Category: Gold and Silver

You should stock up on gold as well as silver while you can – in particular, physical precious metals and high-end mining gives.

In the short and medium terms, prices of precious metals will do anything they do. Up a little, lower some and sideways for a while. Day to day, you just never know. The price chart bounces around. But long term? Hold gold. Hold silver.

In fact, today there’s more reason to hold precious metals…

Why buy silver and gold, especially after the sell-down of the past couple of years? Start with the fact that Chinese are purchasing lots of gold. Lots! Here’s the latest chart of Chinese gold imports from Hong Kong, showing strong, steady build up over the past two years:

Click to enlarge

Since September 2011, China brought in 2,116 tonnes of gold. Therefore in just two years, China has imported just under the equivalent of the entire gold reserves of France (Two,435 tonnes) or Italy (Two,451 tonnes).

Or look at it this way. While Western buyers and monetary players disdain gold and sell it – for example, while big Western stakes like SPDR Precious metal Shares (GLD) are liquidating gold holdings – the Chinese are buying gold, and more.

Evidently, the People’s Bank of China (PBOC) is making great on its quietly mentioned long-term goal of creating a gold-backed national currency. That, and China is actually making all manner of bilateral trade deals with a number of nations, in which nations trade with China using their own national foreign currencies and the Chinese renminbi. This slashes the US dollar out of the cycle.

So why are the Chinese so wanting to buy and import gold? Why make bilateral trade deals? Why don’t the Chinese want to use the dollar? Don’t china know that yellow metal is just a so-called ‘barbarous relic’ in the eyes of many Western economists and political gurus?

Recently, we had a stunning glimpse of how the highest amounts of policymakers think in China. Basically, top echelons in China are worried about the overall security of america dollar and, by extension, China’s vast holdings of dollar-based assets.

Strong Rhetoric to ‘De-Americanize’ the actual World

We live in ‘alarming days,‘ according to articles this week in Xinhua, China’s complete news agency of report – in that it represents the views of the ruling Communist Party.

Apparently, the Chinese language chose an opportune time to drift a trial balloon that we’ve been awaiting for quite some time. Communist Party management wants to get a sense of exactly what the world thinks about taking on the US – and the almighty dollar – several notches. As I said, buy silver and gold. Beat the rush.

Indeed, Xinhua minces no words: ‘The destinies of others are in both your hands of a hypocritical nation,‘ meaning the US, of course. And that’s just the start. There’s more, also it plays out like a barbed-wire back rub.

Chinese editors at Xinhua come down hard on ‘cyclical stagnation in Washington‘ over the federal budget. The US government has repeatedly failed to bring spending and debt under control. This has, according to Xinhua, ‘left numerous nations’ tremendous dollar assets [China’s, certainly] in jeopardy and the international community highly agonized.‘

Overall, states Xinhua, the earth has an American-made financial problem that must ‘be terminated‘. Wow. When Chinese communists use the word ‘terminated’, my instinct is to drop what I’m performing and clean my collection of assault rifles. That, and maintain stocks of precious metals like gold, silver and…brass, if you know what I mean.

This China thing isn’t heading in a good path for the US. Don’t take my word on it. Here are plenty of other excerpts to ponder from Xinhua:

‘As U.S. politicians of both political parties are still auto shuffling back and forth between the White Home and the Capitol Hill without impressive a viable deal to bring normality to the body politic they brag regarding, it is perhaps a good time for the befuddled world to start considering building a de-Americanized world.‘

*****

‘With its apparently unrivaled [sic] economic and military might, the actual United States has declared that it’s vital national interests to protect in nearly every corner from the globe, and been habituated in order to meddling in the business of other countries as well as regions far away from its shores.‘

*****

‘Meanwhile, the U.S. federal government has gone to all lengths to appear before the world as the one that claims the moral high ground, yet covertly performing things that are as audacious as torturing prisoners of battle, slaying civilians in drone attacks and spying on globe leaders.‘

*****

‘A new world order should be put in place, according to which all nations, big or small, poor or rich, can have their key interests highly regarded and protected on an equal footing… For starters, all nations need to hew to the basics of the international law, including respect for sovereignty and keeping hands off domestic affairs associated with others.‘

*****

‘Furthermore, the authority from the United Nations in handling global hot-spot issues has to be recognized. Which means no one has the right to salary any form of military action against others without a U.D. mandate.‘

*****

‘Apart from that, the actual world’s financial system also has to embrace some substantial reforms.‘

*****

‘What may also be included as a key part of an effective reform is the introduction of a new international reserve currency that is to be created to replace the dominant U.Utes. dollar, so that the international community could permanently stay away from the spillover of the intensifying domestic political turmoil in the United States.‘

*****

‘Of program, the purpose of promoting these changes is not to completely toss the Usa aside, which is also impossible. Instead, it is to encourage Washington to experience a much more constructive role within addressing global affairs.‘

Refuting the Pillars of US Policy

Note that last item, about not ‘completely’ tossing the united states aside. Gee, thanks…I think. On the other hand, the Chinese have reason to worry about US finances. China may be the biggest foreign holder of US Treasury ties, worth a total of $1.28 billion according to public American information.

And note that second-to-last item about ‘a new international reserve currency‘ to replace the buck.

In general, a commentary such as this within Xinhua means that powerful political factions in Beijing – Communist Party and/or army – hold the expressed opinions. Oft-times, a strong Xinhua piece means that the entire Chinese leadership holds the opinion as well as seeks to determine how it performs out around the world. (The news article went viral.)

Looking back, Chinese leadership has never been bashful about criticising the course and wisdom of US policy. Still, over many years, top Chinese language echelons have usually limited severe critique of the US to lower-level players – academics, midlevel ministers, retired military officers or even well-regarded business people.

No senior Chinese agent has ever made a comprehensive, point-by-point refutation of the pillars of US policy, accompanied by the suggestion to rebuild the entire system of global trade and relations in between nations. Until now.

This new ‘official’ Chinese language commentary – from the top level – utterly deconstructs US policy in ways which go back to the end of the Chilly War. Reading between the lines, one can see jabs from US policy as far back as Leave Shield and Desert Storm of 1990 and 1991. Or All of us intervention in the Balkans, and certainly bombing Serbia within 1999. The Middle East conflicts of the past decade – to include the Arab-speaking Spring coups and Libya takedown – are doubtless in the Chinese crosshairs as well.

US policymakers love to change labels on what they do from time to time, because it supports the misconception that the nation is doing things differently under new presidents with ‘new ideas’, implemented by brand new stables of diplomats, generals and admirals. For example, the idea of so-called ‘nation building’ (at the point of a gun, some say) is now branded ‘responsibility to protect’ (R2P). Either way, in Chinese eyes, it’s simply garden-variety old US imperialism.

The Xinhua article criticizes how the US stakes out moral high ground to justify illegal detentions, summary executions by drones and torture of prisoners. At an additional point, the author claims that the so-called ‘Pax Americana’ is a subterfuge to foment instability, American meddling, wars and worldwide chaos justified by lies. No sugarcoating here.

Also implicit in the article may be the idea that Chinese leaders are galled at the uncertainty of return on their trillion dollars and more of US bonds. Apparently, Chinese frontrunners are uncertain about the financial security of US bonds, and they fear a massive loss of value over time.

The Big Takeaways

There are several critical items to note here. The actual Xinhua article is the first in which senior Chinese players have dared go public with a bitter, sharp-edged denunciation of the US-managed international system.

The Xinhua article does not ‘just’ hold on there, either. The authors label American policies as destructive ethical failures. The article openly phone calls on other nations throughout the globe to restructure politics and economics. The next version of global economy will be a remarkable reduction in the role of the US and its dollar as the world book medium of exchange as well as measure of value.

The Chinese are clear that their eventual aim would be to topple the US from its placement of global leadership in most values. The rhetoric betrays intense Chinese frustration with the US. Things have reached the boiling point. From the Chinese perspective, the US government is poisonous for world business, while American military power is unleashed at political whim to promote global instability.

Looking Ahead…

Now what? Nicely, we wait. Chinese leadership will let the Xinhua article have its day in the sunlight and then gauge whether other national leaders share these types of views. Stand by to see a flood of proposals through across the world about alternatives to US hegemony.

We’re looking at tough times ahead for the US position in the world. We’re fortunate to possess the shale energy revolution going on along with a rebirth in technology as well as manufacturing. But can this counter the chronic mismanagement of the country that comes out of Washington, DC? We’lmost all likely all live of sufficient length to find out.

These are interesting times. Or as Xinhua says, ‘alarming days‘. Meanwhile, buy gold and silver.

Byron King
Contributing Editor, Money Morning

Gold took quite a beating within September, bucking its seasonal typical monthly return of Two.3%. The political battle between President Barack Obama and Congress, China’utes Golden Week, and India’s gold import restrictions likely weighed on the metal.

September’s correction only adds to the negative emotion toward the precious metal. The assumption from many market pundits is that gold is no longer appealing as an investment. With increasing rates and continuing low rising cost of living, US investors believe they have a solid case for selling their holdings.

However, this could be a premature assessment, causing these bears in order to potentially lose out on a profitable position.

Allow me to use a piece of ice to explain.

One of the strongest drivers from the ‘fear trade’ is real rates of interest. Whenever a country has negative-to-low real prices of return, which means the inflationary rate (CPI) is greater than the current interest rate, gold tends to increase in that country’s currency. And our model tells us that the showing point for gold is whenever real interest rates go above the actual 2% mark.

Consider the ice dice, which shows how brand new equilibriums can have significant effects. At 0 degrees Celsius, H2O is really a solid chunk, but when the temperature increases, the mass gradually begins to turn into a liquid. Over 1 degree, ice modifications form from solid to fluid, but it’s still made of hydrogen and oxygen.

Because money is like water, when many other economic characteristics, such as population growth, urbanisation prices and changes in government policies, reach their tipping stage, the velocity of money tends to be altered.

As global investors, we watch for changes in these trends to understand how to invest in commodities and markets, find new possibilities and adjust for danger.

How Close to Gold’s Tipping Point Are US Investors?

In other phrases, what is the real interest rate today? As you can see below, US Treasury investors still lose money, as the 5-year bill produces 1.41 percent and inflation sits at 1.5 percent. This is nowhere near the 2% mark.

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I would be worried about gold in the event that real interest rates solidly crossed the 2% threshold for an extended amount of time, because it would have a dramatic effect on gold. as an asset class. In a high rate of interest environment, gold and silver lose their own attraction as a store of value.

In purchase for that tipping point to happen, rates would need to continue increasing above inflation, and rising cost of living would need to remain low. These are the forecasts made by many gold sellers today; however I wouldn’capital t get too trigger pleased just yet, as recent data problems these assumptions.

Take the monthly [US] joblessness figure, which is one of the primary indicators the Federal Reserve studies when evaluating the economy. But with respect to the definition of an unemployed person, the actual numbers reveal different results.

The recognized U3 unemployment rate, the exact figure Ben Bernanke uses, tracks the total unemployed as a percent of the civilian labour force.

The broadest gauge determined by the Bureau of Labor Statistics (BLS) is the U6 unemployment rate. For this number, the BLS adds in all those people who are slightly attached to the labour force, in addition people working part-time who want to work full-time.

What does ‘marginally attached to the work force’ mean? These people are neither working nor looking for work but show they want a job, are available to work and also have worked during some period in the last 12 months. These slightly attached people also include discouraged workers who are not looking for work because of some job-market related reason.

Then there’utes a measure of the labour market the BLS tracked prior to 94′. This is the seasonally-adjusted alternate unemployment rate that statistician John Williams continued to calculate. It’s basically the U6 plus long-term frustrated workers.

While the figures closely followed one another from 1994 through 2009, there’s recently been a shift. U3 and U6 have been popular downward over the past few years, while Williams’ ShadowStats unemployment rate shows the noticeably upward trajectory. Probably the official unemployment figure overstates the healthiness of the economy?

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Based on the jobs marketplace, a limited housing recovery and regulations that have been slowing down the flow of money, the Federal Book may have no choice however to raise rates very gradually to keep stimulating the economy.

Figures Don’t Lie, But Liars Figure

Then there’s the suggestion of inflation manipulation. Even though the US has been reporting a reduced inflation number, things feel more expensive to many Americans. Disposable income has been growing less than inflation in recent years; perhaps that’s why many people feel ‘squeezed’.

Also consider Williams’ graph below. It shows month-to-month inflation data going back for more than a century. The blue and gray shaded areas represent BLS’ historical Consumer Price Index (CPI).

You can clearly begin to see the wild swings of rising cost of living and deflation, especially during the First World War, the Great Depression, and the Second World War, as well as the stagflation of the 1970s and early 1980s.

However, shortly after disco, bell bottoms, and episodes of All within the Family faded from memory, the united states adjusted CPI not once however twice, first in the early 1980s and again in the mid-1990s. If you use the pre-1982 calculation, you end up with a much different inflation picture. This really is the area shaded in red-colored.

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Way back in 1889, statistician Carroll D. Wright, within addressing the Convention associated with Commissioners of Bureaus of Figures of Labor, talked about the unbiased and fearless presentation of its data, using the above play on phrases. He said:

‘The old saying is that ‘figures will not lie,’ but a new saying is ‘liars will figure.’ It is our duty, because practical statisticians, to prevent the liar through figuring; in other words, to prevent him through perverting the truth, in the interest associated with some theory he desires to establish.‘

Wright’s speech seems particularly relevant today.

For patient, long-term traders looking for a great portfolio diversifier, an average weighting in gold and precious metal stocks may be just the solution. And, today, when looking over the gold mining industry, you’lmost all find plenty of companies that have compensated attractive dividends, many higher than the [US] 5-year government yield.

Frank Holmes
Contributing Publisher, Money Morning

Publisher’s Note: Figures Don’t Lie, But Liars Figure initially appeared in The Daily Reckoning USA

Goldman Sachs created a stir recently if this forecasted that gold would fall to $1,000 an ounce after 2014, as the firm expected the Federal Reserve to reduce its bond purchasing program. Goldman also suggested which gold miners might want to hedge their output, locking in 2013 costs.

HSBC analysts have also been bearish on gold, even though the firm admits that lower gold prices tend to draw out tremendous need from emerging markets, particularly China. Because of that demand, HSBC believes gold will end 2014 at about $1,435 an ounce, says MarketWatch.

Keep in mind that ‘Goldman Sachs will things that are good for Goldman, not you,‘ says Byron King through Agora Financial. Things can alter quickly in the gold marketplace, as investors saw whenever, only days after Goldman’utes assertion, the Federal Reserve shocked everyone by announcing it would continue purchasing $85 billion worth of bonds. Gold investors cheered because the precious metal shot up the most in 15 months.

Unlike many commodities, there are many shades to gold, such as the Love Trade’s buying gold for loved ones and also the Fear Trade’s purchasing gold as a store of value. An extra ‘shade’ investors need to be aware of is when the Fed interprets the recuperation of the US economy.

I had a few reasons to believe Ben Bernanke was going to pull the rug out from under the market’s feet. Before word came out, I told Canada’s Business News Network that the ending of quantitative easing was not going to be abrupt because it’s not a black and white problem.

Consider the lack of significant job growth in the US, as many of the jobs that have been created in recent history had been part-time positions. Investor’s Business Every day (IBD) links this lackluster employment situation to President Barack Obama’s Affordable Care Act.

According to the publication’utes scorecard, ‘more than 300 employers have cut work hours or jobs, or otherwise shifted away from full-time staff, to limit liability under ObamaCare.‘ Whilst providing affordable health care to Americans sounds honourable, the loss of full-time jobs seems to be an unintended consequence from the burdensome regulations placed upon a business.

Take a glance at IBD’s chart, which exhibits the accommodations industry’s typical weekly hours that nonsupervisors put in since 2000. During each economic downturn, in 2001 and again in 2008 to 2009, the hours dropped.

But since ObamaCare was authorized into law, which mandated that employers would need to provide health care coverage for staff that work more than 30 hrs a week, the average plummeted. As of July, the lodging industry workweek hit 28.8 hours, ‘at a record low,‘ in accordance to IBD.

Click to enlarge

It’s not only about job growth. Housing is also not rebounding as strongly as some people think. I told Reuters that many people don’t realise that the real estate marketplace boom has been narrowly targeted.

According to USA Today, almost half of the houses purchased in July were bought with cold hard cash. Within places like Florida, ‘nearly two-thirds of home sales were completed with no mortgage loan,‘ says USA Today.

In Nevada, about 65 percent of buyers paid with cash, followed by Maine, where nearly 60 percent of house sales were cash. Perhaps regulation in the banking industry has made the process of getting a mortgage as well burdensome for families?

Housing is one of the biggest multipliers for jobs, exactly where $1 spent in housing results in about $16 in related economic activity. When rates of interest are low, more people make an application for mortgages. They build houses, employ moving services and buy new furniture, which in turn employs more people within multiple industries.

But after interest prices rose quickly, the housing market came to a halt. People who once qualified for a mortgage to build a new home no longer qualify at the higher rates, which means a potential inventory of new real estate may quickly build.

At the same time, big banks are announcing layoffs in mortgage loan lending. Wells Fargo announced it was likely to lay off 1,800 workers as refinancing activity continues in order to slow. The company had currently told 2,300 workers to stop coming to work as rising interest rates curtail demand for brand new mortgages and refinancing.

So instead of the Fed quickly declining its bond purchases and raising rates, this process will likely be very gradual. I believe the federal government will have to keep interest rates low to stimulate the economic climate.

And that’s positive for equity marketplaces as well as for gold. If interest rates remain low, real rates might remain in negative territory.

In my personal presentation on opportunities in resources and emerging markets, We told the crowd at the Greater toronto area Resource Investment Conference which 2% has been the tipping point with regard to gold. Historically, gold and silver carried out well in a low or negative real interest rate environment.

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Regardless of where analysts think the actual gold price will be a 12 months from now, we believe gold and gold stocks can be an superb portfolio diversifier. We’d rather maintain quality gold companies that are experiencing a growth in resource base, development in production and growth in cash flow instead of trying to time the market.
 
Frank Holmes
CEO and Chief Investment Official, U.S. Global Investors

[U.Utes. Global Investors, Inc. is definitely an investment management firm focusing in gold, natural sources, emerging markets and worldwide infrastructure opportunities around the world. The company, headquartered in Dallas, Texas, manages 13 no-load mutual funds in the U.S. Worldwide Investors fund family, in addition to funds for international customers.]

Publisher’s Note: The Gold Market’utes Overlooked X Factor originally appeared in The Daily Reckoning USA

And there was the mainstream thinking that gold was lifeless.

They had it written off.

Yet there it is. It’s back from the dead.

Not only that, but it’s flourishing. It’s as though it has a new lease on life.

So what’s next? Is this the end of the rally? Or will it drop in a heap again…just like this did in June?

Here’s our take…

We’ll be straight up with you.

This latest gold rally has had your editor completely unexpectedly.

We admitted as much yesterday to the old pal, Sound Money, Seem Investments editor Greg Canavan. Greg says it’s excellent to see that gold is doing what it’s supposed to do – relocate the opposite direction to the stock market.

That fits in with Greg’s look at the market right now, which is which stocks are on the verge of a big drop.

This ‘gold upward and stocks down’ relationship isn’t necessarily what happened for a lot of the previous five years. For much of the time stocks and gold flower and fell in unison.

But now the real reason for owning gold has returned. It’s not regarding trading gold like a reveal, it’s about the safety of owning gold while globe leaders crank up the volume on war…

Gold Doing What it Does Best

You have to remember a key reason why gold increases during war times. It’s not just because people are worried that the bank notes and coins will disappear.

It’s because historically governments have a tendency to ramp up the printing pushes during a war in order to pay for the war. Doing so naturally devalues the currency already within circulation. And that should imply a higher gold price.

So in a way, it’s good to see the gold price rallying so strongly in recent days. Contrary to the idea that gold was dead and buried, it’s doing exactly what it’s supposed to do. That’s good news.

Source: Goldprice.org

It’s why we recommend investors possess a significant amount of gold. It’utes to protect your wealth as well as investments against the war talk and printing presses associated with war mongering governments (US, United kingdom, France and Australia).

But the mainstream didn’t just too early consign gold to the rubbish bin. Most folks had figured resource shares would never recover either…especially gold stocks.

Gold Stocks Beat Gold

If you think gold has done well, climbing $150 (about 10%) in a couple of weeks, gold stocks did even better.

As you can see on the following chart, the Market Vectors Gold Miners ETF [NYSE: GDX] has gained 21.1% during the exact same time – twice the performance of physical gold.

And if you think that’utes good, the Market Vectors Junior Gold Miners Exchange traded fund [NYSE: GDXJ] has added 34% – three times the actual performance of physical precious metal:

Gold ETF – red line; Gold Miners ETF – blue line;
Junior Gold Miners EFT – yellow line
Source: Search engines Finance

However, we need to make one thing obvious. Buying physical gold as well as gold mining stocks isn’t the same thing.

In fact, they’re at the polar opposites of investing. Physical gold isn’t regarding getting rich. Physical gold is about protecting your wealth from government meddling. You should own physical gold.

You may have 10%, 20% or 30% of your wealth in gold…or maybe more.

Gold stocks (or any exploration stocks) are about betting and growing your prosperity. They’re about placing small wagers on the off-chance you could bag a large triple-digit percentage gain.

For gold stocks I doubt if you would have more than 10% of your share portfolio in a number of stocks. An individual gold stock might account for no more than 1-2% of your total wealth.

The thing is, you don’capital t need a big exposure to gold stocks because of the potential to make super-sized gains.

Of course, the other reason you shouldn’t have a large amount of your money in gold shares is that you can lose money too. The Market Vectors Junior Gold Miners ETF offers fallen 43.5% over the past year, and was down around 62.5% in June.

Don’capital t be a Fool

Look, as we wrote within Monday’s Money Morning, the recent resource stock rout has similarities to the dotcom boom as well as bust in the early 2000s, and the current tech stock recovery.

When stock markets boom, investors make a lot of bad investments. These people don’t buy a stock simply because it’s a good stock, they buy it because other stocks have gone up and they think their stock will go up too.

But when the boom finishes, they soon sort out the good stocks from the bad shares.

That clear-out has happened to resource stocks in recent months. The market has punished those companies that had little substance to them.

And this won’t be the finish of it either. Investors will be more cautious about where they put their money. That will be bad news for the stocks with little to no genuine prospects. But it will be great news for the real explorers and producers.

Just because investors shifted towards the quality technology stocks in recent years, so they’ll shift towards the quality resource stocks in the coming months.

That’s already started to happen. Just as people who thought 2001 was no more the tech boom look foolish today, those who say this is the end of the resource boom will look just as foolish 10 years from now.

Cheers,
Kris+

The recent market uncertainty isn’t any doubt causing investors some worry. That’s especially true for those within or nearing retirement.  The actual ‘professionals’ keep reassuring us the global economy is slowly recovering which this will underpin future market overall performance.

But this ignores the fact that the actual economy and markets have the twin props of money printing (QE) and zero interest rate policies (ZIRP) supporting this so-called ‘recovery’.

So when or if main banks remove these items what are the consequences?

The unprecedented amounts of central banker intervention are a result of The truly amazing Credit Contraction (GCC). The GCC isn’capital t your ‘run of the mill’ economic downturn. It’s a result of the collapse of a credit bubble the likes of which the globe has never seen before.

And so a genuine recovery can only take place after slowly and painfully removing the massive build-up of debt in the system.

Therefore, it’s dangerous with an investment strategy that thinks the worst is over which you’ll shortly see a return to ‘normal service’.

My guess is actually those who believe in the ‘reveal market always goes up’ mantra may run out of money and patience long before this market delivers with that Secular Bull Market guarantee.

Central Banks Can’t Deny This particular Major Trend  

Recent data through Europe and the US show these economies are, at best, limping along. The inclusion of vast amounts of stimulus money has inflated the anemic growth numbers. Take out the government giveaways and you’lmost all see their real economies are well and truly backwards gear.

That means in this new world of credit contraction, an investment strategy based on how things labored in recent decades is actually destined to make you much poorer. And as this loss of wealth effect slowly embeds within society’s psyche, you can expect to observe more direct intervention through policy makers.

Forget taper, they’ll continue to tamper.

The central lenders are trying (in vain) to alter the actual market’s destiny with financial reality. Based on previous interventions, any success will be fleeting. The fact is markets respond to the stimulus steroid until they don’t. As well as the central bankers, withdrawal isn’capital t an option so the market will probably ‘die’ from a stimulus overdose.

Having a big image strategy and a good deal of patience enables you to view these market movements as part of the longer-term trend. It’s the trend in which the market goes much lower.

Holding cash while marketplaces fall is the first 1 / 2 of the strategy. The other part is actually deciding when to begin purchasing markets again. One of the indications to watch is the Dow/Gold ratio.

History has shown which gold is ‘the ultimate shop of wealth’.

In the good times traders chase markets (paper money) and in the bad times they go back to gold (real money). The Dow/Gold ratio monitors this ‘greed and fear’ connection.

The following chart of the Dow/Gold percentage shows how investors fall interior and exterior love with each asset class:

Note: Prior to 1896 a surrogate index can be used for the DJIA Index.
Source: www.bullmarketthinking.com

It’s interesting to note the amount of volatility before and after the creation of the united states Federal Reserve. After the Panic of 1907, the creation of the US Fed had been supposed to be the great stabiliser – at least according to the Act. The following is an extract from www.investopedia.com :

Definition of ‘1913 Federal Reserve Act’
The 1913 U.S. legislation that created the current Federal Reserve System. The Federal Reserve Act meant to establish a form of economic stability through the introduction of the Central Financial institution, which would be in charge of monetary policy, into the United States. The Federal Reserve Behave is perhaps one of the most influential laws concerning the U.S. financial system.

The graph confirms what we know – that when authorities and bankers meddle, the markets go haywire. Bernanke and co are continuing a long tradition associated with central bankers who believe they are smarter than the collective.

(The fact we don’capital t need central bankers whatsoever is a discussion for another day.)

But let’utes go back to focusing on what history may tell us about the near term destiny of these two asset classes.

Your Best Bet May Be to Take a View From Here

At the peak of the ‘tech boom’ in 2000, the Dow Johnson Index was 11,700 points and the gold price was at a minimal of $280 per ounce. That means the ratio was 42 (11,700/280).  In a two-century period, the 2000 Dow/Gold ratio peak has been the pinnacle of greed and over-optimism.

The Dow Jones index is currently around 14,900 points and gold is $1,365 per oz, giving a ratio associated with 10.9. Previous secular bear markets show the Dow/Gold ratio reaches a low of 1 to two before a market collapse is complete (the depth of fear and pessimism).

How do we get to the ratio of 1 or 2? There are four main equations (and a number of variations on them):

1. The Dow stays around current levels as well as gold rises to $7500/oz or more – these were the dynamics which caused the Dow/Gold ratio in order to bottom out in 1980.
2. Gold stays about currently levels and the Dow jones falls to 2700 points or lower – these were the characteristics that caused the low in the Dow/Gold ratio during The Great Depressive disorders.
3. The Dow falls in worth (say to 7000 points) as well as gold increases to $3500/oz or more.
4. Both gold and the Dow drop to much lower levels – state gold at $500/oz and the Dow jones at 1000 points – this really is the deflationary scenario The Great Credit score Contraction may deliver to us.

The previous lows in the Dow/Gold ratio have come about by differing characteristics. This tends to add credence to the saying, ‘History does not always repeat itself, but it does rhyme.’

If the long-term cycle of a lower Dow/Gold is in our future, it’s unlikely the actual Dow will increase from current levels. Best case may be the Dow remains stagnant. The higher probability is that it falls – perhaps 50% or more.

A fall of this dimensions are also reflective of the pattern of past Secular BearMarkets. There are times to be brave and occasions to be cautious. For me caution is the better option.

In short, my position is to remain on the sidelines in cash and be an interested viewer.

Vern Gowdie+
Editor, Gowdie Family Wealth

As you should know by now, we’ve had a fairly simple view on gold.

Don’t hassle around with it.

Don’t dwell over when you should buy it.

Just buy it and be done with it.

But that doesn’t mean we aren’t thinking about gold and the gold market. From time to time something catches our eye.

That happened yesterday. It reminded us of the way to help tell no more the gold bear market…as well as Warren Buffett’s role in determining it…

Yesterday the World Gold Council released its quarterly Gold Demand Trends report.

Given the absolutely brutal performance of gold in recent months, we were keen to flick through it soon after this arrived in our inbox.

To be honest, for most of the past three years we’ve barely paid any attention for this quarterly report. But this period we thought it was worth a minimum of a few minutes of our time.

And we’re glad we did because i was stunned by what we read…

Selling Document Gold to Buy Real Gold

We’ng cut the following table from the report and circled the key figures. What it shows you is that total precious metal bar and coin demand strike 507.6 tonnes during the quarter.

By contrast the demand from gold exchange-traded funds (ETFs) was -402.2 tonnes. In other words, the ETFs were internet sellers of gold:

Source: World Gold Council

The fact that ETFs were internet sellers doesn’t surprise all of us. Especially when we read the newest news about famed hedge account manager John Paulson selling half his fund’s holding in the main All of us gold ETF.

What really stunned us was the size of the bodily bar and coin demand. We knew from personal encounter that there was a long collection the last time we bought gold bullion about three months ago. So the figures make sense. But it still surprised all of us.

But that table only tells part of the story. It only gives you the numbers. It doesn’t interpret the numbers into useful information. For that you need to speak to a respected precious metal analyst.

That’s why we asked our old pal Greg Canavan, editor of Sound Money, Sound Investments, to chime in with his take on the figures. Here’s what he told us:

‘In an ETF, you are able to only get access to the bodily gold if you’re an “authorised participant”, which are generally the banks. As a small investor, a good ETF only gives you “exposure” in order to gold. That isn’t just like owning gold…especially if you find out the “authorised participants” have drained all the precious metal from the ETF and you can only redeem your gold “investment” in equal US dollars. Those stats show an increasing realisation that the recent gold price plunge had been more about selling in the paper gold market, rather than the physical precious metal market.

‘Also, it shows just how much actual demand there was for bodily when the price fell. The bullion banks (authorised participants) are the main intermediaries in the worldwide physical gold market. The fact they’re taking lots of gold out of the ETF’s means there’s strong demand for it elsewhere. ETF’s don’t lose bodily metal just because the price falls. That’s not how they function. The silver ETF, for example, has hardly shed any gold even though silver’s price overall performance has been much worse.

‘So I’deb say this confirms that investors prefer real, limited supply physical gold, not abundant document gold.‘

So, gold has taken a drubbing. Paper gold traders are selling out. But real gold investors are buying in. That’s the main thing. If you’re interested in buying gold at a good price, has become the time?

Gold v Stocks

For the answer to that question we had to turn to another of our old pals, Dan Denning. (We’re happy to admit that we don’t understand a quarter of what these guys learn about gold, and so we tap their marbles for info.)

Some time ago all of us remembered Dan telling us that he had a different way to many people of judging when it would be a good time to buy gold. He or she doesn’t just look at the precious metal price, he looks at gold’s relative price.

In this case, the actual price relative to stocks…and one stock in particular – Berkshire Hathaway [NYSE: BRK/B].

Berkshire Hathaway is of course billionaire investor Warren Buffett’s listed investment vehicle. Buffett is the man who famously says that gold is about because pointless an investment as you can get.

We don’t agree. But that’s by the by. The point is whether gold is now at a price that makes it worth buying when compared to stocks (Berkshire Hathaway).

As Dan sees it, it is. Dan’utes view was that gold would find support when it was trading at 14-times the cost of Berkshire Hathaway ‘B’ shares (currently USD$116.57 for each share), but only after precious metal had over-corrected through that level.

It’utes now at 11.9-times Berkshire ‘B’ gives as you can see on the chart below:

Source: StockCharts.com

Of course, this isn’t just about the gold price falling. It’s regarding stocks hitting an all-time higher too.

As far as Dan is concerned, as he told us yesterday, ‘Move complete, rally to commence.‘

The hedge fund guys are selling big chunks of their gold ETF positions, but the physical gold demand has nearly doubled compared to the previous 12 months.

If you’ve put off buying gold for fear it could fall further, everything we’ve protected today could be reason enough in order to tempt you into the marketplace.

Then again, as we mentioned at the top of this letter, we try not to consider gold too much…we just purchase it whenever we feel like it.

Cheers,
Kris+