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The GoldBugg Report - May 20, 2008

May 20, 2008

For 7 years buying gold in summer has been profitable, fast.

-"I see gold at a minimum of $1200 in 2008."  Jim Sinclair

-Société Générale said in a recent report that the price of silver will average $20.25 an ounce in the second quarter. That would be quite a rally.  Kitco Daily Resource

-John Embry: Last chance to board gold train at under US$1,000. In his new commentary for Investor's Digest of Canada, Sprott Asset Management's chief investment strategist, John Embry, takes some good cracks at the International Monetary Fund and the precious metals consultancy GFMS Ltd. Embry's essay is headlined "Last Call to Board Gold Train at under US$1,000." Read more here-http://www.sprott.com/pdf/investorsdigest/digest.pdf

-For 7 years buying gold in summer has been profitable fast

Buying gold during the summer doldrums has been a winning trade for each of the last seven years, averaging a gain of nearly 13 percent in just six months or so.

http://www.gata.org/node/6314

GOLD

-$2,000 Gold in 2009 according to Peter Schiff.  Watch video here-http://news.goldseek.com/EuroCapital/1210530153.php

-Gold and silver will very likely at least reach their inflation adjusted highs of 1980 in the coming years at $2,300 per ounce and $150 per ounce. They will also likely reach inflation adjusted record highs in all major currencies. And those who have been wrong regarding the precious metals markets in recent years will continue to be wrong. This is unfortunate as it will cost many investors a lot of money through further misallocations of capital.

Even if their bearish pronunciations on precious metals were right, it would be more responsible of them to admit that nobody knows the future direction of any market or asset class and thus proper diversification is merited and risk aversion should be a prime consideration for investors. Thus, a 5% to 10% allocation to precious metals should be advised in order to hedge against increasing macroeconomic and systemic risk.  Gold.ie

-THE gold price can top $1,000/oz because of the US economy and supply/demand fundamentals, said Nick Holland, CEO of Gold Fields. "I'm bullish on the gold price I think it can certainly go over $1,000 an ounce. I'm really bullish," Holland said on Summit Business, a daily television broadcast.

"The US economy still needs to be corrected, and certainly there are going to be some changes there I think the dollar probably is the only that that economy can respond because clearly monetary policy is going the other way," he said. "The natural consequence is that there should be positive outcomes for gold," he said.

"The supply demand fundamentals in the sector are good for gold," he said. "I think gold price can easily go through $1,000 and the rand could certainly be at these levels, or maybe even slightly weaker going forward. So in rand terms we could be doing reasonably well in the quarters ahead," he said on the world's fourth-largest gold producer.  Miningmx.com

-Peter Spina, of GoldSeek.com, contends that, "There are too many bullish drivers in gold to keep it subdued over the short term." "The U.S. dollar has failed to sustain its rally off recent lows and with the gold-oil ratio now around the 7 level, the value gold presents during this inflationary environment has brought out the bargain hunters," Spina wrote. And he concluded that, "Gold looks ready to march back above the $900 level over the coming weeks with present conditions sustaining."  Kitco Daily Resource

-Despite recent dollar strength, "I am seeing [it] catch a new wave of selling, which [will] push gold higher," said Zachary Oxman, of Wisdom Financial. "I also think we can't discount the strong moves in crude and their staying power so far." Indeed, the oil Bull Run has persisted in the face of deteriorating fundamentals, and the longer it continues, the higher it will push inflation. Which, needless to say, is gold-positive.

The oil moon shot has another effect, as well. "Gold is undervalued," said Nick Ruggiero, a trader at Eagle Futures in New York, in that it "is cheaper to buy than crude right now."

Also, despite some early returns that were downbeat, the "Akshaya Tritiya celebration in India should see physical buying and provide background support," wrote James Moore, of TheBullionDesk.com. 

-Former Chairman of the Federal Reserve Warns Again. In contrast to more speculative players with short term horizons and the stock market permabulls, Former Chairman of the Federal Reserve, Paul Volcker, warned yesterday that the United States could face a 1970s-style period of skyrocketing inflation if investors lose confidence in the buying power of the U.S. dollar.

"We are back in the 70s or worse if confidence in the Federal Reserve is lost. If there is a real loss of confidence in the dollar, then I think we are in trouble. That is something that has to be watched," Volcker told the congressional Joint Economic Committee.  Gold.ie-Read more here-http://www.bloomberg.com/apps/news?pid=20601087&sid=a0gtQpItabH0&refer=home

-Poor Analysis of Gold Market

Some of what purports to be 'analysis' of the gold market remains highly selective, uninformed and biased. A recent report said that gold would fall to $700. Interestingly it failed to say whether this was just another sharp correction and healthy consolidation or rather an end of the bull market. The report purported to show that gold remains overvalued and said that the fact that gold is at near record low levels versus the price of oil ratio does not mean that gold is cheap relative to oil.

Bizarrely, the report selectively chose the 1982 to 2008 as their time frame of choosing. 'Lies, damn lies and statistics' comes to mind. How convenient to ignore the 1970s which is the last decade that gold and oil were in bull markets. Stagflation is already present in western economies and to completely ignore the last time period when western economies had high inflation and low growth the 1970s is shoddy at best and extremely biased at worst.

And seems like an attempt to use data in order to establish a pre ordained set of opinions. Rather than allowing the facts to help guide and establish opinions. Financial and economic history pre-1980 and the reality of stagflation remains taboo which is incredible given the current macroeconomic conditions. From a research point of view this is very much a case of "garbage in garbage out". The same report said that gold was primarily a play on dollar weakness. 

This is nonsense dollar weakness is a factor in gold's strength but gold has been surging in all currencies internationally (as seen in the gold charts here http://www.research.gold.org/prices/monthly/). We have a global financial and economic crisis and gold has surged in all major currencies particularly since the start of the crisis last summer.

To suggest that gold's strength is primarily due to dollar weakness is very misinformed and blinkered. How bizarre for any analysis to ignore unprecedented systemic risk as seen in the run on Northern Rock and the bankruptcy of Bear Stearns. A few of our clients who had their life savings in Northern Rock would have something to say about such analysis. Most of them are not concerned in the least regarding the dollar's weakness. Gold.ie

-Gold in a Bubble According to Those Who Never Predicted Gold's Rise in First Place.

Those who never correctly predicted oil at over $100 and gold at over $1,000 in the first place continue their mantra that oil and gold are overvalued and are in ‘bubbles'. They were absolutely wrong before and their opinions should not be given any more credence now. These same commentators have never understood the supply/demand fundamentals driving the commodity markets and continue to focus solely on the speculative element.

While there is indeed speculative elements in these markets as there are all markets, it is more than arguable that there is less speculation in the precious metals markets than in most markets. Gold is not in a bubble. It may be in a bubble when it reaches its non inflation adjusted high of some $2,400 per ounce in the coming years (depending on global macro fundamentals at this time) There is little or no hot fast money as was seen in the NASDAQ boom when mass participation and day trading was evident.

Or even in the property and ‘buy to let' mania of recent years. Gold remains the preserve of the risk conscious and the knowledgeable. It is slow monthly and quarterly money and allocations from individual investors, pension funds and institutions pushing up prices because they want a finite currency and hard asset and need diversification as many remain overweight equities (some dramatically so) and overexposed to property markets.

An important fact unacknowledged by the bears (one of many) is that of $1,000 of investable products across all financial markets in recent years a mere $3 was invested in commodities  and gold is a subset of that 0.3 % allocation to commodities. While this allocation is increasing significantly, it is doing so from a tiny, tiny base and thus remains a fringe investment at best. This is changing and will continue to do so especially given the risky macroeconomic and geopolitical outlook.  Gold.ie

-Greenspan says Oil to Continue Rising and Gold to Oil Ratio Says Gold is a Buy.

 Gold and oil are highly correlated over the medium to long term. But oil can often outperform gold in the short term prior to gold catching up when higher oil prices lead to inflation hedging buying of gold.

The long term average gold to oil ratio is 15 to 1 or 15 barrels of oil to one ounce of gold. Today, the ratio is near record lows at 6.8 ($865/ $127 = 6.8). Oil is at over $125 per barrel and so if we multiply it by 15 we get a gold price of $1,875. At the higher end of the scale gold has traded at over 30 times a barrel of oil which based on today's oil price would result in a gold price of $3,750.

Thus based on today's oil price of $125, the gold/oil ratio would suggest that gold is very undervalued at a near historic low of 6.8. The ratio will revert to the mean in the coming weeks and months and will thus see gold reaching its inflation adjusted high of some $2,400 per ounce in the coming years. Gold has experienced a healthy correction and it is a strong buy at these levels.

Incidentally, Alan Greenspan said overnight in Asia that he believed oil prices would continue to rise over the medium to long term. Greenspan also said the U.S. house prices still have a long way to fall and the U.S. would experience a long recession more factors likely to lead to prudent safe haven buying of gold.  Gold.ie

-Lull in Gold Price Shouldn't Deter Bullion Buyers.Read more here-http://www.dailyreckoning.com.au/gold-price-bullion/2008/05/13/

-After battling illness, market analyst Peter Grandich is writing his letter again and in the issue published this week he reflects on precious metals. It's headlined "Did the Party End before It Ever Got Started?" Read more here-http://www.grandich.com/docs/alert_05-14-08.pdf

-Gold and Oil Price Limits. What might diminish the universal desire to possess wealth in the form of gold? To that question I can fathom no answer, except the drastic ones earlier suggested. In the context of these deliberations, $2,000 gold is an easy call.  Read more here-http://www.midasletter.com/commentary/080514_Gold-and-Oil-Price-Limits.php

-SAfrica's March gold output falls 10.9 pct yr/yr.  Read more here-http://www.reuters.com/article/rbssIndustryMaterialsUtilitiesNews/idUSL1390672020080513

-Gold the "green metal for the twentieth century". Among the players in the gold market, perhaps central banks are not as important as we have thought and the gold standard is nothing new.  Read more here-http://www.mineweb.com/mineweb/view/mineweb/en/page33?oid=52876&sn=Detail

SILVER

-Why Wall Street Hates Gold and Silver by Howard Ruff. There is no best-case or worst-case scenario in which I can conceive of gold and silver being losers. You can mortgage the kids and bet the farm! We can keep the odds decisively on our side!  Read full story here-http://www.kitco.com/ind/Ruff/ruff_may092008.html

-Why the ‘Bull' Market in gold and silver is far From Over.  Read more here-http://news.goldseek.com/GoldForecaster/1210352400.php

-Gold/Silver Market Updates from Clive Maund. Gold's corrective phase is believed to be complete, meaning that it is now in position to begin another major uptrend. In the last update, which was about 5 weeks ago, we were looking for it to continue to react back to support in the $830-$850 area above its 200-day moving average, and that is exactly what it has done.

Silver's corrective phase is believed to be complete, meaning that it is now in position to begin another major uptrend. In the last update, which was about 5 weeks ago, it was pointed out that silver was noticeably outperforming gold, and that this implied that if gold went on to drop to our target zone for its correction in the $830-$850 area, silver might not react much further if at all, and this, as we now know, is exactly what has happened, for it has only dropped marginally below its late March lows, and has not broken below the zone of support that put a floor under it at that time this is a sign of resilience.

The severely overbought condition that had existed in March has more than completely unwound, as silver is now significantly oversold in the context of its larger uptrend, meaning that upside potential has been fully restored. In short the conditions are now ripe for a powerful uptrend to commence.  Read more and see gold and silver charts here-http://www.321gold.com/editorials/maund/maund051208.html

-Gold and Silver, The Fuse is Lit! The fact of the matter is that gold and silver are becoming more of a bargain on a daily basis.  The reason is very simple:  Every day, the central bank money spigots are spewing out at least ten times as much money, as miners are able to produce gold and silver!

Until this situation is reversed, the fundamentals will support higher prices.  Pull-backs or corrections usually swing too far in the opposite direction to the main trend, thereby providing opportunities for us to ‘buy the bargains'.  This is the situation today. 

For some examples of price increases:

Platinum has gone from 400.00 to 2,000.00, an increase of 400% 

Copper from 0.75 to 4.00, an increase of 470%

Lead from 0.20c to 1.20, an increase of 500%

Uranium from 0.63 to 63.00, an increase of 530%

Crude oil from 12.00 to 124.00, an increase of 900%

Molybdenum from 2.50 to 32.50, an increase of 1300%

Rhodium from 400.00 to 9,400.00, an increase of 2200%

Many of these commodities are trading at all-time high prices! By comparison, gold has crawled, from 260.00 to 880.00, for an increase of 338%.  Gold is currently trading at 1/3rd of its inflation adjusted previous high price. Silver from 4.00-18.00 has increased by 350%. Silver is currently trading at 1/8th of its inflation adjusted previous high price. 

That's right, silver has to increase by a factor of 8 times to reach 135.00, which is its 1980 price, when adjusted for inflation.  And that's if you use the official CPI numbers.  By using actual inflation data, the number is even higher. Gold and silver are still bargains!  Read full story here-http://news.goldseek.com/GoldSeek/1210313220.php

-Production of silver in the world.  Read more here-http://www.gold-eagle.com/editorials_08/thomes051308.html

-CFTC study denies manipulation in silver market.  Read more here-http://www.gata.org/node/6301

-Four Proofs of Silver Manipulation!  Read more here-http://news.silverseek.com/GoldIsMoney/1210798485.php

-Ted Butler silver commentary.  Read more here-http://www.investmentrarities.com/05-13-08.html

OIL - GASOLINE

-Senate approves to halt oil reserve shipments. Bush Read more here-http://money.cnn.com/2008/05/13/markets/congress_strategic_oil_reserve.ap/index.htm?postversion=2008051312

-JPMorgan Chase & Co will begin trading physical oil by year-end, increasing its exposure in a market that could rise to $200 a barrel, the bank's global head of commodities said this week.  Read more here-http://www.gata.org/node/6303

-Iran reviews proposal to cut oil output.  Read more here-http://www.reuters.com/article/idUSDAH32437320080513

-Gas prices are not priority for refineries. Stockpiles of oil and gas are less than expected, according to a government report released Wednesday. Refineries are focused on making diesel fuel.  Read more here-http://money.cnn.com/2008/05/14/markets/oil_eia/index.htm

-Is ExxonMobil's future running dry?  Read more here-http://articles.moneycentral.msn.com/Investing/JubaksJournal/IsExxonMobilsFutureRunningDry.aspx

-Surging gas prices could force frugal travellers to stay close to home. Read more here-http://www.cbc.ca/consumer/story/2008/05/13/fuel-vacations.html

COMMODITIES

-China growth to keep commodity boom alive. Citing data from McKinsey & Co, Feldman an estimated 350 million people will be added to China's urban population by the year 2025, more than the population of the United States.

To handle that type of growth, more than 5 billion square meters (54 billion sq. ft.) of paved roads would be needed; 170 mass transit systems constructed; and 40 billion square meters of floor space built in 5 million buildings, of which 50,000 could be skyscrapers the equivalent of up to 10 New Yorks.  Read more here-

http://www.reuters.com/article/managerViews/idUSNOA32475920080513

-China's retail sales climbed at the fastest pace since at least 1999, signaling that domestic consumption may help to buffer the world's fourth-biggest economy against an export slowdown.  Read more here-http://www.bloomberg.com/apps/news?pid=20601013&sid=ahVyjXj8Qops&refer=emergingmarkets

-IMF worries that commodities may not be a bubble. IMF Warns on Global Inflation. Global inflation has re-emerged as a major threat to the world economy, the International Monetary Fund said on Thursday in a stark warning that marked an abrupt change of tone from its emphasis on the risks to growth.  Read more here-http://www.gata.org/node/6285

INTEREST RATES

-King Signals BOE May Be Almost Done Cutting Rates. Read more here-http://www.bloomberg.com/apps/news?pid=20601087&sid=amGaSieyehTM&refer=home

-Libor Poised for Shake-Up as Credibility Is Doubted. Read more here-http://www.bloomberg.com/apps/news?pid=20601109&sid=aQsGCW_LYOfc&refer=home

U.S. DOLLAR

-The dollar's short-lived comeback. The greenback has rebounded nicely from lows hit in April. But some currency experts don't expect it to last.  Read more here-http://money.cnn.com/2008/05/15/markets/dollar/index.htm?postversion=2008051517

-An Update on the Dollar. Have I overstated the bearish case for the dollar in recent alerts? I don't think so. Am I still looking for a crisis in the dollar by this summer? Yes, but we need a new low in the US Dollar Index to confirm that its short-term downtrend remains intact. This new low will re-confirm the bearish outlook for the dollar. The following chart of the Dollar Index shows just how badly the dollar has been doing.

Since reaching a peak in 2000, the Dollar Index has had only one major rally. From December 2004 to November 2005, the Dollar Index climbed 14.7%. This lone rally stands in stark contrast to the numerous double-digit jumps in the late 1980s and early 1990s, which is an important point. This difference to the earlier period signals a profound underlying weakness in the dollar.

There have of course been bounces along the way over the past eight years, but these typically are just a few percent. They recur periodically as the Dollar Index becomes oversold. We are in one of those moments. The Dollar Index has bounced as high as 3.1% from its record low last month, but is now only 2.4% above that low. In other words, it looks like the Dollar Index has started to slip again, which is to be expected.

After all, no one in Washington is doing anything to improve the prospects for the dollar. There has been a lot of talk about the so-called "strong dollar" policy, but nothing is being done to bring it about. The dollar is in a major bear market, and is losing purchasing power day after day because of debasement and inflation. Continue to avoid it. Hold gold and/or silver instead, which remain in clear uptrends.  James Turk

-The Dollar: Shrinkable but (So Far) Unsinkable. Read more here-http://www.nytimes.com/2008/05/11/weekinreview/11goodman.html?_r=2&oref=slogin&oref=login

-Financial Times admits currency market intervention via its own pages and invites more.  Read more here-http://www.gata.org/node/6287

LIQUIDITY-CREDIT CRISIS

-Rubenstein Says `Enormous' Bank Losses Unrecognized. Read more here-

http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aozdYkg4RG3A

-HSBC write-downs 'should be $50bn'. Read more here-http://business.timesonline.co.uk/tol/business/industry_sectors/banking_and_finance/article3915584.ece

-Jim Rogers Says Financial Crisis Hasn't Hit Its Worst. Read more here-http://www.bloomberg.com/apps/news?pid=20601213&sid=akM1XZiRxLls&refer=home

-Soros: Global investing's godfather. George Soros retired as a multibillionaire. But now he's back, hedging his wealth against what he calls the worst economic crisis in 75 years.  Read more here-http://money.cnn.com/2008/05/12/pf/soros_interview.moneymag/index.htm

-Federal Reserve Chairman Ben S. Bernanke said financial markets remain unsettled and the central bank will increase its auctions of cash to banks as needed. While markets have improved, they remain ``far from normal,'' Bernanke said today in the text of a speech to an Atlanta Fed conference at Sea Island, Georgia. ``We stand ready to increase the size of the auctions if further warranted by financial developments.''  Read more here-http://www.bloomberg.com/apps/news?pid=20601068&sid=awr794TeWrew&refer=home

-Fed's Direct Loans to Banks Climb to Record Level. Read more here-http://www.bloomberg.com/apps/news?pid=20601087&sid=aur2QcWbKf2U&refer=home

GEOPOLITICAL

-In his first address to Israel's parliament Thursday, President Bush reiterated the United States' "unbreakable" alliance with the Jewish state and denounced calls to negotiate with "terrorists and radicals." In a speech before the Knesset, Bush compared calls to talk with unnamed terrorist groups as a "foolish delusion" that was suggested before World War II.

"As Nazi tanks crossed into Poland in 1939, an American senator declared, 'Lord, if only I could have talked to Hitler, all of this might have been avoided,' " Bush said."We have an obligation to call this what it is the false comfort of appeasement, which has been repeatedly discredited by history."  Read more here

http://www.cnn.com/2008/POLITICS/05/15/bush.mideast/index.html

-Ahmadinejad: Israel to be 'swept away soon'. Iranian President Mahmoud Ahmadinejad said Tuesday that Israel would "be soon swept away" from the Palestinian Territories by the Palestinians. It is the second time within less than three years that the Iranian president predicted the eradication of the Jewish state. The first time was in 2005 when Ahmadinejad hoped that Israel would be eradicated from the Middle East map.

"This terrorist and criminal state is backed by foreign powers, but this regime would soon be swept away by the Palestinians," Ahmadinejad said in a press conference in Tehran.

Referring to worldwide celebrations for the 60th anniversary of Israel's foundation, he said that "it would be futile to hold a birthday ceremony for something which is already dead."

"As far as the regional countries are concerned, this regime does not exist," Ahmadinejad added. The Iranian president said last week that the anniversary feasts could not save this "rotten and stinking corpse." Ahmadinejad caused international outrage in the past by hoping for the eradication of Israel, the relocation of the Jewish state to Europe or Alaska and questioning the historic dimensions of the Holocaust.  Earthtimes.org 

-Letting Iran have nuclear arms "unforgivable": Bush.  Read more here-http://news.yahoo.com/s/nm/20080515/ts_nm/iran_bush_speech_dc&printer=1;_ylt=AoCRTvS5fuHR6pgi0mGbJ_Zg.3QA

-Congress to Saudis: Give Us Oil or No Guns. A group of Democratic senators wants to make a massive arms sale to Saudi Arabia contingent on getting cheaper oil, reports AFP. "We are saying to the Saudis that, if you don't help us, why should we be helping you?" says Chuck Schumer, a Democratic senator from New York.

"We are saying that we need real relief, and we need it quickly. You need our arms, but we need you to cooperate and not strangle American consumers."  Read more here-

http://blog.wired.com/defense/2008/05/congress-to-sau.html

-Chavez to Order $2 Billion of Russian Arms, Kommersant Reports. Venezuelan President Hugo Chavez will order $2 billion of Russian weapons, including submarines, during a visit to Moscow this month, Kommersant reported, without saying where it got the information. Venezuela, which has bought $4 billion of Russian arms in the last three years, will order four Project 636 diesel subs, Mi-28 combat helicopters and airplanes made by Ilyushin Co., Kommersant said.  Bloomberg.com

-China Says Quake Toll May Top 50,000 as Troops Boost Rescue Bid.  Read more here-http://www.bloomberg.com/apps/news?pid=20601087&sid=a_lnIgZvtQpQ&refer=home

© 2008, Worldwide Precious Metals.
www.wwpmc.com

The GoldBugg Report - May 20, 2008
Posted by Worldwide Precious Metals on Tuesday, May 20, 2008