some they purchase from local power companies. When they looked ahead to 2008, they estimated that a 10% increase in the cost of electricity would translate into an increase of production costs of $4 per ounce, or $28 million. That’s just electricity. With 3.5 million barrels of diesel oil used by the company, it’s no wonder that while they gave up hedging gold, they’re in energy hedging in a big way. If you look at the chart, perhaps it’s not so coincidental that miners traded down just as oil went on a tear this spring.

Safety

Safety at mining companies is a big deal for practical, if not humane reason. If mines are unsafe, gold doesn’t come out. Industry safety has vastly improved over the years, but it’s still a dangerous endeavor. For example, while the number of deaths in South African mines has been coming down, there are over 200 deaths per year. Back in July, Gold Fields (NYSE: GFI) was cited as having the worst safety record in South Africa, responsible for around 50% of the 85 deaths that had occurred by that point in the year. The company has embarked on a companywide safety education program and is performing much-needed maintenance and equipment modernization. In fact, it made the topic of June’s earnings report, with this kickoff from Gold Fields CEO, Nick Holland:

“After a particularly difficult start to the quarter, with the accident at the South Deep Gold Mine in which nine of our colleagues tragically lost their lives, the people of Gold Fields rallied together to show their mettle. Galvanized by my statement that “we will not mine if we cannot mine safely,” they took control of the safety situation on all of our mines, where a new safety culture is rapidly taking root.”

Despite this summer’s rallying cry, during the week of October 13, Gold Fields had to close two of its largest mines in South Africa after two accidents that resulted in fatalities. The company had been expecting lower production, and lower earnings during its first quarter of FY’09, which began July 1, due to scheduled mine improvement projects. Analysts had expected Q2 to see production increase, but with the latest mine closures, that may not be the case. In a Reuters article, it was reported that CEO Nick Holland said past Gold Fields’ production was down about 700 kg a quarter because of safety stoppages.

Keeping The Gold Flowing

Exploration is a hot topic for miners, just as it is in the oil industry. Gold is a finite resource that is getting harder to locate and reach. And sometimes, even if you find a deposit, environmental issues and public sentiment can keep a company from accessing the ore. Junior mining companies are the most vulnerable to this issue, having fewer resources to exploit and less money to spend. One such case is that of Atna (TSE: ATN) and the property delightfully known as “Seven Up Pete.” Pete’s a gold venture in Montana that has been the topic of much media coverage, lawsuits and even a documentary movie. After 17 years of trying to get the rights to mine the property, or at least compensation for not mining, Atna finally had to throw in the towel after the Supreme Court refused to hear the case in early October 2008.

And if you can’t find new gold, managing waning resources can lead to some seemingly counterintuitive mining practices. For example, it is common practice in the industry to stop mining the easy-to-get gold when gold prices are high. Instead of increasing profit per ounce, companies will focus their energies on mining gold that is more costly to produce, preferring to “get it while they can” and switch back to the easier gold when gold price dips. Practices such as these are designed to extend the functional life of gold mines at the expense of short-term profits. After all, no company wants to mine itself out of existence. Though because gold is finite, prices are bound to go up eventually, as “peak gold” is reached and production begins to decline.

Stock Or Gold?

There’s little question that gold miners – like oil companies – are only loosely tied to the price of their underlying commodity. It’s axiomatic that over any meaningful time horizon, what’s good for gold will be good for miners. But just as with any pool of companies, there are winners and losers. We cover the horse race regularly around here, and ultimately, it always comes down to the same thing – which companies get the business part right, and which companies can’t seem to get out of their own way.

A bet into the miners instead of into the metal is fundamentally (and obviously) a bet that the miners are undervalued relative to their metal. As such, the most interesting trade might actually be the long/short pair.

Because the implication of this little chart – the ratio of the price of gold to the value of the Amex Gold Miners Index (GDM), the gold miners are cheaper than they’ve been in years.

P.S. The Other Option: Physical Gold

Beyond buying a Krugerrand and sticking it under your mattress, or buying through an online broker and having them store it for you, recent years have seen new options for investing in gold – ETFs and ETNs. There’s not a tremendous amount to say about these products – they provide reasonably accurate pure gold exposure-with the caveat that they all charge something, and that just because a gold ETF sounds easy to run, there’s no guarantee your particular investment is going to peg the LME PM fix every day.

			Return
	Ticker	Exp. Ratio	1 Mo	3 Mo	YTD
SPDR Gold Trust	GLD	0.40	6.14	-5.02	5.41
PowerShares DB Gold Fund	DGL	0.50	5.49	-5.66	3.00
iShares COMEX Gold Trust	IAU	0.40	2.38	-5.70	4.40
ELEMENTS MLCX Gold Mtl ETN	GOE	0.38	5.55	-5.83	N/A
E-TRACS UBS CMCI Gold	UBG	0.30	5.56	-5.87	N/A
DB Gold Short ETN	DGZ	0.75	-5.41	5.37	N/A

Gold – Spot, Stock or Future

21 Tuesday Oct 2008

Posted by jschulmansr in deflation, Finance, gold, hard assets, inflation, Investing, investments, Latest News, Markets, precious metals

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Spot, Stock Or Future

Written by HardAssetsInvestor.com

Tuesday, 09 October 2007 17:21

Commodities aren’t like stocks or bonds; there are many different ways to approach the commodities markets, and each has its pros and cons.

This article will examine the three main “buckets” of exposure — spot exposure, equity exposure and futures-based exposure. Later, we’ll explore different kinds of financial products — ETFs, ETNs, mutual funds, etc. — and figure out which is best for different situations.

So You Want To Buy…

Let’s say that you’ve decided you want exposure to gold. We could just as easily choose crude oil, or corn, or even a diversified commodity index, but we’ll use gold to make it simple.

You think gold is going up. Great … I hope you’re right. But how do you cash in on that idea?

Well, here are your options…

“The simplest way to buy gold is to walk down to your local bank and pay them for a 1 ounce American Buffalo coin.”

Buy The Physical Commodity:

The easiest way to gain exposure to gold? Just go buy it.

Buying gold bullion gives you, by definition, 100 percent correlation with that magical gold price you hear about on the evening news. The only risks you face are physical theft (if you hold the gold) or financial shenanigans (if you store it with a custodian).

The simplest way to buy gold is to walk down to your local bank and pay them for a 1 ounce American Buffalo coin. That gets you a nice walk, and a chance to say hi to your banker … but that’s pretty much it.

The disadvantages pile up. On any given day, expect to pay 5 to 10 percent more than the spot price for your shiny coin. And if you misplace that coin, or mistake it for a Sacagawea dollar and use it to buy a cup of coffee … well, that’s a $700 cup of coffee, my friend.

Fortunately, there are smarter ways to own the hard stuff. Online metals dealers like Kitco will sell you coins and bars at thin markups. And gold pools — there are thousands of them — will let you buy a stake in a pile of gold for about 1 percent more than the spot price.

But now, thanks to exchange-traded funds (ETFs), we can do better than that. ETFs are mutual funds that trade like stocks, and increasingly, they are moving into the commodities space.

There are currently two U.S. ETFs that hold gold bullion as their sole asset: the streetTRACKS Gold Fund (AMEX: GLD) and the iShares COMEX Gold fund (NYSE: IAU). These funds store gold in a vault — that’s all they do — and when you buy a share of the ETF, you’re buying a share of that gold. You can even see pictures of the gold bars on line. The cost? Just 40 basis points (0.40%) per year in expenses, plus your brokerage fee.

The downside is that there are only bullion ETFs for gold and silver; for other commodities, you’re out of luck. And that raises an important point: While holding physical gold or silver may make sense, holding oil or corn doesn’t. What are you going to do with a barrel of oil, anyway?

Taxes

One big disadvantage of physical bullion is that the Internal Revenue Service (IRS) doesn’t consider it an investment. It calls gold and silver “collectibles” and slaps a 28 percent tax on any profits. That compares to a 15 percent long-term capital gains tax rate on equity investments. And yes, that tax rate applies to the ETF as well as physical bullion. One way around this is (theoretically) to buy exchange traded notes such as the Deutsche Bank series, which come in leveraged and short flavors. For the moment, it looks like these will be taxed as capital gains when sold. But pay attention, because that’s an issue still open for debate.

Buy The Equities

“You may know a little bit about gold, but the guy running a gold mining company knows a lot about gold.”

Alternative #2? Buy the shares of gold mining companies.

The thinking goes like this: You may know a little bit about gold, but the guy getting paid millions of dollars to run a gold mining company knows a lot about gold. So why not cast your lot with him?

In some cases, it can make sense. But it’s important to know that equity investments and spot commodity investments aren’t the same thing. While the two returns are correlated much of the time, there are important differences.

For one, when you buy a stock, you’re buying a company. And like any company, there are lots of things that can go wrong with a gold mining firm (or other commodity producer). The company can be mismanaged; the managers can be crooks; there can be environmental disasters, labor strikes or lawsuits.

Complicating things further is the fact that many companies hedge their exposure to commodity price swings. After all, it’s hard to plan a business when you’re not in control of pricing. So gold miners and other commodity producers use futures contracts to lock in price for their product. That means that, even if commodity prices rise, your company may not benefit.

Of course, equity investments have their advantages, too. For one, companies can make smart decisions, discover new mines or cut costs and boost profits.

Also, companies often take out loans to pursue big projects. That effectively leverages your investment, giving you more bang for your investment buck. In fact, that’s often how commodity equities perform: They act like leveraged exposure to the underlying commodities, with their prices swinging 2-3 times as much as the underlying commodity.

As with any equity market, there are mutual funds and ETFs that provide exposure to commodity-focused companies, including gold-focused shares.

Taxes

Equity investors get all the breaks: Long-term capital gains are set at just 15 percent.

Buy The Futures

“What is a future? It is a promise between two investors.”

Options #3? Invest in futures.

Futures are where many serious commodity investors find a home.

What is a future? It is a promise between two investors. If you buy a gold futures contract, for instance, you promise to buy gold from someone at a certain price at a certain time in the future; they, in turn agree to sell it to you at that price. When the time comes, if the price of gold has gone up, you’ll feel like the smartest guy in the room.

Here’s how it works. The most popular gold contract in the world is the COMEX Gold Contract. Let’s say spot gold is trading for $725/ounce today, and the COMEX Gold contract for June 2008 is priced at $750/ounce. Each contract covers 100 ounces, so the June contract costs $75,000. By buying the contract, you promise to pay someone $750/ounce for 100 ounces of gold on the third Friday in June. If gold goes up above $750 by June, you’ll make out handsomely. If not, watch out…

The real beauty of the futures market is leverage. These are big contracts: $750/ounce X 100 ounces = $75,000. Fortunately, no one expects you to put up all that cash. In fact, for each contract, there’s a set amount of money you have to set aside as collateral. For the COMEX Gold contract, that amount is just $2,500 (although your broker may demand more).

Leverage is a double-edged sword, of course. If you put down $2,500 and the price goes up $100/ounce, you’ve made $10,000 on a $2,500 investment. But if the price falls $100/ounce, you’re in trouble. (And you can expect a call from your broker, asking you to post more cash to your account.)

Like any leveraged investment, this makes directly owning futures both exciting and terrifying. But remember: You don’t have to actually do all this buying and selling of futures; there are mutual funds and ETFs that will do the heavy lifting for you.

Taxes

Futures contracts get unusual tax treatment by the IRS. Sixty percent of any gains are taxed as long-term capital gains (with a 15 percent maximum tax rate), while 40 percent are taxed as short-term gains (with tax rates topping out at 35%). That creates a maximum blended tax rate of 23 percent (less if you’re not in the top income bracket).

The kicker with futures is that you have to pay each year: holdings are “marked-to-market at year-end.” That means that any gains you accumulate during the year are taxed, and cannot be deferred.

Next Up? More About Futures

If you think a futures investment will track the price you hear about on the evening news, think again.

Diamonds Are Forever and Now Can Be Traded Online Too!

21 Tuesday Oct 2008

Posted by jschulmansr in commodities, deflation, diamonds, Finance, gold, hard assets, inflation, Investing, investments, Latest News, Markets

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Diamonds Are Forever, And Can Now Be Traded Online Too

16 Comments

by Robin Wauters on October 21, 2008

Who knew you could auction real diamonds much like you could sell your stamp collection on eBay?

Well, not really, but pretty close. DODAQ has launched a demo version of what appears to be the first ever online diamond exchange, enabling professional traders to buy, sell and hold certified polished diamonds like stocks. The company offers a two-way auction for traders and facilitates electronic transactions with real-time tradable pricing.

Now, it’s been a while since I’ve traded any diamonds, but according to company management the mechanism is bound to make waves in the industry. The way it works now, is that there’s no real fixed price for polished diamonds. The few inventory lists that give an idea of which stones are out there, are often inaccurate or incomplete. Buyers and sellers pretty much agree on pricing based on a scheme that’s distributed on a weekly basis, but without any real, dynamic transaction data that can be used for benchmarking.

DODAQ aims to provide a centralized, global meeting place that enables basically anyone to trade or invest in diamonds, with transparency on rates. The platform also allows outsiders to start investing in diamonds and set up a virtual holding. Obviously, the biggest challenge for the company is building a market place so secure that it’s able to convince industry professionals diamonds can effectively be traded online ‘like any other commodity nowadays’ (not my words). In order to brush off skepticism, the authenticity and actual existence of every stone is graded and guaranteed (including insurance), and the polished diamonds are locked in a vault facility together with their certification documents.

DODAQ acts as a custodian, so it charges a fee for the vault service and takes a commission of maximum 1,5% on any transaction. You can sign up for a demo account and play around with $500,000 on a dummy balance. I embedded a video below that outlines what DODAQ does in a nutshell.

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Comments

Envy – October 21st, 2008 at 3:07 am PDT

this is interesting… really cool idea, but in order to work the power houses have to buy in….

mahalo bruddah – October 21st, 2008 at 7:56 am PDT

I wonder if I can by a CDO on this badboy — collateralized deadpool obligation

jk, actually right now diamonds are priced per the rappaport report or some bs like that.

the only problem is that a lot of jewelers base the pricing that they can acquire a diamond for a customer off that report and the cost is known when the customer is there. If there is an auction, the price is up in the air for two days.

Amit Bhawani

– October 21st, 2008 at 3:25 am PDT

Can they be easily traded like stocks? Also who would verify the quality?

Robin Wauters – October 21st, 2008 at 5:18 am PDT

Yup, traded just like stocks, or more like gold actually (try the demo).

“All diamonds published on the DODAQ platform have first been graded by a recognised gemological grading laboratory and are received with their original certificates into the DODAQ vault.”

gresh – October 21st, 2008 at 7:32 am PDT

Riiiight.

Either the people behind this idea don’t really understand how diamonds are graded and traded in the real world, or they are hoping you don’t really understand how diamonds are graded and traded in the real world.

I’m betting the latter.

LeoDiCaprio – October 21st, 2008 at 3:39 am PDT

Haven’t you seen the blood diamonds movie dude? …diamonds suck

en.wikipedia.org/wiki/Blood_diamonds

mickey

– October 21st, 2008 at 4:05 am PDT

its unlikely anyone’s going to overthrow debeers, but they can try
rankmaniac

yann

– October 21st, 2008 at 4:09 am PDT

What a nice video

Fat Man

– October 21st, 2008 at 4:10 am PDT

As developers of the promo, I can tell you this is an incredible application. I’ve seen it in clear cut action, so to speak and it’s going to cut a swathe through the diamond trade.

Congrats to Simon & team at Dodaq.

Colnector

– October 21st, 2008 at 4:36 am PDT

Next: put/call options on diamonds

Aaron Cohen

– October 21st, 2008 at 5:20 am PDT

I hope the guys at DODAQ have bullet-proof cars and 24/7 secuirty escorts for their families. The cartel does not like upstarts like this.

John Stephens – October 21st, 2008 at 6:31 am PDT

At first I was apprehensive that such a thing could even be done but on closer inspection, having used the site, this looks like it could really change things – ultimately for the better. Fascinating stuff. I look forward to reading more.

Jonathan Mervis

– October 21st, 2008 at 7:31 am PDT

This will certainly be interesting. The diamond world isn’t used to startups of any kind. Not in the least, something like this.

As a financial instrument, why not trade diamonds like any other commodity? But, if you are choosing just ONE diamond for your fiancee, I highly recommend seeing a stone in person. Any gemologist will tell you that no two stones are ever the same, and that each has its own “fingerprint” and will handle light refraction differently. There are 57 angles to a diamond, and each stone is cut slightly differently, according to the natural growth of its crystals.

Two stones of the same 4 C’s can produce very different effects of light and sparkle. This is a subtlety that is often times lost when people compare diamonds, site unseen, and assume the 4 C’s tell the whole story. But when you put the two stones next to each other, you might be surprised at how obvious of a difference there could be.

It’s very helpful to categorize diamonds with the 4 C’s, but as you can imagine, a 10 minute crash course in the 4 C’s can’t replace a lifetime of experience in diamonds. It’s the same in any industry, where reading a wikipedia article on something doesn’t make you a real expert. You’ll have solid footing, though, and that’s a good start.

Why Oil and Gold Are Headed Much Higher

20 Monday Oct 2008

Posted by jschulmansr in commodities, deflation, Finance, gold, hard assets, inflation, Investing, investments, Latest News, Markets, oil, precious metals, silver, Uncategorized

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Friday, October 17th, 2008

Oil is Headed for $150 a Barrel, Gold for $1,500 an Ounce, Merrill Analysts Predict

By William Patalon III
Executive Editor
Money Morning/The Money Map Report

Gold could reach $1,500 an ounce, since the worldwide plans to bail out the global financial industry are certain to fuel inflation, analysts led by Francisco Blanch at Merrill Lynch & Co. Inc. (MER) wrote in a research report.

The Merrill Lynch analysts also predicted that oil would reach $150 a barrel.

In the research note released earlier this week, the analysts said “the unintended consequence of the ongoing financial bailout will be inflationary pressures to the commodity markets.”

The analysts provided no timetable for their predictions.

The $700 billion U.S. bailout – plus the billions of dollars in capital infusions that have been put in place by governments and central banks all over the world – will be highly inflationary, analysts say. Historically, this type of move has been very bad for the U.S. dollar and highly bullish for oil prices.

“This is a very interesting projection,” said Money Morning Investment Director Keith Fitz-Gerald. “I have no idea what they’re basing their numbers on. But I certainly wouldn’t dismiss it based on everything I know about global trends, and my own proprietary calculations – which continue to suggest far higher prices for oil and hard assets than even Merrill is predicting.”

While Fitz-Gerald said that doesn’t mean there won’t be a continued near-term drop in gold and oil prices, he continues to believe the long-term outlook is for much-higher prices.

Currently, Fitz-Gerald has a multi-year target price of $225 a barrel for oil prices.

Typically, Fitz-Gerald says, analysts put a more-specific timetable on such predictions. But the unprecedented worldwide capital infusions that are part and parcel of the central banks’ bailout plans are dramatically skewing what are normally relatively predictable calculations, he said.

Since peaking at an all-time record of $1,032 an ounce on St. Patrick’s Day, gold has seen its price skid about 19%. Gold futures tumbled more than 4% yesterday (Thursday) to their lowest level in a month, as nervous investors sold futures contracts to raise cash, Marketwatch reported. Gold for December delivery fell $34.50, or 4.1%, to end at $804.50 an ounce on the Comex division of the New York Mercantile Exchange (CME), the lowest closing level since Sept. 17. Earlier, it had fallen more than 5% to $791 an ounce.

Some hedge funds were forced to liquidate their positions to cover losses in stocks and other markets, economists at research firm Action Economics told MarketWatch.

“For the moment, the weight of the deep funk felt in the global markets is keeping gold on the defensive, while would-be buyers … find more comfort sitting on the piles of cash,” Jon Nadler, a senior analyst at Kitco Bullion Dealers, told the financial news service.

Crude oil fell below $70 a barrel, reaching its lowest level since June 2007, and gasoline prices tumbled after a U.S. Department of Energy report showed that stockpiles advanced twice as much as forecast, Bloomberg News reported.

Crude oil for November delivery fell $4.37 a barrel, or 5.9%, to reach $70.17 a barrel, at midday yesterday on the NYMEX. The “black gold” fell as low as $68.57 a barrel, the lowest since June 27 of last year. Prices are down 20% from a year ago. Crude oil peaked at $147.27 on July 11.

Oil prices also dropped on doubts that the bank rescue plan will bolster global economic growth – and with it, fuel use. The Organization of the Petroleum Exporting Countries (OPEC) moved the meeting it had planned for November up to Oct. 24 after the oil-price decline.

“The DOE numbers just added to the downward pressure on the oil market,” Brad Samples, a commodity analyst for Summit Energy Inc. in Louisville, K.Y., told Bloomberg. “The weak economy is translating into rising inventories because nobody wants to burn the stuff.”

Money Morning Contributing Editor Martin Hutchinson – who last October correctly predicted that gold would make a run for record highs – this spring said that gold could reach $1,500 an ounce. At the time, Hutchinson listed three factors, one of which – related to the bailout plans – has moved front and center:

Monetary policy: More than for any other investment, gold’s price depends primarily on the world’s monetary policy. When monetary policy is loose, as it was in the 1970s, gold prices soar. When it is tight, as in the 1980s, prices decline sharply. With the global bailout in place, monetary policy is about as loose as it’s ever been.

Global Supply and Demand: For most commodities, price rises have an effect on supply and demand; a higher price increases supply and reduces demand, in “price elasticity.” With oil, for example, a 10% rise in price reduces demand by about 1% to 1.5%, meaning that oil has a price elasticity of 0.1 to 0.15. But oil is priced in dollars, and when the dollar drops, OPEC tends to boost oil prices to keep its revenue steady. The flood of dollars the global bailout plans are going to send washing through the financial system won’t be good for the greenback – meaning the dollar-based price of oil can only go higher. That will more than offset any decline in demand in the near term; in the long run, growing economies in such markets as China, India and other emergent markets will create millions of new consumers who will demand luxuries ranging from jewelry to automobiles.

The upshot: Global demand for oil and gold will escalate – as will their prices.

Comparison with past peaks: If gold had increased in price since 1997 by the same percentage as world dollar reserves, it would currently be trading at around $1,280 per ounce, Hutchinson says. And the current speculative appeal of gold, compared to its inactivity 10 years ago, suggests it could go higher than this: The 1980 gold price peak of $875 per ounce intraday is equivalent to more than $2,200 per ounce when inflation is taken into account, he said recently.

Commenting on Merrill Lynch’s gold-and-oil predictions, Dividend.com analysts Tom Reese and Paul Rubillo, this week wrote that “we think the Merrill call is based on solid reasoning, but we’ll wait and see if the market agrees. So far during the meltdown, gold has shown flashes of running but has not broken out.”

They said that the “obvious trade on paper [which isn’t] so obvious to the market at this point” is Newmont Mining Corp. (NEM), which is “sitting just above a 52-week low.” Newmont’s shares, which closed yesterday at $28.85 each, have traded between $27.25 and $57.55 in the last 12 months.

Silver Could Explode, Says Analyst

20 Monday Oct 2008

Posted by jschulmansr in commodities, deflation, Finance, gold, hard assets, inflation, Investing, investments, Latest News, Markets, oil, precious metals, silver, Uncategorized

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SILVER COULD EXPLODE, SAYS ANALYST

Hard Assets Investor

By Ted Butler (Butler Research)

Ted Butler is one of the better-known silver analysts (and longtime silver bulls) in the world. The founder of Butler Research, a monthly publication focused on precious metals, Butler has been pounding the table on silver since way back when it was trading for $4/ounce.

For many years now, Butler has been among a vocal cadre of silver bulls who have argued that a select number of Wall Street banks were deliberately manipulating the silver market.

In September, the Commodities Futures Trading Commission confirmed it was formally investigating these accusations. It had previously examined the case, and in May, published a report suggesting that there was not manipulation in the market, and that banks taking short positions were simply acting as legitimate market makers. This summer, however, CFTC data showed that two U.S. banks boosted their short positions in silver futures by 450%, controlling 25% of the open interest, according to The Wall Street Journal. That led to new accusations from the silver bulls, and the SEC agreed to reopen the investigation.

Interestingly, the investigation has shifted from the oversight division to the enforcement division of the CFTC. According to the Journal: “The oversight division performs overall market surveillance. The enforcement division looks at activities in a specific time period.”

Butler wrote about the CFTC investigation in late September; that analysis is printed below. He also spoke briefly with HardAssetsInvestor.com about the latest developments in the silver space.

The editors at HardAssetsInvestor.com don’t necessarily agree with Butler’s views. However, it’s a real theme and discussion in the marketplace, and is worth airing publicly.

Interview With Ted Butler

HardAssetsInvestor.com (HAI): What does the CFTC’s investigation mean for silver?

Ted Butler, Butler Research (Butler): That we’ll only know in time. It should mean, at a minimum, that they think the allegations are credible enough to warrant them looking at it again. I suppose if they thought the allegations were baseless, they would say so and dismiss the subject.

HAI: What’s the likelihood that they’ll take real action in the market?

Butler: That’s anyone’s guess. But if my allegations are accurate, as I believe them to be, the question of them taking action becomes moot. That’s because if the silver retail shortage keeps growing and morphs into a wholesale shortage, the market itself will do what the CFTC has refused to do. Any downward manipulation must, inevitably, end in a shortage. I think they may recognize this.

HAI: What exactly are they looking at?

Butler: That, you will have to ask them, but if they are not looking at the one or two U.S. banks that sold short the equivalent of 20% of the world’s annual production of silver, they are not looking at the right thing.

HAI: Why do you think they finally decided to investigate this situation?

Butler: Because the evidence was clear in the August Bank Participation Report, which I disclosed in my “Smoking Gun” article, that it should be impossible not to see the manipulation.

HAI: What is your overall take on the silver market right now?

Butler: It is structured to explode in price, especially after the recent decline to $12 an ounce.

HAI: Should investors allocate to silver over the next year or two?

Butler: They should allocate now, without delay.

—Butler Research Article from 9/29/08, Reprinted With Permission—

It’s hard to imagine now, but there were times when I worried about having anything fresh to write about silver. Lately it has been choosing from many different topics. This week, the choice was easy. Amid the continuing swirl of major financial crises, one issue rose to the top.

On Thursday, September 25, The Wall Street Journal carried an article announcing that the Commodity Futures Trading Commission (CFTC) had opened a new investigation into allegations of manipulation in the silver market.

Furthermore, on that same day, Commissioner Bart Chilton e-mailed a copy of the Journal story, along with his own comments confirming the investigation, to those who wrote to him about the issue. Both the article and Chilton’s e-mail made special note that the silver investigation was being conducted by the Division of Enforcement, and not the Division of Market Oversight, which had previously investigated the silver market. In simple terms, Enforcement is the muscle.

Whether an entire market, like silver (or gold), is manipulated or not is a matter of utmost importance. In fact, nothing could possibly be more important. Market manipulation is a violation of law and a serious crime. Market manipulation damages everyone in the long run.

Because market manipulation is the number one priority of the CFTC, any revelation that they might be investigating a manipulation in any commodity is big news. So big, in fact, that such investigations are almost always kept strictly confidential while the facts are determined. This is usually so as not to disturb the market. That the CFTC has chosen to openly reveal this silver investigation is almost unprecedented.

Moreover, what makes this silver investigation a rare event is that the allegations are of a manipulation in progress. To my knowledge, all past investigations were revealed after the manipulation itself was concluded. Not only is it rare for the CFTC (or any government agency) to reveal a serious active investigation, it is unheard of to reveal an investigation of a potential crime in progress. If a regulator suspects a crime in progress you would assume the regulator would first end the suspected crime and then finish the investigation. If the regulator didn’t think there was a sufficient evidence of an ongoing crime, then why reveal that an investigation has been opened?

I think this is why there is universal expectation (including by me) that the silver investigation will be a whitewash. I know that silver is manipulated, and I’m glad to see the CFTC investigate. But I can’t help but feel suspicious of their objectivity, because they have adamantly denied such a manipulation for more than 20 years. How can they conduct a fair investigation and not be influenced by their past findings? I have been here and done this many times, and I don’t feel like getting fooled again.

EXPLANATION, NOT INVESTIGATION

Why the CFTC is investigating a silver manipulation is somewhat of a mystery to me. I certainly didn’t ask for an investigation. I did ask you to ask for them to explain the data in their August Bank Participation Report, in my “Smoking Gun” article. This is the report that is directly responsible for the investigation. This is the report at the heart of the matter. But there is a difference between explanation and investigation.

When I first uncovered the data in this report, a little more than a month ago, I couldn’t believe my eyes. I had studied the data in previous Bank Participation Reports for years, but that’s because I’m a silver data junkie. This is usually a nothing report. In all the years I studied this data, it seemed like a waste of time. It was an obscure report that I never heard anyone ever refer to before. But the data in the August report was so disturbing that, in order to make sure I wasn’t imagining things, I asked two trusted associates, Izzy Friedman and Carl Loeb, to review the data with no advance suggestion from me as to its meaning. I wanted their unvarnished opinion.

When they confirmed that this was the clearest case of manipulation possible, I faced a new dilemma. I was inclined to believe that the data was in error. I suspected the CFTC would retract the data. So I was worried about being publicly embarrassed for making a big deal out of what may have been a clerical error. But the more I matched this data against the weekly Commitment of Traders Report (COT) data, I could see the data was accurate. Certainly, if the data was incorrect, the CFTC would have said so by now.

The data is clear – one or two U.S. banks sold short the equivalent of 140 million ounces of silver in one month. That’s more than 20% of world annual mine production. Less than three U.S, banks sold more than 10% of world annual mine production of gold simultaneously. The price of silver and gold then collapsed by an historic amount. These same banks have used the sell-off as an opportunity to buy back as many of their short positions at a giant profit. Those are the facts.

It is important to put these numbers into perspective, in order to appreciate their significance. One way to do that is by comparing what just took place in silver to other commodities. If one or two U.S. banks sold short, in a period of one month, the equivalent of 20% of world annual production of corn, that would equal one million futures contracts. (25 billion bushels x 20% divided by 5000 bushels). Since the entire open interest in corn futures is one million contracts, a sudden short sale of that amount would crush the price.

If one or two U.S. banks sold short 20% of the world annual production of crude oil, that would be the equivalent of 6 million NYMEX futures contracts. (30 billion barrels x 20% divided by 1000 barrels). Since the entire open interest on the NYMEX is around 1 million contracts, a sudden sale of 6 times that amount would drive the price of oil to ten cents a barrel. It would also be market manipulation beyond question.

The CFTC doesn’t need to investigate. They only need to explain why their own data fails to prove manipulation in silver and gold. Save the taxpayer some money and all of us some time. This needn’t take days, weeks, or months. This should take, literally, minutes. Why maintain and publish the data in the Bank Participation Reports if the CFTC won’t recognize an obvious manipulation that is a crime in progress.

THE COTs

The latest COTs confirmed the one thing I was hoping and expecting them to confirm, namely, that the biggest shorts continued to cover their short positions in gold and silver. What makes their short covering most noteworthy is that the buybacks in the most recent report occurred on a sharp rise in price, some $3 in silver and $120 in gold for the reporting week. This tells me that the big short, the U.S. bank(s), is serious about getting out of as much of its massive silver short position as it can.

From the time of the August Bank Participation Report, the big shorts have now covered nearly all of the gold short position put on during July. Therefore, the manipulation in gold was a complete success. In silver, while the manipulation must be considered a success, because the big short has covered an impressive amount, it has not covered all of its manipulative short position. In looking at the structure of the COTs, it does not appear to me that much further liquidation can occur to the downside. To say that the COTs are structured bullishly, would be a gross understatement.

IMAGINE

My mentor, Izzy Friedman, recently asked me to turn the clock back to a year ago, and then try to imagine that we would have a severe retail silver shortage. A shortage that now seems to be spreading to gold. It’s a powerful and profound thought process.

This silver retail shortage is completely underappreciated. I don’t think there could be more clear proof that silver has been manipulated in price. The talk that it’s “only” a retail shortage and not a wholesale shortage is silly. The silver retail shortage is so widespread in scope, it’s only a matter of time before it spreads to the wholesale sector. That’s especially true considering the record inflows into the silver ETFs. When the wholesale silver shortage hits, it will make a mockery of any CFTC investigation into manipulation.

The reason I believe the retail shortage is not truly appreciated is because of the boiling frog syndrome. Put a frog into a pot of cold water and increase the heat gradually to a boil and he won’t jump out. Because the silver retail shortage has been so persistent and gradual for the past year, we have grown accustomed to it. Most dealers have little to sell. Nowadays, it’s news when a dealer gets in a supply of silver, which is invariably sold out quickly. Guess what? That’s not normal, and just because it has been a gradual development doesn’t make it normal.

In fact, the growing and persistent physical silver shortage promises to be with us for a long time. Look around at the financial world. Do you see anything better to hold than real silver? Can you imagine owners of real silver rushing to dump their metal at depressed prices. To do what with the proceeds? Rush to put them in a failing bank?

It pains me to see so much financial peril around. Regular readers know I prefer supply/demand considerations and analysis of market structure. I’ve always considered the flight to quality aspect of silver as a bonus. But I see signs of that flight to quality in the current physical shortage. I don’t think that is going away any time soon. How many reasons does one need to load the boat with silver?

Digg – Silver Could Explode, Says Analyst

Gold: Beware the Bucking Bull

20 Monday Oct 2008

Posted by jschulmansr in commodities, deflation, Finance, hard assets, inflation, Investing, investments, Latest News, Markets, oil, precious metals

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GOLD: BEWARE THE BUCKING BULL

By: Fat Prophets

In our most recent report on gold we recommended accumulating some of the larger gold miners (Newcrest Mining (NCMGY.PK), LGL Group, Newmont Mining (NEM)). Big gold producers are incredibly cheap and given the weakness in the Aussie dollar (and rising Aussie dollar gold price) and pullback in energy prices, profitability should begin improving while most other companies’ margins will come under pressure.

However, recent developments in the gold market point to the potential for near term volatility that Members should be aware of.

The short term outlook for gold appeared positive while the yellow metal was trading above US$820 an ounce. However, in New York trading on Thursday, gold was hit with a wave of short term selling.

The green line in the chart below shows that gold plummeted just after the New York trading session began, falling nearly US$40 in a very short space of time. More selling pressure emerged soon after but in early Asian trade Friday, gold has recovered some of its gains.

From a purely technical perspective, the break below US$820 indicates the likelihood of near term weakness. It shifts the focus back to the US$735/US$734 support region and away from the potential for a push above $931.84.

The $820 to $860 region now becomes resistance. While prices remain below this region, the risk is that prices will break below $734 and retreat toward the $650/$640 region. This marks the 50% retracement of the entire 1999-2008 advance, plus the next major price support/congestion region on the charts, shown below.

However, such a move is only a possibility, and should prices once again move into the US$820/US$860 region, the near term outlook would improve again.

We remain committed long term bulls on gold. The stimulus being thrown at the global economy is unprecedented and has not yet even begun to work its way through the financial system. The Fed’s program to purchase commercial paper does not get underway until 27 October. The transmission of this money through the system will take some time.

The Fed’s balance sheet expanded another $245 billion last week to $1.7 trillion. Its important to note that the Fed has not sterilised any of the cash injections it has made in the last month or so. Credit had jumped from $880 billion to $1.7 trillion and none of the Fed’s holdings of Treasury securities have been sold to offset the cash injection. Instead, poor quality assets have been added to the balance sheet.

But in the short term gold can do anything, as we witnessed recently when the yellow metal plummeted below US$750, only to reverse that move a few weeks later with an $80 single surge to the upside.

So Members riding the bull should prepare for more short term volatility. Any cowboy will tell you that riding the bull for the full 8 seconds is a very difficult task. This bull market will be no different, but if we’re prepared, we can tighten our grip.

Why Mining & Metal Investments Could Shine In The Coming Years

16 Thursday Oct 2008

Posted by jschulmansr in Finance, Investing, Latest News, Markets, Uncategorized

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Austrian school, banking crisis, banks, bear market, bear stearns, bull market, central banks, deflation, depression, economic, economic trends, economy, financial, futures, gold, inflation, market crash, Markets, physical gold, precious metals, price, price manipulation, protection, recession, risk, run on banks, safety, silver, sovereign, spot, spot price

Original Post

BY: Daniel Gschwend

Why not start with the most important question. Is it already too late to buy precious metals or commodities in general?

Not at all. Gold and metals generally have very long cycles; ups and downs tend to be for typically 15 to 20 year periods. We are now seven-eight years into the cycle. So depending on which way you look at it, you could be in the one-third or a mid-cycle. In nominal terms (at $900 odd dollars an ounce now) the previous high was $850 in the 1980s. If you take into account inflation then the equivalent price of that now is over $ 2,300. So if you look at where you are in a cycle then it also in some sense reaffirms the direction in which or the potential to where gold can go.

After over 20 years of a persistent bear market in commodities, we have entered a new bull market in 2001 which has still a long way to go. Typically, a bull market peaks with a new high in real terms – which means currently over $ 2,300 per ounce for gold. It’s the same situation for other precious metals such as silver, platinum or palladium.

What else speaks for gold from an investor’s point of view?

The other couple of things that really make a difference to gold are that it is counter cyclical to the US dollar. So, if you expect the US dollar to weaken, then gold moves the other way and appreciates. Gold is also a store of value and therefore is valuable in times of geopolitical stress or calamities in markets or during times of inflation (because of inflation gold price goes up).

You’ve got multiple drivers for why gold is technically a good investment. We are seeing a lot of the above playing out now. Central banks around the world are worried about inflation. There is a lot of financial stress in the system and still some huge time bombs have not been deactivated, such as all the derivatives that may fail and ignite some kind of chain reaction in the financial system.

All these factors make a good case for the gold price to look very attractive. Overall, gold is a good diversifier with reasonably good returns over a long period of time and low correlation to other asset classes.

Are commodities such as precious metals really their own asset class?

If you define an asset class as an independent investment vehicle with its own characteristics, such as bonds, stocks or real estate, than yes. Commodities have unique attributes – no matter if we speak about agriculture, metals or energy – commodities usually rise in times of distinct inflation. Gold has even the tendency to rise in times of deflation since it is more or less the last resort to preserve value.

Commodities have been rediscovered by investors. I’m absolutely not surprised that we have seen such a strong price rally lately. In an environment in which we have negative real interest rates, inflation pressure and depreciation in stocks and real estate because of exaggerations supported by artificially low interest rates and lots of leverage – commodities just have to shine. As for gold, gold is not only a commodity, it is also money – in situations such as today, investors are seeking protection against an overall asset meltdown and buy gold.

What about inflation, is gold really a hedge against inflation?

Gold’s role as a hedge against inflation is unparalleled, though for much of the last 20 years it was challenged in the West on the basis that it wasn’t working. What was being overlooked, of course, was that in Europe and North America at that point inflation had been brought under control and gold was not, at that time, needed as an inflation hedge. In other countries where inflation was running much higher (or out of control – Turkey was a particular case in point), it was doing its job perfectly well.

With the markets now increasingly concerned about inflationary trends, gold has posted its credentials once more. While inflation is nowhere near the levels of the early 1980s (in the first quarter of 1980, inflation in the United States was 14%), inflationary expectations combined with an unprepossessing growth outlook have reinforced gold’s defensive qualities. Only when inflation is really a threat does gold work as a hedge.

What are the main drivers of higher metal prices in the future?

Low inventories in virtually all metals with growing demand and sluggish or even diminishing supply. Investors have not really understood how severe the supply situation actually is. There is only talk about how much a possible US recession or global economic growth slowdown will affect demand.

Demand will remain strong since this cycle has been activated because of structural changes in many developing countries. There are hundreds of millions of people entering the middle class. Entire cities, power plants, streets have to be built – those changes will transform these countries and until all these infrastructure projects – which are not being postponed because of higher copper prices and so forth – are achieved, demand will remain very strong. Unless there is no more supply coming online prices will rise.

But supply is the problem. By way of example: South Africa has a major power problem which probably cannot be solved until 2012 – and SA is still the no. 2 gold producer in the world. Platinum and palladium prices have skyrocketed because of this power disruption and will very likely remain high.

Aside from disruptions because of strikes and maintenance at operations running at or close to capacity, increasing government demands for higher royalties and profit taxes or greater stakes in projects are hampering development in many areas.

Another floor to lower gold prices is rising production costs if gold corrects to 650 $ per ounce many mines would have to shut down. The lack of skilled labour force, particularly geologists, will keep the wages high and also support even higher gold prices. Supply and cost pressure are probably even more important than demand concerns.

While the price of gold has risen very strongly in the recent months, don’t you expect slower demand because of higher prices?

Not really. Higher prices will of course affect jewellery demand negatively at least in the western countries. It’s the opposite in developing countries such as India or China – in these countries we see hundreds of millions of people being able to buy some kind of luxury goods or jewellery for the first time ever. The net effect on jewellery demand will very likely be positive.

Investment demand is growing fast and is not at all affected by the higher prices. It’s actually the opposite. There is some kind of paradigm shift going on in the financial world towards real assets and away from inflated paper assets. Overall we will see very strong demand from jewellery and the industrial and investment side for the years to come.

You mentioned China, how much do you attribute to the China factor?

I believe China is a major factor in the equation of higher prices in the future. But it is not only China, it is the entire Asian region which is experiencing a major structural shift accompanied by strong economic growth. Strong and growing demand is the main driver out of Asia.

As for China, figures from the World Gold Council showed sales of gold jewellery in China hit a record high of 302.2 tons in 2007, up 34 percent on the previous year. China has now overtaken the United States to become the world’s second largest buyer of gold jewellery after India. But behind the remarkable growth lies a deep Chinese traditional appreciation of the precious metal as a hedge against social and economic risks.

Interestingly, so far Chinese consumers are not deterred by rising prices. Rather, they increasingly view gold as not only a means to protect wealth but also as an efficient part of their investment portfolio. The World Gold Council said investment demand for gold at the retail level amounted to 23.9 tons in 2007, a rise of 60 percent compared with 2006.

There is a lot of wealth being created in Asian countries, and India and China have just woken up. Because of the strong economic growth and a appreciating Yuan vs US $ this also makes gold and other commodities traded in US $ cheaper for the Chinese – this is also valid for all other countries with appreciating currencies vs the US $.

There is a lot of talk about central banks or the IMF, aren’t they selling gold, and won’t they keep the prices under control?

Yes, they kept the prices from rising even more, but not under control. Under the current Central Bank Gold Agreement II act, central banks are allowed to sell up to 500 tons of gold per year until the year 2009. Interestingly, even though the price of gold has risen, the maximum quota of 500 tons per year has not been exhausted fully. Some of the participant banks didn’t sell at all or only a fraction. The effect has been minimal – without these sales gold would have risen even more.

As for the IMF, it might sell some of its gold holdings – something around 400 to 500 tons. This news is known and the gold market has not reacted at all. I expect this gold will be sold off market and will be happily absorbed by some institutional investors or central banks in the Asian region.

How about the central banks with huge US $ assets, how will they act in the future?

In contrast to the central banks in the western countries, they will be net buyers of gold very soon. Gold is the only real hedge against a depreciating US $. Since central banks in China, India, Russia or Japan hold huge amounts of their overall reserves in US $ it would be wise to protect these assets against depreciation and also do some more asset diversification. Just imagine, China has over 1,000 billion of US $ reserves and only holds less than 2% in gold – countries such as Germany hold over 60%, France over 55%, Switzerland over 40% or the USA over 75% in gold.

Since paper money is only a derivative to gold – which represents real value – central banks are under a lot of pressure to reallocate some paper assets into gold to preserve their wealth. Let’s play some numbers: if China (1.2%), India (4.1%), Japan (1.8%) and Russia (3.0%) decided to extend their gold holdings to a still very conservative interest of 10% of their overall monetary reserves, they would have to buy over 9,000 tons of gold which is more than 4 years of current worldwide gold production.

There has been a lot of talk about hedge funds buying gold and pushing prices ahead of their fundamentals, what’s your view on this?

There is indeed some speculative momentum in the market, also driven by hedge funds. But more importantly is the realization that gold has again become its own asset class. This has brought many deep pocket players into a comparably small market. Most of these new market players are active on gold futures traded on the COMEX or in ETFs (Exchange Traded Funds). If you look at some of the data, the amount of gold ETFs in the world in October 2003, just 4.5 years ago, was fractional at less than 20 tons of gold. Now it is over 800 tons.

Most of the investors who come into gold ETFs are in the US or the more developed pockets. If you look at the data provided in the weekly Commitments of Trades Report (future & option positions in gold) you will see that long positions in futures held by large speculators are more or less at all time highs. Some analysts see this as a contrarian indicator, but so far the positions remained high and were even growing. Hedge funds and other deep pocket players are very confidant and so am I because of very favorable fundamentals for precious metals.

What’s the role of pension funds and other institutional investors in this commodity bull market?

They actually play a very important and very prospective role. Calpers, the largest US pension fund with around 240 billion $ in assets, decided this February to boost its commodity investments up to 3% of its assets. That’s a 16-fold increase since it started to invest in commodities which was as recently as last year.

There are a lot of very powerful institutional investors entering the commodity sector and this trend has just started. This view is also confirmed by a survey conducted by Barclays Capital published last December. About half of the 150 money managers aimed to expand commodities to more than 10 percent of their total assets. These investors are the so-called deep pocket players, they have a long term strategy and they buy because of very strong fundamentals. Is it wrong for a private investor to do the same? I’d say no. Commodities should be an integral part of everybody’s asset allocation.

Since metal prices have done well, how about mining shares?

Since 2001, when the bull market started, the AMEX Gold Bugs Index (HUI) was at around 35 and is now at 400. In other words, mining shares outperformed metal prices and all other conventional asset classes greatly. Mining shares have a leverage to metal prices since profit margins are rising faster than the underlying spot prices.

In the last few months, this mechanism didn’t work because costs were rising rapidly and neutralized higher revenues. Right now, mining shares vs metal spot prices are at or close to historically low levels and offer a great buying opportunity. Even though spot prices are up, many shares are sharply down because of the sub prime aftershocks which lead to very high credit spreads and huge risk aversion towards all stocks. As an example, junior mining stocks are currently trading relatively lower than when the bull market started in 2001.

We at our fund are taking advantage of this market anomaly and have invested around 30% in the junior market and the remainder in intermediate and senior producers. This strategy was very tough in the last months but should work out very favorably in the near future once the appetite for mining shares returns.

This sounds like you are growing more optimistic about mining shares in the near future?

Absolutely. Right now there are great buying opportunities in this sector. Fundamentals are strong, but shares are trading with discounts to their NPVs. Nobody can tell you when the market will wake up the next time, but it will wake up.

Historically, moves in the mining sector were always very fast. From an investor’s point of view – diversification is everything.

Buy some physical gold and hold some stocks – either directly or by a fund investment – this strategy should work out perfectly for the next many years. For investors who don’t like to buy a fund, they could buy BHP Billiton (BHP) for base metal and oil exposure and Barrick Gold (ABX) for precious metal exposure. Both stocks are very representative for the mining sector.

Disclosure: Article was originally written for the ‘Precious Metal & Mining Investment Outlook Conference’ in Hong Kong, June 2008. The author is fund manager at a mining & metals fund. The author’s view reflects explicitly his personal opinion. The fund has a position in BHP Billiton and Barrick Gold.

The Countdown of a Manipulated Gold Price Is Running Out

16 Thursday Oct 2008

Posted by jschulmansr in Finance, Investing, Latest News, Markets, Uncategorized

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So what
’s wrong with gold? Why has the price not skyrocketed? Do you remember the day when Bear Stearns failed? Do you remember what happened on that day with gold? It spiked up to $1032 per ounce and marked its highest intraday price ever (in nominal price terms – remember, the inflation adjusted high would be in the $2300 per ounce range)…

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Three Steps to Take to Make Sure Your Bank is Safe

06 Monday Oct 2008

Posted by jschulmansr in Finance, Investing, Latest News, Markets, Uncategorized

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banking crisis, banks, bear stearns, central banks, deflation, depression, economic, economic trends, economy, financial, futures, gold, inflation, market crash, Markets, physical gold, precious metals, price, price manipulation, protection, recession, risk, run on banks, safety, silver, spot, spot price

Seeing banks such as Wachovia Corp. (WB) get sold or Washington Mutual Inc. (WM) fail is scary for retail banking customers. But there are simple steps you can take to protect your bank assets.

Here are three quick and easy steps you can take that may help you determine if your bank is safe or not…

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The Austrian School and the Meltdown

26 Friday Sep 2008

Posted by jschulmansr in Uncategorized

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banking crisis, bear stearns, central banks, deflation, economic trends, economy, futures, gold, inflation, Markets, physical gold, precious metals, price, price manipulation, silver, spot, spot price

The financial meltdown the economists of the Austrian School predicted has arrived. We are in this crisis because of an excess of artificially created credit at the hands of the Federal Reserve System. The solution being proposed? More artificial credit by the Federal Reserve.

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U.S. Titanic

26 Friday Sep 2008

Posted by jschulmansr in Uncategorized

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I can’t help but compare our country’s situation to the maiden voyage of the Titanic…The great ship (United States) is sinking. Should we let the band (Hank Paulson) dictate those who get onto the lifeboats first? If we do, we will all face the fate of Jack as he slowly freezes to death in the icy Atlantic.

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Dare Something Worthy Today Too!

Tag Archives: physical gold

Gold’s recent slump bewilders investors – MarketWatch

Gold’s recent slump bewilders investors

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Gold Vs Miners

Gold – Spot, Stock or Future

Diamonds Are Forever and Now Can Be Traded Online Too!

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Comments

Why Oil and Gold Are Headed Much Higher

Silver Could Explode, Says Analyst

Interview With Ted Butler

Gold: Beware the Bucking Bull

Why Mining & Metal Investments Could Shine In The Coming Years

The Countdown of a Manipulated Gold Price Is Running Out

Three Steps to Take to Make Sure Your Bank is Safe

The Austrian School and the Meltdown

U.S. Titanic

Gold’s recent slump bewilders investors

World Gold Council points to fund liquidation, stronger dollar, stock markets

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Interview With Ted Butler

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