Buy (Gold) Low And Sell (Stocks) High

For the past few months, the markets have risen back to highs made earlier this year as traders attempt to front run potential EU and Fed intervention. Federal Reserve Chairman Ben Bernanke and his counterpart ECB Chairman Mario Draghi have used almost every arrow in their quiver in an attempt to juice the markets higher over the summer.

We have been told that the Federal Reserve stands ready to act, the ECB would do whatever it takes, and that the ECB stands ready to enact a policy of unlimited bond purchases and/or sovereign debt yield targeting in an effort to prop up the markets.

The problem with promises of intervention is that once the markets have front run the targeted asset classes there is little left for investors. For example, the S&P 500 (SPY) now trades for 16 times earnings, an expensive multiple when one considers that earnings growth in the second quarter stumbled into the single digits and the third quarter little or no growth is expected. At the beginning of the year, earnings growth was expected to be in the low teens indicating that the global economy is slowing more than anyone expected.

The question now becomes what happens if the Central Banks do or do not deliver on their promises?

The ECB has already poured cold water on the idea of granting the ESM a banking license making the idea of targeting sovereign bond yields impossible at best unless they want to become the only buyer in town. This solution would create more risk and open the door to moral hazard as the affected governments would have no incentive to fix their structural problems.

The idea that targeting sovereign bond yields can stem the crisis in the European bond market harkens back to the LTRO which was effective until it ran out of funds. The LTRO helped plug holes in Spanish banks during bank runs earlier this year, but in terms of bringing an end to the European crisis, it has been a failure.

Initially, yields fell but then rose once the money ran dry. A similar situation may be occurring now as European leaders put the finishing touches on a new bond purchase program. Traders are front-running the program, buying up as much sovereign debt as possible in the hopes that they can flip the bonds to the ECB. If the program does not appear, look for a swift selloff as the trade quickly reverses itself. If the program does appear, look for yields to fall initially as traders stuff the ECB full of debt they purchased earlier only to disappear once the program is full sending rates higher. One huge risk of targeting sovereign bond yields is monetizing all debt from Spain and Italy as the markets will test the cap repeatedly until the limit is found.

In this environment, investors should be taking steps to protect their portfolios against the coming selloff. Stocks like Coca-Cola (KO) are extremely overvalued in this market climate, trading for 20 times earnings while giving investors 4% growth through the first six months of this year. No one denies that they are a one of a handful of global brands whose logo is recognized anywhere in the world, but there is the question of how much premium that brand commands in this economic environment.

The old Wall Street adage of buy low and sell high applies here. Stocks are overvalued and trading near yearly highs, while Gold (GLD) and Silver (SLV) have spent the better part of the summer tracing out bottom formations, setting the stage for the next move higher.

In either case, intervention or no intervention, gold and silver will move higher after a short pullback. Intervention means that gold and silver once again will take on their roles of safe havens in an uncertain environment. If there is no intervention, that means the inevitable has been delayed, giving investors the opportunity to buy in before the storm hit.

Originally published here:

http://seekingalpha.com/article/828651-buy-gold-low-and-sell-stocks-high

Slim Majority See Higher Prices For Gold Next Week

A slim majority of participants in the Kitco News Gold Survey are expecting higher prices next week, but a good number of respondents said there is no reason for the market to push out of its current trading range.

In the Kitco News Gold Survey, out of 33 participants, 28 responded this week. Of those 28 participants, 16 see prices up, while three see prices down, and nine are neutral or see prices moving sideways. Market participants include bullion dealers, investment banks, futures traders, money managers and technical-chart analysts.

Sources who see higher gold prices next week said they expect gold to start to get ready to break out of its August doldrums and try to retest the upper end of resistance at $1,626-30. Darin Newsom, Telvent DTN senior analyst, said looking at Comex gold futures, the most-active December contract “is nearing a breakout of its four-week high of $1,633.30. Also, the U.S. dollar index is in position to turn lower again.”

Those who see prices holding in a range said given the time frame, there’s little reason for gold to break out of its trading range and is likely content to hold in this current path. Frank Lesh, futures broker at FuturePath Trading, said while the pattern of a succession of higher lows since May suggests a move into the $1,700s eventually, “it won’t happen without corresponding moves in the currencies. Next week looks like more of the same, so I expect price to continue sideways and be unchanged.”

Participants who see weaker prices said the low volume, low open interest in the futures market, along with no change in the trading pattern doesn’t bode well for the market. If the minutes from the Federal Open Market Committee come out next week without a hint of more stimulus, that may encourage some selling.

Original appeared at: http://www.kitco.com/kgs/goldsurvey_august17.2012.html

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Gold & Fiat Money

"I do not under any circumstance favor raising the price of gold. It would perpetuate that "barbarous metal" in international monetary use. We have quite rightly broken the link between gold and our domestic money.

We should also break the link between gold and international money. The supply of money, neither domestic nor international, should not be dependent over the long run on the accidents of supply and demand in the marketplace for just one commodity."

July 12, 1968 - Darryl R. Francis, President of the Reserve Bank of St. Louis.

And so it came to pass not long after the speech by Mr. Francis that in August 1971 US President Richard Nixon unilaterally broke the US$/gold peg and declared the US$ no longer convertible to gold.

The convertibility of US$'s to gold was the last tenuous link between fiat currencies pegged to the US$ and gold.

I pick up the tale of Gold and Fiat Money in January 1971 and will tell this tale with graphs. Graphs of fiat money; of consumer inflations and asset inflations; interest rates; central bank activities; gold prices; and official gold movements.

Placing the fiat money year of 1971 in the context of gold requires a pit stop at inflation. Often we are lulled into a sense of security by looking at the inflation rate. This time perhaps we should first look at the traditional inflation index, the CPI.

Read more:

Why Gold?

Centuries ago Aristotle said gold and silver were money because they fit the five properties of money.

Kings and governments used gold for international transactions.

JP Morgan, 100 years ago, said gold was money and nothing else.

If Gold has no use or utility, then why do central banks own it? Why does the US own gold and no paper reserves?

It is because gold is money and the ultimate backstop to our monetary system.

Throughout history no currency other than gold and silver has kept its value.

You can't get a stock bull or gold bear to admit to this, because it defeats their central argument against gold.

Read more:

Gold jumps as dollar declines

Gold prices jumped to the highest price in a week on Friday, rising for a second day, as the U.S. dollar fell versus the euro and traders noted a sense of returning willingness among investors to buy riskier assets, including commodities.

Gold futures for April delivery added $10.40, or 0.8%, to $1,118.90 an ounce, the highest since a week ago. It briefly rose as high as $1,119.50, back near the highest in a month.

Prices are still headed for a 0.2% weekly decline.

"Gold has a split personality in a schizophrenic market," said Jay Feuerstein, a commodities trader and founder of 2100 Xenon. "Sometimes gold trades like a de facto currency and sometimes it participates in a flight to quality, and now it's battling between the two."

Some investors may be buying gold as the weak data increases its investment appeal as a hard asset.

But also, as stocks gain and the dollar falls, commodities may join other so-called risky assets as investors move away from safer positions, like in the dollar. Read more on gold's decoupling from the dollar.

The U.S. dollar index, which tracks the greenback versus a basket of rivals, headed down after weak data on existing-home sales and consumer confidence. See story on existing-home sales.

The euro rose to buy $1.3618, from $1.3554 in late New York trading on Thursday, aided by a media report that a German bank may help Greece address its financial needs. See more on currencies.

"The metal is likely to continue to track the euro and broad risk sentiment in the coming sessions; however, dips are expected to draw further strong support from both jewelry and investment players and should provide a floor," said analysts at TheBullionDesk.com.

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Gold as the ultimate extinguisher of debt

If we accept the thesis that exorbitant debt and the destruction of capital is at the root of the present crisis, then we'll be directed to the solution of the problem. The solution is gold. The reason why there can be no resolution of the crisis without gold is two-fold.

* Gold is the only form of capital that is immune to destruction under any circumstances.
* Gold is the only ultimate extinguisher of debt.

I shall deal with the first reason in a moment. Here I just point out that when a debtor repays his debt by handing over Federal Reserve notes to his creditor, the debt is not extinguished. It is merely transferred to the Federal Reserve bank that issued the note. Transferring debt is not the same as extinguishing it.

One reason for the present plight of the world is that for the past forty years gold, the only ultimate extinguisher of debt, has been forcibly prevented by the U.S. government to discharge its debt-extinguishing function. As a consequence the debt-tower has kept growing, rain or shine. Conversely, until policy-makers at the Fed and the Treasury will understand that there is no substitute for gold in taming the debt-monster, their tinkering at the edges will keep making the global debt crisis worse.

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