On January 11th, we expected the US Dollar to top as Sentiment was uber-bullish, which would lead to a nice rally for Gold, Silver, and (Mining) stocks. That day, the USD index closed at 81.35, Silver at $29.89, and Gold at $1,641. (Click HERE for the article)
Today, the USD stands at 78.90, Silver at $33.89 and Gold at $1,733.50, so we got what we expected.
Just like the Nasdaq, Silver has set a lower/equal low, accompanied by a higher low of the MACD index, and has now rallied quite sharply:
Compare this to the Nasdaq:
An overlay of both charts shows us where we are today:
If we zoom in a bit:
If the pattern holds, we should be about halfway the “Bull trap”, as many will view this as the Return to “normal”.
If the pattern doesn’t hold, and silver blasts through $40, it’s probably on it’s way to the all-time high. In that case, the next big move would be to the upside, with potential targets of $70 and potentially tripple digit silver prices. As long as the pattern holds, I would be careful if silver hits $38.
Alex talks with The International Forecaster’s Bob Chapman as they discuss the economy and the real stats regarding employment and inflation as well as a variety of other subjects.
Yes, central banks are holding more gold. But they’re holding very much more wood-pulp on top…
THE GOLD PRICE on Wednesday broke up through the downtrend starting at last summer’s record high. Or so a technical analyst studying the price chart would tell you.
But just as in late 2007 – from where gold began a 55% run inside 6 months – this week the price of gold bullion jumped on news that is fundamental: the price of money, specifically Dollars, the world’s #1 currency for trade and central-bank reserves.
Back in 2007, the catalyst came as a baby-step rate cut of 0.25%, signaling the Fed’s switch from raising to destroying the returns paid on cash savings. Now the Fed’s new zero-rate promise “took gold comfortably clear of the 50, 100 and 200-day moving averages, and opened up some big targets to the upside,” says one London technician. The previous ceiling of $1700 has become a support level according to bullion bank Scotia Mocatta, “with further key support at the 200-day moving average at $1645.”
Whatever you make of such numbers, it’s worth stepping back to see the wood for the trees. Because the trend in who’s buying gold, and why, is so plain to spot that you hardly need join the dots.
Gold bullion holdings amongst the world’s central banks, for instance, have risen to a 6-year high, according to data compiled by the International Monetary Fund. Emerging and developing nations have swollen their gold reserves 25% by weight since 2008. The debt-heavy West is a net seller, but only just.
“There’s a perception perhaps that gold is no longer a crucial part of the financial system in the way that it was under the Gold Standard before 1970, 1971,” as Marcus Grubb of the World Gold Council put it in an interview with Tekoa Da Silva this week. “But in fact that’s not really true.
“Because even with the ending of the Gold Standard, gold remains as an asset held by the world’s central banks…and you’ve seen a trend recently for gold to become more and more a part of the fabric of the financial system.”
A good chunk of this weaving is due to official reserves. But as our chart shows, central banks control a shrinking proportion of what’s been mined from the ground. A far greater tonnage of gold again is finding its way into private ownership, and there – as Marcus Grubb notes – it’s having a greater still impact on how money and finance work.
First, private individuals have led the rediscovery of gold as a financial asset, rather than the decorative store-of-value it had become by the close of the 20th century. So now, China’s giant bank ICBC for instance is holding gold for the “accumulation” savings of 2.3 million citizens, a program developed in partnership with the World Gold Council. Also the WGC partners with BullionVault, amongst several other private-investor providers worldwide. But institutional finance is catching on, and gold is now in front of the Basel Committee on global banking, proposed as a “core asset” for banks to hold – and count as a Tier 1 holding – for their liquidity requirements.
After all, turnover in London’s bullion market, center of the world’s gold trade, is greater at $240 billion per day than all but the four most heavily traded currency pairs worldwide. So its liquidity is barely equaled. Turkey’s regulators already acknowledged physical gold bullion as a Tier 1 asset for its commercial banks starting in November, with the cap of 10% worth some 5.5 billion Lira ($2.9bn) according to Dow Jones. And a growing number of investment exchanges, meantime, as well as prime brokers, now accept gold as collateral, posted as downpayment by institutions against their commodity and other leveraged positions.
Gold bullion pays no interest of course. But in our zero-yielding world, that only puts it ahead of where the capital markets are being herded by central-bank policy anyway. Nor does gold have much industrial use (some 11% of global demand in the 5 years to 2011), a fact which highlights its unique “store of value” attributes. Being physical property, gold is no one else’s debt to repay or default. Being globally traded, it’s deeply liquid and instantly priced. And being both rare and indestructible, it couldn’t be any less like “money” today.
Scarcely a lifetime ago, gold underpinned the globe’s entire monetary system. Outside China, which tried sticking with silver, the compromised and then bastardized Gold Standard which followed first World War I and then World War II still saw the value of central-bank gold reserves vastly outweigh the paper obligations which those banks gave to each other.
Even three decades ago, 10 years after the collapse of what passed for a Gold Standard post-war, central-bank gold holdings still totaled some three times central-bank money reserves by value. But look at the decade just gone – the 10 years in which gold investment beat every other store of value hands down. Pretty much every currency you can name lost 85% of its value in gold. Yet the sheer quantity of new money pouring into central-bank vaults saw their gold holdings only just hold their ground.
Gold’s rise, in short, has been buried under wood-pulp. To recover its share of central-bank holdings as recently as 1995 would now require a further doubling in value. To get back to the 1980s’ average would require a 15-fold increase. Or, alternatively, a 93% drop in the value of foreign currency reserves relative to central-bank bullion holdings.
Such a trend is not yet in train, neither on the charts nor the fundamentals. The US Dollar remains the biggest reserve currency, weighing in at 62% of stated reserves according to IMF data, down from its peak above 71% in 2001 but more than equal to its share in the mid-1990s. Even so, as former FT columnist and current capital-markets editor at The Economist Philip Coggan writes in his latest book, Paper Promises:
“If Britain set the terms of the Gold Standard [1870-1914], and America set the terms of Bretton Woods [1944-1971], then the terms of the next financial system are likely to be set by the world’s biggest creditor – China. And that system may look a lot different to the one we have become used to over the last 30 years.”
Coggan rightly notes that China isn’t the only large creditor, and nor does it hold anything like the dominance which the US held at the end of World War II. But whether this switch starts today or only starts to show 10 years from now, such a change of direction can’t be discounted to zero. Repudiation of government debt – the form which most foreign currency reserves take – will only begin with the Greek bond agreement, perhaps leading first to a rise in US Dollar holdings but also highlighting the ultimate risk of paper promises.
That fear, of having to write off money in default or devalued, is already driving the rise in central-bank gold purchases.
Adrian Ash is head of research at BullionVault – the secure, low-cost gold and silver market for private investors online, where you can buy physical gold today vaulted in Zurich on $3 spreads and 0.8% dealing fees.
Please Note: This article is to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it.
With gold and silver making huge moves after the Fed announcement yesterday, today King World News interviewed acclaimed money manager Stephen Leeb, Chairman & Chief Investment Officer of Leeb Capital Management. Leeb told us yesterday’s Fed announcement is a game changer that has kicked off a huge second leg in the gold and silver bull markets. Here is what Leeb had to say: “I think what the Fed said yesterday is game-changing. They are opting for inflation and what really strikes me here, Eric, is they described their dual mandate in terms of employment first and price stability second. I don’t know any central bank that would put maximum employment in front of price stability. That’s not the mission of a central bank. Again, I think this is absolutely a game-changer.”
Stephen Leeb continues:
“Inflation will be let out of the bag, maybe for the next three to four years. In this environment gold and silver are the best investments around. Resistance points on charts don’t even count anymore when you are talking about a game-changing event like this. We are really talking about the next leg higher in this bull market. I think yesterday will go down as the beginning of the next major leg higher in the bull market. This is the leg I expect to take gold to $3,000 before the end of 2012.
Although the trading week started quietly for precious metals, gold and silver surged after the Federal Reserve’s latest Federal Open Market Committee meeting. On Wednesday, the Fed announced it will not increase its benchmark interest rate until at least late 2014, citing that record-low interest rates are still needed to help boost the sluggish economy. Furthermore, Fed Chairman Ben Bernanke explained that quantitative easing is “an option that certainly is on the table.”
Before the Fed statement, gold traded near $1,650 per ounce, while silver traded close to $31.60. After the Fed statement, both precious metals jumped to their highest levels since early December. “We were all under the assumption that rates would be held at a low level until 2013, but now with the date extended to 2014, it’s inherently bullish for gold,” said Ralph Preston, senior market analyst with Heritage West Financial.
As the charts below show, gold and silver have not only held the gains from Wednesday, but have edged higher as more U.S. dollar devaluation policies were taken on Thursday. As of today, the U.S. now has a $16.4 trillion debt capacity, representing a $1.2 trillion increase from the previous $15.2 trillion limit.
In a 52-44 vote yesterday, the Senate failed to stop another increase in the debt ceiling target. The new increase was the last of three requests approved in the August debt agreement. While it is difficult to say how quickly the new debt ceiling limit will be reached, many hope it will be after the elections later this year. David Chalian, Washington Bureau Chief explained, “If there is another big debt ceiling showdown before the election it is going to have a big impact. I will predict that a lot of people on both sides of the aisle are trying to figure out the accounting in such a way that perhaps that discussion and vote doesn’t take place until after the election.”
The recent moves by the Fed and Congress are very friendly to precious metals. It reinforces the belief that officials will continue to flood the economy with money in hopes of spurring growth. This reinforcement of friendship has helped gold prices increase more than 12 percent this month, which is the best start to a year since 1980. Meanwhile, silver prices have surged more than 18 percent this month. Recent GDP data also suggests that the economy is far from a recovery, which will provide officials with more reasoning for additional stimulus measures. While the U.S. economy grew at its fastest pace since 2010, the details of the report raise more uncertainties about the expansion.
The Commerce Department said on Friday that the gross domestic product grew at an annual rate of 2.8 percent in the fourth quarter, below estimates of 3 percent. Consumer spending, which accounts for roughly 70 percent of demand in the U.S. economy, increased 2 percent, below estimates of 2.4 percent. This is concerning as the fourth quarter was touted as the return of the consumer. Furthermore, nonresidential fixed investment only increased 1.7 percent, compared to 15.7 percent in the third quarter. A key factor in the 2.8 percent growth rate was a rebuilding of inventories by companies. Zero Hedge explains, “A whopping 1.94 percent of the upside was attributable to a rise in inventories as restocking took place. And as everyone knows in this day and age a spike in inventories only leads to sub-cost dumping a few months later. In other words, the economy grew at a 0.8 percent pace ex inventories.”
Ben Bernanke did not announce another official QE3 program on Wednesday, but previous and ongoing monetary easing polices continue to support gold and silver prices. Bill Gross, who manages the world’s largest bond fund, believes a third, fourth and fifth round of easing “lie ahead.”
Yesterday we asked rhetorically if Ben Bernanke has become the gold bug’s best friend courtesy of his FOMC announcement which led to a surge in gold, and a kneejerk whimper in stocks, which has now been completely wiped out courtesy of a subpar GDP number. Today we note that it is not only the Fed, but the US Treasury, and specifically the ravenous Mr. Geithner, who just got a green light to issue another $1.2 trillion in debt, and bring total debt to $16.4 trillion, which would still be 107% of today’s GDP (which we don’t see growing much if at all over the next year), that can be added to the list of best Goldbug friends. As the chart below demonstrates quite vividly, in addition to global and local monetary expansion, the price of gold tends to correlate quite well with the US debt ceiling. Which means that per yesterday’s Senate 52-44 vote authorizing Timmy to go hog wild (which in turn means that Bernanke will have to step in and monetize much of this new debt issuance), the price of gold just got a green light for at least $250 in upside – the implied price just got raised to $1960. Of course, anyone who thinks the US will stop issuing debt there needs a brain MRI stat. Thank you Senate. And thank you Timmy. And, of course, thank you Ben.
Gold has rallied getting back into the low 1700s, but not closing above the key resistance areas. Let gold rally just a bit, and outcome the I told-you-so crowd. They shut-up with every decline, but let gold rally for a brief second, and well they then view the whole future based upon a single day’s action. It is always best to let the market speak. No individual will ever be able to forecast the future from a personal perspective. This is why I have stated countless times, the object of analysis is to eliminate the human subjective views.
If we step back and just let the market speak, we will survive our own trading decisions. Pictured here is a monthly chart of gold. People are all excited and gold has not ever exceeded the previous month’s high intraday. The Uptrend Channel continues to hold demonstrating it is not yet time to fall apart. The year-end number of $1434 held for the close of 2011 further warning that gold would not simply break-down. At the very least, gold now MUST close ABOVE 1637 at the end of January.
This interesting info-graphic on where Gold comes from and where it goes came courtesy of Trustable Gold, a company that provides information on purchasing gold by comparing the different investment opportunities.
David Morgan predicts the U.S. has another 2 or 3 years before the currency collapses. He also stakes out his predictions on where gold and silver are headed in the next year.
