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The GoldBugg Report - Bullion is Back

February 5, 2008

Gold

• Bullion is back as globe girds for hard times.
  $1,500 US an ounce by mid-2009, bank now predicting
  Canwest News Service
  Published: Wednesday, January 30, 2008
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• Gold hits new record again.
  Commodity hits $931.50 an ounce amid Fed cuts rate, inflation fears.
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• John Hill, a Citigroup analyst had no qualms about writing that, "Gold investors are savouring the recent emergency Fed rate cut as it invokes all three 'Horsemen': global derivatives crisis on multiple levels, clumsy central bank intervention, and deliberate currency devaluations. We continue to favour gold and expect a test of $1,000 an ounce." Kitco Daily Resource
• A monthly close above $900 this week, the first ever, would obviously be very bullish from a technical point of view for gold. Negative real interest rates (with the key discount rate less than the rate of inflation) in the world's largest economy is very inflationary and could lead to gold reaching $1,000 in the coming weeks, as the dollar comes under further pressure.
  
  The moniker 'Helicopter Bernanke' is looking more and more apposite as the Federal Reserve chairman again drops copious amounts of liquidity onto the increasingly troubled financial and economic waters. The risk is that by attempting to prevent deflation in asset classes, the Federal Reserve ends up creating stagflation and a mild form of hyperinflation. Or even worse by endeavouring to protect the banks, stock and property markets they end up putting the dollar's position as the global reserve currency at risk. Gold.ie
• GATA's advertisement in The Wall Street Journal.
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• Half of gold in central banks gone? Watchdog: 'We want to expose and stop the manipulation'.
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• U.S. treasury's gold auditor doesn't know if reserves are leased or swapped.
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• "The Eye of the Hurricane is Upon Us." Peter Grandich
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• "I first started buying gold in 2001 when it was trading close to US$300 per ounce. Since then, it has risen a lot but I happen to believe this bull-market still has room to run. After 28 years, gold has just broken out to a new record-high and this is extremely bullish and considering that it is now in uncharted territory, we could see strong momentum-led buying as the public starts to take notice." Puru Saxena
• "It is not too late to set up gold as portfolio insurance. Private and institutional investors (including pension funds and insurance companies) have investments to protect worth some $180 trillion. Not more than $600 billion worth of gold bullion is presently earmarked as hedges for portfolio insurance. In other words, only about one-third of one percent of all the investments is protected by gold while more than 99 percent is unprotected.
  
  Even this is a gross overestimate because most of the gold hedged portfolios are heavily overweight in gold, leaving that much less gold for the unprotected and thinly-protected ones. Be that as it may, if global investors decided to allocate even a modest three percent of their assets to purchase portfolio insurance, the consequence would be that $6 trillion paper assets would be chasing gold bullion worth $0.6 trillion, or one-tenth, at the present price of gold. This means ten bidders for every ounce of gold available. Portfolio insurance is still cheap, but the cost may quickly go up ten-fold or more, once the stampede starts." Antal E. Fekete
• 'It's going to be much worse'. Famed investor Jim Rogers sees hard times ahead for the United States and a big opportunity looming in China. Once again Rogers draws on the 1970s in his analysis. "Think about the story of gold in the '70s," he says. "Gold went up 600%, and then it started correcting. It went down nearly every month for two years, nearly 50% from the high point. And everybody said, 'Well, that's the end of the gold market.
  
  It was just a fluke. It's over.' It scared everybody out. And then gold turned around and went up 850% from that level. This is what happens in markets. But the fundamentals of the secular bull market in commodities are not over any more now than they were for gold in the '70s."
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• Lights Out in SA, but Gold and Platinum Glow Bright.
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• South African Mining Unions Fear Job Crisis.
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• China's metals production faces challenges from bad weather and power shortages.
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• National Bank makes massive call on gold. When you hear calls for US$1,500 gold within 12 to 18 months, you assume they're coming from the usual gold bugs. They do that kind of thing all the time. But in this case, it's coming from a much more objective source: National Bank Financial.
  
  Chief economist Clément Gignac, who has been bearish on the U.S. economy for ages, lays out five reasons why gold is making a comeback as an investment haven and should reach his lofty US$1,500 an ounce target: financial instability, massive injections of liquidity and a return to negative interest rates, the declining value and roll of the U.S. dollar, swelling U.S. budget deficits and inflation expectations, and increased financial demand for gold as a distinct asset class.
  
  None of these factors will come as a shock to anyone, but Mr. Gignac figures they will combine to keep the upside pressure on bullion well into the future. "We think gold has attractive potential for appreciation and, especially, as a tool for medium-term portfolio diversification via gold stocks or gold ETFs," he wrote in a note to clients. "The current price of crude oil, around US$90 a barrel, is about the same in constant dollars as the late-1970s high. Our new gold target of US$1,500 an ounce is still far from the early-1980s high of US$2,200 in constant dollars." Nationalpost.com
• Gold to hit $1,500-$1,800 in 2009, says Swiss Asia Capital analyst Juerg Kiener.
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• Peter Hambro, the founder of the second-largest gold producer in Russia, expects the prospect of worldwide stagflation to drive gold past the $1,000 barrier this year.
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• Russia's billionaires join next big gold rush.
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• The "Real" Gold Price. Rather than reduce inflation, the US government instead shot the messenger. By fiddling with the CPI, the US government wants us to believe that inflation is not as bad as it really is which is the same strategy it has pursued with the other important inflation messenger – gold. Government interventions to cap the gold price prevent the gold barometer from alerting everyone that inflation is a growing menace.
  
  To conclude, even though gold is trading at a record high in terms of nominal dollars, the real gold price is far below the old January 1980 record when adjusted for inflation. Gold is still good value, and more importantly, government interventions have kept gold cheap, thus enabling us to buy it at prices far less than would be the case if the government wasn't intervening. Therefore, continue to spend overvalued dollars to accumulate undervalued gold. James Turk
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• Panic at the Fed Makes $1,000 Gold Seem Imminent.
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• Could Inflation Explain the Rise in Gold Prices?
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• "Wisdom of Crowds" Helps Explain Gold's Price Climb. All around the world, investors believe in gold.
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• Central Bank Gold Sales Could See 'Significant Shortfall'.
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• Got Gold Report Gold Bullish/Bearish Battle at the COMEX Corral.
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• Gold/Silver Market Updates, Clive Maund.
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• Barrick chairman says gold will go higher. Barrick Chairman Peter Munk said he wouldn't call himself a gold bug, but after last week's rally to a new record high of $924.30, he said the yellow metal is likely to go even higher. "With increased demand and constrained supply, I'm more convinced (the price) is not only sustainable but may even reach the highs in the 1980s," he said at the World Economic Forum, Reuters reported. ResourceInvestor.com
• Long-Term Reasons to Buy Gold-James Turk
  
  With gold now above its record high price of $850, it's a good time to step back and ask: Do I still want to own it? Do I still want to buy it? Is gold still good value? The answer to all three questions is a resounding "yes."
  
  
  • Still Good Value - Adjusting for inflation, it takes $2,208 today to equal the previous high of $850 reached in January 1980. Comparing gold to the Dow Jones Industrials Average is another useful measure to determine gold's value. Gold is overvalued when it takes only one ounce of gold to buy the DJIA. For example, in the 1930s one ounce of gold at $35 bought the DJIA, and it did so again in 1980 when an ounce of gold was $850. Though this ratio has fallen from over 40 ounces in 2000, it still takes 16 ounces of gold to buy the DJIA, meaning gold is still relatively good value.
  • No Counterparty Risk - National currencies depend on the safety of the bank where you have your currency deposited. The Northern Rock crisis has highlighted that risk. National currencies have counterparty risk, but gold does not. As the subprime crisis continues to deepen, the absence of this risk more than offsets any interest income one earns on bank interest.
  • Currencies Are Managed - All national currencies are managed by central banks. Some do a better job than others, but all national currencies without exception are being debased by inflation. In contrast, an ounce of gold preserves purchasing power. The following chart of the price of crude oil shows that an ounce of gold has essentially the same purchasing power today as any other time since 1945.
  • Central Banks Losing Control - As well documented by the Gold Anti-Trust Action Committee, central banks have been intervening in the gold market. Consequently, the gold price is much lower than it would be had there been no intervention. Now that central banks are losing control, the gold price will move toward its free-market price, much like it did after central banks stopped intervening in the late 1960s.
  • Monetary System Is Broken - Global imbalances from trade and capital flows have become so huge that colossal pools of "hot money" are constantly looking for a safe home. The movements of this hot money now dwarfs the flow of capital required for global trade and commerce, and has therefore become a destabilizing force. These imbalances did not occur under the classical gold standard, proving its efficacy. I therefore anticipate that in the not too distant future gold will once again be at centre of global commerce.
  • Summary - All of the above factors will increase the demand for gold. This increased demand will cause gold's rate of exchange to national currencies to rise, meaning gold's price will rise. Therefore, gold should still be accumulated, month in and month out under a long-term savings plan. Instead of saving fiat currency, everyone should be saving sound money gold.
• Zimbabwe's gold production fell by more than a third last year as the industry grappled with widespread power cuts and a lack of foreign exchange, the Chamber of Mines has said.
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Silver

• "Hey, what about silver? Silver used to be a monetary metal, in fact, the dollar was originally defined in terms of a specific weight of silver. In 1980 gold hit a high of 850 and silver hit a high of 50. Today gold is at 940 and silver sells for 16.75 an ounce. Silver seems behind gold and platinum, silver seems cheap." Richard Russell
• Silver may outshine gold, experts say. Metal has gained 40% in past five months.
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• More questions about the silver ETF. James Turk
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• There is no Silver Surplus. Jason Hommel
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• Silver in Surplus? Roland Watson
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• Silver and the General Stock Market. Roland Watson
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• James Cook interviews Ted Butler on the silver markets. Cook to Butler, will you summarize the bullish case for silver and why you think it should be purchased now? Butler: It's greatly undervalued compared to its supply and demand fundamentals. It's undervalued on a relative basis compared to everything else, including gold. There's a smaller amount available for investment than at any time in hundreds of years.
  
  It's under-owned, under-appreciated, misunderstood and overlooked by the investment world. It's about as far away from being in a bubble as it can be, yet is a prime candidate for becoming a future bubble. It has been pre-sold (shorted) to an extent never witnessed in any other item, which guarantees it must be purchased or delivered against at some point. Institutions can easily own it for the first time.
  
  It is vital for modern life. It can't go bankrupt or become worthless and can soar in price by many times its current price. It is easy to buy. All these statements can be verified easily and I can't think of one valid reason why it shouldn’t be bought.
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Interest Rates

• Fed Lowers Rate to 3% as U.S. Expansion Falters. The Federal Reserve lowered its benchmark interest rate by half a percentage point to 3 percent, the second cut in as many weeks, to prevent the U.S. economy from sinking into a recession.
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• Bernanke's Rate Cut, Outlook Align Fed With Investors. Federal Reserve Chairman Ben S. Bernanke and his critics in financial markets may finally be on the same page. The central bank reduced its benchmark interest rate by half a point to 3 percent yesterday, eight days after an emergency three-quarter point move, the fastest easing of monetary policy since 1990. The Fed left the door open to more cuts by saying in its statement that "downside risks to growth remain."
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U.S. Dollar

• How Bush Destroyed the Dollar.
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• The president of Venezuela, Hugo Chávez, urged his Latin American allies to begin withdrawing billions of dollars in international reserves from U.S. banks, warning of a looming U.S. economic crisis.
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• Dollar peg pushes Saudi inflation above official interest rates.
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Global Recession Coming? - George Soros On Recession - Robert Reich Warns Of Dark Days Ahead

• Greenspan Says Global Recession Is 'Inevitable' After 'Boom'. Former Federal Reserve Chairman Alan Greenspan said he's worried that an "inevitable" global recession will create a backlash that forces countries to retreat from worldwide markets. "Globalization has been extraordinarily valuable," Greenspan said in a speech in Vancouver sponsored by BMO Financial Group, also known as the Bank of Montreal.
  
  "I'm concerned that if we get into some form of global recession, which after this extraordinary boom is inevitable at some point, that there will be a very significant retrenchment in the opening up of markets." The Fed, led by Greenspan's successor Ben S. Bernanke, lowered the benchmark U.S. interest rate by three-quarters of a percentage point on Jan. 22 amid increasing signs of recession.
  
  President George W. Bush and congressional leaders today announced they've agreed on stimulus measures to revive the economy that may total as much as $150 billion. The odds of a U.S. recession "have definitely picked up," Greenspan said today. "The probability of a recession is 50 percent or more, but we're not there yet." Greenspan, 81, left the Fed in January 2006 after almost two decades at the helm.
  
  He then returned to his role as a private-sector economic forecaster, speaking at conferences and consulting for clients such as Deutsche Bank AG. Greenspan also said the U.S. housing slump may soon be over, benefiting the economy. "We may be close to the point where actual sales levels are starting to bottom,'' he said. The "sooner we get to stabilization'' of the housing sector, the better for the economy, he said.
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• IMF Cuts 2008 Global Growth Forecast to Weakest in Five Years.
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• Greenspan doubts Fed's ability to prevent recession.
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• Global Recession Risk Grows as U.S. 'Damage' Spreads.
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• Bankers at Davos See Slump, Firms Yet to Feel Effect.
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• Soros Says Lack of Credit Raises Recession Risk. Billionaire investor George Soros talked with Bloomberg's Michael McKee about the prospects for a U.S. recession as lenders and investors stop the flow of credit, the outlook for the global economy, Federal Reserve monetary policy and Soros's support for Barack Obama in the Democratic U.S. presidential primary contest.
  
  They spoke at the World Economic Forum in Davos, Switzerland. Soros is founder of New York-based hedge-fund firm Soros Fund Management LLC, which has $17 billion in assets.
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• Darker Days Ahead? Robert Reich warns a recession, or worse, could be coming.
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• The U.S. economy nearly stalled in the fourth quarter with a growth rate of just 0.6 percent, capping its worst year since 2002.
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• U.S. House Approves $146 Billion Economic Stimulus.
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Bond Insurer Trouble

• Bond Insurer Default May Cause 'Disaster,' Bank of America Says.
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• Bond Insurer Bailout Plan May Be 'Too Late,' CreditSights Says.
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• Bond insurers. Buddy, could you spare us $15 billion? Another shady realm of finance goes begging for a massive bail-out.
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U.S. Slides Into Dangerours 1930's Liquidity Trap

• The United States is sliding towards a dangerous 1930s style "liquidity trap" that cannot easily be stopped by drastic cuts in interest rates, Nobel economist Joseph Stiglitz has warned. Professor Stiglitz, former chair of the White House Council of Economic Advisers, said it takes far too long for monetary policy to work its magic. This will not gain much traction in the midst of a housing crash.
• "People have been drawing home equity out of the houses at a rate of $700bn or $800bn a year. It's been a huge boost to consumption, but that game is now up. House prices are going to continue falling, and lower rates won't stop that this point," he said.
• "As a Keynesian, I'd say the biggest bang for the buck in terms of immediate stimulus would be unemployment assistance and tax rebates for the poor. That will feed through quickly, but set against the magnitude of the problem, even a fiscal stimulus package of $150bn is not going to be enough," he said. "The distress is going to be very severe. Around 2m people have lost all their savings," he did.
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60 Minutes - House Of Cards: The Mortgage Mess

• "60 Minutes" Reports On How The Subprime Loan Crisis Is Shaking Markets Worldwide
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Real Estate

• 3 in 10 spend too much on shelter: Stats Can. Finding affordable housing was a problem for about three in 10 Canadians between 2002 and 2004, according to a study by the Canada Mortgage and Housing Corporation and Statistics Canada.
• The study, released Friday, said that during the three-year period 28 per cent of Canadians reported spending at some point more than 30 per cent of their household income on shelter. Thirty per cent is commonly held as the upper limit benchmark in shelter cost-to-income ratio.
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• Most U.S. middle-class still can't buy a house. Prices have fallen, but not by enough to make it possible for nurses, fireman or teachers to buy homes of their own says a new report.
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• Home Prices Fell in '07 for First Time in Decades.
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• U.S. Economy: New-Home Sales Drop to 12-Year Low.
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• What The Future Housing Market Could Look Like.
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• The Housing Market Continues To Correct.
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• The Higher The Price The Harder They Drop.
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• It's what The Market Is Doing.
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• Broke U.S. homeowners linked to arsons. Authorities in economically stressed U.S. cities see an increase in torched houses. Is the mortgage mess transforming more Americans into criminals?
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• Home ownership in record plunge. Fourth quarter saw biggest one-year drop in since tracking began in 1965 - as mortgage problems and rising foreclosures take their toll.
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Foreclosure - Subprime

• Foreclosures up 75% in 2007. Defaults are way up for the year, with once red-hot Sun-Belt markets reporting the worst losses.
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• Foreclosures spike and will get much worse. Defaults are on the rise according to a new report, and the trend could last for years.
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• The FBI is investigating 14 companies embroiled in the sub-prime mortgage crisis as part of a crackdown on improper lending.
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Iran - Ahmadinejad Tells West: Accept Israel's Imminent Collapse

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• Bush: "US will 'confront' Iran if necessary."
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The GoldBugg Report - Bullion is Back
Posted by Worldwide Precious Metals on Tuesday, February 05, 2008