Gold
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Gold Prices: How to Climb the "Golden Staircase'
When U.K. subscriber John M. wrote in this week, he got right to the point.
Asked John: "What's happening to gold prices? Why are they dropping?"
For an answer, I speed-dialed Real Asset Returns Editor Peter Krauth - our resident expert on mining and precious metals.
Peter is based in Canada, which keeps him close to the natural-resource companies that proliferate north of the border. He gave me a detailed and insightful answer to John M.'s question.
And he recommended three ways to profit – including an ETF he says is perfect for first-time gold investors.
To explain what's happened with the "yellow metal" – and to project where gold prices will go next – Peter invented a pricing theory that he christened the "Golden Staircase."
"The bottom line, Bill, is that the price of gold has simply entered a consolidation phase – much like it has done numerous times since it entered this secular bull market back in 2001," he told me.
Gold futures were at $1,662.40 an ounce yesterday – well off the yellow metal's high. Here's why.
"If you think back, when gold hit its all-time high of $1,900 last August, we were in the midst of wild speculation that the U.S. government wouldn't resolve its debt-ceiling crisis," Peter explained. "A deal in Congress was reached in time, but Standard & Poor's went on to downgrade the nation's credit rating for the first time in history. Since then, there's been considerable apathy towards gold by the general investing public, pushing its price down about 13%. What's more, government-calculated inflation looks benign, taking away from gold's luster."
And here's where it gets interesting.
Buy, Sell or Hold: Buy the Dips in Gold (NYSE: GLD)
SPDR Gold Trust (NYSE: GLD) experienced a major pullback on Leap Day this week, dropping almost exactly 100 points on the day.
This happened while the European Central Bank (ECB) offered its second tranche of three-year Long Term Recapitalization Operations (LTRO).
The sell-off in gold on Wednesday is a related sign that liquidity is currently in demand.
But you only have to look at gold's big move up since the start of 2012 to know this stage of the move was unsustainable short-term.
It's why investors shouldn't be surprised by the pullback, and should use this latest move down to increase their long-term exposure to gold.
This dip is a buying event and nothing more.
The pullback in the price of gold also hit equities along with bonds and some other commodities.
Even so, it appears that the ECB has provided enough liquidity to fight off the near-term fears.
Once these funds begin to work their way through the system, I believe they will be bullish for commodity prices.
Over time, banks will eventually put that capital to work, with an eye toward generating a positive rate of return on it. One of those avenues will undoubtedly be gold.
Here's why, along with a bit of background.
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Will Gold be Paulson's Next "Greatest Trade Ever"?
When famed hedge-fund manager John Paulson speaks, people listen.
And it's no wonder.
Paulson made his way into the financial history books thanks to what many now call the "greatest trade ever".
Paulson & Co. shorted the subprime mortgage market before the collapse banking a $15 billion gain.
So when Paulson went big again by buying gold in 2009 and 2010, investors took notice.
At the time he said, "As an investor, I became very concerned about having my assets denominated in U.S. dollars," Paulson told his audience. "So I looked for another currency in which to denominate my assets in. I feel that gold is the best currency."
In fact, Paulson's holdings in the SPDR Gold Trust (NYSE: GLD) make his firm the biggest stakeholder in this ETF, with a position currently valued at $2.9 billion.
So that begs the question….
Is Paulson still a gold bull?
In a recent letter to investors he wrote, "By the time inflation becomes evident, gold will probably have moved, which implies that now is the time to build a position in gold."
And he's not alone.
Recent filings showed that another legendary hedge-fund investor, George Soros, has nearly doubled his stake in GLD to 85,450 shares.
But "Bond King" Bill Gross's latest words and actions may well be the most significant of all.
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Five Savvy Ways to Conquer the Wall of Worry
If you like extreme risk and consider living on the edge to be "normal," today's column isn't for you.
Today I'm writing to the millions of investors who are completely terrified by the prospect of what's next and who simply want their faith restored – not to mention their investments.
To all of them I would say: You are not alone and you're not wrong to be apprehensive.
Our political situation is an embarrassing train wreck, our national debt looks like a one way trip to financial hell, housing remains in the dungeon, unemployment is unacceptably high and Europe…oh Europe.
It's nothing short of a gigantic wall of worry.
Plus, there have been so many attempts to "fix" things that I've lost count. Throwing good money after bad is a fool's game and one that will have very real and inevitable consequences.
So what should investors do?
The Fed's War on Capitalism
Here's how I see things. The "Whitewash Ministry" has basically five options:
- Repression
- Devaluation
- Austerity
- Deflation
- Inflation
You can forget the double "d's" – devaluation and deflation.
Even though both would be the proper way for free markets to bleed out the excesses of the past, they are essentially political nukes and nobody has the willpower to touch either one of them.
The third, austerity, is being tried but only halfheartedly. Our leaders have no idea what this actually means. Since they remain completely unaccountable, there is no true incentive.
Besides, large numbers of people have figured out it's easier to be on the dole than it is to actually work, so this is another disincentive for meaningful cuts in spending.
As for inflation, this too is officially a non-starter as long as interest rates are held near zero. Unofficially, it's a different story. Most investors I know are feeling the heat of 12% to 15% a year in their wallets.
That leaves option number one – repression.
You can call it what you want, but repression is really a fancy way of saying that our government is conducting punitive monetary policy.
While they mouth off about how they want to create jobs and take care of the middle class, in reality they're eviscerating it.
Why I’m Taking Gold Double-Eagles on My Next Trip to Utah
Federal Reserve Chairman Ben Bernanke may think he has everything under control, but the truth is the monetary ground is literally shifting beneath our feet.
That's why his loose monetary policy has some U.S. states looking to get into the gold coin business.
As I'll explain later, it's why my Gold Double-Eagles are becoming even more valuable.
Because while the U.S. Constitution bans states from printing their own paper money, it does allow states to make "gold and silver Coin a Tender in Payment of Debts."
Now no fewer than 13 states are seeking approval from their state legislatures, either to issue their own currency or to explore it as an option as the Fed's printing presses spin out of control.
So why is there this big rush by states to move into gold as an alternative currency?
It's simple really.
The Trouble with Fiat Money
Fiat money, created by central banks, possesses no intrinsic value. Paper money only works as long as governments don't create too much of it.
For pieces of paper to have value, we all have to believe there won't be too many of them and that the authority creating them has the preservation of their value as its top priority.
When that confidence vanishes, the fiat currency returns to being just paper – as it did famously in Weimar Germany in 1923. Or even more catastrophically in post-war Hungary, where the last stable symbol of value, the 1931 gold pengo, became worth 1.5 octillion 1946 paper pengos.
Of course, central banks do occasionally compete for foreign depositors by offering paper currencies with more stability.
In fact, before 2000, the U.S. dollar benefited from these flows that came from all over the world, including Europe.
Now, apart from the eccentrics who swear by the Japanese yen or the Chinese yuan, flight capital is largely confined to the Swiss Franc.
Since Switzerland is a small economy, the Swiss National Bank has drawn a hard line. It refuses to allow the franc to rise above 1.20 against the euro, so even that refuge has been made less attractive.
The Attractiveness of Gold
As you would expect, the private sector and some governments have begun to look further afield, and are beginning to focus on gold in particular.
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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.
Ben Bernanke is Every Gold Bug's Best Friend
After prices fell 10% in December, many investors wondered if the bull market in gold was running out of steam.
That was before Federal Reserve Chairman Ben Bernanke swooped in with a "red cape" and fired the bulls back up.
Since the Fed reassured the world that interest rates will remain at "exceptionally low levels" for another two years, gold has jumped more than 3%.
UBS AG (NYSE: UBS) described the situation simply, "if investors needed a (further) reason why they should be long gold now, they got it yesterday … a more accommodative policy is a very good foundation for gold to build on the next move higher."
To gold bugs, two more years of near-zero, short-term interest rates means negative real interest rates are here to stay, and this has historically been a strong driver for higher gold prices.
Bernanke and the Fed aren't the only central bankers in the fiscal and monetary bullring.
Brazil has cut its benchmark interest rate a few times and China lowered its reserve rate for banks in December. According to ISI Group, 78 "easing moves" have been announced around the world in just the past five months as countries look to stimulate economic activity.
One of the main weapons central bankers have employed is money supply, which has created a ton of liquidity in the global system. Global money supply rose 8% year-over-year in December, or about $4 trillion, according to ISI. I mentioned a few weeks ago how China experienced a record increase in the three-month change in M-2 money supply following China's reserve rate cut.
Together, negative real interest rates and growing global money supply power the Fear Trade for gold. The pressure these two factors put on paper currencies motivates investors from Baby Boomers to central bankers to hold gold as an alternate currency.
To continue reading, please click here…
Jim Grant and the GOP Joining Forces to Bring Back the Gold Standard
With two GOP presidential candidates saying they'd add legendary Wall Street pundit Jim Grant to their administrations, bringing back the gold standard clearly has moved up on the Republican agenda.
Ron Paul, for whom returning to the gold standard has been a decades-long crusade, has said he would name Grant chairman of the U.S. Federal Reserve. In his case, that would be a compromise – Paul has often called for the Fed to be abolished altogether.
Meanwhile, Newt Gingrich has promised to appoint Jim Grant to head a commission to study the possibility of going back to the gold standard.
Grant, who publishes Grant's Interest Rate Observer, is a well-known gold bug and critic of the Fed.
His ideas have attracted increasing favor in a party that blames the Fed's easy money policy for the country's economic problems.
Grant calls the current system of fiat currency an "anachronism" and questioned the "command and control, top-down system of having a handful of people at the Fed dictate interest rates."
He's worried that the Fed's quantitative easing policies have created a bubble in Treasury bonds.
And make no mistake: If a Republican president gives him the opportunity, Grant already has a plan, starting with making a public case for the gold standard.
"I would then lay out a timeline for the conversion to a constitutional dollar, a dollar as envisaged by the Founding Fathers," Grant told MarketWatch.
Grant said he believes a dollar should be fixed "like a foot, or a pound."
Such a policy would arrest the steep decline in value the dollar has suffered since the United States abandoned the gold standard in 1971 – a point Paul often raises on the campaign trail.
"Since 1971, since we lost our link to gold, the dollar has lost 85%," Paul recently told NPR. "So if you were a saver and wanted to take care of your kid's education, even if you made a little interest, you're going to lose money."
Middle-class worries like that have helped make a return to the gold standard a major issue in the 2012 Republican primary battle.
The other two remaining GOP contenders, Mitt Romney and Rick Santorum, are believed to be against a return to the gold standard, though both refrain from talking about it.
Of course, Republican proponents of the gold standard may not need Paul or Gingrich to win the nomination to move the issue forward.
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