Fundamentals Don’t Change Overnight

November 18, 2009

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Gold has decisively passed its early 2008 intra-day peak of ~$1,030, up ~11% in the past 30 days and ~8% so far this month alone. With fresh new all time highs being recorded weekly, there is concern that perhaps gold is topping and due for a plunge. For the casual investor glancing on the surface, examining nominal prices only, it is not surprising why this is so.

Prior to the recent highs of the last two years, gold had historically peaked at $850 in 1980 and within a few months of that pivotal mark fell nearly 50% to $450. From there gold gyrated, mostly to the downside, coming in at around $250 in August of 1999. The general fear is that gold may be subject to repeating this type of price action – and soon.

Another area of concern, some would argue, is the level of bearishness on the US Dollar. Contrarian investors see this as a clear indicator that the US Dollar is due for a “turnaround”.

While significant negative sentiment around the long term prospects of the US Dollar does exist, it is by and large an investor phenomena, and not yet the mentality of the larger public – one of many wildcards. There could be one or more spikes in the US Dollar, as took place in late 2008, but these should be considered psychological hiccups of denial. When all is said and done, the fundamentals clearly lie on the side of gold.

Here are just some of the key fundamentals:

Banks have trillions in toxic loans and derivatives which, if forced to be valued to the market, would annihilate the financial industry
With record low interest rates, money is cheap around the world, and the US is leading the way
The Federal Reserve is in a box and cannot raise rates without undermining the unprecedented actions, bailouts, and lending facilities it has already executed
Per official inflation, gold would need to hit $2,300 to replicate the same level of purchasing power reflected in the January 1980 high of $850
Per unofficial inflation, leveraging the popular site www.shadowstats.com which calculates inflation the way it was done two decades ago, gold would need to hit $7,150 to replicate the same level of purchasing power reflected in the January 1980 high of $850
The dire fiscal status, consisting of ~$120 trillion in obligations, of the US Federal Government
The United Nations, as well as many foreign governments, especially China, as well as Russia, have publicly voiced concerns about the existing role of the US Dollar and advocated interest in a new global reserve currency

The USD per oz. 10 year chart of gold illustrates a clear bull market trend in correlation to these fundamentals:

For the sake of argument, let’s assume that gold did fall significantly from its current price point. Unless changes within the geopolitical landscape were great enough to counter several of the above fundamentals, investors at all levels would be buying in droves. With the Reserve Bank of India buying 200 metric tons of gold and the Bank of Mauritius buying 2 metric tons of gold, central banks are creating a sound market price foundation for gold. Any drop below these prices would provide other central banks, who may wish to increase gold holdings, the impetus to do so. This is exactly why a significant drop is unlikely to take place. There is significant big money – at national levels – waiting in the wings to purchase on price dips.

Hedge funds and money managers are increasingly wising up as well, which is obviously another significant source of investment capital. Take a look at this CNBC interview with Damon Vickers, Chief Investment Officer of Nine Points Capital Partners, whose fund entered the gold market around the $1,000 price level. Damon is predicting a currency collapse resulting in the formation of a global currency and global government:

The bottom line is that fundamentals don’t change overnight and there are numerous reasons why gold is not peaking. With that said, however, nothing goes straight up and executing purchase transactions during 3-5% dips is the ideal scenario to build core holdings. For the typical investor, this strategy in combination with periodic purchases, will dollar cost average your entry price and provide insurance regardless of upside or downside price action.

UPDATE: Audit the Federal Reserve

http://www.auditthefed.com

H.R. 1207: Federal Reserve Transparency Act of 2009 now has 311 co-sponsors, flat from 311 last week.
S. 604: Federal Reserve Sunshine Act of 2009 now has 30 co-sponsors, flat from 30 last week.

Guess what? It turns out the Chinese are kind of curious about how President Barack Obama’s healthcare reform plans would impact America’s huge fiscal deficit. Government officials are using his Asian trip as an opportunity to ask the White House questions. Detailed questions.
Boilerplate assurances that America won’t default on its debt or inflate the shortfall away are apparently not cutting it. Nor should they, when one owns nearly $2 trillion in assets denominated in the currency of a country about to double its national debt over the next decade.
Nothing happening in Washington today should give Beijing any comfort or confidence about what may happen tomorrow. Healthcare reform was originally promoted as a way to “bend the curve” on escalating entitlement costs, the major part of which is financing Medicare and Medicaid. That is looking more and more like an overpromised deliverable.

Mauritius Buys IMF Gold, Follows India as Metal Soars (11/16/09)

http://www.bloomberg.com/apps/news?pid=20601087&sid=a_9ioLuRtQyk&pos=6

Mauritius bought 2 metric tons of gold from the International Monetary Fund, underscoring a drive by central banks to boost holdings as the precious metal trades near a record and the dollar slumps.
The $71.7 million sale to the Bank of Mauritius was based on market prices on Nov. 11, the IMF said in an e-mailed statement yesterday. The Reserve Bank of India paid $6.7 billion for 200 tons from the IMF, according to a Nov. 2 statement.
The Mauritian purchase is “another signal that emerging- market central banks are looking to increase their foreign- exchange allocation in gold,” Shane Oliver, head of investment strategy at AMP Capital Investors Ltd., said from Sydney.
“There are a lot of uncertainties in the U.S. dollar and not much confidence in other currencies,” AMP Capital’s Oliver said. “Gold is a viable option.”

N.J. Deficit May Top $8 Billion, Christie Team Says (11/16/09)

http://www.bloomberg.com/apps/news?pid=20601087&sid=a_MlrOIV9WRw&pos=6

New Jersey Governor-elect Chris Christie and his economic transition team said the budget gap for the fiscal year beginning July 1 may exceed the $8 billion state budget officials previously forecast.
Revenue collections continue below projection, said Robert Grady, co-chair of the budget and tax team. The $8 billion deficit projection made by the non-partisan Office of Legislative Services in July is at the low end of a range, he told reporters.
New Jersey was one of nine U.S. states identified last week by the Pew Center for the States as facing similar fiscal strains as those that left California on the brink of insolvency four months ago.

Ambac Faces 99% Chance of Default as Deadline Looms, Swaps Show (11/16/09)

http://www.bloomberg.com/apps/news?pid=20601087&sid=avlxowh6BwPM&pos=7

Ambac Financial Group Inc.’s bond- insurance unit faces a 99 percent chance of default, credit derivatives show, as financial institutions brace for the second-largest bond insurer to file a capital update with regulators later today.
Five-year credit-default swaps on Ambac Assurance Corp. have jumped 3.2 percentage points since Nov. 9 to 78.3 percent upfront, according to CMA DataVision. That’s in addition to 5 percent a year, meaning it would cost $7.83 million initially and $500,000 annually to protect $10 million of Ambac obligations from default.
Delinquency proceedings against the company would trigger termination payouts of $23.1 billion by its insurance unit on credit-default swap contracts, Ambac said in a filing earlier this month. Ambac also may be required to accelerate the payment of $1.6 billion of holding-company debt, the New York-based bond insurer said in the filing.
Credit-default swaps pay the buyer face value if a borrower defaults on its debts in exchange for the underlying securities or the cash equivalent. Banks that bought credit swaps from Ambac and other insurers to hedge against losses on mortgage- related securities used swaps on the insurers to protect themselves if the companies fail to make good on the guarantees.

China, Japan Say Fed’s Low Rates Fueling Speculation (11/16/09)

http://www.bloomberg.com/apps/news?pid=20601087&sid=afWDUpkanxCI&pos=3

Financial officials in Japan and China, Asia’s two largest economies, warned the Federal Reserve’s interest-rate policy risks spurring speculative capital that may inflate asset prices and derail the global economic recovery.
The comments reflect concern that the Fed’s pledge to keep rates near zero for an “extended period” may lead to a repeat of the financial crisis. MSCI’s emerging-markets stock index has risen 71 percent this year and Asian countries from Singapore to South Korea are trying to rein in surging real-estate prices.
“The continuous depreciation in the dollar, and the U.S. government’s indication that, in order to resume growth and maintain public confidence, it basically won’t raise interest rates for the coming 12 to 18 months, has led to massive dollar arbitrage speculation,” Liu, chairman of the China Banking Regulatory Commission, said in Beijing yesterday.

Bernanke reassures markets on dollar (11/16/09)

http://www.ft.com/cms/s/0/0f70fbfa-d2e0-11de-af63-00144feabdc0.html

In rare public comments on the dollar, Federal Reserve chairman Ben Bernanke said the US central bank was monitoring currency markets “closely” and will conduct policy in a way that will “help ensure that the dollar is strong”.
He said that the Fed still expected to keep rates near zero for an “extended period” – although he stressed that this was a conditional forecast, not a commitment.
In remarks apparently aimed at reassuring markets and governments that the central bank is not indifferent to the fate of the dollar, the Fed chairman said: “We are attentive to the implications of changes in the value of the dollar.”
He added that the Fed “will continue to formulate policy to guard against risks to our dual mandate to foster both maximum employment and price stability” – and that doing so would support the value of the currency.

Dollar Overwhelms Central Banks From Brazil to Korea (11/13/09)

http://www.bloomberg.com/apps/news?pid=20601087&sid=aj.Cf_hK8TjU&pos=6

Brazil, South Korea and Russia are losing the battle among developing nations to reduce gains in their currencies and keep exports competitive as the demand for their financial assets, driven by the slumping dollar, is proving more than central banks can handle.
Governments are amassing record foreign-exchange reserves as they direct central banks to buy dollars in an attempt to stem the greenback’s slide and keep their currencies from appreciating too fast and making their exports too expensive. Half of the 10-best performers in the currency market this year came from developing markets, gaining at least 14 percent on average, according to data compiled by Bloomberg.

U.S. Treasury Confident Congress Will Increase Debt Ceiling (11/13/09)

http://www.bloomberg.com/apps/news?pid=20601074&sid=aWXDnpFProiY

The Obama administration is confident Congress will raise the country’s debt limit by year end to avert a showdown similar to the one that shuttered parts of the government in 1995, administration officials said.
The White House wants an increase of at least $1 trillion to $1.5 trillion, according to a person familiar with the deliberations between lawmakers and the administration. Record budget deficits are pushing the national debt closer to the $12.1 trillion statutory limit.

Paper promises, golden hordes (11/12/09)

http://www.economist.com/businessfinance/displaystory.cfm?story_id=14853132

TWO hundred metric tonnes of gold would occupy a cube of a little more than two metres on a side; it would fit into a small bedroom. But India’s purchase of that volume of gold from the IMF last month has had an outsize impact on the markets, helping push the price well above $1,100 a troy ounce.
For bullion bulls, the implication is clear: central banks no longer trust the creditworthiness of other governments. And if they have lost confidence, private investors should do the same. The next step in this chain of reasoning is to assume a stampede (or at least a quick trot) by other central banks into holding the yellow metal. Gluskin Sheff, a Canadian asset-management firm, suggests that if China followed India’s lead, bullion could hit $1,400 an ounce.

FDIC Orders Banks to Prepay $45 Billion to Build Fund (11/12/09)

http://www.bloomberg.com/apps/news?pid=20601110&sid=a4D2fp02SSn8

U.S. lenders will prepay three years of premiums to replenish the government’s deposit insurance fund drained by the fastest pace of bank failures in 17 years, the Federal Deposit Insurance Corp. decided today.
The FDIC board approved the payments today at a Washington meeting to raise an estimated $45 billion for the fund that slipped into a deficit at the end of the third quarter. Banks had backed the prepayments over special assessments to bolster the fund as the U.S. closed 120 lenders this year.

Barrick shuts hedge book as world gold supply runs out (11/11/09)

Global gold production is in terminal decline despite record prices and Herculean efforts by mining companies to discover fresh sources of ore in remote spots, according to the world’s top producer Barrick Gold.

http://www.telegraph.co.uk/finance/newsbysector/industry/mining/6546579/Barrick-shuts-hedge-book-as-world-gold-supply-runs-out.html

Aaron Regent, president of the Canadian gold giant, said that global output has been falling by roughly 1m ounces a year since the start of the decade. Total mine supply has dropped by 10pc as ore quality erodes, implying that the roaring bull market of the last eight years may have further to run.
“There is a strong case to be made that we are already at ‘peak gold’,” he told The Daily Telegraph at the RBC’s annual gold conference in London.
“Production peaked around 2000 and it has been in decline ever since, and we forecast that decline to continue. It is increasingly difficult to find ore,” he said.
Ore grades have fallen from around 12 grams per tonne in 1950 to nearer 3 grams in the US, Canada, and Australia. South Africa’s output has halved since peaking in 1970.

Gold Price Won’t Drop Below $1,000 an Ounce Again, Faber Says (11/11/09)

http://www.bloomberg.com/apps/news?pid=20603037&sid=az6qQ8ZuXg9M

Gold won’t fall below $1,000 an ounce again after rising 27 percent this year to a record as central banks print money to help fund budget deficits, said Marc Faber, publisher of the Gloom, Boom & Doom report.
“We will not see less than the $1,000 level again,” Faber said at a conference today in London. “Central banks are all the same. They are printers. Gold is maybe cheaper today than in 2001, given the interest rates. You have to own physical gold.”

Highlights from “The International Forecaster” newsletter (11/18/09)

Published and Edited by: Bob Chapman

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In the recent unemployment report 34,000 temporary jobs were created, unfortunately they will for the most part only last through Christmas. Unemployment was 25% during the depression. It is headed much higher then anyone anticipates. David Rosenberg and Meredith Whitney see unemployment at 13%. If you super impose that 2-3/4% increase on our 22.2% real unemployment you have 25%. That is because serious structural problems underlie our entire labor, economic and financial markets that are not being addressed. All that is being done by government and the fed is more money being thrown at the problem and that is not the answer. Those who believe that U6 and U3 will somehow meet are engaging in wishful thinking. The birth/death ratio is a bogus scam, yet none of the economists or analysts dares to address it. This isn’t economics – it is politics and lying by government, Wall Street and the economic community. We are Japan in 1992 only worse. We could go on like this for 20 years in depression. Save that the Illuminists will pull the plug when they are ready to plunge the world into darkness and chaos.
As a result of unemployment Americans are spending less. Sales taxes have fallen on average 12% nationwide. All states had yoy negative collections in October. Any gains being made by individual stores are due to less competition. You could say it is creative destruction. If this is so how did our economy grow 3.5% in this past quarter? Some say government has just thrown out this number. The adjustment will come in at 2-1/2%. The 3.5% was used to rig the stock market and take heat off of banking, Wall Street and the government. A lot of misdirection for the common good, or the end justifies the means. Very simply how can sales be up, or for that matter the economy, when unemployment is still rising? The administration says 55% of the stimulus has been spent. We see very little as a result. Supposedly 21% is to be spent in 2010 and the rest in 2011. The economy needs 125,000 jobs a month for the next five years to get even. Even if another $1 to $2 trillion stimuli and bank lending packages are completed for next year all they will gain is another year of parallel movement. Worse yet, over the next ten years 2.5 million new workers will enter the workforce each year. This means at the minimum the unemployment rate of 22% plus will be with us for three or more years. Unfortunately on top of all this grief, Nancy Pelosi wants to increase taxes substantially. That would knock the economy out of the box. If HR 1207 is not passed 75% of the public that wants it passed will finally come to realization that they are never going to have representation in Congress, because it is controlled by great wealth from behind the scenes by elitists. That will be the seminal moment that will signal a move toward revolution, as the Illuminists final move toward world government begins. The same situation is arising in Europe with unemployment over 30% for workers from 17 to 35 years old. How long can their social system carry that burden? Muslims have virtually overrun Europe as illegal aliens have overrun the US. In neither case has the system been purged, nor has an environment where small business, that creates 70% of the jobs, can thrive. Government stimulus only temporarily creates jobs. It is private investment that creates permanent jobs and real increases in productivity.
We wonder what the 96% of experts think about, who believe that gold is going down, think about as it increases in value almost every day? Speculative funds now hold more than 23 million ounces of gold in Comex positions. In just a month in a half the GLD positions are up 300,000 ounces, as many holders sell to buy bullion and shares because they do not believe the ETF GLD has the gold they say they have. Presently all 12 ETFs hold 56.7 million ounces of gold, worth about $63 billion. Gold and silver related mutual funds held about $20 billion.
We are finally starting to see upward pressure in real interest rates, although the Fed is fiercely fighting the trend and on the short end of the market has remained successful. It is only a matter of time before yields rise as inflation picks up momentum in 2010. We see 10-year T-note yields of 4% and perhaps 4.5% by the end of next year as a result of monetization and increased money and credit to combat the strong deflationary undertow.
We find it disappointing other professionals only see the inflationary reflection in yields and not into a flight to quality, as investors seek safety from all fiat currencies. Part of gold’s strength is a result of anticipation of inflation, but what has been really driving gold prices over the past two years has been a flight to safety and the preservation of assets.
Another positive for gold, which virtually no one discusses, is rising trade differences and the imposition of tariffs, which we just saw as the US slapped tariffs on Chinese tires and steel pipe. At the same time as election year 2010 appears so does increased Treasury debt issuance, Fed monetization and talk of more major stimulus. They are assisted by $8,000 home credits for anyone who hasn’t owned a home for three years. They figure that will throw $25 billion into clearing housing inventory. They know 60% of these subprime loans will come right back at them in two years, but they could care less. It is all about buying time.
Default is still 1-1/2 to 2-1/2 years away. Government refuses to cut spending and it will have great difficulty in raising taxes. Reflation signs are everywhere. It began last May and now officially inflation is 1.2%. Do not think for one moment that many professionals know real inflation is 6-1/8%. The monetary base has doubled in just two years. Anyone who understands the gold market knows that production decreased 10 years ago. There definitely is peak gold.
As a result central banks are buyers of gold. India ostensibly purchased 200 tons of gold from the IMF leaving it with foreign exchange reserves of gold of 6%. If they increased that back to 20% where it was 15 years ago gold prices would increase by $200 an ounce or to $1,320 an ounce. If China did the same thing the result would be $1,420. If the US did the same thing that would put gold at $2,770. These kind of possible factors have in fact become in part probable. What other central banks are buyers that we don’t know about? Another positive factor is 96% of gold experts are bearish and 88% of market pundits are bullish. As you know, when almost all the market experts agree, they are almost always wrong. if you take just a quick look at what government and the Fed are doing you have to conclude that economic, financial, fiscal and monetary policy is worsening, not getting better. We are facing major inflation and the dollar continues its trip downward. We see no dollar rally until we hit 71 to 72 on the USDX and even then a rally to 76 or 78 would be normal. Besides gold has decoupled from the dollar. Technicians continue to fool themselves on the short term by refusing to admit our markets are manipulated by the President’s “working Group on Financial Markets.” We are in a bear market rally and it is on its last legs, just as similar rallies were in 1931, 1932 and 1933.
Other factors to consider are zero-interest rates, which means the cost of owning gold is very favorable. There is no yield differential, so there is little risk in owning gold. As such rates prevail we see the Japanese experience of the past 18 years being the coming American experience. We, as the Japanese have done, are spending and accumulating debt at a rate never seen in the history of our country. Those fiat funds are going to all the wrong places just like we are currently witnessing in China. As a result the public has cut spending, is paying off debt, and banks have cut lending 14% yoy. Most of these fiat dollars have ended up in the stock market. Perverting the whole scenario is worldwide central bank inflation as banks suppress the value of their currencies to stay competitive and to keep the dollar strong, and it is not working. Finally catching on those banks are now, instead of buying Treasuries, with the dollars they have purchased, they are buying gold. This is protection against any further fall in the dollar. They look back at when the US beat them over the head to sell gold at prices from $252 an ounce to $800 an ounce, and see how they were taken. They again see why gold is superior to dollars and other fiat currencies, including their own.
A major problem in evaluating the soundness of a currency is the almost total lack of transparency in what central banks are doing. As long as this persists in today’s environment the less investors will be willing to hold dollars and most other currencies. It is worthless to believe that the US has 77.4% of its assets in gold, when there hasn’t been an audit, nor has the gold been tested for authenticity since 1954. Does Germany really have 69.2% in gold; France 66.6% or the UK 17.6%, or China 1.9%? We do not know. There is not transparency and all governments refuse to tell the truth. There is no question nations are now buying gold and China is strongly encouraging gold ownership. As a result, China the world’s largest gold producer, is now going to see that production consumed by Chinese savers continues. Even Harrod’s is selling gold coins and bars and is doing a brisk business in the heart of London.
There are several ways you can look at to determine where gold should be selling at. We believe the easiest way is to clock official and real inflation since 1980. Official inflation would put gold at $2,400 and real inflation at $6,700, or to quote John Williams $7.150. This is all scientific and the numbers are real. The question that follows is how much gold does central banks have left of their 31,000 tons 15 years ago? We believe it is less than 5,000 tons. We also believe there is a derivative covered short of between 50,000 to 100,000 tons. There is no way of actually knowing, because governments and other players refuse to tell us what their positions are. They say we do not have a need to know – or it is a state secret. That means there is no free market. We are told that total economic reserves of gold to be mined are 50,000 tons. That, of course, means any shorts beyond that cannot be covered. That means higher prices. Yes, we do have peak gold and lots of uncoverable shorts. That means gold has a long way to go to the upside along with silver.
Gold is the world’s only real currency. That is why all currencies have fallen versus gold for the last six years. This is a response to the viability of fiat currencies.
It is possible that the Fed could raise interest rates a year or 1-1/2 years from now, but even then it would only be a token ¾% to 1% or 1-1/4%. The funded debt is $12 trillion and unfunded debt is about $110 trillion. If they raised rates 1% the interest cost would rise $120 billion a year and for the sake of comparison 5% rates would raise interest rates $600 billion a year. This would make the dollar plunge and prove there is no way back to normality for the dollar. The Fed has no option but to keep rates at current levels or cursory slightly higher levels. That also means it has lost the option of defending the dollar with higher interest rates. Higher rates would also kill the carry trade, which would pull all those funds out of the stock and bond markets causing them to collapse with the economy and derivatives not far behind.
We see 4% to 4-1/2% ten-year T-note rates late in 2010. That will signal ominous problems particularly in housing as mortgage rates climb to 5-1/4% to 5-1/2%. It will signal the Fed has lost control. While this transpires gold and silver will climb mist a string of non-physical delivery scandals.
The minutes of FOMC meetings 1993 reveal that the Greenspan Fed and Governor Wayne Angell were extremely sensitive as to how gold would react to Fed policy. The Fed may have not been the gold suppressor, the Treasury was, but the Fed was giving directions. This is exactly as we reported at the time and few wanted to listen. These were the dark days for gold even though it moved up from $328 to $389, as we called for Barrick shareholders to file suit against Peter Munk, who we said was deliberately suppressing gold prices for fellow Illuminists, and the Treasury. As a result we saw ten years in the 1990s of rising prices as gold was continually disparaged. We knew then we would win the battle. Time was on our side. Since 1988 gold has been manipulated by central bank sales, because gold is the core foundation of financial survival and the only way you can protect yourself from what is coming.
China is facing the biggest challenge to its currency policy since the start of the global recession as economists warn the peg to the dollar risks causing an asset bubble. China’s sales of yuan to keep it fixed to the dollar contributed to a 29% jump in money supply, and the peg helped spur more than $150 billion in speculative funds from overseas in the past six months, China International Capital Corp. says. Record apartment prices and a 74% climb in the benchmark stock index this year are prompting warnings that the policy is inflating asset prices excessively. If China keeps the peg, it will be powerless to prevent asset bubbles,’ says Hu. Greater China chairman at Goldman Sachs.

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