David LevensteinThe Fundamentals Supporting Gold as a Hedge Against Monetary Debasement Remain in Place.
10 January 2012
Gold prices gained 10.1% last year extending its eleventh consecutive annual gain since the bull market began in 2001. The metal has climbed more than 17% a year, on average, since 2001, making this one of the best asset classes for investors over the last decade.
Yet the percentage of investors holding physical gold remains very low and last years' gain disappointed many investors who have come to expect gold to move up in a straight line. I would like to remind readers that I do not know of any bull market that has moved upwards in a straight line and that in times such as these, wealth preservation not massive speculative gains remains our main objective. Of course there is no shortage of investment advisors who scoff at the premise that gold is a safe-haven investment, especially since it has lost around 17% of its value since September 2011 when it traded just above $1920 per ounce. Yet these same so called experts fail to mention how some equities have lost around 60% of their value and how certain government bonds have become pretty much worthless. And, somehow, they will always find that one obscure share out of tens of thousands of shares that out-performed the market by many times over. But, in reality very few people were involved.
Frankly, such statements merely show how little some analysts know about the precious metals markets. For one thing, and as I have stated countless times, investing in physical gold is not a short-term investment and thus, a drop in price such as the one that has occurred over the last few months does not have any bearing on the longer-term picture. Besides, this is not a competition between equities, bonds and gold. As an investment advisor it is important to provide your investors with the best possible solutions. In the current global scenario, it is prudent to have a well-diversified portfolio, and as far as I am concerned especially one that also includes physical metals in particular gold and silver.
The publisher of the Dow Theory Letter summed up last year most aptly by stating the following. "This is the longest bull market of any kind in history in which each year's close was above the previous year. This fabulous bull market will not end with a whisper and a fizzle. I continue to believe that the upside gold crescendo of this bull market lies ahead." To the doubters, Russell said: "I note the frustration and anger of the anti-gold crowd. To miss 12 years of rising prices is enough to make any investor furious with himself."
In a recent interview on CNBC on December 30, Peter Schiff of Euro Pacific Capital said. "You need to own gold, and most people are still clueless about that."
"The fundamentals have never been better for gold and I think prices are going a lot higher," Schiff told CNBC in an interview looking back on gold's 2011 performance and ahead into 2012. "I still think it's headed higher. I'm not really sure when you talk about the turnaround, I don't think that the correction we've had in the last few months has turned the bull trend. I think we're still in a bull market. I think that trend is going to continue. The question is, is the correction over? I don't think there's much more left in the correction. ...
"The U.S. is a bigger disaster than Europe, but all the central banks -- the U.S., the [European Central Bank], the Bank of Japan, Bank of China -- everybody is printing too much money. Everybody has rates too low, and the world is looking for an alternative to currencies, not just the dollar or the euro, but the world. People are going back to real money and not enough people have made that switch. Most people are still clinging to the idea that there's a safe haven somewhere in currency. There is no safe haven in currencies. If you want to protect your wealth, if you want to store purchasing power, you can't do it in a currency. You need to own gold, and most people are still clueless about that."
In order to understand gold it is important to understand money, after all gold is a monetary metal. And, as government debt continues to explode, currencies will lose more purchasing power against gold and it is therefore logical to assume that the price of gold can rise much higher.
As we enter the New Year, it appears that the gold bull market is still very much intact. And, while the Eurozone's worsening crisis has taken the world's focus off the massive U.S. debt problem, renewed faith in the dollar as a safe haven will only be a temporary reprieve. In fact the only reason we have seen recent strength in the US dollar is due to the stampede of out of euros. Today, Greeks have only €170 billion in savings - almost 30% less than they had at the beginning of 2010. Evidently about 20% of these funds have been moved out of the country. But, no matter if euros flow into dollars or dollars flow in euro's it seems that both the US FED and the ECB have designed another scam to deceive the average individual which is to have the value of both currencies decline simultaneously so as to give the appearance that the purchasing power parity persists.
Also, no matter what these bankers want to call it, the fact remains that they are printing more money. Europe is already printing money technically, in that it is purchasing weak sovereign bonds. The balance sheet of the Frankfurt-based ECB and the 17 euro-zone national central banks, grew by EUR2.39 billion, reaching EUR2.735 trillion. The ECB has been widely criticized for increasing the size of its balance sheet by purchasing government bonds and through other so-called non-standard measures to address the debt and banking crisis.
Recently, the ECB experienced higher than expected demand for its three year loan operation, underwriting 489 billion euros ($645 billion) worth. This represents the central bank's largest single lending operation, providing financing for 523 European banks. However, while banks took advantage of the low interest rate, it does not appear that this money is going any further than the banks. Not surprising when you consider that there is going to be between 600 billion and one trillion euros of maturing European bank debt in 2012 - or at least 35% more than in 2011. But not only will banks require funding in order to maintain their solvency, several countries in the Eurozone will also need financing this year.
Another important aspect of the European situation is the negotiation of the "voluntary" haircuts accepted by Greece's private creditors. As part of an agreement made earlier this year, these private holders of Greek debt accepted a 50% write down of their holdings in an effort to bring Greece's debt/GDP ratio to a more manageable level. However, the private creditors are being asked to rollover their existing Greek holdings for new securities with a 5% coupon which would actually represent a 65% loss in the net present value of their holdings which represents a more realistic value for these bonds.
While the US dollar may still be perceived as the last major safe haven currency, the U.S. dollar, experienced a blow to its world reserve status as China and Japan agreed to promote direct trading between the Yuan and yen. By circumventing the dollar altogether, the world's second and third largest economies will be able to settle trillions of dollars' worth of business in their own currencies. As Chinese and Japanese companies increasingly capitalize on this new arrangement, it will represent a large void in dollar demand going forward. This arrangement will also enable Japan to invest larger portions of its foreign reserves into Yuan denominated securities. With more than $1 trillion, Japan has the second largest foreign reserves behind China. As the second largest holder of U.S. debt, a new investment strategy for Japan's foreign reserves could result in dollar divestment in favour of the Yuan.
Only last week the Iranian news agency FARS cited reports that Tehran's Ambassador to Moscow Seyed Reza Sajjadi said that the proposal for replacing US Dollar with Rubble and Rial was raised by Russian President Dmitry Medvedev in a meeting with his Iranian counterpart Mahmoud Ahmadinejad in Astana.
"Since then, we have acted on this basis and a part of our interactions is done in Ruble now," Sajjadi stated, adding that many Iranian traders are using Ruble for their trade deals.
"There is a similar interest in the Russian side," the envoy stated, adding that that Moscow is against unilateral sanctions on Iran outside the UN Security Council, specially the recent sanctions against Iran's Central Bank (CBI).
During the last two years, Iran has been replacing dollar with other currencies in its trade with the outside world. Iran has replaced dollar in its oil trade with India, China and Japan. Late in November, the Reserve Bank of India (RBI) issued the needed permission to the Central Bank of Iran to open rupee accounts with two Indian banks, namely UCO and IDBI, as a long-lasting solution to the two countries' payment problems.
As the world's indebted nations fail to raise enough money they will introduce new austerity measures on the general population. This will cause more unrest as individuals that find themselves expected to work harder and pay higher will ultimately respond with outrage as we have already seen in riots in France, Spain and Greece. Governments will continue to intervene in currencies and other markets. Capital controls and higher taxes will become the norm. And the biggest risk to the individual investor will not be the risk in buying or selling but the risk of having one's money stolen as in the case of MF Global. Bank fraud is already at an all-time high in the US but when a major financial institution such as MF Global can meddle with an individual's segregated account then anything is possible. And what makes this even more despicable is the lack of action from the regulatory body namely the CME. Yet, the CME are very quick to hike margin rates as in the case of gold and especially silver in order to "prevent volatility." Who are they kidding? Frankly, it is a disgrace.
Unfortunately, we are unlikely to see an end to this corruption, fraud and theft and instead we are likely to see an escalation of these crimes as well as a continuation of the expansionary monetary policies of central banks which will be disguised in the form of newly invented names. We will see an increase in economic, political and financial turbulence. While gold has been relatively volatile during the last six months, the long-term fundamentals remain promising. And, although we have seen manipulated selloffs in the gold and silver sectors that have temporarily soured investors on the precious metals, ultimately gold and silver will prove once again to be one of the best ways to preserve your hard earned wealth.
As prices continue to flirt with the key level of $1600 an ounce, it is also pushing up against the 200 day MA which is currently set at $1629. A break above this level will entice technical traders back in to the market.
Best wishes for a healthy and prosperous 2012.
ABOUT THE AUTHOR
David Levenstein is a leading expert on investing in precious metals. He brings over 29 years experience in futures, equities, forex and bullion. And, although he began trading silver through the LME in 1980, when it comes to gold, he has traded gold bullion, gold coins, gold shares, gold ETF, gold funds and gold futures for his personal account as well as for clients. Over the years, David has been published in dozens of publications and has appeared on CNBC and Summit TV (South Africa), and is a regular guest on JSE Direct, a premier radio business channel in Johannesburg, South Africa. He He is also a regular commentator on www.kitco.com and www.mineweb.com David has lived and worked in Johannesburg, Los Angeles, London, Hong Kong, Bangkok, and Bali.
For more information go to: www.lakeshoretrading.co.za
Information contained herein has been obtained from sources believed to be reliable, but there is no guarantee as to completeness or accuracy. Any opinions expressed herein are statements of our judgment as of this date and are subject to change without notice.
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