We are not even close to a bubble in precious metals,
but we are definitely climbing the 'wall of worry'.
The tumble this week is healthy.
Investors who read these posts are, for the most part, either recent or long term converted to the value of gold and silver as stores of value in a time of paper currency debasement.
The majority of investors out there, however, including large institutional investors, have no position whatever in precious metals or precious metal stocks.
Despite the growing advice by naysayer advisors in the mainstream press and media that pm's have run too far, the market remains incredibly tiny relative to the overall market.
There is huge worry out there, though the declining VIX suggests investors are growing increasingly complacent.
However, the market volatility remains high, in some of our opinions, as shown by gold taking out all time nominal highs on the suggestion by the World Bank's president, Zoellick, even hinting at the world's powers using some sort of gold reference or standard in the future.
Of course, the dollar needed to respond with a little show of strength going into and through the G20 meeting in Korea, or else poor Obama and the Fed's policies would have been whipped even more by the emerging markets, China, and Germany.
This small downturn in gold is healthy, and just window dressing, as are statements by the US Treasury and the Fed that they are not pursuing a weak dollar policy.
Apparently, China and Germany are in trouble because their economies are too strong?
And, Brazil and the other emerging markets, with government bonds running in the 7-9% range, don't want their currencies to be revalued up when the carry trade of borrowing for next to nothing not just in Japan but in the US will boom again on the heels of QE2?
ne of the first things Obama stated as a goal when he came to power was to increase US exports.
And, this may be coming true, as long as the dollar continues to fade.
No risk, no gain.
And, precious metals are the risk trade, today.
Enough of my rambling.
All is well for those of us long on pm's and pm stocks.
Even good old pessimistic Barron's ran another article positive on gold this week, by Kopin Tan, entitled "Fretting Over the Fallout".
An excerpt:
"GOLD CLIMBED TO A FRESH record above $1400 a troy ounce last week, before slipping 2.7% Friday.
Despite the threat of tightening money supply, it's hard to argue against the logic of holding onto some gold.
Much has already been made of gold as a hedge against depreciating paper currencies, and it's an ominous sign that ahead of this weekend's G-20 meeting, the U.S. has failed to extract a pledge from leaders to refrain from "competitive undervaluation" of currencies.
But gold is a shield against other risks that could worry investors in 2011.
An all-out trade war is unlikely, but the U.S. has failed to prod China into revaluing the yuan, and is clashing with South Korea over cattle and cars.
As growth slows across the globe and wages stagnate, politicians in developed nations are practising their protectionist rhetoric.
The recent jump in Irish bond yields is yet another reminder that Europe's debt problems are far from over.
This time around, the European Union has a $750 billion back-stopping plan in place and a mechanism for buying government bonds.
But the continent's wan growth and aging populations with mounting needs complicate the task of fiscal belt-tightening.
Gold should hold its value if paper currencies continue to slide, or if investors start fretting anew about everything from emerging-market bubbles to sovereign-debt defaults.
Another risk, flagged by Michael Hartnett, Bank of America Merrill Lynch's chief global equity strategist, is that of U.S. municipal-debt defaults, since stagnant growth eats into tax revenues even as states' obligations continue to swell. If U.S. economic growth sputters, and credit-default-swap spreads of Illinois, California, Michigan, New Jersey or New York start to wobble, the government may be forced to step in.
Yes, yes, we know gold provides no yield, cannot be eaten or burnt for warmth, is hard to store and is even harder to wear (for anyone not in the NBA).
The proliferation of gold ads on TV is also both annoying and worrisome.
But it's too early to fade gold's rally, argues Jason Trennert of Strategas Research Partners.
Gold's 25% gain this year pales next to the 54% surge for silver, which has well-understood industrial applications beyond the purely decorative.
Gold's rally also is very much a function of the buck's slide.
As John Roque of WJB Capital points out, $1000 bought you nearly 50 ounces of gold in 1930 and less than an ounce today, but gold has no more surged than the dollar has slipped nearly 99% over that stretch.
Besides, at about 1.15, the ratio of gold to the Standard & Poor's 500 is still below the long-term average near 1.5 or levels pushing 3 in the 1970s.
And as long as the U.S. feels entitled to spend beyond its means—and it says something that our schoolchildren ranked 25th among developed countries in math and 21st in science, but are No. 1 in confidence—"it's hard not to feel that the correlation between the West's sense of entitlement and the price of gold will only grow," Trennert says."
The Big Question: What gold price would be legislated to reflate the U.S. and global economy?
I can’t tell you what gold price the G-20 would ultimately agree to.
But here’s what they will be looking at …
e.g.,
* To monetize 100% of the outstanding public and private sector debt in the U.S., the official government price of gold would have to be raised to about $53,000 per ounce.
* To monetize 50%, the price of gold would have to be raised to around $26,500 an ounce.
* To monetize 20% would require a gold price a hair over $10,600 an ounce.
* To monetize just 10%, gold would have to be priced just over $5,300 an ounce.
Those figures are just based on the U.S. debt structure and do
not factor in global debts gone bad.
But since the U.S. is the world’s largest debtor and the
epicenter of the crisis, the G-20 will likely base their
final decision mostly on the U.S. debt structure.
So how much debt do I think would be monetized via an executive
order that raises the official price of gold?
What kind of currency devaluation would I expect as a result?
I would not be surprised to see the G-20 monetize at least 20%
of the U.S. debt markets. THAT MEANS …
* Gold would be priced at over $10,000 an ounce.
* Currencies would be devalued by a factor of at least 12
to 1, meaning it would take 12 new dollars or euros
to equal 1 old dollar or euro.
The return of the Gold Standard?
“But Larry,” you ask, “how could this be accomplished when we
no longer have a gold standard?
Further, are you advocating a gold standard?”
If the G-20 monetizes at least 20% of the U.S. debt markets,
gold could easily hit $10,000 an ounce.
If the G-20 monetizes at least 20% of the U.S. debt markets,
gold could easily hit $10,000 an ounce.
My answers:
First, you don’t need a gold standard to accomplish a devaluation
of currencies and revaluation of the monetary system.
By offering to pay over $10,000 an ounce for gold, central banks
can effectively accomplish the same end goal —
monetizing and reducing the burden of debts, via inflating
asset prices in fiat money terms.
Naturally, hoards of gold investors will cash in their gold.
The central banks will pile it up.
At the same time, other hoards of investors will not sell
their gold, even at $10,000 an ounce.
But the actual movement of the gold will not matter.
It is the psychological impact and the devaluation
of paper currencies that matters.
Second, I do NOT advocate a fully convertible gold standard.
Never have.
There isn’t enough gold in the world to make currencies
convertible into gold.
It would end up backfiring, restricting the supply of money
and credit.
What should you do to prepare for these possibilities?
It’s obvious:
Make sure you own some core gold, as much as 25% of your
investable funds.
Also, as I’ve noted in past Money and Markets issues,
you will want to own key natural resource stocks,
and even select blue-chip stocks that will participate
in the reflation scheme ...
Best wishes,
Have a great week.
AI
