Wednesday, February 6, 2013

The Next Big Move Higher In Gold

When you turn to the East and look at Japan, we are now almost at a record high gold price as measured in Japanese yen.  I think that tells you all you have to know about where the whole world is going in terms of the gold price.  The Japanese are being so overt about their intent to debase the yen that it’s being reflected in the gold price over there.That’s coming to America, Europe, and the rest of the world, where we see the same type of debasement going on... - John Embry, King World News
There's been a lot of media misdirection and appallingly invalid commentary about the relative strength of the economy and the outlook for the precious metals.  I've addressed the first issue in some previous posts, most notably my recent post on housing.

As for the latter, a blogger who goes by "Mad Max Trader" posted a widely distributed piece that suggested the bull market in gold has been fueled by China's huge buying over the past decade, that this demand will decline with the growth in China's economy, and the "air" will let out of the price of gold:  LINK.

Unfortunately, this analysis has absolutely no basis in actual fact.  The truth is that China imported a record amount of gold in 2012: LINK  It should be pointed out that this is gold that is "consumed" by the public and does not reflect the buying from China's Central Bank.  Furthermore, on more than one occasion a Chinese Central Bank official has made the comment that China needs to diversify its massive currency reserves by increasing the percentage held in gold.  The author further made no mention of the accelerating trend among most global Central Banks to accumulate gold; and neither did he mention the ongoing demand for gold in the largest gold buying countries like India and Viet Nam or the growth in demand coming from the Middle East.

On that note, I thought I would post this chart for everyone who is getting dragged down by the poor investor sentiment toward gold and the mining stocks:

(click on chart to enlarge)

This is a 10-yr weekly chart of gold.  I'm not sure that Richard Russell, or even Charles Dow himself, could create a more bullish snapshot of a bull market in process.  Keep in mind that in general, and certainly throughout the course of the 12-yr. precious metals bull market, extreme negative sentiment like we have currently has always marked the start of the next big up-leg for gold.  In fact, I can recall back in late 2003, when gold was trying to press through $400, famed Elliot Wave theorist Robert Prechter proclaimed that gold had failed the $400 level and was headed to $50.  You see how accurate the call was.

The Government is starting to run into a brick wall with regard to covering operating costs.  Just today the Postal Service announced it was cutting out Saturday delivery service in an attempt to stay alive without a massive bailout.  That bailout is only postponed.  The bigger problem for the Government is how to cover the more than $85 trillion of unfunded entitlement liabilities.  The truth is that the only way that can be dealt with is either by defaulting on them or printing the money needed to cover them.  They represent, by the way,  5.7x the GDP, so there's no way that the U.S. can ever hope to "grow" its way out of the problem.  Please note, the current amount of funded and unfunded liabilities does not account for any of the Government liability connected to the failing pension system (PBGC), the rapidly deteriorating quality of the FHA-guaranteed mortgage portfolio or the likely re-collapse of FNM/FRE.

As more money is printed to cover the accelerating Government spending and guarantees, confidence in the full faith and credit backing the U.S. dollar will plummet and the holders of the paper backed by that "full faith and credit" will seek refuge in hard assets, most notably physical gold and silver, which are increasingly seen as fiat currency alternatives.  Those who are the first to make this conversion will benefit the most from the inherent wealth transfer that will occur from the holders of paper assets to the holders of real assets.


  1. So the CBO came out today with near future deficits under 1 trillion-thats cash flow budget deficit. Optimistic cash flow budget deficit. Add back whats no tin budget and easily add 100 billion. maybe 200 billion. Consider that Obamacare taxes started and spending is deferred a bit--add in another normalized coupe of hundred billion. Add in starting in a short while, all the mistakes they made in estimating the cost of Obamacare (what was the one yesterday for 233 bil over 10 years, I forgot) Forget the intentional mistakes (called lies in basic terminology)

    Then what about the low interest rates that have been around since 2009?? 3% on maybe 17 trillion is a meager 50 bil a year--compounded forever. Heaven forbid rates go up, even with the printing.

    So, gold is good, silver is good, until someone comes up with a better real money. Have not for what, 5000 years--a little longer than my time horizon.

  2. For 2011 FY, this claims "net" debt interest cost in fed budget is $227B.
    Net could mean after the annual 'rebate' in January the Fed sends back to the Treasury after paying its op costs?

    Found interesting site put up recently where you can read about the real Armstrong--beware:

  3. Happend to read an article today about the new metals Bourse in Abu Dubai.
    The Bourse is trading thousands of gold and silver contracts daily with the volume coming from U.A.E. and India. How long before the Comex and L.M.E. become irrelevent in determining the price of gold and silver?
    Singapore is also increasing there share of trading in gold and silver.

  4. 510,000,000,000 is .03 of 17,000,000,000,000

    Debt service is over 1/2 trillion.

  5. "back in late 2003, when gold was trying to press through $400, famed Elliot Wave theorist Robert Prechter proclaimed that gold had failed the $400 level and was headed to $50". True but I read his "Conquering the Crash" book 8 months before the crash was felt in 2008 and it was a real eye-opener (and a surprise when the crash he mentioned actually happened). Wished I had acted on it as far as stocking precious metal but I'm just a $10 a hour low-wage slave. There were even people back in 1997 warning of this crisis - that's a 10 year span. So we can acurrately surmise an outcome but we can't predict always with certainity when an event will happen. We know the current economic situation is unsustainable and, because of manipulations of the markets and monies, it will become unstable - especially with every country trying to debase their currency. It like a "race to the bottom".

  6. But the chart above does not represent the true value of physical gold, rather it represents the synthetic (hughly leveraged) paper hybrid of futures expectations of a commodity value in USD currency terms.
    So the chart is not really a good representation of the "TRUTH IN GOLD".
    The truth lies in the issues you rightly bring up, and that they are creating a remonetization of gold, and a REALIZATION of the true value of physical (not paper gold, as represented by this chart).

    The real opportunity lies in the few days when physical first separates from paper and the pricing mechanism begins to break down. Will you be at that coin shop when the price has dropped to $800/oz. and will that dealer believe his computer screen as it drops to $750. Will he still sell ounces for that plus premium?? And what premium may I ask, might THAT be ??

    Be there Dano, Aloha

    1. I'm sorry but I dont follow you. You're saying

      "The real opportunity lies in the few days when physical first separates from paper and the pricing mechanism begins to break down. Will you be at that coin shop when the price has dropped to $800/oz. "

      Why will the physical seperate from the paper? (because paper is leveraged i supppose?) but why a fall in price when that happens? wont it be extraordinarily the other way round?

  7. Although I'm bullish on gold, there are 3 things I want to point out.
    1. Japan used to import large amount of gold in the 1980s but it's a net exporter now. The aging population is selling gold for the retirement. The demographics of China is not very favourable because of the so-called "one child" policy. Therefore, China might be a big seller of gold in the future when its population ages.
    2. China imported record amount of gold in 2012. However, what we don't know is how much of the gold was used for financing purpose. China also imports a lot of copper but a large part of it is used for financing purpose.
    3. You'd better stop reading Mad Hedge Fund Trader's stuff. It's a sheer waste of time. I stopped a long time ago. His analysis sucks.

  8. These "gold's gonna crash" types are a dime a dozen, this Mad Max meathead needs to look at all the gold buyers, not just China (Viet Nam, India, central banks, South Korea, etc)

    The "know it alls" on the net predicted gold would go down after the Olympics in 2008, well, the 2008 Olympics came and went, the 2010 Olympics came and went, the 2012 Olympics came and went, yet gold has not come down in price as expected by the "experts". Gold has been forced down from its high in the $1900 range, but it is not down to $800 or $400 or whatever crash price predicted by the paper pushers.
    Right now we are living under what I call London Gold Pool II, with the COMEX (Crimex) and London pressing down the price to hide inflation effects. While it feels like the manipulatiors are winnig the battle they are not likely to win the war (the original London Gold Pool failed, maybe history will repeat)

  9. Neil Macdonald: U.S. media complicit in Obama's drone doctrine
    Some say U.S. president is waging a 'war on whistleblowers'

    U.S. media outlets, it seems, are perfectly comfortable with the term “targeted killing,” now that it is a major tool for the Pentagon and CIA.

    It’s also clear American media outlets are comfortable suppressing news the government does not want published. Today’s story reveals not just that the Americans have operated a secret drone base for years in Saudi Arabia, but that the Post, along with various other news organizations, have been keeping that fact to themselves at the government’s request.

    Reports on the U.S. drone program, also based on leaks, have described how Barack Obama’s administration has become ever more dependent on remote-controlled killing. Obama himself reportedly signs off personally on each target.

    The American public has been largely unconcerned with the program, except when the person killed has been an American citizen. (The U.S., unlike many other countries, accords its citizens special protections from government intrusions.)

    Obama's 'war on whistleblowers'

    All these hardened security measures were begun under the Bush administration. President Obama, who once denounced them and even, as president, ordered Bush legal memos be made public, has not just amplified Bush’s programs, but has begun vigorously hunting down and prosecuting officials who leak details.

    And that is one initiative the American media is not so comfortable with.

    Some are calling it Obama’s “war on whistleblowers.” Current Attorney-General Eric Holder has prosecuted more officials for leaking information to reporters than any of his predecessors since the Second World War.

    The government has hunted down intelligence officials who leaked details of expensive programs to spy on internet traffic, wiretaps placed in the Israeli embassy in Washington and of Obama’s personal involvement in selecting drone targets.

    The lawyer for one of those officials said Holder’s prosecutors “don’t distinguish between bad people – people who spy for other governments, people who sell secrets for money – and people who are accused of having conversations and discussions.”

    Several news outlets have noted, rather acidly, that the administration seems fairly expert at leaking classified material that makes the government look good.

    None of this makes Obama different from any previous president. It just demonstrates his ability to keep the nation’s media on board, and mete out punishment when they publish the wrong sorts of secrets.

    suppression seems to be a theme with all truths..........

  10. Ex-Amaranth Trader, CFTC Unite to Ask Court to Toss Fine

    Hunter sued FERC in December 2011 after the agency ordered him to pay $30 million in penalties,

    ruling he manipulated the price of contracts on the New York Mercantile Exchange in 2006 while boosting the value of financial derivatives.

    Dumped Contracts

    Hunter, according to court documents, dumped large numbers of contracts within the last 30 minutes of trading in an effort to drive down the closing price of the futures.

    The move benefited Amaranth’s larger opposing positions in off-exchange derivatives, according to regulators.

    Amaranth lost $6.6 billion betting on the price of natural gas. The Greenwich, Connecticut-based hedge fund that once controlled half of the gas market collapsed in 2006. In August 2009, the company agreed to pay $7.5 million to end U.S. cases brought by FERC and the CFTC over price manipulation.

  11. Modern Market Alchemy Explained: Converting Junk Debt Into Supersafe Treasurys Out Of Thin Air

    "The final stop on the tour is something called collateral transformation. This activity has been around in some form for quite a while and does not currently appear to be of a scale that would raise serious concerns--though the available data on it are sketchy at this point. Nevertheless, it deserves to be highlighted because it is exactly the kind of activity where new regulation could create the potential for rapid growth and where we therefore need to be especially watchful.

    Collateral transformation is best explained with an example. Imagine an insurance company that wants to engage in a derivatives transaction. To do so, it is required to post collateral with a clearinghouse, and, because the clearinghouse has high standards, the collateral must be "pristine"--that is, it has to be in the form of Treasury securities. However, the insurance company doesn't have any unencumbered Treasury securities available--all it has in unencumbered form are some junk bonds. Here is where the collateral swap comes in. The insurance company might approach a broker-dealer and engage in what is effectively a two-way repo transaction, whereby it gives the dealer its junk bonds as collateral, borrows the Treasury securities, and agrees to unwind the transaction at some point in the future. Now the insurance company can go ahead and pledge the borrowed Treasury securities as collateral for its derivatives trade.

    Of course, the dealer may not have the spare Treasury securities on hand, and so, to obtain them, it may have to engage in the mirror-image transaction with a third party that does--say, a pension fund. Thus, the dealer would, in a second leg, use the junk bonds as collateral to borrow Treasury securities from the pension fund. And why would the pension fund see this transaction as beneficial? Tying back to the theme of reaching for yield, perhaps it is looking to goose its reported returns with the securities-lending income without changing the holdings it reports on its balance sheet."

    Fred Sanford would be proud!

  12. Dave, with the S&P hitting another multiyear high this morning while gold and mining stocks go nowhere (and have gone nowhere for the better part of two years, except down in the case of miners), don't you feel just a wee bit foolish?

    When does your dogma about gold ever change? How do you keep AUM in your fund? Inquiring minds want to know.

    1. LOL. Your inquiry is just another sign that we're about to start an extended move higher.

      Do I feel foolish? I'll tell you what. I've been invested in this sector since the HUI was at 45, gold was $275 and silver was $4.50. Back then the Dow was at 10,500 and the SPX was 1250. I sold my house three years after that (Nov 2004) for about 30% more than what it would cost me to buy it back today.

      Let me give you the opportunity to re-phrase your question. And let me ask you this, relative to my investment thesis and track record, do you feel foolish?

      One more thing: I'm still 90% invested in this sector. If I had more money to invest, I would put every nickel into my fund.

    2. Okay, it's paid to be a gold permabull, so your decision is to remain a gold permabull. That's very consistent of you. Good luck.

    3. A) I'm not paid to write this

      B) I'm not a permabull - I call it as I see, not as I want it to be

      C) It's been very rewarding to right about the last 12 years and
      it will be even more rewarding to be right about the next 5 years.

    4. Hey Dave, Post the S&P measured in gold vs. depreciating fiat. Gold is money. Everything else is credit. Dogma about gold changes when paper money stops losing its value.

  13. Fears of a triple-dip recession in the U.K

    "Amid fears of a triple-dip recession in the U.K., the Bank of England’s Funding for Lending Scheme (FLS), designed to increase credit availability for households and businesses, appears to have taken hold in December. With mortgage approvals beating forecasts, net mortgage lending producing its largest increase since April and housing prices leveling off in January after six months of decline, the housing sector may become less of a drag on the economy."

    I feel like I'm watching The Rocky and Bullwinkle Show when it comes to money policies to prevent the next cliff.

    "Hey Rocky! Watch me pull a rabbit out of my hat!"
    "But that trick never works....."

    so true, Rocky.