2010 Recap
Through the short term noise, The Financial Panner was able to successfully predict key macroeconomic events that shaped 2010.
Our target for gold in 2010 was USD $1,420, and while we believed it would happen sooner than it did – we ended the year at USD $1,421.60.
This has the potential to catapult the 1 troy oz. spot price of gold to $1420 USD by April 2010.
For those who need reminding, gold started 2010 at USD $1,096.50 – this represents an approximate 29% YoY gain in the precious metal for 2010. Silver, on the other hand, had a blowout year up 83% YoY from USD $16.85 to USD $30.91. We did not put out a price target for silver for 2010, however we intend to do so for 2011.
Additionally, in our 2010 outlook, we discussed money printing and manipulation to a great extent, predicting significant news in this area:
In its latest move to jump start the sluggish recovery, the Federal Reserve announced it will pump billions into the economy.
The central bank will buy $600 billion in long-term Treasuries over the next eight months, the Fed said Wednesday. The Fed also announced it will reinvest an additional $250 billion to $300 billion in Treasuries with the proceeds of its earlier investments.
The bond purchases aimed at stimulating the economy — a policy known as quantitative easing — will total up to $900 billion and be completed by the end of the third quarter of 2011.
Prior to this announcment, on July 14, 2010, The Financial Panner discussed how Quantitative Beating 2.0 was inevitable:
If there was any doubt in your mind that they are probing the market for acceptance on another Quantitative Beating (Easing) 2.0 program, the following official statement from the recently released Federal Reserve meeting minutes paint the same picture…
Finally, another major hit on the manipulation side was the public announcement by CFTC Chairman Bart Chilton on the silver market:
I believe that there have been repeated attempts to influence prices in the silver markets. There have been fraudulent efforts to persuade and deviously control that price. Based on what I have been told by members of the public, and reviewed in publicly available documents, I believe violations to the Commodity Exchange Act (CEA) have taken place in silver markets and that any such violation of the law in this regard should be prosecuted.
In saying this, I am fully aware of the prohibition from divulging trader names or information about their positions. I am extremely careful not to violate the law in this, or any, regard. I also cannot pre-judge anything the agency may do with regard to our silver investigation, or any other matter.
2011 Outlook
Moving on to 2011, there is no stopping the continued calls for a new global reserve currency! The latest nail in the coffin comes from the United Nations:
In a radical report, the UN Conference on Trade and Development (UNCTAD) has said the system of currencies and capital rules which binds the world economy is not working properly, and was largely responsible for the financial and economic crises.
It added that the present system, under which the dollar acts as the world’s reserve currency , should be subject to a wholesale reconsideration.
Although a number of countries, including China and Russia, have suggested replacing the dollar as the world’s reserve currency, the UNCTAD report is the first time a major multinational institution has posited such a suggestion.
The proposals would also imply that surplus nations such as China and Germany should stimulate their economies further in order to cut their own imbalances, rather than, as in the present system, deficit nations such as the UK and US having to take the main burden of readjustment.
Another problem on the horizon is the current US debt ceiling, which is beginning to act more like a sunroof:
Treasury Secretary Tim Geithner on Thursday urged lawmakers to act soon to increase the debt ceiling, warning that failure to do so would be disastrous for the economy and for Americans.
In a letter to congressional leaders, Geithner said Treasury estimates that U.S. borrowing needs could push the amount of debt past the legal borrowing limit of $14.294 trillion sometime between March 31 and May 16.
As of Tuesday, the amount of U.S. debt subject to the debt ceiling was $13.961 trillion.
The debt ceiling has never been reached. But if U.S. borrowing hits the ceiling and lawmakers fail to raise it, Treasury would be prohibited from borrowing more money. Barring immediate and draconian policy changes, the country would be unable to pay its bondholders or fund programs and benefits in full. That’s because there wouldn’t be enough tax revenue coming in to cover all of the country’s bills.
Experts say the cascade effect would be crippling not only to the U.S. economy but very likely to economies and markets worldwide.
Finally, to add to this pressure, Moody’s is clamoring on about the USA current Aaa rating – a rating which is fully necessary to maintain world reserve currency status:
Moody’s Investors Service said it may need to place a “negative” outlook on the Aaa rating of U.S. debt sooner than anticipated as the country’s budget deficit widens.
The warning from Moody’s came on the same day that Standard & Poor’s lowered Japan to AA- from AA, signaling that the ratings firms are stepping up pressure on the governments of the world’s biggest economies to curb their spending. The threat of a lower rating may cause international investors to avoid U.S. assets. About 50 percent of the almost $9 trillion of U.S. marketable debt is owned by investors outside the nation, according to the Treasury Department in Washington.
For 2011, we believe the economic landscape will revolve around a recurring theme – namely the fantasy economy must end. Prosperity, savings, and true economic growth do not come from money printing or quantitative beating programs. It must come through discipline, savings, and production.
The road we have elected to take, as a result of the non-stop money printing, will result in a higher cost of living via inflation, namely through energy and food costs. It is the belief of The Financial Panner that this hit to our standard of living, which already has some teeth, will bite deep this year. This will open the eyes of the general public to the shortfalls of our fantasy economy along with the realization that nothing has changed since the financial crisis of 2008.
These high level trends are just a few reasons why gold and silver are so important to an investment portfolio over the next decade. There are NO major changes to the underlying fundamentals of this asset class and therefore we see the price of gold at USD $1880 and silver at USD $44.80 by the close of 2011. We also feel there is significant catapult potential around the areas discussed above that could push these prices even higher.
Since 2011 started, there has been a decent correction in both gold and silver. These markets tend to track one another so if one goes down so does the other. One significant reason for the recent correction was due to a very small hedge fund:
A huge trade by a tiny hedge fund has sent shudders through the gold market.
Thanks to the nature of futures trading, Daniel Shak’s $10 million hedge fund held gold contracts valued at more than $850 million, more than 10% of the main U.S. futures market, and the equivalent of South Africa’s annual gold production.
But as gold prices started falling this year, the trade, which was a combination of being long and short gold contracts – bets that prices will both rise and fall – started going bad. Monday, he liquidated his position, and is returning money to clients.
As a result, the number of gold contracts on CME Group Inc.’s Comex division plunged more than 81,000, to about 500,000, the biggest single reduction ever. While his trade didn’t account for all of the contracts, an average daily move is about 3,000 to 5,000 contracts.
That Mr. Shak and his firm, SHK Asset Management, could control one of the largest positions in the gold market underscores how leverage can enable investors to control huge positions in many commodity markets.
If a $10 million hedge fund could control more than 10% of the US gold futures market – what do you think JPMC can do?
The Financial Panner wishes you a safe and prosperous 2011!
