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Which way is the gold market heading?
Posted By Mark Leibovit On 06/18/2012 @ 9:17 pm In Money | No Comments
As financial analyst Bill Buckler over at The Privateer so succinctly put it many years ago:
“Up until Aug. 15, 1971, there has never in history been an era when no paper currency was linked to gold. The history of money is replete with instances of coin-clipping, printing, debt defaults and the other attendant ills of currency debasement. In all other eras of history, people could always escape to other currencies, whose gold backing remained intact. But since 1971, there is no escape because no paper currency has any link to gold.
“All of the economic, monetary, and financial upheaval since then is a direct result of this fact.
“The global paper currency system is very young. It depends for its continued functioning on the belief that the debt upon which it is based will, someday, be repaid. The one thing, above all others, that could shake that faith, and therefore the foundations of the modern financial system itself, is a rise (especially a sharp rise) in the U.S. dollar price of gold.”
Last Monday, investors breathed a sigh of relief after the EU agreed to lend $125 billion to Spain’s banks. But billionaire investor Jim Rogers wasn’t relieved. He thinks the bailout is misguided – even the worst possible thing that could have happened.
“Let them go bankrupt. Let them all go bankrupt!” he exclaimed on CNBC’s “Fast Money Halftime Report.” “The way the system is supposed to work – when you fail you fail – competent people come in and take over the assets. But what they’re doing is taking assets from the competent people and giving them to the incompetent people. It’s absurd economics and absurd morality.”
The rescue of Spain’s banks (Italy is likely next) is just another example of debt being piled on top of debt and raises serious questions regarding the efficacy of paper assets (fiat currency). Why should we save in these paper assets when we know they will ultimately decline more and more in value? Gold is the clear alternative as a hedge.
Indeed, gold is being viewed more and more as an alternative to cash, stocks or currencies – which has been my position for a decade. Can you trust that your bank deposits are safe or that the government won’t unexpectedly devalue your currency? Is money safe at your brokerage firm? The clamor for annuities is yet another bull trap waiting to be sprung under the premise “you can’t lose.” No financial asset is safe, but gold is gold and has been gold for thousands of years.
Having a substantial portion of your assets in gold and some silver is something all investors need to consider.
We know the gold and silver markets are being manipulated, but it is being done so that the “smart money” can acquire physical gold at bargain basement prices. (Who knows? Maybe Geithner cut a deal with China to drive gold temporarily lower so China can build its position, perhaps in exchange for not dumping U.S. treasuries.) It is also being done to direct attention away from a failing financial system – one that unfortunately stretches across national borders from west to east and back again.
According to money managers Eric Sprott and Shree Kargutkar, key developments in the physical gold market over the last few weeks need to be mentioned:
1) The Chinese gold imports from Hong Kong in April 2012 surged almost 1,300 percent on a year-over-year basis. Total gross imports for April were 103.6 metric tonnes and the net imports were 66.3 tonnes. There has been a stunning increase of gold imports through Hong Kong for export into China over the past two years. Between May 2010 and April 2011, China imported a net 66 tonnes of physical gold through Hong Kong. Between May 2011 and April 2012, that number jumped to 489 tonnes. This represents an increase of 640 percent.
2) Central banks from around the world bought over 70 tonnes of gold in April 2012. Data from the IMF showed developing countries such as the Philippines, Turkey, Mexico and Sri Lanka were significant buyers of gold as prices dipped.
3) Iran purchased $1.2 billion worth of gold in April 2012 through Turkey. As the developed nations continue devaluing their currency at the expense of developing nations, countries such as Iran, China and Mexico are forced to look at alternative stores of value.
4) After 20 years of lackluster returns and stagnant bond yields, Japanese pension funds have finally discovered the value of investing in gold. The $500 million Okayama Metal and Machinery pension fund placed 1.5 percent of its assets into gold bullion-backed ETFs in April in order to “escape sovereign risk.”
5) PIMCO founder Bill Gross writes, “As they (investors) question the value of much of the $200 trillion which comprises our current system, they move marginally elsewhere – to real assets such as land, gold and tangible things, or to cash and a figurative mattress where at least their money is readily accessible.”
6) The Gold Mining ETF, GDX has seen strong inflows in the past 3 months. There has been an increase in assets of almost $1.2 billion in a span of 3 months. It is worth pointing out that for a majority of this three-month period, GDX, and by extension the gold-mining companies, were experiencing significant declines in their market values.
In short, the pendulum has swung back to gold and gold assets, but how long will it last?
Editor’s note: Mark Leibovit is one of the world’s top-rated gold timers, and helps investors anticipate and benefit from the ups and downs of the precious metals markets with his Leibovit VR Gold Letter, available at a huge discount through WND.
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