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Saturday, July 16, 2011

We could see gold at $5,000 and silver at $1,000.

"One of the big US banks texted me today to say that if QE3 actually happens, we could see gold at $5,000 and silver at $1,000. I feel terribly sorry for anybody on fixed incomes tied to a fiat currency because they are not going to be able to buy things with that paper money."
Fed Chairman Bernanke Says "Gold Is Not Money" ... But His Predecessor Alan Greenspan Disagrees
Fed Chairman Bernanke told congress today:
‘Gold isn’t money’

But Bernanke's predecessor - former Fed chair Alan Greenspan - disagrees.

As I noted in 2009:

Professor Emeritus of Mathematics Antal Fekete has argued for years that gold is the ultimate - and only - safe haven when things really hit the fan.
For example, in 2007 Fekete wrote:
The grand old man of the New York Federal Reserve bank’s gold department, the last Mohican, John Exter explained the devolution of money (not his term) using the model of an inverted pyramid, delicately balanced on its apex at the bottom consisting of pure gold. The pyramid has many other layers of asset classes graded according to safety, from the safest and least prolific at bottom to the least safe and most prolific asset layer, electronic dollar credits on top. (When Exter developed his model, electronic dollars had not yet existed; he talked about FR deposits.) In between you find, in decreasing order of safety, as you pass from the lower to the higher layer: silver, FR notes, T-bills, T-bonds, agency paper, other loans and liabilities denominated in dollars. In times of financial crisis people scramble downwards in the pyramid trying to get to the next and nearest safer and less prolific layer underneath. But down there the pyramid gets narrower. There is not enough of the safer and less prolific kind of assets to accommodate all who want to "devolve”. Devolution is also called "flight to
Darryl Schoon makes the same argument.
Here's a visual depiction Exeter's inverted pyramid, courtesy of FOFOA:
(Click here for full image)
Are Exeter, Fekete and Schoon right?
I don't know. But Alan Greenspan just lent some support to the theory.
Gold prices that jumped above $1,000 an ounce this week are signaling that investors are buying metals to hedge against declines in currencies, former Federal Reserve Chairman Alan Greenspan said.
The gains are “strictly a monetary phenomenon,” Greenspan said today at an investment conference in New York. Rising prices of precious metals and other commodities are “an indication of a very early stage of an endeavor to move away from paper currencies,” he said...
“What is fascinating is the extent to which gold still holds reign over the financial system as the ultimate source of payment,” Greenspan said.
In other words, Greenspan is saying that investors are moving out of the second-to-lowest step on the pyramid (currencies and government bonds) and into the lowest step (gold).
Greenspan is also verifying what goldbugs like Exeter, Fekete and Schoon have been claiming: that "the barbarous relic" still holds an important place in the modern investor's psyche.
Moreover, as I reported last year:

Alan Greenspan told the Council of Foreign Relations last week:
Fiat money has no place to go but gold.
Greenspan also said that supply and demand explanations treating gold like other commodities “simply don’t pan out."
Greenspan also spoke of how, during World War II, the Allies going into North Africa found gold was insisted on in the payment of bribes, and said:
If all currencies are moving up or down together, the question is: relative to what? Gold is the canary in the coal mine. It signals problems with respect to currency markets. Central banks should pay attention to it.
As I pointed out last month:

Utah has declared gold and silver to be legal tender - with the value of the coin determined by the weight of precious metal it contains
As the New York Times notes:
The law is the first of its kind in the United States. Several other states, including Minnesota, Idaho and Georgia, have considered similar laws.
World Bank president Robert Zoellick noted last year:
Although textbooks may view gold as the old money, markets are using gold as an alternative monetary asset today.
Moreover, as FT reported last year:

Intercontinental Exchange, the US futures exchange group, has followed rival CME Group by allowing its European clearing house to accept gold bullion as collateral for transactions.

Zero Hedge notes:

JP Morgan Accepts Gold Bullion As Collateral.
And Phoenix Capital Research argues that central banks are themselves loading up on gold because they know that the entire fiat money scam will soon collapse.

Ambrose Evans-Pritchard writes:

"It is very scary: the flight to gold is accelerating at a faster and faster speed," said Peter Hambro, chairman of Britain's biggest pure gold listing Petropavlovsk.
"One of the big US banks texted me today to say that if QE3 actually happens, we could see gold at $5,000 and silver at $1,000. I feel terribly sorry for anybody on fixed incomes tied to a fiat currency because they are not going to be able to buy things with that paper money."
China, Russia, Brazil, India, the Mid-East petro-powers have diversified their $7 trillion reserves into euros over the last decade to limit dollar exposure. As Europe's monetary union itself faces an existential crisis, there is no other safe-haven currency able to absorb the flows. The Swiss franc, Canada's loonie, the Aussie, and Korea's won are too small.
"There is no depth of market in these other currencies, so gold is the obvious play," said Neil Mellor from BNY Mellon. Western central banks (though not the US, Germany, or Italy) sold much of their gold at the depths of the bear market a decade ago.


Step by step, the world is edging towards a revived Gold Standard as it becomes clearer that Japan and the West have reached debt saturation. World Bank chief Robert Zoellick said it was time to "consider employing gold as an international reference point." The Swiss parliament is to hold hearings on a parallel "Gold Franc". Utah has recognised gold as legal tender for tax payments.
A new Gold Standard would probably be based on a variant of the 'Bancor' proposed by Keynes in the late 1940s. This was a basket of 30 commodities intended to be less deflationary than pure gold, which had compounded in the Great Depression. The idea was revived by China's central bank chief Zhou Xiaochuan two years ago as a way of curbing the "credit-based" excess.

Top "Reserve Managers Predicted that Gold Would Be the Best Performing Asset Class Over the Next Year"
The Financial Times notes:

UBS surveyed more than 80 central bank reserve managers, sovereign wealth funds and multilateral institutions with more than $8,000bn in assets at its annual seminar for sovereign institutions last week. The results were not weighted for assets under management.
Robert Zoellick, president of the World Bank, last year proposed a new monetary system involving a number of major global currencies, including the dollar, euro, yen, pound and renminbi.

The system should also make use of gold, Mr Zoellick added. The results of the UBS poll also point to a growing role for bullion, with 6 per cent of reserve managers surveyed saying the biggest change in their reserves over the next decade would be the addition of more gold. In contrast to previous years, none of the managers surveyed was intending to make significant sales of gold in the next decade.

Central banks have bought about 151 tonnes of gold so far this year, led by Russia and Mexico, according to the World Gold Council, and are on track to make their largest annual purchases of bullion since the collapse in 1971 of the Bretton Woods system, which pegged the value of the dollar to gold.

The reserve managers predicted that gold would be the best performing asset class over the next year, citing sovereign defaults as the chief risk to the global economy.

The yellow metal has risen 19.5 per cent in the past year to trade at about $1,500 a troy ounce on Monday, buoyed by the emergence of sovereign debt concerns in the US as well as eurozone debt woes.
The San Francisco Chronicle noted yesterday that China is still gung ho on the barbarous relic:
China's asset managers, who have been approved to raise $70 billion for allocation overseas, are seeking additional funds to invest in gold and precious metals as soaring inflation spurs interest in alternative assets as a way to protect wealth.


Gold demand in China, the world's largest producer, is expected to continue rising as economic growth boosts wealth and inflation rising at the fastest pace in almost three years drives demand for alternative assets. Investment demand more than doubled in the first quarter to 90.9 metric tons as the nation overtook India to become the largest market for coins and bars, the World Gold Council said in May.
Phoenix Capital Research argues: that central banks are loading up on gold because they know that the entire fiat money scam will soon collapse:
Even the biggest proponents of paper money (central banks) have begun to realize that their grand experiment is coming to an end. Central banks officially became net buyers of Gold last year. And we now find that they have acquired the most Gold in over a decade.
The Financial Times reports:

Central banks have pulled 635 tonnes of gold from the Bank for International Settlements in the past yearthe largest withdrawal in more than a decade.
The move, disclosed in the BIS's annual report, marks a sharp reversal from the previous year, when central banks added to deposits of gold at the so-called "bank for central banks" rather than lending it directly to the private sector amid growing concerns over counterparty risk.
Let’s consider this. If you’re a central bank and you actually believe in the value of paper money and your ability to create wealth by printing it…why would you be loading up on Gold?
The answer is simple: you see the writing on the wall.
The central banks of the world are in a competition to devalue their respective currencies against each other. They will work together to suppress a particular currency if a carry-trade gets too out of control (see Japan earlier this year), but in general the ECB wants a cheap Euro, the Fed wants a cheap Dollar and so on and so forth.
These guys know that the financial system is broken. They’ve known it for over a decade (Greenspan even admitted that derivatives could “implode” the market in 1999). But they’re going to kick the paper money can down the road as long as they can… primarily because the entire financial system is banking on their ability to “fix” things.
The 2008 Crisis was the first taste of systemic risk. The central banks threw everything including the kitchen sink at the problem in an attempt to hold things up. And it’s worked temporarily in the sense that the financial world still believes central banks can handle the situation.
However, the fact remains that the central banks actually didn’t fix anything. After all, you can only fix a debt problem by paying the debt off or defaulting. Moving it around and issuing more debt to meet current payments does nothing.
In this sense, the world’s central banks literally “bet the farm” on themselves and the view that sovereign balance sheets can stomach this toxic waste. As we’re now discovering in Europe, the laws of the markets (oversaturation of debt, default and the like) apply to countries as well as private banks.
The central banks know this and are now acting accordingly. It is not coincidence that they became net buyers of Gold within two years of the 2008 Crisis. Nor is it coincidence that they are now loading up on Gold at the fastest pace in over a decade. They KNOW (not think) that systemic risk is still on the table in a big way and that they will be POWERLESS to address the next Crisis when it explodes.
You can already see this in their public statements. Bernanke himself even admitted the Fed has no idea why the economy isn’t recovering. If you extend the implications of this statement it becomes clear Bernanke and pals are realizing that printing money is not going to patch up the financial system.
Hence the Gold purchases.
Certainly, sovereign debt plays a part. As Market Watch reported Tuesday:
Debt problems in the U.S. and Europe continue to support gold prices along with currency volatility and political instability all over the world, said Frank Lesh, a broker with Future Path Trading in Chicago.
“One of the main reasons gold came off $1,550 is because Greece didn’t default,” he said. “But Greece is still simmering at the moment,” and that supports the gold price.
Martin Hutchinson argues that gold will do well until the 2012 election, as Bernanke and the administration will keep rates low and monetary policy loose. But sometime after the election, and perhaps when Bernanke is replaced, rates will be raised dramatically, and it will be time to sell gold.

If those of us who say that gold is not in a bubble are right, then why are most investment advisers so anti-gold?

McAvlany Wealth Management gives an interesting possible answer:

Each bull market of the past 100 years has shared similar characteristics. We’ve often explored the distinct periods within a growth trend, and parsed this out by investor psychology and degree of confidence. We’ve said that there are three distinct phases from beginning to end, beginning with the maverick investor and ending with the masses chasing a momentum trend. We observed one more sign this week of being on the cusp of the third and most explosive growth phase. (You won’t want to sit this one out.)
In the early 1970s, it was a common Wall Street view to see gold as a fringe asset, determined by rational minds in the ’30s to be irrelevant to “modern” investment portfolio allocation. However, by the mid 1970s, as the price dynamics argued annoyingly for a full-fledged bull market, many on Wall Street changed from being dismissive to confidently cautious; cautioning that it had in fact already moved too high in price to be of interest to serious-minded investors. Resistance to the idea was common. (Owning gold is unsettling for a crowd whose job security is determined by “good times.” As Joseph Schumpeter has said, “The modern mind dislikes gold because it blurts out unpleasant truths.”) Once this stonewalling had finally been worn out by the repeated requests of clients seeking to purchase metals against the advice of their brokers, real money began to migrate to the asset class (real world inflation was being felt up and down the socio-economic ladder), and Wall Street no longer had an excuse to be out – they had to be in.
Between ’76 and ’78, analysts began to wrap their minds around the metals market, favoring gold stocks over physical metals (you can look at a balance sheet and even go out and meet the management of the company instead of analyzing warehouse inventories, bar weights, and serial numbers). Analysts first observed that well-run gold companies had earnings that were leveraged to the rising price of the commodity. Earnings growth expectations defined the initial (albeit late) Wall Street infatuation with gold. (We have yet to see this during the current bull market because everyone assumes the price is going lower from this point, not higher, and thus the imagination has not yet been set free – or feverishly on fire.)
Once the imagination was unrestricted by past prejudice and the Wall Street crowd was making a little money in the gold trade, valuations (at that even later stage) shifted and became more aggressive by relating a company’s value to its in-ground ounces. What was the value of a company that had a bazillion ounces available to it, even if it was just a nominal producer today? For anyone that had missed buying the metal at $125.00 an ounce, you could still buy a company with in-ground ounces at that older and more attractive price. You can count reserves; you can even stretch that method and count inferred resources to yield an even higher valuation for the company – or justification for a higher share price.
Fast forward to this week’s Barron’s magazine. David Steinberg, as asset manager out of Illinois, shared in an interview that buying gold companies was a way of buying gold under the current market price. Sounds attractive. It is even partially true. Importantly, it is the first such observation we’ve seen in the mainstream media. We are sure it won’t be the last. The trickle of public interest in the U.S. will become a flood. Conservative metrics will once again become aggressive.
The migration of money has always followed this general pattern from maverick investor to mass mania. We are still far from the point of mania, and the final push higher by momentum investors. However, as we frequently discuss a myriad of issues spanning economics to geopolitics we are closer by the day to a cusp event marking the departure of the middle stage of this bull market taking us into the final stretch.

Of course, a less charitable explanation might be that investment advisers to the little guy don't make money by suggesting physical metals ... they make money by churning stocks.

Why Gold Is Still a Good Long-Term Investment

Utah has declared gold and silver to be legal tender - with the value of the coin determined by the weight of precious metal it contains
As the New York Times notes:

The law is the first of its kind in the United States. Several other states, including Minnesota, Idaho and Georgia, have considered similar laws.

World Bank president Robert Zoellick noted last year:

Although textbooks may view gold as the old money, markets are using gold as an alternative monetary asset today.

Alan Greenspan told the Council on Foreign Relations:
Fiat money has no place to go but gold.


If all currencies are moving up or down together, the question is: relative to what? Gold is the canary in the coal mine. It signals problems with respect to currency markets. Central banks should pay attention to it.
China is buying a lot of gold. As CNN Money reported on May 20th:

China edged out India to become the world's largest buyer of investment-grade gold products, according to a World Gold Council report.
In the first quarter, Chinese consumers purchased 90.9 metric tonnes in gold bars and coins, valued at $4.1 billion.
That's more than double the amount Chinese consumers were buying a year ago.
"You have a growing middle class that has increasing disposable income that is also concerned about upward inflation pressures," said Carlos Sanchez, a precious metals analyst with independent metals research firm CPM Group.

Indeed, commentators such as Ambrose Evans-Pritchard and Byron King have argued that China's hunger for gold will put a floor on gold prices. Specifically, they argue that China will "buy the dips" in gold prices, effectively putting a minimum on how low gold prices can go.
Moreover, with virtually all of the world's countries printing money like mad, it isnot gold - but rather fiat currencies themselves - which are in a bubble. In that light, gold is not overpriced.
And as I noted last year in an exhaustive roundup, there are many other reasons that physical gold could be a good long-term investment (even if there are sharp corrections in the short-run) including:

1) sovereign defaults; 2) shortages of physical deposits; 3) the dollar; 4) central banks; 5) declining production; 6) inflation; 7) deflation; 8) uncertainty and distrust in government; and 9) flight to safety.
Notes: Timing is, of course, everything. Buy during a dip.

If governments start raising interest rates world-wide, it might be time to sell gold. But there doesn't seem to be any risk of that in the near future, as virtually every government which has the ability to do so is still printing money like a drunken sailor. Virtually no country has the political discipline to raise rates.
If you are skeptical of gold because it is not very portable in the event of a major disruption, you might consider buying precious stones, which are easy to transport.

I am not an investment adviser and this should not be taken as investment advice


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