10 Charts Pointing To Higher Gold Prices In 2014 And Beyond

In this article we look at gold from different angles: the money supply, the physical gold market and technical gold indicators. Ten long term charts point to a healty condition in the gold market amid the price drop of 2013. We have always advocated to look at gold in a holistic way; the following charts offer a wide perspective. The charts were created and presented by Frank Holmes (USFunds.com) during the recent World Money Show.

Monetary conditions

In the first month of 2014, the M2 money supply, which is a measure of money supply that includes cash, savings and checking deposits, grew faster than the previous two years. In 2012, M2 grew 7.6 percent and in 2013, money supply rose 4.7 percent; at an annualized rate, January’s money supply growth “reached an annualized rate of increase of 8.75 percent,” according to Bloomberg’s Precious Metal Mining team. This may mean “the U.S. Federal Reserve is trying to resurrect inflation, thus increasing the appeal of gold, the supply of which can only increase about 1.5 percent to 2.5 percent annually,” says Bloomberg.

The first two charts show the historic correlation between the money supply and the price of gold. The global money supply has clearly driven gold prices, although 2013 was the year in which a significant disconnect occurred. The odds favor an upward revision of the gold price, re-establishing the long term correlation.

global money supply chart vs gold price 2001 2014 price

 

price of gold vs balance sheet 1999 2014 price

As Jim Rickards argues in his book, the price of gold would be well above $3,000 if there was some sort of tie between gold and the money supply. Jim Rickards still expects that the central banks will be forced by market forces to re-establish a tie with gold at some point in the future.

US Money supply vs gold price 1934 2014 price

 

Physical gold market

2013 was the year of a massive liquidation in physical metal backing gold ETF’s. The following chart presents the exceptional outflow of gold out of primarily the GLD . The key question, in our opinion, is not the outlfow, but what happened with that gold. The most common answer is that it went East. Is this positive or negative for gold? We believe it’s extremely positive, because the metal is now in strong hands which will keep it for several years or decades. The key point in all this is that much less physical gold will be available once the Western investment demand will pick up again, leading to a potential shortage in the gold market.

Gold ETF liquidation 2012 2013 2014 price

 

The East loves gold. The explosive demand for gold in China is supported by an increase in incomes, a trend that is significantly different compared to the West. This trends favors the affordability of the yellow metal among the biggest gold consumer in the world.

rising incomes china india vs gold price 2000 2011 price

 

China’s investment and jewelry demand has exploded in the last two years. The lower the price of gold went, the higher the demand for the metal. The following chart present an interesting insight: the average grams of gold consumed per inhabitant. Simple math learns that additional 0.1 gram of gold per capita results in an additional 130 tonnes gold demand (which is 5% of the current gold year supply).

china jewelry demand per capita price

 

Technical picture

From a technical point of view, gold is extremely oversold. Any historic measure shows that the current situation is extreme. One of those measures is the gold oscillator, measuring year-on-year change. A correction to the mean is long overdue.

gold oversold oscillator 2003 2014 price

 

The successful retest of the June 2013 bottom is a very powerful technical signal.

gold double bottom 2014 price

 

A short squeeze could be an important technical driver to drive short term gold prices. The chart shows how the gold price tends to rise with extreme short positions by COMEX speculators (non-commercials).

gold short squeeze 2012 2013 2014 price

 

What is tremendously powerful for gold stock investors is this chart: in the last 3 decades, there were only 3 times that gold stocks only saw a consecutive 3-year loss.

gold stocks decline 3 years price

 

 

 

 

Full presentation

 


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Silver Price In The Last 100 Years

Short term price movements of silver should not be the leading driver for investors. Silver is volatile, that’s a commonly accepted fact. For instance, silver closed on February 13, 2014 at $21.42, while 50 days earlier, on December 26, 1913, it closed at $19.88, a 7.7% price increase in 50 calendar days. For some historical perspective, silver moved in 50 days from $27.88 (April 9, 2013) to $22.45 (May 29, 2013), a loss of nearly 20%. The key is to stay focused on the bigger picture, at least for investors. Looking to the silver price trend in the last 100 yearsprovides some guidance. 

According to kitco.com, the average annual prices for gold and silver were:

gold price silver price 100 years price

Prices have dramatically increased for 100 years since 1913, the birth of the Federal Reserve – our inflation machine.  Worse, since Nixon abandoned the partial gold backing for the dollar in 1971, the inflation machine has accelerated.  Using Kitco’s average annual price data:

  • Since 1913 gold has increased 4.32% per year, compounded annually.  Silver has increased 3.78% compounded annually.
  • Since 1971 gold has increased 8.80% per year, compounded annually.  Silver has increased 7.00% compounded annually.
  • Since 2001 gold has increased 14.74% per year, compounded annually.  Silver has increased 15.17% compounded annually.

In the big picture, gold and silver are increasing in price, along with the prices for crude oil, an average house, gasoline, food, and almost everything we need.  Both gold and silver have accelerated their average price increases since 2001, the end of their 20 year bear market.

Official national debt was $2.92 Billion in 1913 and nearly $17,000 Billion in 2013.  The compounded annual increase since 1913 has been 9.04% while the increase since 1971 has been 9.31%.  National debt increases, on average, quite consistently.  Given that consistent exponential increase in national debt, are you surprised that the prices for gold, silver, crude, gasoline, food and housing have also substantially increased, on average, every year?

The Big Picture

Silver gained 7.7% in 50 days.  I think December marked a double bottom in the silver market, but we’ll know in a few months.  Crashes and large rallies are likely to happen more often in this era of High Frequency Trading and “managed” markets.

The national debt has been increasing, remarkably consistently, for 100 years, for 42 years, and for 6 years.  Until monetary systems, administrative policy, and congressional spending practices change (return to fiscal sanity)the national debt, along with most other prices, will continue to increase.

We don’t know if silver will continue its rally through next week or next month, but we can legitimately expect that silver prices, along with the national debt, will be substantially higher in 2015, 2016, and 2017!

silver price 2000 2014 price

Examine this graph of silver prices since 2000.  Note the following:

  • Log scaling
  • Exponentially increasing prices
  • The support line was touched in December 2013.
  • There is a double bottom in June and December 2013.
  • There is an expanding “megaphone” pattern of prices.
  • Crazy and unlikely as it sounds, silver could spike to $100 in 2016 and not violate a 15 year “megaphone” pattern.
  • MACD (monthly) buy signal in 2008, sell signal in 2011, and probable current buy signal.

So the next time you hear from an analyst that silver is likely to remain under $25 for the next decade, or drop to $10, or whatever, remember 100 years of history, 100 years of price increases, and 100 years of official national debt exponentially increasing at 9% per year – compounded each and every year.

My belief is that 100 years of facts are much more relevant than opinions from various people who have a vested interest convincing people that silver and gold are dangerous investments.  Examine silver cycles here: Silver:  4 Cycles in 12 Years.

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Erosion of Trust Will Drive Gold Higher

James Turk: Erosion of Trust Will Drive Gold Higher

By Casey Research

A Q&A with Casey Research

James Turk, founder of precious metals accumulation pioneer GoldMoney, has over 40 years’ experience in international banking, finance, and investments. He began his career at the Chase Manhattan Bank and in 1983 was appointed manager of the commodity department of the Abu Dhabi Investment Authority.

In his new book The Money Bubble: What to Do Before It Pops, James and coauthor John Rubino warn that history is about to repeat. Instead of addressing the causes of the 2008 financial crisis, the world’s governments have continued along the same path. Another—even bigger—crisis is coming, and this one, say the authors, will change everything.

One central tenet of your book is that the dollar’s international importance has peaked and is now declining. What will the implications be if the dollar loses its reserve status?

In a word, momentous. Although the dollar’s role in world trade has been declining in recent years while the euro and more recently the Chinese yuan have been gaining share, the dollar remains the world’s dominant currency. So crude oil and many other goods and services are priced in dollars. If goods and services begin being priced in other currencies, the demand for the dollar falls.

Supply and demand determine the value of everything, including money. So a declining demand for the dollar means its purchasing power will fall, assuming its supply remains unchanged. But a constant supply of dollars is an implausible assumption given that the Federal Reserve is constantly expanding the quantity of dollars through various forms of “money printing.” So as the dollar’s reserve status erodes, its purchasing power will decline too, adding to the inflationary pressures already building up within the system from the Federal Reserve’s quantitative easing program that began after the 2008 financial collapse.

Most governments of the world are fighting a currency war, trying to devalue their currencies to gain a competitive advantage over one another. You predict that China will “win” this currency war (to the extent there is a winner). What is China doing right that other countries aren’t? How would the investment world change if China did “win”?

As you say, nobody really wins a currency war. All currencies are debased when the war ends. What’s important is what happens then. Countries reestablish their currency in a sound way, and that means rebuilding on a base of gold. So the winner of a currency war is the country that ends up with the most gold.

For the past decade, gold has been flowing to China—both newly mined gold as well as from existing stocks. But that flow from West to East has accelerated over the past year, and there are unofficial estimates that China now has the world’s third-largest gold reserve.

The implications for the investment world as well as the global monetary system are profound. Why should China use dollars to pay for its imports of crude oil from the Middle East? What if Saudi Arabia and other exporters are willing to price their product and get paid in Chinese yuan? Venezuela is already doing that, so it is not a far-fetched notion that other oil exporters will too. China is a huge importer of crude oil, and its energy needs are likely to grow. So it is becoming a dominant player in global oil trading as the US imports less oil because of the surge in its own domestic fossil fuel production.

Changes in the way oil is traded represent only one potential impact on the investment world, but it indicates what may lie ahead as the value of the dollar continues to erode and gold flows from West to East. So if China ends up with the most gold, it could emerge as the dominant player in global investments and markets. It already has become the dominant player in the market for physical gold.

You draw a distinction between “financial” and “tangible” assets, noting that we go through a recurring cycle where each falls in and out of favor. Where are we in that cycle? With US stocks at all-time highs and gold down over 30% since the summer of 2011, is it possible that the cycle is rolling over?

Our monetary system suffers recurring booms and busts because of the fractional reserve practice of banks, which allows them to create money “out of thin air,” as the saying goes. During booms—all of which are caused by too much money that banks have created by expanding credit—financial assets outperform, but they eventually become overvalued relative to tangible assets. The cycle then reverses. The fractional reserve system goes into reverse and credit contracts, causing a lot of promises made during the good times to be broken. Loans don’t get repaid, unnerving bankers and investors alike. So money flees out of financial assets and the counterparty risk these assets entail, and into the safety of tangible assets, until eventually tangible assets become overvalued, and the cycle reverses again.

So for example, the boom in financial assets that ended in 1967 led to a reversal in the cycle until tangible assets became overvalued in 1981. The cycle reversed again, and financial assets boomed until the popping of the dot-com bubble in 2000. We are still in the cycle favoring tangible assets, but there is no way to predict when it will end. We know it will end when tangible assets become overvalued, but as John and I explain in The Money Bubble, we are not even close to that moment yet.

You cite the “shrinking trust horizon” as one of the long-term factors that will drive gold higher. Can you explain?

Yes, this is an important point that we make. Our economy, and indeed, our society, is based on trust. We expect the bread we buy from a baker or the gasoline we buy for our car to be reliable. We expect our money on deposit in a bank to be safe. But if we find the baker is putting sawdust in our bread and governments are using depositor money to bail out banks, as happened in Cyprus last year, trust begins to erode.

An erosion of trust means that people are less willing to accept the counterparty risk that comes with financial assets, so the erosion of trust occurs during financial busts. People as a consequence move their wealth into tangible assets, be it investments in tangible things like farmland, oil wells, or mines, or in tangible forms of money, which of course means gold.

Obviously, gold has been in a painful slump since the summer of 2011. What near-term catalysts—let’s say in 2014—could wake it from its slumber?

We have to put 2013 into perspective, because portfolio management is a marathon, not a 100-meter sprint. Gold had risen 12 years in a row prior to last year’s price decline. And even after last year, gold has appreciated 13% per annum on average, making it one of the world’s best-performing asset classes since the current financial bust began with the popping of the dot-com bubble.

Looking to the year ahead, there are many potential catalysts, but it is impossible to predict which event will be the trigger. The derivatives time bomb? Failure of a big bank? The sovereign debt crisis returns to the boil? The Japanese yen collapses? It could be any of these or something we can’t even imagine. But one thing is certain: as long as central banks continue their present money-printing ways, the price of gold will rise over time to reflect the debasement of national currencies. The gold price might not jump to its fair value immediately because of government intervention, but it will rise eventually and inevitably.

So the most important thing to keep in mind is the money printing that pretty much every central bank around the world is doing. The central bankers have given it a fancy name—”quantitative easing.” But regardless of what it is called, it is still creating money out of thin air, which debases the currency that central bankers are supposed to be prudently managing to preserve the currency’s purchasing power.

Money printing does the exact opposite; it destroys purchasing power, and the gold price in terms of that currency rises as a consequence. The gold price is a barometer of how well—or perhaps more to the point, how poorly—central bankers are doing their job.

Governments have been debasing currencies since the Roman denarius. Why do you expect the consequences of this particular era of debasement to be so severe?

Yes, they have, and to use Rome as the example, its empire collapsed when the currency was debased. Worryingly, after the collapse of the Roman Empire, the world went into the so-called Dark Ages. Countries grow and prosper on sound money. They dissipate and eventually collapse when money becomes unsound. This pattern recurs throughout history.

Rome of course did not collapse overnight. The debasement of their currency cannot be precisely measured, but it lasted over 100 years. The important point we need to recognize is that the debasement of the dollar that began with the formation of the Federal Reserve in 1913 has now lasted over 100 years too. A penny in 1913 had the same purchasing power as a dollar has today, which, interestingly, is not too different from the rate at which Rome’s denarius was debased.

After discussing how the government of Cyprus raided its citizens’ bank accounts in 2013, you suggest that it’s a near certainty that more countries will introduce capital controls and asset confiscations in the next few years. What form might those seizures take, and how can people protect their assets?

It is impossible to predict, of course, because central planners can be very creative in coming up with different forms of financial repression that prevent you from doing what you want with your money. In fact, look at the creativity they have already used.

For example, not only did bank depositors in Cyprus lose much of their money, much of what was left was given to them in the forms of shares of the banks they bailed out, forcing them to become shareholders. And the US has imposed a creative type of capital control that makes it nearly impossible for its citizens to open a bank account outside the US. Pension plans are the most vulnerable because they are easy to get at. Keep in mind that Argentina, Ireland, Spain, and Poland raided private pensions when those countries ran into financial trouble.

Protecting one’s assets in today’s environment is difficult. John and I have some suggestions in the book, such as global diversification and internationalizing oneself to become as flexible as possible.

You dedicated an entire chapter of your book to silver. Which do you think will appreciate more in the next year, gold or silver? How about in the next 10 years?

I think silver will do better for the foreseeable future. It is still very cheap compared to gold. As but one example to illustrate this point, even though gold underwent a big price correction last year, it is still trading above the record high it made in January 1980, which was the top of the bull run that began in the 1960s.

In contrast, not only has silver not yet broken above its January 1980 peak of $50 per ounce, it is still far from that price. So silver has a lot of catching up to do.

Silver is a good substitute for gold in that silver, too, can be viewed as money outside the banking system, which is an important objective to keep wealth liquid and safe today. But silver may not be for everyone, because it is volatile. This volatility can be measured with the gold/silver ratio, which is the number of ounces of silver needed to equal one ounce of gold. The ratio was 30 to 1 in 2011, and several months later jumped to 60 to 1.

So you can see how volatile silver is. But because I expect silver to do better than gold, I believe that the ratio will fall to 16 to 1 eventually, which is the same level it reached in January 1980. It is also the ratio that generally applied when national currencies used to be backed by precious metals.

Besides gold, what one secular trend would you be most comfortable betting a large portion of your nest egg on?

Own things, rather than promises. Avoid financial assets. Own tangible assets of all sorts, like farmland, timberland, oil wells, etc. Near-tangibles like the equities of companies that own tangible assets are okay too, but avoid the equities of banks, credit card companies, mortgage companies, and any other equities tied to financial assets.

What asset class are you most bearish on?

Without any doubt, it is government debt in particular and more generally, government promises. They have promised more than they can possibly deliver, so a lot of their promises are going to be broken before we see the end of this current bust that began in 2000. And that outcome of broken promises describes the huge task that we all face. There will be a day of reckoning. There always is when an economy and governments take on more debt than is prudent, and the world is far beyond that point.

So everyone needs to plan and prepare for that day of reckoning. We can’t predict when it is coming, but we know from monetary history that busts follow booms, and more to the point, that currencies collapse when governments make promises that they cannot possibly fulfill. Their central banks print the currency the government wants to spend until the currency eventually collapses, which is a key point of The Money Bubble. The world has lost sight of what money is.

What today is considered to be money is only a money substitute circulating in place of money. J.P. Morgan had it right when in testimony before the US Congress in 1912 he said: “Money is gold, nothing else.” Because we have lost sight of this wisdom, a “money bubble” has been created. And it will pop. Bubbles always do.

As James Turk said, “near-tangibles like the equities of companies that own tangible assets” (i.e., gold stocks) are good investments—and right now, they are dramatically undervalued. In a recent online video event titled “Upturn Millionaires,” eight influential investors including Doug Casey, Rick Rule, Frank Giustra, and Ross Beaty gathered to discuss the new realities in the gold stock sector—and why the odds of making huge gains are now extremely high. Click here to watch the event.

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ANOTHER PIECE OF THE PUZZLE FALLS INTO PLACE

 Gold Scents

Today another piece fell into place in my Great Inflation scenario that I’m expecting for 2014.

Before I begin let me recap. My overarching driver for the Great Inflation scenario is that the dollar would have some kind of crisis, or semi-crisis late this year as it drops down into its major three year cycle low. All other stock and commodity movements will be driven by this impending currency crisis.

For stocks, I’m expecting a final bubble phase parabolic spike over the next 4-5 months, followed by a devastating crash as the parabola collapses in June or July.

For commodities, I’m expecting a stealth rally for another month to a month and a half, followed by a super spike inflationary phase in the latter half of the year as the dollar collapse reaches maximum intensity.

Today the dollar broke through its intermediate trend line confirming that an intermediate degree decline is now in progress.

Since this intermediate cycle topped on week two in a left translated manner, the odds are very high that the dollar is going to break below the October low before this intermediate cycle bottoms. I’m actually expecting another test of the megaphone topping pattern trend line before this intermediate cycle bottoms sometime in March or early April.

The real damage is yet to come later in the year though.

The next component is the stock market. The movement in stocks over the next 4-5 months is a very important component for the Great Inflation to unfold. Stocks must enter a final parabolic melt up, bubble phase during the first half of this year. The very mild intermediate cycle low that bottomed last week has set the stage for this scenario to begin. In only five days the NASDAQ 100 has already moved back to new highs. This confirms my expectation that we are going to see the NASDAQ test the all-time highs above 5000 before this cyclical bull market comes to an end.

At that point the parabolic advance in the stock market will experience its initial collapse, and I expect the S&P will crash at least back to the 2000/2007 support zone at 1550. This is another critical component for the Great Inflation to unfold as it will cause Yellen to panic, reverse the taper, and probably initiate QE5 & 6. This won’t reflate the broken parabola but it will trigger a reaction rally before the collapse continues into a massive bear market that will bottom below 666 sometime in early to mid-2016.

QE 5 & 6 will be the final nail in the coffin for the dollar, and will trigger a full break of the megaphone top. I expect a move below the 2011 and 2008 bottoms before the dollar completes its final three year cycle low.

Commodity markets have already begun the stealth rally that I was looking for during the first half of this year. They successfully tested the 2012 three year cycle low and have now broken through the multiyear downtrend line. The Great Inflation has begun.

During this stealth rally I’m expecting gold to test the initial April breakdown at 1520 over the next 1-2 months.

That should push sentiment levels to bullish extremes from their current depressed levels, triggering an intermediate degree profit taking event into May or June as the stock market finishes its final parabolic blow off top.

Source: sentimenTrader.com

As you can see silver sentiment is already recovering nicely and today’s move will likely push sentiment to levels next week requiring the metals to pull back and take a breather.

Source: sentimenTrader.com

Over the next 4-5 months the easy money is going to be playing the final bubble phase in the stock market. Bubble tops don’t come around very often, but when they do traders can make an obscene amount of money in a short period of time.

Once the stock market bubble pops, and Yellen starts QE5 that’s the point at which the Great Inflation will begin in earnest, and I believe gold will probably rocket from an intermediate bottom of around 1350-1400 this summer, to test $2000 by the end of the year. This is the phase where the metals become the “easy trade”.

Over the next couple of months everything should generally rise together. But once the dollar puts in an intermediate bottom sometime in March or April, commodities and gold will move down into an intermediate correction as the stock market completes its final blow off top. After the stock market parabola collapses later this summer it will be time to put the pedal to the metal in the commodity markets, and especially the precious metal markets as the Great Inflation begins in earnest.

If you are interested in reading my daily and weekend commentary on the movement of the markets, along with accessing the changes in my portfolio positions in real-time and conversing with other investor/traders via my blog, please consider purchasing a $10 trial subscription.

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Silver Global Price Forecast: The Sterling Opportunity

Precious metals were under pressure last year, but investors continued to accumulate silver while gold had a record amount outflow selling.

We can see this by looking at the physically backed iShares Silver Trust SLV is up 25 million ounces Oct. 31, 2013 since January 2013. While physical holdings in the SPDR Gold Shares GLD shrunk by 28 million in 2013.

Investment demand for silver now accounts for 24% of overall demand, up from only 4% in 2003 after the introduction of ETFs as a liquid trading source. Additionally, silver investors typically include small investors, whereas large institutional investors have steered toward gold ETFs.

Unlike gold… silver is consumed by industrial and medical usage. Silver’s relative affordability and industrial usage is helping bolster silver demand.

Silver is used in consumer electronics like touch screens found in smart phones and tablets, medical equipment. As such, silver has proven virtually indispensable in almost all electronic devices.

According to the CPM Group., industrial demand should reach 838 million ounces, up about 3% year-over-year. It is important to know that silver’s global mining production shows a pathetic 2.8% during the past 10 years, which will not be enough to supply this new electronic age we live in.

So regardless of the state of the global economy, real demand for all of these electronics, demand in the 21st century might mean that silver’s industrial demand could grow at a faster rate than mine supply in the years to come.

If we look as what Asia is doing, demand continued to grow for physical metal. We can now add other nations, like Turkey or Argentina of silver and gold purchasers. If it weren’t for the fact that the Indian government has been trying to profit from its gold market with a 10% tax which has virtually stopped gold buying in India compared to what it was a couple years ago. I think gold would be trading much higher and teach the paper shorts a lesson or two regarding why gold and silver are not just commodities, but in fact are money.

In 2010 we saw India’s silver imports surge 235% over the previous year and 2010 was a huge year for silver. I feel as though the silver market is setting up for something even bigger this time around as the markets technical patterns combined with India’s 284% in silver imports last year will spark the next major rally in silver.

See the chart below for a visual of 2010 rally in silver.

Start of 2014 rally in silver?

The bull market in silver and gold during the 1970s took silver up 30 times and gold up over 20 times. If you were to compare the precious metals bull of the 70s with the recent bull market that began 12 years ago, we could see gold over 5,000 an ounce and silver at roughly 130.

During the metals peak in 1980 nearly everyone was trying to get some exposure to these investments. The 2011 highs do not look at all like the 1980 top, so I do not believe that we have seen the parabolic blow-off top often associated with the end of a commodity bull market.

The list of reasons to buy silver is long and diverse. Perhaps the most significant, is the need for the central banks to keep real interest rates below the rate of inflation. This is one the oldest tricks in the book to spark inflation.

Another reason I think silver should be owned is because of a possible short squeeze. The manipulation of silver is very controversial no doubt. What we do know is that the number of paper claims on physical metal has exploded over the course of the past four decades. This is probably the only fact worth focusing on and someday this will catch up with the price of silver and price could go ballistic.

Why Silver Should Rally Aggressively:

- China’s insatiable demand for the white metal continues growing

- India’s demand in 2013 more than doubled from the previous year and consumes 20% of all silver production.

- Silver’s global mining production shows a pathetic 2.8% during the past 10 years

- Yearly Consumption/Production ratio demonstrates acute deficits

- Unlike gold… silver is consumed by industrial and medical usage

- Chinese solar demand is expected to grow several hundred percent and silver is used and not easily recovered from this product.

- Investment demand for silver up 20% and will go ballistic…once the present consolidation ends

- Currency Devaluation Contagion will soon engulf the world, thus fueling all precious metals higher

- Mexico is considering making Silver the national currency…rather than the fiat peso

- Arizona and Utah legalized the use Gold & Silver As Currency and South Carolina & Colorado are going down this road

- A growing number of states are seeking shiny new currencies made of silver and gold

- Sales of US Minted Silver coins are at all-time record highs despite the recent correction in bullion value

- Silver and gold are both a commodity and financial assets

- Low interest rates in western nations bolster inflation

The Sterling Opportunities in Silver…

Silver and Gold Bull Market Comparisons and Forecast

Philadelphia Gold and Silver Index

The Philadelphia Gold and Silver Index is an index of 16 precious metal mining companies that are traded on the Philadelphia Stock Exchange. The index is represented by the symbol “XAU”, which may be a source of some confusion as this symbol is also used under the ISO 4217 currency standard to denote one troy ounce of gold. The Philadelphia Gold and Silver Index and the NYSE Arca Gold BUGS Index (NYSE MKT: HUI) are the two most watched gold indices on the market.

Large Silver Stock – Pan America Silver Corp.

There are many ways to play the next silver bull market. Each has its own strengths and weaknesses. Trading the large silver companies can provide great exposure along with dividends but often the larger stocks will not provide the most upside potential.

Typically the smaller the company the higher the potential gain but keep in mind risk increases as well.

Smaller Silver Stocks

Silver Miners ETF – The Basket of Silver Stocks

The SIL silver miners ETF holds a basket of silver stocks which vary in size. This is a great way to get the best of both worlds in terms of owning all sizes of silver stocks within one investment.

Because of the large and small ownership of volatile silver stocks you can see the potential return is higher than just owning a larger silver stock.

Silver Investment Conclusion:

In reality we have no idea what the central planners will do in the year ahead. All we can do is follow the price, trends and fundamental data in hopes to profit from the precious metals market.

No matter how you cut it, price will be volatile the market will do everything it can to buck us off the next bull market. While I like to actively trade rallies and pullbacks within the market, it is critical to always hold a core position with the longer underlying bull market. Try to remember the long term.

Now that the gold and silver bull market is starting again I will be covering them much closer along with the occasional stock here and there as opportunities present themselves which I feel comfortable putting my own money into. So I plan to share my trading portfolio with subscribers of my precious metals newsletter at www.TheGoldAndOilGuy.com 

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The Best Performing Financial Asset In 2014: Gold

Gold had another remarkably strong day. The yellow metal closed at $1282 (€939.46) at the London PM fix. It traded higher in the the New York session and closed at $1290,98.

We wrote yesterday in Entire Precious Metals Complex At Major Resistance that the $1250 to $1260 level for gold is critical. It is important for the metal not to breach that price, in order to turn the daily chart bullish. With today’s solid move higher, chances are growing that this move higher is a sustainable rally and the beginnings of a new upleg.

The performance of the gold price is surprising as the general consensus was that gold would break down in the light of US Fed tapering. The opposite seems to be true. Since the taper started on 19 December 2013, gold has been the best performing financial asset, with a gain of 3.75%. Evidence is provided in the following chart (courtesy Bloomberg and Zerohedge).

 

taper financial assets January 2014 price

As Zerohedge notes, gold has risen 6 of the last 7 days, breaking back over $1,275. Silver is on a 7-day win streak holding above $20 for the last 3 days.

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Paper Gold Ain’t as Good as the Real Thing

Paper Gold Ain’t as Good as the Real Thing

By Doug French, Contributing Editor

For the first time ever, the majority of Americans are scared of their own federal government. A Pew Research poll found that 53% of Americans think the government threatens their personal rights and freedoms.

Americans aren’t wild about the government’s currency either. Instead of holding dollars and other financial assets, investors are storing wealth in art, wine, and antique cars. The Economist reported in November, “This buying binge… is growing distrust of financial assets.”

But while the big money is setting art market records and pumping up high-end real estate prices, the distrust-in-government script has not pushed the suspicious into the barbarous relic. The lowly dollar has soared versus gold since September 2011.

Every central banker on earth has sworn an oath to Keynesian money creation, yet the yellow metal has retraced nearly $700 from its $1,895 high. The only limits to fiat money creation are the imagination of central bankers and the willingness of commercial bankers to lend. That being the case, the main culprit for gold’s lackluster performance over the past two years is something else, Tocqueville Asset Management Portfolio Manager and Senior Managing Director John Hathaway explained in his brilliant report “Let’s Get Physical.

Hathaway points out that the wind is clearly in the face of gold production. It currently costs as much or more to produce an ounce than you can sell it for. Mining gold is expensive; gone are the days of fishing large nuggets from California or Alaska streams. Millions of tonnes of ore must be moved and processed for just tiny bits of metal, and few large deposits have been found in recent years.

“Production post-2015 seems set to decline and perhaps sharply,” says Hathaway.

Satoshi Nakamoto created a kind of digital gold in 2009 that, too, is limited in supply. No more than 21 million bitcoins will be “mined,” and there are currently fewer than 12 million in existence. Satoshi made the cyber version of gold easy to mine in the early going. But like the gold mining business, mining bitcoins becomes ever more difficult. Today, you need a souped-up supercomputer to solve the equations that verify bitcoin transactions—which is the process that creates the cyber currency.

The value of this cyber-dollar alternative has exploded versus the government’s currency, rising from less than $25 per bitcoin in May 2011 to nearly $1,000 recently. One reason is surely its portability. Business is conducted globally today, in contrast to the ancient world where most everyone lived their lives inside a 25-mile radius. Thus, carrying bitcoins weightlessly in your phone is preferable to hauling around Krugerrands.

No Paper Bitcoins

But while being the portable new kid on the currency block may account for some of Bitcoin’s popularity, it doesn’t explain why Bitcoin has soared while gold has declined at the same time.

Hathaway puts his finger on the difference between the price action of the ancient versus the modern. “The Bitcoin-gold incongruity is explained by the fact that financial engineers have not yet discovered a way to collateralize bitcoins for leveraged trades,” he writes. “There is (as yet) no Bitcoin futures exchange, no Bitcoin derivatives, no Bitcoin hypothecation or rehypothecation.”

So, anyone wanting to speculate in Bitcoin has to actually buy some of the very limited supply of the cyber currency, which pushes up its price.

In contrast, the shinier but less-than-cyber currency, gold, has a mature and extensive financial infrastructure that inflates its supply—on paper—exponentially. The man from Tocqueville quotes gold expert Jeff Christian of the CPM Group who wrote in 2000 that “an ounce of gold is now involved in half a dozen transactions.” And while “the physical volume has not changed, the turnover has multiplied.”

The general process begins when a gold producer mines and processes the gold. Then the refiners sell it to bullion banks, primarily in London. Some is sold to jewelers and mints.

“The physical gold that remains in London as unallocated bars is the foundation for leveraged paper-gold trades. This chain of events is perfectly ordinary and in keeping with time-honored custom,” explains Hathaway.

He estimates the equivalent of 9,000 metric tons of gold is traded daily, while only 2,800 metric tons is mined annually.

Gold is loaned, leased, hypothecated, and rehypothecated, over and over. That’s the reason, for instance, why it will take so much time for the Germans to repatriate their 700 tonnes of gold currently stored in New York and Paris. While a couple of planes could haul the entire stash to Germany in no time, only 37 tonnes have been delivered a year after the request. The 700 tonnes are scheduled to be delivered by 2020. However, it appears there is not enough free and unencumbered physical gold to meet even that generous schedule. The Germans have been told they can come look at their gold, they just can’t have it yet.

Leveraging Up in London

The City of London provides a loose regulatory environment for the mega-banks to leverage up. Jon Corzine used London rules to rehypothecate customer deposits for MF Global to make a $6.2 billion Eurozone repo bet. MF’s customer agreements allowed for such a thing.

After MF’s collapse, Christopher Elias wrote in Thomson Reuters, “Like Wall Street cocaine, leveraging amplifies the ups and downs of an investment; increasing the returns but also amplifying the costs. With MF Global’s leverage reaching 40 to 1 by the time of its collapse, it didn’t need a Eurozone default to trigger its downfall—all it needed was for these amplified costs to outstrip its asset base.”

Hathaway’s work makes a solid case that the gold market is every bit as leveraged as MF Global, that it’s a mountain of paper transactions teetering on a comparatively tiny bit of physical gold.

“Unlike the physical gold market,” writes Hathaway, “which is not amenable to absorbing large capital flows, the paper market, through nearly infinite rehypothecation, is ideal for hyperactive trading activity, especially in conjunction with related bets on FX, equity indices, and interest rates.”

This hyper-leveraging is reminiscent of America’s housing debt boom of the last decade. Wall Street securitization cleared the way for mortgages to be bought, sold, and transferred electronically. As long as home prices were rising and homeowners were making payments, everything was copasetic. However, once buyers quit paying, the scramble to determine which lenders encumbered which homes led to market chaos. In many states, the backlog of foreclosures still has not cleared.

The failure of a handful of counterparties in the paper-gold market would be many times worse. In many cases, five to ten or more lenders claim ownership of the same physical gold. Gold markets would seize up for months, if not years, during bankruptcy proceedings, effectively removing millions of ounces from the market. It would take the mining industry decades to replace that supply.

Further, Hathaway believes that increased regulation “could lead, among other things, to tighter standards for collateral, rules on rehypothecation, etc. This could well lead to a scramble for physical.” And if regulators don’t tighten up these arrangements, the ETFs, LBMA, and Comex may do it themselves for the sake of customer trust.

What Hathaway calls the “murky pool” of unallocated London gold has supported paper-gold trading way beyond the amount of physical gold available. This pool is drying up and is setting up the mother of all short squeezes.

In that scenario, people with gold ETFs and other paper claims to gold will be devastated, warns Hathaway. They’ll receive “polite and apologetic letters from intermediaries offering to settle in cash at prices well below the physical market.”

It won’t be inflation that drives up the gold price but the unwinding of massive amounts of leverage.

Americans are right to fear their government, but they should fear their financial system as well. Governments have always rendered their paper currencies worthless. Paper entitling you to gold may give you more comfort than fiat dollars.

However, in a panic, paper gold won’t cut it. You’ll want to hold the real thing.

There’s one form of paper gold, though, you should take a closer look at right now: junior mining stocks. These are the small-cap companies exploring for new gold deposits, and the ones that make great discoveries are historically being richly rewarded… as are their shareholders.

However, even the best junior mining companies—those with top managements, proven world-class gold deposits, and cash in the bank—have been dragged down with the overall gold market and are now on sale at cheaper-than-dirt prices. Watch eight investment gurus and resource pros tell you how to become an “Upturn Millionaire” taking advantage of this anomaly in the market—click here.

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‘Doug Casey on Gold Stocks’

Doug Casey on Gold Stocks

By Doug Casey, Chairman

The following is an excerpt from famous contrarian speculator and libertarian freethinker Doug Casey’s latest book, Right on the Money. The interview with Casey Research Chief Metals & Mining Analyst Louis James took place on September 30, 2009, when gold stocks were clearly rebounding from their post-crash lows. Doug’s thoughts are just as timely and true today as they were then, presenting a perfect picture of this most volatile and most rewarding of sectors…

Louis: Doug, we were talking about gold last week, so we should follow up with a look at gold stocks. If one of the reasons to own gold is that it’s real—it’s not paper, it’s not simultaneously someone else’s liability—why own gold stocks?

Doug: Leverage. Gold stocks are problematical as investments. That’s true of all resource stocks, especially stocks in exploration companies, as opposed to producers. If you want to make a proper investment, the way to do that is to follow the dictates of Graham and Dodd, using the method Warren Buffett has proven to be so successful over many years.

Unfortunately, resource stocks in general and metals exploration stocks in particular just don’t lend themselves to such methodologies. They are another class of security entirely.

Louis: “Security” may not be the right word. As I was reading the latest edition of Graham and Dodd’s classic book on securities analysis, I realized that their minimum criteria for investment wouldn’t even apply to the gold majors. The business is just too volatile. You can’t apply standard metrics.

Doug: It’s just impossible. For one thing, they cannot grow consistently, because their assets are always depleting. Nor can they predict what their rate of exploration success is going to be.

Louis: Right. As an asset, a mine is something that gets used up, as you dig it up and sell it off.

Doug: Exactly. And the underlying commodity prices can fluctuate wildly for all sorts of reasons. Mining stocks, and resource stocks in general, have to be viewed as speculations, as opposed to investments.

But that can be a good thing. For example, many of the best speculations have a political element to them. Governments are constantly creating distortions in the market, causing misallocations of capital. Whenever possible, the speculator tries to find out what these distortions are, because their consequences are predictable. They result in trends you can bet on. It’s like the government is guaranteeing your success, because you can almost always count on the government to do the wrong thing.

The classic example, not just coincidentally, concerns gold. The U.S. government suppressed its price for decades while creating huge numbers of dollars before it exploded upward in 1971. Speculators that understood some basic economics positioned themselves accordingly.

As applied to metals stocks, governments are constantly distorting the monetary situation, and gold in particular, being the market’s alternative to government money, is always affected by that. So gold stocks are really a way to short government—or go long on government stupidity, as it were.

The bad news is that governments act chaotically, spastically. The beast jerks to the tugs on its strings held by its various puppeteers. So it’s hard to predict price movements in the short term. You can only bet on the end results of chronic government monetary stupidity.

The good news is that, for that very same reason, these stocks are extremely volatile. That makes it possible, from time to time, to get not just doubles or triples but 10-baggers, 20-baggers, and even 100-to-1 shots in these mining stocks.

That kind of upside makes up for the fact that these stocks are lousy investments and that you will lose money on most of them, if you hold them long enough. Most are best described as burning matches.

Louis: One of our mantras: Volatility can be your best friend.

Doug: Yes, volatility can be your best friend, as long as your timing is reasonable. I don’t mean timing tops and bottoms—no one can do that. I mean spotting the trend and betting on it when others are not, so you can buy low to later sell high. If you chase momentum and excitement, if you run with the crowd, buying when others are buying, you’re guaranteed to lose. You have to be a contrarian. In this business, you’re either a contrarian or road kill. When everyone is talking about these stocks on TV, you know the masses are interested, and that means they’ve gone to a level at which you should be a seller and not a buyer.

That makes it more a game of playing the psychology of the market, rather than doing securities analysis.

I’m not sure how many thousands of gold mining stocks there are in the world today—I’ll guess about 3,000—but most of them are junk. If they have any gold, it’s mainly in the words written on the stock certificates. So, in addition to knowing when to buy and when to sell, your choice of individual stocks has to be intelligent too.

Remember, most mining companies are burning matches.

Louis: All they do is spend money.

Doug: Exactly. That’s because most mining companies are really exploration companies. They are looking for viable deposits, which is quite literally like looking for a needle in a haystack. Finding gold is one thing. Finding an economical deposit of gold is something else entirely.

And even if you do find an economical deposit of gold, it’s exceptionally difficult to make money mining it. Most of your capital costs are up front. The regulatory environment today is onerous in the extreme. Labor costs are far above what they used to be. It ’s a really tough business.

Louis: If someone describes a new business venture to you, saying, “Oh, it’ll be a gold mine!” Do you run away?

Doug: Almost. And it’s odd because, historically, gold mining used to be an excellent business. For example, take the Homestake Mine in Deadwood, South Dakota, which was discovered in 1876, at just about the time of Custer’s last stand, actually. When they first raised capital for that, their dividend structure was something like 100 percent of the initial share price, paid per month. That was driven by the extraordinary discovery. Even though the technology was very primitive and inefficient in those days, labor costs were low, you didn’t have to worry about environmental problems, there were no taxes on whatever you earned, you didn’t have to pay mountains of money to lawyers. Today, you probably pay your lawyers more than you pay your geologists and engineers.

So, the business has changed immensely over time. It’s perverse because with the improvements in technology, gold mining should have become more economical, not less. The farther back you go in history, the higher the grade you’d have to mine in order to make it worthwhile. If we go back to ancient history, a mineable deposit probably had to be at least an ounce of gold per ton to be viable.

Today, you can mine deposits that run as low as a hundredth of an ounce (0.3 g/t). It’s possible to go even lower, but you need very cooperative ore. And that trend toward lower grades becoming economical is going to continue.

For thousands of years, people have been looking for gold in the most obscure and bizarre places all over the world. That’s because of the 92 naturally occurring elements in the periodic table, gold was probably the first metal that man discovered and made use of. The reason for that is simple: Gold is the most inert of the metals.

Louis: Because it doesn’t react easily and form compounds, you can find the pure metal in nature.

Doug: Right. You can find it in its pure form, and it doesn’t degrade and it doesn’t rust. In fact, of all the elements, gold is not only the most inert, it’s also the most ductile and the most malleable. And, after silver, it’s the best conductor of both heat and electricity, and the most reflective. In today’s world, that makes it a high-tech metal. New uses are found for it weekly. It has many uses besides its primary one as money and its secondary use as jewelry. But it was probably also man’s first metal.

But for that same reason, all the high-grade, easy-to-find gold deposits have already been found. There’s got to be a few left to be discovered, but by and large, we’re going to larger-volume, lower-grade, “no-see-um”-type deposits at this point. Gold mining is no longer a business in which, like in the movie The Treasure of the Sierra Madre, you can get a couple of guys, some picks and mules, and go out and find the mother lode. Unfortunately. Now, it’s usually a large-scale, industrial earth-moving operation next to a chemical plant.

Louis: They operate on very slender margins, and they can be rendered unprofitable by a slight shift in government regulations or taxes. So, we want to own these companies… why?

Doug: You want them strictly as speculative vehicles that offer the potential for 10, 100, or even 1,000 times returns on your money. Getting 1,000 times on your money is  extraordinary, of course—you have to buy at the bottom and sell at the top—but people have done it. It’s happened not just once or twice, but quite a number of times that individual stocks have moved by that much.

That’s the good news. The bad news is that these things fluctuate down even more dramatically than they fluctuate up. They are burning matches that can actually go to zero. And when they go down, they usually drop at least twice as fast as they went up.

Louis: That’s true, but as bad as a total loss is, you can only lose 100 percent—but there’s no such limit to the upside. A 100 percent gain is only a double, and we do much better than that for subscribers numerous times per year.

Doug: And as shareholders in everything from Enron to AIG, to Lehman Brothers, and many more have found out, even the biggest, most solid companies can go to zero.

Louis: So, what you’re telling me is that the answer to “Why gold?” is really quite different to the answer to “Why gold stocks?” These are in completely different classes, bought for completely different reasons.

Doug: Yes. You buy gold, the metal, because you’re prudent. It’s for safety, liquidity, insurance. The gold stocks, even though they explore for or mine gold, are at the polar opposite of the investment spectrum; you buy those for extreme volatility and the chance it creates for spectacular gains. It’s rather paradoxical, actually.

(to be continued)


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(continued)

Louis: You buy gold for safety and gold stocks specifically to profit from their “un-safety.”

Doug: Exactly. They really are total opposites, even though it’s the same commodity in question. It’s odd, but then, life is often stranger than fiction.

Louis: And it’s being a contrarian—”timing” in the sense of making a rational decision about a trend in evident motion—that helps stack the odds in your favor. It allows you to guess when market volatility will, on average, head upward, making it possible for you to buy low and sell high.

Doug: You know, I first started looking at gold stocks back in the early 1970s. In those days, South African stocks were the “blue chips” of the mining industry. As a country, South Africa mined about 60 percent of all the gold mined in the world, and costs were very low.

Gold was controlled at $35 per ounce until Nixon closed the gold window in 1971, but some of the South Africans were able to mine it for $20 an ounce or less. They were paying huge dividends.

Gold had run up from $35 to $200 in early 1974, then corrected down to $100 by 1976. It had come off 50 percent, but at the same time that gold was bottoming around $100, they had some serious riots in Soweto. So the gold stocks got a double hit: falling gold prices and fear of revolution in South Africa. That made it possible, in those days, to buy into short-lived, high-cost mining companies very cheaply; the stocks of the marginal companies were yielding current dividends of 50 to 75 percent. They were penny stocks in those days. They no longer exist; they’ve all been merged into mining finance houses long since then. Three names that I remember from those days were Leslie, Bracken, Grootvlei; I owned a lot of shares in them. If you bought Leslie for 80 cents a share, you’d expect, based on previous dividends, to get about 60 cents a share in that year.

But then gold started flying upward, the psychology regarding South Africa changed, and by 1980, the next real peak, you were getting several times what you paid for the stock, in dividends alone, per year.

Louis: Wow. I can think of some leveraged companies that might be able to deliver that sort of performance, if gold goes where we think it will. So, where do you think we are in the current trend or metals cycle? You’ve spoken of the Stealth, Wall of Worry, and Mania Phases of a bull market for metals—do you still think of our market in those terms?

Doug: That’s the big question, isn’t it? Well, the last major bottom in this sector was from 1998 to 2002. Many of these junior mining stocks—mostly traded in Canada, where about 75 percent of all the gold stocks in the world trade—were trading for less than cash in the bank. Literally. You’d get all their properties, their technology, the expertise of their management, totally for free. Or less.

Louis: I remember seeing past issues in which you said, “If I could call your broker and order these stocks for you, I would.”

Doug: Yes. But nobody wanted to hear about it at that time. Gold was low, and there was a bubble in Internet stocks. Why would anyone want to get involved in a dead-duck, nineteenth century, “choo-choo train” industry like gold mining? It had been completely discredited by the long bear market, but that made it the ideal time to buy them, of course. That was deep in the Stealth Phase.

Over the next six to eight years, these stocks took off, moving us into the Wall of Worry Phase. But the stocks didn’t fly the way they did in past bull markets. I think that’s mostly because they were so depleted of capital, they were selling lots of shares. So their market capitalizations—the aggregate value given them by the market—were increasing, but their share prices weren’t. Not as much.

Remember, these companies very rarely have any earnings, but they always need capital, and the only way they can get it is by selling new shares, which dilutes the value of the individual shares, including those held by existing shareholders.

Then last fall hit, and nobody, but nobody, wanted anything speculative. These most volatile of stocks showed their nature and plunged through the floor in the general flight to safety. That made last fall the second best time to buy mining shares this cycle, and I know you recommended some pretty aggressive buying last fall, near the bottom.

Now, many of these shares—the better ones at least—have recovered substantially, and some have even surpassed pre-crash highs. Again, the Wall of Worry Phase is characterized by large fluctuations that separate the wolves from the sheep (and the sheep from their cash).

Where does that leave us? Well, as you know, I think gold is going to go much, much higher. And that is going to direct a lot of attention toward these gold stocks. When people get gold fever, they are not just driven by greed, they’re usually driven by fear as well, so you get both of the most powerful market motivators working for you at once. It’s a rare class of securities that can benefit from fear and greed at once.

Remember that the Fed ’s pumping up of the money supply ignited a huge bubble in tech stocks, and then an even more massive global bubble in real estate—which is over for a long time, incidentally—but they’re still creating tons of dollars. That will inevitably ignite other asset bubbles. Where? I can’t say for certain, but I say the odds are extremely high that as gold goes up, for all the reasons we spoke about last week and more, that a lot of this funny money is going to be directed into these gold stocks, which are not just a microcap area of the market but a nanocap area of the market.

I’ve said it before, and I’ll say it again: When the public gets the bit in its teeth and wants to buy gold stocks, it’s going to be like trying to siphon the contents of the Hoover Dam through a garden hose.

Gold stocks, as a class, are going to be explosive. Now, you’ve got to remember that most of them are junk. Most will never, ever find an economical deposit. But it’s hopes and dreams that drive them, not reality, and even without merit, they can still go 10, 20, or 30 times your entry price. And the companies that actually have the goods can go much higher than that.

At the moment, gold stock prices are not as cheap, in either relative or absolute terms, as they were at the turn of the century, nor last fall. But given that the Mania Phase is still ahead, they are good speculations right now—especially the ones that have actually discovered gold deposits that look economical.

Louis: So, if you buy good companies now, with good projects, good management, working in stable jurisdictions, with a couple years of operating cash to see them through the Wall of Worry fluctuations—if you buy these and hold for the Mania Phase, you should come out very well. But you can’t blink and get stampeded out of your positions when the market fluctuates sharply.

Doug: That’s exactly right. At the particular stage where we are right now in this market for these extraordinarily volatile securities, if you buy a quality exploration company, or a quality development company (which is to say, a company that has found something and is advancing it toward production), those shares could still go down 10, 20, 30, or even 50 percent, but ultimately there’s an excellent chance that that same stock will go up by 10, 50, or even 100 times. I hate to use such hard-to-believe numbers, but that is the way this market works.

When the coming resource bubble is ignited, there are excellent odds you’ll be laughing all the way to the bank in a few years.

I should stress that I’m not saying that this is the perfect time to buy. We’re not at a market bottom as we were in 2001, nor an interim bottom like last November, and I can’t say I know the Mania Phase is just around the corner. But I think this is a very reasonable time to be buying these stocks. And it’s absolutely a good time to start educating yourself about them. There’s just such a good chance a massive bubble is going to be ignited in this area.

Louis: These are obviously the kinds of things we research, make recommendations on, and educate about in our metals newsletters, but one thing we should stress for nonsubscribers reading this interview is that this strategy applies only to the speculative portion of your portfolio. No one should gamble with their rent money nor the money they’ve saved for college tuition, etcetera.

Doug: Right. The ideal speculator’s portfolio would be divided into 10 areas, each totally different and not correlated with each other. Each of these areas should have, in your subjective opinion, the ability to move 1,000 percent in price.

Why is that? Because most of the time, we’re wrong when we pick areas to speculate in, certainly in areas where you can’t apply Graham-Dodd-type logic. But if you’re wrong on 9 out of 10 of them, and it would be hard to do that badly, then you at least break even on the one 10-bagger (1,000 percent winner). What’s more likely is that a couple will blow up and go to zero, a couple will go down 30, 40, 50 percent, but you’ll also have a couple doubles or triples, and maybe, on one or two of them, you’ll get a 10-to-1 or better win.

So, it looks very risky (and falling in love with any single stock is very risky), but it’s actually an intelligent way to diversify your risk and stack the odds of profiting on volatility in your favor.

Note that I don’t mean that these “areas” should be 10 different stocks in the junior mining sector—that wouldn’t be diversification. As I say, ideally, I’d have 10 such areas with potential for 1,000 percent gains, but it’s usually impossible to find that many at once. If you can find only two or three, what do you do with the rest of your money? Well, at this point, I would put a lot of it into gold, in one form or another, while keeping your powder dry as you look for the next idea opportunity.

And ideally, I’d look at every market in every country in the world. People who look only in the United States, or only in stocks, or only in real estate—they just don’t get to see enough balls to swing at.

Louis: Okay, got it. Thank you very much.

In 2009, at the time of this interview, Doug said it was not the perfect time to buy because “we’re not at a market bottom.” That, however, has changed dramatically. In the last two years, gold mining stocks have gotten slaughtered, and even the best companies with proven, high-grade gold deposits are now trading 50-75% below their actual value.

The time where contrarian investors can literally make a fortune may be close: Right now, Doug and many other seasoned resource investors are seeing unmistakable signs of an imminent turnaround in the gold market.

Find out how to play the turning tides of the precious metals market by watching “Upturn Millionaires,” a free online video event hosted by Casey Research—featuring Doug Casey, Porter Stansberry, Rick Rule, John Mauldin, Frank Giustra, Ross Beaty, Louis James, and Marin Katusa. Click here to save your seat.

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Now Is the Time to Buy Gold

Now Is the Time to Buy Gold

By Bud Conrad, Chief Economist

Gold has been in a downturn for more than two years now, resulting in the lowest investor sentiment in many years. Hardcore goldbugs find no explanation in the big picture financial numbers of government deficits and money creation, which should be supportive to gold. I have an explanation for why gold has been down—and why that is about to reverse itself. I’m convinced that now is the best time to invest in gold again.

 

Gold Is the Alternative to Non-Convertible Paper Money

If you’ve been a Casey reader for any length of time, you know why gold is a good long-term investment: central banks are expanding paper money to accommodate the deficits of profligate governments—but they can’t print gold. Since the beginning of the credit crisis, the world’s central banks have “invented” $10 trillion worth of new currencies. They are buying up government debt to drive interest rates down, to keep countries afloat. The best they can do is buy time, however, because creating even more debt does not solve a credit crisis.

Asia Is Accumulating Gold for Good Reason

Since 2010, China has been buying gold and not buying US Treasuries. China’s plan seems to be to acquire a total of 6,000 tonnes of gold to put its holdings on a par with developed countries and to elevate the international appeal of the renminbi.

In 2013, China imported over 1,000 tonnes of gold through Hong Kong alone, and it’s likely that as much gold came through other sources. For example, last year the UK shipped 1,400 tonnes of gold to Swiss refiners to recast London bars into forms appropriate for the Asian market.

China mines around 430 tonnes of gold per year, so the combination could be 2,430 tonnes of gold snatched up by China in 2013, or 85% of world output.

India was expected to import 900 tonnes of gold in 2013, but it may have fallen short because the Indian government has been taxing and restricting imports in a foolish attempt to support its weakening currency. Smugglers are having a field day with the hundred-dollar-per-ounce premiums.

Other central banks around the world are estimated to have bought at least 300 tonnes last year, and investors are buying bullion, coins, and jewelry in record numbers. Where is all that gold coming from?

COMEX and GLD ETF Inventories Are Down from the Demand

The COMEX futures market warehouses dropped 4 million ounces (over 100 tonnes) in 2013. The COMEX uses two classes of inventories: the narrower is called “registered” and is available for delivery on the exchange. There are other inventories that are not available for trading but are called “eligible.” I don’t think it’s as easy to get holders of eligible gold to allow for its conversion to registered to meet delivery as the name implies. Yes, that might occur, but only with a big jump in the price.

The chart below shows the record-low supply of registered COMEX gold.

Meanwhile, SPDR Gold Shares (GLD), the largest gold ETF, lost over 800 tonnes of gold to redemptions. At the same time, central banks have provided gold through leasing programs (but figures are not made public).

Why Has Gold Fallen $700 Since 2011?

In our distorted world of debt-ridden governments and demand from Asia, gold should continue rising. What’s going on?

The gold price quoted all day long comes from the futures exchanges. These exchanges provide leverage, so modest amounts can be used to make big profits. Big players can move markets—and the biggest player by far is JPMorgan (JPM).

For the first 11 months of 2013, JPM and its customers delivered 60% of all gold to the COMEX futures market exchange; that, surely, is a dominant position that could affect the market. By supplying so much gold, they are able to keep the price lower than it would otherwise be.

A key question is why a big bank would take positions that could drive gold lower. Answer: Banks gain by borrowing at zero rates. But the Federal Reserve can only continue its large quantitative easing programs that bring rates to zero if gold is not soaring, which would indicate weakness in the dollar and the need to tighten monetary policy. Voilà—we have a motive. Also, suppressing the price of gold supports the dollar as a reserve currency.

The chart below shows the month-by-month number of contracts that were either provided to the exchange or taken from the exchange by JPM. For a single firm, the numbers are large, but the effect across all gold markets is greater because so many gold transactions follow the price set in the paper futures market.

What jumps out from the chart above is the fact that while JPM had been selling gold into the futures market for most of the year, it made a major shift in December, absorbing 96% of all gold delivered.

That is a radical shift and, I believe, an indicator that JPM‘s policy has shifted. In my opinion, their deliveries of gold were suppressing the price during 2013, but now their policy has shifted in a way that will support gold going forward.

This leaves a vital question unanswered: Why? Has the motivation to suppress the price of gold gone away? Not likely, and we may never know the full truth of what is happening, but I suspect the main reason for the shift is that they have done their damage. The $740 drop from top to bottom, a 39% decline, has shaken confidence in gold as a financial “safe haven” among many investors, especially those new to precious metals. At the same time, continuing to lean on gold at this point could become very costly. JPM delivered $3 billion (about 2 million ounces of gold) into the market up to December in 2013, and may not have ready sources of gold to keep that up. It is dangerous to put on big short positions unless you have gold or some future gold deliveries as a hedge.

By now, everyone knows of the shortages in the gold market; JPM has to be as aware of that as the rest of us. It just isn’t safe for them to continue to lean on the market. Being aware, it looks like they are taking the bet that gold will rebound, so they could do well on the other side of the trade.

Another confirmation of the shift by big banks comes from data provided by the US Commodity Futures Trading Commission (CFTC) that shows the net positions of the four biggest US banks in the futures market. There has been a dramatic change from being short the market to now being long.

Crisis Brewing in the Gold Market

Germany claims to hold 3,390.6 tonnes of gold, about half of which is held by foreign central banks. Over a year ago, they announced a plan to repatriate 674 tonnes of gold from France and the United States. The US said it would comply, but told the German government that it would have to wait seven years for all the gold to be delivered. The news out last week was that after a year, Germany had only obtained 37 tonnes of its gold—and only five of them were from the US. That is a trivial amount (only 160,000 ounces).

So why can’t Germany get its gold? Explanations of having to melt down existing gold and recast it just don’t make sense. The most logical conclusion, and the one I’ve come to, is that the United States simply doesn’t have the gold it says it has—neither Germany’s nor its own.

Of course, the US government isn’t going to admit that there’s a problem, but I say there is.

More evidence: JPMorgan’s COMEX warehouse contained 3.0 million ounces of gold in 2012, but that had dropped to 0.5 million ounces by mid-2013. Its registered inventories are a razor-thin 87,000 ounces. These kinds of swings are indicative of shortages and instability.

Further, JPMorgan sold its gold vault in New York City—located next to the Federal Reserve’s vault—to the Chinese. The banking giant also just announced the sale of its commodities trading business (although it may not have sold the precious metals part of that business). Perhaps they were concerned about new regulations of banks with deposit insurance from the government.

In another relevant development, Deutsche Bank recently surprised the gold community by quitting its position on the committee that sets the London a.m. and p.m. fixings. This came a few weeks after a German regulatory body called BaFin started investigating how these prices were set. BaFin also gave an indication that the process appeared worse than the LIBOR fixing scandal, which resulted in billions in fines.

Putting Inventories and Traders Together

The futures market looks fragile to me. The basic problem is that there are many more transactions that could put a claim on gold than there is gold registered for delivery in the COMEX warehouses.

The chart below gives a dramatic picture by simply dividing the open interest of all futures contracts by the registered inventories. The black line at the bottom shows the big jump in the ratio as the registered inventories declined. There are 107 times more open-interest positions than there is registered gold.

The futures markets operate on the expectation that only a few big traders will demand delivery. JPMorgan has shown that it is in a position to demand almost all (96%) of the gold for delivery. They are big enough that they could cause a collapse of the market, if they were to force delivery of more than is available. They know better than to do so, though, and I would guess that they will just manage to try to gain back what gold they have been delivering over the last several years. That should support the price of gold.

Gold Will Rise, and It’s on Sale Now

Now is the time to stake your claim in gold. In the long term, we know that paper money will become worthless; in the short term, the biggest seller has just shifted its actions to becoming a buyer. That makes this a good time to accumulate gold and gold mining stocks before a major shift upward in price.

Speaking of gold mining stocks: My Casey Report co-editor Doug Casey, as well as other famous gold speculators, are also convinced that a turnaround in the gold market may be upon us. If you haven’t yet, do yourself a favor and watch “Upturn Millionaires,” Casey’s online video event with eight well-known resource speculators and investment experts that premieres Tuesday at 2:00 p.m. EST. It’s free, so you just have to sign up to register.

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Is February a Risk-On or Risk-Off Trade: Equities or Gold & Bonds

Recent price action in the stock market has many traders on edge. With the market closing below our key support trend line last week, the market has now technically starting a down trend.

While trend lines are a great tool for identifying a weakening trend and reversals in the market, I do not put a lot of my analysis weighting on them.

Most of my timing and trading is based around what I call INNER-Market Analysis (Market Stages, Cycles, Momentum and Sentiment). Using these data we can diagnose the overall health of the market. Knowing the strength of the market we can then forecast short term trend reversals before they happen with a high degree of accuracy.

In this report I keep things clean and simple using just trend lines. During the last three weeks we have seen the price of stocks pullback. And because 2013 was such a strong year for stocks most participants are expecting a sharp market correction to take place anytime now.

So with the recent price correction fear is starting to enter the market and money is rotating out of stocks and into the Risk-Off assets like gold and bonds.

Stocks tend to fall in times of economic uncertainty or fear. These same factors push investors towards the safety trades (Risk-Off) high quality bonds and precious metals. As more money goes from risk-on to risk-off, stocks will continue to fall and the safety trades will rise. The move by investors to select the safety of gold and bonds compared to the volatility of stocks will result in these risk plays to moving in opposite directions.

Let’s take a look at the chart below for a visual of what looks to be unfolding…

Gold Trading Newsletter

How to Trade These Markets:

While these markets look to be starting to reverse trends, it is critical that we understand how the market moves during reversals and understand position/money management.

Getting short stocks and long precious metals in the long run could work out very well, but if you understand the price action that typically happens during reversals you know that the stock market will become choppy and we could see the recent highs tested or possibly even a new high made before price actually starts a down trend. And the opposite situation for gold and bonds. Drawdowns can be huge when investing and why I don’t just change position directions when the first sign of a trend change shows up on the chart.

Price reversals are a process, not an event. So it is important to follow along using a short term time frame like the daily chart and play the intermediate trends that last 4-12 weeks in length. By doing this, you are trading in the direction of the most active cycle in the stock market and positioned properly as new a trend starts.

 

What I am looking for in the next week or two:

1. Stocks to trade sideways or drift higher for 3-6 days, then I will be looking to get short. Again, cycle, sentiment, and momentum analysis must remain down for me to short the market. If they turn back up I will remain in cash until a setup for another short or long entry forms.

2. Gold remains in a down trend but is starting to breakout to the upside. I do have concerns with the daily chart patterns for both gold and silver, so next week will be critical for them. We will be using some ETF Trading Strategies to take advantage of these moves.

3. Bond prices (not yields) look to be forming a bottom “W” pattern. They have had a big run in the last few weeks and are now testing resistance. I think a long bond position is slowly starting to unfold but if we look at the futures price charts for both bonds and gold, they have not yet broken to the upside and have more work to do. As mentioned before ETFs are not really the best tool for charting but I show them because they what the masses follow and trade.

A few days ago my new book “Technical Trading Mastery – 7 Steps To Win With Logic” became available to my followers and readers with an offer you would cannot refuse. If you buy my book before Jan 1st you get a Lifetime Membership to my new Monthly INNER-Investor Newsletter so you can keep your long term investment capital on the right side of the market forever.

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7 Steps To Win With Logic

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