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"Secondly, we had a hopelessly outdated global architecture and regulatory authorities in the US."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