Today Egon von Greyerz told King World News that central bank balance sheets are expanding at a dangerous rate and this is a recipe for an explosion in gold and silver prices. Egon von Greyerz is founder and managing partner at Matterhorn Asset Management out of Switzerland. Here is what von Greyerz had to say about central bank activity and how it will impact gold and silver prices: “I’ve been looking at the explosion of the balance sheets of the central banks and it’s just astonishing to see how much money they are printing and how their balance sheets are expanding. We have the absolute perfect recipe for hyperinflation and thus a massive increase in the price of gold and silver.”
Egon von Greyerz continues:
“It’s not just the ECB balance sheet that’s gone up in the last six months or even the last three months by hundreds of billions of dollars. It’s the same with the Fed, Bank of Japan, The Bank of England and the Swiss National Bank, they are all exploding. This can lead to only one thing and the market seems to be totally ignorant of this.
The repercussions are going to come very soon. As I said, this can only lead to one thing, an explosion higher in gold and silver prices and the beginning of the massive inflation, which will lead to hyperinflation.”…more
Xinhua, the official press agency of the government of the People’s Republic of China reports that a “gold rush” swept through China during the week-long Lunar New Year holiday this year, with demand for precious metals and jewelry surging since the Year of the Dragon began.
Data released by China’s Beijing Municipal Commission of Commerce shows a 49.7% increase in sales volume for precious metals jewelry and bullion during the week-long holiday (over last year), which lasted from January 22 to 28 over that of last year’s Spring Festival.
One of Beijing’s best-known gold retailers, Caibai, saw sales of gold and silver jewelry and bullion rose 57.6% during the week long New Years holiday according to data released by the Ministry of Commerce (MOC) on Saturday,
Other jewelry stores across the country also saw sales boom during the period, with customers favoring New Year themed gold bars and ingots and other types of Dragon themed jewelries.
During the week-long holiday, which lasted from January 22 to 28, the sales volume in just one gold retailer, Caibaiand Guohua, another of Beijing’s top gold retailers, reached about 600 million yuan (nearly $100 million).
Earlier this month, markets learned that China’s gold imports from Hong Kong reached a record high in November. The Hong Kong government reported that Mainland China purchased 102,779 kilograms of gold from Hong Kong, a 20 percent increase from October and an all-time high. It was the fifth consecutive month of record gold purchases from Hong Kong. Over the weekend, new data was released that showed strong gold demand in China has continued into the new year.
While 2012 is known as the Year of the Dragon in China, it could very well be the year of gold for investors. According to data released by the Ministry of Commerce, sales of gold, silver and jewelry increased 57.6 percent at Caibai during China’s week-long Lunar New Year holiday. Caibai is one of Beijing’s most popular gold retailers. Guan Qiang, assistant manager at Caibai explained, “Long treasured by Chinese, gold is no longer owned only by a privileged few, but has become a new investment channel open to all.” More Chinese customers are purchasing gold as a way to give a gift that will also offer protection from inflation and preserve wealth, as opposed to plastic trinkets that decrease in value.
Xinhua, the official press agency of the government of the People’s Republic of China reports, “During the week-long holiday, which lasted from January 22 to 28, the sales volume in Caibai and Guohua, another of Beijing’s top gold retailers, reached about 600 million yuan ($95.28 million).” According to the Beijing Municipal Commission of Commerce, the sales number represents a near 50 percent increase from last year’s Spring Festival. Much like the United States, negative real interest rates and a troubled property market limits investment options in China.
Property consultant Shanghai UWin Real Estate Information Services Co. released an update that showed Shanghai new home prices plummeted almost 41 percent in the week ended January 29. Sales during the Chinese Lunar New Year declined to their lowest level since 2006, as volume was 36 percent of the 7-year average for Chinese holidays. The recent data points to a clear indication that the appetite for gold in China is increasing as other investments falter. The PBOC Zhang Jianhua recently said, “No asset is safe now. The only choice to hedge risks is to hold hard currency-gold.”
Although the Lunar New Year holiday is nearing its end, gold is likely to remain in heavy demand. Tom Kendall, a precious metal analyst at Credit Suisse in London, believes Chinese gold imports could hit nearly 500 tons for 2011, up from only 245 tons in 2010. Over the next couple years, many expect China to surpass India as the world’s top gold consumer. According to the World Gold Council, strong demand for gold investments and jewelry will drive China’s total gold demand to 750 tons in 2011. Marcus Grubb, Managing Director of Investment explained, “Increasing levels of inflation, the U.S. credit rating downgrade, a worsening eurozone sovereign debt crisis and the lackluster performance of many assets drove investors to increase holdings in gold in order to protect their wealth.”
The year 2011 ended on a very weak note for the price of gold, which tested support near the lowest levels since August as the precious metal slid below $1,550. This movement even drove the GoldMoney Fear Index below 3% as US M3 continued to rise, surpassing $14.4 Trillion. The downward path of gold since the September highs immediately prompted cries that the “bubble was bursting” from every corner of the financial press.
Neither a rising price, nor anecdotal reports of increased buying are in any way proper evidence of a bubble. If we ignore the chatter and actually look at empirical data, it is quite easy to recognise a speculative bubble or mania. That is to say, an irrational and unsustainable overvaluation of an asset regardless of fundamentals, reinforced by the belief that it will continue to rise indefinitely. We have a number of very vivid examples in living memory: the dotcom bubble, the housing bubble, and history provides many more examples, John Law’s Mississippi Bubble being the classic example.
The first bubble they created due to loose monetary policy was the massive bubble in oil in 2008. Fast forward to the present, and they are currently supporting another bubble in U.S. Treasury obligations. The bubble that they will create in the future when the game finally ends will be in precious metals. The precious metals bubble will be building while the Federal Reserve and the U.S. Treasury attempt to keep the Treasury Bond bubble from bursting.
At this point in time, if we continue down this path stocks will not protect investors adequately from inflation should the Treasury bubble burst. I would argue that the central planning and monetary policy we have seen the past few years continues in the United States and Europe that gold, silver, and other precious metals are likely to begin their own bubble of potentially epic proportions.
As the weekly chart of gold futures illustrates below, gold has recently pulled back sharply and has broken out. I will likely be looking for any pullbacks in gold as buying opportunities as long as support holds.
Gold Weekly Chart
In closing, for longer term investors the stock market might have some serious short term juice as cheap money and artificially low interest rates should juice returns. However, eventually equities will start to underperform. At that point, gold will be in the final stages of its bubble and the term parabolic could likely be applied.
If central banks around the world continue to print money there are only a few places to hide. Precious metals and other commodities like oil will vastly outperform stocks in the long run if the Dollar continues to slide. The real question we should be asking is who will win the race to debase, Draghi or Bernanke?
The junior sector had a very difficult year in 2011 but has led the recent recovery (at least statistically) in the precious metals sector. Two of our favorite exchange traded funds, GDXJ and ZJG.to are up 30% and 25% respectively. That exceeds GDX (large caps) which has rebounded 15%. These are significant gains but barely put a dent in the low valuations for the sector. Ratio analysis shows us how undervalued the smaller gold stocks are yet an examination of history shows this is not out of the ordinary at this point in a bull market.
First lets take a technical look at the juniors. We show ZJG.to and GDXJ in the chart below. ZJG.to is a Canadian junior ETF which is comprised of entirely gold companies while three of the top ten companies in GDXJ are silver companies. ZJG is nearing resistance at 20-21 while GDXJ is nearing resistance at 31-33. More importantly, both markets have broken out of their downtrends against Gold.
Next we show a plot of our junior gold index (call it JGI), GLD and a ratio of JGI against GLD. Note that the ratio, which peaked at 0.7 in 2007, is currently at 0.4. JGI is presently at 66. Should Gold eventually break to new highs and JGI/GLD rise back to 0.7, then junior gold stocks would gain more than 100%. With large producers reporting record cash flow and profits, it is only a matter of time before all gold equities reach higher valuations against Gold itself.
Our Junior Gold index as well as the other junior indices do not include the “true junior” companies which are of the microcap variety. The CDNX is basically an index for these types of companies. Most but not all of the companies within the CDNX are gold and silver related. Thus, in the chart below we decided to compare the CDNX to the CCI (continuous commodity index). The CCI is somewhat close to an all-time high while the ratio of the junior companies to the CCI is close to multi-year lows. With commodities not far off all time highs, one would expect the junior companies to be trading at higher levels.
Lately we’ve been writing about how gold stocks are faring in comparison to previous equity bull markets. The comparison argues that gold stocks should fare well this year and well into 2013. Even though this bull market is in its 12th year, it remains a few years away from the start of a bubble. In a bubble, valuations expand far beyond fundamentals and it continues for several years. In order for this to happen, valuations must be low prior to the start of the bubble.
From early 1992 to 1995 the price to earnings ratio (PE) on the Nasdaq fell from 50 down to 20. Over the next two years, the PE ratio climbed from 20 back to 50. Then in the second half of 1997, the PE ratio surged past 50 and never looked back.
From 1973 to 1983, the PE on the Nikkei (Japan) ranged from mostly 15 to 23. After 1983, the PE ratio surged to new highs and eventually peaked at 70.
It is clear that prior to a market bubble, valuations are compelling. Not stretched or fair, but compelling. After all, a bubble needs time to develop and then have its final blowoff stage. Prior to the start, valuations begin to move from the low side to the high side. Then as the bubble really gets going valuations break to new records and surge to extremes.
Months ago we wrote about how the PE for large cap gold stocks was near a 10 year low. Now we see that the speculative side of the precious metals sector, (the juniors), is trading at near basement valuations. This is 12 years into a bull market. Not five or eight. It will take time for valuations of precious metals companies to move back to the high end of the range. Companies that grow their business and add value could perform fantastically thanks to a likely increase in the valuation of the sector.
at Matterhorn Asset Management out of Switzerland. Here is what von Greyerz had to say about central bank activity and how it will impact gold and silver prices: “I’ve been looking at the explosion of the balance sheets of the central banks and it’s just astonishing to see how much money they are printing and how their balance sheets are expanding. We have the absolute perfect recipe for hyperinflation and thus a massive increase in the price of gold and silver.”
