The Goldwatcher

Gold Miners Outperform:

A report in today’s Mineweb notes the recent outperformance by gold mining shares:

‘The past 12-month performance of 947 listed resources stocks around the world shows unequivocally that gold and silver stocks not only dominate relative outperformance within the broader resources sector, but that these stocks also qualify to rank as the top outperformers across all equity sub sectors.’

Mineweb include a table with some detailed analysis of performance in the resource sector. Gold mining heads the list:

THE SPDR GOLD  ETF ALSO OUTPERFORMED:

Ranked as the next best performers in the analysis published by Mineweb are Gold Exchange Traded Funds (ETFs). See The Goldwatcher pages 33-39 and 199.  These ETFs  are structured to hold physical metal on behalf of investors but are not trading entities. The  SPDR Gold Shares ETF, with assets exceeding $30 billion,  is now the second largest ETF  in the world. The largest is  State Street’s SPDR S&P 500 ETF. 

A word of caution:

Returns on mining equities over a year will depend on the prices paid on the dates when they were bought. Raw statistics can  mislead. Share prices of even the best gold mining and other companies are volatile.  An example of recent gold mining share volatility  is reflected in the following one year price chart for blue chip gold miner Newmont:

Chart Wall Street Journal

CNBC’S interview with Frank Holmes, Goldwatcher co-author yesterday: 

Following dramatic rises in the gold price yesterday - and even more dramatic falls  in equity and commodity markets world wide -  CNBC interviewed Goldwatcher co-author Frank Holmes,  one of the world’s most authoritative and respected voices on gold.  

The CNBC interview covers key issues investors must keep in mind and is supported by comments from CNBC analysts. Frank Holmes’s headline advice is straightforward  ’Don’t buy gold to get rich - buy gold for protection.’

 You can  Access the CNBC interview through this link.

The Goldwatcher and this blog contributed by co-author John Katz:

My content in the Goldwatcher is unbiased. I am an independent analyst and neither a gold bull or bear. In a nutshell my contributions point to when owning gold makes sense and when it doesn’t and when gold prices make sense and when they don’t. The Chapters I contribute address the questions investors interested in gold must ask,  starting with their motivation, timing and strategy for making and managing their investments.  

The most recent update on gold price prospects in this blog was posted on 22nd January

The Goldwatcher book and the blog address the issues of the day affecting demand for gold,  other currencies and other assets. They include subjects ranging from  the wars in Iraq and Afghanistan to our once rock solid British Banks now going bust.

The Goldwatcher Book Chapters follow this sequence

 Foreward by Dr. Marc Faber - starting with this comment:

‘Years from now, the events of late 2007 and early 2008 will be remembered as a classic case of the flawed thinking by Governments that choose to use monetary policy to try and sustain an unsustainable economic bubble, and how that action broadens and deepens the pain when the bubble inevitably busts.’

Part 1 : Written byJohn Katz  ‘The Goldwatcher’ in this blog -  e-mail address : john@thegoldwatcher.com

1:  Introduction : Why Gold?

2: The Gold Mining Industry : What price gives producers a worthwhile profit?

3: Gold Supply and Demand : Do Central Banks still need gold, and does gold still need Central Banks?

4: The Rise and Fall of the Gold Standard : Did Gold Cause the Great Depression?

5: The Dollar Standard and the ‘Deficit without Tears’ : Is the dollar again America’s currency and everyone else’s problem?

6: The Economic Consequences of 9/11 and George W. Bush : For how long will Asians go on lending for Americans to go on spending?

7: The End of Cheap Oil, Chindia and other Tipping Points to Instability 

 Will alternative energy come to the rescue?

(The causes and evolution  of the present economic crisis including the housing boom and bust, the CDO racket, Alan Greenspan’s misguided views on regulation  etc are all covered in the above Chapter)

8: Globalisation and Global Economic Rebalancing

Can the IMF avoid global financial meltdown?

9: Gold Prices : Inflation,Deflation, Booms and Busts

Do trees grow to heaven?

10: Investing Choices . What Gold?

Part Two : Written by Frank Holmes:

11: Inside US Global Investors

12: Investing in Gold Equities

13: Gold Mining Opportunities and Threats.

PART THREE : THE FACT BOOK APPENDIX - includes detailed analysis of global gold mining production, fabrication, scrap recovery and central bank holdings, sales and intended sales;  a Chart Book, Chronology and Webliography.

The Goldwatcher is available from Amazon and all leading booksellers

 Troops massing on India Pakistan border:

The Ever Present Chaos of Being:

… every single event is the offspring not of one, but of all other events prior or contemporaneous, and will in its turn combine with all others to give birth to new: it is an ever-living, ever-working Chaos of Being, wherein shape after shape bodies itself forth from innumerable elements…Thomas Carlyle . 1795 to 1881 .  Essay on History

Carlyle’s often quoted essay addresses the ever present potential for chaos.But do any of us, other than Zimbabwians and others in similar unfortunate circumstances,  remember economic and geo-political times as near the threshold of chaos as we are now?  Yet we see almost everyday headlines on chaos in currency markets, insolvent banks and shadow banking establishments,  burst property and other financial bubbles,  fraudulent securities bankrupting organisations, soaring unemployment ravaging commuinities ,  unsustainable debt leverage,  the collapse of major industries, fragile energy stability,  reversion to pre cold war conflicts, nuclear proliferation and even a resurgance of piracy. 

A Bloomberg comment noted yesterday that typically  ’gold staged a strong rally (rising to $870)  following Palestinian militants launching their biggest rocket attack on southern Israel in at least six months after a truce expired Dec. 19,  at the same time as  Pakistani troops were being diverted from tribal areas near Afghanistan to the border with India.’

Roosevelt and Obama: 

With the Great Depression ravaging  the US and other economies President Franklin D Roosevelt faced a dire economic picture when he took office on 3rd March 1933 . In his inaugural address he spoke of dark realities- with ’the withered leaved of enterprise everywhere,’ industrial production slumping, banks failing, unemployed citizens facing the grim prospect of existence. ‘Only a foolish optimist,’ he declared ‘would ‘ deny the dark realities of the moment.’

Pages 62-66 of The Goldwatcher address Roosevelt’s key  2003/4 messages. These pages are, in my opinion, essential reading for everyone - except, of course, ‘foolish optimists!’ But it is debatable whether Roosevelt’s memorable assurance ‘we have nothing to fear but fear itself” is as true now as it was in 1933.

 The Goldwatcher’s Year end message:

The Goldwatcher shares the high hopes held for US President elect Obama’s success and anticipated the  formidable challenges he faces. They include global banking and shadow banking establishments in crisis, unprecedented debt leverage,  nuclear proliferation in unstable countries, failed military enterprises and unfunded social insurance obligations way beyond anything that menaced Roosevelt when he took office. 

GOOD LUCK FOR 2009 AND BEYOND - AND PLEASE RE-READ THE GOLDWATCHER PAGES 8 & 9

Gold is the UNIVERSAL aid to ‘having nothing to fear but fear itself’.' The one and only stateless money franchise that assures protection against chaos in currency and financial markets, social disorder and a range of the other financial and security risks we are exposed to.

Martin Wolf tracks the course to inflation:

Starting with a cartoon of Ben Bernanke piloting the money drop helicopter, similar to the cartoon you will see all over this blog, and commenting on the cut in the Fed’s target interest rate yesterday down to between 0% to 0.25%, the Financial Times’s authoritative Martin Wolf has this to say:

‘Central banks may soon resort to their most powerful weapons against deflation: the printing press and the “helicopter drop” of money. It is a time for which Ben Bernanke, chairman of the Federal Reserve, has long prepared. Will this weaponry work? Unquestionably, yes: used ruthlessly, it will eliminate deflation. But returning to normality thereafter will prove far more elusive….  .

A leaf out of Mr. Mugabe’s book: (see The Goldwatcher blog on The New Bretton Woodsand Dr. Marc Faber’s forward to The Goldwatcher.)

Martin Wolf’s comment continues: ‘As Robert Mugabe has shown, anybody can run a printing press successfully. Once the interest rate hits zero, the Fed can perform much further easing. Indeed, it can create money without limit…. Curing deflation is child’s play in a “fiat money” – a man-made money – system….Similar dangers now arise with the drastic measures that look ever more likely. This time, I suspect, the result will ultimately not be deflation but unexpectedly high inflation, though probably many years hence.

The Goldwatcher book and blog:

A reader interested in tracking the flight path of Helicopter Ben will find several references by searching for Bernanke on this blog. For a better understanding of the similarities between the conditions President elect Bernanke is facing and the conditions Franklin D. Roosevelt faced, and why the course embraces inflation, read The Goldwatcher:

Chapter 4 : The Rise and Fall of the Gold Standard : Did gold cause the Great Depression? 

Chapter 5: The Dollar Standard & the Deficit Without Tears : ‘Is the dollar again America’s currency and everyone else’s problem?’

Chapter 6: The Economic Consequences of 9/11 and George W. Bush : For how long will Asians go on lending for Americans to go on spending?

The Goldwatcher’s ideas on gold prices - and the dollar:

Chapter 9 : Gold Prices : Inflation, Deflation, Booms and Busts: Do Trees grow to Heaven?  And the Goldwatcher 15th December posting on Mattress Stuffers: The case for mattress stuffing never looked better -  particularly as the $ surge could be coming to an end.

Why gold will remain strong:

After the outcome of the proposed bail out of  Chrysler, General Motors and Ford - the CGF Group - the desperate automakers who CAN’T GET FINANCED - it will take a few days to draw the threads together for a year end Goldwatcher  conclusion. Indications are they may get some relief.  For now - back to Helicopter Ben’s epic flight:

Charles Ponzi

The New Mattress Stuffers:

An article in Friday’s Wall Street Journal comments that with the financial crisis sweeping across the nation ’one of the first micro-trend groups to emerge is the New Mattress Stuffers — people who have lost their trust in the financial world, and are preparing for the next meltdown.’ By Monday the stuffers with gold under the mattress looked smarter than many other investors. With the disclosure of Mr. Matoff’s $50 billion Ponzi Scheme another gaping breach in trust was revealed. And, with it, another good reason for investors to own gold as insurance against vulnerable financial assets.

Suckers, Geniuses and Comatose Regulators:

Suckers taken in by the 1920’s fraudster Charles Ponzi were greedy retail investors chasing unrealistically high returns.  But the investors taken in by Bernard Madoff  were greedy banks and institutions with managers,  disdainful of  basic due diligence.  chasing unealistically high retirns.  Making investments yielding over 10% at a time when blue chip  returns were negligible they must have been alert to high risk exposure.  How come  they committed  millions, tens of millions and in some cases billions to investments without abundant due diligence?

The answer appears to be that our genius million £/$ salary stars  were deficient in their performance. An article in today’s International Herald Tribune todayreveals investors failed  to ensure their  investments were safe. And they must have been blind. Madoff never accounted for investmnents with acceptable transparency.

What about the suckers? You,  me and everyone else supporting banks and other institutions.  And, of course, our comatose regulators asleep at the wheel again.

After the financial debacle experienced over the last few years what scope is there left for trust in a financial system still without adequate regulation?   This Bloomberg video includes commentary on the regulatory failure.

Why gold is so strong:

The case for mattress stuffing never looked better -  particualrly as the $ surge could be coming to an end.  Trust in financial institutions and regulators  is being breached without respite making the case for owning gold more and more compelling. It’s not surprising that,  priced in British pounds,  gold is now at or near an all time high.

#  Note added 16th December :

Descriptions of Madoff’s operation read like a cheat sheet out of Investment Fund Due Diligence for Dummies

# Note added 22nd December 2008: Barrons 2001 warning on Madoff

The New Bretton Woods Initiative:

The meeting of G20 heads of state hosted by President Bush last month to address the global financial crisis was, at least in the vision of French President Sarkozy and British Prime Minister Gordon Brown, intended as a first step to a new financial architecture for the 21st century. A new Bretton Woods.  When the Obama administration is settled in office the plans may be taken further. But for now the agreement reached at the meeting to relieve the  current crisis via monetary policy and fiscal relief on a national basis has already proved to be useful and  initiatives to improve financial regulation are in progress.

Readers interested in gaining a better understanding of current macro developments will find the web site The Baseline Scenario maintained by former IMF Chief Economist MIT Professor Simon Johnson a comprehensive and accessible source of information on both current issues and the background to the financial crisis.  The Financial Crisis for Beginners page is excellent.

The Goldwatcher Chapter 5 addresses  The Gold Standard and reviews the ‘Deficit Without Tears’ fault line  in the dollar standard. The so called ‘Bretton Woods 2′ arrangements,  where major emerging economies, particularly China, manage their currencies to keep them competitive and reinvest the proceeds in US securities following the ’America spends Asia lends’ formula are explained and discussed. Recent comment from Brad Setser suggests that ‘Bretton Woods 2′ is still alive and well.

Leadership and the US and Global Financial and Economic Crises:

These are the concluding comments on gold price prospects in The Goldwatcher page 191  ‘Without reassurance on future policy commitments the chances of a systemic solvency crisis, resembling in some ways the crisis experienced in the 1930s, can’t be ignored……………..(but) we know that in the past daunting challenges have been overcome in countries with strong economies, resolve and committed leadership……Gold bugs are now urging investors to bet the ranch on gold. On my analysis that would be foolhardy. Frank Holmes also advocates moderation in the following chapters (11-13).

With President elect Obama being advised by Larry Summers with Paul Volcker at his side, Tim Geithner as Treasury Secretary and Peter Orszag as Director of the Office of Management and Budget we have serious reassurance on leadership. But, as commented in previous Goldwatcher postings, they start with an unholy financial mess.

In this context owning some physical gold can be motivated as  essential insurance against the ’system’ being damaged beyond repair.

Quantitative easing and the Zimbabwe model:

The Guardian business glossary gives this crisp definition: ‘Quantitative easing is what non-economists call ‘turning on the printing press’ adding ‘In extreme circumstances, governments flood the financial system with money, easing pressure on banks by giving them extra capital.  Ben Bernanke, the chairman of the Fed, won the nickname ‘helicopter Ben’ when he floated just such an idea earlier this decade.’

Yesterday in a speech on ‘Federal Reserve Policies in Financial Crisis’  Bernanke spelled out policy being implemented through conventional and unconventional means.Trillions of dollars of funds are being injected into the financial system. Bernanke, however, argues inflation will not necessarily follow as ‘  To avoid inflation in the long run and to allow short-term interest rates ultimately to return to normal levels, the Fed’s balance sheet will eventually have to be brought back to a more sustainable level. The FOMC will ensure that that is done in a timely way. However, that is an issue for the future; for now, the goal of policy must be to support financial markets and the economy.’

The dramatic fall in the gold price yesterday may or may not have been influenced by Bernanke’s assurance he is not turning on the printing press and steps will be taken to control inflation in future. But it’s more likely gold price falls followed another bout of selling by investors seeking  only cash or Treasury securities at the same time as  leveraged funds and other investors were forced to meet margin calls or redemptions.

In his gloomdoomreport yesterday Dr Marc Faber repeats his disdain for Bernanke’s ‘money printing’ and restates his preference in current volatile markets to seek protection from the safe haven credentials that come with owning gold, adding that gold miners and silver could outperform for a while.

This amazing quotation from Dr G. Gono, Chairman of the Zimbabwe Reserve Bank adds a touch of humour to Marc Faber’s report:

“As Monetary Authorities, we have been humbled and have taken heart in the realization that some leading Central Banks, including those in the USA and the UK, are now not just talking of, but also actually implementing flexible and pragmatic central bank support programmes where these are deemed necessary in their National interests. …That is precisely the path that we began over 4 years ago in pursuit of our national interest . …Here in Zimbabwe we had our near-bank failures a few years ago and we responded by providing the affected Banks with the Troubled Bank Fund (TBF) for which we were heavily criticized even by some multilateral institutions who today are silent when the Central Banks of UK and USA are going the same way and doing the same thing under very similar circumstances thereby continuing the unfortunate hypocrisy that what’s good for goose is not good for the gander. …As Monetary Authorities, we commend those of our peers, the world over, who have now seen the light on the need for the adoption of flexible and practical interventions and support to key sectors of the economy when faced with unusual circumstances.”

The Central Bankers Money Printing Song:

When he was a little nipper Ben Bernanke first learned about the Great Depression from his grandmother (The Goldwatcher page 60). At play school when I was a little nipper I learned the song  ’The More We are Together the Happier we will be.’  Let’s join my experience from those nipper days,  when we all believed in The Tooth Fairy,  with the lessons Bernanke learned from his Gran. We can call the new composition the Central Bankers Money Printing Song.  Here is how it goes:

The more we print together…..together…..together

The more we print together the richer we will be……

For your friends will be rich and my friends will be richer

The more we print together the richer we will be.

Of course by now we have learned to listen to  The Truth Fairy rather than The Tooth Fairy. And the messages from The Truth Fairy are that a global money printing spree can’t be a win win story and win win is anyway an oxymoron. Trust  in the fiduciary element of paper money is being lost. All that printing more can do is paper over the cracks.  (The Goldwatcher Page 189).  Yet we must expect far worse consequences if the global economy sinks into a depression again.  (The Goldwatcher Pages 181/2). And,  while investors can protect themselves from the worst ravages of a depression,  it’s not only prosperity in the Western World that’s at stake. Billions of poor people will suffer in developing and other economies and millions could starve to death in a severe global depression. It must be avoided literally at all cost.(The Goldwatcher Page 186). Hence, though an interest rate of 1% produces a negative yield on money,  if it helps fend off a depression there is a case to make that it’s the lesser of two evils.

So, how do we protect ourselves from all the money printing?

Gold can be minted but it can’t be printed:

Gold’s stateless money franchise derives from its value as a resource in limited supply. It can’t be produced without cost.  People all over the world are realising that with the global economy in an unnholy mess inflation and money printing are both on the agenda as part of the solution.

No surprise then that there are reports every day of gold coins being ’sold out’ at national mints and coin dealers. High premiums are being paid for physical gold that people can keep in their own control.  According to this report :

“One ounce and smaller gold and silver coins . . . ten-ounce and hundred-ounce silver bars (etc) have virtually disappeared from the marketplace. They’re in private hands now, and people are holding onto them, unwilling to sell them back into the market… When these coins can be found sellers are demanding (and receiving) premiums of up to 50% or more over the per-ounce spot price. ..Investors are getting a classic lesson in the laws of supply and demand. When demand increases for a declining supply of anything, the price tends to increase.’

The same law applies with money printing except its vica versa. Prices fall when there is too much supply. Only a few years ago when he was already a Fed Governor Ben Bernanke himself wrote :

Like gold, U.S. dollars have value only to the extent that they are strictly limited in supply. But the U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost. By increasing the number of U.S. dollars in circulation, or even by credibly threatening to do so, the U.S. government can also reduce the value of a dollar in terms of goods and services, which is equivalent to raising the prices in dollars of those goods and services. We conclude that, under a paper-money system, a determined government can always generate higher spending and hence positive inflation.“

In an  interview with The Gold Report yesterday Frank Holmes, co-author of The Goldwatcher,  addressed key factors behind the financial crisis. He expects ’short term hesitancy in the upwatrd movement of the gold price until liquidity returns to the markets’ and  predicted gold will go up to $1000  or even $2000 over the next two years. The expected catalyst for the rise is a growing money supply following a change in Government policies.

Abuse of leverage was identified as the biggest culprit behind the market rout and the scale of the global financial crisis. In March this year The Goldwatcher blogged on the leverage disaster unfolding and hedge funds facing margin calls. 

These extracts from Frank Holmes’s Gold Rep0rt  interview are revealing:

‘… The combined impact of Sarbanes-Oxley, FAS 157 (mark-to-market regulations) and leverage abuse has cost New York its position as the world’s financial capital. No one expected this escalation of write-downs… Mike Milken spoke at a conference I attended last week in Hong Kong. He said that at the height of his career he was leveraged 4-to-1. Goldman Sachs now is leveraged 20 times, so a 5% mistake would wipe them out.  If you make a 2% mistake in the $500 trillion derivative market, that’s $10 trillion. What’s $10 trillion? Well, the world’s total GDP is $50 trillion. The total amount of U. S. dollars in circulation is roughly $15 trillion. A 2% mistake wipes out 20% of the world’s GDP…

..The dollar’s not going to collapse due to loss of Asian support. All countries will support the dollar. The reason is that they can’t afford for it to fall too far because then suddenly the U.S would be exporting products and not importing.

..All the currencies will slowly debase themselves against gold and keep the dollar as the currency for global trade…The number-one Asian analyst, Chris Wood, is advocating a 30% gold exposure to institutions. Now, this is the number-one brokerage firm in Asia and their research is excellent…It recommends a portfolio allocation of 30% gold:15% gold bullion and 15% unhedged gold stocks. When an analyst of his stature advises putting 30% of your portfolio into gold, you have to take note. We tell our clients to put a maximum of 5% into bullion and no more than 5% toward gold equities…

Last week the markets hammered every stock with liquidity. Many funds have been hit by this problem. Margin calls are driving this. It has nothing to do with the demand for gold or the supply and discoveries…Whether you have big deflation or big inflation driving the bear market, gold does well. If it’s just a normal cyclical inventory recession or whenever interest rates are above the CPI rate, gold doesn’t do well. Today, the Fed’s funds are below the CPI rate and the printing presses are busy….’

Extracts from an interview never tell the whole story. The Gold Report interview gives a better picture and is well worth reading.

Stratospheric debt:

New York City’s National Debt Clock ran out of enough digit slots to record the staggering sum of $10 trillion breached a few weeks back.  The $ sign has now been changed to the  numeral ‘1′ to record debt at over $10 trillion.

$10,000,000,000,000 (Yes Virginia - 12 noughts).  

When the Durst family installed the clock in the 1980’s they were alarmed by a debt burden of $1 trillion.  A sum of money inconceivable to anyone except a mathemetician or a Zimabwian where, thanks to Mr. Mugabe’s success with hyperinflation, everyone was a billionaire and being a trillionaire didn’t make you rich.  However even Zimbabwians can’t conceive of ten trillion. This CNN Video clip traces the story of the debt clock and its association with  Reagomics - America  borrowing against future prosperity following  a programme George Bush Senior described as Vodoo economics and his son George W. Bush espoused with passion.

High praise for Gordon Brown’s big money  rescue:

‘Gordon Does Good’ Paul Krugman wrote on Sunday, the day before he was awarded a Nobel Prize,  commenting that Gordon Brown had ‘defined the character of the world wide rescue effort with other wealthy nations playing catch up.’ In The Goldwatcher posting on  the same day comments were included on how much money would probably be printed to restore functionality to the global banking system.  The guesstimate was  $4 trillion - similar to other guesstimates being made now.

Will the rescue plan work?

Nouriel Roubini’s RGE Monitor’s summary this morning opens with this comment:

 ’Seeing some green on tickers around the world, as opposed to the red that was flashing last week, sure feels good.  Credit market conditions also appear to be easing somewhat with respect to last week… But is this a just a blip or are we at the turning point? ’

According to Nouriel two essential components are still missing from the measures adopted so far.  The fist one would be a large fiscal stimulus plan in the form of old fashioned traditional Keynesian spending to boost aggregate demand.  “If such a fiscal stimulus plan is not rapidly implemented” he notes “any improvement in the financial conditions of financial institutions that the rescue plans will provide will be undermined – in a matter of six months – with an even sharper drop of aggregate demand that will make an already severe recession even more severe.”  Nouriel’s second requirement is a plan to reduce the debt overhang of distressed households via the institution of a new Home Owners’ Loan Corporation or similar construct.

Should we be thinking $6 trillion instead of $4 trillion will be printed for the rescue passages and fiscal stimuli?  To investors owning gold as insurance against financial market risks and protection against monetary inflation or hyperinflation a trillion one way or the other doesn’t really matter. Erosion in the purchasing power of paper money is already baked in the cake.

Gold is doing well:

Gold is below the magical $1000. But if you buy gold coins or bars now expect to pay a premium of as much as 25% above the daily spot price. You may well find yourself paying over $1000 an ounce.  Bear in mind also that gold was  over $930 before the dollar strengthened and at the current $931 price gold has soared in other currencies.

$931 translates into near record  prices in £ and euros - 

 £550.80 and €668.77.