Welcome to the July 2012 edition of my monthly Gold Report. June brought more stability to the gold market, with gold beginning and ending the month around $1600. The yellow metal hit a high near $1630 around mid-month, then fell as low as $1558 before resuming an ascent that has continued into the first days of July. Silver followed a similar path, starting the month at $27.38 and quickly jumping to $29.28 in the first half before retreating to $26.72. As of this writing, it has been rallying every day for the last week. The good news for precious metals investors (but bad for the global economy) is that Germany agreed to bailout Spain's failing banks, a decision which may be driving this early July rally. It should be no surprise when this round of bailouts fails, and the Germans are asked once again to open their pockets and debase their savings. Unfortunately, with the focus on Europe's troubles, too few politicians and economists are concerned about our own debt issues. You may be aware that I testified before Congress last month on the subject of housing. (Click here to see the highlights.) One would think that after the housing bust, which ignited the rest of our phony economy into flames, Congress would extricate itself from manipulating the market with housing stimulus. But then you'd remember that it takes a miracle for Congress to act rationally. Out of the crowd of folks testifying, I was the only taxpayer advocate; the rest represented various special interests who were looking for handouts! And some wonder why our country continues to decline. Most of the world is waking up to the fact that the US is the albatross around the neck of the global economy, and when it fails, trillions of dollars of perceived wealth will vanish. I discuss in my commentary this month the return of an informal gold standard by central banks from around the world, especially those in emerging markets. They are all stockpiling gold reserves in preparation for the coming global debt crisis. Also this month: Many people are betting whether President Obama can keep this economy on life support until the election. The game becomes more fun when it's not your savings on the line. Call my specialists to add to your precious metals holdings today: 1-888-GOLD-160 (1-888-465-3160). Cordially,
Peter Schiff
CEO
Euro Pacific Precious Metals |
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THE RETURN OF THE GOLD STANDARD
By Peter Schiff
In my latest book, The Real Crash: America's Coming Bankruptcy - How to Save Yourself and Your Country, I devote a full chapter to the merits of the historical gold standard and reasons to reinstate it. What I did not mention and few investors notice is that central banks are already returning to gold as the ultimate safe haven asset.
I believe this change in policy, combined with continued inflation of Western currencies, is creating a stable floor for the gold price and an even brighter upside potential.
A Strategic Shift
The return to gold is unmistakably the product of a strategic, not merely a tactical, shift in global central banking policy. Central banks in the developed world have now altogether stopped selling bullion. This was foreshadowed by their behavior over the past decade, when they sold even less gold than they were permitted to under the anti-dumping Central Bank Gold Agreements. Clearly the concern about dumping gold was out of step with the trend. But more importantly, central banks in the emerging markets have been buying gold by the truckload.
Since the financial crisis of '08, nations as diverse as Mexico, the Philippines, Thailand, Kazakhstan, Turkey, Ukraine, Russia, Saudi Arabia, and India have led the way back to gold as a primary reserve asset. Russia alone has added an impressive 400 tonnes of bullion to its reserves, most of it coming from domestic purchases. Mexico has added over 120 tonnes, including 78 tonnes from one mega-purchase in March 2011. The Philippines have bought over 60 tonnes, with 32 tonnes coming in as recently as March 2012. Thailand has added approximately 60 tonnes, and Kazakhstan just shy of 30 tonnes. Turkey amended its regulatory policy late last year to allow commercial banks to count gold towards their reserve requirements, adding over 120 tonnes to its official reserves. And bullion imports into mainland China through Hong Kong have been reaching all-time highs.
Finally, loyal US allies Saudi Arabia and India, in what is sure to leave particularly bitter taste in Washington's mouth, have been adding gold to their reserves by the hundreds of tonnes.
In short, the governments of emerging markets recognize that the global monetary order is on the verge of a reset. These emerging markets are the economic engines of the 21st century, and they're determined not to be undermined by Western fiat paper.
Taking the Long View
The depth of this new strategy has been on display throughout the precious metals correction of the past few months. Emerging market central banks have continued to be aggressive buyers. This is very bullish. As governmental actors, central banks seek out stability and predictability. When they shift course, they do so only deliberately and gradually, much like aircraft carriers. Western central banks have set a clear course toward inflation, while emerging market banks are shifting toward sound money.
The implications here are enormous for private investors. We now see the biggest market participants buying the yellow metal massively on the dips. What's more, because central banks enjoy substantial clout in the gold market, their purchasing decisions have an outsized effect on price. Institutional investors are coming to once again see precious metals as a 'legitimate' form of investment. It is this positive feedback loop that will serve to stabilize gold as it re-emerges as a reserve asset.
It's Still The One
Gold remains the bedrock of reserve holdings at central banks, even in a world dominated by fiat currencies. Apparently, when it comes to a paper-based global monetary system, it's easier to talk the talk than walk the walk. Government officials the world over, but especially in the developed world, have been quick to call gold an anachronism - unsuitable for a modern, globalized economy. But these same governments have never found it in themselves to sell off their holdings, or for that matter, to surrender even a substantial fraction of them. Those who have clamored the loudest have, in fact, behaved the most conservatively.
The US, which has a whopping 75 percent of its reserve holdings in gold, and the Western European countries, which have an average of approximately 64 percent of their reserve holdings in gold, seem to believe no one should own gold - except them! It shouldn't surprise anyone that emerging market central banks have spotted the double standard. As they advance economically, these nations are less likely to do what Washington tells them is right and more likely to think for themselves. And with an average of less than 20 percent of their reserve holdings in gold, they clearly know they have some catching up to do.
Behind the smoke and mirrors then, central banks in the developed world are hoarders. Central banks in the emerging markets are scramblers. Significantly, nobody is selling, only buying.
The Fiat Fantasy Meets Reality
What is causing the rush back to gold? Two words: excess debt. Independent central banking has always been more of a dream than a reality. Politicians knew from the beginning that they could run up the tab and then corner central bankers into bailing them out via inflation, AKA stealth default. Regrettably, central bankers have dutifully obliged - no one, for example, has yet resigned in protest. Only a few have ever defied their governments, and only for short periods.
Of course, governments throughout history have created the conditions for their own collapse by tampering with their money supply to pay debts. Undermining the currency means undermining the entire economy, which lowers tax receipts and creates more debt. Soon, the unintended consequences of the policy overwhelm its intended consequences, and the state collapses - along with the jobs of those central bankers. Committed, nonetheless, the central bankers are.
Valuation Insurance
Against this historical cycle, the best insurance policy is physical gold. Those with the most of it will best weather the coming rounds of competitive devaluation. No wonder that central banks in the emerging markets are scrambling to play catch-up to their developed-world counterparts.
How much gold will central banks stockpile? We cannot and do not know for sure. What we can and do know for sure is that they have prudently decided on a strategic shift in policy. This is creating a floor for the price of gold and a brighter future ahead for those who are prepared for the return of sound money.
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 or go to our website, www.europacmetals.com. For the fastest service, call 1-888-GOLD-160. |
The Euro Conflict Explained
By Jon Pawelko
(Click to enlarge)
Jon Pawelko authors, illustrates, and publishes the web comic Lampoon The System to poke fun at insane global economic policies and educate the public on sound economics.
Click here for more of Jon's cartoons and information on his just-updated anthology book, available for only $12. |
HOW TO SAVE YOUR MONEY AND YOUR LIFE
By Doug Casey
 I think there are only two good reasons for having a significant amount of money: to maintain a high standard of living and to ensure your personal freedom. There are lesser reasons, of course, including: to prove you can do it, to compensate for failings in other things, to impress others, to leave a legacy, to help perpetuate your genes, or maybe because you just can't think of something better to do with your time. But I'll put aside those lesser motives, which I tend to view as psychological foibles. Basically, money gives you the freedom to do what you'd like - when, how, and with whom. Money allows you to have things and do things and can even assist you to be something you want to be. Unfortunately, money is a chimera in today's world and will wind up savaging billions in the years to come. As you know, I believe we're into at least the fourth year of what I call The Greater Depression. A lot of people believe we're in a recovery now; I think, from a long-term point of view, that is total nonsense. We're just in the eye of the hurricane and will soon be moving into the other side of the storm. But it will be far more severe than what we saw in 2008 and 2009 and will last quite a while - perhaps for many years, depending on how stupidly the government acts. Real Reasons for Optimism There are reasons for optimism, of course, and at least two of them make sense. The first is that every individual wants to improve his economic status. Many (but by no means all) of them will intuit that the surest way to do so is to produce more than they consume and save the difference. That creates capital, which can be invested in or loaned to productive enterprise. But what if outside forces make that impossible, or at least much harder than it should be? The second reason for optimism is the development of technology - which is the ability to manipulate the material world to suit our desires. Scientists and engineers develop technology, and that also adds to the supply of capital. The more complex technology becomes, the more outside capital is required. But what if sufficient capital isn't generated by individuals and businesses to fund further technological advances? There are no guarantees in life. Throughout the first several hundred thousand years of human existence, very little capital was accumulated - perhaps a few skins or arrowheads passed on to the next generation. And there was very little improvement in technology - it was many millennia between the taming of fire and, say, the invention of the bow. Things very gradually accelerated and improved, in a start-stop-start kind of way - the classical world, followed by the Dark Ages, followed by the medieval world. Finally, as we entered the industrial world 200 years ago, it looked like we were on an accelerating path to the stars. All of a sudden, life was no longer necessarily so solitary, poor, nasty, brutish, or short. I'm reasonably confident things will continue improving, possibly at an accelerating rate. But only if individuals create more capital than they consume and if enough of that capital is directed towards productive technology.
Real Reasons for Pessimism
Those are the two mainsprings of human progress: capital accumulation and technology. Unfortunately, however, that reality has become obscured by a morass of false and destructive theories, abetted by a world that's become so complex that it's too difficult for most people to sort out cause and effect. Furthermore, most people in the developed world have become so accustomed to good times since the end of World War II that they think prosperity is automatic and a permanent feature of the cosmic firmament. So although I'm very optimistic, progress - certainly over the near term - isn't guaranteed. These are the main reasons why the standard of living has been artificially high in the advanced world, but don't confuse them with the two reasons for long-term prosperity. The first is debt. There's nothing wrong with debt in itself; lending is one way for the owner of capital to deploy it. But if a society is going to advance, debt should be largely for productive purposes, so that it's self-liquidating; and most of it would necessarily be short term. But most of the scores of trillions of debt in the world today are for consumption, not production. And the debt is not only not self-liquidating, it's compounding. And most of it is long term, with no relation to any specific asset. A lender can reasonably predict the value of a short-term loan, but debt payable in 30 years is impossible to value realistically. All government debt, mortgage debt and consumer debt and almost all student loan debt does nothing but allow borrowers to live off the capital others have accumulated. It turns the debtors into indentured servants for the indefinite future. The entire world has basically overlooked this, along with most other tenets of sound economics. The second is inflation. Like debt, inflation induces people to live above their means, but its consequences are even worse, because they're indirect and delayed. If the central bank deposited $10,000 in everyone's bank account next Monday, everyone would think they were wealthier and start consuming more. This would start a business cycle. The business cycle is always the result of currency inflation, no matter how subtle or mild. And it always results in a depression. The longer an inflation goes on, the more ingrained the distortions and misallocations of capital become, and the worse the resulting depression. We've had a number of inflationary cycles since the end of the last depression in 1948. I believe we're now at the end of what might be called a super-cycle, resulting in a super-depression. The third is the export of dollars. This is unique to the US and is the reason the depression in the US will in some ways be worse than most other places. Since the early '70s, the dollar has been used the way gold once was - it's the world's currency. The problem is that the US has exported about $7 trillion in exchange for good things from around the world. It was a great trade for a while. The foreigners get paper created at essentially zero cost, while Americans live high on the hog with the goodies those dollars buy. But at some point quite soon, dollars won't be readily accepted, and smart foreigners will start dumping their dollars, passing the Old Maid card. Ultimately, most of the dollars will come back to the US, to be traded for the title to land and businesses. Americans will find that they traded their birthright for a storage unit full of TVs and assorted tchotchkes. But many foreigners will also be stuck with dollars and suffer a huge loss. It's actually a game with no winner.
WHAT'S NEXT
These last three factors have enabled essentially the whole world to live above its means for decades. The process has been actively facilitated by governments everywhere. People like living above their means, and governments prefer to see the masses sated. The debt and inflation have also financed the growth of the welfare state, making a large percentage of the masses dependent, even while they've also resulted in an immense expansion in the size and power of the state over the last 60-odd years. The masses have come to think government is a magical entity that can do almost anything, including kiss the economy and make it better when the going gets tough. The type of people who are drawn to the government are eager to make the state a panacea. So they'll redouble their efforts in the fiscal and monetary areas I've described above, albeit with increasingly disastrous results. They'll also become quite aggressive with regulations (on what you can do and say, and where your money can go) and taxes (much higher existing taxes and lots of new ones, like a national VAT and a wealth tax). And since nobody wants to take the blame for problems, they'll blame things on foreigners. Fortunately, (the US will think) they have a huge military and will employ it promiscuously. So the already bankrupt nations of NATO will dig the hole deeper with some serious - but distracting - new wars. It's most unfortunate, but the US and its allies will turn into authoritarian police states. Even more than they are today. Much more, actually. They'll all be perfectly fascist - private ownership of both consumer goods and the means of production topped by state control of both. Fascism operates free of underlying principles or philosophy; it's totally the whim of the people in control, and they'll prove ever more ruthless. So where does that leave us, as far as accumulating more wealth than the average guy is concerned? I'd say it puts us in a rather troubling position. The general standard of living is going to collapse, as will your personal freedom. And if you're an upper-middle-class person (I suspect that includes most who are now reading this), you will be considered among the rich who are somehow (this is actually a complex subject worthy of discussion) responsible for the bad times and therefore liable to be eaten. The bottom line is that if you value your money and your freedom, you'll take action. There's much, much more to be said on all this. I've said a lot on the topic over the past few years, at some length. But I thought it best to be brief here, for the purpose of emphasis. Essentially, act now, because the world's combined economic, financial, political, social, and military situation is as good as it will be for many years... and a lot better than it has any right to be. WHAT TO DO No new advice here, at least as far as veteran readers are concerned. But my suspicion is that very few of you have acted, even if you understand why you should act. Peer pressure (I'm confident that you have few, if any, friends, relatives, or associates who think along these lines) and inertia are powerful forces. That said, you should do the following. - Maintain significant bank and brokerage accounts outside your home country. Consider setting up an offshore asset protection trust. These things aren't as easy to do as they used to be. But they'll likely be much less easy in the future.
- Make sure you have a significant portion of your wealth in precious metals and a significant part of that offshore.
- Buy some nice foreign real estate, ideally in a place where you wouldn't mind spending some time.
- Work on getting official residency in another country, as well as a second citizenship/passport. There's every advantage to doing so, and no disadvantages. That's true of all these things.
One more thing: Don't worry too much. All countries seem to go through nasty phases. Within the lifetime of most people today, we've seen it in big countries such as Russia, Germany and China. And in scores of smaller ones - the list is too long to recount here. The good news is that things almost always get better... eventually. Doug Casey is Chairman of Casey Research. He is a highly respected author, publisher, and professional investor who graduated from Georgetown University in 1968. For Casey's ongoing guidance about physical gold and silver, try BIG GOLD today for just $79 per year, with a 3-month money back guarantee.
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QUESTIONS FROM OUR CUSTOMERS Does a 22-Karat Gold Coin Still Contain an Ounce of Gold?
Yes. We sell a variety of one ounce gold coins that vary in purity from 22-karats to 24-karats. These coins all share one common attribute: they contain one troy ounce of gold. We also sell ¼ and ½ gold coins, and the same holds true for the fractional coins. If you purchase a ¼ fractional gold coin, the coin will contain a ¼ ounce of gold. Gold purity tends to be measured by karats - abbreviated kt - with 24-karat gold designated as .999 fine or above. Pure gold fineness would be 1.000; however, the softness of gold would make such coins impractical to use, so .999 fine and above is considered pure gold. These coins contain only the most minuscule amount of another metal - or 'alloy' - needed to make them tradable. With a 22-karat coin or a 18-karat piece of jewelry, more alloy is mixed into the product to create strength and/or manipulate the color. The American Gold Eagle and South African Krugerrand bullion coins, for instance, are made up of .9167 fine gold, thus making them 22-karat. But they still contain one troy ounce of gold - which is why they weigh 1.0909 troy ounces overall. The added alloy creates a more durable coin, and is considered desirable for bartering or home storage. But since gold coins aren't typically used for daily transactions (at least not today) and are most likely to be stored securely in protective packaging, gold coins with higher purity are also great for investment. The most well-known pure gold bullion coin is the Canadian Gold Maple Leaf, created by the Royal Canadian Mint. The Maple Leaf, American Gold Buffalo, Austrian Philharmonic, and Austrian Kangaroo are all .9999 fine. Many customers expect that a coin with a higher gold purity would be more expensive than a 22-karat coin. This is not always the case, and certainty not with the Canadian Gold Maple Leaf. This is our most popular product, with lower premiums than the American Gold Eagle. If you are looking for more gold for your dollar, and you plan to protect the coin from scratches and nicks, the Maple Leaf is the best bang for the buck. Whether it is 22- or 24-karat gold, every coin we sell is in superb condition. We sell only investment-grade products at competitive prices. To learn more about gold purity or our offerings, call a Euro Pacific Precious Metals Specialist today at 1-888-GOLD-160 (1-888-465-3160). No sales pitches, only straight answers.
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THIS MONTH IN GOLD
Gold Investment Demand in China to Advance 10%
Bloomberg - China's largest bullion bank expects domestic investment demand to increase by 10% this year. Zheng Zhiguang, general manager of the precious metals department at the Industrial and Commercial Bank of China Ltd. (ICBC), said currency debasement and the European debt crisis are driving safe-haven demand among local investors. "It's necessary," Zheng noted, "for individual, institutional, or even government investors to hold gold when the value of money is decreasing at a time of possible quantitative easing or excessive money-printing practices."
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Central Banks Buying Gold Like It's 1965
Barron's - The last time the world witnessed the official sector buying bullion as consistently and substantially as it is now was... 1965. The 2008 financial crisis and the US Federal Reserve's response to it, namely money printing, proved to be the turning point for sovereign bean counters. Central banks worldwide increased their gold holdings by 400 metric tons in the 12 months through March 31, up from 156 tons during the prior year. Emerging market central banks, in particular, have spearheaded the return to non-fiat reserves. This trend is driving speculators out of the gold market. Now, "the best way to play gold is as a long-term investor as a hedge against loss of purchasing power of paper money," says George Gero, strategist at RBC Capital Markets in New York.
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Never Mind Europe, US Is the Bigger Threat
CNBC - Goldman Sachs economist Jim O'Neill thinks the weak employment picture in the US is a bigger threat to markets than the protracted European debt crisis. For O'Neill, stalled hiring reflects the underlying fragility of the American economy. With the May job creation report coming in at just 69,000 and the unemployment rate ticking up to 8.2%, "...some of the momentum in the US has been lost." Were it not for a lack of confidence overall, O'Neill suggests that the European crisis would be having less of an impact on US markets.
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Endless QE? Yes.
Reuters - A Reuters analysis finds a robust majority of investment professionals see central bank pump priming coming by October. The expectation is that all of the Big Four global central banks - the US Federal Reserve, the European Central Bank, the Bank of Japan, and the Bank of England - will continue to shift into inflation mode. "It is almost as if investors are saying QE will happen no matter what," said Bank of America Merrill Lynch's Gary Baker. The analysts note that political pressure is overwhelming to keep the spigots turned on. "The heyday of independent central banking could be drawing to a close," notes HSBC economists Karen Ward and Simon Wells. Scary times indeed.
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Inflation Camp About to Win the Argument
MarketWatch - "The next decade will see a global consensus for inflation. If you want it, you'll get it, central banks just have to print enough money," argued Matthew Lynn, columnist for MarketWatch. Lynn notes that very soon Europe and Japan will resolutely join the US and the UK in the inflation camp to mitigate sky-high debt burdens, further increasing the global appeal of the inflation fix. How to survive this market environment? Invest in gold, property, and blue-chip equities, says Lynn - and stay away from bonds.
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