Fall 2010

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May 3, 2010

Gold reached a five-month high of $1180, closing April with 6% gains, its biggest one-month rise since last November. U.S. stocks suffered their worst week since January, on news of a criminal probe into investment banking giant Goldman Sachs and the increasing costs of the bailout to Greece. The bailout is estimated to top $146 billion, but there are at least three other deep-debt euro-zone nations (Portugal, Ireland and Spain). With gold soaring in euro terms, and in dollar terms, gold is now superior to these and other paper currencies. This overcomes the common objection that gold “doesn’t offer interest income.” Growth of 20% per year, in an asset which is not dependent on government backing, has been superior to the small income and great risk inherent in these paper currencies for ten long years.

Last Friday, seven more U.S. banks failed. As of April 30, a total of 64 banks failed in the first four months of 2010 – an annual rate of 192. Last year, there were 140 bank failures, up from 24 in 2008, three in 2007, and none in 2005 or 2006.

May 10, 2010

The stock market suddenly collapsed by nearly 1000 Dow points Thursday, followed by a partial recovery and then another collapse on Friday. Nobody knows, with any authority, exactly what happened. The massive $9.5 billion iShares Russell 1000 Value Index Fund went from $59 to around 8 cents quickly.

Gold re-emerged as a truly safe haven last week. During the violent Greek riots and stock market collapse last Thursday, gold gained $20 that day and $20 the next day. Major coin dealers told of investors lined up in European coin and bullion stores trading their depreciating euros gold coins, As a result, $20 Liberties and $10 Indians are becoming increasingly tough to buy abroad and here and prices are trending higher. These were the two denominations sent to Europe in the early 20th Century for balance of trade payments.

The Wall Street Journal featured an editorial, “The Gold Standard: The Case for Another Look.” It pointed to the success of the gold standard for nearly 100 years, from the English Parliament’s Coinage Act of 1816 to the outbreak of World War I in 1914. They said that gold could once again impose discipline on governments and stop manipulation of the dollar for political reasons. Gold might not be welcome in Washington, but it is a basic platform of the “Tea Party” movement, which might begin to elect a core of gold-standard advocates in the next Congress. The emergence of gold as a major investment alternative was revealed in a USA Today report. A page-1 chart showed that precious metals are now one of the top four candidates for personal portfolio protection for 1,144 surveyed independent investment advisors. The May 17 edition of Time includes an article, titled “Gold Fated,” which provides a balanced view of gold. Here are some passages: “Gold is beautiful, pliable, strong. The Stone Age and Iron Age came and went, but gold is forever.”…. “A government facing a crisis could print banknotes or issue bonds a lot faster than it could find more gold.” … “Abstract money is an awesome thing – as long as people believe in it. But suppose that belief were to collapse one day and all the customers of the bank tried to empty their accounts at once. They would discover that the money wasn’t there.” …. “Gold is a badge of mistrust in the modern political economy.”

May 17, 2010

Gold hit a record high last week, closing above $1240. Gold is especially strong in euro terms (rising to 1000 from only 800 euros in March.), due in part to the inflationary now estimated to be trillion-dollar bailout of the weakest euro-zone nations. Reports from Europe reveal that demand for gold and gold coins is soaring, from small coin shops to the largest banks, such as UBS, one of the largest bullion banks in the world. ETF Securities, a London-based fund manager, had an inflow of $490 million into its gold-backed funds in just the last two weeks. The firm’s head of research said that all that demand came from European investors. Britain’s Mervyn King, Governor of the Bank of England, said that the U.S. faces the same problems as Greece. In addition, some of our 50 states appear to be in worse shape than Greece and need to be rescued first, before we send $50 billion over to rescue Greece, Spain, Hungary and Portugal. For instance, California announced a $19 billion shortfall last week, and will cut salaries and essential services.

White House budget director Peter Orszag told Reuters that the U.S. must tackle its deficits quickly “to avoid the kind of debt crisis that hit Greece. (There you have it: The first official White House comparison of our Grand Republic to Greece!) The New York Times made the same comparison in an article titled, “In Greek Crisis, Some See Parallels to U.S. Debt Woes.” The Fed cannot raise rates soon thereby punishing traditional bank savings accounts. It won’t be long before investors start moving some of their $3 trillion in at-risk bank CDs and money market funds at 1% or less into alternative investments. One look at the long 11-year comparison of stock market returns and precious metals returns will convince many of those investors that diversifying with some gold like the World Gold Council recommends is wise even if your stock broker disagrees. After all, he’s typically been “0” for the 21st century on gold.

May 24, 2010

Gold corrected to $1,177, down 4.2% for the week. But there were far more dramatic declines in the stock market and the platinum group metals. Platinum is a smaller market, so it can be more volatile.

The new quarterly number of Problem Banks was released by the FDIC. The list reached 775 as of March 31, 2010, or one in 10 of all banks and more than triple the 252 “problem banks” at the start of 2009. Having all your deposits in just one bank is like playing “Russian Roulette” with your savings.

Scott Cendrowski posted an article on CNNMoney.com “Will Gold Be $800 in One year or Two?” It is typical of articles by the anti-gold crowd (or pro-Wall Street stock boosters who didn’t like gold 11 years ago at $252 per ounce) trying to dissuade investors from considering gold. This article listed common criticisms of gold:

Claim #1: “Runaway prices will return to long-term averages.” The main argument is that gold has risen rapidly and must rapidly return toward its historical mean, like in 1980. This comparison of today’s gold price to 1980 is common and misleading. Why compare gold’s price to its one-day spiky peak in 1980? Compared to 1985, gold is up 300%. Compared to 1960, gold is up 3,263%, far more than the stock market. Picking January 21, 1980 out of a hat holds gold to an impossibly high standard. Stocks are also well below their all-time high at Dow 14,280, but so what? Gold is a single investment, based on a real market, whereby the stock market indexes get a "mulligan" whenever big-name stocks (like Enron or Citigroup) fail or fall sharply. The indexes simply shift to another stock holding in the index. You can't do that with gold. More importantly, the current gold bull market has not been a “runaway” affair. This bull market has been totally unlike 1980. Gold has risen gradually for the last 10 years – in a dance step that resembles "two steps up, one step back." That kind of technical “base-building” is much healthier than the 1979-80 spike in gold.

Claim #2: “Cratering jewelry demand is down 8%….” An 8% decline was hardly a “cratering”. But jewelry demand in some key markets like India rose 698% in the first quarter of 2010 vs. 2009, according to a new report released by the World Gold Council. In India, gold jewelry accounts for 75% of gold demand. Meanwhile, total consumer demand for gold in China rose 22% last quarter. If you combine those two demand levels for just those two countries, that’s about half of the annual new gold mine production. Jewelry demand is very "price sensitive" in Asian markets, but that only serves to put a floor under gold. Whenever prices decline marginally, jewelry demand rises, in the belief that "we may never see prices this low again."

Claim #3: “Miners are working overtime. The supply of mined gold around the world jumped 7% last year to 2,572 tons, the second largest increase in history.” New gold mines have turned out less gold each year from 2000 to 2008, but 2009 saw a small increase. That was the exception to the general rule. “Miners working overtime” can’t create much new gold. The grades of gold are thin (0.1 ounces per ton) today, vs. about 0.5 to 1.0 ounces per ton a generation ago. You can’t increase gold supplies nearly as fast as paper money supplies. This article doesn’t mention the fact that South Africa’s gold mines are nearly depleted, producing less gold each year. Gold production in South Africa, once the world’s #1 producer was down 12% from the first quarter of 2009. According to the latest GFMS survey, global mine production is declining due to very low ore grades.

Claim #4: “New mines in China could boost gold mining by 5% a year through 2014.” This is not true. China is now the #1 gold producer, but its production can’t grow as fast in future years as it has grown recently, since China has been front-loading the easy “low-hanging fruit” in their gold fields. Chinese demand has already absorbed all Chinese output, and more. Chinese gold demand has grown 13% per year. At current rates of production, China would exhaust its known gold mine reserves in 20 years. In addition, China's nominally-Communist leaders are now encouraging private gold ownership, unlike previous years, when they did not want Chinese citizens to have that personal freedom to own gold.

Claim #5: Fear-mongers like Glenn Beck have driven up the demand for gold. Gold advocates like Glenn Beck and Rush Limbaugh, and gold bears on Fox like Dave Ramsey have huge audiences, and they have gold dealers as their advertisers. Most Americans are just beginning to enter the thought process that brings more investors to gold investing. But there are a lot more voices of "caution" about gold than there are bulls. If those "talking down" gold had their way, their arguments alone would push the price of gold down, but Americans are slowly realizing the compelling reasons for owning gold -- the soaring U.S. budget and trade deficits, massive dollar-printing by the Federal Reserve, global crisis conditions and other reasons cited by Glenn Beck and others. It isn't Glenn Beck fueling gold demand, but the pro-gold arguments that are sinking into the consciousness of America.

June 1, 2010

Gold soared back over $1,200 per ounce. By contrast, Wall Street suffered its worst May since 1940, when Hitler invaded Western Europe. In May 2010, stocks fell 8%, while gold rose 3%, for an 11% out performance by gold in May, due to increased tensions between North Korea and South Korea. Spain’s sovereign debt was downgraded by Fitch Ratings.

The investment demand for gold is certainly for real: sales of American Eagle gold coins are up 65% this year, according to the U.S. Mint similar to other world mints. Central banks and governments are also buying gold. The world’s central banks will likely add another 200-300 tons to their gold holdings this year. Despite the claims of anti-gold journalists, there is more demand now than new supplies being mined. Gold price projections of $1,500 or more are coming out again. The median projection in a Bloomberg survey of 23 traders analysts and investors showed that gold will reach $1,500 by the end of the year.

June 8, 2010

At one point early Friday, gold dipped below $1200 per ounce, but it quickly recovered after a weak jobs report. Meanwhile, since the birth of the euro, gold is up four-fold to both the dollar and the euro. In that same launch year, 1999, central banks drafted an agreement to start selling their gold. At first, that pushed gold down to a 20-year low of $252.80 on July 20, 1999, but then a funny thing happened: The more gold central banks sold, the stronger gold became. Today, gold is up roughly 380% to both the euro and the dollar. Central banks are once again accumulating gold. Iran’s central bank announced it would buy gold. Michael Lewis, head of commodities research at Deutsche Bank, said that gold may reach $1700 per ounce within a year, partly due to demand from Asian central banks. Gold investment demand is “exceptionally strong” (according to the World Gold Council) in Europe, due to the high levels of debt in the euro-zone, on top of a collapsing currency.

June 14, 2010

Gold traded at another new high in both dollars ($1,252) and Euros (1,043). Reports surfaced that Russia increased its gold holdings by about 50 tons.

June 21, 2010

Gold reached another all-time high as it rose to $1,266 intra-day in New York. Former Fed Chairman Alan Greenspan warned in The Wall Street Journal that “the federal government is currently saddled with commitments for the next three decades that it will be unable to meet in real terms.” He said we must cut spending: “Our economy cannot afford a major mistake in underestimating the corrosive momentum of this fiscal crisis,” so “our policy focus must therefore err significantly on the side of restraint.”

Money manager Peter Schiff told Business Week that “Gold could reach $5,000 to $10,000 per ounce in the next 5-10 years.” Economist David Rosenberg said “there is no doubt that gold could easily double from here.” Many major holders like George Soros and John Paulson had quietly accumulated a record 1938 tons of gold as of May 21. Their holdings now eclipse all but four of the biggest central bank holdings. Kyle Bass, head of a $500 million hedge fund, also bought gold. Another billionaire, Thomas S. Kaplan, has invested nearly all of his $2 billion hedge fund in gold. In poker terms, he said he has gone “All-In on Gold.” “I have reached a point where I feel the only asset I have confidence in is gold…If the world does well, gold will be fine. If the world doesn’t do well, gold will also do fine, but a lot of other things could collapse.”

On June 22, 1776, Congress issued $2 million in new bills known as the “Continentals.” Unbacked by gold or any other assets, the bills led to immediate inflation. As George Washington noted, “A wagonload of currency will hardly purchase a wagonload of provisions.” The Continental failed and left America with a hefty debt. Chastened by the experience, America minted gold coins in the 1790s and resisted the urge to regularly issue new paper notes until the dawn of the Civil War. Paper currency didn’t work out well for the confederacy.

June 28, 2010

Gold closed Friday at $1256. Every sell-off has brought new buyers. Chilling news items arise almost every day – like Iran controls enough weapons-grade uranium to build two bombs. One major demand factor behind gold’s rapid rise from $250 to $1250 in the last eleven years has been the birth of gold-based Exchange-Traded Funds (ETFs), which hold physical bullion but trade in paper receipts (shares), with one share equaling the price of one-tenth of an ounce of gold. Recently, more traders and investors are demanding physical gold ownership in a segregated account, not just paper shares said an article in Friday’s Wall Street Journal.

July 6, 2010

Gold set a new London high at $1261. In North America, the G20 meeting in Toronto, European forces called for more spending restraint. The New York Times kept arguing for the Obama platform, saying that without continued mega-deficits and bailouts we will enter a new Greater Depression. The Times’ main economic mouthpiece, Dr. Paul Krugman, argued that austerity plans (like those in Europe) won’t work. The Royal Bank of Scotland predicted a massive wave of printing-press dollars leading to another banking crisis, which they colorfully describe as “driving off the cliff” toward another huge credit crisis. The U.S. told the G-20 that the U.S. might cut deficits in half by 2013. The budget deficit this year is in the $1.6 trillion range. Meanwhile, the U.S. economic recovery is stalled, putting the doubt to their “deficit spending will rescue the economy” theory. The $787 billion stimulus package has not kept the unemployment rate under 8%. Instead, it has stayed above 9%.

July 12, 2010

Gold has been hovering around $1200 per ounce, give or take $12, since its sharp fall from new record highs in late June. This chart pattern has been consistent and healthy for the last decade – two steps up, one step back, gathering momentum (and more buyers). But even at $1200, gold is 32% above its price of a year ago ($908.50), 10% above its 2009-ending figure ($1,087).

The “Freedom Fest” in Las Vegas (July 7-11) featured many speakers with a gold investment angle. Within the conference, there were “emergency” sessions entitled the “World Economic Summit: Crisis in America,” in which some of the nation’s most prominent voices (Steve Forbes, Peter Schiff, Gary Johnson (former New Mexico governor), John Mackey (CEO of Whole Foods Markets), and others) heartily recommended gold as an investment – or as a barometer.

Dallas Fed President Richard Fisher said that the U.S. economy will likely decelerate. Fisher pointed to lack of strength in consumer spending, high unemployment, concerns about financial markets, and inability of consumers to take money out of their homes due to lower housing values. In a dig at Congress, Fisher said businesses “don’t know where they’re going to be in terms of health-care costs” and “Until that’s clarified ... it’s very hard for business to plan.”

July 19, 2010

Gold has basically stayed in a fairly narrow trading range of $1180 to $1260 since April 30, building a base for further advances. Summer is traditionally the sleepy time for gold, before the fall holiday buying season. Inflation is one danger, but deflation is an equivalent danger. Deflation is feared most by our central bank, the Federal Reserve. Gold’s strength as an inflation hedge in a global fiat currency system is well-known. But with indications of potential deflation popping up recently (wholesale prices down, consumer prices slipping), the question arises: How will gold perform in deflation. It did quite well holding value or rising during the past two major deflationary periods of 1878-1901 and 1929-1941. We have to look all the way back to The Great Depression to find the last serious period of deflation in the U.S. The problem is, gold prices were fixed by the government at that time and private ownership of gold was banned in 1933, so there’s no open market price action to study. However, analysts at JP Morgan conducted a study using silver as a gold analog. What the JPM analysis revealed is that silver outperformed the stock market substantially. The JP Morgan study hints that gold could be as much as three times more profitable than the stock market in that scenario as the best medicine against deflation. Any postdeflation precious metals bounce is likely to be more vigorous.”

July 26, 2010

Gold was flat last week. The pundits blamed today’s drop on “better-than-expected housing news,” implying that a stronger economic recovery is bad for gold. That’s old-fashioned 1970s thinking. Gold is more than a crisis hedge or an inflation hedge. It is also a “deflation hedge,” since this 11-year bull market has accompanied generally flat prices for the last decade.

A new development in Japan could accelerate a possible next big move up in the fall. The first exchange-traded funds for gold launched on July 2 when they were listed on the Tokyo Stock Exchange. The gold ETF assets could explode eight-fold by this time next year, according to Osamu Hoshi, deputy general manager at Mitsubishi UFJ Trust and Banking Corp., a member of Mitsubishi UFJ Financial Group Inc. Asian investor demand in China, India and Indonesia is growing dramatically.

The University of Texas Investment Management Company has invested over $500 million in gold. CEO Bruce Zimmerman told the University of Texas board of regents that UTIMCO bought gold as a “protection against inflation, but even more as a lack of confidence in financial markets due to extraordinary government fiscal and monetary stimulus." Zimmerman added, "I wish I could tell you the future looked rosy. That's not our view. At best, the future is uncertain."

In the Financial Times, European Central Bank President Jean-Claude Trichet said that U.S. policymakers who want to keep “stimulating” (i.e., running higher deficits) are mistaken. It is highly unusual for the ECB to criticize U.S. policies.

Aug 23, 2010

Gold added another $12 last week, for the third straight week of double-digit dollar gains. This morning, gold awoke flat, trading as high as $1,234 before stabilizing around $1,230 on the December (most active) futures contract. The dollar index was somewhat stable too, as the euro was flat at $1.27. It’s a typical late August week, with most big traders away on vacation.

Gold 52 weeks ago (August 24, 2009): $921.50     Gold’s London low for 2010: $1058 on February 5 Gold’s average price during 2010: $1163.04      Gold’s London high for 2010: $1261 on June 28

Congress is (finally!) in recess, the President is on vacation and most big Wall Street traders are in the Hamptons or on Cape Cod, so it’s a convenient time to review 10 top reasons why Gold is your Best Investment for 2010. These 10 reasons are basically NEW demand factors taking effect or growing in impact this year, giving gold new luster as a hedge against rising global uncertainty. In no particular order, here are the Top 10 new gold demand stories for 2010:

#1: Big New Buyers I: Hedge fund managers accumulating gold: Last week, another big hedge fund, Eton Park Capital Management, revealed that they had accumulated a new $800 million stake in SPDR Gold Shares (GLD). In previous months, mega-hedge fund managers George Soros, John Paulson and other high-profile investors filed documents with the SEC claiming large position in gold. Paulson’s fund owns 31.5 million shares ($4 billion) of GLD as of June 30, and Soros’ Fund owns about $600 million.

In one dramatic example, hedge fund manager Thomas S. Kaplan has gone “All-In on Gold,” according to the Wall Street Journal. He bought mining properties in 17 countries on five continents. His bullion and mining shares total a $2 billion bet on gold, which he says helps him sleep well at night: “I have reached a point where I feel the only asset I have confidence in is gold. If the world does well, gold will be fine. If the world doesn’t do well, gold will also do fine, but a lot of other things could collapse.”

#2: Big New Buyer II: The University of Texas Investment Management Company (UTIMCO) has invested over $500 million (3%) of its huge investment fund in gold. UTIMCO CEO Bruce Zimmerman told the Texas board of regents that UTIMCO bought gold as a “protection against inflation, but even more as a lack of confidence in financial markets due to extraordinary government fiscal and monetary stimulus…I wish I could tell you that the future looked rosy. Unfortunately, that's not our view.”

#3: Big New Buyer III: China is Selling Dollars, Buying Gold: Bloomberg reported last week that China was turning bullish on the euro and yen for its massive $2.45 trillion in foreign currency reserves. China recently reported that it cut its U.S. Treasury holdings by $100 billion in the year ending June 30. At the same time, China has been encouraging its citizens to buy gold. China’s leaders have not yet admitted they are buying gold for China’s foreign currency reserves. The fact that China is now the #1 gold producer, #2 gold consumer and #2 biggest global economy point to a big new role for gold. China’s investment demand for gold jumped 187% in the second quarter.

#4: The Dollar is Sinking, Magnifying Gold’s Rise. The U.S. trade deficit came in dangerously high ($50 billion) in June, the latest reporting month. The federal deficit is larger, even in a recovery year, than it was in the crisis/recession year of 2009. The federal government is adding one spending program after another, while Europe is cutting back government spending in a new wave of austerity. The Fed has resumed “quantitative easing” (printing more money, monetizing the debt). All of these “easy money” policies point toward a declining dollar, which automatically increases the price of gold in dollar terms. Since the beginning of the Euro in 1999, gold is up over four times in dollar and Euro terms.

#5: The Alternatives are All Weak Tea…or Worse. Stocks are under water for the year. Bank CD rates keep declining toward zero. Even short-term Treasury bills and notes yield under 1%, which is a guaranteed loss after inflation and taxes. Real estate is flat or falling. Nearly all new money is heading into bonds, which resemble a new “bubble.” As soon as interest rates begin rising, bond prices will fall. Gold is the most reliable investment for the rest of 2010 – it is even beating most other commodities.

#6: Other Investments can be Counterfeited*… or Cratered in a minute. Stocks were “cratered” in a minute last May 6, when the Dow dropped 1,000 points in a few seconds. Stock exchange officials still can’t explain how that happened, so it could clearly happen again. Most paper money in history has been counterfeited by improving print technology. Most bonds and other government documents rely on the solvency of the issuing government. Gold stands above that crowd, easily authenticated and highly unlikely to crater without new buyers suddenly buying at new levels. *Speaking of counterfeits, the original purpose of the creation of the Secret Service in 1865 was to prevent counterfeiting, which accounted for fully one-third of all notes in circulation at the time. In modern times, the Secret Service cuts back on monitoring counterfeit schemes during the year leading up to each Presidential election – in order to protect nominated candidates.

#7: Gold Demand is Rising in Europe…Finally! The Greek debt crisis last spring scared Europeans into buying and hoarding gold as their safest haven in a storm. Gold investment demand is “exceptionally strong” (according to the World Gold Council) in Europe, especially from German and Swiss investors, due to the high levels of debt in the euro-zone. The ECB’s $1 trillion rescue package scared investors into storming the coin shops and bullion desks in major banks to diversify their savings into hard money. The Austrian mint said that it sold 243,500 ounces of gold coins in just half a month, from April 26 to May 12, more in just 17 days than the total of 205,300 ounces sold in the entire 90-day first quarter.

#8: Rising Demand in the U.S. and Central Banks. Sales of American Eagle gold coins were up 65% in the first half of 2010, according to the U.S. Mint. Demand for physical gold is projected to rise to 52.3 million troy ounces this year. In another kind of investment demand, central banks and governments are also buying gold. They bought 425.4 tons last year, according to the World Gold Council. According to most gold observers, the world’s central banks will likely add another 200-300 tons of gold this year.

#9: New Hot Spots Threaten Hot Wars: Iran has moved forward in building its nuclear capability. It is now a virtual certainty that either Israel or the U.S. will intervene to stop the recalcitrant hard-liners in Tehran before they actually build a bomb delivery system. Speaking of nuclear warheads, North Korea and Pakistan already have nuclear bombs, while their leaders are becoming increasingly irrational. When the U.S. exits Iraq and Afghanistan, that could leave a void in which the worst warlords could thrive. In times of crisis or threat gold has trended higher.

#10: Breaking News (not seen reported elsewhere today): 8 Banks Failed Last Friday. On Friday, August 20, eight U.S. banks failed, tying the 20-year high set last April 16. Four were in California (in Solvang, Stockton, Chico and Sonoma) and two were in Florida (Ocala and Bartow). This year should suffer the most bank failures since 1991, at the height of the savings and loan crisis, and yet there is no headline in the weekend or Monday papers about this record-high level of bank failures last Friday and during 2010. About 1 in 10 banks are now on FDIC’s troubled banks list. When mom-and-pop savers and investors can’t totally rely on their banks for safety and income, they will increasingly diversify with the one proven investment over the last 5,000 years of human history: Gold.

FINAL NOTE: On Saturday September 6, 2010 the Wall Street Journal and Barron’s both ran prominent bullish articles on gold.