$2000 dollar gold?

The conclusion that gold in the range of $1000 to  $1100 makes sense is well supported by: 

 1: Renewed central bank interest evidenced by The Central Bank of India’s  $6.7 billion purchase of 200 tons of gold from the IMF at $1045 per ounce  announced two days ago ; and

2: Background analysis in The Goldwatcher on when gold prices make sense and when they don’t . 

Pundits are now beating the goldrush drum with talk of prices on course to $2000, $3000 and even $5000. At present, in my opinion, these predictions don’t make sense.  Conditions will change as will expectations for gold and other currency prices.  But, while the world still faces deflation,  further dramatic price rises can’t be expected  without a catalyst for change,    

The recovering world economy:

I advanced the case in The Goldwatcher for drawing a line between the pre 9/11 and post 9/11 worlds. Now we have to draw another line between the world as it was in September 2008 when the global economy was about to plunge into the depths, as illustrated in the above Time cover,  and the world as it is now with clear signs of  recovery in some important economies.  However,  though generally showing signs of growth,  many economies are still in emergency care and won’t survive without financial life support.  In this delicate state investors need continuous advice on currencies and I don’t give investment advice. Further investors in different parts of the world will also need advice specific to their needs.   Here are some accessible information sources I rely on:

1: Kitco for live reports with charts on gold prices and analysis differentiating the extent to which price movements are attributable to $ movements and investor activity;

 2: Dr Marc Faber’s Gloom Doom and Boom report with astute comment from the perspective of a gold expert and icon contrarian investor; 

3: Sharefin’s extraordinary chart resource and regular news postings;

4:  Link deleted 10th August 2010

 5: The Bullion Buzz for well selected contributions supporting the case for gold;

6: IHS Global Insight’s Economic Outlook -  a superb resource that takes the pulse of the most important factor in the global economic equation - the US economy. Working outside the investing bank community Global Insight are free of hype.  As independent economists they are consistently rated among the world’s most prescient forecasters across the spectrum of key economies and industries;

7: Nouriel Roubini’s RGE Monitor . The gold standard macro economic commentary for those who can afford the price;

8:  Kitco Casey : the immaginative and sound resource for speculative investors focusing on the big picture and rewarding opportunities; and

9: The Goldwatcher Webliography  listing of publications contributing essential regular information and analysis.(Page 322) 

Goldwatcher commentary:

I will comment on catalysts for change and key developments affecting gold from time to time. To be kept advised on future postings to this blog,  or other contributions I make,  e-mail me:  johnnkatz@gmail.com

Note added 16th December : There appears to be a glitch with the forwarding of e-mails addressed to me at The Goldwatcher. Any message not acknowledged has not been received. I apologise for this and will respond to any messages not acknowledged if they are re-sent to me at the above address. Thank you for reading The Goldwatcher and good luck with your investments.

* Added 9th November 2009 : Video interview with Jon Nadler, Kitco, on bear market in the $ rather than bull market in gold>

* Added 11th November : Street.com interview with Jon Nadler, Kitco 

CLICK HERE FOR KITCO PRICES AND ANALYSIS

CLICK HERE FOR REALTIME MULTICURRENCY GOLD PRICES  

TO BUY THE GOLDWATCHER CLICK HERE:

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

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.“

The Denver Gold Forum

In the Goldwatcher (Chapter 1  Page 11) the two sides of the gold coin for investors are discussed.  One side is opaque. It relates to global macroeconomics, geopolitics etc. The other side relates to gold as a commodity and the gold mining industry. This side of the coin is, by contrast, refreshingly transparent.

 The annual Denver Gold Forum hosts a programme of presentations for institutional investors by leading gold mining and important developing mining companies.  The presentations include valuable information on mining costs,  gold price and volume prospects as well as information on other materials frequently mined with gold including copper.

This year’s  forum from September 7th to 10th has just ended. The audio record of the proceedings is accessible on the Denver Gold website. For readers interested in mining equities the information highlighted at the forum is a must. Readers interested in a better understanding of the economics and challenges of gold mining will also find the presentations useful.

The invisible hand or very visible financial regulation:

Ben Bernanke’s lecture  ‘Financial Regulation and the Invisible Hand’ was given to students at New York University Law School a year ago -  almost to the day. A week later a Goldwatcher blog included this extract from the lecture: ‘The growing market share of hedge funds has raised concerns about possible systemic risk…… the collapse of a hedge fund might come with little warning….many hedge funds are either highly leveraged or hold positions in derivatives or other assets that make their net asset positions very sensitive to changes in asset prices…..leverage also increases the risks to the broader financial system….. The failure of a highly leveraged fund ….could involve ….. heavy losses on counterparties.(that) could lead to further defaults or threaten systemically important institutions. …… market discipline can fail, as is illustrated by the hedge fund Long-Term Capital Management (LTCM), which was at the centre of an episode of severe financial stress in 1998.′   I didn’t understand Bernanke’s academic meander about the ‘invisisble hand’ at a time when he knew it was urgent for regulation with an iron fist to be introduced  and still don’t understand why action wasn’t taken until the  crisis erupted  a year later. Any announcements being broadcast now that the crisis is over can’t be taken at face value and must be considered in the light of all current risks. 

The hazards of leverage:  The balance sheets of the Fed, the Bank of England and other central banks are now being re-leveraged with debt securities - at the same time as  banks, hedge funds  and other parties are de-leveraging. Jeremy Grantham’s April 2008  letter ‘Immoral Hazard – Greenspan,  Bernanke and Volcker – A Study in Contrasts’ is revealing. (You have to register on  www.gmo.com to gain access to the site. Registration is free.) Grantham accepts that the present crisis is the worst since the great depression and raises the question why some  people believe ‘self justifying high quality blarney’ suggesting the crisis is all but over.  A Bloomberg interview with commentator James Grant is illuminating on depreciated central bank balance sheets and gold as an appropriate investment in these conditions.  

            It will be a few weeks before we know if initiatives by US lawmakers to find a formula that helps homeowners unable to meet mortgage payments becomes law. It will take longer before we know the extent to which the formula will be effective in arresting further dramatic falls in house prices.  And a few more weeks are also needed before the all important question of who the candidates and their running mates in the forthcoming US Presidential election will be and what economic polcies they will campaign on. Without this knowledge commentary on outcomes for the dollar tend to be chatter.  

Publication of The Goldwatcher and blog revisions: The Goldwatcher reaches the bookshelves in a few weeks time. For future postings on this blog to directly address key questions raised in the book the format for this blog is being revised. The first question is always ‘Why Gold?’  In 2008 the case for gold’s stateless money franchise with  utility as a hedge against financial market risks has been compelling. The case remains compelling unless we believe ‘the blarney’ that the global credit crisis is yesterday’s story. 

The Humpty Dumty Economy: Headlined ‘The Great Fall : Here comes the Humpty Dumpty Economy’ Barron’s veteran columnist Alen Abelson noted in his Saturday column two weeks back that the Fed was already in the ‘bail out business.’  A  Bear Stearns bailout on different terms to those mooted at the time was effected in extreme circumstances and announced the following Sunday March 16th before Monday trading started on Asian markets . The Fed was the only government agency directly engaged in the transaction but President George W. Bush and Treasury Secretary Paulson signed off on it. The deal was made without the consent of shareholders  and the buyer J.P. Morgan Chase was facilitated with a $30 billion borrowing facility from the Fed. The strong arm action was taken because a Bear Stearns default on debt and derivatives obligations could have started a chain reaction of defaults that would trigger financial market meltdown. 

The Fed has a role as lender of last resort and appears to have done the right thing. On the Sunday when the deal was announced it approved a request by the Federal Reserve Bank of New York to decrease the primary credit rate from 3-1/2 percent to 3-1/4 percent, effective immediately. On Tuesday March it lowered the target for the federal funds rate 75 basis points to 2.25%. But can bailouts by order of a Sheriff and interest rate cuts by order of equity markets  transform Humpty Dumpty to Hunky-dory?

A sinking dollar, low interest rates, and a reminder of October 1931: In a March 13^th 2008 article Northern Trust Director of Economic Research Paul L. Kasriel writes that after the US asset price bubble burst in 1929 the Fed reduced interest rates from 6% to as low as low as 1.5% by May 1931and  explains that after the UK went off gold in 1931 there were fears of a run on the dollar and,  by October 1931,  the Fed had raised rates again to 3.5%. He answers his question ‘What does October 1931 has to do with current Fed policy commenting that ‘….if not a run, there has been a renewed “walk” on the dollar of late…further declines in the dollar could induce an accelerated rate of increase in the prices of imported consumer goods…..further reductions in the U.S. federal funds rate would seem to put additional downward bias on the foreign exchange value of the dollar.’  To prevent a dollar plunge rates may have to go up again as they did on October 1931 .

An awesome, unrelenting descent for the dollar? Back to Barrons Humpty Dumpty Economy column for some predictions: Humpty is going to suffer a great fall. But ‘the pieces most definitely can be put together again. It’s just that it may take quite a few years, or maybe more than quite a few years. And, we should admit, too, that the end result will look more like Humpty Dumpty stuck together with Band-Aids than Goldilocks’ The Fed can’t ‘dispel the toxic cloud that’s enveloping the sub prime mortgage market …ease the tightening vice of runaway rising prices and stagnant income that’s sending the consumer into hibernation, or keep the dollar from its awesome and unrelenting descent.’

The compelling case for gold’s stateless money franchise: The next Goldwatcher blog will be  on the Humpty Dumpty economy patched up in casualty with band aids. A far cry from a Hunky-dory economy. Rather than ending this blog again with the comment that the case for gold as risk insurance is compelling I am closing  with a quote from Financial Times Assistant Editor Gillian Tett’s column on March 16^th giving her take on gold’s stateless money franchise: ‘No wonder so many asset managers have been scrambling to buy in sectors such as government bonds or gold. After all, gold has the compelling attraction of being easier to understand than a mortgage bond; better still, it has existed long before even the Romans.’

 Bailout time:  In his column in the New York Times this morning headlined ‘The B Word’ the economist Paul Krugman writes ‘the unthinkable is about to become the inevitable…. things are falling apart as you read this.’ A few headline points from Paul Krugman’s column follow:

1:        US Taxpayers’ money will have to be used to resolve the crisis whatever US Treasury Secretary Paulson or anyone else may say to the contrary. 

 2:         ‘Between 2002 and 2007, false beliefs in the private sector — the belief that home prices only go up, that financial innovation had made risk go away, that a triple-A rating really meant that an investment was safe — led to an epidemic of bad lending. Meanwhile, false beliefs in the political arena — the belief of Alan Greenspan and his friends in the Bush administration that the market is always right and regulation always a bad thing — led Washington to ignore the warning signs… The result of all that bad lending was an unholy financial mess that will cause trillions of dollars in losses. A large chunk of these losses will fall on financial institutions: commercial banks, investment banks, hedge funds and so on.’ 

3:         ‘The U.S. savings and loan crisis of the 1980s ended up costing taxpayers 3.2 percent of G.D.P., the equivalent of $450 billion today. Some estimates put the fiscal cost of Japan’s post-bubble cleanup at more than 20 percent of G.D.P. — the equivalent of $3 trillion for the United States.’  

 A Wyle E Coyote moment for the $?      

A February 2nd 2008 Goldwatcher posting includes a link to a  video interview with Paul Krugman discussing the risk of a Wyle E Coyote plunge  for the dollar   Krugman didn’t consider that outcome unthinkable  - unlike the prospect we are facing now. A meltdown in financial markets triggered by a bank or major hedge fund default.  Unthinkable until very recently. The Fed is being pro-active as a lender of last resort. increasing borrowing facilities available and cutting interest rates. Unfortunately as interest rates fall so does the dollar. As a result far from the over leveraged debt and liquidity crisis being solved the bank solvency crisis gets more lethal.

A warning on $ devaluation from the 24th February 2008 Goldwatcher posting:   ‘The Goldwatcher alerts readers to the prospect of economic and social problems to an extent resembling those Franklin D. Roosevelt confronted in 1933 with a solution on similar lines - massive dollar devaluation.’

The case for gold remains compelling compelling compelling.

Another boring attack on Gordon Brown’s 1999 gold sale:

Today’s Guardian runs a full page feature with a political attack on Gordon Brown for selling gold at an average price of $275 in 1999.  It’s a re-run of a politically inspired full page feature published by The Sunday Times on 15th April this year. A Goldwatcher blog in response challenged the Sunday Times polemic on Gordon Brown’s mistake  There’s really nothing to add to that blog now, but it’’s useful to highlight a few points and add few comments:

Professor Bernanke’s problem: In alarming testimony to the House Financial Services Committee this week Fed Chairman Ben Bernanke declared:  ‘We have a problem … the spreads between the Treasury rates and lending rates are widening, and our policy is essentially, in some cases just offsetting the widening of the spreads, which are associated with signs of illiquidity.’   

Maybe Bernanke’s real problem is that he is essentially a Professor and Professors we are told  can be  absent minded.  He has forgotten what John Maynard Keynes said about inflation:

.

‘The best way to destroy the capitalist system is to debauch the currency. By a continuing process of inflation, governments can confiscate,  secretly and unobserved, an important part of the wealth of their citizens.’    

Probably the most prescient and informative commentator on the house price bubble and bust in the US  Calculated Risk  conclude  today we now have a Bernanke Conundrum. This is it : ‘In the short term, the more he cuts short rates, the more certain long rates may rise.’ The calculated risk comment comes with an excellent video clip on Bernanke’s testimony and the associated economic woes facing the US – and by association the rest of us. 

The dollar is diving: The Goldwatcher book includes analysis on the economic consequences of 9/11 and George W. Bush. In spite of the terrifying trillions borrowed and lost over the last few years  part of me has always believed that the strength and resilience of the US economy would survive a few terms of unprecedented blunders.  But the plunging dollar suggests otherwise. Charts produced by Sharelynx even point to a risk of a free fall.

 Gold’s stateless money franchise is thriving:   Absent minded Professor Bernanke needs to refresh his memory. Otherwise instead of George Bush and Alan Greenspan,  who deserve the lion’s share of the blame, he could become the scapegoat for damage done to the capitalist system.  Because it affords  protection against uncertainty, the dilemmas that haunt central bankers and politicians, their collective amnesia and at times reckless actions gold’s stateless money franchise is thriving

Can smart central bankers protect us from the nasty effects of a stock market collapse?

 Foreign Policy : September 2000 : Contribution from Dr.  Ben S. Bernanke, at the time Professor of Economics and Public Affairs and Chair of the Department of Economics at Princeton University:

  ’A collapse in U.S. stock prices certainly would cause a lot of white knuckles on Wall Street. But what effect would it have on the broader U.S. economy? If Wall Street crashes, does Main Street follow? …..After the 1929 crash, the Federal Reserve mistakenly focused its policies on preserving the gold value of the dollar rather than on stabilizing the domestic economy.…………The downturn following the collapse of Japan’s so-called bubble economy of the 1980s was not as severe as the Great Depression. However, in some crucial aspects, Japan in the 1990s was a slow-motion replay of the U.S. experience 60 years earlier………..‘Central bankers got it right in the United States in 1987 when they avoided deflationary pressures as well as serious trouble in the banking system. In the days immediately following the October 19th crash, Federal Reserve Chairman Alan Greenspan—in office a mere two months—focused his efforts on maintaining financial stability…..Reassured by policymakers’ determination to protect the economy, the markets calmed and economic growth resumed with barely a blip. There’s no denying that a collapse in stock prices today would pose serious macroeconomic challenges for the United States. ….History proves, however, that a smart central bank can protect the economy and the financial sector from the nastier side effects of a stock market collapse…..’

 Does gold protect? 

 On Wednesday 1^st August. US Global Investors’ CEO & CIO Frank Holmes will present a Webcast with noted precious metals analyst Paul Burton, Editor and Publisher of World Gold Analyst. The subject is: 

‘GOLD : SURVIVING OR THRIVING’ The gold market today and important considerations about its appropriatness in a diversified asset allocation.

You can register now to follow the Webcast live - or listen to a recording afterwards.

Frank Holmes is also co-author of The Goldwatcher being published by John Wiley & Sons Ltd early in 2008  

The last Goldwatcher posting  ‘And if America falters? Uh-Oh’  quoted US Treasury Secretary’s Paulson’s warning:  ‘We haven’t had a global financial shock since 1998. …When we do have one - and it’s when, not if; …we’ll be seeing for the first time how some of these instruments perform under stress.’  The Webcast Gold Surviving or Thriving is likely to shed light on gold in times of stress.