By Louis James, Chief Metals & Mining Investment Strategist
In many of my conversations with legendary speculator Doug Casey since the crash of 2008, Doug has talked about a coming super-bubble.
Everything Doug has studied about human nature, history, and economics—from Roman times right up to the present—has him absolutely convinced that the global economy is headed for high inflation, with a very real potential for hyperinflation in the US.
Ben Bernanke’s panicked deployment of squadrons of cash-laden choppers has been emulated around the world. The Bank of International Settlements estimates that global debt markets now exceed $100 trillion.
The laws of economics—maybe even physics—say that this inflation, whenever it arrives, must have consequences… and that those consequences cannot be avoided forever.
The easiest consequence to predict, and the one we’re betting heavily on, is that the price of gold will move higher. Much higher. That move will in turn ignite a bubble in gold stocks and, as Doug likes to say, a super-bubble in junior gold stocks.
Jeff Clark, editor of our BIG GOLD newsletter, recently illustrated what such a super-bubble can look like, citing figures from several historic bull markets. I hesitate to repeat any of his figures because the right junior stocks’ gains when the market goes bubbly are, frankly, hard to believe. However, it is a fact that quite a few junior stocks achieved the much-vaunted 10-bagger status (1,000% gains) in previous bubbles, and some even returned 100-fold.
Here’s the essential reason why junior mining stocks are Doug’s favorite speculations.
Let’s start at the beginning: Doug’s mantra is that one should buy gold for prudence and gold stocks for profit. These are very different kinds of asset deployment.
It’s particularly important not to think of gold as an investment, but as wealth protection. It’s the only highly liquid financial asset that is not simultaneously someone else’s liability. Every ounce of gold you physically possess is value in solid form—there is no short to your long. Come hell or high water, it is value you can liquidate and use to secure your needs. That’s why gold is for prudence.
Gold stocks are for speculation because they offer leverage to gold. This is actually true of all mining stocks and, more broadly, of stocks in commodity-related companies; they all tend to magnify the price movements in the underlying commodity. But the phenomenon is especially strong in the highly volatile precious metals.
Allow me to illustrate—and in an effort to avoid seeming overly promotional, I’ll show how gold stocks’ leverage works on the downside as well as the upside. Bad news first: here’s a chart showing how gold retreated during October and November of 2008, the worst two months of that year’s crash for mining stocks. Also shown are an index of gold juniors and our own portfolio performance. This was, of course, a terrific time to buy, resulting in spectacular gains over the next two years.
Now the good news: here’s a chart showing the performance of the same three things in January and February of this year, which saw a major rally in the gold sector.
Here’s one more, with a particularly telling point to make. This is the stock price of ATAC Resources (ATC.V) over the same time period as the chart above. The point I want to draw your attention to is that the company had no major news during the time period shown. It’s a Yukon gold play, buried deep under the famous snows of the Great White North, so there’s no exploration under way, and there won’t be until the snow melts weeks or months from now.
This third chart shows in one simple yet powerful way exactly why Doug loves buying these stocks when they’re on sale and selling them when they go into bubble mode. ATAC essentially did nothing and still shot up over an order of magnitude more than gold. Note that while this third chart looks like the second, the scales are quite different. (ATAC, by the way, is part of my special report, 10-Bagger List for 2014, that details nine companies I believe could show 1,000% or more returns this year. Note that the report was written before the big move upward you see in the chart above.)
It’s worth emphasizing that ATAC’s performance this year is just on a rebound from recent lows—imagine what a stock like this could do when Doug’s super-bubble for gold stocks arrives.
But what if it doesn’t? Or worse—what if we already missed it?
I remember a conversation with Doug back in 2011, when gold rose to within reach of $2,000 per ounce. Many mainstream analysts said gold was in a bubble. I told Doug I couldn’t understand why anyone would listen to analysts who’ve called the gold trend wrong every year since the current bull cycle started. I remember Doug chuckling and saying: “Just wait and see—this is barely an overture.”
I am certain Doug is right. That’s not because he’s the guru, nor because I’m a nutty gold bug, but because no government in history has ever multiplied its currency base without sparking serious and often fatal inflation. That’s a fact, not an opinion, backed by enough data to make me extremely confident in predicting what lies ahead for the US dollar, even if I can’t say exactly when we’ll reach the tipping point.
Since that 2011 interim peak, as we all know painfully well, gold has backed off on par with the correction in the middle of the great 1970s gold bull market. But economic realities require that the market turn around and head for his long-predicted super-bubble in junior mining stocks before too long. That makes the correction the last, best time to build a substantial position in the stocks best positioned to profit from the coming bubble.
And now Doug is saying that he believes the upturn is at hand. He expects a steadily rising market for a year or two, perhaps more, but not many more, culminating in a market mania for the record books.
Our market does appear to have bottomed. It may take a while to go into its mania phase, but it’s already heating up. No one is going to want to be short when this train leaves the station—and the conductor has blown the whistle.
To find out what you could be missing if you don’t invest in junior mining stocks right now, watch Casey Research’s recent video event, Upturn Millionaires—How to Play the Turning Tides in the Precious Metals Market. With resource and investment experts Doug Casey, Frank Giustra, Rick Rule, Porter Stansberry, Ross Beaty, John Mauldin, Marin Katusa, and myself. Watch it here for free, or click here to find out more about my 10-Bagger List for 2014.
By Louis James, Chief Metals & Mining Investment Strategist
It is with a troubled heart that I look at the continued fighting in eastern Ukraine. I worry about my friends and students in the country who may well be in physical danger soon, if the conflict escalates. As an investment analyst, it’s the financial war the Russians seem quite willing to wage that has my attention.
It should have yours as well.
In our just-released documentary, Meltdown America, one of the experts noted that the Kremlin had already made moves to dethrone the US dollar as the world’s reserve currency before the renewed East-West tensions of this year. Putin has openly threatened what amounts to economic warfare as a response to sanctions placed on Russia after its Crimea grab.
Now bullets are flying—can Putin’s financial ICBM be far behind?
Mind you, the US and global economies are on such shaky ground, they could come crashing down without any help from Gospodin Putin.
One of the things that really struck me while watching Meltdown America was the way the writing was clearly visible on the wall in past cases of financial collapse and hyperinflation—but no one wanted to believe it.
That’s the way I see the US today. Life seems so normal and there’s so much wealth even in poorer regions, it’s hard to believe the cracks in the foundation could really bring down everything built on it. And that’s exactly why the cracks never get fixed; people don’t want to see them, and politicians do everything possible to deny they exist. So they widen and deepen until the collapse becomes inevitable—and I believe we have already passed the point of no return.
It’s just a matter of time now.
Gloomy thoughts indeed, but I’m not here to depress anyone. Hopefully, I can help deliver a wake-up call. Perhaps even more useful, I can tell you what I’m doing about it.
Of course, precious metals and the associated stocks are a key part of my strategy. As Doug Casey likes to say, I buy gold for prudence and gold stocks for profit. If I’m right about the economic trouble ahead, gold will protect me, and my gold stock picks will make me a fortune.
But Doug also says that our biggest risk today is not market risk; it’s political risk. He has moved to rural Argentina to get out of harm’s way. I’ve moved to Puerto Rico, a US territory that is rapidly becoming the only tax haven that matters for US taxpayers.
Million-Dollar Condos for Half Price
As I type here in my new home office, I glance up and see waves of Caribbean blue crashing on the palm-lined beach. Surfers are out in force. Scattered clouds add to the already amazing variety of colors in the ocean. I wonder if I will have time to go for a swim before dinner—and I’m amazed yet again to think that it was a shot at lower taxes that brought me here to Puerto Rico.
It seems almost unnatural for me to be able to enjoy so much beauty while saving money, but that’s exactly what I’m doing.
The view from my new home office.
You see, the economy here never really recovered from the crash of 2008. This is very bad news for long-suffering Puerto Ricans trying to make ends meet. When I first came here with my wife to check the place out, locals kept asking us why we were thinking of moving here; jobs are scarce, and something of an exodus is taking place in the opposite direction (Puerto Ricans are US citizens and can travel and work freely anywhere in the US).
But I wasn’t coming to Puerto Rico to sell hot dogs. My income doesn’t depend on the local economy, so its woes are an obvious opportunity for a contrarian speculator like me.
Take the most simple and basic asset class one can invest in as a Puerto Rico play: real estate. The market has been so devastated that million-dollar condos are selling for half price. When we closed on our new place, the seller came up short, and we had other options, so we weren’t willing to pay more. The real estate agents involved were so eager to keep the deal from falling through, they kicked in with their own money to help the seller out.
Personally, I’m not a big fan of gated communities, but for people who are concerned about possible social unrest in the future, it’s good to know that you can buy properties in some of the most posh and secure communities on the island with no money down.
Now, as much as I like a contrarian bargain, and as much as my wife loves the tropical weather, what really brought us here were the new tax incentives the government of Puerto Rico enacted to make the island more attractive to investors and employers.
The critical point here is that Puerto Ricans are exempt from US federal income taxes, even though they are US citizens. They pay Puerto Rican taxes, of course, and those have generally been similar to US taxes, so the island has never been seen as a tax haven before. That all changed in 2012, when Puerto Rico passed Acts 20 and 22.
Act 22 is basically a 100% capital-gains tax holiday designed to attract investors to come live in Puerto Rico. Exactly what is included or excluded is beyond the scope of this article, but for me, the important thing is that it covers the stocks I already owned when I moved here on January 1, 2014. Given that the market bottomed at almost the same time, I have no gains to be taxed on for 2013, and will not be taxed for the gains I make going forward—all the way to 2036.
This alone was worth the move to Puerto Rico, in my opinion.
Happily, the application process was simple. My wife downloaded the form and filled it out. I signed it, and a couple weeks later, we got an official tax holiday decree in the mail—no questions asked. I had to accept the conditions of the decree in front of a notary and send in an acceptance form with a $50 filing fee, and that was it. Didn’t even have to hire a lawyer.
This tax break is not available to current residents of Puerto Rico—it’s designed to attract wealthy people to come live on the island, after all—but it’s available to all others who move here, including but not limited to US taxpayers.
Act 20 is a tax break on corporate earnings designed to incent job creation in Puerto Rico. The idea is to persuade US employers who might set up call centers in India, or create other similar jobs abroad, to do so closer to home, by offering them a 4% corporate earnings tax rate.
My fellow Casey Research editor Alex Daley has moved to Puerto Rico as well, and we’ve formed a company here that exports writing and analytical services to Casey Research in Vermont. This is the basis of our application for Act 20 tax benefits, which has not been approved yet, but which we understand is close.
If we get our Act 20 decree approved, we’ll still have to pay regular income taxes on our base salaries, but the lower tax rate applied to our corporate income will result in a drastically lower total income tax rate for us as individuals.
I’ll be sure to let readers know when we get our Act 20 decree approved.
All 100% Legal
The beauty of this is that Puerto Rico’s tax breaks are not shady tax dodges set up by entities of questionable legality or trustworthiness, but perfectly legal tax incentives within the US.
Act 20 and Act 22 benefits are available to non-US persons, but they are especially important to US taxpayers because, unlike almost every other country in the world, the US taxes its serfs citizens whether they live in the US or abroad.
In other words, while a Canadian can get out of paying Canadian income taxes by moving out of Canada, a US person cannot escape US taxes by moving to Argentina, or anywhere else—anywhere besides Puerto Rico.
It’s like expatriation without having to leave the US, truly a unique situation.
And it’s a win-win situation; people like us bring much-needed money, ideas, and energy to the island, while getting to keep more of what our crisis-investing strategy nets us. We create jobs, rather than take them. We are part of the solution here, and we’ve been made very welcome.
Is It Safe?
So that’s why I’m here. Whether or not my Act 20 status gets approved, I’m so happy about my Act 22 decree that I’m convinced we did the right thing moving here.
When I tell people what I’ve done and why, most get immediately excited by the idea—and then they balk. The first question they ask is usually: What about crime?
Puerto Rico isn’t a large island, and a good chunk of its three million inhabitants are clustered in and around the capital city of San Juan. Of course there is crime here, as there is in any large city. There are places I would not walk alone at night—just as there are in New York City.
Mexico City, Buenos Aires, La Paz… the capital of any other Latin American country or Caribbean country I’ve been to is much larger, more polluted, and more dangerous than San Juan. In my subjective view, San Juan, with its old Spanish fortifications and amazing beaches, is more beautiful. And you can drink the water here.
Sure, it might be cleaner and safer in Palm Beach, Florida—but it’s a lot more expensive there, it has less charm, and there’s no Act 20 nor 22. It’s a matter of priorities.
When I say this, most people remain skeptical; they read about the economic problems Puerto Rico has and the financial trouble the government is in, and they wonder if things could get worse.
Of course they can—but if Doug is right about The Greater Depression about to envelop the whole world, things are going to get worse everywhere.
Here at least, people are already used to massive unemployment. It won’t come as a shock; it’s never left since 2008.
Another way of looking at it is that since tropical storms hit the island from time to time (southern Florida is much more prone to major hurricanes than Puerto Rico, but they do happen), people here are more prepared for disasters than in many other parts of the US. The better apartment buildings and hotels have their own electricity generators. Nobody can freeze to death here, anyway, and fruit trees grow all over the island.
There’s a lot more I could say, but the bottom line is that I think Puerto Rico is a much better place to ride out a global financial storm than Miami, or Anchorage, or almost any city in between. A self-sustaining farm in rural Alabama might be better, but that’s not the sort of place I want to live.
I Like It Here
That last is an important point: if I have to hunker down to ride out an economic storm, it should be in a place where I like being.
Puerto Rico is beautiful and bountiful year-round. I speak Spanish, but most people in San Juan are bilingual, so that’s not really an issue. Our new flat is blocks from the best schools, shops, and restaurants in town—and even the hospital.
I open the window and the fresh air coming off the ocean carries the sound of waves, sometimes laughing children. There’s more noise pollution during the day, but at night, the city calms down, and we can hear the famous Puerto Rican coquí frogs, which my daughter calls “happy frogs.” Ten floors up, the ocean breeze is cool enough that we have yet to turn on the air conditioning.
The beaches are fantastic, and the clear water makes for great diving. I’ve never been a surfer, but the waves here are famous too, so I’m thinking of trying it out. There’s no end of other things to try out, and the neighboring islands have their own charms to offer as well.
Granted, my wife and I try to be smart about what we do and where we go, but we’ve never felt unsafe here—well, apart from the crazy drivers.
We like it here. We’re happy. For tax reasons, for quality of life, and with the potential meltdown of America in mind, we’re glad we made the move.
Find Out More
Doug Casey’s International Man Editor Nick Giambruno, Alex Daley, and I have coauthored a special report on Puerto Rico’s stunning new tax advantages. The report gets into all the details I didn’t have time or space for here. We cover all the specifics of what, why, and how. The report includes links to the forms you need, as well as recommended resources, from lawyers to realtors.
Whether you’re thinking about expatriating or you’re just tired of paying high taxes, I think Puerto Rico is a place you should consider. I know of no better resource to help you get started than our special report.
For your own health, wealth, and enjoyment, I encourage you to get your copy today.
Gloom Boom & Doom Report publisher Marc Faber discusses the fragile state of the US and global financial systems… how rising inflation will affect the average American… how soon the bubble will burst… and why gold and silver will triumph.
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Here are a few highlights:
“The US is a country that likes to create trouble, but they don’t like to clean up things.”
“We’ve now been five years into the bull market and the US economy bottomed out in June 2009. We already had a crack-up boom—not in the economy of the typical household, but in the economy of the super-well-to-do people, whose asset prices rose dramatically and as a result created a huge wealth inequality.”
“My view would be that we have already printed so much money, and to accelerate it will be bringing about numerous other problems, so my time frame is that the [bubble], maximum, will burst in three years’ time.”
“Once the collapse happens, the power of central banks will be curtailed greatly because people will realize who brought along first the Nasdaq bubble in 1999: The Federal Reserve. Who brought about the housing bubble between 2001 and 2007? The Federal Reserve. And who is bringing now along another great credit bubble and asset bubble? The Federal Reserve.”
“I don’t think that anything is very cheap, but if I have to compare different asset prices, say real estate, stocks, bonds, commodities, gold, art, and so forth—and old cars—then I think that gold and silver [are] relatively inexpensive because they have had big corrections already, and you should not forget that the global bond market now is over $100 trillion.”
Despite last week’s pullback, the precious metals market is off to an impressive start in 2014. Gold is up 10.6%, silver 4.3%, and the PHLX Gold/Silver (XAU) 17.1%. Gold, in particular, had a great February, rising above $1,300 for the first time since November 7, 2013.
This has led to some very handsome gains in our Casey International Speculator portfolio, with a few of our recommendations already logging triple-digit gains from their recent bottoms.
Why Junior Gold Mining Stocks Are Our Favorite Speculations
In other words, don’t think of gold as an investment, but as wealth protection. It’s the only highly liquid financial asset that is not simultaneously someone else’s obligation; it’s value you can liquidate and use to secure your needs. Possessing it is prudent.
Gold stocks are for speculation because they offer leverage to gold. This is actually true of all mining stocks, but the phenomenon is especially strong in the highly volatile precious metals.
Most typical “be happy you beat inflation” returns simply can’t hold a candle to stocks that achieved 10-bagger status (1,000% gains). In previous bubbles—some even generated 100-fold returns. And we may see such returns again.
It’s Not Too Late to Make a Fortune
Here’s a look at our top three year-to-date gainers.
What’s especially remarkable is that all three of these stocks shot up much more than gold itself, on essentially no company-specific news. This is dramatic proof of just how much leverage the right mining stocks can offer to movements in the underlying commodity—gold, in this case. Two of the stocks above are on our list of potential 10-baggers, by the way.
So have you missed the boat? Is it too late to buy?
Looking at the chart, two bullish factors jump out immediately:
Gold stocks have just now started to move up from a similar level in 2008.
Gold stocks remain severely undervalued compared to the gold price. A simple reversion to the mean implies a tremendous upside move.
Now consider the following data that point to a positive shift in the gold market.
After 13 consecutive months of decline, GLD holdings were up over 10.5 tonnes last month. The trend is similar to other ETFs.
Hedge funds and other large speculators more than doubled their bets on higher gold prices this year.
Increase in M&A—for example, hostile bids from Osisko and HudBay Minerals to buy big assets.
Apollo, KKR, and other large private equity groups have emerged as a new class of participants in the sector.
Gold companies’ hedging of future production—usually a sign of insecurity among the miners—shrunk to the lowest level in 11 years.
China continues to consume record amounts of gold and officially overtook India as the world’s largest buyer of gold in 2013.
Large players in the gold futures market that were short have switched to being long.
Central banks continue to be net buyers.
To top it off, there’s been no fallout (yet) from the unprecedented currency dilution undertaken since 2008—and we don’t believe in free lunches.
The gold mania train has not yet left the station, but the engine is running and the conductor has the whistle in his mouth. This means…
Any correction ahead is a potential last-chance buying opportunity before the final mania phase of this bull cycle takes our stock to new highs, well above previous interim peaks.
In spite of the good start to 2014, most of our 10-bagger gold stocks are still on the deep-discount rack. And you can get all of them with a risk-free, 3-month trial subscription to our monthly advisory focused on junior mining stocks, the Casey International Speculator.
If you sign up today, you can still get instant access to two special reports detailing which stocks are most likely to gain big this year: Louis James’ 10-Bagger List for 2014 and 7 Must-Own Stocks for 2014.
Test-drive the International Speculator for 3 months with a full money-back guarantee, and if it’s not everything you expected, just cancel for a prompt, courteous refund of every penny you paid. Click here to get started now.
I hope you will take advantage of this opportunity in front of us—while shares are still relatively cheap.
In his weekly market review, Frank Holmes of the USFunds.com nicely summarizes for gold investors this week’s strengths, weaknesses, opportunities and threats in the gold market. Gold closed the week at $1,334.21, down $48.84 per ounce (3.53%). The NYSE Arca Gold Miners Index lost 8.05% on the week. This was the gold investors review of past week.
Gold Market Strengths
A recent survey by the Silver Institute shows that 73% of U.S. jewelry retailers reported increased silver sales in 2013. Furthermore, 92% of the retailers said they are optimistic that the current silver demand growth will continue for the next several years.
Mineweb reports the Indian government eased import regulations to allow some of the country’s private sector banks to buy gold from abroad in a move that could boost gold imports in India and bring down physical premiums considerably. The Reserve Bank of India has allowed five private sector banks to participate in the import programs, as the country seeks to prevent the flow of illicit money and smuggled gold ahead of the primary elections this year.
In the platinum group metals space, platinum and palladium have benefitted from platinum strikes in South Africa, as well as the threat of sanctions in Russia, the world’s main palladium producer. Standard Bank is seeking to profit from the instability by launching palladium and platinum ETFs to be listed on the Johannesburg Stock Exchange.
Gold Market Weaknesses
Gold fell after the Federal Reserve indicated that it will raise interest rates next year. The Fed’s tone was deemed as being more hawkish than expected, which contributed to a sharp rise in the dollar. As a result, gold traders turned bearish with a majority of them expecting gold to fall next week.
U.S. domestic mine gold production in 2013 has dropped 3 percent, or 128,602 ounces, from the prior year, according to estimates released by the U.S. Geological Survey. Production coming from the states of Nevada (the U.S. gold output leader), Arizona, and California decreased in 2013.
A Wall Street Journal article shows European central banks may end a 15-year-old restriction on sales of their gold holdings. Under the agreement, central banks were limited to selling a maximum of 400 tonnes over a five-year period. According to a Bundesbank board member, the agreement may not be extended because over the past five years central bank gold sales have decreased significantly, making the policy unnecessary.
Gold Market Opportunities
On Thursday, gold recorded a golden cross when the 50-day moving average crossed above the 200-day moving average. A golden cross is traditionally associated with the breaking of a bear market trend and the beginning of a bull market, where the 200-day moving average becomes a support level in the rising market. Our analysis shows that, going back to 2000, a golden cross in gold has been followed on average by a 50 percent rally lasting on average 15 months.
David Rosenberg, Gluskin Sheff’s Chief Economist, is of the opinion that the Fed appears to be looking at inflation in the rear-view mirror, not through the front window as it should be. Rosenberg agrees that inflation appears benign today; however, the signs of imminent rising inflation cannot be ignored any longer. According to Rosenberg, the National Federation of Independent Business plans to raise selling prices, which has a 70 percent correlation with inflation. In addition, the non-financial commercial paper lending has exploded at a 43 percent annual rate, not a particularly deflationary statistic. As a result, Rosenberg believes we have no “anchor” to hold inflation back.
Michael Gray, head of Macquarie Mining Research in Canada, commented on the newfound energy of the gold space in an interview with The Gold Report. According to Gray there are three reasons to believe the sector has turned a corner: (1) few people expected gold prices to rise so quickly into 2014, (2) the environment is fertile for equity deals and M&A transactions, and (3) Goldcorp’s bid for Osisko effectively removed an overhang. In addition, Dennis Gartman, one of the most senior and widely-respected newsletter writers, remains bullish on gold, arguing the curtailing of production by senior miners signals the end of the bear market.
Gold Market Threats
Goldman Sachs’ head of Commodities Research Jeffrey Currie has reiterated his view that gold will fall to $1,050 by the end of the year, leading numerous analysts and investors to question his conclusions. According to Currie, gold’s rally this year has been driven by unsustainable factors, such as the weather-induced slowdown in the U.S., increased geopolitical tensions, and Chinese credit concerns. According to Lawrence Williams, a Mineweb contributor, Currie has avoided any comment related to the continued strength of Asian physical buying and the decided reversal of ETF redemptions, the two most important gold drivers of 2013.
As a result of the speculation on Chinese commodity trade financing in copper and iron ore unwinding due to capital tightening, UBS published a report on gold-trade financing. In conversations with market participants, UBS has found evidence that gold is also being used for trade finance, albeit to a small degree. This is because gold has proven harder to use for financing as it is more closely monitored by regulators, and its value makes storage arrangements more complicated and costly.
JPMorgan Chase announced the sale of its physical commodities trading unit to the Mercuria Energy Group. The move was announced as Wall Street Banks are moving out of the commodities trading business to avoid tighter scrutiny by regulators who are currently investigating price fixing allegations. Morgan Stanley and Deutsche Bank have announced similar moves in recent weeks. These transactions, however, are shifting the commodities trading business into the even less regulated market of private companies, at a time when the sector has seen consolidation. The end result likely will be a market with fewer players and less transparency – hardly desirable for commodities producers.
History repeats itself. Although it does not repeat exactly in the same way, it rhymes. Consider this, exactly one year ago, on March 16th, Cyprus reached the newswires globally with the announcement of its bank bail-ins.
One year later, the geopolitical escalation between Ukraine and Russia is front stage. Just moments ago, the long awaited referendum in Crimea resulted in an overwhelming 95% of votes to join Russia, according to Reuters. The Western world, even before the closing of the referendum, has officially stated that it denies the results.
Think about this. Crimea has 2 million inhabitants, a GDP of $4.3 billion, an average monthly salary of $290, a budget deficit $1 billion. Its GDP is 0,02% of the US GDP. Yet, the US government, along with “its friends and allies”, feels the need to intervene in Putin’s backyard. Why?
Motives of the West become much more clear when looking below the surface, in this case literally. It appears that Crimea has a capacity of 7 million tons of oil production per year. Moreover, ExxonMobil and Royal Dutch Shell have closed a deal (although currently on hold) worth $1 billion. As far as Ukraine is concerned, it is a central hub of energy supply to the West, in particular gas.
Now there is nothing new to this. All geopolitical tensions of the last decades were centered around oil, gas or other commodities. Think of Iraq two decades ago, Syria very recently, and a dozens of other examples in between. However, there are important reasons why “this time could really be different.”
Next to the tensions in Russia, there are signs that the Chinese credit bubble, the biggest credit bubble in history, is cracking. Chinese bank assets expressed in US Dollars currently exceed 25 trillion, while US bank assets are close to 14 trillion USD. Chinese credit doubled since 2009. The most concerning news, however, is under the hood. Zerohedge cited Bank of America, when they discovered that one of the large trusts (CITIC) “tried to auction the collateral but failed to do so because the developer has sold the collateral and also mortgaged it to a few other lenders.”
The fundamental issue here is that an economic crisis, which seems developing, could be very different this time. The effect could really be dramatic. The reason why “this time is different” is directly related to the worsening debt crisis, which is inherently linked to the currency wars. The US is playing a key role here. Why? During all previous escalations, the US, with its global dominance, was in a better economic shape than it is today. And so was the rest of the world. Think about these global facts and figures:
Global debt in the financial system is at historic highs. It recently surpassed $100 trillion, as reported by Bloomberg based on BIS data.
US government debt alone has surged to $12 trillion up from $4.5 trillion at the end of 2007.
The interest rates on government debt, especially in the US with a zero interest rate policy, is at 5,000 year lows.
Global derivatives have a notional value of around $700 trillion (latest official BIS data from mid 2013), the highest point historically.
What this means in plain simple terms is that the financial system is extremely leveraged, highly sensible to an external shock. All major economies and, hence, the whole world, is inherently vulnerable. Unfortunately, the first signs of cracks are there, as evidenced by several facts in the last two weeks.
First, Friday’s reported data about US Treasuries from foreigners held by the Fed, has shown a drop of $104.5 billion. Zerohedge notes: “This was the biggest drop of Treasurys held by the Fed on record, i.e., foreigners were really busy selling. This brings the total Treasury holdings in custody at the Fed to levels not seen since December 2012, a period during which the Fed alone has monetized well over $1 trillion in US paper.” The following chart says it all.
Why is this important? US Treasuries are the backbone of the world monetary system, at least as long as the US dollar is the world reserve currency. Think about this: China held $1.269 trillion of US Treasuries and Japan $1.183 trillion at the end of December, while Russia held $138.6 billion. After the US sent out warnings to Russia, China openly chose the side of Russia. Below the surface, however, “someone” sent a very strong signal to the US, and, by doing so, to the world, by withdrawing record amounts of US Treasuries. This is economic warfare at a level not seen to date, because of the current extremes in the monetary system.
Second, in terms of international currencies, Russia is very likely to engage with China more actively in bilateral trade with the ultimate goal to transact in their own currencies, not the US Dollar. It is not unthinkable that they will use gold.
As Ambrose Evans noted this week, the latest financial ructions go beyond Russia, they reek of stress in the international system. “Countries are intervening all over the place to defend their currencies, which means they are tightening. Their central banks built up huge war chests of reserves for a rainy day, and now it is raining,” said the currency chief at HSBC.
One of the biggest concerns for the US in particular would arise when Russia, backed by China, will start trading oil for gold, as we wrote in “Russia Touches U.S. Achilles Heel: Petrogold instead of Petrodollar.” Similar attempts of other countries in the past were not very effective. Think of Iraq or Turkey recently. But with major countries like Russia or China front stage, this has the potential to truly disrupt the US Dollar, and, hence, the world monetary system.
Note that the US Dollar has been a safe haven currency in the last years and even decades. Political tensions and wars have resulted in a flight to the dollar. Not so this time. In fact, since the tensions in Ukraine started a couple of weeks ago, the US Dollar index has turned down.
Now what is the key take-away of all this? We see a confirmation of three fundamental (big picture) trends.
First, central bank control is an illusion. As hard as central banks are trying to achieve some specific goals, think of zero interest rates, inflation or GDP growth, it is ultimately the market that will determine what will happen. Look at the recent evolutions as described above. Even the most powerful countries on this planet cannot control market forces. Their power looks convincing in “normal market circumstances,” but the truth is they are powerless in times of stress in the market.
In that context, we think it is appropriate to quote John Williams, researcher at Shadowstats.com, when he recentlyexplained what would happen if there was a massive dollar dumping globally. “It would be disastrous for our markets. All those excess dollars coming in, with bonds being sold, interest rates would spike. The stock market would sell off and we would see inflation. To prevent that and try and keep things stable, the Fed would tend to buy up those Treasuries. It would intervene wherever it could to stabilize the circumstance.”
Second, paper assets are in a secular decline. It really does not matter that US and some European equities are at trading at all-time highs. They are doomed to fail till the bear cycle is over. Why? Because the inherent weakness of our financial system, with the US Dollar vulnerability at its heart, built on fiat.
The fact that Russia’s stock market is being hit recently seems not to be of the highest importance for Putin. We agree with Zerohedge when they wrote that “for Putin it is orders of magnitude more important to have the price of commodities, primarily crude and gas, high than seeing the illusion of paper wealth, aka stocks, hitting all time highs.”
It really is no coincidence that most countries, including Russia, China, and the likes, have been adding to their gold reserves for several years. This brings up the third long term trend: gold is in a secular uptrend. Yes, the gold price sold off in 2013. No, the price of gold is not the only aspect that matters. What is far more important is the protection one gets from physical gold.
Gold’s protection serves individuals as well as countries. The “Golden Rule” will continue to be relevant to countries: he who holds the gold rules. Quoting Michael Noonan: “The transition of physical gold from West to East is disrupting the elites domination of the entire financial world. The East has been saying “Enough is enough.” In our view, that is reflected in Eastern physical gold accumulation.
To individuals, what matters is that physical gold is immune to counterparty risk. And this, ladies and gentlemen, we believe is the key take-away from the ongoing economic and financial turmoil. All those dollars, Treasuries, stocks, derivatives, e.a., running a risk to become the object of the new economic warfare, in the context of extreme leverage and excess liquidity, has one and only one antidote: unencumbered ownership of physical gold and silver.
In his weekly market review, Frank Holmes of the USFunds.com nicely summarizes for gold investors this week’s strengths, weaknesses, opportunities and threats in the gold market. Gold closed the week at $1,382.65, up $42.67 per ounce (3.18%). The NYSE Arca Gold Miners Index lost 0.36% on the week. This was the gold investors review of past week.
Gold Market Strengths
Gold rose $43.07 per ounce in the last trading week fear about Chinese macroeconomic data and geopolitical tensions in Ukraine. Furthermore, as shown on the following chart, the 50-day moving average closed less than $10 below the 200-day moving average, which implies that barring a gold collapse below $1,300 next week, we should see gold making a golden cross before the end of the week. Our analysis shows that, going back to 2000, a golden cross in gold is followed on average by a 50% rally lasting on average 15 months.
Gold ETFs appear to be back in fashion, as total known gold ETF holdings are now 870 thousand ounces higher since bottoming at 55.8 million ounces in mid-February. The ETF data comes as the situation in Ukraine reinforces gold’s safe haven status and the weak macroeconomic data coming from China highlight gold’s hedging properties amid a risk-off investing environment.
Gold Market Weaknesses
The China Gold Association (CGA) said China’s gold demand may decline by 17 percent to 250 tonnes in the first quarter of 2014, from 300 tonnes in the first quarter of 2013. Despite this fact, CGA vice chairman Zhang Yongtao expects annual demand to remain strong at 1,176 tonnes, very close to the actual annual demand for 2013. According to HSBC Research, Mr. Zhang’s forecast indicates that China’s gold demand should be stronger for the rest of 2014 after the first quarter, when compared to the same period in 2013. This may indicate that China’s strong appetite for gold is likely to be sustained well into 2014.
Gold Market Opportunities
A Royal Bank of Canada report shows similarities between the 2005 to 2008 gold price rally and the current gold price environment, which analysts believe could lead to a sustained gold price rally over the next 12 to 24 months. While still early in gold recovering from its lows, Chinese and emerging market gold demand combined with the absence of central bank selling both offset any ETF liquidations. Given the volumes seen in China recently, and the fact the Chinese market is not as price sensitive – thanks to high savings rates – Chinese demand on its own could replicate the 2005-08 ETF-driven gold rally.
Gold Market Threats
The instability in Ukraine, together with the China hard-landing fears, has not changed Goldman Sachs’ bearish view on gold. According to Jeffrey Currie, the bank’s head of commodities research, the weakness in the U.S. and the turmoil in Ukraine are not driving gold. Instead, the lower mining costs mean it is more probable that gold drops below $1,000. Marc Faber on the other hand believes the near tripling of the S&P 500 since the end of the bear market in 2009, together with heavy insider selling, high valuations, and extremely high corporate profits should make any investor consider the possibility that we may be at a top of the U.S. equity cycle.
A wave of weak economic data released by the Chinese government agencies this week helped propel gold higher as U.S. and Europe markets weighed the risk of a deceleration in Chinese economic growth. The weak data points released show the risk of Chinese physical gold and jewelry buyers to defer consumption to a later date. As a matter of fact, Chinese retail sales data showed growth of 11.8 percent, missing analysts’ estimates for a 13.5 percent increase. As a result, gold demand from China may be lower in the short term, or until the festive and marriage season starts later in the year.
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This article is based on the latest premium edition of the Sentimentrader report (click here for a free trial). Market sentiment towards gold and silver are analyzed and put into perspective.
In the last gold sentiment update some three weeks ago (read Gold and Silver Sentiment Improving Significantly), we noted that gold just crossed its 200 day moving average for the first time in a year. That happened on an improving sentiment score.
According to Sentimentrader, who analyzes sentiment in almost all markets, it was important to watch gold sentiment cross 70%. “Above-average and rising sentiment is good, as long as it doesn’t get excessive, which would occur on a move closer to 80%. Even in a bull market, that would suggest that at least some nearer-term caution would be warranted.”
Where do we stand today? The latest figures, released this weekend, show that gold’s sentiment is 75% and silver 50%. That’s almost identical as 3 weeks ago, although the price stands significantly higher. It is mainly platinum and palladium that went higher significantly.
Zooming in on gold, the sentiment chart shows that gold is approaching “excessive optimism” territory, with a current reading of 75%. That’s on a par with the highest readings of the past few years, close to where it stood several weeks in the fall of 2012.
Over the past 20 years, there have only been four other times that sentiment climbed to 75% while gold was still at least 10% below its previous 52-week high. Those dates were 3/4/97, 10/6/97, 2/2/98 and 4/3/98, all fairly clustered together during the metal’s last bear market.
Each of those times, the rally was close to petering out, leading to negative returns over the next month (at least) each time, averaging -4.6%. Gold wasn’t able to rally more than 2.3% before rolling over any of the four times, and three of the four it rolled over immediately.
As always, when a market shrugs off its typical reaction during a market cycle, then the probability increases that that market cycle has changed…meaning that if gold can hold steady in the coming weeks in spite of high sentiment levels, then the case for a new bull market will be bolstered even further.
Indeed, it is key to watch how gold sentiment will behave with the changes in the gold price in the coming weeks. If the price goes higher and gold sentiment remains close to its current readings, it would indicate to internal strength. If the sentiment readings go significantly higher, then a pullback in price is very likely.
Gold and gold stocks have be stabilizing for months and have been quietly rising. Many gold stocks are up 30% even 50% in the past three months. The $HUI AMEX Gold Bugs Index is up over 30% from the lows.
If you think you have missed most of the move already you are wrong. The truth is most of the biggest rallies in stocks take place after a basing pattern with 30 -50% or more has formed. This is signaling massive accumulation in gold stocks and its happening right now by the institutions.
So in this exclusive report I want to share one golden rocket stock pick which I feel has huge upside potential “IF” the precious metals market and miners can breakout of this stage 1 pattern it has formed.
One thing that excites me is about precious metals and gold stocks is the fact that we have heard nothing about gold, silver or mining stocks in the media for months… almost like the big institutions have told the media to avoid putting the spot light on it until they accumulate all they can in terms of physical bullion and stock shares.
This is the same for a few other sectors I have been watching build massive stage 1 bases in over the past few months and will be investing and actively trading them also once they break out of the basing stage.
Gold Stock Trading & Investing Success Formula
1. KISS – Keep It Simple Stupid! – Non one likes or follows complicated trading strategies
2. Understand and know how to identify the four market stages – Read My Book: Click Here
3. Know why and how stages must be traded for timing your entry, profit taking and exits.
4. Scan the market for the top performing sectors and focus on stocks/ETFs within those sectors.
5. Review all stocks and funds to meet setup criteria and trade only the best looking charts primed to start a new bull market (low overhead resistance nearby, strong relative strength, strong volume on breakout, 30 week SMA moving up etc..) Get this done for you: Click Here
6. Sit back, watch and monitor position for possible change in the stage, to adjust stops and identify profit taking levels.
Golden Rock Stock Pick
The chart below is top quality gold stock which has all the characteristics of a big winner. Just to be clear, I normally do not mention individual stocks within public reports. I am not compensated in any way to post this report. This is nothing more than my technical outlook on a stock and not investment advice. I do plan on buying some shares of this company this week or next.
Gold Forecast – Gold Stock Picks
Golden Rocket Conclusion:
While it still my be a little early for precious metals to bottom, it looks as though the stage (pardon the pun) has been set for a precious metals bull market to start. As they say, there is always a bull market somewhere… the key is finding it and taking the proper action.
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Chris Vermeulen – www.TheGoldAndOilGuy.com
Founder of Technical Traders Ltd. – Partnership Program
Many investors, especially those new to precious metals, don’t know that gold is seasonal. For a variety of reasons, notably including the wedding season in India, the price of gold fluctuates in fairly consistent ways over the course of the year.
This pattern is borne out by decades of data, and hence has obvious implications for gold investors.
Can you guess which is the best month for buying gold?
When I first entertained this question, I guessed June, thinking it would be a summer month when the price would be at its weakest. Finding I was wrong, I immediately guessed July. Wrong again, I was sure it would be August. Nope.
Cutting to the chase, here are gold’s average monthly gain and loss figures, based on almost 40 years of data:
Since 1975—the first year gold ownership in the US was made legal again—March has been, on average, the worst-performing month for gold.
This, of course, makes March the best month for buying gold.
But: averages across such long time frames can mask all sorts of variations in the overall pattern. For instance, the price of gold behaves differently in bull markets, bear markets, flat markets… and manias.
So I took a look at the monthly averages during each of those market conditions. Here’s what I found.
The only month gold has been down in every market condition is March.
Combined with the fact that gold soared 10.2% the first two months of this year, the odds favor a pullback this month.
And as above, that can be a very good thing. Here’s what buying in March has meant to past investors. We measured how well gold performed by December in each period if you bought during the weak month of March.
Only the bear market from 1981 to 2000 provided a negligible (but still positive) return by year’s end for investors who bought in March. All other periods put gold holders nicely in the black by New Year’s Eve.
If you’re currently bullish on precious metals, you might want to consider what the data say gold bought this month will be worth by year’s end.
Regardless of whether gold follows the monthly trend in March, the point is to buy during the next downdraft, whenever it occurs, for maximum profit. And keep your eye on the big picture: gold’s fundamentals signal the price has a long climb yet ahead.
Everyone should own gold bullion as a hedge against inflation and other economic maladjustments… and gold stocks for speculation and leveraged gains.
The greatest gains, of course, come from the most volatile stocks on earth, the junior mining sector. Following our recent Upturn Millionaires video event with eight top resource experts and investment pros, my colleague Louis James released his 10-Bagger List for 2014—a timely special report on the nine stocks most likely to gain 1,000% or more this year. Click here to find out more.