There is a decline in the number of reads in our articles that do not provide a fully developed “fundamental” story about why gold and silver should be much higher in price, [but are not]. Relying upon charts to more accurately capture the developing “story” does not capture the imagination of as many readers, for whatever reason. We attribute this to Confirmation Bias where a reader wants to read an article that confirms his/her beliefs. The accuracy/validity/truth may or may not be true, but is satisfies an emotional need for affirmation.
The true story of gold and silver is a simple one. There is a recognized and acknowledged shortage of supply in opposition to the greatest demand for both precious metals, for at least in recent memory, if not all time. Current prices are in total disregard to the fixed law of Supply v Demand, or perhaps more accurately stated, in total defiance of that law. It is the most reliable of truths that when demand is in far excess of supply, price goes higher.
This has not been the case for precious metals for the past two years, as central banks have been actively suppressing prices in order to preserve their fiat currencies, particularly the Federal Reserve’s “dollar.” In our last article, Cognitive Disconnect Between Physical and Paper, we covered several aspects that addressed political/central banker motives that account for why gold and silver are not rising in value.
It is all about money, following the money, for money is power, and those central bankers currently in power face losing it. Desperate people do desperate things, and the power- hungry will destroy all currencies to keep themselves where they are. Even they know the clock is ticking. Repeating statistics, dwindling exchange supplies, etc, etc, etc, has done nothing to otherwise explain why PM prices remain low.
Fundamentals are relative, charts are absolute. They accurately reflect all that is going on, regardless of reasoning/motivation. A few, or some, the number[s] do not matter, have no regard for the validity of PM charts which reflect a bogus paper market. To an extent, the paper markets are bogus, but the number of contracts being sold are large, much larger than buyers, and this ironically reflects the reality of supply v demand.
As to the physical, China being the largest buyer for whatever is available, there is no reason for China and the other buyers to want price to go to higher levels when they can be buying so cheaply. The suppressed prices may even be an accommodation to China and others to compensate for the depreciating/disappearing “value” of toxic bonds the US has been dumping on the world for so long. That game is over, but no one has a fix on the time line for ending the fiat currency Ponzi scheme and reverting back to some kind of gold-back currency sponsored by China and the other BRICS nations.
Right now, the charts are letting us know that higher PM prices are unlikely to occur anytime soon. Barring some kind of “overnight surprise” that will shock the markets, odds favor lower prices over higher prices unless and until demand shows up in chart activity.
Whenever a trend is down, the onus is on buyers to create a change. Right now, that is not happening. We show the bearish spacing, a sure sign of weakness and one of sellers being in control. The 50% retracement level is also shown, and the August swing rally failed to reach that level. A half-way retracement is a general guide used to measure the relative strength/weakness of a trend. In a down market, when a retracement rally cannot retrace to the half-way level, it is a sign of greater market weakness.
There is a small possibility of a low from the last week of June, and there have been two potential retests that have held, so far. If this lower probability proves out, it is unfolding in a weak manner, which is no surprise given what was just explained about the character of the market’s overall weakness.
Assume for the moment that we are looking at a possible low, because it is developing slowly, even under this scenario, it will take much more time for buyers to turn this market around. Should price go lower still, then the time frame for a turnaround will be extended even more.
This is a weekly chart, and it take more time and effort to make a turn in trend.
The fact about the daily gold chart is that it continues to make lower highs, and that is a characteristic is a down trending market, so the message here remains clear. There was a high volume strong rally in mid-October. The bar is marked “D/S,” Demand over Supply. This positive expression of demand was erased by the 4th bar from the right. Another fact is that the October rally effort was totally retraced, last week. Both are signs indicating the weak character of the gold market.
Silver is not faring any better. Regardless of whatever positive fundamental consideration one can advance, the chart structure is telling us silver is struggling. We see evidence of that from the bearish spacing, supportive of overall weakness.
Also, note the location of the last two little swing high rallies. The last one, 3rd bar from the right, is a lower swing low, a sign right there, but both fall short of rallying half-way in the down channel, once again, echoing weakness.
As with gold, the June low has the potential of being a bottom, but it needs more confirmation than we are seeing, to date.
The arrow pointing to the sharp increase in volume, and the poor close on the bar, at a support area, resulted in a price gap up from the close, next day. It could be a small bear trap. Friday’s close was upper end on the bar, and that says buyers won over sellers for that day. The only caveat we hold is how price has been unable to rally from support right away, as it did at points 1 and 2. Weak rallies lead to lower prices, so buyers better step up on Monday, or silver can break current support.
The best feature about buying physical gold and silver is that charts do not matter. Just keep on buying, especially at these lower prices. These low levels may last for some time, but timing is less of an issue for accumulating tangible assets that cannot be debased and have no counterparty risk. Beat the central bankers at their own game.
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In his weekly market review, Frank Holmes of the USFunds.com nicely summarizes for gold investors this week’s strengths, weaknesses, opportunities and threats in the gold market. The price of the yellow metal went lower after two consecutive weeks of gains. Gold closed the week at $1,290.20 which is $1.6 per ounce lower (0.12%). The NYSE Arca Gold Miners Index rose 0.34% on the week. This was the gold investors review of past week.
Gold Market Strength
Last week saw more action in the Comex warehouses, with a net gain in gold inventories for the week. However, registered gold stocks hit a new all-time low at a little under 639,000 ounces. The ratio of registered Comex gold inventory also hit a new low, reiterating the impending physical delivery shortage. In China, demand volumes for cash gold on the Shanghai Gold Exchange climbed to a one-month high this week, leading traders to cover some their short positions early in the week. In addition, the U.S. Mint sold 764,500 ounces of American Eagle coins as of November 8, compared with 753,000 ounces in all of 2012, according to data on the mint’s website.
Gold rose on Thursday after Federal Reserve Chairman nominee Janet Yellen spoke in testimony before the Senate. Yellen commented that the economy and labor market are performing far below their potential and pointed that large improvements must be made before the Fed reduces its unconventional asset purchase stimulus. The continuation of ultra accommodative monetary policies, together with Yellen’s dovish tone, is viewed as supportive of gold prices.
Gold Market Weaknesses
Ed Yardeni, in his daily commentary this week, thinks that there are lots of grey shades in the latest batch of global economic indicators as well as in the stock market’s reaction to them. For one, U.S. GDP growth isn’t “red hot” as initially believed. When excluding inventory build-ups, real final sales in GDP increased by only 2.0 percent, shy of the headline 2.8 percent. Yardeni adds that real final sales to domestic purchasers rose just 1.7 percent, following a gain of 2.1 percent during the second quarter. All that glitters is not gold, as they say.
Hedge funds cut bullish gold bets late last week, adding the most short contracts in four weeks, as U.S. economic growth fuels speculation that the Fed will trim stimulus. Gold’s negative price reaction to the possibility of a December Fed tapering indicates that the bullion market is likely to remain sensitive to expectations for changes in monetary policy, according to Howard Wen of HSBC. Short bets jumped 37 percent, the most since October 15.
Gold Market Opportunities
In regard to China’s physical demand, a gold vault capable of storing 2,000 metric tonnes, or twice the amount of China’s expected demand this year, opened in Shanghai and is seeking to benefit from rising physical demand in Asia’s largest economy. The facility is a massive vote of confidence for the Chinese gold market, according to Philip Klapwijk of Precious Metals Insights. In addition, recent World Gold Council data shows that China’s demand for gold jewelry, bars and coins rose 30 percent, while gold usage in India rose 24 percent, adding that the bulk of year-to-date growth in consumer demand came from eastern markets. Both Klapwijk and two Bloomberg research analysts have come to the conclusion that the People’s Bank of China (PBOC) has taken 300 tonnes of gold into reserves in the first half of the year, just under 15 percent of global supply. The key highlight of the report is that the conclusion was reached independently. At such a massive rate of accumulation, China could match or even surpass U.S. gold reserves within the next 10 years.
Bloomberg published a brief exhibit this week highlighting that China’s buying and holding of gold has increased contango to $134 per ounce on the five-year futures contract, from $94 over the course of six months. This is because the gold moved from London gold ETP liquidations to China during 2013 may no longer be available should ETP demand return. China has been the world’s largest buyer of gold this year, and it is widely known that gold going into China is not expected to hit the international market again. This is due to the country’s view of gold as a long-term investment, leading traders to increase contango as a result.
In his Friday commentary, David Rosenberg of Gluskin Sheff gave his take on Yellen’s Senate testimony. According to Rosenberg, Yellen not only pointed towards endless quantitative easing (QE), she also indicated that the Fed will consider lowering the meager 0.25 percent it pays for bank deposits to kick start a more vigorous credit cycle; the era of free money is alive and well, he asserted. The result of Yellen’s nomination, and impending ratification, is that liquidity will remain friendly and will fuel risk appetite for the foreseeable future, implying that investors will be punished for at least another five years of decay, if they are overweight cash underneath Yellen’s mandate. In essence, Rosenberg summarizes to borrow short and lend long and start going long hard assets since we will come out of the other side with inflation.
Gold Market Threats
Despite an expected solid underpinning from industrial demand for silver prices, the possibility of the Fed tapering its stimulus, along with the resulting weakness in gold, should send silver tumbling, according to Thomson Reuters. Thomson Reuters’ analysts add that the rising physical demand for the metal will not be enough to sustain prices when faced with the unwinding of the massive U.S. government QE program, and the stronger U.S. dollar. Despite this opinion, it is necessary to highlight that the 2011 record of 39.869 million American Silver Eagle bullion coin sales was shattered this Tuesday as the U.S. Mint revealed sales of 40.175 million coins sold so far this year.
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This is an excerpt from this week’s premium update from the The Financial Tap, which is dedicated to helping people learn to grow into successful investors by providing cycle research on multiple markets delivered twice weekly. For more up to date commentary subscribe. Now offering monthly & quarterly subscriptions with 30 day refund available if not 100% satisfied.
The recent midweek report highlighted a technical pattern that frequently occurs during Gold’s Daily Cycle declines – a step pattern of 3 sessions down followed by 3 days of sideways consolidation. The pattern is repeated as Gold falls into its DCL, with the final 3 day drop marked by broad capitulation and panic.
Gold’s recent move toward a DCL has generally followed this pattern, but I’m concerned that the last 3 day burst down was, by DCL standards, fairly mild. Technically, Tuesday’s low qualifies as a DCL. The lower Bollinger Band was touched and the RSI was oversold. But since we’re also looking for this Cycle to mark a much deeper Investor Cycle Low, we would expect broader capitulation and deeper technical damage.
To satisfy my expectation of an ICL in the $1,210-$1220 area, Gold will need to endure yet another, more violent, step-down decline. A final drop is needed to wash out the remaining bullish sentiment and to push the weekly Investor Cycle down into a more recognizable Cycle Low. Because the Cycle is already 24 days in and price has churned sideways for 3 days (a bear flag), the final 3 day down move should begin almost immediately.
The above these leaves room for doubt, however. In a modest departure from the primary expectation, I’m starting to reconsider the possibility that we might have another Daily Cycle ahead of us – the current Investor Cycle simply doesn’t yet show the normal signs of an ICL. Gold’s next move should provide clarity. If Gold immediately drops to retest the June lows in the $1,220 range, we can mark the drop as a both a DCL and an ICL, although the ICL drop will have been fairly mild.
On the other hand, if Gold moves higher next week, Gold bugs should be fearful. With Gold at 25 days from the last DCL, a move higher through the 10dma ($1,294) and the declining trend-line will confirm that a new Daily Cycle is in play. On the surface, a new DCL is bullish, and many investors will interpret and trade it as such. But a new Daily Cycle will likely be the 5th in the current Investor Cycle, so should fail and lead to significant low. To avoid the downside that a 5th Daily Cycle would bring, the current 4th Daily Cycle needs to show a rapid $80 decline in Gold’s price. Though nothing is certain, such an immediate drop will dramatically increases the odds of a DCL which also marks an ICL.
Last week I penned an article titled, Gold Bear to End with a Bang. For those of you who prefer video,here is my analysis on video. I warn of the dangerous short-term downside potential in Gold that could mark the end to this bear market. Thus far, this analysis has been on track and has served to protect subscriber portfolios in recent days and weeks.
Sadly, this analysis did not sit too well with “Ranting” Andy Hoffman, marketing man and manipulation guru extraordinaire at precious metals dealer Miles Franklin. Rather than critique my analysis, he resorted to personal attacks in a lengthy rant. When someone attacks you personally, it’s probably because you are right. Moreover, he didn’t even read the entire article because he made numerous errors in reference to its content. Before I get to the larger point, let me correct some of his errors.
First of all, he assumes I’m implying that the gold stocks would not decline given a decline in the price of Gold. This is totally absurd. I noted: There is very strong support sitting right below the summer lows. Here is that same chart which shows the downside potential to that major support.
Secondly, he posted only one chart from my article while neglecting not only the other two important charts that show the pattern but also my conclusion. He compares my A-B-C labeling to the Aden Sisters’ pattern of which there is no relation whatsoever.
Instead of carefully reading the entire article and considering my analysis, he resorted to attacking me personally and professionally. He tried to denigrate me professionally by mocking my Chartered Market Technician designation and calling me a “two-bit” technician. If that were the case then how did I anticipate the June bottom and big rebound here and here or the top in commodities in 2011 and the big decline in Silver in 2011? Surely I’ve made some bad calls but the reality is technical analysis works fine. It fails when the analyst has the wrong interpretation. And by the way, I’m one of only a few legitimately credentialed technical analysts in the gold community.
Furthermore, Hoffman claims that I don’t have my readers interests at heart and am leading them to slaughter. Are you serious? Its disgusting and disingenuous to claim that I don’t have my readers interest at heart. I’m alerting them about the potential for a serious decline. This guy was jamming Silver down people’s throats above $40/oz and he has the gall to call out someone else for making an honest prediction?
Hoffman goes on to mock newsletter writers as a group which I find ironic considering the only references Miles Franklin has (as to its credibility as a dealer) are newsletter writers! Also, according to its website, part of Miles Franklin’s philosophy is integrity. Yet, to attack someone personally and their professional credentials for no sound reason shows that its front man does not represent the company’s philosophy.
Honestly, it’s not surprising. Hoffman and the gold bug conspiracy loving charlatans have made a complete mockery of precious metals and the gold community. As the bear market has persisted these folks have shown no humility and become more fanatical in their already outlandish and ridiculous views.
The bigger the decline, the greater the manipulation they say while raising their already extreme future price targets. The more US equities outperform, the more grandiose the headlines become about the world ending and markets collapsing. Gold goes up, they are right. Gold goes down, they weren’t wrong. It was manipulation. How convenient for these guys. They never lose!
What is hilarious is this group has a double standard with technical analysis. Anytime I post an article with a really bullish chart pattern, the conspiracy brigade will quickly utilize it to its advantage. If my opinion is to the contrary, then they trot out the manipulated market line like a trained monkey.
Not once publicly or to subscribers have I ever blamed manipulation for my own mistakes and failures. It is a loser attitude and prevents growth as a trader or investor. Learning from mistakes is what makes you better in anything.
It’s absolutely pathetic how much Hoffman and his ilk use this excuse to cover up their failed forecasts and pumping of the metals at much higher prices. This whining about manipulation never made anyone one single cent. Do you ever hear money managers or fund managers blame their problems on manipulation? Does anyone actually believe a cartel is naked shorting mining stocks? “Honey I have to get to work early today, we really need to knock down the mining stocks.”
An interview with Dennis Miller of Miller’s Money Forever, by Jeff Clark
We get a lot of questions from readers about what role precious metals should play in retirement planning, so we figured, who better to ask than our own Dennis Miller, editor of Miller’s Money Forever. In the following interview, Dennis talks about how to categorize investments, why he likes Roth conversions, the greatest danger many seniors will face from Obamacare—and how he recommends protecting against it.
Jeff Clark: You’re our in-house retirement expert, Dennis, so let me ask… what place do precious metals have in your retirement portfolio?
Dennis Miller: A critical place. But first, let me address how we categorize our investments…
In our Miller’s Money portfolio, we start with what we refer to as “core holdings.” These are the assets you want to own should our worst fears come true. Many investors are concerned about government debt levels and money printing, and your core holdings are designed to help you weather any coming storm, whether it be inflation, economic collapse, or something unforeseen.
Think of your core holdings as insurance. These are assets you want to hold on to and not trade—we’ll only “cash in” if a worst-case scenario comes to pass. And as you know, gold and silver are ideal for this type of insurance. They’re recognized throughout the world and, if held in physical form, have the added benefit of being outside the financial system.
Jeff: No argument here. How much do you recommend in core holdings?
Dennis: We recommend core holdings comprise at least 10% of a portfolio. For those nearing retirement, I would recommend you be positioned at 10% by the time you stop working full time.
We trade time for money in our younger years—but retirement is the opposite; we trade money for time. Our focus changes from working and accumulating wealth to retirement and maintaining that wealth and making it last so we can enjoy the rest of our life.
Jeff: What investments are in your core holdings?
Dennis: I start with the basics. Should we see high inflation or even hyperinflation, you will need immediate access to the type of assets that will still function when no one wants paper money. I start with junk silver because it is a smaller denomination and more practical on a day-to-day basis. Silver bullion coins are also good for this purpose. You may not want to cash in a one-ounce gold coin for groceries, though we include gold, of course.
It can also include farm land, foreign currencies, and other investments; however, metals should be a significant part. Their portability and worldwide recognition provide advantages few other assets can.
Jeff: I know many gas stations in the 1970s accepted junk silver and silver bullion coins.
Dennis: That’s right.
Jeff: What’s the other category?
Dennis: Our second group of investments is for the explicit purpose of selling for a profit. This can be ETFs, stocks, stock funds, etc., that you believe will appreciate. Those should be evaluated just like any other investment opportunity.
Jeff: Is gold and silver in this group?
Dennis: Yes, I include precious metals in this “for-profit” group, too, because they offer profit opportunities. You may find times where they’ve had a big run-up and you want to sell some of your position to take a profit. I cashed out some gold investments with some nice gains in the past and plan to do so again—but these are not my core holdings, they’re in my “investment” category.
This is why when people ask what percentage of their portfolio should be in precious metals, I feel it is the wrong question. It really should be how much of your portfolio is in core holdings and how much is invested for the purpose of selling down the road at a profit. Mentally, and sometimes physically, you need to keep them separate.
Jeff: That makes sense. Are both of these groups in your retirement portfolio, or how do you divide the assets between a taxable brokerage account and a non-taxable one?
Dennis: There are a couple parts to that answer. First, by the time most people retire, they generally have some assets that are tax deferred, such as a 401(k) or IRA, and others that are taxable. Our strategy is to use the taxable accounts and let the tax deferred accounts grow. Then we draw from these accounts as sparingly as possible.
However, tax deferred should not be confused with non-taxable. Somewhere in the process, buying out your business partner (i.e., the government) and moving your money into a Roth IRA makes a lot of sense.
This is one area where my retirement experience comes into play. There are lot of retirement experts that recommend keeping your money in your 401(k) and traditional IRA as long as possible, and they’ll run the numbers to make their point. However, they don’t account for the likelihood that our tax structure will change, a rather shortsighted and risky assumption. If taxes rise as I suspect, their models become much less accurate and you’ll end up with much less money to spend.
When you move money from a traditional IRA into a Roth, the distribution is taxable. However, you do not have to move all of it in a single year. By converting a little each year, you keep your overall taxes down because you’re not moving up to the higher brackets so quickly.
Jeff: Do you have a strategy for which investments to convert first?
Dennis: Good question, and yes, I would move the holdings that are temporarily in a downturn first, because when you take them out of the tax deferred account, they’re taxed on the current market value. With metals and particularly metals stocks being in a holding pattern, this is an important consideration—if you wait a couple years until they appreciate more, you’ll pay more not just in taxable gains but probably a higher tax rate on those gains.
Once your assets are in a Roth, it is truly a non-taxable account, with the added benefit of not having to take out a required minimum distribution as you get older. Personally, I own a lot of my gold stocks in our Roth accounts, patiently waiting for that market to turn around, as we know it will. If I were making the transition from a 401(k) or traditional IRA to a Roth, I would move most of my metals sooner rather than later. Then when the turnaround comes, our gains are truly tax-free.
Jeff: I like your plan, Dennis. But do you worry about the government confiscating our retirement accounts, or a portion of them?
Dennis: We’ve all read the reports concerning those issues. The most frequent angle is not confiscation in the traditional sense, but the idea that they’ll force us to keep a certain percentage of our retirement portfolio in “safe” government Treasuries—for our own good, of course.
Can you imagine what would happen if they tried that—even a mere 10%? Think of the sell orders that would hit the stock market from investors liquidating equity positions to replace them with government IOUs. It would clobber the stock market. And a lot of folks with Roth IRAs would just take their money out as opposed to holding worthless government paper.
Jeff: What about international storage of precious metals in a retirement account?
Dennis: I am now a strong advocate of making sure you have plenty of money offshore. There are some aspects of Obamacare, for example, that the public is unaware of and could be detrimental to not just investors, but to anyone who has a pressing medical need.
Jeff: How so?
Dennis: At our recent Casey Summit, one of the speakers was Dr. Elizabeth Lee Vliet, an MD and health reform activist. Dr. Vliet agrees on what many have said about surviving the new healthcare law: she believes seniors will be hit the hardest and in many cases denied care.
A recent article in Money Morning quoted Betsy McCaughey, former lieutenant governor of New York and author of the recent book, Beating Obamacare—Your Handbook for Surviving the New Health Care Law. She says, “Hip and knee replacements and cataract surgery will be especially hard to get from Medicare in the months ahead.” She warns seniors to get those types of procedures done now before Obamacare goes into effect January 1.
That may not even be the worst part. There are concerns that once care is denied by the government, absent a couple very minor exceptions, the doctor won’t be allowed to provide that service, even if you can pay for it out of your own pocket.
While the full impact of the Affordable Care Act is not yet known, I think these are valid concerns. I understand that these are strong statements, and some people claim they’re not true, but by the time we find out, it might be too late.
Jeff: If it is true, how could it impact one’s retirement planning?
Dennis: It would mean that a lot of Americans would have to go offshore for treatment that’s been denied or delayed. Which means you would not only need the money to do so, but would have to have some of it already outside the country.
Jeff: I think I know why…
Dennis: A day may be coming where it could be very difficult to get funds transferred from your domestic bank account to a medical facility in another country. At the least, there will be severe restrictions in doing so, but I think the more likely scenario is some form of capital controls, where it will be illegal to transfer any funds outside the US.
Jeff: I agree.
Dennis: And what if you don’t have any assets stored outside your country? You’re stuck—you may not be able to get that procedure.
While we don’t know for sure how it will shake out yet, imagine this possible scenario: you need a medical procedure to improve your quality of life or maybe even extend your life, but it’s been denied by Obamacare. You have the funds to pay for it, but the doctor is not authorized to perform it. You find a state-of-the-art facility in a nearby country that will perform the procedure for you, with no waiting list and probably at a lower cost—but when you attempt to wire funds to the medical facility, it’s denied by the US government.
Pity the poor person who might need a hip replacement, sitting in the waiting room of an offshore hospital and not being able to get the treatment because he can’t get money out of the country.
Jeff: Very scary, Dennis.
Dennis: The bottom line is that while our fears may not come to pass, we still need to take steps to ensure against these possibilities. There are lots of good reasons why prudent investors should hold some of their assets offshore—the fact that we’re even discussing the possibility of currency controls and how they relate to healthcare just reinforces the point that it’s not something to put off.
This is why I believe placing some assets offshore could be the most important healthcare decision a person can make. We all believe in internationalizing our assets, and now I feel an even greater sense of urgency.
And this is where precious metals make perfect sense. You can easily and cheaply store gold and silver internationally and sell them in an emergency if you need to. That’s exactly what I’m doing.
Offshore precious metals storage isn’t a benign investment, either. My wife and I recently went to Panama and spent some time with the president of the world-class Johns Hopkins facility there. If I needed a procedure done outside the US, I wouldn’t hesitate to use this facility. But think about this: the currency in Panama is US dollars, so if our dollar experiences high inflation, the cost of care in Panama will rise. But by having metals stored offshore, we can mitigate that loss in buying power.
One of the keys to enjoying retirement is good health—who wants to spend the last decade of their life popping pills while in constant pain, when you have the ability to live a much higher quality of life? I don’t.
Jeff: Good point. More capital controls are almost certainly coming.
Dennis: I spoke with Nick Giambruno of International Man, who went to Cyprus with Doug Casey and investigated what happened when they instituted currency controls earlier this year. Basically, on a Friday night, after all the banks were closed, they shut down the entire banking system and had currency-sniffing dogs at every point of entry. No money was allowed to be taken out of the country.
And you probably heard that the International Monetary Fund recommended just two weeks ago that a “capital levy” be placed on citizens with a “positive net wealth.” The part in the article that really bothered me was this: “Democrats and Republicans … are entertaining closed-door schemes designed to, once again, relieve Americans of their property.”
Jeff: As a retirement specialist, what do you recommend?
Dennis: It is better to be safe than sorry. We don’t know for certain that currency controls are coming, but as a retirement planner, I have to ask your readers, will you be prepared if they do?
Keep in mind that offshore health care is generally less expensive than in the US. The quality in many places is every bit as good, and wait times will almost certainly be less than what will soon be the reality here. Medical tourism is a booming industry for these very reasons.
The bottom line for me is that internationalization of a portion of our assets is vital. And like I said, precious metals are the best place to start. Offshore storage has the added advantage of inflation protection—should our dollar become worthless, our gold and silver holdings will appreciate accordingly. I think this is now a crucial part of retirement planning.
I can tell you that my wife and I have a good part of our nest egg offshore. In fact, I used to view the offshore choice as a risky one—now I see not having assets offshore as a much greater risk. I encourage all who will listen to diversify internationally—and soon.
Jeff: I appreciate your candor, Dennis. I’ve been able to spend some time getting to know you since you started work at Casey Research, and I know you are very sincere and only want to help your readers.
Dennis: Thank you, Jeff. If I can help one person avoid a catastrophe, it will be worth it. If something drastic happens like what occurred in Cyprus, I suppose some might thank me for warning them. I obviously would prefer the situation not deteriorate to that level, but I think we would all sleep better knowing we’re prepared for the worst-case scenario.
Jeff: Do you cover things like this in Miller’s Money Forever?
Dennis: Our mission is to show people how to build their nest egg and then make it last so they can sleep well at night and not have to worry about money. Our portfolio is doing very well—but a retirement portfolio is much more than just owning a few stocks that are performing. Our analysts have been doing what Doug Casey recommends: looking where others are not. We have found some safe, solid income builders that will perform regardless of the direction the market takes. In our last analyst meeting, we identified some candidates for next month’s issue, too. When you combine strong yield with safety, it’s pretty easy to get excited about it.
As the politicos in Washington continue to move the deck chairs around on the Titanic, ignoring the monster iceberg in plain sight, I’m keeping my eyes wide open. Here are a few tidbits from a recently published Social Security Administration factsheet:
An estimated 161 million workers—94% of all workers—are covered under Social Security.
In 1940, the life expectancy of a 65-year-old was almost 14 years; today it is more than 20 years.
By 2033, the number of older Americans will increase from 45.1 million today to 77.4 million.
There are currently 2.8 workers for each Social Security beneficiary. By 2033, there will be 2.1 workers for each beneficiary.
We can forget about the trust fund when the cupboard is bare. Right now, today, the government collects Social Security taxes from the work force. From those receipts, it pays out Social Security benefits. In 2010 the Congressional Budget Office announced, “[T]he system will pay out more in benefits than it receives in payroll taxes, an important threshold it was not expected to cross until at least 2016.” Baby boomers will retire at a rate of 10,000 per day for the next 19 years, and the gap between Social Security tax revenue and expenditures will grow with each passing day.
Social Security is just the tip of the iceberg. In 2011 USA Today pegged the US government’s unfunded liabilities at $61.6 trillion. That’s $528,000 per household. I doubt most Americans, regardless of their age, have a spare half million to bail out the government. All the wealth of the Warren Buffetts and Oprah Winfreys of our country wouldn’t even make a dent.
The rest of the world knows what’s going on. Historically, other countries have lent us the money to help pay our bills. Keeping our economy in spending mode helped them sell exports to the US and create jobs. That lending is slowing down radically as the world grows concerned about the US government’s ability to pay its bills.
In January, CNS news gave us a pretty shabby report card:
“[T]he Federal Reserve revealed that its holdings of U.S. government debt had increased to an all-time record of $1,696,691,000,000 as of the close of business on Wednesday. The Fed’s holdings of U.S. government debt have increased by 257 percent since … Jan. 20, 2009, and the Fed is currently the single largest holder of U.S. government debt.”
If other countries won’t lend us money and our tax revenue is not enough to cover expenses, the Federal Reserve will just keep creating money without much more than a simple accounting entry.
What comes next? You have all heard pundits predict a crash or talk about unsustainable debt. What does that really mean? First, folks depending on the government for income or benefits will take a huge hit. Many Generation Xers (wisely) assume Social Security won’t even be around when they reach retirement age. Any help they get from the government will be icing on the cake. They know the system is unsustainable.
And while the Federal Reserve continues to create money out of thin air, Social Security gets clobbered, and expenses will continue to rise—rapidly. I asked Terry Coxon, a senior economist at Casey Research, what will happen when people catch on. He explained:
“When price inflation starts to become obvious, more and more people will behave as though they are playing a game of Old Maid. They’ll try to get rid of depreciating dollars. And that effort—to get rid of dollars before they lose even more value—will make inflation even worse. The players who diversified out of dollars early will win the game.”
Seniors and savers are particularly vulnerable during periods of high inflation. They worked hard, saved their money, and need it to last. But if their nest eggs are denominated in a rapidly inflating currency, their buying power could vanish virtually overnight. And as their nest eggs shrink, Social Security, food stamps, and government benefits will buy fewer goods and services to boot.
This is no accident, folks. Governments hopelessly in debt create inflation so they can pay their obligations with depreciated currency units.
The big squeeze is coming. It will trap us between rising costs and withering incomes. Carter-era inflation is the closest most Americans have come to what lies ahead. Let me refresh your memory.
It wasn’t pretty. Imagine you bought a $100,000, five-year certificate of deposit on January 1, 1977. The interest rate for the CD was 6%, paid annually, and you were in the 25% income tax bracket. At the end of five years, assuming you reinvested your after-tax interest income, you would have received $24,600 plus your initial $100,000 investment. Would you have been any better off? No.
Your net return adjusted for inflation would have been $74,100. That’s a 25.9% decline in purchasing power. Inflation would have reduced your net worth by the cost of a well-equipped, mid-size automobile.
Inflation can devastate our standard of living. We know prices are going up. Money doesn’t seem to go as far, but it’s tough to calculate the decline. Still, we know we need to do something.
How can we protect ourselves? Holding assets that historically retain their value is a good start. Gold and precious metals are a prime example. Those who specialize in precious metals like to point out that gold is not getting more expensive; our currency is just losing its value.
Farmland and foreign currencies in countries that are not papering over their debt are also viable sources of protection.
Money Forever subscribers know that we subject our portfolio investments to a Five-Point Balancing Test. Number 4 is: “Does it protect against inflation?” In part, that means investing in companies with a large international base. There are many foreign companies that trade in the US market, and we keep our eyes peeled for the best among them.
When a currency experiences high inflation, no one wants it. In our lifetimes the currencies of Argentina, Brazil, Mexico, and Zimbabwe have become totally worthless. Those who followed Terry’s advice and got out of those currencies early kept a much larger portion of their wealth.
When ultra-high inflation arrives, desperate governments will do anything to protect themselves. Instituting currency controls that make it difficult, if not impossible, for their citizens to dump a quickly depreciating currency is one of their favorite moves. By then it may be too late to protect ourselves.
The time to discard your Old Maid card and pick up inflation protection opportunities is now. When it comes to protecting your life savings, it is far better to take precautionary steps a year early than one day too late. If you’d like access to inflation-protecting investments specifically curated for seniors and savers, click here to become a Money Forever subscriber today.
In his weekly market review, Frank Holmes of the USFunds.com nicely summarizes for gold investors this week’s strengths, weaknesses, opportunities and threats in the gold market. The price of the yellow metal went lower after two consecutive weeks of gains. Gold closed the week at $1,316.20 which is $34.6 per ounce higher (2.5%). The NYSE Arca Gold Miners Index went 8.15% higher. This was the gold investors review of past week.
Gold Market Strengths
Sell-side analysts and traders’ commentaries have highlighted a noticeable pickup in generalist and fundamental accounts buying large cap gold names in recent days. According to Macquarie, the move appears to be motivated by the fact that a lot of the bad news is already out there, and it’s likely for companies to surprise to the upside rather than perform negatively.
Barrick Gold reported earnings this week showing a noticeable improvement on the bottom line, with earnings per share of $0.58 versus the analysts’ consensus of $0.51. Both gold and copper operations beat their operational targets, but the most significant improvement came on the cost side, where Barrick reported an 85 percent completion of its corporate downsizing program.
Gold Market Weaknesses
A recent International Monetary Fund (IMF) report shows that the gold holdings in Russia’s Central Bank fell for the first time since August 2012, decreasing 0.4 tonnes in September. However, Russia has added more than 50 tonnes to its gold reserves this year alone and about 600 tonnes since 2007. It is expected that gold purchases by central banks will decrease to 350 tonnes this year from 544 tonnes in 2012. Despite the decrease, analysts agree that central banks will remain substantial net buyers of gold in years to come.
The spot gold price on the Shanghai Gold Exchange dropped below the London price this week, signaling that demand may be waning in the world’s second-largest gold market. Bloomberg reports that gold was selling at a 54.14 percent discount to the London price on Wednesday on very low volume in the Shanghai Gold Exchange.
Gold Market Opportunities
Jeffrey Currie, an analyst with Goldman Sachs, suggested just under a month ago that gold miners should hedge their output and lock current prices. In his opinion, gold would be the next big short trade. Other analysts, including Tom Kendall of Credit Suisse, also followed with negative commentary on the gold market, adding their names to the short-selling list. It’s interesting that this group dares to recommend that investors do the exact opposite of what asset allocation studies show: adding gold and gold stocks to a portfolio can add alpha without a significant increase to risk. Not only are these analysts ignoring proven academic research, they seem to be ignoring reality. BCA Research published a report at the end of last week highlighting that gold prices have failed to rise in recent months in spite of a weak dollar, adding that a catch-up is likely. BCA argues that gold is oversold on a technical basis, as seen in the following chart, which in itself could be enough to drive a gold rally above the $1,500 per ounce threshold.
Mineweb contributor Dorothy Kosich reports that in a rare show of bipartisanship, Congressional Democrats and Republicans introduced a comprehensive bill aimed at fostering and facilitating the domestic growth of critical minerals to prevent future supply shocks. This highlights the urgent need to facilitate the development of American mineral deposits. The ultimate purpose of the bill is to ensure that officials are required to set, and adhere to, timelines and schedules for completion of reviews as well as for inspection and enforcement activities in the mining sector. According to Hal Quinn, CEO of the National Mining Association, the slow and inefficient permitting system in the U.S. is the largest impediment to unlocking the full value of American minerals, adding that the U.S. relies on foreign countries such as China to supply many of these critical minerals.
This week, RBC Capital Markets published the fifth part of its study on capital and operating cost expectations in the gold market. In the report, RBC underlines that capital costs have stabilized while all-in sustaining costs could fall by $150 per ounce in 2014 alone. RBC argues that since prices have fallen by a larger extent than all-in costs, this should discredit gold producers’ efforts to maintain or increase their returns on capital. After rising by 60 percent over the past three years, it appears 2014 may actually be a good time to build projects given the availability of engineering and equipment. Those companies that learned the importance of protecting balance sheet integrity and returns on capital will be the biggest beneficiaries of this new stage in capital costs, at the expense of those who were growing for the sake of growing.
Gold Market Threats
Alan Greenspan published his new book “The Map and the Territory” in which he warns, among other things, that the “Spectacle of American central bankers trying to press the inflation rate higher in the aftermath of the 2008 crisis is virtually without precedent.” He follows up by commenting that this type of policy could easily trigger double-digit inflation. In light of this, David Rosenberg of Gluskin Sheff proposed a new mantra for the Federal Reserve: “Bring on inflation!” However, Rosenberg followed up by criticizing the Fed’s optimistic sentiment that inflation is good for economic growth, in which there is no widely accepted evidence or studies to support the assertion. For those who still believe in the Fed’s optimism after Wednesday’s meeting, consider Rosenberg’s list of market facts that show financial asset overheating:
valuations are no longer cheap, no matter the measure;
80 percent of S&P stocks are trading above their 50 day moving average;
mutual fund and ETF inflows are at dot-com bubble levels;
NYSE margin debt just hit an all-time high;
portfolio managers are sitting on thin, 3.5 percent cash ratios;
the VIX is sitting at 13 points, showcasing how few feel the need to buy downside protection.
The list is simply too long to continue, but the point comes across easily.
David Zervos of Jefferies wrote quite an entertaining and ironic takedown on Janet Yellen’s nomination to the Federal Reserve Chairmanship. According to Zervos, the most exciting part about having Yellen in the seat is her inherent mistrust of market prices and her belief in irrational behavior processes. Zervos adds that there likely will be a day in 2016 when unemployment is still well above Yellen’s estimate and the headline inflation rate is above 4 percent, in which the Fed’s models will still show a big output gap and lots of slack. This way, Yellen could continue talking down inflation risks. In fact, Zervos argues that Yellen’s obsession with filling the output gap makes for a very real chance of policy mistakes down the road, similar to those resulting from an obsession with Keynesian mis-measuring of the output gap during the 1970s.
Coincidence or not, the video is not accessible in the US (some sources report it is blocked on Youtube). That is why we are providing the transcript in this article of the most important elements of the interview.
Gold is not paying any dividend or interest so what is the usefulness as an investment?
Most people that really understand gold do not want to get it out of the vault in return for dividends or interests. The same would apply to physical dollars or euros in a vault; those currencies do not pay dividends. In order to get a dividend or interest, one should put its wealth at risk of not getting it back.
Is gold a commodity or a monetary asset?
There is a lot of confusion about precious metals being a commodity or a monetary asset. Gold, silver and platinum have been money for over 3,000 years. The financial statement of Western nations under their balance sheet shows monetary assets as a subcategory. That subcategory has only two items: foreign currency reserves and gold. There has not been any single fiat currency throughout history that has not ended in a hyperinflation and a complete collapse. Today, we have a different set of circumstances in that we have a global fiat currency system. It is starting to become exponential in terms of amounts of currency in circulation and amounts of new currency created. The ratio has always been in tact between total debt and the gold price.
Gold’s outlook: $10,000 gold or the inflation adjusted $720 per ounce?
If the gold price falls below the production cost ($1,200), gold exploration is done and demand totally overwhelms supply. Besides, as the gold price rises, some commodity based demand may drop but monetary demand goes up. In the new Shanghai futures exchange, the amount of gold deliveries per month is almost equivalent to total global mine supply. So it is the monetary aspect that is overwhelming; it is not the commodity aspect that makes the difference.
From a point of view of inflation, the accurate way to look at it is the wealth preservation aspects of gold. If we look at how many ounces of gold it took to buy a car in 1971, when it was depegged from the dollar, it was 66 ounces. Today it is ten. A house with 703 ounces 228. The Dow 25 today is 8. The only thing that held its value is oil: you would 12 barrels of oil for one ounce of gold in 1971, you get 12 barrels of oil today, even if the price has gone from 12 to 107. That is the true measure of wealth preserving aspects of gold.
Does the world need currencies linked to commodities?
As humans, we have not come up with the perfect system of money. In all religions, there is consistency that gold and silver are the only forms of honest money. The US Constitution says the same thing. It had its flaws but right now the problem is the ability of the central banks to print unlimited quantities of currency. In such a situation, they inevitable overprint. Once you get to the exponential curve, you get into hyperinflation. It always happened this way in the past, I believe it is where are going in the future.
A rather interesting development occurred on Friday, and one that I wasn’t really expecting. The dollar sliced right through its intermediate trend line on its first attempt. I thought for sure we would see some kind of pullback from that trend line before a break. In my opinion this signals that there are a lot of people caught on the wrong side of this market.
The ferocity of the first five days out of this yearly cycle low has me wondering if the megaphone pattern isn’t still in play and we’re about to see a test of the upper trend line area over the next 1-2 months.
If we take a look at the euro chart we can see that the daily euro cycle is only on day 12. That implies it still has another 8-13 days before finding its next daily cycle bottom. The dollar should have those same 8-13 days to rally before this daily cycle tops.
Originally I thought we might see a test of the 200 day moving average over the next 4-6 weeks. But the explosive nature of the first five days, and taking into account this daily cycle still has another 8-13 days to go before topping, we could see a test and break of the 200 day moving average over the next 1-2 weeks. I think we would then have at least one more daily cycle higher before the intermediate cycle tops. Two daily cycles of this kind of behavior could definitely send the dollar back up to test the upper megaphone trend line over the next 2 months.
I’m starting to get the feeling that this rally out of the yearly cycle low is going to be a lot more powerful then almost anyone is expecting, including me. In order to turn this back down it may require a fundamental change in the market such as an increase in QE. I don’t believe that is politically feasible at the moment unless the stock market really starts to tank in front of the Christmas holidays.
By Eric Angeli, Investment Executive, Sprott Global Resource Investments
Precious metals miners are the most volatile stocks on earth. They’re so volatile that investors often forget that underneath those whipsawing stock prices lie real businesses. But even many of those who consider themselves old pros in natural-resource investing tend to get one thing wrong. Eric Angeli, an investment executive with Sprott Global Resources and protégé of legendary resource broker Rick Rule, explains how not to fall into the “top-down” trap…
If the past two years have taught us anything, it’s that trying to predict short-term moves in the gold price can be a road to ruin. Parsing the umpteen countervailing forces that combine to set the price of gold is tough. And it’s even tougher when you consider that oftentimes, market-moving news, such as a central bank trade, isn’t reported until after the fact.
In my years spent evaluating natural resource companies as a broker and analyst, I’ve found that there are two ways to successfully invest in precious metals equities. Doing it right can bolster the strength of your portfolio, not to mention your own confidence in your holdings.
Method #1—Top-Down Approach
You may have heard this method referred to as “Directional Investing.”
A directional investor decides that gold prices will increase in the long run. That’s the starting point of his thesis. He then proceeds to find the companies that will be successful if his prediction comes true. He looks for companies with leverage to the gold price.
If an investor can get the timing right, this can be a lucrative strategy. There is an obvious caveat, though: for this strategy to work, precious metals prices must rise.
In my role as a broker, I deal with both companies and investors all day long. I can tell you that most speculators involved with gold equities use this top-down approach.
That’s why the number one question I’ve heard over the last three months has been, “Why isn’t gold moving up?” To directional investors, the answer to this question is paramount.
This mindset leads to the herd mentality and, frankly, gives us our best bull markets.
I prefer method #2.
Method #2—Fundamental Approach
Fundamental investors ignore prognostications about where gold prices might move next. We eliminate gold price movements as the crux of our investment decisions, which removes a lot of the guesswork from our portfolios. For a fundamental investor, gold prices are still a piece of the puzzle, but they are not the only driver.
Fundamental investors want to know: which company has a promising deposit in a relatively safe jurisdiction? Which has a tight share structure? This “bottom-up” method, however, does require a lot more homework.
Fundamental investing is all about identifying the difference between a stock’s intrinsic value and the price at which it is trading at in the open market.
While I do believe in higher gold prices eventually—and inevitably—I know that short-term movements in the price of gold are beyond my control. I instead prefer to position my clients for success in the current environment. Instead of focusing on when the gold price will move—which we can never know—we focus on picking quality companies.
Why Hasn’t the Top-Down Approach Been Working?
You might say: because the price of gold hasn’t gone up! That’s true, but there’s more to the story.
Until quite recently, gold has continued to rise, though not at the same clip we enjoyed after 2008. The problem is that miners’ operating costs rose faster than the price of gold. Investors didn’t expect that.
Nor did they factor in other cost increases. Sure, the value of a deposit rises every day the gold price rises. But did oil prices jump at the same time, making trucking the goods out more expensive? Did your laborers start demanding high wages? Did energy costs increase? Did the federal government demand a bigger slice of the pie?
Top-down investors can stop trying to figure out why they haven’t been correct over the last several years. They were correct on the gold price—but they ignored underlying cost factors.
The Top 7 Things to Look For
This is where the Fundamental Approach shines. All of your investments should fulfill a few key checkpoints:
Look for companies where management owns a large percentage of the stock. A vested interest at a higher share price is even better.
Look for a tight capital structure. A bloated outstanding share count is a red flag. As is a history of management carelessly diluting away shareholder interest by issuing new stock.
Look for a thrifty management team. A good company should spend their capital on projects, not swanky new offices.
The company’s mine should remain profitable even if gold drops to $1,000 per ounce. It could happen.
Look for companies with enough cash to finance their current drill program, expansion plans, feasibility study, or construction phase. This year in particular, companies are having a very difficult time finding financing. Those who have adequate cash are diamonds in the rough.
Know which countries support mining. A tier-one asset under the control of a wildly corrupt government isn’t really a tier-one asset. You don’t want to get caught in the middle of a government dangling final permits above managements’ heads.
Know the geological potential of the exploration area. A four-million-ounce gold deposit is swell, but what if your company discovers not just one gold mine, but an entire new gold district? How will you factor in that upside?
Don’t Let Fear Make You Miss Out
Mining companies have a fiduciary responsibility to make their shareholders money, so they can’t help but paint a rosy picture for potential investors. That’s why you need to have a disciplined and impartial eye. Most companies are not worthy of your hard-earned capital.
Having an advisor you trust, or access to technical expertise, is crucial. Ideally you should have both. The most educated investor always has the edge.
I’ll conclude with this: the markets have not been kind to the miners recently. But selling a stock just because it dropped in value is an emotional decision. Seeing red on your computer screen is painful, but it is not relevant. What is relevant is what you do with that capital going forward. Don’t let emotion cloud your judgment.
On the other hand, if you’re waiting for the gold price to move higher before you sell, then you’re a speculator masquerading as an investor, and you may as well buy a ticket to Vegas.
My boss and mentor, Rick Rule, recently said, “Bear markets are the authors of bull markets.” When these markets do start moving, if you’re not positioned with the highest-quality tier-one companies, you could miss out on one of the biggest bull market moves of your investing life.
Eric Angeli is an investment executive at Sprott Global Resources. You can reach him at email@example.com by calling1.800.477.7853.
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