Welcome to the October 2013 edition of my monthly Gold Letter.
Right now, some of you might be thinking, "Wait, did Peter miss April Fool's by six months? In August, he announced the end of the Gold Letter and yet here's another one!"
It's true, I did announce that a new feature would be replace the Gold Letter this month. But that initiative has been subsumed into larger plans I have to revamp Euro Pacific Precious Metals into a leaner, meaner gold dealer. While the Fed makes promises and never delivers, I assure you this will be worth the wait.
My commentary this month focuses on the Fed's "taper fakeout." I am on record (see video) as having strongly doubted the will of the Fed to even modestly reduce money-printing, and that forecast proved correct. I explain why the fakeout should not have been a surprise to anyone who listened carefully to the Fed's QE rhetoric or considered the economic implications - and what we can expect from the Fed in the coming months.
Also in this issue, Jeff Clark digs down into the rampant demand for gold in China, juxtaposed with the ongoing bearish calls by Western firms like Goldman Sachs. Do Chinese housewives know more about gold than Western bankers?
Enjoy the new comic from Lampoon the System, which takes a crack at the media circus surrounding replacing Bernanke as Fed Chairman. In our FAQ, we explain in more detail how an average investor might split his precious metals portfolio between gold and silver. And, of course, don't miss the summaries of major gold news stories from the past month.
Euro Pacific Precious Metals
|THE TAPER FAKEOUTBy Peter Schiff
Anyone who bought the media buzz about a September reduction of QE - called the "taper" - was very surprised when the Federal Reserve announced that stimulus would continue unabated. According the the official narrative, inflation is under control and the labor market is steadily improving. Why wouldn't a modest taper be announced?
The reality is that the economic indicators the Fed claims to rely on to decide when to taper are all dependent on stimulus money. This is not a mystery to Ben Bernanke. Instead, this entire saga amounted to little more than a "taper fakeout" that sent hard asset investors for a loop.Months of Anticipation
We can forgive the financial media for being blindsided by the Fed's non-taper. Even after decades of deception, journalists by-and-large still believe that it is their job to report official pronouncements as fact. Every month of 2013, one Fed official or another has openly discussed the need for or possibility of tapering. In January, it was Lockhart; in February, Bullard; Plosser brought it up in March; and Williams talked taper in April.
Bernanke finally took up the taper torch in May, but it wasn't until June that he hinted the Fed might start tapering QE "later this year" and end it entirely by the middle of 2014.
The markets went wild on these progressively foreboding statements, sending Treasury and mortgage rates upward and driving gold and silver into their biggest correction since the secular bull market started a decade ago. In spite of Bernanke's caveats that the bulk of the stimulus would continue for the foreseeable future and that the federal funds rate would remain at record lows, the markets braced for the easy-money spigot to begin closing.
I was on the major news networks calling the Fed on its bluff, but once again, my forecasts were dismissed by anchors and co-panelists. [See the new video: Peter Schiff Was Right - Taper Edition
.] Then, on September 18th, the Fed did exactly what I expected.A Möbius Strip
When the Fed announced that it was backtracking on its previous indications, Bernanke cited the "tightening of financial conditions observed in recent months" as a major reason for delaying the taper.
As an academic economist focused on the history of monetary policy, Bernanke had to know that warning of tapering would cause the market to prepare by raising rates. This is part of a clever strategy to appear serious about withdrawing stimulus but have a convenient excuse to (forever) delay the exit.
After all, if interest rates surged on the mere talk of tapering, imagine what would happen if tapering actually began! Taper Talk Is Cheap
Bernanke may not understand how to grow a healthy economy, but he's not foolish enough to dream that he can end QE without affecting interest rates. The real message behind Bernanke's excuse for putting off tapering is that there is never going to be a taper. If the economy shows sign of improving, the Fed will start talking about tapering again. This will send interest rates higher, which the Fed can point to as "tight financial conditions" in need of further stimulus.
Sure enough, the day after the fakeout was announced, St. Louis Fed Chief James Bullard jumped onto the airwaves claiming that a tightening decision might come as early as October.
While some analysts think the Fed is in disarray, I think they're trying to have their cake and eat it too. By hinting but not delivering on tightening, they can keep investors second-guessing themselves and ignoring the fact that the promised recovery never materialized. Regime Uncertainty
On September 18th, the S&P and Dow closed at new record highs on news of the Fed's taper fakeout. Precious metals surged as well. Whether this precipitated Bullard's renewed advisory on tapering the following day I do not know, but his comments had the effect of smacking down the previous day's gains.
Uncertainty over the Fed's intentions leaves US investors in a bind. Even prominent Wall Street money managers are truly frightened by this market.
My advice remains the same: focus on long-term fundamentals, take advantage of discounts, and avoid the US Treasury bubble. While unfortunate timing may have cost some gold buyers short-term losses, the difference between $1300 and $1800 for gold will look less important when it is trading at $3000 or $5000.
This much is certain, when QE does unravel, the fallout will be devastating. In the meantime, opportunities abound for the precious metals investors.
Just this week, when gold failed to rally on the government shut down, as many assumed that it would, it promptly sold off $40 per ounce, as disappointed speculators bailed out. However, gold investors know that a government shut down in-and-of-itself is not bullish for gold. What is bullish for gold is that the shut down will soon end, and any government functions that were temporarily shut down will start right back up again.
In the end, it's the government that will shut the economy down. But the one thing they will never shut down is the printing press. Now that
is really bullish for gold.Peter Schiff is Chariman 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.
BERNANKE'S "EXIT STRATEGY"
(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.
for more cartoons and information on his just-updated anthology book, available for only $15.
CHINESE HOUSEWIVES vs GOLDMAN SACHS: NO CONTEST
By Jeff Clark of Casey Research
Goldman Sachs is once again predicting that gold will fall, setting a new near-term target of $1,050.
Never mind the schizophrenic gene that would be required to follow the constantly fluctuating predictions of all these big banks; it's amazing to me that anyone continues to listen to them after their abysmal record and long-standing anti-gold stance.
Sure, the too-big-to-fails can move markets - but they say things that are good for them, not us. For example, while Goldman Sachs was telling clients and the public to sell gold in the second quarter of 2013, they bought 3.7 million shares of GLD and became the ETF's 7th largest holder.
When I visited China two years ago, guess who no one was talking about? Goldman Sachs. There was news about the US, of course, but the regular diet of journalistic intake consisted of Chinese activity, not North American. And surprise, surprise, the view from that side of the world was materially different than what we hear and read here - and in some cases, the opposite.
Not only have most Chinese housewives - perhaps the most frugal and cautious savers in the world - probably never heard of Goldman Sachs and their call for $1,000 gold - if they had, they would think: 垃圾! (Rubbish!)
Here's some evidence. Since January 1, gold ETF holdings have fallen by 26%, according to GFMS. But Chinese housewives aren't refraining from buying and certainly aren't selling:
The red dotted line represents the total outflows of GLD through last Tuesday. The gold bars are cumulative monthly imports of gold to China through Hong Kong. You can see that China has absorbed roughly twice what most North American ETF holders have sold. It's actually more than that, because we only have Hong Kong import data up to the end of July. But the story gets even more dramatic. If you dig into the data further, you find that cumulative gold imports through July surpassed the 26.7 million ounces (831 tonnes) that was imported to China for the whole of 2012.
That means rather than being deterred from buying gold when its price declined this year, the Chinese bought the yellow metal as fast as they could. Further, last year Chinese miners produced 12.9 million ounces (403 tonnes) of gold, all of which stayed in the country.
When you look at physical deliveries from the Shanghai Gold Exchange (SGE) vs. the COMEX and global mine production, you can see a clear trend this year:
Deliveries at the SGE are significantly greater than those at the COMEX. Delivery ratios on the Comex have consistently been under 10%, in contrast to more than 30% on the SGE. Through June, the SGE has nearly matched all of last year's total.
What's even more astonishing: year-to-date deliveries on the SGE are close to global mine production. In the first six months, delivery reached 35.3 million ounces (1,098 tonnes), just 20% less than what all gold companies mined last year.
It is headlines like these that the Chinese read - not what Goldman Sachs writes.
It's not just the Chinese, of course. India, for now, is still the largest gold market. Despite relentless restrictions from her government, India bought more gold jewelry and bullion last quarter than any other country.
China and India accounted for almost 60% of the global gold jewelry sector last quarter, and roughly half of total bar and coin demand. Further, both countries saw almost 50% more consumer demand in the first half of the year compared to the same period in 2012. The two countries are again setting records:
It's true that official Indian gold imports dropped in August, to just 0.08 million ounces (2.5 tonnes), a 95% plunge from July's volume of 1.5 million ounces (47.5 tonnes). It's not yet clear, however, that Indian authorities have managed to subdue gold imports as they have been desperately trying to do - keep in mind the widespread reports of gold smuggling. Meanwhile, the wedding season is just ahead, so demand is likely to bounce back up.
- China purchased 8.8 million ounces (275 tonnes), 87% more than last year
- India bought 9.9 million ounces (310 tonnes), 71% more than 2012
Physical demand also soared in Thailand, Indonesia, and Vietnam last quarter, with reports of increases ranging from 20% to 40%. Add it all up and the Asian/emerging countries comprise the lion's share of consumer demand for gold - about 70%.
It raises the question, are Chinese housewives just smarter than Goldman Sachs?
Jeff Clark is the editor of BIG GOLD, Casey Research's monthly advisory on gold, silver, and large-cap precious metals stocks.
Worried about your dollar dominated assets and want to know more how to diversify your wealth outside of the US? Check out Casey's free webinar, Internationalizing Your Assets, featuring Peter Schiff.
QUESTIONS FROM OUR CUSTOMERS
What Ratio of Gold to Silver Does Peter Schiff Recommend in a Precious Metals Portfolio?
Peter has always recommended holding 5-10% of an investment portfolio in physical precious metals. But how much of that percentage should be in gold and how much in silver?
Generally speaking, Peter advises holding about 2/3 of precious metals holdings in gold and about 1/3 in silver. This provides a stable foundation in the resilient yellow metal paired with the strong upside potential of silver.
Many of our clients are interested in better performance in their metals investments, and therefore buy a larger share of silver. They are willing to endure silver's short-term fluctuations in exchange for its long-term growth prospects. Silver's ever-expanding industrial applications and apparent undervaluation relative to gold both indicate silver is likely to make big moves in the future. You can read all about silver's bright future in the Euro Pac Metals Special Report, The Powerful Case for Silver
Generally, defensive investors prefer to stick with the more conservative 2:1 allocation of gold to silver. It's ultimately up to the individual investor how to allocate his or her precious metals holdings. For some, this also includes a consideration for platinum and palladium.
If you'd like to discuss your precious metals strategy in more detail, please call 1-888-GOLD-160 (1-888-465-3160)
to speak with a Precious Metals Specialist, request a callback
at a time convenient for you, or click here
to chat online with a Specialist right now.
THIS MONTH IN GOLD
Gold Posts Biggest Quarterly Gain in a Year
Reuters - Gold ended the third quarter up 8%, the largest quarterly gain since Q3 2012. It's expected to recover further if Fed stimulus continues, which analysts consider a possibility given a US government shutdown and weak dollar. "It seems to us that the central bank will likely stand pat again, perhaps not wanting to take two completely different directional views on rate policy in the span of just 30 days," said INTL FCStone analyst Edward Meir.
Central Banks Keep Buying Gold
Reuters - Eight central banks added to their gold holdings in August. Turkey made the biggest addition to its reserves in five months, while Russia made its biggest gold purchase since December. For 11 consecutive months Russia has increased its reserves, while Turkey has grown its gold holdings 13 of the past 14 months. Ukraine, Azerbaijan, and Kazakhstan also added significant amounts of gold to their reserves. Central bank gold purchases are seen as a good support of the gold price going forward. "Central banks continue to view gold as good value on a long-term basis," said Victor Thianpiriya of the Australia and New Zealand Banking Group.
US Mint Silver Coin Sales Beat 2012
Bloomberg - By the end of August, the US Mint had sold 33.75 million ounces of silver coins YTD, compared with 33.74 million ounces in all of 2012. Record high demand for silver has been driven by its safe-haven appeal and expanding industrial demand in countries like China, the second biggest silver importer in the world. Chinese imports increased every month from May to June. Demand has been so strong that the US Mint suspended sales temporarily in January due to lack of stock, and dealer premiums were as high as 25% in April.
China to Increase Gold Trade
Reuters - China's central bank has proposed new rules allowing more banking firms and gold producers to apply for gold import and export licenses. Currently only 9 out of 25 Shanghai Gold Exchange member banks are allowed to trade gold. The change would also reduce restrictions on individual gold buyers, allowing them to import up to 7 ounces of overseas gold without reporting or taxes. The new policy may increase China's gold imports and ease local premiums, which surged last spring on supply shortages. China will likely surpass India as the biggest global gold consumer this year.
Enhancing Energy and Water Technology with Gold
Bloomberg - Growing global demand for energy and clean water has industries turning to gold as a way to improve efficiency and lower costs. Gold's high electrical conductivity and corrosion resistance make it useful in the catalytic converters of cars, and nanoparticles of gold can remove pesticides and heavy metals from water. Gold could also be used to improve the efficiency of solar-cell technology and the performance of fuel cells.