Archive for March, 2011:
Gold Breaks Out of “Limbo” as US Fed’s Tightening-Talk Is Outweighed by Euro Downgrades and Global Liquidity
By: Adrian Ash, BullionVault
London Gold Market Report
THE PRICE OF wholesale gold bullion jumped out of what one dealer called “limbo” lunchtime Wednesday in London, hitting $1429 per ounce as world stock markets rose but major-economy government bonds slipped in price, alongside oil and base metals.
Silver bullion rose 1.7% to $37.67 – just shy of last week’s new 31-year highs.
The British Pound rose following news of a sharp “bounceback” from the mid-winter slump in UK retail sales, leading analysts to forecast a rise in Bank of England interest rates.
With real UK interest rates – adjusted for inflation – currently more negative than at any time since the late 1970s, the gold price in Sterling today pushed up to £891 per ounce, some 2.8% higher from the start of March.
Looking ahead to Friday’s official US employment report, “Our real interest lies with what the labour market signals for Fed policy in terms of liquidity,” says Walter de Wet at Standard Bank in London.
“When the Fed drains liquidity, it will be bearish for commodities in general, for gold specifically,” explains de Wet, noting that gold “has by far the greatest causality with [money-supply] liquidity, followed by crude, and then the base metals.”
Tuesday saw non-voting Federal Reserve president James Bullard say in a speech that “If the economy is strong…in 2011, I think it will be time for us to start to reverse our ultra-aggressive and ultra-easy monetary policy.”
A new auction of 5-year US Treasury bonds drew the highest interest rates paid by Washington in 11 months.
ADP Payroll’s private-sector data today showed weaker-than-expected growth in US hiring for Feb.
On Standard Bank’s metrics, the Federal Reserve’s balance-sheet only accounts for one third of global liquidity. The remainder – calculcated by Standard Bank from other central-bank currency reserves – has already swelled by 3.5% since the start of Jan.
As for the widely-touted rise in Euro interest rates due on April 7, “the greatest initial impact for commodities…may come via the exchange rate,” says de Wet, because it may support the Euro vis-à-vis the Dollar and provide support for commodities on the downside.”
The Euro was little changed below $1.41 to the Dollar on Wednesday, helping the price of gold bullion for French, German and Italian buyers unwind the week’s 1.3% loss so far to trade back at almost €32,600 per kilo.
“Financial markets throughout the Euro area have been under pressure [from] credit-rating actions,” says a new report from the International Monetary Fund, even though those credit-rating downgrades “were concentrated in few countries such as Greece, Iceland, Ireland, Portugal and Spain.”
Following yesterday’s fresh downgrade of Lisbon’s credit rating by the S&P agency, Portuguese 10-year bond yields today rose further above 8.0%.
“There seems to be no relief,” says one analyst quoted by Bloomberg, “and it’s only a matter of time before Portugal asks for help.”
“Investment demand will remain the key determinant of where the gold price goes over the next year or two and sovereign debt fears will be the engine room behind that,” said Paul Burton – managing director of London’s GFMS World Gold Limited – at the first day of this week’s Paydirt 2011 Gold Conference in Perth, Australia on Tuesday.
Looking at global gold mining supply, “It has been a lean time in terms of major finds,” Burton said, quoted by MineWeb.
“We can expect, because of current prices, that there will be a short-term rise in gold production but it will decline thereafter, and this will only add to merger and acquisition activity.”
The gold mining industry is making less profit than many people assume, he went on, because “total cash costs” – including the infrastructure which local governments now demand in exchange for granting licenses – have risen sharply.
“Basically, the sector needs the gold price to stay above US$800 an ounce for a producer to stay in business.”
Adrian Ash
Formerly City correspondent for The Daily Reckoning in London and head of editorial at the UK’s leading financial advisory for private investors, Adrian Ash is the editor of Gold News and head of research at BullionVault – winner of the Queen’s Award for Enterprise Innovation, 2009 and now backed by the World Gold Council market-development and research body – where you can buy gold today vaulted in Zurich on $3 spreads and 0.8% dealing fees.
(c) BullionVault 2011
Please Note: This article is to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it.
Gold & Silver “Struggling to Digest” Global Events, Copper Exposed to Chinese Real Estate
By: Adrian Ash, BullionVault
London Gold Market Report
THE PRICE OF SILVER and physical gold bars held in a 0.5% range in London dealing on Tuesday, sitting tight above yesterday’s 1-week lows against the Dollar as global equities stalled and the US currency rose on the forex market.
Government-bond prices also slipped, and commodity markets lost up to 1%.
London’s FTSE100 stock index fell back to 5,900 – a two-year high when reached in late Dec. 2010.
“There’s a lot of worries weighing on all market as we near quarter’s end,” says a London gold dealer in a note.
“It is…a wonder that the generally risk-aware investors in Germany have not strongly come back to the physical gold market,” says Heraeus head of sales Wolfgang Wrzesniok-Rossbach in Hanau.
Calling sales of gold bars in Heraeus’ domestic market “within the normal scale”, even last week’s Euro-gold drop to 1-month lows beneath €1000 per ounce “did not rekindle physical demand beyond the normal,” he writes in the refining group’s latest Precious Metals Weekly.
Despite “dip buying” reported by Asian traders on Tuesday, gold prices moved in a 0.5% range above $1412 per ounce, slipping back as the US Dollar knocked the Euro lower and pushed the British Pound to new two-month lows beneath $1.5950.
That kept the gold price in Sterling above £882 per ounce and helped the Euro price recover to €43,300 per kilo (€1008 per ounce).
Short-term in wholesale gold bar trading, “The clear trend over the past three days has been for lower highs and lower lows,” says Japanese conglomerate Mitsui’s London team, “but the market feels a bit non-committal at the moment as we attempt to compute everything that is happening in the world.”
Syria’s prime minister and cabinet today handed their joint resignation to 11-year president Bashar al-Assad following two weeks of anti-government protests that have seen 60 people killed.
Pro-Gaddafi forces meantime pushed rebel Libyan troops back some 30km, while an international conference on continued UN-NATO airstrikes began in London.
Japanese prime minister Naoto Kan told the Tokyo parliament that his government is “in a state of maximum alert” over the ongoing nuclear crisis in earthquake-hit Fukushima prefecture, some 150km away.
The outlook for gold prices “remains overall bullish,” writes Axel Rudolph in his latest technical analysis research for Commerzbank clients, pointing next to the “November-to-March resistance line at $1458.50…
“If exceeded, the $1500 region will be in sight longer term.”
But “Silver continues to push higher and outperforms other precious metals,” says Rudolph, citing “the psychological 40 area” where he would expect the silver price “to lose upside momentum, at least temporarily.”
Tuesday’s benchmark pricing for wholesale silver was set at $36.62 per ounce at the London Fix – more than 3% off last week’s new 31-year high.
Sunday marked the 31st anniversary of “Silver Thursday”, when a one-day loss of $1 billion forced Texan oil barons the Hunt brothers to abandon their attempted corner of the entire global market.
Jan. 1980 saw the Hunt brothers holding some 180 million ounces of silver bullion, more than a third of the world’s non-government and non-industrial stocks. But sharply rising interest rates, plus a clampdown on their “speculation” by US regulators, found them unable to settle outstanding contracts. They filed for bankruptcy in Sept. 1988.
Last week, according to data from London’s VM Group consultancy, silver investment holdings worldwide rose 2.1%, hitting 796 million ounces across exchange-traded funds and derivative products traded in New York.
“Imagine having the entire world speculate on what’s going on at one [good-sized] company,” says Tom Winmill, president of the Midas group and manager of the $131 million Midas Fund.
“That’s what’s going on lately in the silver market,” Winmill is quoted by Fortune magazine, likening the $27 billion annual output of the global silver mining industry to a publicly-listed firm “such as, say [computer manufacturer] Dell.”
Over in base metals, “Falling Chinese property prices, perhaps combined with a government clampdown on alternative sources of funding, would be a devastating outcome for the copper market,” says a new report from Standard Bank’s commodities team – quoted at length by the FT‘s Alphaville blog – confirming that property developers in particular have been using deferred-payment purchases of copper to raise fresh loans for re-investment elsewhere in China’s fast-growing economy.
“Anecdotally, something in the region of 600,000 million tonnes of refined copper is currently sat in bonded warehouses in Shanghai,” says Standard – around two-fifths of China’s net annual demand – with up to 80% of that metal bought on letters of credit and used to create a borrowing vehicle enjoying “very attractive” costs amid China’s tightening bank lending landscape.
Adrian Ash
Formerly City correspondent for The Daily Reckoning in London and head of editorial at the UK’s leading financial advisory for private investors, Adrian Ash is the editor of Gold News and head of research at BullionVault – winner of the Queen’s Award for Enterprise Innovation, 2009 and now backed by the World Gold Council market-development and research body – where you can buy gold today vaulted in Zurich on $3 spreads and 0.8% dealing fees.
(c) BullionVault 2011
Please Note: This article is to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it.
Gold & Silver Slip, Face “Bigger Correction” If Arab Turmoil “Quickly Resolved”
By: Adrian Ash, BullionVault
London Gold Market Report
THE PRICE OF GOLD slipped 1.3% in Asian and early London trade on Monday, pulling back to a 6-session low of $1411 per ounce as global stock markets slipped and the US Dollar rose on the FX market.
Silver prices dropped 2.1% to trade beneath $36.50 per ounce, a 3-session low.
Crude oil and the broader commodities markets were little changed, meantime, as anti-Gaddafi forces in Libya – benefiting again from US-led airstrikes – pushed westwards towards Tripoli.
Secretary of state Hillary Clinton said there would be no US-led action against the regime in Syria, where 12 people were killed at the weekend in anti-government protests.
“We could be in for a pullback in the short term,” says one precious-metals dealer in London, noting the “inability” of the gold price to push upwards from last week’s new record high above $1447.
“It feels as if we are standing on an increasingly slippery slope,” says a Hong Kong dealer in a note.
“The market has had a huge move up and the higher we go up, the more chance of a bigger correction,” Bloomberg quotes Afshin Nabavi, vice-president at Swiss refiner MKS’s Finance division.
Writing today in the Financial Times, “We would consider [in the 1990s] a healthy average capacity utilisation to be maybe 70%,” says John Dizard, quoting an un-named Swiss gold refinery director.
“Now, technically, we have been running at over 100% of capacity…going three shifts, 24 hours a day every day of the year.”
This surge in demand means the major gold bullion refineries can overcome their “high fixed costs” and are all expanding operations, says Dizard. For existing plant, however, “it means there is little time to do necessary maintenance.”
As a group last week, gold refiners and the other industry-side players classed as “Commercial” raised their always bearish bets on the gold futures market, according to Commitment of Traders data from US regulator the CFTC.
Net of bullish gold futures contracts, the Commercials’ short position grew by 3.5% in the week-ending last Tuesday to the equivalent of 817 tonnes. Right in line with the last two years’ average, it was exactly matched on the other side of the trade by a rise in the “Speculative” net long position held by investment funds and private individuals.
“This is an encouraging sign that investors are less bearish on gold,” says the latest CFTC analysis from Standard Bank’s commodity team.
“Should safe-haven demand remain intact, we could see gold recover from the liquidations seen in the aftermath of the earthquake in Japan.”
Japanese officials today said that highly radioactive water has been found outside the reactor buildings at the damaged Fukushima plant.
New government advisor Takayoshi Igarashi of Hosei University is pressing for ¥20 trillion ($245bn) to be spent on de-centralizing power, Bloomberg reports. Because “We have no idea when the big one’s going to hit Tokyo, but when it does [that earthquake] is going to annihilate the entire country because everything is here.”
German chancellor Angela Merkel ‘s Christian Democrat party suffered a “sensational” loss in the weekend’s local elections, with a left-wing coalition of Social Domecrats and the anti-nuclear Green Party now likely in Baden-Württemberg.
The central bank in Dublin has meantime asked the European Central Bank to fund the €60 billion ($42bn) in emergency loans it’s made to support Ireland’s banks.
Priced in the Euro, gold bullion slipped 0.8% early Monday to €32,360 per kilo as the single currency retreated to a 10-day low near $1.40.
The gold price in Sterling dropped back to £885 per ounce – halving last week’s 2.0% rise – as the Pound fell to an 8-week low vs. the Dollar beneath $1.60.
“Silver continues to garner the most interest,” says Standard Bank in its latest analysis, saying that last week’s addition of 181.5 tonnes to trust-fund ETF positions “confirms the market’s current preference for silver.
In the US futures market, says London’s VM Group consultancy, latest silver data show “the largest exit” of bearish players since the start of Feb., enabling the speculative players’ net long position (of bullish minus bearish bets) to record “its first gain after three weeks of declines.”
Noting the sharp outperformance of silver relative to gold bullion over the last 12 months, plus the “sound” fundamentals, Daily Telegraph Questor analyst Garry White today cautions that the silver price “could be ahead of itself – especially if there is a quick resolution to the current turmoil in the Arab world.”
Adrian Ash
Formerly City correspondent for The Daily Reckoning in London and head of editorial at the UK’s leading financial advisory for private investors, Adrian Ash is the editor of Gold News and head of research at BullionVault – winner of the Queen’s Award for Enterprise Innovation, 2009 and now backed by the World Gold Council market-development and research body – where you can buy gold today vaulted in Zurich on $3 spreads and 0.8% dealing fees.
(c) BullionVault 2011
Please Note: This article is to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it.
Gold Value: Where to Now?
Gold value presentation from Paul Tustain of BullionVault
Gold remains materially under-valued, says BullionVault founder and CEO Paul Tustain – even now, after 6 years of almost continuous price rises.
Based on historical data, in fact – plus his expectations of future inflation – Paul Tustain believes the true value of gold is nearer $3,844 per ounce today.
Leading finance columnists have already called his gold value analysis “a bold view…giving more reasons to buy gold.” Paul’s new 5-part presentation shows why. You can download this video here, for free.
Part 1 – Gold fundamentals
(17 mins)
Part 2 – Debt and Keynes (17 mins)
Part 3 – Commodities & our standard of living (10 mins)
Part 4 – Western currency devaluation (24 mins)
Part 5 – Valuing gold (23 mins)
Gold, says Paul Tustain, can “rescue your finances when things go badly wrong.” Its value today comes because “our governments have behaved very irresponsibly,” he believes, “and we’re now not so different from the ‘banana republics’ which have lurched from crisis to crisis over the last 100 years.
“I think our future is likely to look a bit like their past.”
Paul Tustain’s gold value of $3,844 is not a prediction of its future price; it is what BullionVault’s analysis says the precious metal is worth today on a risk-adjusted basis, calculated as an actuary would value insurance.
Gold’s value is open to debate, of course. So you can challenge and judge what you think gold is worth for yourself, using the Gold Value Calculator which Paul created for his research.
Download the Gold Value Calculator used in Part 5.
Please Note: This presentation is to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it.
Portugal is big warning flag for ALL investors!
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Remember 2007 when the subprime mortgage crisis began to unravel? If you recall, the cracks in the real estate market were exposed. And the problems kept spreading. First it was small mortgage lenders that went bust. Then it became evident the entire financial system was going down.
But contrary to the glaring evidence, the three most influential figures in the United States — President Bush, Treasury Secretary Paulson, and Fed Chairman Bernanke — stood before cameras, time after time, telling the public not to worry. “The subprime crisis is contained,” they professed.
Soon thereafter, Paulson went to Congress asking for $700 billion to avert a total global meltdown.
After that, the message from government officials changed on a dime. The big three stood before the people telling them it was time to worry! They declared that the massive emergency Troubled Asset Relief Program (TARP) was absolutely critical.
“Otherwise,” they warned listeners …
“More banks could fail, including some in your community. The stock market might drop even more, which will reduce the value of your retirement account. The value of your home could plummet. Foreclosures could rise dramatically. And if you own a business or a farm, you’ll find it harder and more expensive to get credit.
“More businesses will close their doors, and millions of Americans could lose their jobs. Even if you have good credit history, it’ll be more difficult for you to get the loans you need to buy a car or send your children to college. And ultimately, our country could experience a long and painful recession.”
Well, they got the $700 billion. And we still got all of the above, plus more!
Those who bought into the confidence-massaging campaign were led like sheep to walk off the edge of the cliff. Many were caught on the wrong side of a collapse in global financial markets, a freeze in global credit, and were sideswiped by the sharpest downturn in global economies since the Great Depression.
While the fallout from this crisis remains with us today and the economic outlook uncertain, there’s another act to this saga that is ongoing. And the script reads in a similar way.
This time, however …
Its Roots Are in Europe
But it’s not private debt that’s exposing the world to another wave of global crisis, rather it’s public debt. And for the past year, we’ve witnessed more government campaigns to shore up confidence by European officials who have:
- Said it was contained,
- Rolled out numerous plans to resolve the crisis, and
- Denied that any country in the euro zone would fail.
Yet we continue to see the dominoes of an unsolvable sovereign debt crisis in Europe fall, and the probability of the default of a European monetary union member country rise. They’ve managed to extend the timeline of the fallout, but they’ve done nothing to change what seems to be its inevitable fate.
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The fact is the euro-zone debt crisis could make the subprime crisis look like just the opening act. Euro-zone banks are heavily exposed to sovereign debt of weak euro members. And asking creditors to take a haircut on their investments means banks in Europe would have to eat losses.
That’s exactly what European officials are trying to avoid!
Instead, through the rules set by the EU and IMF for doling out rescue funds, it’s the people who are asked to absorb all of the pain through tough austerity measures. But the people are beginning to rise up and demand that the burden be shared.
Now we have …
Portugal, the Next Falling Domino
First it was Greece, then Ireland, and now Portugal looks like it’s days away from requesting a lifeline.
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This week, Portuguese Prime Minister Socrates presented his plan of tough austerity measures to Parliament, to reign in the unsustainable debt and deficits that have put the country on the edge of insolvency. Portugal’s parliament voted it down. Socrates promptly resigned.
Consequently, Portugal has sent a clear message to the EU/IMF leadership: The people are not willing to absorb all of the pain!
But if the weak countries reject a rescue, it would destabilize the financial system. And if the EU/IMF compromises its terms for rescuing the weak by making creditors share the burden, it would endanger the financial system.
Simply put: It’s a no-win all the way around.
The question is then: Will Portugal be the lynchpin that collapses the euro? If so, expect the reverberations to be felt across all markets.
Regards,
Bryan
This investment news is brought to you by Money and Markets. Money and Markets is a free daily investment newsletter from Martin D. Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil. Dr. Weiss is a leader in the fields of investing, interest rates, financial safety and economic forecasting. To view archives or subscribe, visit http://www.moneyandmarkets.com.
“Avoid Gold” Says Institutional Survey as Markets “Grow Tired” of Worries Over Euro Debt, Libyan War, Japan Crisis
By: Adrian Ash, BullionVault
London Gold Market Report
THE PRICE OF GOLD ticked higher in London trade on Friday, recovering half of yesterday’s 1.5% drop from new record highs above $1447 per ounce.
Silver prices also rallied, regaining a third of Thursday’s 3.2% drop from new 31-year highs above $38.20 – some 112% higher from this time last year vs. the Dollar.
European stock markets meantime gave back early gains, but neared the weekend 2.9% higher from last Friday.
The Euro currency meantime slipped back to $1.4130 – one US cent up on the week – as EU politicians signed their “comprehensive package” of stability fund promises, but Portuguese bonds fell sharply again, driving 10-year yields to new post-union highs of 7.80%.
Japanese authorities widened the exclusion zone around the stricken Fukushima nuclear plant, while British warplanes attacked Gaddafi targets in Ajdabiya, “where Libyan rebels are trying to retake the town,” according to the BBC.
A new “day of rage” brought hundreds of thousands of both pro- and anti-government protesters onto the streets of Yemen’s capital Sanaa.
“Continued conflict in Libya, growing focus on the European debt crisis and uncertainty surrounding the longer-term impact of the Japanese earthquake should keep investors interested in gold and silver,” reckons the commodity team at South Africa’s Standard Bank today.
But gold and silver bullion markets “temporarily seem tired of both [the Libyan and Japanese] stories,” says another London dealer in a note.
Data from TrimTabs this week showed US investors pouring record volume of cash into Japanese equity funds, doubling the previous 1-day record on March 16th – just 5 days after the earthquake and tsunami which killed at least 10,000 people.
With Spanish banks said to be “crawling with hedge fund and private equity people” in a bid to avoid a Madrid bail-out today, “At some point the currency market will wake up the Eurozone debt crisis,” says Standard Bank forex strategist Steven Barrow. “But for now, the market seems blinkered.”
“[Investors] don’t believe in the gold story anymore,” declared Kevin Norrish of Barclays Capital on Wednesday, announcing the bank’s latest commodity investment survey of institutional players.
“Not one single respondent” chose gold bullion as the likely best performer in 2011, Norrish said.
Crude oil – the survey’s top pick for 2011 gains – today ticked back through $105 per barrel of US West Texas Intermediate.
“Avoid gold appears to be one of the most striking messages of the poll,” according to Norrish. Some 60% of respondents also said they now favor active strategies in commodities, rather than merely buy-and-hold – up from 20% a year ago.
“As the financial market concerns that supported it in over the past two years fade, gold may now be in need of a new catalyst if its nine-year upward price trend is to be maintained.”
The People’s Bank of China’s new global outlook, releaesed with is 2010 review on Friday, warned that “the risks from European sovereign debt still remain and geopolitical risk may spread, which will give the US Dollar temporary strength [amid] general weakness.”
The 125-page report said commodity prices should be firm as “the recovery momentum of the world economy will continue,” but gold prices could retreat from their new all-time highs.
“With both Indian and Chinese central banks tightening monetary conditions, we would be surprised if gold demand from China and India remained strong this year,” says the latest weekly commodities analysis from French bullion bank Natixis.
“While few Indians would contemplate selling gold, rising interest rates are encouraging cash-strapped holders of gold to use the metal as collateral for new loans. We would view this as part of the process whereby tighter money leads to a less conducive environment for net new investment.”
Adrian Ash
Formerly City correspondent for The Daily Reckoning in London and head of editorial at the UK’s leading financial advisory for private investors, Adrian Ash is the editor of Gold News and head of research at BullionVault – winner of the Queen’s Award for Enterprise Innovation, 2009 and now backed by the World Gold Council market-development and research body – where you can buy gold today vaulted in Zurich on $3 spreads and 0.8% dealing fees.
(c) BullionVault 2011
Please Note: This article is to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it.
Gold Bubble: Written in the Stars
By: Adrian Ash, BullionVault
London Gold Market Report
Oh lordy! Gold investing is being tipped in tabloid horoscopes…Sell!
“ARE YOU available for an interview this afternoon? I’d like to discuss the possibility that we’re in a gold bubble!”
So asked a journalist’s email we got here at BullionVault…back on 30th January 2009. Such bubble talk has only grown louder since then.
Yet gold has risen a further 56%. Which over two and more years is hardly the stuff of bubbles, however you define them.
Gold investing used to be seen as a contrarian move, of course – a rejection of the happy-clappy bullishness pervading the late-20th century’s credit-fueled stupidities. So what about mass participation – that frenzy of Joe Public buying as the mass media urges him on?
Well, “My esteemed colleague, the astrologer Christine Skinner, says in her latest financial newsletter that over the next few months, ‘precious metals should hold their value and, indeed, increase’…” wrote the UK’s Jonathan Cainer this week in mass-market tabloid The Daily Mail.
Oh lordy! Gold investing is being tipped in tabloid horoscopes…Sell!
But what’s this? “Generally,” Mr.Cainer goes on, “precious metals rise when international insecurities rise. I too foresee a bumpy few months on the world markets…but the further into the future I gaze, the more I like the look of the global economy. For Japan in particular, the financial outlook is surprisingly rosy.”
So here again, gold’s bubble finds its pin all too soon. Christeen Skinner – source of the gold tip – “has studied space and time for over 40 years,” according to her website, but doesn’t currently have a million-strong following. Unlike Jonathan Cainer, who takes instead what you’d have to call the contrarian line, if only gold investing really were all the rage today. Which it’s not.
1. It’s the wrong shape
Compared with undeniable bubbles, gold’s recent climb just isn’t steep enough. Gold prices rose 85% for UK investors in the last 3 years, but US stocks rose 160% in that length of time in the 1920s, and Germany’s Neuer Markt rose over 1600% starting in 1997. The South Sea Bubble in 1720 rose 9-fold in 5 months! What makes gold remarkable today is the longevity, not speed, of its bull market – now delivering positive, inflation-beating returns to savers pretty much everywhere worldwide each year since 2000.
2. Investment “mania” still missing
The financial pages might be packed with gold comment, but actual participation by both professional and private investors remains low. In the early 1980s, private-bank clients were expected to hold 3% of their wealth in gold, many times the 0.5% allocation seen in the finance industry today. Even in the bullion market itself, three-quarters of the 500-plus analysts and traders attending last autumn’s LBMA conference in Berlin said they held as little as nothing (“Between 0% and 10%”) of their savings in precious metals. Saturation is a long way off.
3. …as is true “bubble” psychology
A speculative bubble, by definition, needs the mass of investors and analysts to ignore its faults until it’s much too late. As late as summer 2007, for instance, and with US home prices already falling fast, housing was called a “serious national bubble” by only 29% of professional business economists, up from just 14% two years earlier.In Jan. 2011, in contrast, over half the 1,000 Bloomberg terminal users answering the newswire’s quarterly survey called gold a bubble. Just this week, Barclays Capital’s latest institutional survey found no one – not one! – who thought gold would be the best performing commodity in 2011. With prices hitting new all-time highs vs. the Dollar right alongside, does that sound like bubble behavior to you?
4. Gold’s far from over-valued
All the gold outside central-bank vaults today (jewelry plus bars and gold coins) is now priced around £3.7 trillion – barely 3% of the world’s total private wealth and far below the 15-30% estimated for the 1930s and early 1980s, the last two global financial crises. It’s only just climbed back to one-fifth of the value of G7 government debt, a level last seen in 1990 and well below the near-parity of 1980. And on a risk-adjusted basis, calculated as an actuary would price insurance, fair value for gold could now be nearer $3800 per ounce than the $1440 being asked in the market. That’s because the market continues to discount to zero the risk of a severe, even hyperinflation, such as the rich West hasn’t seen since WWII. Which could no doubt prove the correct view, if only it weren’t so complacent.
5. Money-crisis insurance still needed
It’s always hard to accuse gold buyers of “over-optimism ” (Charles Kindleberger‘s definition of bubble mentality), but this market will only switch to “irrational exuberance” (Robert Shiller‘s phrase) when its key driver – loose monetary policy – ceases to be true. That’s what happened as interest rates began rising sharply at the start at the end of the 1970s. In the early ’80s, cash in the bank started to pay double-digit returns over and above inflation, so inflation defence just wasn’t needed. Whereas today, in contrast, real interest rates in the UK are worse than at any time since 1978, with our record peace-time deficits – plus the loose money consensus which continues to dominate both monetary and fiscal policy – capping any hope savers might have of earning a decent yield on their cash.
To recap: Nothing has changed fundamentally. Ultra-loose monetary policy is chipping away at the value of official cash, only it’s now locked in by record peace-time deficits which have hamstrung central bankers’ ability to respond to rising prices. As an aside, emerging-market demand continues to grow, but mass participation in the rich West is a very long way off.
Or as GoogleLab’s Ngram widget puts it – searching books published in English since 1800 – the word “gold” is only just making a comeback. Gold investing is by no means sure to defend or grow your savings, it certainly remains far from a bubble.
Adrian Ash
Formerly City correspondent for The Daily Reckoning in London and head of editorial at the UK’s leading financial advisory for private investors, Adrian Ash is the editor of Gold News and head of research at BullionVault – winner of the Queen’s Award for Enterprise Innovation, 2009 and now backed by the World Gold Council market-development and research body – where you can buy gold today vaulted in Zurich on $3 spreads and 0.8% dealing fees.
(c) BullionVault 2011
Please Note: This article is to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it.
The Greatest Complacency of the 21st Century
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Many of our readers know intuitively that their neighbors and friends have become complacent about the world around them, but they don’t know how to prove it.
Today, I’ll show you two ways to do just that.
The key is that rising equity prices usually lead to an increase in stock market optimism, while falling prices generate stock market pessimism.
That alone is no justification for bearish or bullish strategies — until it reaches an extreme.
So the questions are: How do you measure this optimism or pessimism? And how do you know when it’s at an extreme level?
Right now, I’d like to focus on two measures in particular …
Mutual Fund Cash Levels
The average cash allocation of mutual fund managers is one of the most important sentiment indicators available — and for good reason: Forty percent of all U.S. stocks are held by mutual funds. So their buying and selling can easily move the market.
What’s especially remarkable is that fund managers are as prone to the herding instinct as any other group, which leads to an interesting pattern in their investment behavior:
Mutual fund managers almost invariably hold relatively high cash levels near market bottoms, and relatively low cash levels in the vicinity of important market tops.
Go back to March 2000, for example, near the top of the tech stock bubble. Precisely when they should have been taking profits off the table, mutual fund managers loaded up with stocks and ran their average cash levels down to 3.7 percent. For them and their shareholders, it was a disaster. For astute investors, however, it was a blatant and very TIMELY sell signal!
But now look:
Mutual fund cash levels are even lower than they were in March of 2000!
In fact, according to the Investment Company Institute, mutual fund cash levels are currently at an extremely low 3.5 percent. They have been that low just twice before:
- First, in the summer of 2007, at the climax of the 2003-2007 cyclical bull market.
- Second, in March/April 2010 right before the flash crash of May 6, which marked the beginning of a 17 percent market correction.
What’s most remarkable is that, as you can see in the chart below, cash levels have been very low for more than a year. This tells us that the only thing driving the market higher is the Fed, and we don’t doubt their ability to continue their money pumping. But the history of this indicator suggests that the next vicious bear market may be lurking around the corner.
Another indicator I closely follow is …
Investors Intelligence Advisor Sentiment
Investment newsletter editors play an important role in influencing and driving investor sentiment; and Investors Intelligence has developed a relatively reliable sentiment indicator to track them.
Here, too, a pattern is clear:
Compared to mutual fund editors, newsletter writers seem to be more flexible, adapting more rapidly to changing market conditions. So when they’re overly bullish as a group, it often has only short- to medium-term bearish implications.
But still, long stretches of extreme bullish sentiment as measured by this indicator has often marked major tops.
As you can see in the second panel on the chart below a high degree of bullishness has been persistent for nearly four months. And the trigger line for a bearish signal — more than 55 percent bulls — has been broken.
This is another clear warning sign that a larger correction is overdue. Moreover, despite the stock market correction of the past few weeks, bullish sentiment has prevailed. That’s very unusual, and I think it’s another confirmation of the bearish signal!
Indeed, we see little or no angst even in the wake of ominous news coming out of Japan, North Africa, and the Middle East!
That’s complacency par excellence — historically a sign of an imminent stock market top.
If you are looking to profit from falling stock markets, I’d say that a decline in the Nasdaq 100 is the most probable. So you might consider ProShares Short QQQ ETF (PSQ) in the $33-$34 range. This inverse ETF is designed to rise 1 percent for every 1 percent drop in the NASDAQ-100 Index.
Best wishes,
Claus
This investment news is brought to you by Money and Markets. Money and Markets is a free daily investment newsletter from Martin D. Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil. Dr. Weiss is a leader in the fields of investing, interest rates, financial safety and economic forecasting. To view archives or subscribe, visit http://www.moneyandmarkets.com
Rising Inflation Turning Up the Heat on Central Bankers!
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A hilarious thing happened earlier this month. The President of the New York Fed, William Dudley, tried to justify the Federal Reserve’s easy money policy.
In a speech before the Queens Chamber of Commerce, he claimed inflation wasn’t a problem, noting as one example that:
“You can buy an iPad2 that costs the same as an iPad1 … you have to look at the prices of all things.”
The response from the crowd? Utter disbelief! One person in the crowd referenced the rampant food inflation we’re seeing by asking Dudley,
“When was the last time, sir, you went grocery shopping?”
Another quipped,
“I can’t eat an iPod!”
Me?
I can’t believe the claptrap the Fed is peddling either! Former Goldman Sachs economists like Dudley and his Ivy League-educated boss Ben Bernanke may say (at least publicly) that inflation is under control. But the rest of us in the Real World know that’s bupkis.
Gas. Food. College. Heck, Diet Coke! It’s all getting more expensive.
More importantly, the OFFICIAL data is now confirming what you and I are seeing every day. That’s turning up the heat on central bankers worldwide — with important investment ramifications for you.
Don’t Look Now, but Inflation
Gauges Are on the Rise!
We get three major inflation reports every month here in the U.S. — one each on import prices, producer prices, and consumer prices. So what did the latest figures show?
* Import prices jumped 1.4 percent in February from January. That easily topped forecasts, and it was the fifth month in a row where prices rose by more than 1 percent. Imports cost 6.9 percent more than they did a year earlier, the fastest inflation rate in nine months. And imported food shot up the most in any month since the government began tracking in 1977!
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* Producer prices surged 1.6 percent, the biggest monthly gain since June 2009! Wholesale goods and services are now rising in price at a 5.6 percent year-over-year pace, the most in almost a year. Further up the pipeline, intermediate goods rose in price at the fastest pace since July 2008 while crude goods jumped another 3.4 percent.
* Consumer prices jumped 0.5 percent, the most in 20 months! Price increases at the “core” level are also picking up, rising by two-tenths of a percent for two months in a row. That’s something we haven’t seen since the fall of 2009.
Then earlier this week, we learned that U.K. inflation surged to 4.4 percent in February. That was faster than the 4.2 percent expected by economists, and the worst reading in any month since October 2008. Consumer inflation in the 17-nation euro zone is also picking up. At 2.4 percent in February, it’s now comfortably above the European Central Bank’s 2 percent “limit.”
Market Sands Shifting as
Price Pressures Increase
Look, central bankers can try to stick their heads in the sand for a while when the numbers take a turn for the worse. That’s what U.S. policymakers — and their developed world counterparts in the euro zone and U.K. — were doing for a while.
But our foreign counterparts are showing increasing signs of breaking ranks. That’s leading to speculation the ECB could hike rates as soon as next month, with the U.K. not far behind in July.
Here in the U.S., Bernanke is still (yes, STILL!) dragging his feet. But the yield curve continues to flatten as I predicted several weeks ago. And investors are continuing to bet against him in the interest rate futures market.
So why should this matter to you?
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Well, I wouldn’t be surprised to see risk assets like stocks get hit as slightly tighter monetary conditions get priced in. I also continue to believe the dollar is vulnerable.
I’d use the “relief rally” we’ve seen in the wake of the Japanese quake and nuclear crisis to lighten up on stock market risk. I’d also look to hedge currency risk in my fixed income portfolio using investments such as the iShares S&P/Citigroup 1-3 Year International Treasury Bond Fund (ISHG). Foreign bonds tend to rise in value when the dollar falls because each interest or principal payment remitted in a foreign currency translates into more dollars as it’s repatriated.
Oh, and if a Fed official shows up in YOUR town to talk policy? Feel free to heckle all you want! These guys don’t know what the heck they’re talking about when it comes to inflation.
Until next time,
Mike
This investment news is brought to you by Money and Markets. Money and Markets is a free daily investment newsletter from Martin D. Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil. Dr. Weiss is a leader in the fields of investing, interest rates, financial safety and economic forecasting. To view archives or subscribe, visit http://www.moneyandmarkets.com.
Weak Holders Have Sold Their Gold – Now the Metal Can Make its Next $300 Move UP
By Andy Hecht, Commodity Options Expert
Dear Sovereign Investor,
This move – weak holders selling their gold – is the next tipping point in gold. And it’s your cue to add more gold to your holdings NOW.
Because gold is “moving on up baby!”
It’s not in a bubble… as several market naysayers would have you believe. Here’s why…
What the Technical Indicators
Say About a Gold Bubble
First, open interest – that’s the number of longs and shorts in the futures market – has actually dropped by over 13% since the beginning of 2011! That means that there are fewer positions in the market. This is not the hallmark of a “bubble.”
Second, the volatility that option traders believe the gold market will be trading in the future is at levels between 16% and 20%. Currently gold’s historical volatility is running at 15%. So option traders are on to something…
These levels are consistent with a non-volatile- slow and steady market.
If implied volatility – which determines option prices – spiked suddenly to 40% or 50%, then I’d argue that the market is overdone! Since the rally has been slow and steady, option prices haven’t blown through the roof like that.
Third, the precious metal’s Daily Relative Strength Index (the RSI), which measures if gold is oversold or overbought, is at 67%.
Clearly, none of these numbers indicate any “frenzy” in the gold market.
So where’s this gold bubble analysts are talking about?
It’s nowhere.
It doesn’t exist.
Gold is not even remotely near bubble territory.
In Fact, the Best is Yet to Come for in Gold
Just think about it. Central banks across the globe are still buying gold.
The Chinese continue to consume more than their annual gold production. On February 19th, 2011 Forbes reported that, “China’s Industrial and Commercial Bank (ICBC) says purchases of physical gold and gold-related investments are growing at record setting rates.”
John Paulson, the investor who made billions during the 2008 housing crisis, owns 25% of the largest gold ETF (GLD). He’s owned it since gold was $900 an ounce. He also holds significant positions in gold producing companies. Today, his ETF holding alone is worth over $14 billion!
George Soros owns a significant amount of gold too.
J.P. Morgan Chase recently announced it would accept gold as collateral for loans.
With fiat currencies collapsing around the globe, economies teetering on the brink of collapse, natural disasters, civil unrest, war, and just general fear and uncertainty gold is a strategic reserve… a safe haven.
Gold Remains in a Sustained Uptrend
Gold has been in a sustained uptrend for ten years. Since 2000, it’s up over 500%. And I believe this trend will continue.
Here’s a little-followed fact for you. The number of contracts in out-of-the-money gold call options is huge!
There are 25,000 contracts open on June $2,000 Call options and June $2,500 Calls. This means some traders and investors believe gold will be above the $2,500 per ounce mark by June.
Even more staggering are the more than 37,000 open contracts on December $2,000 Calls and December $3,000 calls! Some traders and investors expect gold to cost more than $3,000 an ounce by December.
These contracts represent over $14 billion worth of gold if it goes to a price higher than $3000 per ounce.
The Gold Trend Will Be Your Friend to $3,000 an Ounce
The gold daily chart:
It’s important you don’t miss this golden ride, so let me reiterate: there is no bubble in the gold market.
All market indicators, both technical and fundamental, point to higher prices in 2011 and beyond.
Buy gold.
Happy trade hunting!
Andy Hecht
Blog: Commodity Options Outlook
