Peter Krauth
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Is Gold Money?… Don't Ask Ben Bernanke, Examine the Federal Reserve
If you really care about your financial future, here's something you need to know.
It's about a story that received almost zero coverage from the mainstream press. I can't say that I am surprised.
It involves gold.
Thanks to requests by Bloomberg News under the Freedom of Information Act, the Federal Reserve has revealed unprecedented details concerning the personal holdings of its regional bank presidents.
What they found is nothing short of stunning …
Ben Bernanke on Gold
But let me back up a little.
There's an exchange between Fed Chairman Ben Bernanke and Congressmen Ron Paul you need to hear first.
During a monetary policy report delivered to Congress last summer, Congressman Ron Paul asked Bernanke if he thought gold is money.
After a clearly uncomfortable pause Ben said, "No. It's a precious metal." [By the way, if you haven't seen Ron Paul questioning Bernanke about gold, click here. It's already had over half a million views.]
Paul went on to ask Bernanke why it is then that central banks hold so much gold. Bernanke answered that it was simply a tradition.
Well, congrats Ben, you did get that one right, just for the wrong reasons. (Deep down, you surely know the true reasons).
The fact is gold has been a monetary tradition for millennia.
Nearly 2,000 years ago Aristotle laid out what characteristics make for good money. According to Aristotle:
- It must be durable.
- It must be portable.
- It must be divisible.
- It must be consistent.
- It must have intrinsic value.
So it's no accident that the most common basis for money – in all of human history – has been gold.
You might want to reread that: the most common basis for money – in all of human history – has been gold. It's no accident.
After all, only gold meets all five of those requirements for sound money.
It is only in the past century that fiat money has supplanted gold or gold-backed currencies on a worldwide basis.
What makes today's central bankers and their system of printing fiat currencies and setting interest rates so special? It is hubris and nothing more.
Fiat currencies are just a relatively recent, and failing, experiment in economics. So much so, it's become exceedingly dangerous to hold them of late.
Here's why.
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QE3, $2,200 Gold, and the Trillion Dollar Bazooka
It's the beginning of a new year, and there's no shortage of big headlines…
Europe is on the financial brink, Iran is a powder keg, and precious metals like gold have retreated.
It's also a time when there is no shortage of financial forecasts.
Even though these kinds of predictions about the future can be tough to make, I'll admit it's kind of fun to look forward and see what the future may hold.
Like in December 2010, when I said I expected gold to reach $1,900/oz in 2011. Some people thought that I was crazy. At the time, gold was trading for just $1,390/oz.
But just nine months later, that turned out to be a pretty good call as gold hit a new high of $1,923/oz. before eventually pulling back.
Better yet, in January 2010, I even said gold would eventually top $5,000. Of course, most people thought that call was preposterous.
Now, even Standard Chartered bank's analysts expect gold to climb to $5,000.
Gold Prices 2012 Forecast: How to Make Double the Gold Profits in the New Year
Despite a pullback from its all-time high of $1,923 an ounce a few months ago, gold is still trading in the $1,700 range. In fact, the glittering metal has gained 22% in the past 12 months.
What's more, I believe gold prices will eclipse $2,200 an ounce in the next year, and shoot beyond even $5,000 an ounce after that.
With the economy still in turmoil – and the U.S. dollar sinking even lower in 2012 (Take a look right here to learn how far the dollar will sink in our new report) – gold prices will continue to rise.
So there's obviously still time to get in on this once-in-a-lifetime bull-run, if you haven't already.
Of course, every investor should at least have shares of a gold-based exchange-traded fund, but if you really want to profit from the price surge, you ought to look at gold mining companies.
Let me explain.
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Gold Price Outlook 2012: Miners Will Shine as Prices Soar
[Editor's Note: This special report on currency investing is part of Money Morning's annual "Outlook" series, which forecasts the prospects for stocks, commodities, and other top profit opportunities in the New Year. Our last forecast focused on currencies.]
Despite a pullback from its all-time high of about $1,920 an ounce set in September, gold is still trading in the $1,750 range. In fact, the glittering metal has gained 22% in the past 12 months.
What's more is that I believe gold prices will eclipse $2,200 an ounce next year, and shoot beyond even $5,000 an ounce after that.
So there's obviously still time to get in on this once-in-a-lifetime bull-run, if you haven't already.
Of course, every investor should at least have shares of a gold-based exchange-traded fund, but if you really want to profit from the price surge, you ought to look at gold mining companies.
Let me explain.
A Golden Opportunity
While gold prices have surged 22% over the past year, gold mining stocks have lagged curiously behind over that period.
The Amex Gold Bugs Index, a weighted benchmark made up of 16 of the world's largest gold and silver mining companies, began the year at 540, and after numerous troughs and peaks, we're back near those same levels.
Normally, gold stocks will leverage gold on a 2-for-1 basis, but in this case, we've seen miners move sideways as gold has advanced.
Yet with gold's price powering skyward, the gold miners have seen their margins expand, making them very profitable at current levels. That makes them absolute steals at these prices.
You don't have to take my word for it, either. Just look at what industry insiders are saying.
"A substantial disconnect has developed between the price of gold and the mining companies," said David Einhorn of Greenlight Capital. "With gold at today's price, the mining companies have the potential to generate double-digit free cash flow returns and offer attractive risk-adjusted returns even if gold does not advance further. Since we believe gold will continue to rise, we expect gold stocks to do even better."
Portfolio managers Michael Bowman and Allan Meyer of Wickham Investment Counsel Inc. concur.
"We are now finding a large number of gold stocks are hitting our value screens, something that has been unheard of in the past," said Meyer.
What else are experts noticing?
Well, as gold prices have risen and stayed high, the price/earnings (P/E) ratios of gold miners have been cut in half. That means the sector as a whole is at as compelling a value as it's been in three years. And with the price of gold set to rise still higher on the back of incessant money printing in the United States and Europe, these miners are only going to get more profitable.
How high is gold likely to go?
My own research tells me we should expect gold to easily reach $2,200 in 2012.
Copper Prices Update: Prosper As Copper Becomes the "New Gold"
The Statue of Liberty is one of the most recognizable American icons in the world.
And as she towers 305 feet above Ellis Island, what's Lady Liberty wearing? Copper – 60,000 pounds of it.
Clearly, copper's big in art. It's also a key metal that keeps the world economy humming. Copper consumption has grown at an average annual rate of 4% since 1900.
Gold Price Conspiracy: What Uncle Sam Doesn't Want You To Know
Is it really so preposterous to believe the United States and Europe would conspire to keep pole position in the global financial system?
I don't think so – and neither does China.
That much was revealed in a diplomatic cable recently uncovered by Wikileaks.
According to the 2009 cable from the U.S. embassy, China believes the United States and Europe have, as a matter of policy, suppressed the price of gold to discourage its use as a reserve currency.
And there's a pretty compelling case to be made for a gold price conspiracy.
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The Gold Price Conspiracy Uncle Sam Doesn't Want You to Know About
Is it really so preposterous to believe the United States and Europe would conspire to keep pole position in the global financial system?
I don't think so – and neither does China.
That much was revealed in a diplomatic cable recently uncovered by Wikileaks.
According to the 2009 cable from the U.S. embassy, China believes the United States and Europe have, as a matter of policy, suppressed the price of gold to discourage its use as a reserve currency.
And there's a pretty compelling case to be made for a gold price conspiracy.
The Gold Price Conspiracy
The cable summarized several commentaries in Chinese news media sources on April 28, 2009.
"The U.S. and Europe have always suppressed the rising price of gold," it reads. "They intend to weaken gold's function as an international reserve currency. They don't want to see other countries turning to gold reserves instead of the U.S. dollar or Euro. Therefore, suppressing the price of gold is very beneficial for the U.S. in maintaining the U.S. dollar's role as the international reserve currency."
According to the cable, China believes that by building its gold reserves, it can not only safeguard itself against the declining value of the dollar, but encourage central banks around the world to expand their gold purchases, as well.
"China's increased gold reserves will thus act as a model and lead other countries towards reserving more gold," the cable said. "Large gold reserves are also beneficial in promoting the internationalization of the RMB."
Now, if all we had were the Chinese claiming the U.S. and Europe were suppressing gold prices, it would be easy to disregard as superficial propaganda.
But in fact, there's evidence that supports this claim.
In the decade between 1999 and 2009, central banks – dominated by the West – were net sellers of gold in every single year. And that's despite the fact that gold in that time soared from $250 an ounce to $1,200 per ounce – a nearly 400% gain.
Then there's the infamous "Brown Bottom."
Between 1999 and 2002, Gordon Brown, then U.K. Chancellor of the Exchequer (and later Prime Minister), decided to sell nearly half of his nation's gold reserves. At the time, just the advance notice of these substantial sales drove gold's price down from $282.40 an ounce to $252.80.
Those gold sales yielded an average price of $275 an ounce, raising a total of $3.5 billion. Today, those 395 tons of gold would be valued more than $19 billion.
You have to admit, it doesn't make a whole lot of sense to sell a solid asset whose price is moving steadily higher each year – especially when the United Kingdom's debt problem then wasn't nearly as bad as it is today.
The answer: Because there's a conspiracy afoot.
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