Randgold Resources: In Gold We Trust

In the closing weeks of 2008, Americans have once again been shocked by a massive Wall Street scandal. Former Nasdaq chairman, Bernie Madoff was arrested for masterminding a $50 billion fraud. The "Bernie Mad(e)off-with-investors'-money" Ponzi scheme is just the latest Wall Street scandal to see the light of day.

I firmly believe that the Madoff $50 billion Ponzi scheme will be just the first of many Wall Street frauds that will be revealed in 2009. In the past, Americans trusted their hard-earned savings to Wall Street bankers, brokers, fund managers, and so-called professional money managers.

I seriously doubt that most Americans will do so in the future. Many Americans are now very understandably asking, “In whom can we trust?”

In Ben We Trust?

Americans should also be asking that same question with regard to the Federal Reserve's attempt to inflate its way out of massive US debt and a nasty downturn in the economy. This economic downturn is different in that it was born not just from excessive speculation but also of massive leverage and downright fraud. So there are an awful lot of excesses that need to be wrung out of the system.

The debts of the United States already stand at five times America's annual GDP and rising rapidly. Some Americans, such as us here at Oxbury Research, are now questioning how these huge loans will ever be repaid. Unfortunately, the answer is that the loans will be repaid by every current holder of US dollars and by future generations of Americans. It is sad that generations still unborn will be paying for the immense greed of a few.

Both President-elect Barack Obama and Fed head Ben Bernanke are students of the Great Depression and FDR's economic policies. I only hope that they don't adopt all of FDR's policies, particularly what FDR did in 1934.

First, FDR confiscated all gold from American citizens. Then, more importantly, FDR devalued the US dollar by 75 per cent versus gold. Since the US was still on a gold standard, all Americans and all overseas holders of US dollars lost 75 per cent of all their monetary wealth almost instantly. This was the easy way for the US government to wipe out 75 per cent of its national debt in one day!

Can something similar happen again? I believe it can. This time, however, the US government will be more subtle. The Federal Reserve will simply “print” so much money that the value of the US dollar will decline steadily which, in turn, will allow the US government to pay back their debt with much “cheaper” dollars.

Ben Bernanke is already rapidly going down that path and creating incredible amounts of “funny money” almost daily. The effect of his policy will be the same as FDR's policies were in 1934 – a drastically reduced lifestyle for most Americans.

In Gold We Trust

What can someone do to preserve their purchasing power and to preserve the wealth that they do have for their descendants? I believe the answer lies in something that has been a store of wealth for people for thousands of years – gold.

Gold is respected throughout the world for its value and rich history. Coins containing gold first appeared around 800 B.C., and the first pure gold coins were struck during the reign of King Croesus of Lydia about 300 years later.

There are myriad reasons to own gold. Some of the reasons would include: US dollar weakness, inflation, deflation, supply & demand, geopolitical risks, and diversification. A wonderful article titled Eight Reasons to Own Goldwas written by yours truly and can be found at Investopedia.com, which is an online subsidiary of Forbes magazine.

There are, of course, numerous ways for investors to own gold – gold bars and bullion, gold coins, gold ETFs such as GLD, gold mutual funds, or individual gold stocks. Today I want to draw investors' attention to one specific gold stock – Randgold Resources.

Randgold Resources (GOLD)

Randgold Resources is a gold mining company with major gold mines located in politically-stable areas of Western Africa. Major discoveries to date include the 7.5 million ounce Morila deposit in southern Mali, the 7+ million ounce Loulo deposit in western Mali, and the 4+ million ounce Tongon deposit in the Ivory Coast.

Gold production at the company's flagship Loulo mine in western Mali is being expanded. Higher output from the Loulo mine means that Randgold Resource's annual gold production will jump 50%, rising from 400,000 ounces in 2008 to more than 600,000 ounces in 2011.

Randgold Resources trades on the Nasdaq exchange under the symbol of GOLD. It is a very liquid stock with average daily volume in excess of 1 million shares. The company's market cap is in excess of $3 billion.

Randgold Resources is one of the few mining companies whose shares have actually risen in 2008! I believe that this is so because the company is extremely well-run. The company's CEO, Mark Bristow, has stuck to a “boring” long-term strategy and has eschewed deal-making and debt.

Mr. Bristow has instead focused on organic growth. He pursued only projects that would generate returns of at least 20 per cent, and repaid any debt incurred out of cash flows. As a result of Mr. Bristow's conservative strategy, the company is completely debt-free and has more than $250 million of cash sitting on its balance sheet!

Randgold Resources's stock price has ranged between $22.28 and $56.28 over the past 52 weeks. The stock is currently trading near $43. I believe that this price offers an excellent entry point for investors looking to own a high-quality, well-run gold company.

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Looking at the Market Through Slightly Bullish Lenses

As of the close on Wednesday we got another buy signal on the markets and I thought to myself that the whipsaws occurring these days are ridiculous. I’ve said this before that almost every time for the past two months the market looks like it wants to move in one direction and starts to gain steam it reverses course.

Looking at the chart below (click to enlarge), I drew some simple lines connecting recent highs to lows and lows to highs to show how much it resembles an EKG. If you're a swing trader like myself it makes it really difficult to enter positions and hold them longer than a few days because the trend reverses so quickly. For this reason I’ve mostly been trading gold/silver as the trend there seems to be a little bit longer, not changing every 4th day.

But the last time I got a bullish sign on the Dow I entered some longs and did fairly well, so near the close Wednesday I decided to enter a few long positions despite what common sense is telling me. What I mean by that is that it doesn’t feel quite right to buy this light volume holiday rally, but I’ve read that the difficult trade to make is more often the profitable trade. In fact, most traders I follow on Twitter or blogs I read seem convinced this market is going to roll over and play dead starting in January.

I wouldn’t be surprised to see heavy selling starting as early as today, but that’s one reason why I think we may move slightly higher than most expect. I’m not calling for a new bull or anything, just a continuation of this current bear market rally and I’m positioning my portfolio accordingly.

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Remember What Happened In the Market a Year Ago?

In looking through material from exactly one year ago in preparation for tomorrow's all-important (and exceedingly difficult) predictions for the new year, the following chart popped up from the January 2nd post titled "That was interesting".



It seems that the first day of trading last year set the tone for the next six months.

While broad equity markets set out on their year-long decline, oil began at just under $100 a barrel and got a good head start on its move to almost $150 from which it began tumbling in July. Similarly, gold was priced about $50 below where it stands today but was getting ready to surge to over $1,000 in March when the Bear Stearns leg of the credit crisis began.

A short excerpt:

Well, that really started the year off with a bang. Of course it probably wasn't the kind of a bang that most people were expecting but it was a bang nonetheless.

Oil hit $100 for the first time (briefly, so they say) and finished at over $99. This Bloomberg report said, "Three-figure prices may bring energy costs near the tipping point that will cause global economic growth to falter."

Didn't they say that about $50 and $60 and $70 and $80 and $90?

Gold made a new all-time high at over $860 closing in New York at $856.70. This Bloomberg report noted, "Investors are pouring money into the precious metal as part of a commodity surge with the dollar under pressure from the prospect of more cuts in U.S. borrowing costs."

Memories...

When the damage was tallied, it turned out to be one of the worst opening days in history. A USA Today report the next day was the subject of this post that contained an interesting graphic and some bad math along with some ominous parallels courtesy of Floyd Norris.

USAToday reports on yesterday's dismal performance of U.S. equity markets noting that the decline was the steepest opening day loss since 1983.

Hopes for a strong start to the new year barely lasted a half-hour Wednesday as stocks ran smack into the exact same fears that caused so much trouble in 2007.

All three major stock market indexes started sliding following a morning report showing manufacturing activity slowed in December, and the selling accelerated after oil prices briefly spiked above $100 a barrel. The news fanned concerns that the economy could be teetering on the edge of recession — and triggered Wall Street's worst January-opening performance in 15 years.

Maybe my math is wrong, but that looks more like it should be 25 years, not 15 years.

Floyd Norris at the New York Times reported on the relative damage to the S&P 500 via numbers provided by Howard Silverblatt. In this tally, yesterday's 1.4 percent plunge ranks as the 6th worst start to the new year.

Every one of the previous five came when the economy was in a recession, or not far from one.

Here’s the list:

1. 1932, down 3.7% on the first day. Thus began the last year of the worst part of the Great Depression. The National Bureau of Economic Research thinks the recession that began in August 1929 lasted until March 1933.
2. 2001, down 2.8%. A recession began in March.
3. 1980, down 2.0%. A recession began that month.
4. 1949, down 1.6%. A recession had begun in November 1948.
5. 1983, down 1.6%. A recession had ended in November 1982.

Now even if you make the leap that this somehow forecasts the economy, it doesn’t do much for the stock market investor. The stock market had great years in 1980 and 1983, and a good year in 1949. On the other hand, getting out at the beginning of 1932 or 2001 turned out to be a wise decision.

Today should be better.

Though it wasn't known until almost a year later, a recession was already officially underway at the time and, as it turns out, the next day was indeed better. After the 1.4 percent drop on Wednesday, the S&P 500 finished Thursday exactly where it began at 1447.16.

On Friday, however, the index plunged a whopping 2.4 percent (no, it doesn't seem like a lot now, but it did back then) before going on to lose five percent for the month of January in the beginning of what would turn out to be the worst year for stocks since the Great Depression.

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Gold Shines Brighter Thanks to Fed

By Don Miller

The currency markets' reaction to the Federal Reserve’s recent interest rate cuts has ignited a rally in gold, as investors weigh the benefits of owning the yellow metal versus U.S. Treasuries and the dollar.

As a result, gold has started to shine again as a stable source of value at a time when the dollar and other commodities – like oil and copper – have fallen hard. The spot price of gold has climbed above $870 an ounce on the New York Mercantile Exchange, up about 20% from its October lows.

Gold has been on a roller coaster ride in 2008, moving from its all time high of $1035 in March, to as low as $681 an ounce. Some of that decline occurred during the recent stock market plunge. Many investors were forced to liquidate profitable gold positions in order to raise money to cover their paper losses.

Its decline was then accelerated by the recent onslaught of financial bailouts, as many investors held a preference for liquidity and safety in the form of cash holdings guaranteed by the U.S. government. That was reflected in the skyrocketing prices of government bonds and investments in government-backed banks, which also lowered yields.

But with the Fed’s recent decision to cut its target interest rate to a range of 0% to 0.25%, the dollar has suffered a significant decline. Suddenly, foreign investors who were scooping up dollars have cut back on their flight to safety, knocking the dollar index ((NYBOT: DX)) down 10% in the last month. The index reflects the dollar’s value against the Euro, Japanese Yen, British Pound, Canadian Dollar, Swedish Krona, and Swiss Franc.

The Fed’s interest rate cut may also have given gold a comparative boost in the eyes of investors. Gold, which never pays interest, suddenly doesn’t look so bad when compared to T-bills, which also are paying zero interest lately.

Volatility has risen this year compared to previous years, and the last few months have been the most volatile of all – an indication of investor ambivalence. But any uncertainty about the increasing price of gold may have been waylaid by the Fed’s recent rate cut and its dampening effect on the dollar and Treasuries.

Consequently, don’t expect this rally to be short-lived. As we pointed out in our 2009 Outlook Report on Gold, the fundamentals in the market hold the promise of more gains ahead.

It appears unlikely central bankers around the world will stop stimulating economies, printing money and doing whatever it takes until growth and confidence are restored – even if the cost is rampant inflation.

Consider these wild card inflation indicators that Money Morning Contributing Editor Martin Hutchinson believes will carry gold prices to $1,500 an ounce by the end of 2009:

• Over $7 trillion of freshly minted U.S. dollars are now in circulation with the aim of saving the global financial system.


• The incoming Obama administration has promised that another $1 trillion or so stimulus package is on the way.


• It’s likely the Fed’s interest rate cuts will soon be followed by central banks around the world.

These economic stimuli are designed to do one thing – get the consumer spending again.

The bailout of the banks was the first step, but the banks are still keeping a tight rein on credit. Now the government is trying to get easily available, cheap money back into the hands of the consumer by running the printing presses around the clock.

“The government is pumping money in so many banks, and that money has to come out somewhere,” said Hutchinson.

Some of that money will “come out” into the economy in the form of higher stock prices. That will make consumers wealthier, and could give them more confidence in the economy. More confidence means more spending. As that happens, prices for goods should begin ticking upward, giving another booster shot to gold prices.

For instance some of that money is already going into gold bars and coins. In fact, the U.S. Mint was forced to suspend sales of the popular American Eagle and Buffalo gold coins for extended periods twice in the last year. The mint was unable to secure enough gold blanks from suppliers to match demand.

“I’ve never seen a case where demand was so high and supply was so short,” Chicago coin dealer Harlan Berk told the Associated Press.

With massive amounts of capital floating around, the time it takes to re-inflate the global economy will be far shorter than most analysts expect. Governments fear deflation more than anything. It appears they will only fight inflation when they are assured they have won the first battle, which is growth at any cost.

When inflation kicks in, the dollar’s buying power will suffer long-term. In fact, we expect a decline in all the world’s paper money, over time. Historically, investors in gold have prospered during periods of weakening fiat currencies.

That leaves gold as a bright light in the investment world, making it an odds-on favorite to open a new leg of a long-term uptrend.

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Gold Ends 2008 Higher for US, UK and Euro Investors; Stocks Suffer Record Rout

London Gold Market Report
By: Adrian Ash, BullionVault

THE PRICE OF GOLD BULLION slipped into the New Year's shutdown on Wednesday, ending 2008 a little shy of 3% above the close of 2007 for US investors at $865 an ounce.

The last London Gold Fix of the year also pegged the Gold Price in Euros at €614 for French, German and Italian buyers – more than 7% higher from 12 months ago.

UK gold investors saw the price end 2008 at £596 per ounce, fully 40% better from New Year's Eve 2007.

"Thin market volumes limited any major moves on the upside," reports Manqoba Madinane for Standard Bank in Jo'burg, "which kept precious metals under pressure in aftermarket activity [late Tuesday].

"The US Dollar did not weaken as much as we may have anticipated following worse-than-expected consumer confidence data – which also weighed on precious metals. This may have been a result of increased investment flows into US equity markets, shielding the greenback from economic headwinds."

US stock futures pointed higher as the last session of 2008 drew near. European stock market also gained before the lunchtime close. But like the S&P on Wall Street, both London and Frankfurt shares finished the year more than 30% lower overall, suffering their worst ever 12-month loss.

"We're dealing with something that is really historic and we haven't had a playbook," says US Treasury secretary Hank Paulson in an interview with the Financial Times.

Ignoring his own role in creating the credit bubble when he led Goldman Sachs as the investment bank's CEO, "The reason it has been difficult is, first of all, these excesses have been building up for many, many years," Paulson goes on.

"Secondly, we had a hopelessly outdated global architecture and regulatory authorities in the US."

Now those "excesses" are to be compounded by record levels of government debt and all-time lows in global interest rates – apparent solutions which have so far failed to stem capital losses and dividend cuts for equity buyers.

The outlook for Gold in 2009, in contrast, continues to hold strong – if only because everything looks so weak in comparison.

Adrian Ash
BullionVault

Gold price chart, no delay | Gold investment – simple, safe & efficient

Formerly City correspondent for The Daily Reckoning in London and head of editorial at the UK's leading financial advisory for private investors, Adrian Ash is the editor of Gold News and head of research at BullionVault – where you can Buy Gold Today vaulted in Zurich on $3 spreads and 0.8% dealing fees.

(c) BullionVault 2008

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The Intrinsic Value of Gold

It is said that gold is precious because it doesn't oxidize, it is relatively scarce, it is beautiful, and it is the only thing proven to hold its value over long periods. If gold is a good store of value, maintaining its purchasing power relative to other things over time (e.g., one ounce of gold buys about 20 barrels of oil on average), then it must have some intrinsic value around which its actual value fluctuates.

This chart is a crude attempt to find that intrinsic value, which I'm guessing is about $400/oz. give or take a bit. My rule of thumb for interpreting gold prices (which I don't try to predict) is that when gold trades above its intrinsic value, as it is now, that means that people are willing to pay a premium for its qualities. It's trading at a premium today because monetary policy is accommodative, and because geopolitical tensions (e.g., India/Pakistan, Israel/Hamas) are elevated. Gold tends to trade below its intrinsic value (e.g., in the 1950s and 60s) when monetary policy is tight and inflation risk and geopolitical risk is relatively low.

So if you are considering buying gold these days, you need to keep in mind that it is somewhat expensive. That's not to say it can't pay off, but there is a hurdle that needs to be overcome (i.e., fears of rising inflation and geopolitical disasters need to be realized) before gold prices can move higher. In addition, there is the issue of timing: over the next 10-20 years I would predict that gold will tend to drift back to its intrinsic value, thus rendering it a very poor investment—and don't forget that gold is one of the very few things that doesn't offer any yield. But that doesn't rule out gold going to $1500 should the Fed fail to withdraw in a timely fashion the massive amount of money it has supplied to the market in recent months.

Something to think about.

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Don't Miss the Coming Gold Bull

With the massive monetary expansion experienced in recent months and the promise for unprecedented levels of money and credit supply increase in coming months, the United States Federal Reserve looks on paper to be sending America straight into hyperinflation. Germany's post-World War I Weimar Republic, post-World War II Hungary, 2001 Argentina, and present day Zimbabwe are all analogous examples of massive debt monetization, which all led to hyperinflationary disaster. Never before has the entire world's economy been linked to one nation's, however, as is the case today with the United States.

In a case of economic mutually assured destruction, foreign creditor nations and their central banks can't afford to spark a run on the US Dollar, because it would kill their own export-based economies, as well as devalue their debt repayments and foreign exchange reserves. But the United States has been financing consumption through debt for decades and has resorted to monetary expansion to finance its debt and deficit spending, which is only going to increase with Barack Obama's infrastructure and social programs. The Troubled Assets Relief Program (TARP) itself amounts to $700B, all of which will essentially be "printed." Foreign demand for US debt is all but gone, as creditor nations are now attempting to unwind their USD positions. Huge creditor nations like China and Iran were net sellers of US Treasuries in recent months, attesting to the weakening of the American debt bubble. So where's all this excess liquidity go?

The answer is gold, and it is the only way to prevent the hyperinflationary scenarios referenced above from materializing in the United States.

The Fed has been on a money printing binge of unprecedented proportions, but has been able to thus far "trap" the excess liquidity from reaching the consumer level, which is what causes price inflation. It started a massive foreign currency sale this summer through the Exchange Stabilization Fund (ESF) that led to a supply increase of Euros and suppression of dollar usage. It has been liquifying troubled banks by issuing them T-bills financed through monetization in exchange for toxic assets by utilizing reverse repurchase agreements. And it has used the recent deleveraging and commodity collapse (partially caused by credit defaults in many of the overleveraged institutions that were supporting the commodity bull) to supply the temporary demand for US Dollars and feeding its own foreign exchange reserves.

But the excess liquidity thus far is trapped in time-sensitive and manipulated instruments now, and without a demand for American debt, it has to go somewhere. As T-bills expire and the stock market descends further, actual currency is going to be released out of sequestration into the economy. The Fed cannot allow the market to breach below its November lows, unless it wants widespread insolvency in insurers and banks, which are legally required to halt operations in the event of insolvency. I've heard estimates of 7500 and 8000 in the Dow as being minimum support levels that, if broken for an extended time, would lead to economic collapse in America as financials would all go under. To prevent this and to finance Obama's deficit spending, actual dollars will have to be injected into the system and they will be.

Weakness in the dollar causes strength in gold, which is something the Fed (through America's banks) has been suppressing for years. COMEX shorts dominate this suppression of gold prices, but this act will be discontinued to prevent economic collapse. Allowing gold's price to rise to current fair levels (and then rise further to represent gold's rising fundamentals) will soak up much of the excess liquidity, preventing hyperinflationary price increases in consumer goods. Gold reached backwardation this month, signifying the big gold market manipulators are abandoning their short positions.

Ben Bernanke is a proponent of dollar devaluation against gold and is a staunch advocate of Frank D. Roosevelt's decision to do so in 1934 during the Great Depression. Dollar devaluation is one of the government's most prized tools, as it allows debts to be paid back in devalued nominal terms, transferring risk and purchasing power destruction to American taxpayers, who have no clue what is going on. Inflation is a tax on the people and with a fiat currency, a power-limitless Fed can (and has) tax the hell out of the American people.

The dollar, and fiat currency as a whole, faces collapse now, however, as the artificial wealth created and used in the past few decades is now showing its nature as being just that-- artificial. The global monetary system will have to return to some sort of precious metal backing, directly or indirectly, and surging gold prices is essential for this to occur.

Rising gold prices represents the excess liquidity being soaked up and also causes nominal equity values to rise without dramatic rises in consumer goods. Gold has little utility outside of store of value, which is why its price hasn't collapsed at nearly the same rate other commodities, like oil and natural gas, have. As crude and steel suffered demand destruction from consumers losing wealth quickly, gold was barely touched at all and in fact probably would have shown even more strength hadn't it been for the aforementioned manipulations of the Fed and the global deleveraging of financial institutions.

Creditor nations like China and Iran are buying as much gold as is possible without dramatically disturbing prices, and Iran has said it wants to convert the majority of its foreign exchange reserves into bullion. Gold-buying sentiment is getting stronger as the massive seigniorage of the Fed, and with gold shorts being abandoned by the Fed, the huge demand is finally going to surface into price expansion.

Technically, gold appears poised to break out of its countertrend down move in its primary bull, leading to much higher prices soon. It broke out of its 50DMA on strong volume recently and is approaching a 200DMA breakout. With backwardation occuring this month, all indicators point to gold surging in the coming months.

Gold and gold miner stocks are also looking quite bullish. I recommend Royal Gold (RGLD), which recently broke out of a great long-term base, as well as El Dorado Gold (EGO), Goldcorp (GG), Iamgold Corp (IAG), Barrick Gold (ABX), Randgold Resources (GOLD), Jaguar Mining (JAG), Anglogold Ashanti (AU), Agnico-Eagle Mines (AEM), and Newpont Mining (NEM) for the coming year. Also, look into buying the Ultrashort 30-year Treasury Bond ETF (TBT) as the US debt bubble collapses and debt monetization starts to show up in the Fed's balance sheets. I do suggest buying lots of bullion, however, as stock market returns are in nominal dollar-denominated terms.

The American total credit market debt to GDP ratio is at unprecedented highs, well above 350%, and this with ridiculously manipulated inflation numbers artificially deflated through hedonics. The government deficit could top $2 trillion next year. And the Fed is going to print money to pay for it all. The only way to prevent hyperinflation is to return to some sold of hard asset-backed monetary system and to allow gold's price to rise dramatically.

My prediction: gold breaks $2000/oz in 2009 and $10,000/oz by 2012.

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Portfolio Advice for 2009: Stick to Gold, Stay Away from Stocks

By Eric Roseman

Records were broken in 2008 - money-losing records from an investor’s perspective.

U.S. stocks will record their worst calendar year since 1931. As measured by the S&P 500 Index, the broader market tanked 40% this year while the Dow Jones Industrials fell 36%.

U.S. stocks are already “dead money” since 1996. They’ve shown no net gain at all - including dividends. The ongoing market environment is eerily similar to another period of dismal returns - from 1966 to 1982. During those 16 years, the Dow and S&P 500 Index posted zero profits. Adjusted for soaring inflation, the markets actually recorded a loss.

Global equities as measured by the MSCI World Index posted its worst year since inception in 1969. International equities fared even worse with European and Japanese stocks down more than 45% and the MSCI Emerging Markets Index clobbered - down 53% in 2008.

World Markets Got Trashed in 2008

For stocks, the ongoing bear market has resulted in record mutual fund outflows as investors continue to dump their holdings and run for cover into money market funds.

Unfortunately, money market funds are now paying barely any yield at all since the Fed slashed interest rates to effectively 0% on December 16.

Only Treasury bonds, European and Japanese government bonds yielded a profit for investors in a wickedly harsh year for investors. As a currency investor, naturally you already know that the Japanese yen was also a winner against the dollar and euro as the “carry-trade” came to a crushing halt.

So Much for “Diversification”

With the exception of super-safe and low yielding U.S. Treasury bonds, yen and gold, the entire gamut of assets from stocks to non-Treasury bonds all plummeted in 2008.

Commodities, certain currencies, fine art and hedge funds all succumbed to brutal price declines. Overall, 2008 was the first losing year for U.S. and global stocks since 2002 and the worst period to be invested in financial and hard assets in more than 75 years.

Stop-losses rang out like pinball machines in 2008. Diversification across sectors, industries, countries and currencies proved futile. Almost everything was pummeled. By October 10, a panic gripped world markets as the threat of systemic collapse threatened the viability of the banking system.

Chaos to the Rescue

In late 2007, I introduced the TSI Chaos Portfolio to my Sovereign Society readers. It’s a U.S.-based portfolio of six equally-weighted investments, including short-term Treasury bonds, gold, Japanese yen and reverse-index funds that bet against the S&P 500 Index. Recently I added a seventh safe-haven - short-term German government bonds.

This cost-effective strategy dominated my recommendations in 2008 rising more than 17%, including dividends.

For growth investors, hedging your market exposure is vital in a secular bear market. I continue to like the TSI Chaos Portfolio in 2009 even though the stock market has probably suffered the bulk of its declines at this point.

Volatility will remain rampant in an uncertain economic environment marked by growing consumer credit woes, massive government bond issuance to support gargantuan fiscal spending plans and weak corporate earnings. Investors must hold downside market protection.

Short Most Commodities, But Stock Up on Gold/Silver

Starting in October 2007, I recommended my Commodity Trend Alert (CTA) subscribers begin to bet against oil and gas stocks as a way to hedge against the energy sector. At the time, oil prices were racing to US$100 a barrel and the oil stocks were in the midst of a multi-year bull market. We all know how that story fared in 2008.

Since peaking in July, the benchmark CRB Index has crashed more than 50% as the entire commodities complex continues to aggressively deflate in a rapidly slowing global economy.

To protect our natural resource exposure in CTA, I immediately issued a series of reverse-index purchases betting against commodities. We were most successful betting against industrial metals or base metals, as copper and other metals collapsed. That position, still open, has gained a cumulative 80% since August 2008.

And since September, CTA has been riding a broad commodity index to the basement as part of our reverse index strategy - up more than 60%. We also maintain hedges against gold, oil, gas and long-term Treasury bonds.

Gold has also been a strong performer compared to most other assets in 2008. Significantly, gold is the only asset that is completely outside the credit system and the only asset that has no liability.

In 2008, spot gold prices gained a modest 1% - not much in absolute terms but certainly impressive compared to other plunging assets. Silver, more of an industrial metal and therefore more vulnerable to broad economic trends, declined 18%.

Looking ahead to 2009, growth investors will only reluctantly return to stocks. Losses have been massive for investors since late 2007 as mutual fund redemptions hit records.

Stocks might indeed offer better values compared to mid-2007 after plummeting more than 40% from their highs. But domestic consumption in the United States, Japan and Europe is depressed and likely to remain under threat as unemployment rises and savings rates begin to rise again.

The correlation between a higher savings rate and corporate earnings is negative. It’s difficult to be bullish on earnings when the world’s largest economy will remain mired in a period of sluggish growth, debt retrenchment and rising job losses. The same is true for Japan and Germany - the second and third largest economies, respectively.

This is not the time to be aggressively buying stocks. Odds are prices will get cheaper again following any bear market rally. That’s certainly been the case every time stocks have rallied off their lows since October 2007.

Instead, make sure your portfolio includes gold, portfolio hedging strategies and income from high quality investment-grade corporate bonds in 2009.

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Will the New GCC Single Currency Include Gold?

Gulf Cooperation Council leaders yesterday concluded their 29th annual summit meeting in Muscat, Oman with a final approval for the creation of a single currency for the six-nation economic bloc, still targeted for 2010.

Saudi Arabia is the largest economy in the GCC and boasts substantial gold reserves. But whether gold will be included in the currency basket has not yet been decided.

Golden opportunity

GCC assistant secretary-general Mohammad Al Mazroui told Gulf News: ‘We first have to decide on the location of the Central Bank, then the Central Bank and Monetary Council will have to decide on the gold reserves for the Central Bank’.

The creation of the GCC single currency - likely to be known as the Khaleeji which means Gulf in Arabic - is a major gold event for two reasons.

First, the breaking of their dollar pegs by the Gulf Arab nations is clearly dollar negative. Secondly, any inclusion of gold either as a part of the monetary basket, or in the reserves of the new GCC Central Bank will create additional demand for the precious metal.

2009 deadline

The project is gathering pace, and no lesser a figure than Saudi Arabia’s King Abdullah has directed that GCC economic integration committees speed up their work and complete the whole exercise by September 2009.

It is only a couple of months since a group of Saudi businessmen allegedly bought $3.5 billion worth of gold, believed to be the largest ever single transaction for the precious metal. Perhaps in 2009 it will be gold rather than local currencies which become of interest to speculators about monetary reform in the GCC.

Gulf countries are keen to break away from the link with the US dollar because it ties them to inappropriate monetary policies that exaggerate the boom-to-bust cycle in their economies.

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Gold Prices Could Double...or More than Double

Running into year-end 2008 with a hatful of fears, losses, hope and questions?

Here's another puzzler to ponder as the $3 trillion of tax-funded bailouts now promised worldwide slowly roasts every bond holder's goose over Christmas ...

As a proportion of global investable assets, gold hasn't been this strongly weighted for the last 15 years.

But seeing how this financial crisis is the ugliest since the Great Depression, World War I or perhaps even earlier (depending on which political hack, wonk or meddler you speak to), it could double yet again - if not rise more than tenfold.

Either that, or the value of paper assets - meaning stocks and bonds - could tumble in half. If not sink by more than nine-tenths.

Am I kidding? No more than anyone else.

Tessa Jowell, a UK minister, reckons this downturn is "deeper than any we have known." Mervyn King, head of the Bank of England, says it's the worst financial crisis since before the Great War.

And given that "when investor stress reaches extreme readings" people buy gold - as John Hathaway at Tocqueville Asset Management put it in a 2006 paper - then we should expect the valuation of all the gold in the world to rise accordingly.

People turn to this rock, after all, when paper's too scary to own. Have we reached an "extreme" amid this financial end of days ...?

First, let s try (if we can) to ignore the $596 trillion worth of "notional" value outstanding in credit, currency, stock-market and collateralized derivatives.

Let's also put the Western world's real estate markets to one side, as well. The idea that housing is a tradable asset only shows up every generation or so. In between, the slumps and dips just make bricks and mortar somewhere to live in - not retire on.

That leaves us, pretty much, with stocks and bonds. And as the good folk of World Financial Exchanges will show in their data just as soon as 2008 croaks out, last year's peak of $90 trillion is set to take a knock. By our reckoning here at BullionVault, in fact (and with thanks to the Bank for International Settlements' latest figures), that gross market capitalization will show a fall of one-quarter and more in global equities and tradable debt.

On the other side of the trade, in contrast, gold priced in dollars actually rose in 2008, notching up its seventh annual gain on the trot. (That's not to say it won't fall next year; for now, the gold price in 2009 is not our beef.) And with the total, above-ground stock of gold now standing around 165,500 tonnes (guesswork courtesy of GFMS, the World Gold Council and ourselves), that puts the notional value of all gold ever mined in the world at some $4.6 trillion.

Yes, that's a very rough guess fashioned without a sharp pair of scissors. And yes, it includes all central-bank gold hoards, jewelry, tooth fillings, mobile-phone chips and Goldschlager flakes ... as well as gold bullion bars, coins and exchange-traded holdings.

But comparing all the gold in the world against stocks and bonds shows a far less than "extreme reading" for investor stress. So far, at least.

Back in 1980, for instance - when the Iranian crisis and war in Afghanistan last sent gold to a nominal peak at $850 an ounce - "the $1.6 trillion invested in gold exceeded the market value of $1.4 trillion in US stocks," according to Peter Bernstein in his classic tome, "The Power of Gold."

U.S. equities today stand closer to $13 trillion. Every ounce of gold ever mined is worth barely one-third.

Put another way (and yes, the numbers are rough once again), "We calculate the market cap of all above ground gold, including central bank reserves, equals about 1.4% of global financial assets," wrote Tocqueville's John Hathaway almost three years ago.

"In 1934 and 1982, when investor stress reached extreme readings, that percentage was between 20% to 25%."

In short, the mass people choosing to buy gold today remains tiny compared with the value which the world still puts on paper. And it's only when paper collapses in value - an event you might expect during the worst post-World War II crisis - that gold is likely to hit its true peak for this investment cycle.

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The Gold to Oil Ratio Does Matter

Seasonally, oil (USO) is extremely weak from October through December. In 2008 oil started October at about $100 and ended December around $40 or around a monstrous 60% decline. Oil is strongest seasonally from July through September with the strongest individual months being January and August. Oil’s 200dma sits right around $100, appears to have hit around its bottom and the 200dma is exerting a gravitational like effect pulling oil prices up.

By contrast gold’s 200dma is at about $860 per ounce. Gold (GLD) has recently passed through its strongest seasonal period from September to December. It maintains the uptrend from January to March, is asleep the rest of the year except for a strong rally in May. While seasonality is helpful, it does not etch the future in bullion and this year has been different.

The recent financial turmoil has caused tremendous technical damage to gold almost as if it was done intentionally to stunt its bull market during all of the financial carnage. GATA asserts that when the news is really bad gold goes down. Well, the last half of 2008, when gold should have performed well seasonally, it swooned from over $1,000 per ounce to the $680’s while Lehman Brothers (LEHMQ.PK) evaporated, Fannie (FNM) and Freddie (FRE) were nationalized and bailouts were served every night on the news. Such suppression has only wound the spring that much tighter.

It is important to keep in mind that both of these commodities are still in strong secular bull markets. The FRN$ is in a strong secular bear market as is the DOW and real estate. The Gold/Oil ratio is now about 23 barrels of oil per ounce of gold. The 200dma is about 9.5 and the historic average is around 15.

The extremes happened in 1974, 1986 and 1988 as the ratio approached 30 and 1977, 2001, 2008 at about 8 and 2006 at around 6. For these relative prices to return to more normal ratios something is going to give. Oil is either going to go up, gold is going to go down or to move into some sneaky calculus the rate of oil’s rise will be faster than gold’s. The silver (SLV) to oil ratio is not nearly as extreme as gold to oil but silver will most likely follow gold, either up or down, at a faster rate of change.

This is where geo-politics arrives. Are the oil producers willing to take so little value in exchange for their precious black gold? With Peak Oil (mp3) asserting itself the oil producers should hold the bargaining power. The latest IEA numbers indicate an extremely serious steeper than expected 9.1% decline rate. Yes, the Canadian Oil Trusts will rise in value as a safe, secure and stable source of oil. But perhaps the oil exporters should sit on their oil and let the importers roil and writhe in pain as E. M. Forster’s 1909 essay The Machine Stops is played out. After all, a barrel in the future will be worth more than a barrel today. Obviously, the collapse will not be televised.

At all times and in all circumstances gold remains money. It is the most powerful currency in the world. Oil is the world’s primary energy source which is why the gold to oil ratio is important. Gold is the most effective tool humans have to perform mental calculations of value. By analogy it is the tool used to determine how many calories an apple provides and how many calories it takes to collect and process the apple so it can be eaten.

Producing gold is essentially converting energy into bullion. How many calories go into producing a one ounce gold coin? In some cases to produce a single ounce hundreds of tons of rock are moved. Ultimately, money is about energy. To make it personal, how much value should you put on that nice steak dinner, bottle of water from Fiji or 3,000 mile Ceaser salad? Well, think through the supply chain and how much energy the good or service represents.

The world has a very serious problem. Because it has used a fiat currency with no definition or basis in reality for nearly 100 years and because oil production was constantly increasing during that time the effects of unwise capital investment were masked. Energy Return On Energy Invested (EROEI) calculations were not even performed. A fiat currency attempts to sustain the unsustainable while a commodity-based currency employs the strict laws of reality to ensure the unsustainable is not encouraged.

In other words, no one knew or calculated either how many calories the apple supplied or how many calories it took to procure and process the apple. The entire infrastructure of the entire world was built using mental calculations of value based on a derivative illusion. As natural and economic law assert reality and gold begins circulating as currency in ordinary daily transactions the distortions will be removed and the gross misallocations of capital will be revealed. I wonder what such a world will look like? Will The Machine Stop?

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Manipulation in the Gold and Silver Markets

This article deals with the manipulation that has been occurring in the gold and silver markets, and offers a solution. While this scandal has been going on for many years, at last more and more people are becoming aware that it is going on.

One of the first people to document the ongoing attempts to suppress the gold price was Frank Veneroso.

Next was Bill Murphy of GATA.org. GATA continues to press the issue. GATA has discovered that the IMF instructed its member banks to treat gold that had been leased to bullion banks and sold into the market, as if it were still in the vault! Imagine if an entrepreneur was running his business in this underhanded manner – how long would the government allow that?

A few years ago John Embry, while he was Portfolio Manager at RBC Global Investment Fund - a multi-billion dollar resource fund at the Royal Bank - prepared a memo for the bank’s clients that detailed the manipulation in the gold market.

Ted Butler has written extensively on the manipulation in the silver market.

This is something I have observed first hand since I became interested in silver in the mid-1960’s. It seemed that every time silver reached a peak, an invisible hand came out of nowhere and knocked the price back down to the starting point again. I wrote an article about this titled: ‘Once upon a time, in Never-Never Land’.

Every time a geo-political event, or a serious economic happening, such as the collapse of Bear-Stearns, causes gold to rise, (as it would be expected to do since it has always been a ‘safe haven investment’), the price immediately gets trounced, and investors and producers accept this new price as ‘THE price’, since the new event has now been discounted.

Whenever common sense tells you something is happening that should cause a rise in the price of gold and silver, you can count on intervention to cap the price. As a result, millions of investors and mining companies have lost billions of dollars that they would have earned if these markets had been allowed to run their normal course.

The manipulation is obvious in the following charts:

Charts courtesy www.kitco.com

This chart shows steady buying interest that took price from the low at 955.00 on July 14th to 985.00 the next day. The buying took place in Asia, then Europe, and carried over for about an hour in New York, when suddenly, in the space of minutes, an unseen entity dumped gold in the form of futures contracts (green line), without any attempt to obtain the best price possible. In about 5 minutes the gold price was down by 15.00, and the rise was over, as price drifted sideways for the rest of the day.

It was discovered later that several large banks, suspected to be HSBC (HBC) and JPMorgan Chase (JPM) and possibly one other bank, had switched from being ‘net long’ 5,381 gold contracts at the beginning of July 2008, to being ‘net short’ 87,609 gold contracts by the end of July. That is a 94,000 contract ‘turnaround’ and smacks of blatant interference in the market place, since these banks do not produce gold, nor are they likely to be hedging against that much gold in the vaults, since they do not own physical gold. Such a dramatic switch without any change in fundamentals is beyond reason.

Featured is the daily gold chart from October 13th. The blue line shows steady demand followed by consolidation early Oct 14th as recorded via the red line. Then a mysterious seller showed up shortly after the COMEX began trading in New York, and in the space of minutes the price was knocked down by 30.00. This is totally illogical, since the seller has no interest in obtaining the best price. His only interest is to destroy the price.

“In 1980 we neglected to control the price of gold. That was a mistake.” Paul Volcker.

“Central banks are ready to lease gold, should the price rise.” Alan Greenspan during Congressional testimony July 24/1998).

Featured is the price action right after the COMEX began trading in New York on October 16th. Within a few minutes the price was knocked down by 35.00 (green line), after the price had established a solid trading range between 830.00 and 850.00 during the previous two days (red and blue lines). This illogical dumping of gold contracts caused margin related selling to bring the price down another 15.00 before bargain hunters were able to level the price around the 800.00 mark.

These are just some of the examples of ‘irrational behavior’ on the part of several large traders on the COMEX, whose actions are not being controlled by the people who oversee the COMEX. While this article deals primarily with gold, the same manipulation exists in the silver markets. To repeat an earlier comment, ‘millions of investors (including miners) have lost billions of dollars because of the manipulation’. The US government is able to interfere in the markets by way of the Exchange Stabilization Fund which is run by the Federal Reserve and the Treasury Department. The size of the manipulation referred to in this article could not take place without the encouragement that is very likely provided by people who are highly placed in government.

Cause and effect

The effect of this manipulation in the gold and silver markets is an artificial low price. In view of the fact that bullish events are not being allowed to permit prices to rise, nevertheless these events will eventually have a positive effect on the price. The cause is real, but the effect is delayed. The steam in the kettle continues to boil, despite the lid being clamped down. The artificial low price stops the development of mining projects that would have been profitable at the higher price. The artificial low price also cuts into profit margins at every producing mine, making it more difficult to obtain funding for exploration to increase resources. Every mine in the world is at all times a ‘depleting asset’ and needs exploration to postpone the day when the last ounce is mined.

THE MANIPULATORS ONLY HAVE TWO WEAPONS.

The ammunition used by the manipulators is provided by two sources: Central banks (including the IMF), and the COMEX. While there is nothing anyone can do about the gold selling that originates with the central banks, there are ways to choke off the amount of precious metal that flows into the COMEX warehouses.

Those of us who are tired of the manipulators picking our pockets need to become active.

In 1978 – 1979 it was a rising silver price that caused gold to rise – silver was the leader. It makes sense therefore to concentrate on silver, especially since the central banks do not have hoards of silver.

A SOLUTION!

Mining companies that supply silver to the COMEX need to find a way to turn their silver into small bars (1 oz to 100 oz), and 1 oz rounds and sell these to the public. Already some mines are doing this by selling from their websites, and they are obtaining a hefty premium over the spot price. If your production is limited, join forces with a mine that is already merchandising silver products, or form a sales organization with other small mines. Hire some cracker-jack salespeople; there is a big market out there! Starve the COMEX if you want to see silver sell to realistic prices. Adjusted for inflation, the silver price of 48.00 that we saw in February of 1980, is trading at $4.00 today.

Next, instead of keeping money in the bank, or in various kinds of short-term notes, mining CEOs should store up silver, and show us that they believe in the product they are producing. Instead of cash on hand, buy futures contracts, and keep rolling them over.

Coin dealers and wholesalers need to buy 5,000 oz bars from the COMEX, take delivery, and contact a refiner who will turn the silver into retail products. If your operation is not large enough for a 5,000 oz purchase, then buy silver from people like Jason Hommel, who was smart enough to start doing this on a large scale.

Investors who can afford to spend $55,000.00 should consider buying a silver contract from the COMEX and taking delivery. James Sinclair at JSMineset.com will show you how to go about that.

Finally, anyone who holds any kind of a certificate that promises to deliver silver needs to make sure that the bank or institution that stores the silver is willing to provide bar numbers. Otherwise, when the day comes to collect, you may find that the silver does not exist. On my website you will find an article that I wrote about a fund that stores gold and silver at a bank in Western Canada. They invite auditors twice a year to audit the inventory.

The Madoff scheme is but one example of the lack of oversight on the part of people who have been placed in the position of protecting the public. In the US Congress, two of the people responsible for the mess that was created by Freddie Mac and Fannie Mae, Congressman Barney Franks and Senator Chris Dodd, are now part of the group that is trying to ‘fix’ the problem. The foxes are in the henhouse! It was Franks and Dodd, who for years received money from Fannie and Freddie, while they stood in the way of people who wanted to tighten the lending standard at these two mortgage lending institutions. Whatever happened to responsibility? Where is the outrage?

Featured is the weekly gold chart. The price is ready to breakout on the upside. The supporting indicators are positive (green dashed arrows). The 7 – 8 week cycles have been short (twice at 6 weeks). We are due for a longer cycle. A close above the blue arrow will indicate that week #4 is the start of a run up to the green arrow. Once 925.00 is reached, then 975 is next. Since Labor Day, the Federal Reserve’s assets (including huge amounts of toxic assets) have increased from 905.7 billion to 2.3 trillion dollars. This, along with the increase in the monetary base is going to add to price inflation and will cause a lot of investment money to enter the gold market. The gold rally that started in November has only just begun.

Featured is the weekly silver chart. The price has been rising since late October. The supporting indicators are positive (green dashed arrows). A close above the blue arrow sets up a target at the green arrow.

Thanks to Eric Hommelberg for the idea to use ‘historic spot charts’ to make my case. I applied the 11th commandment: “Thou shalt use every good idea thou comest upon.”

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Gold Delivers One of "Very Few" Positive Returns for 2008; Outlook Strong for 2009

London Gold Market Report
By: Adrian Ash, BullionVault

THE WHOLESALE PRICE OF PHYSICAL GOLD slipped in London on Tuesday, retreating 2% from yesterday's early 11-week high to trade at $871 an ounce.

World stock markets rose and crude oil fell in thin holiday trade. Bond prices pushed higher again, driving yields still further below inflation.

"By and large, the market is unwilling to trade gold from the short side," notes the latest Gold Futures analysis from Mitsui, the precious metals dealer, in London.

"While scrap selling across traditional hubs placed an obvious ceiling on gold scaling $900, this appears to have dissipated for now."

Indeed, "Gold is set to close the year as one of the very few assets posting a positive 2008 return," Mitsui goes on – "a very significant achievement [that] bodes well for the year ahead."

Looking to Gold in 2009, "as the current deflation reality eventually abates and inflation looms large over the market," says Mitsui, "in such environments gold theoretically should flourish."

Overnight, however, the US Dollar leapt 4¢ against the European single currency, driving it back to $1.3950 and supporting the Gold Price in Euros above €615 an ounce.

That put gold more than 5% higher for French, German and Italian investors from the close of 2007.

Versus the British Pound, the price of Gold continued to hold north of £600 an ounce, more than 37% above its closing level last year.

London's FTSE100 index, in contrast, has dropped one-third of its capitalization. Interest paid to cash-in-the-bank now trails the rate of inflation by the worst margin since 1980.

"The Israel-Hamas tension [has] continued lending support to gold," said Shuji Sugata at Mitsubishi Corp. Futures & Securities in Tokyo to Bloomberg today.

Preparing the outlook for Gold in 2009, "we may see some technical selling and year-end book squaring after the recent gain."

Tocom gold futures closed Tuesday – the last day of 2008 trading – some 16% lower from New Year's Day. The first annual loss in almost a decade came as the Japanese Yen leapt on the forex market, delivering its strongest performance since 1989.

Bruised by this same "risk aversion" – a flight to cash that saw domestic Japanese investors begin to unwind $6 trillion-worth of offshore investments – the Nikkei stock index ended the year more than 42% lower, its worst ever 12-month loss.

On the monetary front, meantime, the US government promised $5 billion to buy equity in GMAC, the struggling auto and mortgage finance company, in one of the last desperate acts of the Bush administration.

The White House also vowed late Monday to extend the tax-funded loans to General Motors by a further $1 billion.

"Technical momentum signals are still warning of further upside potential for the Dollar," reports Manqoba Madinane for Standard Bank in Johannesburg.

"This could see the Dollar endure volatile swings if [today's Consumer Confidence & Case-Shiller Home Price] data comes in worse than expected. This might then create a negative feedback loop, causing further drainage of tactical investment flows from precious metals today – further compromising upside potential."

Adrian Ash
BullionVault

Gold price chart, no delay | Gold investment – simple, safe & efficient

Formerly City correspondent for The Daily Reckoning in London and head of editorial at the UK's leading financial advisory for private investors, Adrian Ash is the editor of Gold News and head of research at BullionVault – where you can Buy Gold Today vaulted in Zurich on $3 spreads and 0.8% dealing fees.

(c) BullionVault 2008

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President of Euro Pacific Capital on Gold and the Dollar

Mike Norman, HardAssetsInvestor.com (Norman): Well, he's back. Mr. Doom and Gloom is here ... Peter Schiff, president of Euro Pacific Capital and author of the new book just out, "Bull Moves in Bear Markets."

Peter Schiff, president of Euro Pacific Capital (Schiff): "The Little Book ..."

Norman: "The Little Book ..."; it's in The Little Book Series. Well look ... the last time you were here, things were kind of going your way, but it looks like things have turned upside down.

All kidding aside, I know your big thing over the last seven or eight years has been gold. We're very supportive of gold on this show; we think that probably people should have some gold as part of their overall portfolio mix. But let's just look at what happened.

Several weeks ago, the U.S. stock market had its worst week in history ... even going back to the 1930s ... worst week in history. I saw a breakdown of various assets - all assets really - stocks, bonds, gold, commodities, oil. Gold was at the bottom of the list. The top-performing asset, and something that you hate, was the U.S dollar.

So how do you explain that? If we are going through the worst economic and financial crisis in history - precisely what gold is supposed to protect against - why would it perform so bad?

Schiff: Well, I think it will perform very well; you got to give it a little bit more time.

Norman: More time or more decimation?

Schiff: No, what's happening right now, Mike, is just de-leveraging, and so gold is going down for the same reason a lot of stocks are going down, a lot of commodities are going down. There's a lot of leverage in this system, there's a lot of margin calls, a lot of liquidation; a lot of people are having to sell whatever they own to pay off their debts.

Norman: But look at where the money is going ... the money is going into U.S. sovereigns, Treasuries ... it's going into the U.S. dollar.

Schiff: For now.

Norman: Why for now?

Schiff: Right now there's some perception of safety there, but it's the opposite of the leveraging. If you're selling your assets, you're accumulating dollars; but ultimately right now, it's like there's been this gigantic nuclear explosion in the United States, and everybody is running toward the blast. Pretty soon they're going to figure out they're going in the wrong direction.

Norman: You always talk about gold as a currency, and we have seen currencies appreciate - the yen, for example, the dollar tremendously, for example, but gold has not held up.

Schiff: Well, if you actually look at gold versus other currencies, in the last couple of weeks gold has made new record highs in terms of the South African rand, the Canadian and Australian dollars ... so gold was not doing as poorly as many of the currencies, and I think this is all short term.

I think you're going to see a lot of money moving into gold, and if you look at how much gold has gone down from the peak, the peak was about a thousand ... it's off about 25%. Stocks are off 40%. Gold is still up during this year against the Dow.

Norman: Let's see the performance from this point forward; we'll look back at this again and we'll revisit this issue.

Let's talk about something else, something that you have also ... and I just mentioned it ... the U.S. dollar. You were very, very negative. In the last month, we have seen unprecedented actions by the U.S. Fed in terms of expansion of the monetary basis; in other words, printing money ... what you call printing money ... and despite that, the dollar has remained incredibly strong.

How do you explain that according to your logic?

Schiff: Everything the government is doing is inherently negative for the dollar, and all of this...

Norman: It's not playing out that way.

Schiff: It will; you've got to give it time.

I remember when I was on television talking about the subprime and people were telling me it's no big deal, and I said, just wait a while; give it time

Look, everything that we're doing - all the bailouts, all the stimulus packages - this is all being financed by inflation. It's inherently terrible for the dollar.

Norman: But you just said yourself that everything is deflating.

Schiff: But right now, Mike, you're getting this de-leveraging, and this is benefitting the dollar, so despite the horrific fundamentals for the dollar, it's going up anyway.

But ultimately, when this phony rally runs out of steam, the dollar is going to collapse, and that's when we're going to have a much greater crisis because now you're going to have a collapsing dollar, which is going to push long-term interest rates up, commodity prices up.

Norman: I still don't understand why the dollar is going to collapse. So you're saying that the Fed is just going to allow ... or leave this enormous amount of liquidity in there, that at some point down the road, if we recover, they're not going Scto take it out?

Schiff: Look, they have no control over it. The Fed is trying to artificially reflate our phony economy, right?

We had this economy that was based on Americans borrowing money and then spending it on products. We have this huge debt finance bubble which is collapsing, and it's being supported by foreigners.

But when this artificial demand for Treasuries goes away, the Fed is going to try to print a lot of money and the dollar is going to get killed.

Norman: All right; I'm going to ask you to hold on. Folks, check back because we're going to do the second part of my interview with Peter Schiff, so check back to this site. This is Mike Norman; bye for now.

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What Does Gold's Price Behavior Mean?

I am no gold analyst, but the metal has always interested and perplexed me. It is supposed be a hedge against inflation as also a savior in bad times – depression/deflation scenarios.

A Business Week report explains:

It can be argued that gold's price spike to a record high of almost $1,030 an ounce last March had more to do with a surge of strength in commodities as a whole than anything specific to the yellow metal. Unable to buck the general sell-off in commodities since the summer, gold sank to a low of $680 in November before rebounding above $800 as the end of the year approached. Now that a new era for commodities seems to have begun—one likely to be characterized by greater price stability—any future gains by gold will have to come on its merits as a perceived safe-haven store of wealth, a hedge against inflation, and as a desirable component of jewelry.

…. cited questions he has received as to whether gold is still a safe haven asset—and if so, why the metal hasn't performed better during the recent economic tumult. Meger believes gold remains a safe haven asset and says it has weathered much smaller percentage decreases in price than have other commodities while avoiding the extreme volatility seen in other financial instruments. In fact, some of the selling pressure has been the direct result of gold's function as a store of wealth with easy liquidity, he points out...

The true inflection point for gold, however, will come when concerns about deflation give way to inflation worries, Meger predicts...

Much like the stock market, which is way ahead of the economy, the price of gold is reflecting the market's belief that the worst of the recession is over, he says.” (All emphasis added.)

The main point is that gold can be sold in times of chaos and disorder, and hence you should invest in it if you expect a major deflation/unemployment/depression scenario. Also, in case of expectations of inflation or high-inflation when the value of currency is falling rapidly, gold can be a proxy as it is real, compared to fiat money (fiat or order by the government that it should be accepted as a means of payment), which is created out of thin air without any real asset backing. As the trust in a given currency bursts, gold increases in value as it is anticipated that gold can be used as currency for payment of goods and services if the currency fails.

Further this distrust in the fiat currency makes governments and central banks jittery, and more so in the case of US dollar, which is a reserve currency for many countries/institutions. The fear that this reserve currency may now change to gold because of the lack of faith in US dollar has lead to manipulation theories where various central banks are supposed to have sold gold in a coordinated fashion to strengthen the US dollar, and the spike from July in USD was as a result of this effort which also squeezed the dollar shorts. Gold in other words is an inverted dollar.

Source: gold-eagle.com

What I understand is that the current move up above $800 is because of the weakening of the dollar due to the Fed rate cut to zero. However, it is expected that ECB and BOE will also follow with their own ZIRP (Zero interest policy) and it would be interesting to watch how US dollar and gold behave thereafter. Also, the current geo-political situation in the Gaza strip and the Indo-Pak situation is supposed to have given it a further push.

Another point made by the Business Week article referred to above is:

Not everyone favors gold, even as a mere hedge against inflation. Historically, the returns on the physical commodity are miserable, although commodity futures are "somewhat more favorable as a diversifier," according to Rick Miller, founder of Sensible Financial Planning and Management in Cambridge, Mass.

Those looking to gold as a store of wealth as part of a doomsday portfolio are better off holding gold coins, which they can keep in their physical possession.

"If the worst happens and you want gold because nothing else is worth anything, being able to say 'I have shares in this gold ETF' and going to the vault of a bank to get it out is unlikely to cut much ice," Miller says.

Prices of gold coins have spiked in the last six to seven weeks due to a shortage of supply and a jump in demand, even as gold futures prices have come down on the Comex division of the New York Mercantile Exchange. The American gold eagle, one of the three most popular gold coins, is now selling for the spot price of $845 plus a premium of $80 to $100, compared with the usual premium of 4.5% to 6.0%—or $38 to $51…

That indicates small investors are moving more and more into gold because they're worried about the economy… (All emphasis added.)

So while physical demand has been strong, the question that arises is why did gold fall to $680? The manipulation theory explained above has been given by many. It is a fact that the paper gold market is 40 times the physical one and the former sets the price. The other reason is the deleveraging or forced selling due to the credit crisis.

If gold prices are the leading indicator, what is its behavior telling us about the possible future economic conditions? It appears to be a ‘heads you win-tails you win’ asset class both in a potential inflationary (or hyperinflationary as some think) situation and deflationary or depression conditions – desire to hold gold should be pre-dominant in both situations. In such a situation, shouldn't gold prices already be at the levels they are projected to be - at $2000+? Why this hesitancy? Is the behavior giving some other signal? Or am I missing something? I look forward to readers’ views and comments.

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