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Welcome to the December 2012 edition of my monthly Gold Letter.

 

The debate over the fiscal cliff has created a lot of volatility in the markets. In my commentary, I discuss why we haven't seen a decisive move up in the spot price of gold in response.

 

While most analysts, myself included, expect Congress to reach a deal before any major spending cuts take effect, I am once again virtually alone in thinking this is a negative outcome for the country. We would be better off accepting the scheduled cuts and showing that we're serious about getting the deficit under control, even though the proposed cuts are not nearly deep enough to solve the problem. Instead, the politicians will likely keep kicking the can down the road.

The good news? This is bullish for gold investors. 


Also in this issue: 
  • Special guest contributor Dr. Valentin Petkantchin reveals the global adoption of gold as a reserve asset. 
  • Jeff Clark tells us what the Chinese think of America's gold phobia. 
  • Lampoon the System reminds us that we now have to bribe Uncle Sam just to leave the country.   
  • We explain why you might consider adding physical platinum to your portfolio. 
  • And, as always, we close with summaries of the major news in the precious metals' markets this past month.

Cordially,  

 

Peter Schiff
CEO

Euro Pacific Precious Metals 

DITCHING BEFORE THE FISCAL CLIFF 

By Peter Schiff

Peter Schiff

Turn on the TV and this is what you'll hear: The US budget is heading for a fiscal cliff. If a deal isn't reaching in Congress by the end of this year, a combination of automatic tax hikes and budget cuts will sink America into economic depression. There is no escape.

Of course, my readers know that the fiscal cliff is merely an example of the piper having to be paid. The problem isn't the bill, but that we ran it up so high in the first place. Any deal to avoid the cliff by borrowing even more money may allow the piper to keep playing a while longer, but when the music finally stops, the next fiscal cliff will be that much larger.  

My readers also know that there are several ways for investors to avoid the cliff altogether. Perhaps the most secure is buying precious metals. However, given what we know, it may seem confusing that the spot prices of gold and silver have been moving sideways.

 

However, these headline prices have largely concealed a more important indicator: physical bullion sales are booming.

Gold Bullion Sales Chart

An Under-the-Radar Rally

The figures are astounding. For US Gold Eagle coins, mint sales are up some 150% from the QE3 announcement on September 13th. Despite what the spot prices show, there has been a tremendous surge in people buying physical gold. 

 

But why hasn't this translated into higher spot prices?

It seems clear that the spot prices of both gold and silver are being driven right now by a large pool of institutional capital moving into and out of instruments like commodity ETFs. The movements have been predictable: When there is a sign of a deal coming out of Washington, the spot prices move up. If negotiations are faltering, there is instead a major selloff.

Physical bullion investors are a different breed. We are in this market for the long haul. When I increase my physical gold and silver holdings, I do it because I see the long-term fundamental picture for the US getting worse.

Getting a Read on the Bullion Bull

While the ETF speculators are trying to anticipate the market's - and each other's - immediate reaction to whatever 11th hour deal is struck, I believe physical bullion investors are sending a clear signal: this whole debate is out of order.

A J.P. Morgan study concluded that 82% of the hit to GDP if we go over the fiscal cliff would be related to tax increases, not spending cuts. And if the legislators reach a deal? It will only result in more tax increases and much fewer spending cuts. These guys just don't get it.

 

Looking back to the debt ceiling debate of August 2011, we saw big movements into physical gold there as well. What investors are concluding as they hear these grand debates is that whatever the result, the budget, the dollar, and the taxpayer will lose.

 

They are deciding to get off this runaway train. Because the real fiscal cliff isn't coming on December 31st - it is coming when there is a global flight from the US dollar.

 

The Real Fiscal Cliff

The Democrats are complaining that the fiscal cliff imposes too steep demands on those who receive entitlements. Republicans are trying to protect the military budget. What no one seems to want to address is what happens as foreign creditors increasingly decide to stop financing this bonanza.

To a large extent, this is already happening. China has already become a net-seller of Treasuries and is diverting more of its reserves into gold. The Chinese government recently approved banks holding gold as a reserve asset and made it easier for banks to trade gold amongst themselves.

While Japan and other Keynes-drunk governments have filled some of the gap with increased purchases, a supermajority of new issues are being bought directly by the Fed. That was the idea behind QE3 Plus, as described in last month's commentary

 

Because of the acute trauma in Europe and certain institutional mandates to hold Treasuries, much of this new inflation is being absorbed. This has caused what may be the most dangerous of situations. It has allowed the inflationists to paint people like me as the boy who cried wolf. It seems to them that no matter how irresponsible Congress and the Fed are, we are immune from economic consequences.

In reality, all this money printing is like pulling back a spring. Pent up inflationary forces are building, and when they are unleashed, the debate will be over faster than they can say "oops."

The Only Way to Win Is Not to Play

Those buying into physical gold and silver see this inevitability and are getting prepared.  We believe there is no sense playing Russian roulette with our savings. Every time Washington raises that debt ceiling or announces another stimulus, it's like one more click of the trigger.

When the global markets finally wrap their heads around the scale of US insolvency, the response will be as fierce as it is rapid. In such a once-in-a-century scenario, physical gold and silver are among the few assets without counterparty risk. From the looks of the physical bullion sales charts, I'm not the only investor who has figured this out.

  

Peter Schiff is CEO and Chief Global Strategist of Euro Pacific Precious Metals.       

If you would like more information about Euro Pacific Precious Metals, click here. For the fastest service, call 1-888-GOLD-160.    
RENEWED INTEREST IN GOLD AS A FINANCIAL ASSET
By Valentin Petkantchin

You may be among those investors who had the opportunity, but did not seize it, to buy gold cheap in the early 2000s. You may also be willing, but hesitant, to do so at current prices, while still desiring the "anti-crash insurance" it represents.

However, you should be aware that the yellow metal is increasingly valued as a reserve asset, which will tend to push the price up, independently of all other factors. Due to new regulations, you may also have to bid in the future alongside financial institutions, including several banks, to acquire it.

First, let's take a step back, at least as it regards central banks' attitude towards gold. The fact is that it has considerably changed. Central banks, which had sold gold for decades, have become - for the "first time in 21 years", dixit the World Gold Council - net buyers in 2010, i.e. the total quantities purchased by them have exceeded the quantities sold.

Net Purchases (Green) / Net Sales (Red) of Physical Gold from the Official Sector
Central Bank Gold Purchases Since 2002  
The official sector is comprised of central banks and other official institutions. 
Source: World Gold Council

 

So while central banks fueled the supply of gold by 400-500 tons per year on average between 1989 and 2007, they are now increasing demand by the same factor. If this trend is to gain momentum due to the current crisis, the price of gold could soon become inaccessible to individual investors.

But central banks are not the only ones. There is also a renewed interest in gold as a safe and highly liquid asset, and this for two reasons:

First, physical gold is increasingly accepted - and therefore sought - as collateral in cases, for instance, of margin calls or securities loans. A growing number of clearing houses - such as CME Group (including its branch in Europe), ICE Europe, or LCH Clearnet Group - or of banks, like JP Morgan, now accept physical gold as collateral on their own.

Added to this is the willingness of public authorities - in line with the G20 meetings in 2009-2010 - to regulate the OTC derivatives market, including the eligible collateral that market intermediaries and central counterparties should accept. Thus, for instance, the new EU regulation on market infrastructure adopted last summer explicitly lists physical gold among the types of eligible "highly liquid collateral with minimal credit and market risk," alongside cash or government bonds. Scheduled to become fully operational in the summer of 2013, this regulation may have a clear bullish impact for the gold price in the longer term.

Second, commercial banks could also be a source of additional demand for the yellow metal due to the intricate regulation trying to transpose the so-called "Basel III" regulatory framework. Among other things, this framework introduces new criteria such as liquidity coverage ratios, requiring banks to hold certain assets considered highly liquid to serve, presumably, as a buffer in case of a liquidity crisis.

Despite its long history as a safe haven and its high liquidity (even during war times), gold was not originally included as part of those assets in Basel III, nor in the legislative package destined to its implementation in the EU and originally proposed by Brussels. The European Banking Authority, the European Securities and Market Authority, and the ECB are supposed to transmit to the Commission no later than June 30, 2013 a report that defines which assets should be considered, in their bureaucratic jargon, of "high and extremely high liquidity and quality."

The amended proposal by the European Parliament and the EU Council explicitly states in that regard that "it shall be assessed whether gold or other highly liquid commodities (...) can be considered" as such liquid assets.

Debates about the legislative package are still in progress, and the vote in Parliament is expected before the end of the year (with entry into force in 2015). But if gold is included in the finally adopted regulation, it will mean that in the next few years, the commercial banks could be compelled to buy gold just to meet their legal liquidity ratio requirements.

If you have not yet purchased your "anti-crash insurance" but you are willing to do it, you should follow closely those regulatory developments and act before they become fully effective. If you think the current price of gold is too high, wait to see what will happen when commercial banks start rushing to buy it too. 

 

Valentin Petkantchin is a French economic and financial analyst. He holds a PhD in Economics from the University of Aix-Marseille III and is most recently the founder of the Economic Education Initiative (www.economic-education.org), a project aimed at publicizing sound economic thinking through comic books and cartoons. 

THE EXIT TAX
Exit Tax Cartoon
(Click to enlarge)

Jon Pawelko publishes the web comic Lampoon The System to poke fun at insane economic policies and educate the public on sound economics.

Click here for more cartoons and information on his just-updated anthology book, available for only $12.
HOW DO THE CHINESE VIEW THE GOLD MARKET?
By Jeff Clark of Casey Research 
 
Have you ever wondered what the typical Chinese gold investor thinks about our Western ideas of gold? We read month-after-month about demand hitting record-after-record in their country - so how do they view our buying habits?

Since 2007, China's demand for gold has risen 27% per year. Its share of global demand doubled in the same time frame, from 10% to 21%. And this occurred while prices were rising.

Americans are buying precious metals, no doubt. Gold and silver ETF holdings just hit record levels. The US Mint believes that 2012 sales volumes will surpass those of 2011.

But let's put the differences into perspective. This chart shows how much gold various countries are buying relative to their respective GDPs:

Gold Coin & Jewelry Demand 2011 Chart
(Click to enlarge)

It's widely believed that the majority of the gold flowing into Hong Kong ends up in China, so its total is probably close to double what the chart reflects. Even if none of it went to China, coin and jewelry demand is 35 times greater than the US, based on GDP.

The contrast between how our two nations can buy bullion is striking...
  • In China, you can buy gold and silver at the bank. My teller looked at me oddly when I asked.
  • Bullion is available for purchase at Chinese post offices. I wonder how my local postman would respond if I asked for a tube of silver Eagles.
  • Mints are readily accessible to retail customers. Here, I can only order proof and commemorative products from the US Mint and am forced to go to an independent dealer.
  • A new product design is manufactured every year. This being the Year of the Dragon, many bullion products are emblazoned with dragons. You can still buy last year's rabbit, and next year it will be a snake. The US has two designs, the Eagle and Buffalo; the latter was introduced in 2006 and is available only in gold (if you see a silver Buffalo, it is a "round" manufactured by a private mint, not the US Mint).
Some will point to cultural affinity to account for the differences. There's some truth to that, though this is a much greater factor in India. Even there, gold jewelry is not viewed as a decoration or an adornment; it's a store of value. It is financial insurance in a pretty bow. In India, gold can be used as collateral, regardless of its form. It's not just an investment that they're trying to make money from; it's more important than that.

But certainly the differences can't all be attributed to culture...

You've likely heard how government leaders in Beijing have been encouraging citizens to buy gold and silver. This would be akin to seeing your local Congressman or President Obama appearing on TV and imploring you to buy some gold and silver. (Utah made gold legal tender, but it was mostly a symbolic move.)

Chinese radio and TV spots, along with newspaper ads, talk about "safeguarding your wealth" and putting "at least 5% of your savings" in precious metals. I haven't seen this here except from bullion dealers themselves. Can you imagine Ben Bernanke appearing in a commercial during American Idol, encouraging you to buy gold Eagles?

No, what I hear from politicians about precious metals is nothing but the sound of crickets chirping - save Ron Paul. And the mainstream continues to claim gold is in a bubble. We've pointed it out before, but in case any of them are reading, there are two criteria for a bubble: first, a massive price increase, such as the gold price doubling in less than 7 weeks like it did in 1979-'80... which, of course, hasn't occurred in this bull market.

The second criterion is widespread participation on the part of the public. I don't hear celebrities and TV anchors bubbling on about the latest gold stocks. Most people I know outside Casey Research aren't talking about the great price they got on a silver Maple Leaf. Most investors I talk to say their friends, family, or co-workers aren't scrambling to snatch up gold Eagles. And the #1 reason we're not in a bubble is because Eva Longoria still hasn't asked me out on date - something she'd only do because I'm a gold analyst.

And with apologies to those of you who do know history, I think the Chinese have studied history a little better than many of us. The lessons are right in front of us, though I don't hear this kind of data very much on CNBC...
  • Morgan Stanley reports there is "no historical precedent" for an economy that exceeds a 250% debt-to-GDP ratio without experiencing some sort of financial crisis or high inflation. Total debt (public and private) in the US is 300%+ of GDP.
  • Detailed studies of government debt levels over the past 100 years show that debts have never been repaid (in original currency units) when they exceed 80% of GDP. US government debt is approaching 100% of GDP this year.
  • Peter Bernholz, a leading expert on hyperinflation, states emphatically that "hyperinflation is caused by government budget deficits." This year's US budget deficit will be about $1.3 trillion. It's expected to total $6 trillion during Obama's first four years in office.
What do we hear instead? That the country will drop into recession if current amounts of spending and outlay of benefits are reduced. I think it is quite the opposite; it will be worse if our leaders continue down this path of debt, deficit spending, and printing money.

What I'd love to see on CNBC is a spot with Doug Casey saying this: "Anyone who thinks they have any measure of financial security without owning any gold - especially in the post-2008 world - is either ignorant, naïve, foolish, or all three." I bet that'd get the airwaves buzzing.

It must seem strange to many Chinese that we continue to believe in our dollars, Treasuries, and bonds more than gold and silver. And it's not just China that would view our investing habits as peculiar. Indeed, as the above tables implies, our views on precious metals are in the minority.

My fear is that regardless of what form the fallout takes, many of my friends will be caught off-guard. Probably many of yours, too. As the value of dollars continues to decay and inflation creeps closer and closer and then higher and higher, many investors will feel blindsided. Many Chinese citizens will not.

Given China's aggressive buying habits, my suspicion is that many of them will probably wonder why we didn't see what was happening all around us, why we didn't learn from history, and why we didn't better prepare.

Part of the reason why American dollars are losing value can be traced to Chinese actions as well: Realizing that the US government was not going to rein in its profligate spending, the Chinese have stopped investing in the US economy and are now dumping dollars. This, of course, simply adds to the US government's problems... but it provides ways for you to turn a tidy profit.

 

Jeff Clark is the editor of BIG GOLD, Casey Research's monthly advisory on gold, silver, and large-cap precious metals stocks. 

 

For ongoing guidance about physical gold and silver, as well as the large-cap precious metals stocks, try BIG GOLD today for just $129 per year, with 3-month money-back guarantee.  

QUESTIONS FROM OUR CUSTOMERS 
 
What are the benefits of owning physical platinum?

Considered the rich man's gold, platinum is the rarest of all the precious metals, more rare than gold by about 30 to 1. With only 135 tons of the white metal mined annually and high industrial demand, platinum typically trades at a premium compared to gold. Currently, platinum trades at a discount to gold, one of the few times it has over the past 50 years. Still, platinum outperformed gold in 2012.

The largest consumer of platinum is the automotive industry, with the metal made into catalytic converters, which render the fumes from internal combustion engines less toxic. We expect this demand to grow with more stringent air standards worldwide and as citizens in the booming East Asia economies demand their own vehicles. As a metal that is hard to tarnish, platinum is more durable than silver or gold in jewelry, and more coveted. The jewelry demand for platinum continues to increase, with China and India leading the way. Jewelery and industrial uses consume an estimated 90% of the platinum mined annually, with the balance going to investments.

Platinum holds opportunities both as a store of wealth and a speculation on its future price growth.The white metal is 30% below its all-time high price, whereas gold is 11% below its all-time high.

Euro Pacific Metals sells physical platinum in a variety of coins and bars to fit your needs.

To decide which precious metals allocation is right for you, call our precious metals specialists at 1-888-GOLD-160 (1-888-465-3160).
THIS MONTH IN GOLD

 

Schiff: Gold Will Pass $2,000/oz

ABC News - Gold will go much higher than $2,000 an ounce, says Peter Schiff, CEO of Euro Pacific Precious Metals. The reason it hasn't gotten there yet, argues Schiff, is because most people have yet to fully grasp the true scale of the economic predicament the US faces. However, Schiff warns that there are many scammers in the gold market today. He has published tips to help buyers avoid the most common swindles.

Read Full Article >>

 

Supply-Side Squeeze Ahead for Gold, Says Barrick CEO

Bloomberg - The CEO of Barrick Gold Corp., the world's largest producer, said in November that gold discovery rates are declining even as exploration spending is hitting all-time highs. Jamie Sokalsky pointed out that none of the finds currently being made are "supergiant," or in excess of 20 million ounces. "I don't see a surge in gold production [even] if we saw a gold price of $3,000," Sokalsky said. He noted that today it takes twice as long to develop production as it did a decade ago. In short, the supply-side sees little room for growth, while the demand-side is exploding. Expect prices to adjust accordingly.  Read Full Article >> 

 

Brazil Ups Gold Holdings, Again

Reuters - After stepping back into the bullion market in September for the first time since 2008, Brazil's central bank upped its gold holdings yet again in October, according to IMF data released this month. The data shows that Brazil increased its gold holdings by slightly more than 17 tonnes, bringing its total holdings to 52.5 tonnes. The increase is a ten-fold expansion of September's increase of 1.7 tonnes, suggesting an acquisition trend that is decidedly upwards sloping. Meanwhile, emerging markets Kazakhstan and Turkey also increased their gold holdings, while Germany - now responsible for bailing out its fellow EU member-states - shed some 4.2 tonnes. Read Full Article >>

 

China Keeps Gold Bugs Smiling

Financial Times - The big take-away from this year's London Bullion Market Association annual convention, held for the first time in Hong Kong, is: China's love affair with gold is only beginning. In 2007, China made up 10% of global demand for gold. By 2011, that figure had more than doubled to 21%. Many people in China and the region view gold as a second currency. Gold also is useful to circumvent strict capital controls on the yuan. In addition, the central bank in Beijing is widely expected to grow its bullion holdings, which currently stand at less than 2% of total reserves. Read Full Article >> 

 

Indian Gold Demand Likely to Jump 23%

MarketWatch - Strong festive season purchases and an uptick in economic growth suggest demand for the yellow metal in the South Asian behemoth is likely to register 23% higher than previously estimated. Total demand for 2012 is likely to approach 800 tons, up from a previous estimate of 650-750 tons. The pickup in demand in India is bullish for international prices. Read Full Article >>

 

Lawmaker Asks to Be Paid in Gold

Politico - Jerry O'Neil, a Montana state lawmaker and a member of the Republican Party, has asked the state legislature to pay his salary in gold rather than US dollars. Recently reelected to his northern Montana district, O'Neil says his constituents have asked him to uphold the text of US Constitution, which states that only gold and silver can be allowed as legal tender. "I think we've gotten a tremendously long way from [the Constitution]," O'Neil argues. "If we don't start paying that debt down, we're going to lose the country." Read Full Article >>  

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In This Issue
Ditching Before The Fiscal Cliff
- Peter Schiff
Renewed Interest in Gold as an Asset
- Valentin Petkantchin
The Exit Tax
- Lampoon the System
How Do The Chinese View The Gold Market?
- Jeff Clark
Questions From Our Customers
This Month in Gold
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