Now as then, China keeps its own counsel. We know what they want us to know, plus what we can surmise from rumor and reading between the lines. But lately, we’ve been able to add presumption to news and come up with something that looks very significant.

Specifically, there’s been a flood of tantalizing stories out of the East that, taken together, strongly suggest a growing preoccupation with a form of money that was ancient even in Signor Polo’s time. And it ain’t silk. It’s gold.

We already learned, back in April, that China has been salting away bullion for the previous six years, out of sight of international gold watchers. To the tune of 14.6 million ounces. Now the evidence suggests that that was merely the prologue.

Let’s take these tidbits one at a time:

Sovereign Wealth Fund Dumping $$ for Gold?

This one is still at the rumor stage, but highly-respected website Mineweb.com is supporting it. What we know for sure is that the country founded its primary sovereign wealth fund, China Investment Corporation (CIC), two years ago, with the stated aim of rapidly deploying some of its $1.5 trillion forex surpluses – $200 billion initially, with another $100 billion recently added to the kitty – into investment in non-Chinese enterprises. This it has been doing in spades, acquiring businesses around the globe. Extractive industries are among them, including Teck Corp., the diversified Canadian mining giant.

Might it also be buying up gold? We don’t know that for sure, but it seems likely. And, in addition, rumors sneaking off the mainland indicate that within the CIC, a lot of effort is being poured into prospective investment deals in the oil and precious metals sectors. The more it produces, the more it can keep.

The Chinese have made no secret of their disdain for current American economic policy and what they see as the inevitable destruction of the dollar. That they would be moving to diversify out of the greenback shocks precisely no one, and gold is one logical landing place for all those bucks. We suspect that’s exactly what is happening, behind the scenes as well as center stage.

Gold and Silver Pushed to the People

As recently as 2002, the private ownership of gold was prohibited in China. You could be jailed if caught with any in your possession. Beginning in 2009, in a stunning about-face, the central government removed all restrictions. In fact, as Mineweb and other sources report now it’s actively pushing folks to buy some personal metal, with China’s Central Television, the main state-owned television company, running news programs cum infomercials, letting the public know just how easy it is to purchase gold and silver as an investment.

It truly is as simple as can be, because every bank sells gold and silver bullion bars in four different sizes to individuals. (Try to find the same the next time you make the trek down to Wells Fargo.) Mining companies are reportedly encouraging employees to convert some of their wages to gold on payday. Gold is traded in some form 24 hours a day. And paper proxies for the metal are also soaring in popularity.

There are persistent rumors that the export of silver has already been banned. Gold could be next.

Thus China, which only yesterday was the lowest per-capita consumer of gold in the world, is bidding to become the biggest. Some analysts believe it will pass India – the top dog since forever – as early as 2010. Clearly, the government believes the country is strengthened if everyone who can holds some hard currency.

All this suggests a mania in the making, and only in the formative stage. Imagine if hundreds of millions of new consumers climb on that particular bandwagon…

China Repatriates its Bullion

Meanwhile, in early September numerous sources reported an announcement that Hong Kong is pulling all its physical gold holdings from depositories in London and transferring them to a newly built, high-security depository at the city’s airport.

That means the government is backing the promotion of Hong Kong to a more formidable status as a Swiss-style, regional trading hub for bullion, at the same time as it reduces London’s role as a key settlement and storage center.
Press reports cited government officials as saying that marketing efforts will be launched to convince Asian central banks to transfer their gold reserves to the Hong Kong facility. Outreach will also be made to commodity exchanges, banks, precious metals refiners and ETF providers.

There can be little doubt this signals that the Chinese government fully recognizes the importance of gold in a time of crisis, and that the most prudent plan involves keeping its stores close at hand.

China Threatens to “Just Walk Away”

In one of the year’s most intriguing developments, commodity and derivative markets were thrown into a tizzy on Monday, August 31, by the worldwide circulation of a story published two days earlier in Caijing magazine (and reported by Reuters here).

According to the Caijing article, a spokesperson for China’s state-owned Assets Supervision and Administration Commission – the regulator and nominal shareholder for state-owned enterprises (SOEs) – told six foreign banks that SOEs reserve the right to default on contracts.

Say what?

Maybe the commission has been paying attention to the “just walk away” forfeiture movement that blossomed among American homeowners whose overall debt on their properties far exceeded the assessed value.

Small wonder there was panic in trading houses that hold a lot of Chinese paper. They hope any problems will be worked out short of a default. In fact, “It’s [only] a handful of companies who are being encouraged by regulators to ‘re-negotiate’,” says one banking source. “It’s outrageous, but it’s China, so everyone is treading very carefully.” Very carefully.

Nevertheless, in addition to tangible losses, those potentially affected fear the establishment of a dangerous precedent, one that could lead to utter chaos in the enormous, tangled world of derivatives.

And there is one other, albeit highly speculative, possibility. Some major entities – we don’t know who, due to the opaque nature of international gold trading – have huge, perhaps quite concentrated short positions in the metal, both on the COMEX and OTC market. Is one of them China, acting through American intermediary banks?

A short position in precious metals means that the initiator of that position is obligated to deliver physical gold or silver if the buyer (who holds the long end) wants it. Suppose China is one of the big shorts. Suppose it’s been playing the market in order to buy at what it sees as bargain prices. Now suppose a gold rally induces it to just walk away from all those obligations to deliver. Who’s going to force it to make good? Guess what, no one has a gun large enough.

Granted, it’s an outlandish scenario. But impossible? No. Beijing has shown nothing but indifference to what others think of it. And if the dollar does crap out as the world’s reserve currency, there’s nothing to say that China won’t see its self-interest as lying in a completely new direction.

Conclusion. Gold, and the companies that produce it, have enjoyed a brisk runup of late, as the metal mounts yet another assault on the beckoning, symbolic $1,000 level. How much of this can be traced to what China has done, is doing, or may yet do?

We don’t know, but we suspect it’s not entirely coincidental. All rumor and speculation aside, as China clearly turns more and more bullish on gold, so will everyone else.

Regards,
Doug Hornig

September 14, 2009

What the Heck Is Going on in China? was originally featured on Whiskey and Gunpowder

At several points in the past 30 years, things were so bad that gold sellers were like the proverbial Maytag repairman. They led lives of quiet desperation about which no one cared. Because like the late Rodney Dangerfield, gold got no respect.

Heck, between 1999-2002, the British government sold a large amount of its national gold, nearly 395 tonnes (metric tons), for about $275 per ounce. The Bank of England used the proceeds to purchase (ahem) “high-yielding” assets, like bonds. I suppose it seemed like a good idea to somebody. But really. In hindsight, how dumb was that? The British used to fight wars for gold (remember the Boer War, anyone?) Now they’re selling gold to buy bonds? They used to hang people for lesser crimes.

Last March 2008, gold sold for over $1,000 per ounce. Then the price retreated 30% as oil rocketed from about $100 to $147 per barrel. But even though gold fell back in price, it was still selling, on average, for almost three times what the Brits took in less than a decade ago. You didn’t do that with bonds. So the lesson is that we have to keep our eyes open about cycles and trends, even with something like gold.

Just in the past six months, almost every nonprecious metal asset class has been headed down. The stock markets have been tanking. Prices for everything from aluminum to zircon are way down. Oil has been bottom-fishing. The world is sliding downhill into deep recession. It’s a long litany of bad news out there. Except for precious metals, which have held their own.

Lately, precious metals have been in a stealth rally. It was not front-page news, until last week when gold touched the $1,000 mark again. Operating gold miners hit lows in October 2008…and they’ve all been rising in the markets ever since.

Investors in a Mass Migration to Gold and Silver

What’s going on? It’s a worldwide trend. Investors have been flocking to gold and silver. There’s a money migration going on. And I mean BIG money is migrating. It’s like those herds of zebras or wildebeests or gazelles in Africa. When they migrate, the earth shakes and the ground is just a moving kaleidoscope of hides and footprints. The dust clouds blow high into the sky.

Yes, the world economy might be in a recession. People across the world are worried about their job and security for their family. But other people with big bucks are scooping up gold and silver. Those buyers are looking for investment safety.

Moneyed investors don’t trust the world’s governments or paper currencies. So they are going with gold and silver. The mines and mints are having trouble keeping up with demand. Exchange-traded funds (ETFs like, for example, SPDR Gold Shares, GLD) are buying huge volumes of gold and silver. (And they ought to be buying more. At the margins, at least, it appears that even the ETFs are holding “paper” gold rights, as opposed to the real McCoy metal.)

Who’s Holding the Metal?

Let’s look at silver. In January 2006, the total silver held in ETFs was about 40 million ounces. By January of this year, 2009, the total silver in ETFs exceeds 280 million ounces. That’s an increase by a factor of seven in just three years.

The story with gold is just as dramatic. Who ever heard of a gold ETF until just a few years ago? But by the end of 2008, gold holdings of ETFs reached a record level of 1,090 tonnes, according to the World Gold Council (WGC). Thus, ETF holdings now exceed those of Switzerland and many other large and important nations. (Check the listing below.) In the fourth quarter of 2008, investors purchased ETF gold interests representing 96 tonnes of gold. (Far more than the total gold reserves of Australia.) This followed the purchase of an unprecedented 145 tonnes (more than the reserves of Saudi Arabia) in the previous quarter, according to the WGC. These are astonishing levels of demand, where there was almost none just a few years ago.

Just for comparison, here are the approximate gold holdings of a list of major countries as of the end of 2008, plus the International Monetary Fund and the European Central Bank. Wow!

Gold Holding and Gold Hoarding

Much of the gold in the vaults of the worlds’ central banks has accumulated over many decades. Much of the U.S. government gold reserve, for example, dates from the national gold confiscation of 1933 under President Franklin Roosevelt. Roosevelt had a compliant Congress to do his bidding. Eventually, even the Supreme Court backed him up. So what’s that old expression? “It CAN happen here.”

Many other countries of the world are currently buying gold, fresh from the mine. Today, China is the world’s largest gold-producing nation, and its central bank is buying and building reserves. Russia, too, has a tradition of holding gold and today is acquiring gold from its own mine output and via purchases on international markets. Or look at tiny Qatar, a small nation in the middle of the Persian Gulf. Qatar had only 8 tonnes of gold about three years ago. Now it has 12 tonnes, an increase of 50% in a very short time. What do the Chinese, the Russians or the Qataris know? They know that they want gold. They can buy it. They will hold it. And they are hoarding it.

The Feel of Real Gold — Useful Weight Gain

I’ve mentioned on many occasions that I like holding precious metals. I like holding metals as an investment and I just like the feel of the stuff. At the “elementary” level (yep, that’s a pun), you can hold physical metals. If you’ve never felt the coolness and heft of a shiny gold $50 Eagle or a Canadian Maple Leaf in your hand — let alone a fine old specimen of a $20 coin from the days of old in the U.S. — you’ve missed something. Really, the only thing better than holding an Eagle or Maple Leaf is holding an entire roll of 20 of them.

When I was in South Africa last year, I visited a refining operation and actually picked up a gold brick. It was almost right out of the melting pot. The brick was still warm, and the darn thing weighed about 75 pounds. That’s what I call “useful weight gain.” Too bad I couldn’t bring it home with me. But the armed guards at the refinery might have objected.

I’ve never made a formal Outstanding Investments recommendation for buying a particular kind of gold or silver coin, or ingots from this mint or that or any such thing. Those kinds of gold purchases are too hard to track in a newsletter like this. So I’ve recommended gold and silver miners and their shares. But over the past couple of years, I hope you’ve had the chance to acquire some real metal for your portfolio. Agora Financial has been banging the golden drum for at least 10 years. If you have never bought any gold, it’s still not too late. I think that the recent visit to $1,000 is just the beginning of another great wave of gold buying. I won’t be surprised to see $3,000 gold.

Coins and ingots are the kinds of things you keep in your bank safe deposit box or in a well-hidden home safe. Some people keep them in their “second” home safe. Why a second safe? Well, the first safe is the one with a few hundred bucks of cash and some good-looking costume jewelry in it. You would open the first safe if a robber broke into your house and held a gun to your head. (Sorry, I’m not kidding. We live in a tough world.)

And for as much as I urge you to own some gold or ingots, you should never talk about it. OK, you might tell a few family members or maybe a trusted friend or two. But the fact that you have a stash of real gold is too valuable to broadcast or advertise. As I said above, “It CAN happen here.” It already has happened here. It might happen again, if things get too rough out there.

For all the talk in Washington about getting the national economy back on track and spending under control, I think you still need to keep an eye on gold and silver. Get some. Own some. Hold some.

Until we meet again,
Byron W. King

March 4, 2009

Gold Is Going to $3,000: Get Some Physical Gold was originally featured on Whiskey and Gunpowder

Yes, there are a few other asset and income plays as well in the market. After all, there’s still an economy to run out there. There are 303 million Americans, and 6.2 billion other people in this world, who want to eat every day. But much of the stock market is a crapshoot. If you love pain, then the broad stock market is the place for you. While gold and silver represent the flight to safety and quality.

The U.K. Telegraph put it nicely: “As investors scrambled to make sense of last week’s events, already one conclusion was all but irrefutable — the U.S. dollar will have to take another major fall. The dollar rally that began in July and pushed the pound’s value against the greenback significantly lower has come to an abrupt end as markets face up to the fact that the currency will have to absorb the effects of a sudden shocking increase in America’s budget deficit.”

So we see lots of bad news for the dollar. But when you own gold, it’s your asset. With a specific gravity of 19.3, gold is dense, non-reactive and otherwise immutable. Gold is nobody’s liability. As one of my old professors at Harvard used to say, “That’s physics.”

Gloomy News from Wall Street

Speaking of physics, I’ve looked east of the sun and west of the moon. I can’t see much good news for the U.S. dollar on any horizon. Really, what’s gloomier than the news from Wall Street? The investment model of the modern era (borrow short, lend long, pay big bonuses) is dying before our eyes. “And it’s about time,” some might say. But it’s happening on our watch. So we had better suit up in battle-rattle.

Wall Street’s losses are in the range of hundreds of billions, maybe trillions. Which prompts me to inquire, where are Bonnie and Clyde when you need them? At least the Barrow couple knew who they were and what they did for a living. To their credit, on their last foray the dynamic duet had the guts to shoot it out with the cops and go out in tragic style.

But now the modern bank robbers are talking about how they should get big bonuses for all the good work they put in right until things blew up. Really, I’m serious. Lehman Brothers wants to pay $2.5 billion in bonuses to 10,000 employees. That’s an average of $250,000 per person. (Except I think the office runners and secretaries will get less than $250K and a select few will rake in a lot more.) What has anyone there done to deserve $250,000? Did I miss the news about somebody at Lehman discovering a cure for cancer? It’s all just so… Baby Boomer.

At the end of the day — and the clock is ticking fast — it’s too bad that the wrong people are going to get paid. And bonuses? Oh, if only I could be a bankruptcy judge for just one hour.

The War on Risk

Do you recall the $700 billion of borrowed money that the U.S. paid over the past seven years to fight the War on Terror? Well now, with the stroke of a pen the U.S. taxpayers will pay another $700 billion (and probably more) for the “War on Risk” in the next year or so.

War on risk? It seems that way to me. Let’s back up. In the past few years — seven or so, coincidentally — a lot of people gambled and lost. People bought houses they couldn’t afford. Brokers arranged the loans. Bankers lent the money. Other bankers bundled-up the mortgages and sold them as “asset-backed securities.” Rating agencies sprinkled their holy water on the transaction. Insurance companies insured everything against default and loss.

A lot of people were making a darn good living for a while. But it was all a farce based on cheap credit and an abiding faith in a “something-for-nothing” way of life. And it’s too bad that a lot of people bought — as the saying goes — “as much house as they could afford.” Except they couldn’t afford it.

So now the whole mess is falling apart. And in true Baby Boomer fashion, the key perps on Wall Street want to change the rules and stick the house with the bill. That is, the White House and the House of Representatives, and your household as well.

The advertised number of $700 billion for the Wall Street bailout is just the posted price — the “loss leader” to get the American people into the store, so to speak. But get set for a bad case of sticker shock as events unfold. A group of business reporters at Bloomberg tallied up the raw numbers and came up with their own number of $1.8 trillion.

$700 billion? $1.8 trillion? When the numbers are that big, does it even matter? It’s the inflation-adjusted equivalent of fighting World War II again. Except who is the enemy?

Whatever the final tally may be, it cannot be good for the U.S. dollar. So buy gold and silver. If you can’t acquire the metal in the form of coins or bars, then buy precious metal stocks of companies with ore in the ground.

Until we meet again…
Byron W. King
September 26, 2008

The Dollar and Precious Metals was originally featured on Whiskey and Gunpowder

Personally, I exited the last of my precious metals equity positions at $975 per ounce and have been on the sidelines ever since (I do still own physical metals). But I believe that we are currently encroaching a good entry point in the precious metals. I’m normally not a big chart guy, but I would like to throw some charts at you and explain why I will be doing some discount shopping for my favorite mining stocks in the not too distant future.

The first chart I would like to discuss is the three-year daily chart:

Please take note of the similar chart patterns in the circled areas. After spectacular rallies, both the May ‘06 rally and the rally at the beginning of this year, gold entered a consolidation period that took the form of a descending triangle. Gold proceeded to break out at $625 per ounce and rallied to a 60 percent-plus gain. The other point about this chart that I would like to point out is the extremely strong underlying support that the 200-day moving average has acted as. In rare instances, such as following the ‘06 peak, gold briefly broke below its 200-day moving average, but it didn’t stay there for long.

The next chart I’m going to look at is the three-year weekly chart:

I like weekly and monthly charts simply because they drown out some of the intraday noise that might show up on a daily chart. You will notice that this chart has some strong similarities to the daily chart. It has the same descending triangle formations following intermediate peaks. Even more so than the 200-day moving average in the daily chart, the 50-week moving average has been pretty much unbreakable during this bull rally.

So where does that put us? Although I think we are getting close to an entry point in this market, I don’t think we are quite there yet. In the daily chart, I would like to see, and fully expect, the 50-day moving average, the 200-day moving average and the spot price to really consolidate tightly. We have entered a trading period where the spot price is trading between the 50- and 200-day moving averages. They will continue to squeeze together until something breaks. This is a signal that a strong move is near.

In the weekly chart, I would like to see the 50-week moving average fully catch up to the spot price. Again, the 50-week moving average has acted as unbreakable support, and I would like to get my money in at or near those levels.

I’ve made my argument for the possible beginning of a new bullish phase in precious metals, so the next question to pose is how high will the next rally take us? This is a difficult question, especially with the ever-changing atmosphere in financial markets. Given that, I believe I can make an educated guess as to how high the next rally will take us. I am going to borrow a chart from my co-author John Polomny, as well as use the charts above, to come up with some specific numbers:

There is a strong correlation between the price of oil and the price of gold. John mentioned that the last time the gold/West Texas Intermediate crude ration dropped to current levels, it rallied sharply to 12. Let’s go ahead and assume we move back to 12, and let’s also use current oil prices of $135 per barrel. That gives us a price for gold around $1,620 per ounce. Let’s say gold rallies amid an oil rally to $150 per barrel. With the gold/WTIC ratio of 12 and $150 oil, we get an approximate price of $1,800 per ounce.

Keeping that in mind, I am going to refer back to the daily chart. The percent rise in the price of gold between the ‘06 breakout of $625 and the peak of $1,025 per ounce was approximately 60 percent. If the next rally moved another 60 percent, we would be looking at gold around $1,600. This is consistent with the figures I derived using the gold/WTIC ratio.

Using all of the above data, I believe that the next interim high will be in the neighborhood of $1,700-1900 per ounce.

There are a couple of things to keep in mind going forward. In a bull market, like the one we’ve had in gold since 2000, each consecutive bullish phase tends to move by a higher percent than the prior one. For example, although the rally to $1,000 gold was approximately a 60 percent rally from the last intermediate high, the next rally could result in a 70 percent move. This is a result of the Johnny-come-latelys entering the market. Each rally simply has more investors than the prior one.

There’s another item worth noting. Although the 2007/2008 gold rally was spectacular, it didn’t sprint out of the gates. You can see that at the end of ‘06 and in the first half of ‘07, gold just didn’t move much. After a brief rally, it kind of puttered around. But looking more closely, you can see that the chart was actually making higher highs and higher lows, building a solid base. We may have a period like that in the following months.

All in all, I think we are close to a really great entry point in precious metals. I would recommend following a couple of your favorite mining stocks and getting comfortable with their price action in order to determine a proper entry level. There’s no reason to hurry, so take your time and make your moves when you’re ready.

Regards,
Nick Jones
The Real Deal
June 26, 2008

Entering the Precious Metals Market was originally featured on Whiskey and Gunpowder