PRESS RELEASE
Dollar demand for gold reached an all time quarterly record of US$32bn in the third quarter of 2008 as investors around the world sought refuge from the global financial meltdown, and jewellery buyers returned to the market in droves on a lower gold price. This figure was 45% higher than the previous record in Q2 2008.Tonnage demand was also 18% higher than a year earlier.
Identifiable investment demand, which incorporates demand for gold through exchange traded funds (ETFs) and bars and coins, was the biggest contributor to overall demand during the quarter, up to US$10.7bn (382 tonnes), double year earlier levels, according to Gold Demand Trends, released today by World Gold Council (WGC).
The figures, compiled independently for WGC by GFMS Limited, show retail investment demand rose 121% to 232 tonnes in Q3, with strong bar and coin buying reported in Swiss, German and US markets. The quarter also witnessed widespread reports of gold shortages among bullion dealers across the globe, as investors searched for a haven. Overall, Q3 saw Europe reach an all time record 51 tonnes of bar and coin buying and France became a net investor in gold for the first time since the early 1980s.
Gold ETFs enjoyed a record quarterly inflow of 150 tonnes in Q3, boosted by extreme levels of economic and financial uncertainty. The peak in inflows occurred in late September, triggered by the collapse of Lehman Brothers and a fear of banking sector failures. Net inflows surged by an unprecedented 111 tonnes during 5 consecutive trading days, equivalent to US$7bn.
As the financial crisis deepened these increases in identifiable investment demand were offset by outflows in “inferred investment”. This was characterised by hedge funds liquidating investment positions in gold as they were forced to raise cash and by institutions liquidating commodity index investments, including gold, as fears of recession deepened. The trend largely reflects gold’s better performance relative to other assets and also explains why the gold price did not perform better during the quarter in the face of very strong demand.
Q3 saw a record US$18bn of consumer demand for gold jewellery with buyers returning to the market on lower price points, around and below US$800, demonstrating the underlying positive sentiment towards gold and its recognition as a store of value. The biggest contributor to the positive trend was India which witnessed a rise of 65% in US$ value or 40 tonnes relative to previous year levels, with the Middle East, Indonesia and China all enjoying rises of more than 40% in value or 10% in tonnage. There were however, strong declines in Western markets with the US down 9% in value and 29% in tonnes, and the UK down 5% in value and 26% in tonnes due to the overall decline in the retail market.
James E. Burton, Chief Executive Officer of World Gold Council, commented:
"Gold’s universal role as a store of value has shone through during this quarter helping attract investors and consumers to all forms of gold ownership. The rise in demand for gold bars and coins has been impressive as has the record rise in gold ETF inflows. Perhaps most encouraging is the return to positive jewellery buying which has been absent for several quarters due to the high levels of price volatility."
"Looking forward, given the uncertainty that surrounds the global economy, gold’s safe haven appeal should continue, but so too will the possibility of heightened levels of activity in the speculative side of the gold market, therefore it is too soon to call an end to market volatility."
Despite a deteriorating global and domestic economic climate, demand in India, the largest market for gold demand, recovered during the third quarter, encouraged by lower gold prices, a good monsoon and the onset of the festive season. At 250 tonnes, total consumer demand was 31% higher than Q3 2007 levels. In value terms, demand hit the record quarterly sum of US$5bn.
Demand in Greater China rose 18% to 109 tonnes, with the majority of this increase attributable to a strong rise in demand in mainland China (+16 tonnes).
Jewellery demand in the Middle East, which accounts for more than 90% of total consumer offtake in the region, rebounded in Q3 with tonnage demand up 15% on Q3 2007 and up 47% in dollar terms, hitting a new record of US$2.8bn. Retail investment demand, while relatively small in size at 7 tonnes, recorded strong growth of 23%, and 57% in dollar terms. In Turkey total Q3 offtake, at 99 tonnes, was up 15% on the levels of a year earlier, with investment demand smashing all previous records to reach 31.7 tonnes.
Industrial and dental demand declined to 104 tonnes during the quarter 11% down on year-earlier levels. Electronics, the largest component of industrial demand, was hampered by the downturn in the global economy and a lack of confidence within world markets.
Gold supply was down 9.7% on year-earlier levels, largely driven by a significant reduction in central bank sales. Sales under the Central Bank Gold Agreement (CBGA) totalled a provisional 357 tonnes in the CBGA year ending September 26, the lowest annual figure since the first Agreement was signed in 1999.
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GoldTraderAsia.com - Where to Buy and Sell Gold Bullion Bars, Gold Ingots, Gold Coins Collection and Gold Jewellery in Singapore.
To buy Hallmarked 999.9 Pure Swiss Gold Bars, Gold Bullion, Gold Ingots & 916 Gold Coins in Singapore or convert your 916 Physical Gold to physical 999.9 Pure Swiss Gold Bars, Click on Buy Gold Bullion Bars to find out more. You may Sell Gold Bullion Bars to us too.
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Wednesday, November 19, 2008
Wednesday, November 12, 2008
Why commodities could be heading for an upturn
Never has there been a time where the stock market has influenced the commodities markets so much. Last time I checked, the price of soybeans, cocoa or orange juice had absolutely no relationship to whether Microsoft (Nasdaq:MSFT), Disney (NYSE:DIS), or Google (Nasdaq:GOOG) declined in price.
But these days, we've got a serious blurring of the lines between global marketplaces. In addition, the prevalence and ease of electronic trading, coupled with well-capitalised hedge funds, means we're seeing all kinds of different markets having an affect on one another.
Not so long ago, it used to be that money typically flowed from one asset class to another - for example, from stocks to commodities. But that isn't happening now as most players have either bailed out of everything completely, or are selling assets to meet margin calls.
For commodity-watchers like me, I've looked on in surprise (as well as a little frustration) as commodities head the same way as stocks and pickings are slim. All the different commodities have suffered a hammering over the past few months, as the stock market's mess spills over.
The selling wave has taken all the major commodities to new lows for the year, with most markets giving back all their gains for 2008 and more. Let's see if we can pinpoint the next moves…
Oil's slippery downward slope… have we hit support?
There's no question that the oil has dominated the commodity headlines this year, topping out at $147 a barrel back in July.
But somewhat quietly amid the financial crisis, stock market slump, and bailout talk, oil has bounced down to around $60 a barrel. In turn, this has resulted in gasoline prices declining to the $2 a gallon level.
Although there might be more downside to come, it seems we may have hit a temporary support area here.
Natural gas could be nearing a bottom… but we need more evidence
Oil's partner in crime - natural gas - has also endured a vicious selloff. Having topped out in July, it's given up just as much ground as crude oil, with the December 2008 futures contract dropping a solid 8100 points from top-to-bottom. That's a whopping $81,000 change in equity.
Like crude oil, natural gas seems to have found a temporary support level as prices have consolidated a bit over the past two weeks and remained in the same area. In order to feel confident about a support level, prices have to tread water for a while without giving up more ground. We're going to watch the price action for a while, but we could be getting near a bottom here.
Even the safe havens are on shaky foundations
Ask most folks to name which markets are usually the beneficiaries of an unstable financial market… and you'll likely get the resounding answer: "Gold and silver."
Nine times out of ten, they'd be right. But not today. Even amid the economic turmoil, the safe haven hard asset metals can't muster up any bullish action.
Sure, they got caught up in the bullish frenzy over the summer, just like the other markets. But when the music stopped, investors decided to bail out of the metals, too.
However, take a look at the charts and you can see that they've joined oil and natural gas in trying to establish some support. We can see evidence of this in the fact that neither metal has made a new low over the past two weeks. If the stock markets can find their footing here, then the metals may move up just the same.
As you can see, the December silver futures currently sit at $10.40 an ounce, while the December gold futures are trading around $753 an ounce - a far cry from their highs this year of $19.70 an ounce and $1,000 an ounce respectively.
If the market feels confident that the Federal Reserve's bailout plan will work, investors could start dipping their toes into the long side of the market. If so, that could result in gold and silver moving higher. Until that happens, however, remain cautious, as it doesn't take much for widespread selling to rear its ugly head again.
It seems that 'support' is the word of the moment for the commodities sector. The rest of the markets (corn, wheat, soybeans, coffee, cocoa, sugar, orange juice, and cotton) are all trying to find a foothold and establish some support.
Having been torn apart in the nasty selloff over the past few months, though, it may take some time. Remember, if you're going to play these markets, stick to limited-risk option strategies like credit option spreads.
• This article was written by Lee Lowell for the Smart Profits Report.
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GoldTraderAsia.com - Where to Buy and Sell Gold Bullion Bars, Gold Ingots, Gold Coins Collection and Gold Jewellery in Singapore.
To buy Hallmarked 999.9 Pure Swiss Gold Bars, Gold Bullion, Gold Ingots & 916 Gold Coins in Singapore or convert your 916 Physical Gold to physical 999.9 Pure Swiss Gold Bars, Click on Buy Gold Bullion Bars to find out more. You may Sell Gold Bullion Bars to us too.
----------------------------------------------------------------------------------------------
Friday, November 7, 2008
Is It Really Time to Invest in Gold?
By Antonio Perez
NEW YORK—Gold prices reached an all-time high at a little above $1,000 per ounce days after investment bank Bear Stearns collapsed, and it has steadily declined since. These days, gold prices tend to fluctuate between $700 and $800 per ounce.
With the stock market in a tailspin much of the last two months, analysts expected gold prices to take off as stock investors search for a safe haven. But the exact opposite effect manifested, leaving commodities traders and investors searching for answers.
Analysts have different theories about why gold isn’t as high as it should be. But most believe that it is a solid investment nonetheless, amidst a market which isn’t expected to rebound in the immediate future. After all, unlike your local savings bank, gold could never go bankrupt.
The biggest reason for gold’s sluggish growth mentioned by analysts is a sudden strengthening of the U.S. dollar against most other currencies, due to an imminent economic recession in many European and Asian countries. Gold typically is a hedge (protection) against dollar devaluation, and a strengthening dollar kept gold prices in check.
The Gold and Silver Blog (GSB), an online depository of information and analysis for commodity investors, proposed several reasons for gold’s modest valuation, including a collapse of the commodities market and weak demand due to economic woes around the globe.
“Since the summer months, commodities have been on the rapid decline. Oil has fallen by more than half from its peak price of $147,” the report said.
Other precious metals such as silver and nickel have also been hurt. While gold is holding steady, its prospects nevertheless have been dampened by the overall commodities market.
A second reason cited by GSB experts is a weakened demand for gold. Production of jewelry, watches, and other luxury items is the largest non-investment demand for gold. As consumer discretionary spending declines, sales of such luxury items will likewise falter.
Whatever the case may be, some investors are simply sitting on their cash. The stock, bond, currencies, and commodities markets have taken such a hit that some investors may be reluctant to put their money in any type of investment.
But some analysts, such as Francisco Blanch from Merrill Lynch & Co., predict a big comeback for gold, oil, and other commodities. In a research report to clients last week, Blanch wrote that oil could top $150 per barrel, and gold could increase to $1,500 per ounce. He did not provide a timetable for reference.
History seems to support that conclusion. Gold prices typically climb during times of inflation, loose monetary policy, and an increased money supply. The U.S. Federal Reserve’s recent financial bailouts and printing of money seem to suggest that we may be headed toward that direction.
In the end, gold is subject to speculation and market turbulence like all other commodity investments. As experts weigh in with their opinions of investing in gold, investors should take solace in the following: currencies, banks, governments, and even civilizations have come and gone, but gold has always maintained its value—more or less—for the past five thousand years.
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GoldTraderAsia.com - Where to Buy and Sell Gold Bullion Bars, Gold Ingots, Gold Coins Collection and Gold Jewellery in Singapore.
To buy Hallmarked 999.9 Pure Swiss Gold Bars, Gold Bullion, Gold Ingots & 916 Gold Coins in Singapore or convert your 916 Physical Gold to physical 999.9 Pure Swiss Gold Bars, Click on Buy Gold Bullion Bars to find out more. You may Sell Gold Bullion Bars to us too.
----------------------------------------------------------------------------------------------
NEW YORK—Gold prices reached an all-time high at a little above $1,000 per ounce days after investment bank Bear Stearns collapsed, and it has steadily declined since. These days, gold prices tend to fluctuate between $700 and $800 per ounce.
With the stock market in a tailspin much of the last two months, analysts expected gold prices to take off as stock investors search for a safe haven. But the exact opposite effect manifested, leaving commodities traders and investors searching for answers.
Analysts have different theories about why gold isn’t as high as it should be. But most believe that it is a solid investment nonetheless, amidst a market which isn’t expected to rebound in the immediate future. After all, unlike your local savings bank, gold could never go bankrupt.
The biggest reason for gold’s sluggish growth mentioned by analysts is a sudden strengthening of the U.S. dollar against most other currencies, due to an imminent economic recession in many European and Asian countries. Gold typically is a hedge (protection) against dollar devaluation, and a strengthening dollar kept gold prices in check.
The Gold and Silver Blog (GSB), an online depository of information and analysis for commodity investors, proposed several reasons for gold’s modest valuation, including a collapse of the commodities market and weak demand due to economic woes around the globe.
“Since the summer months, commodities have been on the rapid decline. Oil has fallen by more than half from its peak price of $147,” the report said.
Other precious metals such as silver and nickel have also been hurt. While gold is holding steady, its prospects nevertheless have been dampened by the overall commodities market.
A second reason cited by GSB experts is a weakened demand for gold. Production of jewelry, watches, and other luxury items is the largest non-investment demand for gold. As consumer discretionary spending declines, sales of such luxury items will likewise falter.
Whatever the case may be, some investors are simply sitting on their cash. The stock, bond, currencies, and commodities markets have taken such a hit that some investors may be reluctant to put their money in any type of investment.
But some analysts, such as Francisco Blanch from Merrill Lynch & Co., predict a big comeback for gold, oil, and other commodities. In a research report to clients last week, Blanch wrote that oil could top $150 per barrel, and gold could increase to $1,500 per ounce. He did not provide a timetable for reference.
History seems to support that conclusion. Gold prices typically climb during times of inflation, loose monetary policy, and an increased money supply. The U.S. Federal Reserve’s recent financial bailouts and printing of money seem to suggest that we may be headed toward that direction.
In the end, gold is subject to speculation and market turbulence like all other commodity investments. As experts weigh in with their opinions of investing in gold, investors should take solace in the following: currencies, banks, governments, and even civilizations have come and gone, but gold has always maintained its value—more or less—for the past five thousand years.
----------------------------------------------------------------------------------------------
GoldTraderAsia.com - Where to Buy and Sell Gold Bullion Bars, Gold Ingots, Gold Coins Collection and Gold Jewellery in Singapore.
To buy Hallmarked 999.9 Pure Swiss Gold Bars, Gold Bullion, Gold Ingots & 916 Gold Coins in Singapore or convert your 916 Physical Gold to physical 999.9 Pure Swiss Gold Bars, Click on Buy Gold Bullion Bars to find out more. You may Sell Gold Bullion Bars to us too.
----------------------------------------------------------------------------------------------
Wednesday, November 5, 2008
Why precious metals look set for a winter rally
By Dominic Frisby
Most MoneyWeek readers will be aware by now of the fundamental reasons for owning gold and silver (if not, take a look at my cover story from last year). Today I'd like to take a purely technical look at the monetary metals. I think we are set for a decent run here.
We'll start with the Commitment of Traders (COT) Report. One of the more reliable indicators for the short- to medium-term direction of gold and silver, and indeed any commodity, is to see what position traders are taking on Commodities Futures Exchange (the world's largest exchange) in New York.
Traders are divided into three categories: commercials, large traders and small speculators. The simplified wisdom is that the large traders are the ones who get it wrong, while the commercial traders are the ones who get it right.
The commercials are often hedging miners' future gold production, and will often be short (betting the market will fall), while the large traders tend to be on the long side (betting the market will rise). The trading strategy is as follows: the more open interest – i.e. open positions – the more likely it is we are near a top; the less open interest, the more likely it is we are near a bottom. The more the large traders are long, the more likely the top, the less the commercials are short, the more likely the bottom.
Below is a weekly chart of gold for the last five years with, underneath, the positions taken by traders on the Comex. You can see that at the moment, the commercials have dramatically cut their short positions and the large traders their long positions to levels where significant market bottoms have previously taken place. The arrows I've drawn show previous bottoms and the corresponding positions of the traders.
The set-up for silver is even more bullish. In fact, it's as bullish it's been for five years or more.
Remember the COT Report is just one indicator and, as we have seen over the last few weeks, pretty much anything can happen in markets. The larger trend in silver is very much down from the highs of last spring, but the shorter-term picture for the next few months looks very bullish. I believe a rally to $14 or even $17 is very much on the cards.
We have also seen some very nice moves in some of the silver companies such as Silver Wheaton (NYSE:SLW) and First Majestic (TSE:FR) with some of them up almost 100% from their lows of last week, which bodes well.
It's also the time of year to buy precious metals
Seasonally, October is a time to sell gold and this year was no exception. But late October, early November is a good time to buy back, as you will usually get some kind of rally into the year end and often into Spring. The chart below from Nick Laird at ShareLynx (a site, by the way, which has some superb charts) shows the seasonal tendencies:
Since 2007, gold and silver have outperformed gold and silver stocks. In other words, you'd have been better off owning the metal. But the ratio of the metals to the miners has reached extreme levels. In fact, the most extreme levels since 2000-01, at the very bottom of the market. This extremity suggests we could be entering a period when stocks will outperform the metals.
Keener readers will remember a fortnight ago that I reported that we are close to a sell signal in gold and silver, according to the strategy I outlined here: How to make money from markets you know nothing about. However, often when you get such a signal, it's a good idea to wait for the chart rise back to its 52-week moving average and then review the situation (it doesn't always happen, of course). In this case, this would mean a return to silver at around $15.50 and gold at $870. I'm confident we'll get there before too long.
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GoldTraderAsia.com - Where to Buy and Sell Gold Bullion Bars, Gold Ingots, Gold Coins Collection and Gold Jewellery in Singapore.
To buy Hallmarked 999.9 Pure Swiss Gold Bars, Gold Bullion, Gold Ingots & 916 Gold Coins in Singapore or convert your 916 Physical Gold to physical 999.9 Pure Swiss Gold Bars, Click on Buy Gold Bullion Bars to find out more. You may Sell Gold Bullion Bars to us too.
----------------------------------------------------------------------------------------------
GoldTraderAsia.com - Where to Buy and Sell Gold Bullion Bars, Gold Ingots, Gold Coins Collection and Gold Jewellery in Singapore.
To buy Hallmarked 999.9 Pure Swiss Gold Bars, Gold Bullion, Gold Ingots & 916 Gold Coins in Singapore or convert your 916 Physical Gold to physical 999.9 Pure Swiss Gold Bars, Click on Buy Gold Bullion Bars to find out more. You may Sell Gold Bullion Bars to us too.
----------------------------------------------------------------------------------------------
Friday, October 31, 2008
How the Fed could create a new gold rush
There are only two things gold bulls should worry about from this point forward, now that the general commodity correction is out of the way and the froth has been worked out of the market: deflation in the strict sense of the term (monetary, not asset deflation) or a suddenly brightening economic outlook, both of which, in this writer's opinion, would require a political austerity hardly imaginable these days.
As far as deflation goes, we saw that the Federal Reserve inflated its balance sheet by an astonishing US$600 billion (almost 70%) in September, $170 billion of which ended up as an unsterilised liquidity injection into the financial system - also unprecedented any way it is measured.
It is almost as much as the entire US banking system created in the 12 months ending August 2008. It is about 20% of the cumulative amount of reserves the Fed has directly injected into the banking system since its inception in 1913. In one month, the Bernanke Fed "printed" MORE money than the Greenspan Fed in its entire easing campaign from 2001-03 - on top of which the banking system created $1.5 trillion.
Let me be the first to tell you that this represents a deliberate and abrupt change in monetary policy.
The Fed is no longer sterilising its liquidity injections by selling off assets - probably because it doesn't have any left. No one else seems to have caught on yet. The Fed is now printing with abandon, as literally as that can mean.
However, that isn't enough to convince the deflationists. They point out that banks aren't lending and that credit markets have frozen all over the world.
This is obviously true. However, it does not follow from this that there will be deflation. Let me reiterate that first, whether deflation comes about or not (I think not), the financial crisis is deepening precisely because, up until last month at any rate, the Fed had not created much money, despite the massive rate cuts. This policy was unconventional and deliberate. It was aimed at gold.
It has produced many things that the Austrian business cycle theory would predict from the policy.
The enterprises that are failing today are boom dependent. They have come to depend not only on the artificial stimulus of lower interest rates, but on a continued expansion in credit and money supply.
Indeed, Fed and Treasury officials, the media and Wall Street all talk as if the economy could not grow if the banks were not producing new credit. For them, boom and growth are one and the same thing.
The market is telling you that some operations are uneconomical in the absence of this "stimulus."
If the Fed continued on its austerity program (with respect to the printing press), the dominoes would no doubt continue to fall. This would be a process of returning the economy to equilibrium, if you will.
That is the definition of a bust or recession. It would probably be deflationary.
The Fed wasn't aiming for that. It wanted only to put the squeeze on inflation expectations building in the gold and currency markets without undermining the boom. It was a bold and new move, but naive. But its actions can only suggest that it is realizing this, and is not prepared to do what is right - nothing.
Lending strikes are not new. They are typical at the height of a crisis.
The Fed has published data on reserves only up until the third week of September, so it does not yet reflect the $170 billion net increase in reserves created by the Fed through the entire month, as I had reported last week. However, up to Sept. 24, the Fed created some $84 billion in reserves, while the figure for total reserves increased by $67 billion (from $44 to $111 billion) in the same period.
Excess reserves, meanwhile, increased by about the same amount.
Don't get caught up in the numbers. These facts essentially support the view that banks aren't lending out those new reserves. However, this fact is neither new nor typically long lasting.
US depository institutions are required to have about 10% of their checkable demand deposits at the Fed as reserve. This amount peaked at a little over $60 billion in the mid-'90s, declined to about $40 billion by the end of the century and has hovered around that number ever since, as if inflation did not exist. It pales in comparison with the more than $1.5 trillion in reserves that the Fed has pumped into the banking system in its entire 95-year history or the $4-5 trillion in deposits that the US banking system has created on top of that in the same period (even after accounting for deposits destroyed).
This is leverage, but the Fed, not the stock market, controls the denominator.
The reason that total reserves have been shrinking has to do with reserve requirements. Although savings deposits are often checkable in practice and can be accessed by debit cards, banks are not required to keep reserves against them. Therefore, banks like to sweep (and create) as many of these deposits as possible into the savings categories. That's why there is an upward bias to the underlying trend in the ratio of excess to total reserves. It does not reflect an increasing tendency for bankers to restrict lending voluntarily, but likely understates the inflation in reserves.
But while the figure on total reserves may have become obsolete and lost much of its relevance, big changes in the data are always important and shed light on things.
Today, the Fed is opening new windows through which to transmit policy. It can inject liquidity directly into money markets, and now commercial paper markets. It can lend directly to primary dealers. It can buy mortgages. It can pay interest on deposits, which will have two effects: exposing the hidden reserves (above) and luring money into the Fed. The latter is deflationary, but the interest payments are inflationary, if "unsterilised." At every crisis that is bigger than the last, the deflation argument is always compelling. But it is fundamentally misguided if it is related to the idea of asset deflation or deleveraging. These concepts are not interchangeable with deflation.
Deflation, for instance, hasn't occurred since 1933, but deleveraging and asset deflation have, often - last in the 2000-02 bear market, and even as the Fed and banking system created a bunch of money.
Banks don't make money on the interest differential from lending out other people's deposits. They make money by lending out more than they take in…by "creating" deposits (i.e., inflation).
This is what a fractional reserve banking system does. It will lend again once it is confident that the central bank is making funds easily available and stands ready to bail banks out. By not printing until last month and letting Lehman go, the Fed sent out mixed messages that it is only now clearing up.
Abolishing the Fed would be a great idea. Your freedom would be secure. Recessions would be gone. Governments would not be able to increase spending without immediate retribution. Growth and equality would become synonymous.
Crazy? Not really. It's basic economics. However, it appears somewhat utopian given the public's attitudes about the market and politics.
Most of the world, led by its political leaders, believes that the economic crisis was caused by greed and excess in the private sector, that the market is inherently unstable or that deregulation was the culprit.
Even some Austrian School authors blame the repeal of Glass-Steagall - the New Deal-era legislation that prohibited bank holding companies from owning nonbank financial firms or competing with securities and insurance companies - for the crisis. That's ironic for reasons I won't get into here, but it is a qualified charge - meaning deregulation is a good idea only if the central bank didn't exist. I personally don't agree.
Still, people by and large do NOT see monetary and fiscal policy as interventions causing disequilibrium.
They see them as offsetting and stabilising institutions - safety nets and tools of economic and social management - as they were supposedly envisioned.
For this reason, I posit, central banks and governments do not have the political will it takes to do nothing.
The change in Fed policy last month proves precisely that, which is why gold should soar.
I believe the markets are wrong again to perceive a deflationary outcome. It is an entirely different monetary system than existed in the 1930s, when the Fed could not simply print up reserves.
Deleveraging and asset deflation are not bearish for gold, as they don't necessarily imply a contraction in money supply, and rarely have. They may be bearish for gold stocks, but they are bullish for gold prices, because they are the very factors that motivate the near-certain cries for new credit (or more money) arising from a bad understanding of the true causes of the crisis. They are not new and are ultimately dwarfed by the next crisis.
But maybe the deflationists will be right about the behavior of banks this time. They have been wrong at each point in history when the economy faced a crisis caused by inflation. The thymological (historical) experience is that when the Fed inflates, the banking system does soon after. The Fed has never inflated in one month as much as it did in September. So the odds are against deflationists.
Indeed, the money supply could grow 25-50% in less than a year if that liquidity isn't taken back.
Ultimately, though, both the prior boom and the bust can be explained wholly by the Fed's specific policies. As will the next boom... in gold mining!
• This article was written by Ed Bugos for Whiskey and Gunpowder
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GoldTraderAsia.com - Where to Buy and Sell Gold Bullion Bars, Gold Ingots, Gold Coins Collection and Gold Jewellery in Singapore.
To buy Hallmarked 999.9 Pure Swiss Gold Bars, Gold Bullion, Gold Ingots & 916 Gold Coins in Singapore or convert your 916 Physical Gold to physical 999.9 Pure Swiss Gold Bars, Click on Buy Gold Bullion Bars to find out more. You may Sell Gold Bullion Bars to us too.
----------------------------------------------------------------------------------------------
As far as deflation goes, we saw that the Federal Reserve inflated its balance sheet by an astonishing US$600 billion (almost 70%) in September, $170 billion of which ended up as an unsterilised liquidity injection into the financial system - also unprecedented any way it is measured.
It is almost as much as the entire US banking system created in the 12 months ending August 2008. It is about 20% of the cumulative amount of reserves the Fed has directly injected into the banking system since its inception in 1913. In one month, the Bernanke Fed "printed" MORE money than the Greenspan Fed in its entire easing campaign from 2001-03 - on top of which the banking system created $1.5 trillion.
Let me be the first to tell you that this represents a deliberate and abrupt change in monetary policy.
The Fed is no longer sterilising its liquidity injections by selling off assets - probably because it doesn't have any left. No one else seems to have caught on yet. The Fed is now printing with abandon, as literally as that can mean.
However, that isn't enough to convince the deflationists. They point out that banks aren't lending and that credit markets have frozen all over the world.
This is obviously true. However, it does not follow from this that there will be deflation. Let me reiterate that first, whether deflation comes about or not (I think not), the financial crisis is deepening precisely because, up until last month at any rate, the Fed had not created much money, despite the massive rate cuts. This policy was unconventional and deliberate. It was aimed at gold.
It has produced many things that the Austrian business cycle theory would predict from the policy.
The enterprises that are failing today are boom dependent. They have come to depend not only on the artificial stimulus of lower interest rates, but on a continued expansion in credit and money supply.
Indeed, Fed and Treasury officials, the media and Wall Street all talk as if the economy could not grow if the banks were not producing new credit. For them, boom and growth are one and the same thing.
The market is telling you that some operations are uneconomical in the absence of this "stimulus."
If the Fed continued on its austerity program (with respect to the printing press), the dominoes would no doubt continue to fall. This would be a process of returning the economy to equilibrium, if you will.
That is the definition of a bust or recession. It would probably be deflationary.
The Fed wasn't aiming for that. It wanted only to put the squeeze on inflation expectations building in the gold and currency markets without undermining the boom. It was a bold and new move, but naive. But its actions can only suggest that it is realizing this, and is not prepared to do what is right - nothing.
Lending strikes are not new. They are typical at the height of a crisis.
The Fed has published data on reserves only up until the third week of September, so it does not yet reflect the $170 billion net increase in reserves created by the Fed through the entire month, as I had reported last week. However, up to Sept. 24, the Fed created some $84 billion in reserves, while the figure for total reserves increased by $67 billion (from $44 to $111 billion) in the same period.
Excess reserves, meanwhile, increased by about the same amount.
Don't get caught up in the numbers. These facts essentially support the view that banks aren't lending out those new reserves. However, this fact is neither new nor typically long lasting.
US depository institutions are required to have about 10% of their checkable demand deposits at the Fed as reserve. This amount peaked at a little over $60 billion in the mid-'90s, declined to about $40 billion by the end of the century and has hovered around that number ever since, as if inflation did not exist. It pales in comparison with the more than $1.5 trillion in reserves that the Fed has pumped into the banking system in its entire 95-year history or the $4-5 trillion in deposits that the US banking system has created on top of that in the same period (even after accounting for deposits destroyed).
This is leverage, but the Fed, not the stock market, controls the denominator.
The reason that total reserves have been shrinking has to do with reserve requirements. Although savings deposits are often checkable in practice and can be accessed by debit cards, banks are not required to keep reserves against them. Therefore, banks like to sweep (and create) as many of these deposits as possible into the savings categories. That's why there is an upward bias to the underlying trend in the ratio of excess to total reserves. It does not reflect an increasing tendency for bankers to restrict lending voluntarily, but likely understates the inflation in reserves.
But while the figure on total reserves may have become obsolete and lost much of its relevance, big changes in the data are always important and shed light on things.
Today, the Fed is opening new windows through which to transmit policy. It can inject liquidity directly into money markets, and now commercial paper markets. It can lend directly to primary dealers. It can buy mortgages. It can pay interest on deposits, which will have two effects: exposing the hidden reserves (above) and luring money into the Fed. The latter is deflationary, but the interest payments are inflationary, if "unsterilised." At every crisis that is bigger than the last, the deflation argument is always compelling. But it is fundamentally misguided if it is related to the idea of asset deflation or deleveraging. These concepts are not interchangeable with deflation.
Deflation, for instance, hasn't occurred since 1933, but deleveraging and asset deflation have, often - last in the 2000-02 bear market, and even as the Fed and banking system created a bunch of money.
Banks don't make money on the interest differential from lending out other people's deposits. They make money by lending out more than they take in…by "creating" deposits (i.e., inflation).
This is what a fractional reserve banking system does. It will lend again once it is confident that the central bank is making funds easily available and stands ready to bail banks out. By not printing until last month and letting Lehman go, the Fed sent out mixed messages that it is only now clearing up.
Abolishing the Fed would be a great idea. Your freedom would be secure. Recessions would be gone. Governments would not be able to increase spending without immediate retribution. Growth and equality would become synonymous.
Crazy? Not really. It's basic economics. However, it appears somewhat utopian given the public's attitudes about the market and politics.
Most of the world, led by its political leaders, believes that the economic crisis was caused by greed and excess in the private sector, that the market is inherently unstable or that deregulation was the culprit.
Even some Austrian School authors blame the repeal of Glass-Steagall - the New Deal-era legislation that prohibited bank holding companies from owning nonbank financial firms or competing with securities and insurance companies - for the crisis. That's ironic for reasons I won't get into here, but it is a qualified charge - meaning deregulation is a good idea only if the central bank didn't exist. I personally don't agree.
Still, people by and large do NOT see monetary and fiscal policy as interventions causing disequilibrium.
They see them as offsetting and stabilising institutions - safety nets and tools of economic and social management - as they were supposedly envisioned.
For this reason, I posit, central banks and governments do not have the political will it takes to do nothing.
The change in Fed policy last month proves precisely that, which is why gold should soar.
I believe the markets are wrong again to perceive a deflationary outcome. It is an entirely different monetary system than existed in the 1930s, when the Fed could not simply print up reserves.
Deleveraging and asset deflation are not bearish for gold, as they don't necessarily imply a contraction in money supply, and rarely have. They may be bearish for gold stocks, but they are bullish for gold prices, because they are the very factors that motivate the near-certain cries for new credit (or more money) arising from a bad understanding of the true causes of the crisis. They are not new and are ultimately dwarfed by the next crisis.
But maybe the deflationists will be right about the behavior of banks this time. They have been wrong at each point in history when the economy faced a crisis caused by inflation. The thymological (historical) experience is that when the Fed inflates, the banking system does soon after. The Fed has never inflated in one month as much as it did in September. So the odds are against deflationists.
Indeed, the money supply could grow 25-50% in less than a year if that liquidity isn't taken back.
Ultimately, though, both the prior boom and the bust can be explained wholly by the Fed's specific policies. As will the next boom... in gold mining!
• This article was written by Ed Bugos for Whiskey and Gunpowder
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GoldTraderAsia.com - Where to Buy and Sell Gold Bullion Bars, Gold Ingots, Gold Coins Collection and Gold Jewellery in Singapore.
To buy Hallmarked 999.9 Pure Swiss Gold Bars, Gold Bullion, Gold Ingots & 916 Gold Coins in Singapore or convert your 916 Physical Gold to physical 999.9 Pure Swiss Gold Bars, Click on Buy Gold Bullion Bars to find out more. You may Sell Gold Bullion Bars to us too.
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Should we still be betting on gold?
When the world's financial system appeared on the verge of meltdown following the collapse of Lehman Brothers last month, gold soared, gaining 22% to $911 an ounce by mid-October. But more recently, the ultimate safe haven "has not proved quite so safe", says Javier Blas in the FT. Last week it slid to its lowest level in over a year before regaining the $700 mark; it has lost around a fifth of its dollar value in four weeks.
Physical demand has been strong, with Fidelitrade, one of the largest gold coin dealers, last week quoting the popular South African krugerrand one-ounce gold coin at a $75 premium to the spot price. But other, stronger forces are at work. Gold has benefited from the rising oil price over the past few years as it has stoked demand for a hedge against inflation, so the reversal in this market has put downward pressure on gold. The recovery in the dollar, up 5% last week alone against a basket of six trading partners' currencies, isn't helping either.
The greenback's rally is a reflection of global deleveraging and the flight to quality, which has caused a rush into Treasuries, says Christopher Laird of Prudentsquirrel.com. The trend is also prompting investors to ditch commodities as fears of a severe recession mount, which means they are selling out of benchmark raw materials indices that contain gold. Many investors desperate to meet margin calls are also selling gold as it is highly liquid. So while gold still benefits from a flight to safety, "it's being overwhelmed" by stock and commodity deleveraging, says Laird. Solid physical demand is not enough to stem the tide.
Nonetheless, as Chris Weber points out in Daily Wealth, this hardly looks like the end of the gold bull. In dollar terms it's down by less than 10% on a year ago, and even a slide to about $615 would mirror the downswing within the longer-term bull run of the 1970s. What's more, thanks to the dollar's recovery of late, measured in other currencies – notably sterling and the euro – gold is near all-time highs. And there is scope for further gains. The "long-term fundamentals remain tight, with little sign" of a significant jump in supply as mines are struggling to boost production and recent exploration has been unsuccessful, says Graham Birch of BlackRock.
Moreover, while the main near-term danger to the world economy is a period of deflation, inflation could well make a comeback over the next few years, as we noted in our cover story a fortnight ago. Governments will find that the only way to pay for all the stakebuilding in banks, the private debt they are accumulating, and the state spending sprees to prop up economies, is to print more money, says Jeff Nichols of American Precious Metals advisers. Gold may look weak now, notes Weber, but in time, as inflation returns, it will rise.
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GoldTraderAsia.com - Where to Buy and Sell Gold Bullion Bars, Gold Ingots, Gold Coins Collection and Gold Jewellery in Singapore.
To buy Hallmarked 999.9 Pure Swiss Gold Bars, Gold Bullion, Gold Ingots & 916 Gold Coins in Singapore or convert your 916 Physical Gold to physical 999.9 Pure Swiss Gold Bars, Click on Buy Gold Bullion Bars to find out more. You may Sell Gold Bullion Bars to us too.
----------------------------------------------------------------------------------------------
Physical demand has been strong, with Fidelitrade, one of the largest gold coin dealers, last week quoting the popular South African krugerrand one-ounce gold coin at a $75 premium to the spot price. But other, stronger forces are at work. Gold has benefited from the rising oil price over the past few years as it has stoked demand for a hedge against inflation, so the reversal in this market has put downward pressure on gold. The recovery in the dollar, up 5% last week alone against a basket of six trading partners' currencies, isn't helping either.
The greenback's rally is a reflection of global deleveraging and the flight to quality, which has caused a rush into Treasuries, says Christopher Laird of Prudentsquirrel.com. The trend is also prompting investors to ditch commodities as fears of a severe recession mount, which means they are selling out of benchmark raw materials indices that contain gold. Many investors desperate to meet margin calls are also selling gold as it is highly liquid. So while gold still benefits from a flight to safety, "it's being overwhelmed" by stock and commodity deleveraging, says Laird. Solid physical demand is not enough to stem the tide.
Nonetheless, as Chris Weber points out in Daily Wealth, this hardly looks like the end of the gold bull. In dollar terms it's down by less than 10% on a year ago, and even a slide to about $615 would mirror the downswing within the longer-term bull run of the 1970s. What's more, thanks to the dollar's recovery of late, measured in other currencies – notably sterling and the euro – gold is near all-time highs. And there is scope for further gains. The "long-term fundamentals remain tight, with little sign" of a significant jump in supply as mines are struggling to boost production and recent exploration has been unsuccessful, says Graham Birch of BlackRock.
Moreover, while the main near-term danger to the world economy is a period of deflation, inflation could well make a comeback over the next few years, as we noted in our cover story a fortnight ago. Governments will find that the only way to pay for all the stakebuilding in banks, the private debt they are accumulating, and the state spending sprees to prop up economies, is to print more money, says Jeff Nichols of American Precious Metals advisers. Gold may look weak now, notes Weber, but in time, as inflation returns, it will rise.
----------------------------------------------------------------------------------------------
GoldTraderAsia.com - Where to Buy and Sell Gold Bullion Bars, Gold Ingots, Gold Coins Collection and Gold Jewellery in Singapore.
To buy Hallmarked 999.9 Pure Swiss Gold Bars, Gold Bullion, Gold Ingots & 916 Gold Coins in Singapore or convert your 916 Physical Gold to physical 999.9 Pure Swiss Gold Bars, Click on Buy Gold Bullion Bars to find out more. You may Sell Gold Bullion Bars to us too.
----------------------------------------------------------------------------------------------
Friday, October 24, 2008
Why the gold standard could make a comeback
Over the last few weeks, three people have told me they refuse to buy gold.
My dad told me gold is only worth what someone else is willing to pay for it. That it only has theoretical value. That he'd much rather own something useful, like copper.
Then the Thai politician I met in Bangkok told us he couldn't own gold because he didn't understand it or know how to value it.
Then one of my friends in England told me gold is a fraud and if it ever lost its appeal as jewellery, its price would plummet.
I've heard all these arguments many times. They almost always come from people who've worked in the financial industry. The truth is, gold is an incredibly useful commodity. Like any other commodity, supply and demand determine its price.
First off, gold has applications in technology and communication. Gold is the most malleable and ductile material known to man. Second, gold is eye-catching. Humans use gold for jewellery. That's never going to change.
But the third reason is by far the most important. This reason is the one that's going to send gold prices to the moon.
Money is essential to humans. We need it to trade. The material you make money out of must be portable, divisible, homogeneous, durable, and valuable. Without each of these five qualities, it's useless.
Gold and paper are the only two basic materials on Earth that can serve as money. (Silver and platinum might be good complements to a gold system.)
Right now, we're using a paper-money system. So gold isn't really important to anyone (except a few fringe investors on the Internet). It's why so many people don't understand gold, especially those who work in finance.
The flaw with paper money is, it's portable, durable, homogeneous, and divisible... but it's not valuable. It's only paper. So there's always a temptation to print money out of thin air. And that's what always happens. Paper-money systems always end up collapsing.
That's what's happening now. We're coming to the end of the largest paper-money experiment the world has ever seen. It may take a few years, but when it ends, whoever is in charge will implement a gold standard. Gold is the perfect foundation of a currency system. It's the only material we have that meets all five essential characteristics of money. It's the only available alternative.
But how high would you have to price gold to use it as a foundation of the world's monetary system? The money supplies of Japan, China, the United States, and Europe add up to around $50 trillion. There are 5 billion above-ground ounces of gold. You'd need to value each ounce of gold at $10,000 to back these four currencies in gold.
According to consulting firm McKinsey, the value of all the world's financial assets – stocks, bonds, and bank accounts – is $167 trillion. These assets are also denominated in paper currency. To back them with gold as well, gold would have to rise over $40,000 an ounce.
I'm not suggesting gold will ever trade at $40,000 an ounce. But it shows you how, unlike paper money, gold is a useful commodity and has intrinsic value. I do think gold is easily worth over $2,113 per ounce. That's the level gold set in January 1980 – $850 per ounce – stated in today's money.
To invest in gold, I recommend you buy physical gold and keep it hidden on your property. Pick up the yellow pages and look for gold brokers or coin dealers. Ask them what price they charge on gold bullion coins. Buy from the broker with the lowest price and the longest history of doing business in your town.
One more thing, don't buy it right now. Physical gold is in short supply and prices are at rip-off levels. I called two dealers yesterday and both said they were out of stock. They told me they could get gold bullion for me, but I'd have to pay a large premium over the gold price to buy it... as much as 13%.
I recommend you wait for the panic to die down in the market and start accumulating gold when there's more gold bullion in the market.
----------------------------------------------------------------------------------------------
GoldTraderAsia.com - Where to Buy and Sell Gold Bullion Bars, Gold Ingots, Gold Coins Collection and Gold Jewellery in Singapore.
To buy Hallmarked 999.9 Pure Swiss Gold Bars, Gold Bullion, Gold Ingots & 916 Gold Coins in Singapore or convert your 916 Physical Gold to physical 999.9 Pure Swiss Gold Bars, Click on Buy Gold Bullion Bars to find out more. You may Sell Gold Bullion Bars to us too.
----------------------------------------------------------------------------------------------
My dad told me gold is only worth what someone else is willing to pay for it. That it only has theoretical value. That he'd much rather own something useful, like copper.
Then the Thai politician I met in Bangkok told us he couldn't own gold because he didn't understand it or know how to value it.
Then one of my friends in England told me gold is a fraud and if it ever lost its appeal as jewellery, its price would plummet.
I've heard all these arguments many times. They almost always come from people who've worked in the financial industry. The truth is, gold is an incredibly useful commodity. Like any other commodity, supply and demand determine its price.
First off, gold has applications in technology and communication. Gold is the most malleable and ductile material known to man. Second, gold is eye-catching. Humans use gold for jewellery. That's never going to change.
But the third reason is by far the most important. This reason is the one that's going to send gold prices to the moon.
Money is essential to humans. We need it to trade. The material you make money out of must be portable, divisible, homogeneous, durable, and valuable. Without each of these five qualities, it's useless.
Gold and paper are the only two basic materials on Earth that can serve as money. (Silver and platinum might be good complements to a gold system.)
Right now, we're using a paper-money system. So gold isn't really important to anyone (except a few fringe investors on the Internet). It's why so many people don't understand gold, especially those who work in finance.
The flaw with paper money is, it's portable, durable, homogeneous, and divisible... but it's not valuable. It's only paper. So there's always a temptation to print money out of thin air. And that's what always happens. Paper-money systems always end up collapsing.
That's what's happening now. We're coming to the end of the largest paper-money experiment the world has ever seen. It may take a few years, but when it ends, whoever is in charge will implement a gold standard. Gold is the perfect foundation of a currency system. It's the only material we have that meets all five essential characteristics of money. It's the only available alternative.
But how high would you have to price gold to use it as a foundation of the world's monetary system? The money supplies of Japan, China, the United States, and Europe add up to around $50 trillion. There are 5 billion above-ground ounces of gold. You'd need to value each ounce of gold at $10,000 to back these four currencies in gold.
According to consulting firm McKinsey, the value of all the world's financial assets – stocks, bonds, and bank accounts – is $167 trillion. These assets are also denominated in paper currency. To back them with gold as well, gold would have to rise over $40,000 an ounce.
I'm not suggesting gold will ever trade at $40,000 an ounce. But it shows you how, unlike paper money, gold is a useful commodity and has intrinsic value. I do think gold is easily worth over $2,113 per ounce. That's the level gold set in January 1980 – $850 per ounce – stated in today's money.
To invest in gold, I recommend you buy physical gold and keep it hidden on your property. Pick up the yellow pages and look for gold brokers or coin dealers. Ask them what price they charge on gold bullion coins. Buy from the broker with the lowest price and the longest history of doing business in your town.
One more thing, don't buy it right now. Physical gold is in short supply and prices are at rip-off levels. I called two dealers yesterday and both said they were out of stock. They told me they could get gold bullion for me, but I'd have to pay a large premium over the gold price to buy it... as much as 13%.
I recommend you wait for the panic to die down in the market and start accumulating gold when there's more gold bullion in the market.
----------------------------------------------------------------------------------------------
GoldTraderAsia.com - Where to Buy and Sell Gold Bullion Bars, Gold Ingots, Gold Coins Collection and Gold Jewellery in Singapore.
To buy Hallmarked 999.9 Pure Swiss Gold Bars, Gold Bullion, Gold Ingots & 916 Gold Coins in Singapore or convert your 916 Physical Gold to physical 999.9 Pure Swiss Gold Bars, Click on Buy Gold Bullion Bars to find out more. You may Sell Gold Bullion Bars to us too.
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