Friday, February 27, 2009

Nothing Shines Like Gold

The S&P 500 is making new bear market lows today. The Dow Jones Industrials did that last week. There's only one risky investment doing well: gold.

A week ago gold traded above $1,000 per ounce, coming within spitting distance of the all-time highs made last March. It's pulled back now to about $940. But still — what other investment other than riskless government bonds can you point to that's so near all-time highs?

Amazingly, just a month ago, gold and the S&P 500 were trading at about the same price — gold at $854, the S&P 500 at 840. From there, stocks have fallen 10% to near their bear-market lows of last November, while gold has risen as much as 16%. That's a divergence of more than 25%, in just a single month.

Readers of this column know that I've been touting gold for quite a while. I think the bull case for gold still holds, and I would be a buyer of any pullback. I think it's highly likely that gold will be at new all-time highs within the next several months.

If that happens, it will be great for my portfolio. But you have to be careful what you wish for. The force driving gold is the prospect of inflation. So if gold breaks new all-time highs, the bad news is that it will be a scary signal of inflation to come.

It's a mistake to think of gold as a barometer of global wealth. Sure, when people get rich they like to buy more gold jewelry. But global wealth is collapsing now, and yet gold is near all-time highs. So there must be another explanation.

It's also a mistake to think of gold as a panic asset — something that people hoard because they think the world is going to come to an end, and gold will be the only thing left of any value at all. In the all-out financial panic that started last September and climaxed at the stock market bottom in November, the price of gold collapsed, too. It fell almost as much as stocks. The real panic asset is cash, not gold. When things get scary enough, people will sell their gold to get it. So now with stocks back to the same levels as last November's lows, there must be another explanation for why gold is near all-time highs.

As Sherlock Holmes said, when you rule out the impossible, whatever's left — however improbable — must be the solution. Thus: inflation.

I admit that seems improbable. Yet it is the answer.

I say it seems improbable because all the other evidence all around us is pointing to deflation, not inflation. That is, falling prices, not rising prices.

The simplest evidence of that is the Consumer Price Index. It's been showing deflation more intense than that experienced in the middle of the Great Depression. You have to go all the way back to 1921, the great deflation that followed the end of World War I, to find the equivalent.

Yet still, gold is signaling inflation. I think the reason why is that the gold market understands that Federal Reserve Chairman Ben Bernanke will do everything he can to keep deflation from worsening or persisting. Bernanke knows that in times like ours, when households and institutions are struggling with dangerous debt burdens, deflation is the worst thing that could possibly happen.

The reason why was first explained in a 1933 paper by the famed economist Irving Fisher, in an attempt to understand why the Depression was so severe. Fisher noted that when investors hold assets financed by debt — whether its banks holding toxic securities, or individuals holding expensive homes — deflation destroys in two ways at the same time. First, in a deflation the prices of assets fall — so the value of your portfolio, or of your home, collapses. At the same time, your debt burden gets worse, because you are committed to make loan payments in dollars which are becoming increasingly valuable in deflation-adjusted terms.

Bernanke is a student of the Depression, and knows Fisher's work well. So he'll do anything — including causing a lot of inflation — to prevent deflation. And that's exactly what he's doing. Never before in history has the Federal Reserve printed so much money so fast.

It's not showing up in inflation indexes like the CPI, because banks and households are so terrified right now they're just hoarding all that money the Fed is printing. But at some point, the fear will ebb, or just stop getting worse. And all of a sudden everyone is going to decide to do something with all that money — like spend it. And then we're going to see extremely bad inflation.

But if the alternative is deflation, then extremely bad inflation is actually extremely good inflation.

But it's still inflation. Which is why gold is testing the $1,000 level again, and why I think it's highly likely to punch through it.

When gold does that, and the threat of deflation is replaced by the reality of inflation, then the economy and the stock market should stabilize. So if you agree with me that gold is destined for new highs, that ought to at least make you a cautious optimist on stocks at this point, even as stocks make new lows.

But don't get carried away. Inflation is only good because the alternative — deflation — is unspeakably worse. Inflation is still bad. And if financial history teaches us anything, it's that stocks do poorly in general during periods of inflation — such as the 1970s — and well during periods of stable prices, such as the 1990s.

Then when you add to all that the reality that the new president is trying to take America back to the 1970s in other ways — more regulation, bigger government, higher taxes and all the rest — it's not exactly a formula for excellent long-term equity performance.

I think it's time to set aside all the religiosity about “stocks for the long run,” because right now the long run doesn't look so great. Maybe now's the time for “stocks for the short run.” And gold.

http://www.smartmoney.com/Investing/Economy/Nothing-Shines-Like-Gold/

Wednesday, February 25, 2009

Gold prices lose further ground as stocks rally

Gold fell for the second day in a row Tuesday as investors flooded back into the stock market, roused by Federal Reserve Chairman Ben Bernanke's remarks that the recession could end this year and that regulators aren't planning to nationalize banks.

Other commodities, including energy and agriculture futures, rallied along with Wall Street.

Most commodities, with the exception of gold, have taken a beating this year due to investors' unrelenting concerns about the eroding economy. Prices for raw materials including corn, wheat and copper have moved largely in tandem with the stock market.

On Tuesday, stocks rebounded after days of heavy selling that left the major indexes down near 12-year lows. The Dow Jones industrial average ended up 236.16 or 3.32 percent at 7,350.94.

Bernanke, in remarks to Congress, predicted the economy is likely to keep contracting in the first six months of 2009, but that "there is a reasonable prospect" the recession will end this year.

As bargain-hunting traders moved back into equities, gold prices suffered. Investors often use gold as a safety net in times of market turmoil.

Going in to Tuesday's session, gold prices were up 12.5 percent for the year, and had logged a 5.6 percent increase in just five sessions. Prices are still up about 10 percent in 2009.

Gold for April delivery fell $25.50 to settle at $969.50 an ounce on the New York Mercantile Exchange.

Other metals were mixed. March silver dropped 45.5 cents to $13.9950 an ounce, while May copper futures rose 4.9 cents to $1.50 a pound.

The dollar was mixed against other major currencies. The yield on the benchmark 10-year Treasury note, which moves opposite its price, rose to 2.80 percent from 2.76 percent late Monday.

Energy prices benefited from the gains in the stock market. Light, sweet crude for April delivery rose $1.52 to close at $39.96 a barrel.

Gasoline futures rose 3.26 cents to $1.076 a gallon, while heating oil rose 3.35 cents to $1.2089 a gallon.

Grain prices moved higher on the Chicago Board of Trade.

May wheat futures gained 4.75 cents to $5.2625 a bushel, while corn for May delivery rose 2.25 cents to $3.63 a bushel.

May soybeans added 7.5 cents to $8.8350 a bushel.

http://www.iht.com/articles/ap/2009/02/24/business/NA-US-Commodities-Review.php

Wednesday, February 11, 2009

Silver and Gold will make you more attractive

02/11/09 Tampa Bay, Florida SilverForecaster.com announces that “silver has done well” recently, as far as its price is concerned, which is almost certainly explained by the old demand-versus-supply market-clearing pricing mechanism, which means that since the price went up, then demand must be up, too, and more than supply is up; or it means that supply is down more than demand is down; or it means something else entirely, maybe, since I have seemingly confused myself.

But since the recent moves in price are not that spectacular, my attention wavered and I casually looked around the press room, and I noticed that there was a pretty new reporter who was young and cute, which is such a depressingly stark contrast with my being, you know, old and ugly.

I sighed and began to daydream when I suddenly realized the cosmic universality that demand and supply applied even to pretty girls! We testosterone-besotted males of the species ensure a constant high demand for them, yet with a low supply of the little cuties, the price is high! Hahaha!

And, to balance things out, I realized that pretty young girls constantly demonstrate that there is no demand for creepy old men, but yet since we exist in such huge supply, we have zero value, or perhaps even negative value, considering the phrase, “I would rather eat poison and die a horrible painful death rather than even feel your bad breath touching my skin, or even acknowledge your foul existence, Old Mogambo Creep (OMC)!”

But, as with silver and pretty girls, it is this selfsame mechanism of balancing supply with demand that determines the prices of everything else in the Whole Freaking Universe (WFU), so why not this, too?

So, I was about to interrupt to lecture GoldForecaster.com about my little revelation, perhaps to garner a little of the attention that I so desperately crave, when I realized that they had anticipated my observation that silver going up in price meant that demand is greater than supply when they verified it by saying, “Investment demand for silver leapt a huge 309 tonnes last week, a tonnage we have never seen before in such a short time!”

I notice the phrase “never before!” which includes an exclamation point to indicate special emphasis, as seems befitting of “never before”, not only because of this sudden huge demand for silver, but the cute little reporter had just coincidentally used that very phrase when she said to me, “Begone, Mogambo! Never before have I felt such revulsion! I feel soiled and sickened just from being in the same room with you!” which, alas, also contains an exclamation point.

Mr. Phillips and Mr. Spina both pretend that they did not hear me get insulted, and go on to suggest that despite being completely humiliated by this conceited girl, if I buy silver now, I will soon be rich as hell and I will have beautiful ladies hanging all over me all the time, every one of them so beautiful that they will make this little bit of fluff look like a pig, as they conclude from the data that “heavy investment demand is flowing into silver [and gold] in quantities sufficient to ensure this trend is long-term.”

And I agree with them, as inflation in prices is going to be roaring soon, and for the long-term, as the laughable Obama administration is firmly united in announcing grand plans for years and years of huge amounts of new spending and huge amounts of new debt that is supposed to save us (pardon me for laughing right in your face “hahahaha!”) from the collapse caused by the preceding “too much new debt, too much new money and too much new spending” over the last few decades that produced the inflationary booms in the prices of stocks, bonds, houses and size of government that are now going, predictably, bust and causing all the headaches

That is why it is so alarming that Total Fed Credit last week actually went down by a gigantic $149.1 billion in ONE FREAKING WEEK (OFW), instead of increasing in the same OFW, which it must do if all of this deficit-spending is going to be accomplished!

And as if this $149 billion in OFW was not enough to make your heart start fibrillating and make you start puking your bloody guts out in fear, this is, I remind you, Total Fed Credit, which is that magical, out-of-thin-air money that appears, thanks to the Fed arbitrarily creating it in the accounts of the banks, ready for lending to somebody at huge multiples of the amount of additional credit originally deposited in the banks.

In short, we’re talking HUGE amounts of money! HUGE! Huger than huge! FREAKING HUGE!

And what makes it all the scarier is that this TFC is, even with this $149.1 billion drawdown, still totals a hefty $1.84 trillion, which is DOUBLE what it was last year, which demonstrates a huge, huge, HUGE increase in the monetary base, which is now at $1.7 trillion, which is ALSO double what it was last year! Yikes! We’re freaking doomed!

If you buy gold, silver and oil, then you will not personally be doomed, understand, but everyone else soon will be. Bummer for them, huh?

http://www.dailyreckoning.com/silver-and-gold-will-make-you-more-attractive/

McEwen, Goldcorp Founder, Bets Crisis Will Drive Gold to $5,000

Goldcorp Inc. founder Rob McEwen, who has more than $100 million in gold investments, said he expects the metal to top $5,000 an ounce as governments increase the money supply to combat recession.

Bullion will more than double to $2,000 an ounce by the end of next year before rising to McEwen’s target by the end of the cycle, which could take an additional four years, the investor said.

“Politicians around the world are listening to cries from their electorates and they’re giving money to all callers,” McEwen said yesterday in a telephone interview from Toronto.

McEwen, who founded what is now the world’s second-largest gold producer by market value, owns stakes in three Canadian precious-metal explorers worth more than $100 million. He said he also has a “big, big” holding in bullion. Gold gained for the eighth straight year in 2008 amid investor concern the economy would collapse and government efforts to prevent that would increase inflation.

Gold futures for April delivery rose $29.10, or 3.2 percent, to $943.30 an ounce at 11:51 a.m. on the Comex division of the New York Mercantile Exchange, the highest for a most-active contract since July 23. The metal climbed to a record $1,033.90 on March 17.

McEwen said he started buying bullion in August 2007, at the beginning of the subprime mortgage crisis. Gold has jumped 40 percent since Aug. 1 of that year, touching a high of $948.20 today, while the Standard & Poor’s 500 Index has dropped 43 percent.

“I realized we had reached an inflection point regarding money,” McEwen said. “It was all about protecting money, and gold served that purpose.”

McEwen is the largest shareholder in Lakewood, Colorado- based U.S. Gold Corp., Vancouver-based Rubicon Minerals Corp. and Spokane, Washington-based Minera Andes Inc. Vancouver-based Goldcorp is the world largest gold producer by market value after Toronto-based Barrick Gold Corp.

http://www.bloomberg.com/apps/news?pid=20601082&sid=adHg7t8BL5Bg&refer=canada

Tuesday, February 3, 2009

Gold drops 2 percent but financial fears buoy sentiment

Mon Feb 2, 2009

Gold dropped more than 2 percent on Monday, holding just above $900 an ounce as short-term investors took profits on signs of weak jewelry demand and selling related to technical resistance.

Analysts, however, say prices will be underpinned by investors looking for a safe place to park their assets, away from the turbulence in equity markets.

"Gold is currently working as a 'fear indicator', signaling risk aversion of market participants," said Eugen Weinberg, commodities analyst at Commerzbank.

"Strong investment demand should help gold prices to stay around $900 in coming days ... Over the last few weeks the gold price has increased despite a significantly stronger dollar and news about a massive fall in Indian gold imports."

Spot gold traded $904.10 an ounce at 2:17 p.m. EST, down 2.4 percent from the last trade $927.00 on Friday in New York.

U.S. gold futures for April delivery settled down $21.20, or 2.3 percent, at $907.20 an ounce on the COMEX division of the New York Mercantile Exchange.

Traders said profit taking after gold's recent run higher was behind lower prices on Monday.

India's gold imports plunged more than 90 percent to just 1.2 tonnes in January from 18 tonnes in the same month last year.

India is the world's largest gold consumer and its jewelry sector accounts for almost 70 percent of global bullion demand.

A stronger U.S. currency would normally weigh on gold as it makes the precious metal, priced in dollars, more expensive for holders of other currencies.

SCALE OF INTEREST

But over the last few days both the dollar and gold have moved in the same direction. Data showing falling consumer spending and income in the United States did little to dampen investor interest in the dollar.

"People are looking at the longer-term prospect. Everything is in trouble now, and who knows what's going to happen to the dollar in the longer run. So, gold is perceived to be safer," said one precious metals broker in New York.

The scale of investor interest can be seen in the world's largest gold-backed exchange-traded fund (ETF), the SPDR Gold Trust, which as of January 29 held a record 843.59 tonnes of gold, up 10.71 tonnes from January 27.

Whether gold can reach its record high of $1,030.80 an ounce, hit last March, is still under debate and opinions, as seen in a recent Reuters survey, are varied.

The survey of more than 50 precious metals analysts showed a range of between $650 and $1,150 an ounce for this year.

For platinum, the range for this year is $750 to $1200. The metal, used in autocatalysts to help clean car emissions, is down nearly 60 percent since a record high of $2,290 an ounce March.

Recession and slumping car sales around the world and expectations of worse to come for the auto sector will keep prices low, analysts say.

Spot platinum traded at $968.50 an ounce, down 1.7 percent from its last finish of $985.

Silver was at $12.38 an ounce, down 2 percent from its previous close of $12.63, and palladium was at $195.00 an ounce, up 2.1 percent from its previous close $191 on Friday.

http://uk.reuters.com/article/hotStocksNewsUS/idUKTRE5115EL20090202

Monday, February 2, 2009

Gold ready to rumble

Today we've got falling prices. Many pundits are saying that today's falling prices are caused by deflation. Well whatever they're caused by it's hard to argue against gold being clearly the winning investment. With the price of gold hovering around $900 it's definitely living up to its oft proven history of preserving purchasing power.

Gold's rise in purchasing power compared to the price drop in other commodities is lowering the cost of energy and other capital and material costs for gold producers. Pretty sweet to be a producer with rising product prices because of investor demand, tightening supply and dropping production costs!

And our gold producers are quickly becoming market darlings. This is happening right now because dropping prices makes mining, milling and G&A costs a lot cheaper. It directly effects their bottom line making them suddenly attractive to main stream investors whose normal stocks are a whole lot less attractive.

But what if we're not seeing deflation, a decrease in the money supply, but a temporary slowdown in the velocity of money? "The velocity of money is the average frequency with which a unit of money is spent in a specific period of time." Wikipedia

In other words prices are falling because demand has dried up, not from a decrease in the money supply. People get some money and they're holding onto it. Plus by far the largest percentage of the bailout money is still locked in bank coffers. Sooner or later, in my opinion much sooner than later, people will start spending and banks lending, money will flow. I believe the plan to get the worlds economy back on track by massive monetary stimulation will work, as a matter of fact I believe it'll work so well we're heading, over the next few years, to a massive hyperinflationary blow-off, Weimar Germany style.

Consider the following:

* The US is going to issue untold trillions to pay for the bailout programs. As of now this money is sitting in bank coffers unused and providing the banks no return. Since banks are in the habit of making money by lending money this money won't be gathering dust for long. And with the multiplier effect will become many times over what they now have on their ledgers.
* Medicaid and Medicare have no money in their respective accounts.
* Social Security is broke and the first baby boomers are starting to retire at the same time the workforce is shrinking. And increasing the number of government workers doesn't count towards filling the gap necessary to fully fund retirements as government workers are paid by taxing existing workers or creating money to pay them.
* World wide infrastructure building and improvement plans costing trillions of dollars. This will be paid for in large part by the spending of US $'s held in Foreign Reserve accounts. That means a lot of dollars are going to be coming home to roost. The United States will pay for its programs and multi trillion dollar deficits for years to come by printing money.
* Existing wars, future planned and unplanned wars, escalation of wars. War on drugs, war on terror, resource wars etc etc etc.
* And lets not forget one of President Obama's first acts was pissing off the Chinese by calling them currency manipulators. Are they going to continue supporting US spending by continuing to purchase their debt? If they stop then the US has to monetize its debt, buy it themselves, which is the most inflationary thing a country can do.
* Tax cuts.

What happens to our gold investments, the ones that are looking pretty good right now, when "deflation" turns to inflation? And since the broad money supply is growing at a rate of +13% a year and the monetary base has gone pretty much parabolic, doubling in a year, which is to say the dollar you held last year has had its value effectively cut in half today. I think it's a safe conclusion we're headed for a price reversal sooner rather than later. Does gold serve us as well in an inflationary environment as it's serving now?

Gold shines brightest in inflationary times. The ongoing deflationary scare is a buying opportunity for gold and gold company shares. The real threat facing us today is the coming massive rise in prices right across the board caused by the ongoing world wide increase in the monetary base. I'm not sure how long it will take for all the money creation to work its way through the pipeline but its coming and with trillion dollar deficits being promised for years to come once it starts it isn't going to stop anytime soon. When investors wake up to this fact we'll see a flood of money into all things gold.

That deluge of money will start hitting the major gold producers and ETF's first then trickling down to the mid tiers then into brownfield juniors well along the track to developing a deposit, those with 43-101's and then into raw greenfield exploration companies.

With world wide gold production down so drastically and the dramatic disruption of the junior markets last year, and continuing still, supply and demand is going to be completely out of whack. There will be fierce competition for stable safe ozs in the ground by producers having to replace their reserves in an extremely competitive environment.

Today many of our larger gold companies are taking advantage of our present "deflationary" conditions and their strong share prices by selling stock and cashing up their treasuries so they can begin buying up the smaller companies and their deposits. There aren't very many decent sized deposits, ones over two million ozs, left in politically stable countries.

Now I'm not a licensed financial planner, a broker, an analyst, a geologist nor an economist. I'm just an investor who likes junior exploration companies looking for precious metals. And I like them, my juniors, to be in the post discovery resource definition stage. I think gold juniors, without a base metal component to their prospective deposit, are going to be the most rewarding, the most lucrative way to garner the huge rewards from the coming freight train rush to gold. Those golden tracks are being laid today using the world's currencies as ballast. It truly is going to be a time of generational wealth creation for many.

The most profitable, rewarding way to get involved is to own gold shares. And the best gold shares to own will be the shares of companies owning deposits gold producers want to buy. I mentioned "post discovery resource definition stage." These companies have already found something and are working to see exactly what they have. A lot of the risk, and a lot of waiting time for the company to actually make a discovery worth looking at has been removed for us, the investor.

With good drill results and the junior successfully moving the project along the development path towards a mine hopefully a majors interest will be sparked. If this all happens according to plan your payback as an investor during this stage can be a many fold return of invested capital.

Let's step back for a moment and consider what happens if I'm wrong about falling prices and are they here to stay. Well that's the beauty of gold. It works well in either situation, better in inflation but still very good in a falling price regime as its doing today. Add in geo-political tensions, falling supply and it seems like a perfect storm is developing for gold. Whichever way the wind blows from this point in history gold and its related investments should do well.

At Ahead of the Herd we believe there is opportunity in times of crisis, that the set of circumstances we find ourselves in are better than they have ever been for astute and courageous investors. Are you going to be part of the group that plans to take advantage of the tremendous opportunity being presented for extraordinary gains?

http://www.midasletter.com/commentary/09012901_Gold-ready-to-rumble.php