Why Gold Bubble Advocates Could Be Wrong

Gold has risen to an unprecedented $1140, causing some to conclude the market is a bubble about to burst. Moses Kim makes a case for resisting the urge to short gold as political tensions, particularly class conflict and concerns over taxation, will cause instability, volatility, and an increased demand for the security offered by gold. See the following post from Expected Returns.

That is, if you want to survive as a trader. Anyone who has been trading actively for a reasonable period of time knows that gold and silver move to their own unique rhythm, and that shorting gold over the past decade has been a losing proposition. I know there are many investors "dollar cost averaging" their short positions in gold, praying for a correction that never comes. The formula for making money in this bull market is simple: buy the dips and sell the rips.

I am amazed at the total change in sentiment from investors towards the gold market. Just watch how investors react to any pullback in gold; my guess is that all dips will be bought aggressively. The pattern over the course of this bull market has been clear: a multi-month consolidation followed by a huge breakout. We haven't come close to going parabolic yet, and until we do, this bull market is well intact and is not at bubble levels. Keep your television tuned in to CNBC so you can do exactly the opposite of what they are recommending. Currently CNBC is telling you to sell gold because it is a clear bubble- this means you should be buying.

Anyway, what is $1140 gold telling us? I'll try to give you an idea of my thought process when I invest, which is heavily dependent on politics.

Political and Economic Dislocations Ahead

If you study history, you realize that the majority of truly seminal events happen in the shortest span of time. While most people are stuck in the mindset that events move in a predictable, steady, linear manner, what's actually happening right now politically, economically, and socially are huge changes that will affect the lives of everyone globally. Political tensions will likely escalate in the coming years, and there will be a sudden change in global dynamics. The catalysts for major events will only be obvious to most people in hindsight. The job of the successful investor, however, is to understand how current actions dynamically influence future events. This allows you to foresee events and to adjust investment decisions accordingly.

Class Warfare, Increased Taxation= Recipe for Disaster

It's not surprising, but class warfare is already beginning in America, as politicians try to enforce equality on the population. If your company can't compete globally, don't worry, Uncle Sam will be there to take capital away from productive individuals and funnel it to unproductive companies. State taxes are already rising for the "rich", and as a result, capital will flow out of the U.S. More than people realize, capital flows have an enormous effect on the growth of economies. Further, as unemployment benefits get extended once again, jobs remain scarce, and "too big to fail" becomes the official mantra of government, we are developing an economic model that is more socialist than capitalist. We will learn once again that enforced equality is contrary to the idea of freedom, both economic and political, and that economic growth will suffer as a result. Why is this important as an investor?

Likely Government Responses to Insolvency

Lets look at the range of possible actions the U.S. government will undertake to stay solvent and delay the inevitable path to bankruptcy. If I were a greedy politician, where would I look to confiscate wealth? Besides gold, which acts as a check against government ineptitude, I would be looking at 401k's. Just look at what the government has done with the Social Security "Trust Fund"? It has replaced money taxed from the population and replaced it with worthless government IOU's. I wouldn't be surprised in the least if 401k's were replaced with U.S. Treasuries, all in the name of stabilizing portfolios. Of course this will be a smokescreen for criminal confiscation of the hard-earned wealth of Americans, but what about the handling of this crisis hasn't been criminal under the surface? The point of my little rant is this: eliminate counterparty risk, especially if you are approaching retirement. If you own a 401k, you are a sitting duck in my opinion.

What's the other option? Inflation. This form of confiscation is obviously much harder to escape. Most lower and middle class Americans will understand the curious feeling that standards of living are going down even in the midst of supposed growth in our economy. The idea that our government would purposely manipulate economic statistics to further their agenda is, surprisingly, repugnant to some people. The truth is, government statistics misrepresent the true state of our economy, which should be obvious to anyone who actually thinks. Why do we need such tremendous stimulus if our economy is recovering? Use your common sense and don't buy into flawed Keynesian propaganda.

My point is that in a time of total disregard for the rule of law and an ad hoc approach to administering justice, the free market just can not operate. This is incredibly bearish for our economy. Why do you think so much money is flowing to gold? You never know when the government will do something truly nutty like ban short-selling or impose ridiculous taxes on capital gains. People are buying equities in the short term, but I don't think anyone in their right mind believes equities are undervalued. Everyone has two hands on the exit.

What is Gold Telling Us?

A move to $1500-$2000 gold, especially in the next year, is a frightening possibility. Don't expect business as usual with gold at those valuations. I have repeatedly stated that gold is a purveyor of truth in a time of lies. You have heard our government officials talk about a "strong dollar policy" for years and years, yet the dollar has lost about 50% of its value in the past decade against a basket of global currencies. The dollar's performance against gold is even worse. At what point does this relatively controlled decline in the dollar become chaotic? I can assure you that smart money is stealthily moving out of the dollar and into gold. When there is mass recognition that the dollar is going way down, good luck trying to head for the exit.

Like it or not, we are approaching a time of volatility both economically and socially. Gold is the only true hedge against instability. The coming volatility is already embedded in the system, whether it is in the form of complex derivatives, insane debt levels, unprecedented unemployment statistics, or a fundamentally flawed global currency arrangement. Be sensitive to the message gold is relaying right now- the worst is definitely not behind us.

This post has been republished from Moses Kim's blog, Expected Returns.

Unique Considerations When Owning Gold

While more investors find gold to be a good investment in today's uncertain economic climate, they are learning how to deal with the unique considerations for gold investment like finding a safe place for storage. Tom Dyson explains some of the ways in which to transfer and store physical gold and how to invest in gold with your IRA through a custodian. See the following from Daily Wealth.

"Keep moving," said the TSA agent...

Two years ago, I traveled from Las Vegas to Baltimore with five gold coins – worth $8,000 – in my pocket. I wanted to know if the gold coins would set off the airport security systems.

I put my bag onto the belt and threw my shoes into a plastic bin. I kept the coins in my pocket. The security officer beckoned me through the metal detector.

Nothing happened. The gold coins did not set off the metal detector.

I love owning physical gold bullion. With gold bullion, I have an asset that'll never lose its value or its utility, no matter what happens in politics or the economy. I can't always buy the gold I want at the shop around the corner, so I've spent some time researching the ins and outs of transporting and storing my gold...

For example, if you're moving gold out of the country, keep it in your pocket, not your hand luggage. Only ferrous metal (which contains iron) sets off the detectors in airports. So pure gold coins in your pocket will not set off airport metal detectors. If the gold is in your hand luggage, it will show up in the x-ray machine.

Last week, I sat down with Michael Checkan, an international gold investment specialist who's been in the business for 30 years. I asked him to discuss the different ways to store your gold once you've bought it...

A bank safety deposit box was the first solution Michael mentioned. It is the easiest. Boxes cost as little as $50 a year. If you're already a customer of the bank, they may even offer it to you for free.

But I have a problem with banks. What if they go bankrupt? You don't want to get stuck banging on a locked door when you need your coins in a hurry. Second, Michael says the Feds can force banks to divulge information about your security box. They can force the bank to tell them whether or not you own a box. Then the Feds can issue a subpoena and force the bank to open it.

So Michael suggested keeping gold bullion in an IRA...

To qualify for inclusion in an IRA, the gold must by pure, 24-karat gold. The Feds make one exception to this rule: They allow you to put the U.S. Eagle, a 22-karat gold coin, in your IRA. (Here's a good FAQ about including gold bullion in an IRA.)

I see a couple of big problems with buying gold in your IRA. First, you can't put coins you already own into an IRA. You have to make a fresh purchase. Secondly, you don't have access to the coins. A qualified custodian must keep them on your behalf.

Another option is to send your gold overseas to a private security vault. I like this idea. You keep your gold where it's out of reach of the U.S. government. These private vaults don't qualify as financial institutions, so you don't have to report them as foreign accounts when you file your taxes. Michael recommends Safes Fidelity in Geneva and Das Safe in Vienna. These are the two safest, most confidential vault businesses in the world. You can send them your gold through the mail. Just make sure you use registered insured mail. Or you can take it there yourself.

But of all the places Michael suggested, hiding gold on your property was my favorite solution. You have instant 24-hour access to your gold, and you don't pay any storage charges. The key is, it has to be safe.

One option is to install a safe or a gun locker in a discreet part of your house. Make sure you secure the safe to the floor so a thief can't carry it out of your house. Or you can bury the gold in your backyard or a friend's backyard. You can buy waterproof coin tubes online or go to Home Depot and buy a PVC tube and caps to seal the ends.

Just make sure you tell one person where you hid it... in case something happens to you. And don't tell anyone else.

This post has been republished from Daily Wealth, a contrarian investment site.

Not Too Late To Profit From Gold

Gold has seen a rapid rise of about 300% since 2000. Despite its lack of intrinsic value or dividends, and the costs of storage, investors are wondering if they still have time to profit from gold's run before it's too late. See the following from Expected Returns.

From The LA Times, Why gold is shining brighter:

The American public has no say in Federal Reserve policy.

But the gold market might.

The metal hit yet another record high on Friday, gaining $6.40 to $1,095.10 an ounce. It jumped $55 for the week and is up $211, or 24%, year to date.

This cannot be comforting to Fed Chairman Ben S. Bernanke. The classic view of gold is that it is the best inflation hedge. That's a faulty assumption, but still: Given the record sums the Fed has pumped into the financial system -- and the fear that that money mountain could eventually power a surge in inflation -- Bernanke doesn't need rising gold prices reinforcing investors' doubts.

Gold is just about the only asset that keeps governments and central banks honest. When governments decide to debase their currency and confiscate the wealth of their citizens, gold rises to reflect this currency debasement.

Gold is no doubt an inflation hedge, but it also rises when people lose confidence in the government. Gold will rise whenever you see times of political instability and uncertainty over the future. As unemployment rises above 10% and people start to realize that "green shoots" are a myth, gold will rise as a reflection of the loss of confidence in government.

"What If" I Bought Gold Earlier?

Investors who've been swapping dollars for gold since the start of this decade are a happy lot. After declining for most of the 1980s and '90s, gold finally bottomed in 1999 around $250 an ounce.

Since early 2001 the metal has been on a bull run that has mocked the U.S. stock market. Gold has risen for nine straight years, and is up 300% since Dec. 31, 2000.

The Standard & Poor's 500 index's return is negative since that date, including dividends.

Gold, a silly artifact to many investors in the 1990s, has become the great "if only" investment: "If only I'd bought it nine years ago, or four years ago, or six months ago."

But even now there are plenty of people who can't bring themselves to consider gold as an investment. It pays no interest, and if you're buying bars or coins (versus owning shares of a mutual fund that holds the metal or stocks of mining firms), it costs money to store safely.

The fallacy that stocks are safe investments in the long run got a lot of people in trouble this decade. You still have people closing their eyes and hoping for the best in stocks when there is a raging bull market in gold that investors refuse to hop on. Expect investor regret to continue as gold reaches new heights and the supposed "bubble" doesn't burst. Gold will eventually reach bubble-like valuations, but that is closer to $10,000 an ounce than $1,000 an ounce. The past couple of weeks have shown that gold moves on its own fundamentals, regardless of dollar strength or the stock market. I'm convinced that the next 5 years will make a believer out of everyone in this gold bull market.

This post has been republished from Moses Kim's blog, Expected Returns.

China Is Becoming The World Leader In Gold

Last year, China produced over 9 million ounces of gold, one million ounces more than South Africa and more than any other country. This, combined with the Chinese government’s recent public statements encouraging its citizens to buy gold, could quickly cause China to become the world leader in the gold market. See the following post from Daily Wealth by Jeff Clark.

As you read this, the Chinese government is doing an extraordinary thing... something nearly unheard of in the modern world.

It is encouraging citizens to put at least 5% of their savings into precious metals.

The Chinese government is telling people gold and silver are good investments that will safeguard their wealth. After last year's meltdown in the stock market, people believe it. After all, Chinese citizens don't receive government retirement money... and they don't have company pension plans like people in many other countries do.

This is why folks in China are lining up outside of banks, post offices, and the new official mint stores to buy gold and silver (they especially like silver because it's cheaper per ounce).

The Chinese attitude toward gold and silver is a striking contrast to the American attitude right now. I don't recall a TV or radio ad from my congressman or President Obama encouraging me to buy gold or silver. Does your bank sell silver bars? Are gold mints popping up in your neighborhood? Are any of your friends, family, or coworkers scrambling to buy precious metals?

In spite of a few ads on television and satellite radio, buying gold and silver in the U.S. is still largely seen as a fringe-group activity. That's not the case in China. And in the big picture, there are three distinct trends occurring in China today that many in the Occidental world are not paying attention to.

First, look where China stands as a gold-producing nation.



In 2008, China produced 9,070,000 ounces of gold, exceeding all other countries. Further, its production continues to rise, while many of the top-producing countries are in decline.

Second, China had the lowest per-capita gold consumption of any country over the past half-century. This year, it is widely expected that Chinese demand for gold will surpass that of India. In other words, they'll also become the world's No. 1 retail buyer.

Third, the Chinese government has been using its foreign exchange reserves to buy gold – a lot of it – and doing so on the sly. This past April, Chinese officials made a surprise announcement that they had been secretly buying gold since 2003, increasing their gold reserves by 76% to 33,886,000 ounces. The Chinese government now owns 30 times the gold it held in 1990. And China is believed to be a leading candidate to buy some or all of the 12.9 million ounces the International Monetary Fund says it will sell.

But all this production and all this buying isn't enough...

Even though China is the world's seventh-largest holder of gold, gold comprises but a tiny fraction of its reserves, as shown in the table below.



What would happen to the gold price if China increased its gold reserves to just 5%? What about 10%? To overtake the U.S. as king of the gold hill, it would have to buy all the gold held by the governments of France, Italy, and Germany combined. Can China really do any of that?

At $1,000 gold, to push China's gold holdings to 5% of reserves would take $55.3 billion; to 10% would cost $144.4 billion; to be the world's top gold dog would run $227.6 billion.

Chinese reserves are approaching $2.3 trillion, of which almost 70%, or $1.6 trillion, are denominated in U.S. dollars. The cost to become the world's biggest holder of gold would be a pittance compared to the amount of money China has available. In other words, money is not a problem.

Combining the country's massive holdings of dollars and the very real likelihood those dollars are going to lose much of their value, the motivation to buy tangible assets is urgent.

Further, keep this in mind: China's reserves continue to grow. Therefore, the country must continue buying gold (or consuming its own production) just to maintain the small gold-to-reserves ratio it has, let alone increase it.

In addition to the government buying precious metals, Chinese citizens will continue gobbling them up, too. Demographics alone tell us why.

Government statistics show the average urban household in China has about US$1,300 in disposable income. Multiply that by the number of urban households in China and you come up with roughly $36 billion in available capital.

According to precious metals consultancy CPM Group, about 9.5 million ounces of gold will be turned into coins this year (including "rounds" and medallions). At $1,000 gold, that's $9.5 billion, or only about one-third of the capital available in China.

The number is more striking for silver: Total coin production this year is expected to hit 35 million ounces, equaling $615 million or just 1.7% of the available capital in China. Of course, a lot of Chinese people want cars and refrigerators, etc., but it won't take much of a shift of this capital into gold and silver to have a major impact on the global retail precious metals market. It may already be under way.

And long-term projections show the demographic trend won't slow down: The middle class in China is expected to increase by 70% by 2020. So over these next 10 years, more Chinese and more money will be coming into the precious-metals markets, all at a time when inflation is almost certain to be high, adding to gold and silver's appeal. Couple this with China's long-standing cultural affinity for gold and you have the makings for a potentially life-changing gold rush.

If I were a crime detective, I'd say China has the motive, means, and opportunity to push gold and gold stocks much higher.

This post has been republished from Daily Wealth, a contrarian investment site.

Famous Investor Says Gold Could Reach $5,000

John Paulson, who is known as one of the greatest hedge-fund managers of all time and has been called "The Man Who Made Too Much" after making billions betting against mortgage-backed securities is bullish on gold. Paulson said that gold could rise to $5,000 due to the devaluation of paper currencies. Chris Mayer from Daily Wealth discusses this in the following article.

The U.S. dollar is a sort of monetary brand.

And like any other brand, it can fall out of favor. Even iconic brands can rapidly lose their "must-have" cachet. Sometimes, a brand can disappear entirely, as did Pan American Airways or "Members Only" jackets. But there is always something else waiting to take its place. So it is with the U.S. dollar, a brand making lows in the financial markets.

The dollar has been the "Coca-Cola of monetary brands," says James Grant, editor of Grant's Interest Rate Observer. But even the best of brands can be lousy investments. Grant uses the analogy of the New York Times. It was the greatest name in newspapers. In 2002, the stock sold for $53 per share – an all-time high, as it turned out. Today, the "Gray Lady" fetches only $8 per share.

"What happened?" Grant asked. The World Wide Web happened, he says. "The Times has hundreds of reporters, but this is a story they seem to have missed." As if the lowly stock price was not evidence enough of its decline, the NY Times got another reminder when it borrowed $225 million against its headquarters building.

The cost of such borrowing, Grant reports, was 14%. The august Times today borrows at rates no better than a working-class stiff at a pawnshop. The U.S. Treasury should take note. The government seems as intent on creating dollars as prolifically as bunnies create other bunnies.

Here we get to John Paulson, a presenter at the Grant's Fall Investment Conference and undoubtedly the richest man in the room. Portfolio magazine dubbed him "The Man Who Made Too Much" after he made $3.7 billion by betting against mortgage-backed securities (MBS). He is one of the greatest hedge-fund managers ever.

Gold is his favorite today. As to why, Paulson presented a simple, but compelling case. First, the monetary base has exploded in a way we've never seen before. The monetary base is essentially the Federal Reserve Bank's currency and reserves. The Fed, by buying up securities in this crisis, has pumped a lot of money into the economy.



You've probably seen this chart, or some variation of it. Still, there haven't been noticeable signs of inflation as a result of that big spike – not yet.

As Paulson explained, that's because this base money has not yet been lent out and multiplied throughout the economy. Yet the monetary base and money supply are highly correlated, "almost 1-to-1 between the two," Paulson said.

That means that as the monetary base expands, the money supply surely follows, though there is a lag. (Money supply is a broader measure of money than just the monetary base, as it includes personal deposits and more. The monetary base is like a kind of monetary yeast. It makes money supply rise.)

If money supply grows faster than the economy, that will create inflation, says Paulson. As it is impossible for the economy to grow anywhere near that vertical spike in the monetary base, Paulson contends inflation is coming.

The U.S. is not alone in its money-printing exercise. The supply of most currencies is expanding rapidly – even the normally tame Swiss franc. In the race of paper currencies, they are all dogs. Hence Paulson's interest in gold, which no government can make on a whim.

Therefore, in the content of the exploding monetary base, gold seems relatively cheap. In other words, as the money supply rises, so does the price of gold, eventually. As a result, says Paulson, "gold has been a perfect hedge against inflation."

There is some slippage over time. The gold price can change faster or slower than the money supply. But when the market gets worried about inflation, the gold price usually changes much faster – as happened in the 1970s. In 1973 – to pick a typical year – inflation was 9% and gold rose 67%. That was a pattern common in the 1970s.

The potential for inflation this time around is greater than it was in the 1970s, given that the growth in the monetary base is so much greater than it was in the 1970s. Gold could do much better this time around, reaching "$3,000 or $4,000, or $5,000 per ounce" as Paulson said.

Future historians will look back at the present day and see clearly how this unfolded. They will see the litany of news items that pointed to the dollar losing its top perch: China and Brazil are settling up trade in their own currencies. The Russians and others are openly calling for a new monetary standard. Even mainstream outlets are discussing alternatives to a dollar-based standard, a province once solely occupied by cranks and gold bugs. Not a week goes by without these kinds of stories.

As for a replacement waiting in the wings, Grant offers up gold. Indeed, a kind of "de facto gold standard" seems to be taking shape. The SPDR Gold Trust, the largest gold-backed security in the world, is now the sixth largest holder of the metal in the world. Anybody with a brokerage account can easily buy gold today through the trust, which trades on the NYSE under the ticker GLD.

It's still early. Most people still own no or very little gold. As it becomes clearer what's happening, they will buy more gold, especially as it is now easy to do so.

The gold supply, too, is limited against the vast pool of dollars. As Paulson points out, global money supply is 72 times the value of gold. I'm betting that gap will narrow. It only has to narrow a smidgen and the gold price flies.

As Grant eloquently put it: "Gold is a speculation. But it is a speculation on a certainty: the debasement of the currency." Gold stocks, too, are a speculation. But they are a speculation on an inevitably higher gold price.

This post has been republished from Daily Wealth.

Is Gold Overrated?

Is Gold Overrated? Economics Professor Nouriel Roubini says yes, arguing that gold is unlikely to go much higher due to deflationary pressures. However, there are many counterarguments to this such as the falling dollar and the higher demand by the world's central banks. See the following from The Mess That Greenspan Made.

Nouriel Roubini shares some thoughts about gold in this interview with IndexUniverse, drawing the same conclusion that millions of investors have drawn - gold can't go significantly higher without high inflation or Armageddon, neither of which are imminent.

I don’t believe in gold. Gold can go up for only two reasons. [One is] inflation, and we are in a world where there are massive amounts of deflation because of a glut of capacity, and demand is weak, and there’s slack in the labor markets with unemployment peeking above 10 percent in all the advanced economies. So there’s no inflation, and there’s not going to be for the time being.

The only other case in which gold can go higher with deflation is if you have Armageddon, if you have another depression. But we’ve avoided that tail risk as well. So all the gold bugs who say gold is going to go to $1,500, $2,000, they’re just speaking nonsense. Without inflation, or without a depression, there’s nowhere for gold to go. Yeah, it can go above $1,000, but it can’t move up 20-30 percent unless we end up in a world of inflation or another depression. I don’t see either of those being likely for the time being. Maybe three or four years from now, yes. But not anytime soon.

To his personal list of reasons that gold can go up, Nouriel may want to add the one that David Einhorn noted last week - people are increasingly realizing that all paper money is bad.

After what we've seen over the last couple years, $1,200-$1,300 an ounce gold sometime in the next year without either high inflation or a financial catastrophe probably isn't going to shock too many people (aside from those like Roubini).

In fact, if the dollar continues to weaken, that could occur very quickly - just look at the move from $950 to $1,050 over the last couple months and then look at a multi-year chart.

You'll see that the gold price has spent a lot of time in the $800-$1,000 range and is due for another big move up.

Regarding the "lack of inflation" argument, the folks at GATA had a few comments:

If GATA had been part of the interview, we might have asked Roubini to elaborate with a few follow-up questions. For example:

1) What if the monetary inflation already has occurred over decades and has been masked, in regard to gold, by Western central bank gold sales, leasing, and underwriting of bullion bank derivatives, activities meant to mask that inflation and support government currencies and bonds and suppress interest rates?

2) Since it is generally acknowledged that in recent years gold demand has greatly exceeded supply and that the gap has been filled by massive dishoarding of gold by Western central banks, what if, inflation or deflation aside, the day comes when central bank reserves available for dishoarding are simply exhausted? What happens to gold then?

3) Is Roubini aware of the Federal Reserve's recent admission that it has gold swap agreements with foreign banks that the Fed insists on concealing? (For that admission, see http://www.gata.org/files/GATAFedResponse-09-17-2009.pdf.) What does Roubini imagine the purposes of those swap agreements might be? Could those swap agreements indicate the continuation of a long and often surreptitious U.S. government policy of suppressing the gold price, a policy documented extensively by GATA and others? (See http://www.gata.org/node/7894 and http://www.gata.org/node/6242.)

Roubini is a brilliant guy who has identified much that is wrong with the world financial system and who lately has fascinated the financial news media. Imagine the possibilities if someone in his position was to go beyond the financial news media's superficiality in regard to gold, or if the financial news media were to question his own superficiality -- or, for that matter, any other supposed expert's.

The more you think about it, the less meaning there really is in any "gold-inflation" relationship given how central bankers and economists have changed the meaning of the word "inflation" over the years.

We'll probably never have high "consumer price" inflation the way it's currently measured.

As for the GATA arguments about gold price suppression, a few years ago I was starting to worry that I'd never know in my lifetime whether there was anything substantive behind this.

That's much less of a worry these days...

For years, Jim Rogers has poo pooed gold as an under-performing commodity saying that central banks simply have too much of the stuff that they can sell for too long and that this will keep a lid on the price. The sales are ostensibly not because they're suppressing the price, mind you, but because they have no use for the stuff any more.

That seems to have changed rather dramatically in just the last year or so as central banks around the world have been doing more buying than selling.

The gold story is not going to go away anytime soon, though it's not clear whether any economist will ever really understand it.

This post has been republished from Tim Iacono's blog, The Mess That Greenspan Made.

The Relationship Between Gold and Interest Rates

Former economics professor John Doody argues that $1,000 is the new floor for gold based on a simple historical relationship between gold and interest rates. As interest rates remain low and inflation rises, this information can help you profit from gold. See the explanation in the following post from Daily Wealth.

Using basic economic principles (the gold to interest rate ratio), a former economics professor explains why gold is not a safe investment but rather the only safe investment.

"$1,000 an ounce is thought by some to be gold's ceiling..." John Doody wrote last week to his subscribers. "We see it as now the FLOOR."

When John Doody talks about gold, I listen...

This year, his Top Ten List of gold stocks is up over 100%. John says his Top Ten list has averaged a 30% annual return since the start of his newsletter, Gold Stock Analyst. John has been writing Gold Stock Analyst for about 15 years.

One thing I like about this former economics professor is that it's all about the numbers to him... It's not about conspiracy theories like it is with so many gold bugs. For example, John will actually tell you when gold stocks are overpriced according to his model – imagine that with dyed-in-the-wool gold bugs!

So why does John think gold will keep going up now, when many others say it's bumping up against its ceiling? I asked John that yesterday...

It's simple, he said, if you just compare the price of gold to interest rates.

In short, when interest rates are high, then gold (which pays no interest) falls. And when interest rates are low (like they are now), gold rises. To keep it apples to apples over time, John subtracts inflation from interest rates.

In the 1980s and 1990s, you earned high rates of interest on your cash. So gold was flat for those two decades. Plain as day.

But for much of this decade and the decade of the 1970s, you typically earned NEGATIVE interest on your cash (after you subtracted inflation). So gold has soared.

John sees those negative real interest rates continuing. So gold will keep rising. Simple as that.

For the specifics, currently, the consensus inflation rate forecast for the first half of 2010 is around 2%. But banks basically pay you no interest. So you have a choice: Own gold, which pays no interest. Or hold cash, which pays you NEGATIVE interest, when you take inflation into account.

Yesterday, John explained that since the Federal Reserve will likely keep interest rates very low for a very long period of time, gold can keep going higher.

I asked John if gold had become too popular these days. He said absolutely not...

"Look, hedge funds are just starting to get into gold. Retail investors haven't bought. CNBC calls gold a bad inflation hedge. Central banks haven't bought. If gold was popular, I'd have a hundred thousand subscribers, not a couple thousand. We've got a long way to go. $1,000 isn't the ceiling... it's the new floor."

John ran the numbers, and in a sneak preview of his upcoming issue, he proves how the price of gold has "beaten" inflation fivefold since it first started freely trading 40 years ago.

"CNBC says that gold has only gone from a peak of $850 in 1980 to $1,050 today – for a $200 gain," he said. "So CNBC's conclusion is that gold is not a good inflation hedge... That's just plain wrong, but the people believe it."

To be brutally honest, if you plan to be a serious investor in gold stocks – and you're willing to do your homework – you're foolish if you don't read John's newsletter. John updates his unique valuation numbers every month for the 75 precious metals companies he follows. Plus, he writes up a detailed analysis about once a quarter on each company.

It is the best starting point in the business. It's the first place I go to find out how much gold each company has in the ground and what its cash flows are.

If you agree with John – that $1,000 gold is the new floor, not the ceiling – chances are, you're buying gold stocks. And if you're buying gold stocks in size, you ought to do it with John's help.

This post has been republished from Daily Wealth.

Gold Still Far Below 1980 Inflation Adjusted Peak

If adjusted for inflation, then gold is not near the 1980 peak, which would be over $2000 in today's dollars. With the Federal Reserve still unable to raise interest rates to fight the risk of inflation, gold's current upward cycle could continue. See the following post from Expected Returns for more on this.

From Bloomberg, Gold at $2,000 becomes inflation-adjusted bullseye for '80 high:

Gold’s rally to a record means prices are still 53 percent below the 1980 inflation adjusted peak.

While gold rose 19 percent this year to $1,072 an ounce on Oct. 14, consumer prices almost tripled in the past three decades, eroding the metal’s value. Bullion hasn’t kept pace with the cost of bread, fuel or medical care. In 1980, gold hit a then-record $873 an ounce. In today’s dollars, that would be $2,287, according to the U.S. Labor Department’s inflation calculator.

When speaking in terms of real, inflation-adjusted dollars, it's easier to understand the argument that gold is still cheap. Note that these inflation adjustments are based on government statistics of inflation, which are understated.

Gold Bears

“If you bought gold in the 1980s, you’re still losing money today,” said Zeman, a metals trader.

Gold prices in New York languished for two decades after declining from the 1980 record, dropping to a 20-year low of $253.20 on July 20, 1999. While bulls say gold is cheap, the inflation-adjusted price is 15 percent above its 30-year average, Bloomberg data show.

The Federal Reserve may limit gains by raising interest rates before inflation balloons, analysts said. Fed Chairman Ben S. Bernanke said on Oct. 8 that policy makers will need to raise interest rates “at some point” to control inflation

This is the argument you hear most often from gold bears. Of course if you bought gold at its absolute bubble peak in 1980, you wouldn't be doing well. Most people assume that "gold bugs" are always bullish on the yellow metal. In fact, the smart money in gold knows that gold, like any other asset, moves in cycles. We just happen to be in a powerful upward cycle for gold.

Concerning interest rates, the Fed has its back against the wall. Our economy has become so dependent on artificially low interest rates and government stimulus that raising interest rates anytime soon would be disastrous for our economy. Any talks of raising rates to contain inflation must be viewed as mere jawboning. Historically, inflation has always been the means by which governments attempt to escape the burdens of debt.

This article was republished from Moses Kim's blog, Expected Returns.

Riding The Gold Bull To Profit

Moses Kim of Expected Returns lays out a solid case for why gold will continue to appreciate to new highs in the future. One compelling reason is the growing debt that can only be repaid by printing more dollars, a recipe for disaster if you know about the history of fiat currencies. See the following post for more on this.

My projections for gold have remained the same throughout this whole bull market: $2,000, $3,000, and then $5,000. Skeptical? Think gold is "expensive"? Good. I'll keep on buying on every single dip.

I have already given a fairly comprehensive explanation of why I think gold will go to at least $2,000 an ounce. Our monetary system virtually guarantees that gold will appreciate against the dollar. Dollars are debt instruments whose interest can only be repaid through the creation of even more dollars. Every single dollar that enters the system debases currently existing dollars. Imagine an inverted pyramid scheme that must collapse. Don't understand this process? Good, I'll keep buying gold.

Do you think the Fed will let asset prices fall? Cash for clunkers + stimulus + bailouts + first time homebuyer tax credits = dollar debasement. Do you think politicians will risk reelection by restructuring Social Security, and thereby anger the single largest voting bloc- the Baby Boomers? Fat chance. Therefore, the unfunded liabilities of our government will be funded through the printing press.

Gold in inflation adjusted dollars is still trading well below its all-time highs. Sure gold is $200 more expensive than its nominal all-time high seen in 1980. But what has happened to health care prices during that timespan? What about higher education costs? What about real estate and stock prices? Thinking in purely nominal terms means you are thinking at a 3rd grade level.

What is a fiat currency? Fiat currency is money that derives its value purely from government fiat. There is no intrinsic value in fiat currencies. Now, if you study history, you know that fiat currencies have a 100% failure rate. Why? Governments from the beginning of time have funded their profligate spending and wars through debasement of their currency. Look at what our government is doing now. There is nothing materially different from what our government is doing and what Roman, Greek, and Chinese governments in the past did to hyperinflate their currencies. Believe this time will be different? Good, I'll take the other side of the bet and buy gold with both hands.

I could go on for pages, but people who don't want to believe are never going to believe. $2,000 gold is coming. The masses will not jump on board this clear bull market until then.

This post has been republished from Moses Kim's blog Expected Returns.

Finding Shelter From Unrestrained Money Printing

There is an outcry of investors who worry about the consequences of unimpeded printing of dollars, as it increases the danger of hyperinflation. Can our unbacked fiat money system survive the aggressive monetary policies of the central bank? If the history of fiat money is any indication, gold investment is as attractive as ever. For more on this, see the following post from The Prudent Investor.

Neither CNBC, the Bull Street Journal or the Debt Times have covered the latest earth-shaking news reported in the new media concerning gold price suppression by governments and central banks. Let me first send respectful hat tips to Zerohedge, EconomicPolicyJournal.com and GATA who all came out in the last 2 weeks with official documents that prove that especially the USA has a most vital interest to keep the price of gold as low as possible. Please check out all three sources to find links to countless official declassified documents that deal with the hot issue of gold manipulation.

Looking at the 10-year chart shows that all multi-billion operations by central banks in the gold market have led to nothing else than the current near-to-record prices although these institutions can short gold unlimited via futures markets.

The fear of a gold price that would correctly mirror the uncountable money printing excesses which show us that central banks are no more than one-trick-ponies. Take away their privateering privileges of creating money out of thin air and it becomes understandable that tireless Congressman Ron Paul wants nothing less than abolishing the Fed.

While Ron Paul has still many hurdles in front of him he at least nurses a strongly growing community supporting him.

Happy USA - it has at least a few million citizens who understand the biggest ponzi scheme in history, AKA Federal Reserve Notes (FRN) created by the trillions nowadays, and who begin to fight this scheme that led to the impoverishment of every generation in the last 3 centuries.

The Situation in Europe is Sad at Best
The situation in Europe is sad at best. I presume that the number of Europeans understanding the diabolic actions of central banks which always ended in hyperinflation would not fill more than a small town concert hall.

While Fed Chairman Ben Bernanke encounters a more and more aggressive environment on his trips to Congress and Senate, ECB President Jean-Claude Trichet can still get away with such blatant disinformation in the European Parliament (EP) like the following 5 bullet points presented to EU politicians on September 28:

1. First, we have fully accommodated banks’ liquidity needs at fixed interest rates.
2. Second, we have further expanded the list of assets eligible as collateral.
3. Third, we have further lengthened the maturities of our refinancing operations.
4. Fourth, we have provided liquidity in foreign currencies, notably the US dollar, to address the need of euro area banks to fund their dollar assets.
5. Fifth, and finally, we have launched a direct covered bonds purchase programme to support financial markets.

You don't have to be an expert to get angry on the nonsense Trichet tells a generally disinterested EP with no second-guessing of his elaborate speeches that hide the simple process of creating unbacked fiat money by the shipload below a couple of technical terms that work like Quaalude on the EP members.

Trusting that my readership knows about the undeniable fact that so far all experiments with unbacked money ended in hyperinflation I nevertheless want to point out that the abolition of metal standards - gold and/or silver - had at least one positive fact: All kingdoms and empires collapsed, beginning with the revolution in France in 1789 that became the first democratic republic and set a precedent for the rest of the world. Monarchic rulers have only survived on a representative level and they are certainly a proper looking circle for ribbon-cutting ceremonies of all kinds.

Allow me to point you again to the 3 sources in the first paragraph of this post (and save me from uploading PDFs when they can be found there easily) that show us that the real power has moved from policymakers to central banks since the USA abandoned the gold standard in 1971 under a pardoned criminal by the name of Richard Nixon.

The gold standard is most uncomfortable for politicians as it would limit their spending. After almost 4 decades where the public was talked out of gold with the main argument that gold is the relic of a past of un-sophisticated finance, gold is stronger than ever.

Gold has Never Lost its Value in 6,000 Years
Gold has never lost its value as all fiat currencies did and it is the last measure we have to calculate real inflation. If you were told that a bag of potatoes cost 3 guilders or 6 florins or 1 mark some decades ago you would not be able to get down to the real price. But if you are parsing historical price statistics and you find out that one troy ounce bought you 100 bags of potatoes it becomes pretty easy to compare it with current prices.

But this probably the last thing those in charge of the financial world want. Inflation can fool people for a long time as every history of a fiat currency begins with the soothing effect that everybody feels richer.

But there is also another undisputed pattern in the history of unbacked money. The trust about its purchasing power took always only a few months, e.g. Germany's hyperinflation, that collapsed in less than 2 years and set the ground for the rise of Adolf Hitler which then led to the demolition of Europe.

In my opinion it is astonishing that in the presently running ruination of the Western world because of unbacked paper money any discussion dogmatically avoids a return to metal backed money. While China's central bank governor favored a commodity based currency last March in a most interesting article I cannot agree to use a commodity basket as backing for a new international monetary system. All commodities are too volatile and can be manipulated in many ways. Just imagine Russia/China/India announcing that their grain stocks have been erased because of bacterial contamination.

There is only one solution to arrive at a stable monetary system: The paper money must be backed by gold and/or silver as they are a value in itself. This worked well for 5,700 years. It would be better for the world to return to this old fashion instead of wasting more time discussing how to repair the monetary system with the same built in weaknesses that have disowned every generation since 1720.

This post has been republished from Toni Straka's blog The Prudent Investor.

No Gold Bubble This Time

With gold reaching an all time inter-day high of $1,033, the skeptics might say this is starting to look like another bubble. However Chris Weber explains why there are simple signs that show that we are not seeing a bubble but rather an opportunity. See the following post from Daily Wealth for more.

When spot gold closed on September 11 in New York at $1,005.10, it was the highest price on record... though by the time you read this, it may have been surpassed.

Gold traded higher than this, back on March 17, 2008. When that day opened in Asia, the early morning Australian and Hong Kong markets pushed gold quickly up from $1,000 to a high – so far an all-time inter-day high – of $1,033.

But as Europe opened later in the day, the price fluctuated between $1,020 and $1,030. As the U.S. markets opened, the price plunged down to $1,000 and ended just three dollars more than this.

So if you are going by the closing trade of that day, which happens to be New York as time zones go, then what happened on Friday, September 11 broke the record.

This breakthrough has drawn a lot of publicity. Hedge funds are now heavily tilted toward the long side of the gold futures market. Many gold stocks sit near all-time highs. Mainstream newspapers and magazines are starting to carry stories about gold.

This bullish sentiment has led many people to ask me if gold is far too popular now... or even in a "bubble."

My answer: I see nothing like a bubble yet. Ask your friends or neighbors these questions:

"What do you think about gold or silver as an investment?" and if they answer in a positive manner, further ask: "What are the best ways to own it? How do you own it? What percentage of your assets do you have in the precious metals area?" If this seems too invasive, ask, "What percentage of a person's assets do you think should be in the precious metals area?"

That's what I do. The people I ask have no idea what I think about gold or silver. I ask just as a sort of person – maybe on the slow side and not that bright – who wants to know about the area.

From what I'm told, almost no one is in gold or silver. Maybe a few shares of Newmont Mining, but as a percentage of their total net worth, we are talking tiny here.

People who think gold is in a bubble are often people who did not see real bubbles when they happened. In the real estate boom, the easy profits were on everyone's lips. Same with the Internet bubble 10 years ago.

When I mentioned gold back in 2001 and 2002, when I accumulated it, I got looks from people as if I were crazy.

These days, the crazy looks are gone. But now I often only get answers that gold or silver may be a good investment, but they don't have any themselves. Try it yourself.

Of course, if you've been mouthing off about how great gold and silver are, you probably want to ask people who don't already know your views: They won't think you are trying to "lay your propaganda" on them.

Granted, the public awareness of gold and silver as investments is much, much higher today than in 2001. No one was buying then, and people thought you were crazy if you told them you were. But things haven't changed in that the average person still does not own any.

When everyone you know is talking about how to make "easy money" buying gold or silver, then we may be in a different era. But right now, I think both metals have more room, and most likely much more room, to go.

This post has been republished from Dr.Steve Sjuggerud's blog, Daily Wealth.

Could China's Government Send Gold Soaring?

As the value of the US dollar goes down, holding dollars could become more of a risk to your portfolio. That is why hedging your investments in gold could be a smart move. The following post from Daily Wealth discusses the possibility of a looming gold bubble.

Inside sources have recently confirmed the Chinese government is actively promoting gold and silver investment to the masses.

Some analysts now contend that China can no longer afford to let the gold or silver price slump.

The rationale behind that contention is that with the Chinese government now telling the general populace to buy precious metals, it would be highly problematic should gold and silver subsequently take a nose dive.

In many cases, what a government wants and what ultimately occurs can be wildly different, due to unintended consequences rarely foreseen by officialdom, and because once the masses get it into their heads to break one way or another, government's desires are largely ignored.

"You shall not smoke marijuana," says the government. "Roll me another," says John Q. Public.

But in the case of gold, interestingly enough, the Chinese government has the means at its disposal to actually do something about prices. Namely, at $1,000 an ounce, the total value of all the gold ever mined comes to about $5 trillion.

Of that amount, less than $1 trillion is held in official reserves, the rest under mattresses, in jewelry and family heirlooms, and in various ETFs – GLD being the biggest, by far, holding about $34 billion worth of gold.

Against these totals, China has foreign reserves in excess of $2 trillion.

In other words, more than enough to push the tiny gold market around in any way it wishes. Given that much of its reserves are now denominated in fragile U.S. dollars that it would sorely love to replace with something more tangible, and that China is the world's largest gold producer, the country's involvement with gold is something more than just a passing fancy.

Simply, there is a new gorilla in the room in global gold markets. The extent to which the broader market hasn't yet figured this out is the extent to which you as an early mover can ultimately profit. Especially in the more leveraged gold stocks, which continue to be strong even as the broader markets show weakness.

That all of this comes before the dollar hits the wall it must hit, or before the inflation that is now baked in the cake arises, lends a lot of credibility to the idea that when the gold bubble begins to expand, it could reach all the way to the moon.

No need to chase gold at these levels, as opposed to buying on dips. But buy.

This post has been republished from Steve Sjuggerud's blog, DailyWealth.

$1000 Gold Could Spark A Bull Market

With gold getting ever so close to the $1000 threshold this week, could we be headed toward a bull market in gold? Dr. Steve Sjuggerud from Daily Wealth thinks that once gold hits $1000, it could create a lot of buzz and fuel optimism that would keep gold prices above $1,000. See the following post to learn more.

Aren't you stinkin' tired of it yet? I sure am...

I'm tired of hearing "Inflation is coming!" and "Gold is going to soar!" over the last 18 months... only to see nothing happen.

The inflation argument makes some sense... In the second half of 2008, the bond market essentially froze – so the government started on a binge of "printing" money to help unstick it. As the economy sank, the money-printing continued.

That much new money should have caused the price of gold to soar. But something wasn't quite right...

Gold didn't soar. And it still hasn't. Back in March 2008, when the storied Wall Street firm Bear Stearns went belly up, Gold poked its head above $1,000 per ounce for two days... Then strangely, that was it for gold.

No matter how bad the credit crisis got... no matter how much closer the world got to the Next Great Depression... gold still didn't soar. Gold didn't do anything really, except go to sleep.

For almost two years now, gold has been hovering between about $800 and $1,000 per ounce. It's been a year and a half since gold last closed over $1,000. Quietly, I've been getting worried...

If the Credit Crisis couldn't push gold over $1,000... and if the prospect of the Next Great Depression couldn't push it over $1,000... then what would happen when the economy started to return to "normal"? Would gold crash? It sure could.

And now it seems that "normal" is returning...

In the last few months, the world has come back from the abyss. I've repeatedly said the U.S. recession is over. The crazy fears that the world was ending are behind us for now.

But a funny thing has happened... gold is quietly moving up.

Now this is important – incredibly important. You see, this is exactly the way a REAL bull market works...

In a real bull market, the asset (in this case, gold) hits a new high as optimism over that asset peaks (that was back in March 2008). Then the optimism fades... and so does the price of the asset.

Next, the asset just meanders along, letting people give up on it... But it's just plotting its next move higher. It's shaking off all the nonbelievers before it breaks through to a new high.

My friend Jason Goepfert (of www.sentimentrader.com) is the best in the business at analyzing investor sentiment. So I looked at his recent work to find out if gold is at a peak in optimism (which would mean gold should top out soon) or if we still have farther to go.

Jason says his gold sentiment indicators are "not showing any excessive optimism just yet." In short... we still have farther to go.

If gold closes above $1,000 per ounce a few times in the next few sessions, it could finally hold above the $1,000 level.

People simply haven't been buying gold "hand over fist" lately. But if gold closes over $1,000 a few times, they will. Gold will be all over the news, and the average investor (who hasn't bought yet) will finally start to get in. He'll sell his stocks that have soared but have recently run out of gas... and move his money over to gold.

We could be on the brink of a big move in the price of gold... the next leg up in the gold bull market.

In the last 18 months, the way gold was acting, I wasn't so sure if it was coming. But with this week's action, with gold inching up over $995, I believe a new leg higher in the bull market is here.

We'll know if it's for real in the next few days. If it is, make sure you own some.

This article has been republished from Daily Wealth, a contrarian investment analysis site.

Obama Makes Safe Bet With Bernanke Reappointment

President Obama chose to go with the status quo and not shake things up at the Fed by reappointing Ben Bernanke. Despite widespread criticism, Obama praised Bernanke for helping the US avoid another Great Depression. Tim Iacono discusses how investors can be take advantage of from this latest development.

President Obama made it official this morning by nominating Federal Reserve Chairman Ben Bernanke to a second four-year term as reported by MarketWatch.

In a short statement in Martha's Vineyard with Bernanke standing at his side, Obama said Bernanke's background, temperament, courage and creativity helped to prevent another Great Depression.

"Ben approached a financial system on the verge of collapse with calm and wisdom; with bold action and outside-the-box thinking that has helped put the brakes on our economic free fall," Obama said.
...
In a brief statement, Bernanke said the goals of his second term at the central bank will be fostering stable economic conditions and financial markets. "We have been bold or deliberate as circumstances demanded, but our objective remains constant: to restore a more stable economic and financial environment in which opportunity can again flourish," Bernanke said.

"Mr. President, I commit today to you and to the American people that, if confirmed by the Senate, I will work to the utmost of my abilities -- with my colleagues at the Federal Reserve and alongside the Congress and the Administration -- to help provide a solid foundation for growth and prosperity in an environment of price stability."

While Bernanke may face some testy questioning during his confirmation hearings this fall, a result of last year's bait-and-switch bank rescue package and other questionable dealings with giant Wall Street firms while standing at the side of former Goldman Sachs CEO Hank Paulson at the Treasury Department, approval for a second term is a virtual lock.

This is good news for financial markets in general and will likely spur even higher prices for many commodities, one commodity in particular.

You see, Ben Bernanke has been a veritable one-man gold price appreciation machine.

References to the government's printing press earlier in the decade and his eagerness to use it as Fed chairman apparently have a way pushing the gold price higher.

Since his initial nomination in 2005, when gold was trading at only about $465 an ounce, the yellow metal has more than doubled, besting just about any other asset class during that time, so gold bugs should welcome today's news.

Let's just hope that the next four years are as good as the last four - $2,000 an ounce gold in the year 2013 when it comes time for his next re-nomination sounds about right to me.

This post has been republished from Tim Iacono's blog, The Mess That Greenspan Made.

Chinese Investment In Silver Could Push Up Prices

Now that Chinese citizens are not only allowed to invest in silver, but encouraged to, there is reason to believe that this could push up silver values. The Chinese are savvy investors and are skeptical of the security of American dollars, which may mean a shift to greater investment in precious metals like silver and gold. The following article from Daily Wealth explains why an increase in Chinese demand for silver can have a significant impact on prices.

Two years ago on August 21, China's government allowed its citizens to invest in an entirely new asset. It allowed them to invest in Hong Kong-listed stocks.

Hong Kong is a special region of China. It's one of the most dynamic, capitalistic places on Earth. The move from the government was a move toward "investment freedom" for the Chinese people.

On that day, Hong Kong's benchmark stock index rose 8.74%. Over the next two and a half months, it skyrocketed from 11,000 to over 20,000. It was a chapter in a story that you should get used to over the coming years: When the Chinese decide to invest in something, it causes giant ripples across the world.

This sort of situation is starting to happen again: This time it's happening in precious metals... especially silver.

The Chinese have a centuries-old affinity with silver. It began in the 1500s with the explosion of trade with Mexico via the Spanish galleons. These sailing ships were the super-tankers of their age. They made one voyage per year, carrying tea, silks, and spices from Asia to Mexico. The ships returned to Asia with gold and silver. After the Chinese threw off imperial rule in 1912, the country used silver money. Today, the Chinese word for "bank" means, "silver movement."

And now that China is becoming one of the richest, most dynamic capitalistic countries on Earth, this story is about to take a modern twist. The Chinese want silver again.

Thanks to a decade of wealth accumulated by regular Chinese citizens, there is plenty of cash to chase good investments. As the famed global investor Jim Rogers points out, these people are the best capitalists in the world. They are great savers. Chinese people want their money to work for them... so they invest.

I recently watched a China Central Television piece on gold investing... According to the program, there are some 400 million households in China, with an average ownership of about 0.1 ounces of gold. The average gold ownership in most emerging countries works out to about 1 ounce per household. The Chinese are beginning to make up that gap. From 2006 to 2007, domestic demand for gold rose 60% to around 700,000 ounces. Experts continue to urge citizens to put 3% to 5% of their net worth in precious metals.

Chinese government statistics show the average urban Chinese household has about $1,300 in disposable income to invest. While that doesn't seem like much, when you add up all those households, there's about $36 billion that could move into the next big investment opportunity – precious metals.

The government is now actively encouraging its citizens to buy gold and silver. They recently unveiled silver bullion for investing (you can see the video here). The premise is that gold was 50 times more expensive than silver in 2007... but is now 70 times more expensive.

The government is promoting silver bullion as an investment for regular citizens. And remember, a bunch of Chinese students laughed at U.S. Treasury Secretary Tim Geithner this year when he claimed the dollar was safe. The Chinese know the value of real assets... real money like gold and silver.

What does this mean for silver prices? It's impossible to say. But here's a little math that interests me. According to the Silver Institute, demand for silver in 2008 (for industry, jewelry, and investing) was 832 million ounces. At today's price, that's an $11.5 billion market... or about 1/3 the capital available in China alone.

The most important thing to understand about this situation is the Chinese people become freer every time the government loosens up a restriction. These people couldn't legally buy silver bars before. Now, they can. They're becoming richer... and they will continue to do so for decades.

Add this to a world already waking up to the grand currency debasement you've read about in DailyWealth (like here and here), and you have a recipe for the continuation of the big bull market in silver and other precious metals.

This post has been republished from Daily Wealth, an investment analysis and advice site.

Deflation Risk Averted But Could Massive Inflation Be Around The Corner?

By creating nearly $4 trillion in new money and credit, representing the largest increase by the American federal government since the country's Civil War, the monetary system has been repaired and deflation is no longer an imminent risk. But a lack of political will and continued annual deficits in excess of $1 trillion through 2016, along with significant pressures in the economy, could likely lead to broad inflation over the next two years, with gold and strategic assets offering potential shelter from the expected storm. Porter Stansberry from Daily Wealth discusses this below.

There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as the result of a voluntary abandonment of further credit (debt) expansion, or later as a final and total catastrophe of the currency system involved.
– Ludwig von Mises

For most of 2009, I've had a friendly disagreement with several colleagues who believe a big deflation will be the end result of the 2008 financial crisis.

I knew they were wrong. I knew inflation would become a problem sooner, rather than later. And in the past several months, I've been proven right.

The mortgage and banking collapse of 2007-2009 saw total collateral values collapse between $5 trillion and $10 trillion. The response from our politicians and central bankers was massive: the largest creation of new money in credit since the Civil War.

The Federal Reserve created roughly $2 trillion in additional credit and loaned it against all kinds of dubious collateral, things like Bear Stearns' mortgage book. (There's a handy and simple guide to estimating the Fed's credit quality. The more acronyms in the lending programs, the worse it gets.)

The Federal government responded with a record annual deficit of at least $1.8 trillion. In the second half of 2008, the outstanding federal debt grew by roughly a 40% annualized pace (24% for the entire year). Thus, in only a few months' time, the roots – the money and credit – underlying our economy expanded at a record pace.

In the second half of last year and the first quarter of 2009, the main question in the world's financial markets was: Can the world's government print enough money, fast enough, to forestall a deflationary collapse?

I knew it was no contest. There is no way for an economy to outrun a printing press. The Fed has the power to create an unlimited amount of money or credit and the power to inject that money into the economy in any way it sees fit.

Let's look at the numbers. Let's assume the total collateral damage of the banking crisis turns out to be $5 trillion. Yes, that's a huge hit – roughly half the output of our economy each year. It's the equivalent of sending every American household a bill for $50,000 – due immediately. However, in less than a year, the Feds have already created nearly $4 trillion in new money and credit. The hole in the system has already been plugged. It only took a few months.

The fight between inflation and deflation is over. Deflation was knocked out in the first round.

The big risk is what happens next. Having turned on the presses to save the day, who will have the political clout and the desire to shut them off? Barack Obama's budget calls for annual deficits in excess of $1 trillion for the next eight years. Thus, by the end of this year, not only will all of the damage from the mortgage collapse ($5 trillion) be replaced by new money and credit, there will be significant inflationary pressures in the economy.

The good news in our economy this year, so soon after such a major collapse, means we will certainly have a massive inflation during 2010 and 2011. There's no such thing as a free ride. Bailing out the banks will carry a heavy price for anyone who doesn't have the resources or the knowledge to escape the dollar.

How can you "escape"? First off, make sure you own plenty of gold bullion. I also recommend owning assets that will run higher in an inflationary environment, like vital transportation and energy assets. Also, own some good farmland. Food and land prices will go higher.

Yes, the news is grim... but if you own gold and strategic assets, you'll survive and prosper in the coming inflation.

This article has been republished from Daily Wealth, a contrarian investment analysis and advice site.

How Much Gold You Should Own

Ben Bernanke recently warned congress of the consequences of overspending which could include inflation. If you think inflation will accelerate in the future, it may be a good idea to consider gold to offset the affect of inflation on your investments. For more on this, read the following article by Dr. Steve Sjuggerud from Daily Wealth.

You often hear "You need to own gold!" But how much is the right amount?

You don't want to own too little gold and have the purchasing power of all your savings shrink dramatically. You can't afford that. But you don't want to be an end-of-the-world nutcase either.

Well, one of the world's shrewdest investors – Jean-Marie Eveillard – has 10% to 12% of his extremely successful investment fund allocated to gold and gold plays...

Jean-Marie Eveillard's First Eagle Global Fund beat the stock market every year this decade. What's more, he's done it conservatively... He doesn't take big risks. Over 30 years, he's proven to be one of the most successful mutual fund managers ever.

So what's Jean-Marie Eveillard recommend buying today?

"After equity markets have gone up 35%-40% or more over the past three months, ideas that are immediately appealing are few," he told Bloomberg news today. But he did have one big idea... gold.

Right now, his fund is about 10% invested "in gold and gold mining securities," he said.

His explanation is simple: "It's insurance to protect against the fact that current policies by the American government and the Fed are potentially wildly inflationary."

Jean-Marie likes gold because he expects the Fed will leave interest rates near zero for a very long time.

The Fed will "stay pat until the politicians give them the green light to raise rates, which will take quite a while. As long as unemployment is very high, politicians will be reluctant to push up short-term rates."

When I got into investing nearly 20 years ago, Jean-Marie was already a legend. After doing my homework, his First Eagle Global Fund was one of the very first investments I ever bought. (Back then, it was called the SoGen fund... it still uses its old symbol, SGENX.)

Jean-Marie started managing the fund in 1979. If you had invested $10,000 in the fund back then, it would be worth roughly $500,000 today. (Heck, I should have kept my money in there!)

His "big idea" now is very simple. Gold pays no interest. And money in the bank pays nearly no interest. You can print money. But you can't print gold. If the Fed keeps interest rates near zero for the foreseeable future, the obvious outcome is that it will take more slips of paper (dollar bills) to buy an ounce of gold.

He believes his clients' money should be about 10% or so allocated to gold and gold investments. What's right for your situation? That's up to you. But if you're substantially under or over the legendary investor's gold allocation, then you ought to consider getting more in line with him...

Dailywealth.com offers a free daily investment newsletter which focuses on contrarian investment opportunities.

Think Your Gold ETF Really Invests In Gold? Better Check The Small Print

Several analysts are bullish on gold right for reasons such as the threat of inflation or potential weakening of the dollar. However if you want to invest in gold ETFs be careful. Not all ETFs are created equal. According to Toni Straka from The Prudent Investor some ETFs hold paper contracts and claim no liability of the third party's management of the gold.

Does your favorite precious metals exchanged traded fund (ETF) or exchange traded commodity (ETC) really invest in bullion all time? Or does it rely on paper contracts where a third party poses a counter party risk to a varying degree? Not everything marketed as a way to safely invest in precious metals truly shines under the spotlight.

To my knowledge there is only one group of precious metals ETFs, managed by Swiss Zuercher Kantonalbank (ZKB) - sorry, no English language information found - that always holds the 4 fund's funds in 100% gold, silver, platinum or palladium. This limits the only risk to the size of cash holdings that are unavoidable for short periods when the ETFs adjusts bullion holdings during trading hours.

I have checked a few other liquid European and US ETFs, but this appears to be the only safe way to own allocated gold besides holding it physically. Within the European Union there appear to be no restrictions to buy/hold/sell these ETFs, others please check local regulations.










GRAPH: Read from this gold chart whatever technical indicators you prefer. The fundamentals have never been stronger for a long gold strategy. Chart courtesy of kitco.com

Read more about investing in gold here at wikinvest.

Most, if not all other precious metals ETF/ETC come with some sort of a counter party risk.

Checking the prospectus (PDF)of global heavyweight SPDR , risk factors beginning on page 10 give room to "don't blame me, blame the next one in the food chain" finger-pointing games like this quote from page 13,

If The Trust's gold bars are lost, damaged stolen or destroyed under circumstances rendering a party liable to the Trust, the responsible party may not have the financial resources sufficient to satisfy the Trust's claim.

Check out the 4 pages of risk factors yourself and find more quotes hinting at a counter party risk. SPDR may also accept non-standard gold bars without checking their genuineness by its management.

Click here for a SPDR chart who reported record holdings of 1,124 tonnes or 36,460,190 ounces as of today. But it is not 100% gold according to the fine print.

A price below spot gold stems from expenses paid for after selling some gold.
Basically the same applies to Europe's popular XETRA gold ETC, traded in Frankfurt. Check out the prospectus starting at this disclaimer page. Always remember only to enter security classes when you fully understand them. Xetra gold is basically a permanent zero bond without a coupon, covered by gold and claims on gold.

As ZKB's precious metals fulfill my requirements I have not looked further. If you come across more ETF/ETCs that truly hold the gold/silver/platinum/palladium themselves down in the vault, please let me know in comments.

DISCLAIMER: I am in no way affiliated with ZKB and I cannot confirm the rumor that ZKB headquarters is sinking under the weight of its ETF holdings in its vaults. Long gold positions.

This article has been reposted from The Prudent Investor. The full post can also be viewed on The Prudent Investor.

Gold Investment: Is There Still Room For Growth?

With national debts growing all over the world, a strong case can be made for the future of gold prices. Even though gold values have risen from under $300 in 2002 to nearly $1000 in 2009, some gold experts believe there is still a lot of room for growth. For more on this, read the following article from Dr. Steve Sjuggerud at Daily Wealth.

Yesterday, I spent an hour and a half with two of the most experienced gold investors on the planet...

It was a bit by accident... I was at a private two-day meeting on the Eastern Shore of Maryland, and I needed to leave early to get to the Baltimore airport. Both Van Simmons (my good friend and a legend in the coin world) and ace gold-stock analyst John Doody needed to be at the airport too, so they hitched a ride with me.

At the meeting, John had told us gold stocks will "surprise on the upside" this year. In short, if you don't own gold stocks now, you need to buy. Let me share John's reasons why...

The cost of producing gold is down. According to John, oil makes up 25% of the cash cost of producing an ounce of gold. The price of oil has fallen by over half since last summer.

Also, the value of the currencies in gold-producing countries has fallen. John showed a table including the currencies of Australia, South Africa, and Canada (among others). The currencies had lost between 15% and 40% of their value versus the dollar.

Don't underestimate the importance of this... Much of the cost of production of gold (like local labor costs) is in those local currencies, but the gold is priced in U.S. dollars. In short, a fall in the currency is an instant boost for most gold producers.

So the price of gold is up while the cost of production is down. This directly increases profit margins. Gold-mining companies should report excellent earnings in the next few quarters... surprising on the upside.

John tracks three solid indicators to figure whether gold mining companies, as a group, are cheap or expensive. He looks at 1) market value versus ounces in the ground, 2) market value versus production, and 3) market value versus operating earnings. He tracks these in his excellent, data-heavy monthly newsletter, Gold Stock Analyst.

In his most recent newsletter, John said gold stocks were undervalued by 19% based on the first two of these metrics above.

Lastly, John explained sentiment toward gold stocks is still pretty bad. He had just spoken at the New York Gold Show, which he said was relatively poorly attended.

So gold stocks are cheap based on history... People are not clamoring for them, yet... And with cheaper oil and currencies, earnings of gold miners will surprise on the upside. In other words, if you think you've missed the move in gold stocks, you haven't.

If you haven't bought gold stocks yet, you should. And if you want to get the complete picture on gold stocks, then you should get to know John Doody.

Dailywealth.com offers a free daily investment newsletter which focuses on contrarian investment opportunities.

More Gold News...

The World Gold Council just released the newest Gold Investment Digest, and it contains a lot of great information about Gold, and the Gold market. Tim Iacono walks us through some of the main points, and adds his own insight, in his blog post below.

Always a sucker for a good chart, particularly when it involves precious metals, the one below in the most recent Gold Investment Digest from the World Gold Council is a doozy.
The trade group's first quarter report on gold has some rather interesting statistics related to the quickly changing supply and demand situation.

As shown above, inflows to the many gold ETFs around the world have been brisk:

Investors bought 469 tonnes of gold via this channel, dwarfing the previous record, of 145 tonnes, set in the third quarter of last year. SPDR®Gold Shares (“GLD”) enjoyed the bulk of the inflows. The total amount of London Good Delivery bars held by the Trust increased to 1127 tonnes at the end of Q1 09, from 780 tonnes at the end of last year. The two Swiss listed gold ETFs (the ZKB Gold ETF and the Julius Baer Physical Gold Fund) enjoyed the next strongest inflows, rising by 37 tonnes and 32 tonnes respectively. Inflows into the gold ETFs continued to grow throughout the quarter, despite the downward correction in the gold price, indicating that, as in past price corrections, ETF holdings tend to be “sticky”.

It's kind of ridiculous just how big the SPDR Gold Shares ETF (NYSEArca:GLD) has become when compared to the nine other funds and they have certainly characterized the inventory correctly in light of recently faltering prices - "sticky" is the right word.

As noted here yesterday, just 23.2 tonnes of the almost 350 tonnes added earlier in the year have exited the trust as the gold price declined from almost $1,000 an ounce in early February to current prices of just over $900.

They had this to say about the many and varied rumors about trading on the COMEX:

The quarter was beset with stories either urging investors to take delivery of, or claiming investors had taken delivery of, large amounts of gold from COMEX, driven by widespread shortages of gold in the spot market. Some claimed that the COMEX warehouses might therefore run out of gold.

The reality was quite different. While there were (at times severe) shortages of coins and small bars during the quarter, there was no shortage of London Good Delivery Bars, the main trading vehicle in the global over-the-counter market. And with respect to COMEX stocks, both registered stocks on COMEX (gold which meets the standards for delivery and for which a receipt from an exchange-approved depository or warehouse has been issued) and eligible stocks (gold which meets the delivery standard but for which no receipt from an exchange-approved warehouse has been issued) increased over the quarter, to 2.94 million ounces and 5.94 million ounces, from 2.83 million ounces and 5.71 million ounces respectively. This took total COMEX stocks as a percentage of long positions to 38%, which is high by historical standards, rather than indicative of stocks that have been depleted by a run on physical gold at COMEX.

Geez... The folks at the World Gold Council should really get a hold of some of the officials over at the National Association of Realtors (NAR) to see how an industry trade group is really supposed to operate.

Here's a perfect example where they could add to the fervor over rising gold prices by citing some shoddy statistics about how the supply of gold is limited and "it's a good time to buy" but, instead, they pour cold water on one of the biggest stories this year in the gold community about the goings-on at the CRIMEX.

Maybe former NAR chief economist David Lereah could be hired as a consultant to help out.

The Gold Investment Digest goes on to discuss such important topics as gold's correlation with other asset classes, jewelry demand, mine supply, and central bank sales.

If you've never thumbed through this quarterly report, it really is worth a look.

Registration is required at the World Gold Council website to get a copy, but it's free.

This post can also be viewed on themessthatgreenspanmade.blogspot.com.

Gold And Silver Update

Last week we saw some big news come out of China regarding gold, and investors are paying close attention. China almost doubled their gold reserves, and after a stretch of falling prices, this news sent prices up. For more on this, read the following post from Tim Iacono.

Big news for the precious metals markets came from China last week when the Xinhua News Agency published comments made by Hu Xiaolian, head of the State Administration of Foreign Exchange, indicating that China's gold reserves had increased by 454 tonnes since 2003. Apparently, they were required to report the new total to the IMF and made a public disclosure at the same time, however, it is not at all clear why there were no previous updates in recent years.

This almost doubled their previous reserve total of 600 tonnes and vaulted China into sixth place on the World Gold Council's list of official gold holdings as noted in this item last week. With almost $2 trillion in foreign exchange reserves and an increasingly vocal dislike of the U.S. dollar in recent months, this big gain comes as no surprise to most analysts, however, the magnitude of the increase in dollar terms was mostly overlooked in media reports.

This addition amounts to only $13 billion - less than one percent of their foreign exchange reserves - and boosts their "percent of reserves held as gold" from 0.9 percent to just 1.6 percent. The "rule of thumb" for western central banks is a stockpile of 15 percent, about ten times the new total, and most analysts expect thousands more tonnes to be purchased.

Prices for both gold and silver were buoyed by the news late in the week but, after two months of mostly lower prices, the metals were due for a rebound. For the week, the price of gold rose five percent to end at $913 an ounce and spot silver surged nine percent to close at $12.89 an ounce.

As a result of this move back up above the $880 level, buy indicators for both gold positions in the model portfolio - Gold Bullion and the SPDR Gold Shares ETF (GLD) - have been changed from green back to yellow.

It will be important to keep an eye on the world's most popular gold ETF since, for the first time this year, metal recently exited their vaults as shown to the right. Inventory has declined by 23.2 tonnes since April 16th after an impressive addition of almost 350 tonnes since the first of the year.
Interestingly, mainstream financial media outlets such as Reuters and Bloomberg now routinely report changes in GLD inventory in their gold reports and also compare their stockpile to official country holdings around the world, something that I've been doing for years. In fact, I remember being disappointed early last year about not being mentioned in an article in the Wall Street Journal after a reporter called to follow up on one of my articles about the GLD inventory passing China's official holdings of 600 tonnes.

It's was ironic to see these two items in the news together last week.

Buying in India has supported the gold price in recent days as the world's most price-sensitive buyers have been on strike for most of the year, only appearing when sub-$900 an ounce prices were to be had as Monday's important Akshaya Tritiya festival neared. This is one of the four most important days of the year for Hindus and is considered an auspicious day for buying long-term assets such as gold, a legend stating that any venture begun on Akshaya Tritiya will bring prosperity.

The recent surge in enthusiasm for the gold price, while welcome, should be tempered by the knowledge that, according to GFMS, about 500 tonnes of scrap gold entered the market during the first quarter of 2009. This is the equivalent of an entire year's worth of scrap metal and exceeds the record 469 tonnes added to gold ETFs around the world over the same period. While I'm sure that prices for precious metals will go much higher at some point, making such a move in the near term will be difficult absent another flight to safety, something that is now looking more likely than it did a few weeks ago.

This post can also be viewed on themessthatgreenspanmade.blogspot.com.

Gold Prices And US Dollar Both Rising

Those who keep up with gold and currency prices have probably noticed that things are a little strange right now. Typically the gold prices work inversely, however, right now they are rising almost instep. Currency expert Kathy Lien explains more about this phenomenon, and offers some insight into what is likely causing it in her blog post below:

If you haven’t caught it already, in my Daily Currency Focus on FX360, I talked about What the Rally in the US Dollar and Gold is Telling Us. As both the Dollar Index and Gold Prices press higher, it important to know what this means:

It is not very often that we see the US dollar and gold prices move in the same direction. Since gold is priced in dollars, the value of the yellow metal tends to fall when the dollar rises and rise when the dollar falls. However this has not been the case since January 14th as the rally in the US dollar corresponds with the rise in gold prices, which closed today at a 7 month high of $970 an ounce.

The last time we saw this traditionally negative correlation turn into a positive one was in 1982. At that time, recession hit many countries including the US. Although the rise in gold prices can be partially attributed to future inflation problems, the cohesive movement in the value of gold and the US dollar suggests that central banks around the world are losing credibility. There are growing concerns that a time bomb could explode in Europe leading to more troubles for the region as a whole. If that is the case, there may not be any safer form of investment than gold.

The rally in the US dollar and gold is telling the market that investors are worried about global economic stability outside of the US and therefore they are preparing for the worst.

This post can also be viewed on kathylien.com.

Reviewing The Latest Quarterly Gold Report

Despite the extreme volatility of gold prices, investors continued to dump more money into gold throughout 2008. The latest quarterly gold report shows us some interesting figures and clearly displays that despite the volatility, many investors feel more comfortable holding gold then various other investments. Tim Iacono from The Mess That Greenspan Made takes a closer look at the report and tries to shed some light on the precious metal's up and down performance.

The World Gold Council released their quarterly Gold Investment Digest yesterday and it contained a number of very good charts including the one below that recounts the many financial market crises that drove investors away from other financial assets and into gold.
They noted that the rising price of gold was quite impressive given all the carnage that occurred elsewhere, most equity markets and many other commodities tumbling 40-50 percent or more for the year as the price of gold posted its eighth annual gain, up four percent.

Holdings by the ten gold ETFs around the world climbed to new record highs with another 96 tonnes purchased during the fourth quarter following a whopping 145 tonne addition in the third quarter.

As shown below, the total amount of gold in the ETFs rose to 1190 tonnes by year-end, worth more than $33 billion. Note that the SPDR Gold Shares ETF (NYSEArca:GLD) just added another 13 tonnes yesterday after a three tonne increase on Monday bringing its holdings to 819 tonnes, by far the largest of the bunch.
Elsewhere in the report, mine production was said to be stable, up just two percent overall from a year ago with a number of countries, notably South Africa, experiencing sharp declines. China passed South Africa last year as the world's biggest gold producer.

De-hedging continued but will have a much smaller impact in the future as the total outstanding hedge book now stands at just 526 tonnes. As shown to the right, during the four quarters ending in Q3-2008, miners de-hedged a total of 368 tonnes.

Note that official central bank gold sales dropped sharply, ending up considerably below the 500 tonnes allowed during the fourth year of the Washington Agreement on Gold.

Jewellery demand rose during the third quarter (the most recent quarter for which data is available) and was up modestly on a year-over-year basis, however, the fourth quarter will likely show a big decline due to the worsening worsening economic conditions around the world.

As should be clear in the table, it is the increase in investment demand, not jewellery demand or industrial uses, that supported the gold price in 2008 and this is likely to continue this year.

This post can also be viewed on themessthatgreenspanmade.blogspot.com.

How Will Deflation Worries Affect Gold?

Gold has historically been an asset that people turned to when they are worried about inflation. Today, though, we are in a very unique situation. Governments around the world still don't have inflation under control, but there is a lot of worry right now of deflation. Because inflation is tracking down and deflation is on the horizon nuemours measures are being taken that could have dramatic impact on inflation, and the price of gold, in the future. Deflation may or may not ultimately come, but if it does what impact will it have on Gold prices? What about if deflation doesn't come, and inflation spikes, what then? Tim Iacono from The Mess That Greenspan Made looks closer at that question in his blog post below.

This morning's Ahead of the Tape column($) in the Wall Street Journal neatly summarizes conventional wisdom regarding gold, beginning with the 'ol "inflation hedge" saw.

As the quintessential hard asset, one that traditionally hedges against rising consumer prices, gold's trajectory these days should be downward. After all, prices for just about every other commodity, from oil to nickel to cotton, have plunged as inflation risks have seemingly abated and as investors increasingly fear deflation.

Yet, gold has largely traded between $750 and $850 an ounce for the last few months, and is up about 8% since the Fed cut interest rates to between 0% and 0.25% last week.

It hasn't been an entirely smooth ride. Gold sank amid panic this fall as investors crowded into the U.S. dollar. And it remains well under its $1,002 close back in March. But the metal hasn't stumbled nearly to the degree many other commodities have. Clearly, deflation worries aren't tugging at gold.

It's probably fair to say that, with what the central banks around the world have been doing over the last year or so, gold owners who are now worried about the recent downward trend in the consumer price index are few and far between.

It continues...

And while inflation isn't apparent today, stimulus packages and bailouts mean much more money in the system. That is classically inflationary. Moreover, despite efforts to sop up this liquidity later, the effects of unintended consequences might mean some portion of the trillions added to the Fed's balance sheet are likely to "stick around" to fuel inflation, says Axel Merk, who recently increased gold exposure in his Merk Hard Asset Fund and personal portfolio.

Says Malcolm Southwood, commodities analyst at Goldman Sachs JBWere in Australia, "I'm telling clients that the environment over the next five years is extremely constructive because of the inflationary risks further out."

Near-term gold could still demonstrate some weakness as the last of the panic trade peters out. And if the European Union cuts interest rates, as some expect, that could boost the dollar's value, which could undermine gold. And U.S. and European Central banks could sell gold to raise cash to pay for bailouts, which would be bearish for gold prices. But Mr. Southwood suspects Asian central bankers looking to diversify reserves would grab that supply, seeing the sales as "an alarm signal about the dollar."

And what if deflation does hit? Even that doesn't necessarily spell doom for gold, as some think. During the deflationary Great Depression, "gold preserved its value," says Matt McLennan, a lead manager at First Eagle funds, which runs a gold fund. "It preserved its purchasing power."

Yes, some of this new money is likely to "stick around" as Axel Merk says - maybe a lot of it.

This post can also be viewed on themessthatgreenspanmade.blogspot.com.

Central Banks Around The World Continue With Rate Cuts

Last week the U.S. cut their Fed Funds rate by 0.5, and now the rest of the world is following right behind issuing rate cuts of their own. Tim Iacono from The Mess That Greenspan Made looks closer at these interest rate cuts and evaluates what that mean for Gold.

Quarter-point interest rate cuts seem so passé in the new world financial order. It seems that, if you're going to cut interest rates, you need to cut by at least a half-point, otherwise your central banker friends are going to laugh at you.

In the ongoing game of competitive currency debasement, the Bank of England made a bold move this morning in pushing lending rates to their lowest level since 1955, shocking world markets with a cut of 1.5 percentage points - from 4.5 percent to 3.0 percent.
That made the half-point cuts by the European Central Bank and Switzerland's central bank look downright wimpy by comparison.

The BOE leapt past the euro-zone where interest rates are now 3.25 percent and looks intent on catching up to the Swiss in short order where the key lending rate now stands at 2.0 percent. Then it's on to the Americans where the Fed funds rate is 1.0 percent and perhaps even Japan, where interest rates have not exceeded one percent for many years.

As has been the case for months now, all of this slashing of rates in Europe has made the U.S. dollar stronger by comparison and, on one of those rare days when the dollar and precious metals move together, gold and silver have posted even bigger gains.

The much lamented, negative correlation between the U.S. dollar and gold looks like it will be put to the test in the period ahead - and for good reason.

A rising U.S. dollar - a currency that only looks less bad than all of the world's other paper money at this time - provides no fundamental reason why the gold price should move lower.

On days like today, the real fundamental relationship is once again on display - gold is rising against all of the world's currencies, as it should.

While there are many factors that contribute to the dollar-gold relationship, it is sometimes maddening to watch central banks around the world make money cheaper and cheaper in an effort to pull the global economy up out of its nosedive, while nature's money just sits there and goes along for the ride.

Gold deserves better than that.

After all, the nosedive of the global economy was rooted in the reckless expansion of money, credit, and its various Wall Street offshoots which can be collectively termed "cheap money", and as it becomes increasingly clear that the cause and the cure can not be one-and-the-same, gold should continue to shine.

With the world's bankers and economists having failed so badly in stewarding paper money into the new century, there is increasing talk of a Bretton Woods II or some other "improved" monetary system where precious metals and/or other commodities may play a role.

Yes, they'll go kicking and screaming back onto a "commodity-backed" currency, but one look around the world today should make clear that we are not yet ready for a global system of pure fiat money - we may never be ready.

This article has been reposted from The Mess That Greenspan Made. The full post can also be viewed on The Mess That Greenspan Made.

Safe Deposit Boxes: They Aren’t As Safe As You May Think

Safe deposit boxes, kept in bank vaults behind thick layers of steel, are widely believed to be one of the most secure ways to store valuables. However, people should make certain considerations and be aware of certain misconceptions before placing their valuables in a safe deposit box.

One major misconception is that valuables placed in a safe deposit box are covered by FDIC insurance. The FDIC only insures bank deposits in FDIC-insured banks, but safe deposit boxes are not considered to be bank deposits and are not covered. In addition, only banks found to be negligent are legally required to cover losses in the event of damage or theft of a safe deposit box’s contents. Some homeowner insurance policies will cover losses, so check with your insurance provider. Bank robberies and major natural disasters happen more in the movies than they do in real life, so these aren’t huge concerns, but safe deposit box holders should understand the limits of their protection.

An interesting story was published in the BBC today that should be of interest to people who keep their valuables in safe deposit boxes. The story is about a man in India who kept his life’s savings inside a safe deposit box in a bank that developed a termite problem. The bank posted a notice warning customers, but the man did not visit the bank on a regular basis and never saw it. On his next visit to the bank, all he found in his safe deposit box was a pile of termite dust where once there had been money and investment papers. Because the bank posted a notice, and because the safe deposit box itself was not damaged, the bank was not found liable.

The lessons of this story are 1) Make sure you understand exactly what is and is not covered by the bank when you open the safe deposit box, and 2) Make sure you have insurance to protect whatever is not covered by the bank. If you put your entire life savings in one spot, make sure it is 100 percent safe and secure.

Safe deposit boxes have their place. Your valuables are certainly much safer in a safe deposit box than they would be in your home, and many insurance companies will charge lower premiums for coverage of certain valuables if they are held in a safe deposit box. If you are storing investments such as gold or other precious metals, a safe deposit box will probably be your best bet. However, it is important that people understand exactly what they are getting with a safe deposit box, so they do not enter the arrangement with any preconceived notions. If you want to make sure your valuables are protected, ask questions and then get additional insurance if necessary.

Global Warming: How Could It Affect Future Real Estate Values?

Global warming is on the minds of many people after yesterday’s news that a 160 square mile piece of Antarctic iceberg collapsed. According to an AP article, that ice formation had been estimated to be approximately 1,500 years old.

Most of us have heard evidence for and against the theory that human activity is the cause of global warming. I’m not a scientist, and I won’t debate whether global warming is a natural phase of the earth’s climate or the product of human industry. However, I will discuss how real estate values could potentially be affected if the polar ice caps melt, as some believe is already happening at an unnatural rate.

In an article in USA Today, scientists at the U.S. Geological Survey estimate that the maximum rise in sea levels would be approximately 215 feet, or 65 meters. This estimate assumes that all of the ice sitting on land in Greenland and Antarctica were to melt. That is the worst-case scenario that they predicted, and they said it would probably take a few thousand years to reach that point. For more details, read the USA Today article.

I found an interactive map that helps identify the areas that would be impacted. By changing the estimated sea level rise, you can see how the different areas are affected. As most people know, the biggest threat is probably to Manhattan. The area is home to millions of people and it is barely above sea level. It is also the financial center of the country, if not the world.

In a worst-case scenario, if Manhattan were to go under, millions of people and businesses would need to relocate, and there would be billions--if not trillions--of dollars in losses.

Here are just a few questions to consider: Would property insurance cover some or all of the losses? If they did cover such losses, how many insurance companies would go under as a result? Would the government come to the rescue, and if so, how much would it cost taxpayers?

I don’t believe that the worst-case scenario will happen. Many cities across the world would be lost--not just Manhattan--and the world wouldn't just sit back and let that happen. Scientists are already working on ways to combat the effects of global warming.

But if no action is taken and the sea levels rise, I believe that there will be widespread panic and people will head for high ground. If I were investing with the long term potential effects of the global warming in mind, I would stick to markets and areas that are at least 215 feet above sea level. Even if it will take thousands of years for sea levels to rise that much, people will become extra cautious much earlier on. Real estate values could increase dramatically in these areas as many millions of people are displaced and have to look for new homes.

I don’t think we will probably have to worry about this sort of chaos (at least stemming from the current global warming threat, but who knows what will happen when we start implementing the counter measures I mentioned earlier) but were it to happen, severe global warming would shatter the markets and send the world into financial turmoil such as never before witnessed. Even though desire for real estate in certain areas will increase, there may not be people who enough people who can afford higher prices, and actual demand probably wouldn’t equal investor expectations. Investors who think the effects of global warming will be felt in their lifetime might want to purchase gold. In times of panic, investors have always been able to count on gold.

$1,000 Gold Has Officially Arrived: A Warning From Ron Paul

It long appeared inevitable, but it has now officially happened: today the price of gold hit the $1,000 mark. Wondering what’s so important about the $1,000 gold price? Well, let's see what Congressman Ron Paul has to say.

The following excerpts were pulled from an article posted on Lewrockwell.com by Paul (all emphasis mine):

“Buying gold and holding it is somewhat analogous to converting one’s savings into one hundred dollar bills and hiding them under the mattress–yet not exactly the same. Both gold and dollars are considered money, and holding money does not qualify as an investment. There’s a big difference between the two however, since by holding paper money one loses purchasing power. The purchasing power of commodity money, e.g., gold, however, goes up if the government devalues the circulating fiat currency.”

“Holding gold is protection or insurance against government’s proclivity to debase its currency. The purchasing power of gold goes up not because it’s a so-called good investment; it goes up in value only because the paper currency goes down in value. In our current situation, that means the dollar.”

“A soaring gold price is a vote of ‘no confidence’ in the central bank and the dollar. This certainly was the case in 1979 and 1980. Today, gold prices reflect a growing restlessness with the increasing money supply, our budgetary and trade deficits, our unfunded liabilities, and the inability of Congress and the administration to reign in runaway spending.” (This was written back in 2006, so you can probably add the uneasiness being felt from the credit crisis.)

“Likewise, a fiat monetary system encourages speculation and unsound borrowing. As problems develop, scapegoats are sought and frequently found in foreign nations (hello China). This prompts many to demand altering exchange rates and protectionist measures. The sentiment for this type of solution is growing each day.”

Congressman Paul then gets in-depth about how the fiat system will inevitably fail, as it has throughout history (which is an interesting truth). If you are interested in knowing the details, read the complete article. It is fairly lengthy, but well worth the time to read, whether or not you agree with his ideas—it will get your mind spinning a bit if nothing else.

I don’t envision the U.S. moving to a gold standard as Paul suggests, and I’m not sure exactly how I feel about that idea one way or the other. Paul makes an interesting—and extreme—point at the end of the article that I do want to bring up:

“Economic law dictates reform at some point. But should we wait until the dollar is 1/1,000 (which arrived today) of an ounce of gold or 1/2,000 of an ounce of gold? The longer we wait, the more people suffer and the more difficult reforms become. Runaway inflation inevitably leads to political chaos, something numerous countries have suffered throughout the 20th century. The worst example of course was the German inflation of the 1920s that led to the rise of Hitler. Even the communist takeover of China was associated with runaway inflation brought on by Chinese Nationalists. The time for action is now, and it is up to the American people and the U.S. Congress to demand it.”

As The Price Of Gold Rises, What Is An Oscar Worth?

With the price of gold sky high right now, how valuable are those Oscars that got passed out yesterday?

According to The Seattle Times, each Oscar Statuette cost $500 this year, up from $400 last year. In only one year the price jumped $100, or 25 percent! That is pretty amazing, and it goes to show how bad inflation is getting, especially for materials. Each Oscar, according to The Seattle Times, is made from pewter that is plated in successive layers of copper, nickel, silver and gold, and then lacquered and buffed. The price of gold itself has jumped around 40 percent in the last year.

Those who think that $500 isn’t much to pay for an Oscar might be disappointed to know that they can’t be bought. There are strict rules forbidding their sales, and Oscar winners sign contracts guaranteeing that they won’t sell their own award. If they were to break that contract, they would probably fetch more than $500 on the black market, but instead of investing in Oscars, one might want to consider the materials that make up an Oscar.

Even though it seems that silver and gold are at ridiculous highs right now, I think there is more room to grow. Considering the rate at which the Fed is inflating the monetary supply, gold and silver are practically a must for investors right now.