Welcome to the latest issue of my monthly Gold Report.
It's been another big month in the gold market. After August's consecutive days of $50 jumps, September brought a $100 single-day decline, and by the end of the month, almost all the summer's gains had been erased. I explain the factors driving this correction in my commentary below, but suffice it to say I expect future investors to look back on this period as a bull-market fire sale.
Silver is down 27% for the month, knocking it down to a level we haven't seen since February. This is the biggest correction since May, when the CME raised margin requirements on silver three times in a week. The CME again raised their margins for gold and silver this month, which deepened the correction. Ultimately, the result will be positive, as less leveraged speculators in the market should reduce volatility for long-term investors.
I'm pleased to include in this issue another exclusive commentary from Jeff Nielson of Bullion Bulls Canada. He examines bullion gold as compared to US stock investments over the past ten years, taking into account this current dip. The results may surprise our new readers.
Also, we have a wonderful interview with my old friend Doug Casey. For those who don't know, Doug is a true man of the world, having travelled to 175 countries and lived in 10. I always appreciate his honest and uncompromising perspective, and I'm glad to be sharing his latest thoughts with you.
The story goes that in China, an ancient curse is said to be: "May you live in interesting times." Unfortunately, we live in times so interesting that the very foundations of the global economy are being turned on their heads. I think gold is a reliable refuge from that chaos, and I hope this edition of my Gold Report helps to explain why.
Euro Pacific Precious Metals, LLC
ON THE RECENT GOLD PULLBACK
by Peter Schiff
The past couple weeks have seen a strong pullback in both commodity prices and stocks. Gold fell sharply off its peak after soaring just past $1,900. Volatility in commodity, currency, and equity markets has been very high recently, and these short-term price movements have Wall Street pundits in an uproar.
As gold prices soared, many advisors recommended investing in the yellow metal with appeals to the "bandwagon effect". A rising price, they argued, indicated changing sentiment, and thus future appreciation. For those who bought on this reasoning, a falling price is a bad omen.
In addition, for a while, gold prices were rising even as stock prices were falling. As a result, some investors bought gold to hedge stock market risk. When gold eventually followed equity prices lower, these trades were unwound.
But as my readers know, following the crowd has never been the reason to buy gold. After all, that same logic would have recommended buying a house in Phoenix five years ago. Since the fundamentals still point to gold's long-term viability, our phones have been ringing off the hook with customers smartly seeking to take advantage of the dip.
It's important to understand the fundamental reasons for owning gold, and those reasons have not changed. The US government embarked on a decades-long spending spree of historic proportions. To finance the resulting debt, the Federal Reserve is printing money furiously. Because most every central bank governor appears indoctrinated in the Keynesian economic philosophy, foreign central banks are simultaneously printing euros, yen, francs, yuan, and pounds to "keep up." Of course, this competitive devaluation actually represents countries shooting themselves in the foot.
Don't expect any abrupt changes either. The Fed's philosophy - a resolute faith in central planning and debasement - has been unchanged since Paul Volcker stepped down as Chairman in 1987.
Rather than considering any change of direction, the Federal Reserve Board is likely asking itself: "Should we print $50 billion or $500 billion in our next round of stimulus?" "Can the ECB bailout Greece now or do we first need to bail out the ECB?" "Should we call our money-printing'liquidity assistance' or 'quantitative easing'?"Or perhaps, "Do we have enough ink refills for all those printing presses?"
You may think I'm joking, but this is quite serious. While monetary policy was bad under Greenspan, Ben Bernanke has literally instituted a revolutionary devaluation program for the dollar. And gold is the only way to avoid his guillotine.
TRUE VALUE VS. SPOT PRICE
Let's remember that it is the fundamental value of an asset which dictates its long-term market price. Yet for some reason, many see this relationship backwards - they use the short-term market price to extrapolate the fundamental value. Consider a car on the dealer's lot: if the price of the car falls tomorrow, it becomes a better deal. If the price rises tomorrow, the car has becomes less attractive.
This principle is equally true in long-term investments. I believe that gold's fundamental value is far higher than $1,600, and far higher than $2,000. So, while it may be unsettling for some of those who own gold to see steep short-term price declines, remember to focus on the fundamental value of the asset, not the spot price on the market today.
Has the fundamental value of gold fallen in these past two weeks? Quite the opposite.
A DEBT-LADEN HOUSE OF CARDS
The Fed is still trying to find ways to manipulate the bond market with the newly announced "Operation Twist." This is yet another plan to suppress yields, encourage spending (as if too little spending was America's problem), and paper-over the untenable interest payments hanging over Washington. The manipulated US bond market is perhaps the greatest bubble in existence. Further manipulation only makes it more unstable in the long-term, and when that bubble bursts, gold should skyrocket.
Meanwhile, the European debt crisis is quickly spreading to Italy. On Sept. 28th, Italy was selling bonds at yields twice as high as the previous sale at the beginning of the year. The ECB may be able to keep Greece afloat, but Italy is the eurozone's third largest member. That's a load too heavy for the ECB to bear.
This is especially true in the wake of Moody's downgrade of two of the largest French banks - Societe Generale and Credit Agricole. As reported in the Wall Street Journal, "[Moody's] said its decision to downgrade the banks included the assumption of debt restructuring that would cost investors up to 60% on Greek sovereign debt, 50% on Portuguese and Irish debts, 10% on Spanish debt and 7% on Italy's debt."
In other words, the Western financial system is a debt-laden house of cards. This is the root of the current market panic. But what's harder to explain is why investors are responding by selling gold and buying dollars and euros. Then again, I was always told not to look a gift horse in the mouth.
KEEP CALM AND CARRY ON
Do not get caught in the exuberance or pessimism of short-term movements, even if they're sharp. Observe the fundamentals - the events in Europe, the looming budget calamity in the US, central bankers' steadfast strategy of debasement, and emerging markets' continued diversification into precious metals. These are the main drivers for gold's long-term appreciation.
To my readers who may have purchased metals just before this pullback, your concern is understandable. But I believe this bull market has a long way to run, and the rise up ahead looks even steeper from these levels.
Peter Schiff is CEO and Chief Global Strategist of Euro Pacific Precious Metals, a gold and silver coin and bullion dealer offering honest products at competitive prices.
If you would like more information about Euro Pacific Precious Metals,
THE DOUG CASEY INTERVIEW:
HOW TO PREPARE FOR WHEN MONEY DIES
If dollar-dumping turns from a trickle into a flood, look out. Exploding prices (aka exorbitant inflation) resulting from the devaluation of the dollar will compound the problems we saw in 2007-2009. Catastrophe will come when everybody realizes that the dollar is an "IOU nothing." That's the downside in the decade(s) ahead, according to Casey Research Chairman Doug Casey. But an optimist at heart, in this interview with The Gold Report, Doug also identifies some reasons to be hopeful.
The Gold Report: You've been talking about two ticking time bombs. One is the trillions of dollars owned outside the US that investors could dump if they lose confidence. And the other is the trillions of dollars within the US that were created to paper over the crisis that started in 2007. Are these really explosive circumstances that will bring catastrophic results? Or will it just result in a huge, but manageable, hangover?
Doug Casey: Both, but in sequence. One thing that's for sure is that although the epicenter of this crisis will be the US, it's going to have truly worldwide effects. The US dollar is the de jure national currency of at least three other countries, and the de facto national currency of about 50 others. The main US export for many years has been paper dollars; in exchange, the nice foreigners send us Mercedes cars, Sony electronics, cocaine, coffee - and about everything you see on Walmart's shelves. It has been a one-way street for several decades, a free ride - but the party's over.
Nobody knows the numbers for sure, but foreign central banks and individuals outside the US own US dollars to the tune of something like $6 or $7 trillion. Especially during the recent crisis, the Fed created trillions more dollars to bail out the big financial institutions. At some point, foreign dollar holders will start dumping them; they are starting to realize this is like a game of Old Maid, with the dollar being the Old Maid card. I don't know what will set it off, but the markets are already very nervous about it. This nervousness is demonstrated in gold having hit $1,900 an ounce, copper at all-time highs, oil at $100 a barrel - the boom in commodity prices.
Some countries are already trying to get out of dollars, but it could become a panic if the selling goes from a trickle to a flood. So, yes, it's a time bomb waiting to go off, or maybe a landmine waiting to be stepped on. If a theatre catches fire and one person runs out, soon everybody rushes toward the door and they all get trampled. It's a very serious situation.
TGR: You warned early on in the 2008-2009 economic crisis that it would really be more of a hurricane. In the last year or so, we've been in the eye of the hurricane and there's more turmoil to come. Will the other side of the storm be worse than the first? And given the recent economic news, do you think we have moved out of that eye?
DC: Yes, I think we are moving out of the eye and going into the other side of the storm. This storm will be much more severe because we haven't solved any of the problems that caused the hurricane in the first place. The fact that governments all over the world have created trillions of currency units has only aggravated those problems. Now, I expect exploding prices to compound the problems that we saw back in 2007, 2008, and 2009. That will devastate the prudent people in society who saved money. They saved it in the form of currency, and wiping out their savings will be catastrophic.
TGR: That's something you've been saying for years - about this being the "Greater Depression." We are now four years into it, based on your 2007 start date.
DC: Actually, depending on how long a historical scale you look at, you could say that, for the working class in the US anyway, the depression started in the early 1970s. After inflation, after taxes, their take-home pay hasn't risen in real terms for 40 years. But the definition of a depression that I use is "a period of time during which most people's standard of living drops significantly."
Net savings shows that you're living within your means and putting aside capital for the future. In the US, people have been living above their means for many years - that is what debt is all about. Debt means that you are borrowing against future production, which is exactly what the US has been doing.
TGR: So, how long will this Greater Depression last?
DC: It doesn't have to last long at all. It could be quite brief if the US government, which is basically the root cause, retrenches vastly in size and defaults on the national debt, which is essentially an enormous mortgage, an albatross around the neck of the next several generations of Americans. The debt will be defaulted on one way or another, almost certainly through inflation. I simply advocate an honest, overt default; that would serve to punish those who, by lending to the government, have financed its depredations. Distortions and misallocations of capital that have been cranked into the economy for many years need to be liquidated. It could be unpleasant but brief.
The government is likely to do just the opposite, however. It will try to prop it up further and make it worse - compounding the problem by expanding the wars. So, it could last a very long time. In that sense, I'm not optimistic at all. I think there is little cause for optimism.
On the other hand, I'm generally optimistic for the future. There are only two causes for optimism. First, smart individuals all over the world continue, as individuals, to produce more than they consume and try to save the difference. That will build capital, which is of critical importance. Second, expanding and compounding technology will increase the standard of living. Remember that there are more scientists and engineers alive today than have lived in all previous history combined. Those two factors countervail the government stupidity around us. Whether they will be overwhelmed and washed away by a tsunami of statism and collectivism, I don't know.
TGR: You say that the US government is the root cause of this problem. Isn't that putting too much blame for a worldwide problem on one nation?
DC: The institution of government itself is the problem, and the problem is metastasizing like a cancer all over the world. But, sad to say, the US is the most serious offender because it is currently both the most powerful and the most aggressive nation-state. It has been greatly abetted by the fact that the US currency has been accepted globally. The US dollar is, in effect, the reserve that backs all the other currencies in the world. That is why the US government has been the most destructive from an economic point of view. Furthermore, military spending - which in the US equals that of all the other militaries in the world combined - is purely destructive. It serves no useful economic purpose at all. The military is no longer "defending" anything - least of all liberty. It's actively creating enemies and provoking conflict. So, yes, I think the US government is actually the most dangerous force roaming the world today.
TGR: Do you see that changing after the next election?
DC: No. I think the chances of Obama being reelected are high, simply because more than half of Americans are big net-recipients of state largesse. The US has turned into a larger version of Argentina politically, where the electorate is effectively bribed to vote for the biggest thief. It is likely to turn out much worse than Argentina, however. Unlike the Argentines, the US government is fairly efficient. And, unlike Argentina, the US is rapidly turning into a police state.
Electing a Republican might be even worse, though. With the exceptions of Ron Paul and Gary Johnson, the potential Republican candidates absolutely make my skin crawl. So, no, there is no help on the horizon. The US government is spending about $1.5 trillion more this year than it takes in, and it is not going to cut that. In fact, foolish spending to bail things out will increase. And, worse than that, the Fed has artificially suppressed interest rates for three years. Interest accounts for roughly 2% of $15 trillion official national debt, or $300 billion per year. As interest rates inevitably rise, that interest amount will grow. At 12% - and I'm afraid they'll have to go even higher than that - it would add another $1.5 trillion just in interest payments.
I absolutely see no way out without a collapse of the US currency and a total reordering of the US economy.
TGR: When Money Dies, the title of your latest summit, implies some return to a gold standard. How do you see that playing out?
DC: Nothing is certain, but when the dollar disappears - and it's going to reach its intrinsic value soon - what are people going to use as money? Will we gin up another fiat currency like the euro? The euro is likely to fail before the dollar. My suspicion is that people will want to go back to gold. It's not because gold is anything magical, but simply the one of the 92 naturally occurring elements that - for the same reasons that make aluminum good for planes and iron good for steel girders - is most useful as money. In fact, the reason that gold has risen as high as it has is that the central banks of third-world countries - places that don't have large gold reserves, such as China, India, Korea, Russia, even Mexico - have been buying the stuff in size.
TGR: The concept of going to a gold standard seems impossible in the sense that there is only so much gold above ground - 6 billion ounces? Maybe $11 trillion worth? But it's only a fraction of the US GDP. Even with gold at $2,000 an ounce, that leaves an immense gap. In that scenario, how do you convert to a gold standard?
DC: In terms of today's dollars, gold should probably be a lot higher than it is. I don't know what the number will be, because a lot of those dollars will disappear in bankruptcies; they will dry up and blow away. It's like a real estate development that was worth $1 billion on somebody's books; when it fails, that's $1 billion destroyed. It's a question of the battle of inflation (with the government creating dollars to prop things up) against deflation (where businesses fail and wipe out dollars). But put it this way: the US government reports it owns about 265 million ounces. Its liabilities to foreigners alone are at least $6 trillion. If they were to be redeemed for a fixed amount, that would require roughly $22,000/oz gold. And that doesn't count dollars in the US itself.
I'm a bargain hunter and a bottom fisher, and bought most of my gold at vastly lower prices. But I think gold is going much higher because most people still barely even know that the stuff exists. As inflation picks up, they are going to want to get rid of these dollars - but what other monetary commodity can they turn to? So, gold is going higher. I'm still accumulating gold.
TGR: Thank you for the tips, Doug, and as always, for your thoughtful insights.
Doug Casey is Chairman of Casey Research. He is a highly respected author, publisher, and professional investor who graduated from Georgetown University in 1968.
At the sold-out Casey/Sprott Summit When Money Dies, more than 20 seasoned investment pros, economists, and freethinkers provided their insights and advice on the coming currency collapse... and what investors can do to protect their assets. Listen to the timely investment advice of North America's top financial experts from the comfort of your home-in over 20 hours of power-packed audio recordings on CD (or MP3). Click here for more details.
A TIME TO TAKE STOCK, NOT TO BUY STOCKS
by Jeff Nielson of Bullion Bulls Canada
It has been a rough month to be a precious metals investor. However, irrespective of whether we are talking about markets or life in general, whenever we encounter any short-term turbulence, we need to step back and look at the big picture.
The main reason to do this is that, being human, these short-term events provoke our emotions: exuberance if our investments are suddenly rising, and fear or despair should they suddenly decline.
When this happens, many lose sight of the fact that short-term movements may have no relevance to a longer term trend, and certainly that short-term events are rarely the cause of those longer (and more stable) trends. Look at a one-week chart of the price of gold recently and one might be tempted to do their best impersonation of Chicken Little. However, look at a ten-year chart and the recent pull-back brings but two words to mind: "buying opportunity."
Conversely, for those investors who prefer the perilous world of US equities, the Dow Jones Index has spent the last ten years "breaking 10,000" - having done so more than 25 times, most recently in 2009. One look at a ten-year chart of the Dow and I'm thinking that's one heck of a merry-go-round.
|Source: Google Finance|
And 10,000 on the Dow today is not what it was ten years ago. Rather, Washington's Plunge Protection Team has used the printing press to keep the stock market afloat.
Take a look at the following chart of the Dow in terms of gold. Since gold doesn't rise in value as much as keep its value versus falling fiat currencies, this chart gives a clear picture of how much purchasing power an investor would have lost buying the Dow in 2001.
|Source: Fred's Intelligent Bear Site|
Obviously, gold has been the place to be for the last ten years, while Dow stocks have seen about as much appreciation as that car in your driveway.
Trends do change, however. So, the question becomes is there any reason for US investors to believe that the future will be significantly different for either gold or the Dow? In short, no.
While entire books could be written about all the bullish fundamentals currently favoring precious metals, two words will do: "competitive devaluation". Prior to the "Crash of '08", the price of gold had nearly quadrupled versus our depreciating fiat currencies - while the price of silver quintupled! With most of the world's governments now racing to drive down the value of their currencies, gold's long-term performance should continue to improve going forward.
For US equity markets, the future is not nearly as bright. The "record earnings" that many large US corporations now boast about have come at the expense of stripping millions of American workers (and consumers) of their jobs. High profits overseas will continue to be offset by weak demand and shrinking profit margins domestically. Since US tax law discourages these firms from "repatriating" these overseas profits, I wouldn't expect them to appear in the form of dividend checks to the American stockholder.
It is said in markets that "the trend is your friend." This is abundantly true for gold investors, especially given the current price reduction.Meanwhile, US equity investors should be asking themselves,"With friends like these, who needs enemies?"
Jeff Nielson studied economics and law at the University of British Columbia, obtaining his degree in 1989. He came to the precious metals sector in the mid-'00s as an investor and quickly decided he wanted to make it the focus of his career. He is the co-founder of Bullion Bulls Canada, a precious metals website with a global audience which provides economic analysis, commentary on precious metals, and detailed information on more than 100 North American-listed mining companies.
Since starting Bullion Bulls Canada, Mr. Nielson's work has been widely published on sites such as Seeking Alpha and TheStreet, along with dozens of precious metals websites.
For more of Jeff's insights and analysis, visit www.bullionbullscanada.com.
THIS MONTH IN GOLD
China Buys Gold to Challenge US Dollar
Al Jazeera - America's diplomats know the world will one day pull the plug on the US dollar's life support system. A recently published, unredacted Wikileaks cable from the US Embassy in Beijing shows that the concern has, in fact, been at the front of their minds. The cable quotes an editorial in a Chinese government-sponsored newspaper claiming Beijing is increasingly buying gold to encourage the rise of monetary alternatives; in effect, as the cable quips, to "kill two birds with one stone" by simultaneously undermining the US dollar's and euro's status as reserve currencies. Read full article >>
Hedge Fund Heavyweight Sees Gold at $2,200
Bloomberg - Tony Hall, the moonlight boxer and hedge-fund heavyweight who returned a whopping 33 percent for his clients last year, prefers to fight from the gold corner. Golden-glove Hall believes that the yellow metal could work its way up to $2,200 an ounce by the end of 2011. Hall notes that in today's turbulent economic environment, gold is attractive due both to its safe-haven and inflation-hedge qualities. For Hall, the latest correction in gold to the $1,700 level is a good opportunity to jump back into the ring. Read full article >>
Central Bank Gold-Buying Back in Vogue
Financial Times - Following more than two decades of attempting to empty their vaults of bullion, European central banks have this year finally decided to jump onto the gold bandwagon, once again becoming net buyers of specie. The about-face highlights the extent to which uncertainty surrounding currency risk and sovereign debt defaults are shaping investment behavior. The decisions mirror those made recently by emerging market central banks. QE3 is lurking rather conspicuously. Any central bankers still caught on the sell-side of the gold market the day the Fed kicks off a third round of large-scale asset purchases will probably want to dust off the old resume. Read full article >>
Gold-Backed Dollar Puts 'Fair Value' at $10,000 an Ounce
Bloomberg - If every US dollar in circulation were actually backed by the full faith and credit of incorruptible gold and not by politicians' hollow promises, you would need approximately 10,000 greenbacks to buy one ounce of the yellow metal, a recent report maintains. Dylan Grice, a London-based global strategist at French bank Société Générale, crunched the numbers and says that the $10,000 figure is the actual "fair value" of gold. Significantly, the calculation suggests that in playing catch-up, gold has the potential to quintuple its current spot price. Read full article >>
Industry Eyes Gold at $2,000+
The Globe and Mail - According to the average prediction of participants at the London Bullion Market Association's conference, the gold industry's biggest annual gathering, gold is primed to crack the $2,000 an ounce threshold over the coming year. Participants expressed über-bullish sentiments based on their direct experience with buyers and sellers. For instance, Steven Nathan, marketing director at the Rand Refinery in South Africa, had this to say about the popular Krugerrand coin: "Demand is insatiable. It's the strongest period ever right now." Incidentally, in years past, the conferences' average predictions have often turned out to be excessively cautious. Read full article >>