In English, please? The bulls got suckered.

Gold prices fell through their $850 May low now, which means that I was wrong to think that the market had discounted a reversal in oil and the dollar, both of which we fully expected.

But could the market be setting up the bears here?

The last time that we saw two false signals in a row was in 2004, when a marginal new high reversed sharply and turned down to break a key support level, trapping the bears before turning up for good. Interestingly, this happened when Greenspan started his tightening campaign.

It is significant that he didn’t have to deal with a financial and economic crisis, and that his gradual rate increases didn’t do anything to gold, anyway — though they were enough to derail the housing boom.

Today’s Fed is constrained from even a small tightening by the condition of the economy.

Of course, we’ve already had two false signals in the chart, so if this is a bear trap it’ll be the third, which would make it different than in 2004, or at any other juncture in this bull so far.

The gold stock charts tell a more bearish story.

Now, you must keep in mind that while deceptive moves have been rare in gold itself over the course of this bull market, bear traps have been common in the gold share averages — especially the Amex Gold Bugs Index below. For the record, a bear trap is a move, like a breakdown, that suckers the shorts; a bull trap is a move that suckers the bulls:

A bear trap has occurred as a false breakdown in the chart on at least three noticeably separate occasions — 2001, 2005 and 2007. In each case, a bullish move followed immediately. I don’t know if history will repeat itself, but the record says breakdowns in the HUI are a buy.

For the Love of Gold

I keep telling you, gold is next! No one believes it yet. Who can blame them?

We all would have done better owning oil stocks, at least after 2004. In fact, you would think the only reason gold ever went up is because of oil. But you’ll find some truth in every lie.

Undoubtedly, energy is vitally important to the economic engine of growth.

It’s used in every imaginable process. Oil is important only because it is the most convenient source of this energy, but tomorrow, it might be something else that does this job. Gold, of course, is jewelry. It’s not technically money, except in select circles. But I want to draw your attention to the need for money…it is just as vital to the economic engine as energy.

Given the record of fiat money, invariably the debate will shift to the best kind of money in the same way that it currently revolves around the best kind of energy.

So what would it take to see the same love in gold that we saw in tech stocks in 1999, the housing market in 2003-05 or oil recently? The answer is simple: More of the same…

You will see it in gold when all the usual anti-gold arguments fall flat on their faces… when people no longer believe that the “modern-day” central bank has a handle on inflation and interest rates; that inflation is “caused” by oil, growth or a shortage of goods; or that prices will one day come down.

You will see it when people realize that the bubble in commodities is really a destruction of confidence in the medium of exchange. Yes, this can get overdone, like anything else in the market. But unlike a specific bubble, it will repeat itself generally, against some other asset, commodity or maybe all goods.

Why?

Simply because the central bank and government are afraid to address the root cause.

All that the central banks have to do is abandon the boom by letting the market determine the proper interest rate level. This is the only lasting solution to the current inflationary quagmire.

They won’t do it. The short-term costs are too high, and rise with each new asset bubble.

No, the bull market in gold is not over.

The best is yet to come.

Top 10 Reasons to End Cheap Gold

I can understand why investors are selling their large-cap gold stocks. They aren’t making any money — at $900 gold! And they’re trading at 20-50 times earnings. Still, while the rising cost of producing gold is trouble for gold stocks, it is also one of the most bullish factors underpinning gold values.

Effectively, $700 gold would be as catastrophic for the industry today as $300 gold was in 1999.

With jewelry demand alone, the supply side is already tighter than it is in oil.

As I went through my 18-point model, I was looking for reasons to buy gold that have not been widely discounted, aside from the big one above — i.e., in which the masses wake up and fall in love with gold:

• Cost inflation slowing down development pipeline, hence future production growth
• Political risks in frontier countries also shrinking available supplies
• Faltering global economy persuading central bankers to abandon tightening plans
• Soaring government deficits
• Saber rattling between Iran and Israel and other geopolitical tensions heating up
• Another GLD ETF just listed on Hong Kong Exchange
• Some countries already experiencing crackup and heightened gold demand
• Shrinking official gold supply
• Seasonal trends turning bullish again into the new year
• Large producer Anglo has yet to cover all its hedges.

Regards,
Ed Bugos
September 2, 2008

The Gold Market was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.

The Dow gave back almost five days’ worth of gains in one fell swoop.

So should we not have seen a better bounce in gold? Maybe it’s too early to call the Dow.

Further weighing on gold prices were a lifeless bounce in oil and the market’s shift in focus to signs that gas demand is ebbing. Sometimes, however, there is a delayed reaction in gold, which happens more often than efficient market theorists would like to admit. Gold’s fundamentals are still bullish.

Mining costs continue to increase, which pushes up the floor on gold prices.

Several months ago, I calculated that production costs had more than doubled for the gold mining industry since gold traded at under $300 per ounce some eight years ago, and, consequently, that the decision to shut down mines would today occur at $600-700, rather than $300. The supply situation is already tight. It is getting increasingly difficult to replace gold reserves. And of course, there is no end in sight to the readiness of central bankers to inflate, guaranteeing a strong flow of gold demand.

As for the prognosis, I see two possible scenarios for which there is some technical precedent.

Technically, the market is trendless. Neither bulls nor bears have gained much traction since the correction began in March. The seasonal low could be in, but it remains unconfirmed by a higher high.

A casual glance at the chart would tell you nothing except that the market could fall to $750 as easily as it could rally to $1,200. Technicians would call it a neutral pattern, though some may read bullish or bearish biases into how it is developing. I won’t get into that. But one does not have to be a technical analyst in order to grasp some useful truths from the chart.

It is true that history never exactly repeats itself. But there are similarities, or regularity in the behavior of prices, that can help with our outlook.

For example, if you look at the corrections since 2001 in the chart below, you’ll notice that rarely have they lasted much more than a couple of quarters before the bulls took charge again. You might also notice that the first leg in each correction has been followed by a second one that usually fails to make a lower low — 2004 being the exception. The market also likes to brush up against its 50-week moving average before completing the correction.

Moreover, we can even infer a loose relation between the extent of a rally and the depth and duration of the ensuing correction. These things are called “technical” mainly because they have nothing to do with the fundamentals. And let me tell you, it is dangerous to put too much weight on past performance and behaviors when we’re talking about investors and the market.

Notwithstanding, if this were just a typical correction, we could expect to see a second “attempt” by the bears to make a lower low over the next month or two before the bulls break out, sometime in the fall.

But the exception is worth considering, too.

Give The Gold Rally Some Elbowroom!

The market is at an important number and inflection point, which threatens to complicate the situation central bankers face today — their control of interest rates, to be precise.

Naturally, the “powers” will do everything they can to resist this change.

Similar conditions prevailed back in 2004, when gold was trying to break past its old 1996 high, about $425ish, which would reverse the downtrend in the longer-term charts and signal a new bull market — note in the chart below how the moves became more violent once gold broke past this level.

As it is now, the Fed was then about to embark on its tightening campaign, after having talked about it for almost a year… making gold bulls nervous about the impact of higher rates. Of course, the Fed’s job was a tad easier then. There was no series of financial crises to contend with. The stock market hiccupped, but the economy was producing jobs, and nobody much minded the Fed gradually ratcheting up interest rates.

As it turned out, however, it was just enough to keep bondholders happy, but not enough to rein in the effects of the Fed’s previous inflation policy. The bears pushed down on gold prices, but did not realize just how tight the springs were and got caught in a lower chart low before gold whipsawed higher.

The market hasn’t looked back since.

So it is possible that the market could make a lower low, if only to make more elbowroom in the chart for the breakout… sort of like pulling a slingshot back further to get a little more energy out of it.

On the other hand, the Fed’s hand is weaker than it was in 2004-05. Because of this, I have to favor the former scenario, in which the correction low in gold is already in.

Regards,
Ed Bugos
July 29, 2008

P.S.: While we wait for the gold correction phase to end, and the next phase of the gold rally to begin, investors are facing a great opportunity for investment. As you just read, the technical and fundamentals point to the price of gold going up once again. This is the price dip you’ve been waiting for, and now you can really begin making some money in the coming blowoff phase.

The Gold Correction was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.

Big institutional players in the New York futures market slashed their bullish betting on gold in the week of June 10. Data from the CFTC — the U.S. regulator — shows a net reduction of 11 percent in the long gold positions held by what it calls “large speculators.”

And this “reduction in the gross longs may be a further sign that gold is losing its attraction,” reckon analysts at the Swiss banking and wealth management giant.

But less pressure from large investment funds could alternatively signal more loss of froth from the gold market since it shot 54 percent higher in the seven months to mid-March.

Topping out at a new all-time record above $1,032 per ounce — just as the Federal Reserve lent $29 billion to support J.P.Morgan’s fire-sale purchase of Bear Stearns — the gold price has gone on to drop 15 percent of its value against the Dollar.

Versus the Euro and British Pound, the loss has been just as dramatic. And looking at the technical action on its charts, “any meaningful bounce from the 200-day moving average could bring back a lot of money into gold,” the UBS comment goes on.

That’s what “happened last year,” it adds:

The 200-day moving average, as the name says, measures the average price of an asset over the last two hundred days. It’s called “moving” because, as time rolls ever onwards, so too does the average — used by chart-loving technical analysts to see what the deeper, underlying trend is up to.

And why 200 days? Because that’s roughly the number of trading days during one year. So the chart here, therefore, shows both the daily gold price as well as its 12-month trend. And you can see how the 200-day average has indeed acted as “strong support” during the bull market so far.

Well, kinda. Most of the time.

Nine times since gold quit its 20-year bear market in 2001, the price has either bounced off or moved sharply higher through its 200-day average. The following surge — lasting an average of 21 weeks — delivered a 28 percent gain before the price of gold tipped lower again, back toward that ever rising up-trend.

The leap starting in late September last year was the most spectacular, as UBS notes. By the top of March 17, 2008, the gold price moved some 54 percent higher. Might that happen again now?

Two points to note if you’re chasing the bull market in gold for short-term gains to shoot out the lights:

1. Summer Lull — as the chart shows, gold typically moves flat to lower during the middle four months of the year. And even as the global banking crisis hit in August 2007 it still took another six weeks before gold started to vault higher;
2. Pre-Empting the Bounce — prior to last year’s jump — sparked by the U.S. Federal Reserve slashing the cost of borrowing below the rate of consumer-price inflation — the gold price had dipped below its 200-day average seven times during this bull market so far.

Buy gold now, in other words, and a keen market timer might well have to endure a further drop first, even if the apparent magic of the 200-day average does come good once again.

But with the 200-day moving average now just above the $850 level, longer-term investors who’ve been considering a purchase — but were put off the huge volatility of 2008 to date — might want to stop waiting around. Precisely because larger investors are sitting it out, and precisely because technical analysts like the UBS team are pointing to a possible dip before advising you buy.

You see, that price of $850 marked the bottom of gold’s fast & furious sell-off in March. It was also the previous bull market’s top, hit just as Soviet tanks rolled into Afghanistan on January 21, 1980. So a return to prices below that level might actually signal a longer-term drop. If the price is to push higher from here instead, a drop below $850 might be a long time in coming.

Hanging on for another pullback from today’s current gold price and so trying to nick a little extra off your investment outlay might prove expensive, in short. If you’re looking to take a position in gold for longer-term or deeper fundamental reasons, the kind of low-profile flat action we’re seeing this June could offer your best chance to get in.

Just ask anyone who tried to wait for a pullback once the last surge in gold prices had started in Sept. ‘07.

Regards,
Adrian Ash
BullionVault
June 19, 2008

Gold Price Dips was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.

Therefore, forward-looking investors might want to take advantage of the current weakness in the gold share market to invest in some of the small mining companies that would be attractive takeover targets.

One of the most intriguing aspects of the current market is the dearth of major discoveries so far in this cycle. This despite record amounts of money spent on exploration since this bull market began in 2001.

Older and smarter minds than mine had predicted that the soaring price of gold would produce a new wave of exploration that would, eventually, produce a new wave of major discoveries.

But so far, as Barrick Gold’s CEO, Peter Munk, recently observed, “There have been virtually no new discoveries.” Only Aurelian (ARU: TSX) has landed a legitimate “elephant” deposit bagged. Unfortunately, the carcass of that particular elephant rests entirely within the sketchy outlines of the nation of Ecuador where the locals are currently circling like a pack of hungry hyenas.

It has been our contention that what was needed to light the fuse on the junior exploration stocks would be, in no specific order:

1. Sustained higher gold prices.
2. Improving financials and free cash flow of the major producers.
3. A discovery to heat the blood of the investing community.

So far, we have had (1) and we are beginning to see (2), but (3) has proved remarkably elusive.

Now, don’t misunderstand. You can have a whopper of a bull market in these stocks without the discovery — that was the case in the 1970s bull market. But a discovery that fires the imagination can jump-start things in a big way, no question about it.

Too bad nobody has found one recently.

In short, we appear to have reached the era of Peak Gold. Whereas a major discovery used to be 10 million ounces or more, the threshold for attention-getting discoveries these days has fallen to more along the lines of 1-3 million ounces…and even those are hardly falling off the trees.

Viewed from the perspective of an investor in the junior resource sector, this lack of discoveries means the fuse is lit — starting with straight-up supply and demand fundamentals — for a rocket shot tomorrow. Adding boosters to the rocket, we have a commodities bull market that shows no sign of ending anytime soon and, while the U.S. dollar will periodically rebound, it is not going to somehow reinvent itself as sound money in our lifetime.

Importantly, as you can clearly read between the lines in Chairman Munk’s words, once the majors get cashed up and get serious about replacing their reserves, they are going to have to look downstream to the juniors with discoveries…even if those discoveries are below the five-million-ounce threshold they previously required to even consider taking an ore body into production.

Of course, lowering the threshold on deposit size will require trade-offs. For example, in order to be considered for an acquisition, a smaller deposit will almost certainly have to be near surface and open-pittable. It will also have to be near good infrastructure, and located in a jurisdiction with good laws and reasonable taxation. There is, in this situation, an opportunity and a risk.

Starting with the latter, if your portfolio now includes companies going after deposits in the one- to five-million-ounce range, you need to make sure they are not in a remote location that would require a massive infrastructure investment.

As for the opportunity, while the odds and the amount of exploration spending still favor that we’ll see the discovery of at least one and maybe two monster deposits in this cycle (there are a couple of companies advancing projects with that potential), and early shareholders will make fortunes as a result, there has rarely been a better time to invest in junior exploration companies with modestly sized projects in good locations. That said, you should still be focusing only on projects with at least two million ounces, or the strong potential of same.

In other words, take the opportunity in these down markets to invest in the kinds of junior mining companies that major mining company might want to acquire… That’s where the big money will be made as the gold market gathers steam again.

Regards,
David Galland, Casey Research
June 2, 2008

Peak Gold was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.

The most relevant area of resistance in the way of this outlook is the 30-point range between $890 and $920. If gold can break through and find support at these values it will be poised to rise for the summer.

With that said, I think we’ve had our seasonal low and now it’s gold’s turn to shine…as the most preferable commodity…and better yet, to become money again.

Just writing that makes me realize how early in the game it still is. Who today would believe gold will become money again? Yet, at the top of the market everyone will.

Here is the best opportunity for us right now…

The Five Best Reasons to Buy Good Quality Precious Metal Juniors

Most of the small-cap and junior resource market has been in decline since gold first broke the $700 level back in 2006. But that’s all about to change, I have five reasons why you should buy juniors now before the window closes — lets get started…

Reason #1, is that, several depressing factors have come together to produce an early seasonal low, at least for the precious metals sector.

Reason #2, as implied in the introduction, gold has lagged the commodity cycle because the market is infatuated with the growth in developing countries, and has inferred a “realness” to their demand for commodities. I’ve never disputed that the growth exists… just that there is a lot more inflation, and that inflation is what drives prices higher.

I believe the gold market is at a bullish inflection point — a point of recognition of sorts.

Reason #3, the precious metal juniors have hardly benefited from the bullish trends in these commodities to date, especially since 2006, never mind the future.

Lots of money found its way into the junior segment over recent years, to be sure, but this expansion in capitalization has been dilutive. The Canadian Venture Exchange (CDNX) has had a hard time keeping up with gold itself, and is at its lowest level relative to gold since 2002. Simply put, the juniors should be tracking gold — and right now they have a lot of catching up to do. The result is a widening gap between the values of majors and juniors. In my mind, that gap will soon contract.

With that said I think it’s the best buying opportunity in this segment since 2002.

Reason #4, The money that has poured into the junior precious metals segment over the past few years has been soundly invested. I am impressed with the value that I’ve seen many juniors create throughout this cycle — the development of assets discovered back in the nineties has been astonishing.

Finally, the best reason to own these juniors now…

Reason #5, the next takeover wave!

Many of the large-cap producers are priced for growth, and they know that if they want to sustain those multiples, they’ll have to buy or find reserves. That’s the incentive.

Meanwhile, the juniors spent lots of investment dollars proving up their assets, and the market has ignored them. So they are ripe for acquisition.

And, the majors have plenty of cash, thanks to the latest run in gold prices.

Some, such as Agnico Eagle have said they’re on the hunt, while others like Gold Fields are obviously in need of assets outside of South Africa. Corrections in the price of gold won’t discourage them.

There’s your ammunition, five Solid reasons to make sure you are small-cap and junior miners. These miners won’t remain at these levels long, so now is your chance to get in!

I’m working on a more comprehensive target list as we speak. I see a window of opportunity between now and the end of this gold price correction to buy the good quality small-caps and juniors before they take off. The window could close earlier than you think.

Regards,
Ed Bugos

May 23, 2008

The Five Reasons Why Now’s the Time to Buy Junior Miners was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.

With prices at these levels and markets as volatile as ever, you have to proceed with caution in these markets. They are very susceptible to a strong pullback at current prices. Me personally, I’m not looking to try to set up new positions and nickel and dime the rest of this short leg up. I have put tight stop losses on my current positions, and I will wait for the next serious pullback to set up new positions.

In the meantime, there is a big story brewing. In my opinion, this could be the biggest story for commodities markets in 2008.

Dear reader, I am talking about natural gas. I believe that natural gas will have a huge year in 2008, and there’s good reason to believe so.

I would like to start by noting that natural gas exploration was down in 2007, and is also expected to be down again in 2008. This seems logical for the non-forward-looking energy-producing and exploring companies. I mean, why would someone explore for natural gas with oil trading at $100 per barrel and looking to go higher?

The answer is just that reason. With oil trading at $100, people will begin to look for feasible alternatives. Over the next few years, natural gas seems to be one of the most plausible solutions.

You have to look at the alternatives. I love nuclear energy, and we could sure use a whole lot more nuclear power plants, especially in the U.S. The problem there is that the nuclear industry is still trying to overcome political obstacles, as ridiculous as that sounds.

What about renewable energy? Well, simply put, for renewable energy to be a reasonable near-term solution, we would have had to start seriously implementing all forms of renewable energy about 10 years ago, and we can’t change the past.

So it seems that even if natural gas were a poor substitute, we would be forced to continue to develop it. The beautiful thing is that natural gas is a good alternative.

At current prices, it costs twice as much to produce a British thermal unit (BTU) from crude as it does from natural gas. In today’s world, we can’t help but notice the political attitude toward energy production from a carbon-emitting standpoint. The U.S. sits on more coal than any other nation in the world, but because coal doesn’t burn clean, we won’t see coal power plants popping up on every corner. You might be curious to know that natural gas is the cleanest burning of all the carbon-based fuels.

Also, say what you will about liquefied natural gas, but it is an ever growing market. At that point, it becomes even cleaner to burn, but it is also less economical. As well, not only can natural gas be used in power plants, it can also be used to produce diesel fuel.

Since natural gas seems to be one of the only feasible alternatives, is clean burning and has experienced declining exploration due to crude prices, I believe that natural gas will be the best performing commodity in 2008. I believe it is trailing slightly behind most other commodities in the commodity super-cycle, but believe me when I say that natural gas will be a crucial aspect of supplying power to the millions of people in the emerging markets that will be coming onto the power grids in 2008.

A company worth looking into in this sector is Delta Petroleum Corp. (DPTR: NASDAQ). Delta is located in Denver and is involved with the exploration and production of natural gas, as well as crude oil. It is also very actively involved in M&A. It has operations in both the Rocky Mountain and Gulf regions. It is already producing, which is very important to me when looking at juniors and intermediates in the commodities sector.

One thing that really jumped out at me about DPTR is that Kirk Kerkorian’s Tracinda recently purchased a 35% stake in Delta at a 23% premium to market value. It seems that I’m not the only one who likes the potential of DPTR going forward as it continues to expand production and exploration in order to build revenues, as well as its proven and probable reserves.

Regards,
Nick Jones
February 7, 2008

Top Commodities of 2008 was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.

“IT WAS SO embarrassing…

“I mean, who in the hell ever let the guy publish that report? Credit Agricole was a laughing stock. Everyone in the gold industry was amazed. It was just ridiculous…”

The gold market analyst I met for a beer one warm summer’s evening in Soho, London, earlier this year took himself very seriously. The infamous report from Chevreux — a division of Credit Agricole — on the other hand, made him wince.

The report “Remonetization of Gold” by Paul Mylchreest put the reputation of France’s largest bank right on the line — the very same line spun by the Gold Anti-Trust Action Committee (GATA) since 1999:

“Central banks have 10-15,000 tonnes of gold less than their officially reported reserves of 31,000,” the Chevreux report announced. “This gold has been lent to bullion banks and their counterparties and has already been sold for jewelry, etc. Nongold producers account for most [of the borrowing] and may be unable to cover shorts without causing a spike in the gold price.”

In other words, “Covert selling (via central bank lending) has artificially depressed the gold price for a decade [and a] strongly rising gold price could have severe consequences for U.S. monetary policy and the U.S. dollar.”

The conclusion? “Start hoarding,” said Mylchreest…a smart call. Because in finance, being right — even if for the wrong reasons — still pays off. His report for Credit Agricole’s Chevreux division was published in January last year. Come May 2006, the gold price leapt to a 26-year high. It’s since gone on to break those levels again, rising to its highest price since the all-time peaks seen at the start of 1980.

As for the world’s central banks, they seem to have done a pretty bad job of “covert selling” since the start of this decade. The gold price has now doubled for U.S. investors and savers, and it’s pretty much doubled for British and European gold owners, too. Japanese gold prices have more than tripled.

How come? Whatever the reality of active, covert manipulation, the world’s central banks do, indeed, control the gold price, as former Federal Reserve governor Wayne Angell put it in 1993:

“The price of gold is pretty well determined by us…But the major impact on the price of gold is the opportunity cost of holding the U.S. dollar…We can hold the price of gold very easily; all we have to do is to cause the opportunity cost in terms of interest rates and U.S. Treasury bills to make it unprofitable to own gold.”

Cutting interest rates below the rate of inflation between 2003-2005, the Greenspan Fed guaranteed a bull market in gold. Cutting rates again now in late 2007, even as oil and global crop prices move to new record highs, the Bernanke Fed seems bent on pushing gold prices higher, too.

Indeed, a new report from Citigroup — the United States’ largest bank — agrees with Credit Agricole’s conclusions. “Central banks have been forced to choose between global recession or sacrificing control of gold,” say John Hill and Graham Wark at Citi:

“And [they] have chosen the perceived lesser of two evils:

“We believe that the policy resolution to the credit crunch will take the form of a massive, extended ‘Reflationary Rescue’ in a new cycle of global credit creation and competitive currency devaluations. This could take gold to $1,000 an ounce, or higher.”

More than that, the flood of central bank gold sales earlier in 2007 was, “clearly timed to cap the gold price,” they go on. But little good it did the central bankers’ aim of capping gold if so. The price just moved above a 27-year high versus the dollar, and it’s tracking new 16-month highs for European investors each day.

Why suppress gold? If gold goes higher, or so the thinking runs, the world’s confidence in the confidence trick of paper money backed by government promises alone might just collapse. That was the threat in the late 1970s. Given last month’s run on Northern Rock in the United Kingdom…and now the collapse of NetBank in the U.S…that might come to be seen as a possible threat again today.

Allegations that the world’s major central banks actively work together to suppress the price of gold were given credence in only 2004 when Paul Volcker — chairman of the U.S. Federal Reserve at gold’s all-time top — wrote in his memoirs that “letting gold go to $850 per ounce was a mistake” during the last great bull market in gold bullion.

At one of the policy meetings led by Volcker in late 1979, his Federal Reserve committee noted the threat of “speculative activity” in the gold market. It was spilling over into other commodity prices. One official at the U.S. Treasury called the gold rush “a symptom of growing concern about worldwide inflation.”

“We had to deal with inflation,” as Volcker said in a PBS interview in September 2000:

“There was a kind of great speculative pressure.

“It was the years when everybody wanted to buy collectibles from New York. The market was booming, and other markets of real things were booming — because people had got the feeling that things were inflating and there was no way you could stop it.”

But besides waving a gun at anxious gold owners, there seemed only one other route to stopping speculators profiting from — or, rather, defending themselves against — the demise of the dollar.

Fix it up with higher interest rates. The Volcker Fed took U.S. interest rates to 19%…and put the real cost of dollars above 9% after adjusting for inflation. The gold price sank almost in half inside 12 months.

Because just like Wayne Angell says, the price of gold really is determined by central bankers. They hold it very easily…simply by causing the opportunity cost in terms of interest rates and U.S. Treasury bills to make it unprofitable to own gold.

To do that, however, they have to raise interest rates dramatically above inflation. If you don’t trust the Bernanke Fed to do that — not least after it cut 0.5% off the returns paid to dollar savings in mid-September — then you want to consider buying gold today.

Regards,
Adrian Ash

October 8, 2007

How Central Bankers Control the Gold Price was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.

One of the best skills a commodity trader can acquire is to be able to pick out the markets that are on the cusp of breaking out, and then get out of those markets before they fizzle. In the last few years, this ability has become even more difficult with the onset of electronic trading and myriad new commodity contracts, ETFs and hedge funds.

Even so, some of the markets that have been around since futures contracts began are still the most viable and ultimately profitable. One of those markets is the precious metals, especially gold.

The Changing Face of Gold

Late in 2006, I was visiting friends on the floor of the New York Mercantile Exchange silver pit. That day they were launching the electronic version of the gold and silver futures on the exchange. Since then, the electronic markets have virtually taken over and dried up liquidity in the open outcry trading pits. This isn’t because interest in the gold markets has waned; in fact, it’s the exact opposite. The reason is because interest has increased exponentially and the electronic markets make it even more attractive to a much broader segment of global investors.

Another major occurrence for gold’s growth has been the emergence of gold ETFs. These investment vehicles have allowed investors of all backgrounds to buy physical gold with the same ease with which they’d buy a mutual fund. It’s fair to say that with these new investment methods, gold has become even more attractive as money.

Gold as Money

I have established accounts in my second home country of Estonia with a company that handles so-called e-gold. By using gold credits, I am able to make transactions and accept payments just as I would with paper currency, but without the rate risk and exchange costs. Other companies, such as GoldMoney.com, offer traders easy access to the physical metal without the worry of holding or storing it.

Lately, many investors are asking themselves the question is gold a buy-and-sell investment or a buy-and-hold for the long term? This very question may have been answered during the recent collapse of the markets. ETF trading was volatile, to say the least, but if we really look at what happened, there was no widespread sell-off of gold holdings in the ETFs. That would seem to indicate that a very large percentage of investors are using them as part of a buy-and-hold strategy. I see a very strong future for gold ETFs, and they’re likely to continue to grow and drain gold supplies from the world market.

The recent pullback in gold was quickly made up as the broader market recovered, and that is a clear indication that the yellow metal may well be on the upswing of a new bull market. The ongoing international tensions with countries like Iran are also helping to support the price of gold.

One of the most important things for an investor these days is to be well diversified. A diversified asset base is key to long-term growth, period. And having a diverse portfolio means that it includes precious metals.

In my opinion, at the end of the day, gold will end up doing what it’s always been known to do — gain in value over the longer term.

Now that much of the fear about the yen carry trade and housing implosion is figured into the market, the long-term outlook for gold is shining bright.

Kevin Kerr

March 28, 2007

Golden Rule: Looking for Profits in All the Right Places was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.