Saturday, April 15, 2006

Numbers Are Getting Redder and $600 Gold

Found a couple of articles I felt may of you would enjoy. The first one is from the folks over at The Daily Reckoning and concerns US Debt. The second article is from the folks over at FMNN and discusses $600 gold.

One of life's few certainties...the numbers are getting redder all the time

America is going style. We say that not to alarm you. It's just one of those certainties in life that you should point out to your children, such as "the dollar will be worthless" and "we're all gonna die."

There's not even any great shame in it. Going bust is what every great empire does sooner or later. Besides, it may not happen for another quarter of a century - or maybe sooner.

Last month, ominously, the U.S. government registered a record deficit of $85.47 billion. That is, for every dollar the feds sucked in, they managed to burn through a $1.50. But, why run up such hefty losses now? After all, the nation revels in "full employment," does it not? The economy is going like gangbusters, is it not? And, housing and stocks have soared to near all-time highs. If the government can't break even now, when will it ever break even?

If you have to ask the question, you must be out of step with the times.

Every policy wonk, number abuser, and budgetary contortionist in Washington knows the U.S. government will never run a genuine un-manipulated surplus. Every Beltway buffoon in a suit is counting on it.

Every parasitic politician knows that the positive numbers touted during the Clinton years were a ripe fraud, achieved only by pretending that Social Security was not a government program. Now, even that larcenous legerdemain won't change the ink color; the numbers are red from top to bottom, and getting redder all the time.

Among the seven wonders of the modern world is that lenders and merchants world over are still not only willing to accept U.S. paper, but they are positively craving it. Last year, China alone racked up more than $200 billion in its trade surplus with the United States, and what did they do with all that money?

"China is on a buying spree in U.S.," says a headline in the Houston Chronicle.

"See," we can almost hear gorgeous George Gilder whisper in our ear, "the money comes back to us. What's the worry?"

No worry...just an observation. The money leaves home a servant; it comes back a master. The dollars are spent on consumer items. In other words, Americans use paper to buy junk while the Chinese hold on to it as capital and use it to pocket U.S. debt, U.S. factories, and U.S. assets. Americans used to be able to say what they wanted to the Chinese. Now they must say, "Yes sir." And it wouldn't hurt to learn to kowtow; the Chinese like that sort of thing.

Another observation: the dollar is losing ground against the things that aren't junk. The price of oil edged up to nearly $70, yesterday. A headline in the Financial Times tells us, "Gold could reach $850." That is the top price the metal reached in the last bull market, when Jimmy Carter was still president. Well, duh.


Suggest you see link above if you want charts. Post below has none of the attached charts

Even though gold prices have risen to over $600/ounce, investors are still failing to acknowledge that we are in a fundamentally driven precious metals bull market. Instead of focusing on the specific fundamentals(declining US dollar, central bank buying, inflationary concerns), that have driven this bull market from the start, your average investor and Wall Street pundit is attributing this move up to “geopolitical unrest” and unnaturally high” oil prices. While it is true that those factors have contributed to gold prices moving to a 25 year high, they are by no means the reasons why we have seen gold prices double over the last several years. In fact, the same fundamental reasons that have driven the price of gold from its lows in 2001 will continue to drive it still higher in the years to come. As such, it is important for investors to note that we have only just begun, and it is not too late to participate in this gold bull market.

Putting $600 Gold into Perspective

As a point of reference, it is important for investors to realize that the real all time high for Gold is not $850 an ounce. Although the nominal all time high is indeed $850, the inflation adjusted all time high for Gold is closer to $1250. Comparing today’s price of Gold with the price of Gold in 1980, fails to take into account the rise of inflation over the last 25 years. Simply put, $850 could buy you a lot more in 1980 than it can today. In 1980, you could buy a house for under $100,000, buy a cup of coffee for less than a dollar, and put gasoline in your car for under a dollar. Having this perspective, allows you to realize that the price of Gold is still cheap at these levels.

Dollar Decline Will Continue to Fuel This Bull Market

Since the US dollar experienced significant appreciation in 2005, many people have forgotten that we are in a multiyear downtrend in the dollar.

In fact, if you compare it against the Euro, the Dollar is down over 40% from its high. The same factors that initially triggered the US Dollar decline will continue to add towards this sell off. In the past, the dollar was the world’s reserve currency. It signified strength and security in a growing US economy. Investors all over the world where scrambling to purchase our US dollar assets. Today, we are no longer a booming and growing US economy. Sadly, we have become an economy that is driven by consumers that are going further into debt everyday and a real estate market that has been pushed up by artificially low interest rates. Although this has fooled your average American to believing that the economy is strong, it has not fooled central banks around the world that are looking at diversifying out of the US dollar. The United Arab Emirates and other Middle Eastern countries have already switched or are looking at switching some of their US dollar reserves into Euros and Gold. Russia, Korea, and other countries have also reacted in the same manner.

The China Factor

The Chinese government has also stated that they are looking diversifying out of the US dollar into Gold. This news in itself holds tremendous significance towards the overall direction of Gold. Presently, China has under 2 % of its reserves (850 billion +) in Gold. Most of their reserves are US dollar assets. According to the World Gold Council, the world average is 9 % of its reserves. The EU average is at 25 %, and the US holds 60% of its reserves in Gold. In comparison, China’s percentage of its reserves in Gold is unbelievably low. As China continued to become a world economic power, they will continue adding Gold to their reserves. Even if they only reached the 9% average, the amount of Gold that would be taken off the market would have a significant impact on the price of Gold.

In the past year, China has begun laying the groundwork for substantial Gold investments from both its citizens and its Central Bank. Floating their currency and allowing the average Chinese citizen to own Gold were the first steps. The Bank of China will start facilitating US dollars for Gold transactions within recent months. The Bank of China also reported last month that they will slash the spread on gold trading by up to 20 % for a trial period. All of these factors combined with continued demand for Gold jewelry (as Chinese citizens continue to increase their standard of living) will continue to fuel this Gold bull market.

Yes, Virginia...We Do Have Inflation

The question of whether we have or don’t have inflation is a hotly debated topic. On one end of the debate, you have data dependent individuals that argue that the Core Consumer Price Index does not show that we should be concerned about inflation. Therefore, all of this talk about inflation is incorrect and purely speculative. On the other end of the debate, you have the price of Gold (which has always been an anti-inflationary hedge), rising to a 25 year high. So who is right?

Investors can answer the question themselves, if they truly step back and look at what is happening around them. The first aspect to consider is the fact that the Core CPI index does not take into consideration food and energy prices. As a result, even though we have experienced high oil prices, this is not immediately reflected in the Core CPI data. Although $70 oil is not initially reflected in the Core CPI data, it will eventually pass through to the Core CPI index as manufacturers pass through the higher costs of producing the goods to the consumer. Additionally, copper, zinc, aluminum, and other raw materials have steadily risen higher over the last several years. These costs will also pass through to the consumer. It is important to note, however, that this pass through effect will not be immediate. Manufacturers typically have contracts where they are required to sell their products for a certain amount for a fixed period of time. I do believe, however, that we will experience a sharp jump in the Core CPI numbers by 3rd or 4th quarter of this year, as the high energy and raw material prices we have experienced for the last several years finally are reflected in the Core CPI numbers. At that time, I expect another influx of gold buying from investors who finally acknowledge that we do have inflation. The continually higher energy and raw material costs are not localized strictly to the United States. Inflationary concerns can be seen throughout Europe and even Japan. In the same manner that Americans will likely buy more gold as inflationary concerns seep through the economy, the same will be true for Europeans and the Japanese. Magnifying these inflationary concerns is the fact that there has been a tremendous increase in money supply across the globe. Although the below chart shows the increase in money supply for the United States, the scenario is true for a number of different countries.

The immediate implications of Central Banks flooding the markets with excess liquidity, is that it paints a false picture of wealth. The more money that is created might offer an initial stimulus to the economy, but it actually serves in diluting the purchasing power of their currency. In turn, as the decline in purchasing power of fiat currencies is magnified, Gold will start attracting even more interest from individuals that are seeking an alternate “currency”.

Any of the above mentioned factors (and others that I have not written about) would in themselves, increase Gold demand and push Gold prices much higher. A combination of those factors is creating the greatest precious metals bull market in history. Additionally, continued geopolitical concerns further propel this bull market, as investors are naturally drawn to a historical safe haven during times of instability. Going forward, I expect Gold prices to consistently make new highs as the true fundamentals that are driving this market can no longer be ignored. If you have been on the sidelines, the time to act is now.

Gold from a Trend Following Perspective

Even if you ignore the above fundamentals, you cannot ignore that Gold has been in an obvious uptrend over the last several years. A number of our trend following systems, that do not take fundamentals into consideration, have triggered buys on Gold and other precious metals based purely on technical indicators. The basic logic behind long term trend following is that you cut your losses quickly and you let your winners run. This long term trend following strategy can also be applied to other commodity markets. With trend following, you are able to follow trends (both on the up and downside) regardless of fundamentals. Often times, this allows you to participate in markets that move higher in the face of contradictory fundamental data. For example, Gold prices have trended higher even though Core CPI data has not revealed inflation. If you waited for the Fed to scream “inflation”, you would have missed out on Gold prices more than doubling in price.


young_activist said...

Our debt is not our children's responsibilty we need to let our members of Congress now this. We are only being greddy when we are selling our children's future to pay for frivilous spending.

Out at the peak said...

The gold bull run is pretty certain. But if the run up is too parabolic, who is going to dump their share?

contrarian2day said...

I have no doubt we will see major corrections in the future, but the long-term trend is very positive.

I believe what the article was trying to say is: We've seen a very positive bull market based, in large part, on geopolitcial issues, oil, and technical indicators.

When common folk & investment firms realize that inflation, dollar problems and central bank issues are worse than advertised, more money will flow into this hedge and we will probably see new all-time highs.

Now, when your taxi driver, hairdresser, co-workers and the latest talking heads on TV start to talk about the major profit potential in gold (like today's housing market), it's probably a good time to bail/cash-out. However, I don't foresee something like this taking place for the next 5 + years. By that time, I personally think we'll be well over $1,500 oz.

Idaho_Spud said...

Here's a conundrum I've pondered as a precious metals holder:

When gold and silver hit the point where they are worth the most US$, will I actually be willing to sell them for discredited & inflated $