Tuesday, September 21, 2010

Gold at new high as recovery fears resurface

From the UK Telegraph: Gold prices rose to a record high at $1,283.25 an ounce on Monday as worries about the health of the global economy and more quantitative easing in the United States boosted the metal's safe haven appeal.

"There definitely seems to be an upward momentum," said James Moore, analyst at TheBullionDesk.com. "There is technical buying out there and $1,300 still seems to be the target everyone is looking for.

"The debt jitters in Europe seem to be back on the agenda. We've seen a few disappointing releases of data, particularly from the US and again the double-dip scenario has been back in people's minds."

Weak data out of the US on Friday helped push gold to a new all-time high at $1,282.75 an ounce. Underlying US inflation pressures were muted in August and consumer morale hit a 13-month low this month, keeping alive fears of deflation and spurring bets on further monetary easing.

On a thin economic calendar, investors await housing data from the United States for further direction as the session progresses.

The US Federal Reserve was not expected to make any new monetary policy moves on Tuesday, but the post-meeting statement will be closely parsed for signals on the debate about whether further large-scale asset purchases are needed to support the sluggish recovery.

"Rumours that the Fed may be looking to put some more money into the system to stimulate the economy ... obviously that has some inflationary impact further down the line," said Mr Moore.

"The Fed is going to be the key event and looking to the strength and tone of the statement."

Revalue gold at $5,000 - Jim Richards interviewed

China resorts to blackouts in pursuit of energy efficiency

Reading the following story one has to wonder when, like South Africa, this will impact on China's mining industry. With China being the world's largest gold producer and a major player in the smelting of metals will this in time affect the supply side of gold and silver?

From the UK Gaurdian:

No TV. No internet. No air conditioning. Traffic lights off. Hospitals deprived of electricity. Tens of thousands of household fridges and freezers without power. Milk curdling. Vegetables rotting. The risks of delaying energy-saving measures have been all too apparent in a Chinese region where the authorities initiated draconian rationing last month to achieve the state's efficiency targets.

Anping County, in Hebei Province, cut electricity to homes, factories and public buildings for 22 hours every three days in a radical move that has highlighted both the serious last-minute effort that China is making to achieve environmental goals and the immense long-term difficulty of shifting away from a dirty, wasteful model of economic growth.

There are less than four months left until the end of China's current five-year plan, during which the economy is supposed to have become 20% more energy efficient. That target (which measures energy use relative to GDP growth) is crucial for a nation that wants to move up the economic value chain and prove to the world that it is making a significant contribution toward tackling greenhouse gas emissions......read on

Iran on verge of potential US-led war?

A top Iranian commander has warned of a potential US-led war against Iran in the near future, insisting on enduring readiness of Iran's defense forces to repel any attack.

Speaking at the fifth conference on the study of Iran's 'sacred defense' files, Deputy Commander of Iran's Armed Forces of the Islamic Revolution's Guards Corps (IRGC) Major General Gholamali Rashid said that under "current threatening conditions" when the US and Israel are "daily beating on their war drums," it would not be an exaggeration to say that we are on the verge of a potential war in the [near] future.”

Gen. Rashid's remarks came following his description of threats made by the US and Israel against countries of the region after the "suspicious September 11 incident.”.......read on

Nouriel Roubini and the Dreaded Double Dip

You Can't Keep Promises by Printing More Dollars!

By Peter Souleles B. Com. LLB., Sydney:

Forget what you hear and read in the press about a gold bubble. I can virtually guarantee that there will never be a bubble in gold for seven simple reasons:

  1. Buyers of gold rarely borrow to buy gold and hence cannot create the same fallout that over-indebted real estate is suffering from. Buyers of gold are gradually realising that gold is an inter-generational wealth asset that defies the quirks of politics, economics and human stupidity.
  2. The number of gold investors and their average investment is miniscule compared to the number of real estate and share market investors and the investments that they make. Moreover, gold is valued by everyone.
  3. The galloping deficits, the accumulated debt of the government and its unfunded liabilities cannot be reined in due to the fact that the compounding interest and demographic decline will outrun any meagre improvements in economic conditions. The bottom line is that the government will not be able to keep its promises no matter how many dollars it prints.
  4. The only collateral the government is left with is the printing press, as it is highly unlikely to either slash its spending or markedly increase taxes. The intrinsic value of dollars as a store of value (either as dollars or Treasuries) is therefore NIL NIL NIL in the longer term.
  5. Interest rates will remain at depressed levels to avoid a housing implosion. If a rate rise triggers an implosion, gold will still hold its relative worth, manoeuvrability and international appeal better than most assets.
  6. Then there is always the possibility that manipulation of the gold market either through one of the exchanges or the various ETF's might be proven and uncovered beyond dispute.
  7. Finally, if gold is in a bubble why do the Russians (publicly) and the Chinese (furtively) keep accumulating it?

The above arguments more or less hold true for silver investors as well.

On the other side of the gold owners are the "living dead". I hear you asking, "WHO, are they?".....read on

Why $2,500 Gold could result in $175 Silver

By Lorimer Wilson: More than 95 respected economists, academics, analysts and market commentators are of the firm opinion that gold will go to $2,500 and beyond before the parabolic peak is reached. In fact, the majority (55) think a price of $5,000 or more - even as high as $15,000 - is actually more likely! As such, just imagine what is in store for silver given its historical price relationship with gold!

Precious metal bull markets have three distinct demand-driven stages and we are now quickly approaching or perhaps even in the very early part of the last stage which occurs when the general public around the world starts investing in gold and this deluge of capital into gold causes it to escalate dramatically (i.e. go parabolic) in price.

Gold went up 24% in 2009 and is up 16% YTD and, as such, there are no shortage of prognosticators who see gold going parabolic reminiscent of 1979 when gold rose 289.3% in the course of just over a year (from a $216.55 closing price on Jan. 1, 1979 to a closing price of $843 per ounce barely a year later on Jan. 21, 1980) and 128% higher in a late-1979 parabolic blow-off of just under 11 weeks! A 289% increase in the price of gold from $1275 would put gold at $4,960. (More on what that might mean for the future price of silver is analyzed below.) That being the case what appear on the surface to be rather outlandish projections of what the bull market in gold will top out at don't seem quite so far-fetched. (For a complete list of the economists, academics, market analysts and financial commentators who maintain that gold will go parabolic to $2,500 -$15,000 in the near future please see: http://www.munknee.com/2010/09/5000-gold-bandwagon-now-includes-these-55-analysts-got-gold/

Silver has proven itself, time and again, to be a safe haven for investors during times of economic uncertainty and, as such, with the current economy in difficulty the silver market has become a flight to quality investment vehicle along with gold. The 49% increase in silver in 2009 (and 23% YTD) attests to that in spades. During the last parabolic phase for silver in 1979/80 it went from a low of $5.94 on January 2nd, 1979 to a close of $49.45 in early January, 1980 which represented an increase of 732.5% in just over one year. Such a percentage increase from the current price of almost $21 would represent a future parabolic top price of $175. (For what that might mean for the future price of gold see the analysis below.) Frankly, such prices seem impossible in practical terms but that is what the numbers tell us.

Gold:Silver Ratio
The current gold:silver ratio has been range-bound between 70:1 and 60:1 for quite some time which is way out of whack with the historical relationship between the two precious metals. It begs the question: "Is now the perfect time to buy silver instead of the much more expensive gold metal?"

How both gold and silver perform, in and of themselves, does not tell the complete picture by a long shot, however. More important is the price relationship - the correlation - of one to the other over time which is called the gold:silver ratio. Based on silver's historical correlation r-square with gold of approximately 90 - 95% silver's daily trading action almost always mirrors, and usually amplifies, underlying moves in gold. With significant increases in the price of gold expected over the next few years even greater increases are anticipated in silver's price movement in the months and years to come because silver is currently seriously undervalued relative to gold as the following historical relationships attest.

Let's look at the gold:silver ratio from several different perspectives:
- Over the past 125 years the mean gold:silver ratio (i.e. 50% above and 50% below) has been 45.69 ounces of silver to 1 ounce of gold. - In the last 25 years (since 1985) the mean gold:silver ratio has increased to 45.69:1 - The present gold:silver ratio has been range-bound between 60:1 and 70:1 (61.3:1 as of September 17/10). - Interestingly, during the build-up to the parabolic blow-off in 1979/80 silver outpaced gold going up 732.5% vs. gold's 289.3% causing the ratio to drop from 38:1 in January 1979 to 13.99:1 at the parabolic peak for both metals in January,1980.

Let's now look at the various price levels for gold and the various silver:gold ratios mentioned above one by one and see what conclusions we can draw.

First let's use the Sept. 17, 2010 price of $1276.50 for gold and apply the various gold:silver ratios mentioned above and see what they do for the potential % increase in, and price of, silver.

Gold @ $1276.50 using the current 61.3:1 gold:silver ratio puts silver at $20.82 (Sept. 17/10)
Gold @ $1276.50 using the above 45.69:1 gold:silver ratio puts silver at $27.94 (i.e. +34.2%)
Gold @ $1276.50 using the above 13.99:1 gold:silver ratio puts silver at $91.24 (i.e. +338.2%)

Now let's apply the projected potential parabolic peaks of $2,500, $5,000 and $10,000 to the various gold:silver ratios and see what they suggest is the parabolic top for silver.

@ $2,500 Gold
Gold @ $2,500 using the gold:silver ratio of 61:1 puts silver at $41
Gold @ $2,500 using the gold:silver ratio of 45:1 puts silver at $55.50
Gold @ $2,500 using the gold:silver ratio of 14:1 puts silver at $178.50

Before we go any further the above analyses bears closer scrutiny. In paragraph four above it was noted that "During the last parabolic phase for silver in 1979/80 it went from a low of $5.94 on January 2nd, 1979 to a close of $49.45 in early January, 1980 which represented an increase of 732.5% in just over one year." Such a percentage increase from the current price of almost $21 would represent a future parabolic top price of $175.

It is interesting to note that the above $175 is almost identical to the $178.50 that would result from a reversion to the mean in the gold:silver ratio with gold at $2,500. For the gold bugs who believe that gold is going to go even higher it can only mean a very much higher price for silver as the analyses below suggest.

@ $5,000 Gold
Gold @ $5,000 using the gold:silver ratio of 61.1 puts silver at $82
Gold @ $5,000 using the gold:silver ratio of 45:1 puts silver at $111
Gold @ $5,000 using the gold:silver ratio of 14:1 puts silver at $357

@ $10,000 Gold
Gold @ $10,000 using the gold:silver ratio of 61:1 puts silver at $164
Gold @ $10,000 using the gold:silver ratio of 45:1 puts silver at $222
Gold @ $10,000 using the gold:silver ratio of 14:1 puts silver at $714!!

From the above it seems that, any way we look at it, physical silver is currently undervalued compared to gold bullion and is in position to generate substantially greater returns than investing in gold bullion.

History will look back at the artificially high gold:silver ratio of the past century as an anomaly, caused by the dollar bubble and the world being deceived into believing that fiat currencies are real money, when in fact they are all an illusion. This fiat currency experiment will end badly in a currency crisis and when that happens, as it surely will, gold will go parabolic and silver along with it but even more so as the gold:silver ratio adjusts itself to a more historical correlation. The wealthiest people in the future will be those who put 10% to 15% (or perhaps more - much more!) of their portfolio dollars into physical silver today and were smart enough to research and pick the best silver mining/royalty stocks and warrants to maximize their returns.

Indeed, while gold's meteoric rise still has room to run, silver's run is yet to get started. As such, it certainly appears evident that now is the time to buy all things silver.