Gold & Precious Metals

In my latest book, The Real Crash: America’s Coming Bankruptcy – How to Save Yourself and Your Country, I devote a full chapter to the merits of the historical gold standard and reasons to reinstate it. What I did not mention and few investors notice is that central banks are already returning to gold as the ultimate safe haven asset.

I believe this change in policy, combined with continued inflation of Western currencies, is creating a stable floor for the gold price and an even brighter upside potential.

A Strategic Shift

The return to gold is unmistakably the product of a strategic, not merely a tactical, shift in global central banking policy. Central banks in the developed world have now altogether stopped selling bullion. This was foreshadowed by their behavior over the past decade, when they sold even less gold than they were permitted to under the anti-dumping Central Bank Gold Agreements. Clearly the concern about dumping gold was out of step with the trend. But more importantly, central banks in the emerging markets have been buying gold by the truckload.

Since the financial crisis of ’08, nations as diverse as Mexico, the Philippines, Thailand, Kazakhstan, Turkey, Ukraine, Russia, Saudi Arabia, and India have led the way back to gold as a primary reserve asset. Russia alone has added an impressive 400 tonnes of bullion to its reserves, most of it coming from domestic purchases. Mexico has added over 120 tonnes, including 78 tonnes from one mega-purchase in March 2011. The Philippines have bought over 60 tonnes, with 32 tonnes coming in as recently as March 2012. Thailand has added approximately 60 tonnes, and Kazakhstan just shy of 30 tonnes. Turkey amended its regulatory policy late last year to allow commercial banks to count gold towards their reserve requirements, adding over 120 tonnes to its official reserves. And bullion imports into mainland China through Hong Kong have been reaching all-time highs.

Finally, loyal US allies Saudi Arabia and India, in what is sure to leave particularly bitter taste in Washington’s mouth, have been adding gold to their reserves by the hundreds of tonnes.

In short, the governments of emerging markets recognize that the global monetary order is on the verge of a reset. These emerging markets are the economic engines of the 21st century, and they’re determined not to be undermined by Western fiat paper.

Taking the Long View

The depth of this new strategy has been on display throughout the precious metals correction of the past few months. Emerging market central banks have continued to be aggressive buyers. This is very bullish. As governmental actors, central banks seek out stability and predictability. When they shift course, they do so only deliberately and gradually, much like aircraft carriers. Western central banks have set a clear course toward inflation, while emerging market banks are shifting toward sound money.

The implications here are enormous for private investors. We now see the biggest market participants buying the yellow metal massively on the dips. What’s more, because central banks enjoy substantial clout in the gold market, their purchasing decisions have an outsized effect on price. Institutional investors are coming to once again see precious metals as a ‘legitimate’ form of investment. It is this positive feedback loop that will serve to stabilize gold as it re-emerges as a reserve asset.

It’s Still The One

Gold remains the bedrock of reserve holdings at central banks, even in a world dominated by fiat currencies. Apparently, when it comes to a paper-based global monetary system, it’s easier to talk the talk than walk the walk. Government officials the world over, but especially in the developed world, have been quick to call gold an anachronism – unsuitable for a modern, globalized economy. But these same governments have never found it in themselves to sell off their holdings, or for that matter, to surrender even a substantial fraction of them. Those who have clamored the loudest have, in fact, behaved the most conservatively.

The US, which has a whopping 75 percent of its reserve holdings in gold, and the Western European countries, which have an average of approximately 64 percent of their reserve holdings in gold, seem to believe no one should own gold – except them! It shouldn’t surprise anyone that emerging market central banks have spotted the double standard. As they advance economically, these nations are less likely to do what Washington tells them is right and more likely to think for themselves. And with an average of less than 20 percent of their reserve holdings in gold, they clearly know they have some catching up to do.

Behind the smoke and mirrors then, central banks in the developed world are hoarders. Central banks in the emerging markets are scramblers. Significantly, nobody is selling, only buying.

The Fiat Fantasy Meets Reality

What is causing the rush back to gold? Two words: excess debt. Independent central banking has always been more of a dream than a reality. Politicians knew from the beginning that they could run up the tab and then corner central bankers into bailing them out via inflation, AKA stealth default. Regrettably, central bankers have dutifully obliged – no one, for example, has yet resigned in protest. Only a few have ever defied their governments, and only for short periods.

Of course, governments throughout history have created the conditions for their own collapse by tampering with their money supply to pay debts. Undermining the currency means undermining the entire economy, which lowers tax receipts and creates more debt. Soon, the unintended consequences of the policy overwhelm its intended consequences, and the state collapses – along with the jobs of those central bankers. Committed, nonetheless, the central bankers are.

Valuation Insurance

Against this historical cycle, the best insurance policy is physical gold. Those with the most of it will best weather the coming rounds of competitive devaluation. No wonder that central banks in the emerging markets are scrambling to play catch up to their developed-world counterparts.

How much gold will central banks stockpile? We cannot and do not know for sure. What we can and do know for sure is that they have prudently decided on a strategic shift in policy. This is creating a floor for the price of gold and a brighter future ahead for those who are prepared for the return of sound money.

Peter Schiff
C.E.O. of Euro Pacific Precious Metals
email: info@europacmetals.com“>info@europacmetals.com
website: www.europacmetals.com

Peter Schiff is CEO of Euro Pacific Precious Metals, a gold and silver dealer selling reputable, well-known bullion coins and bars at competitive prices.

For the latest gold market news and analysis, sign up for Peter Schiff’s Gold Report, a monthly newsletter featuring contributions from Peter Schiff, Doug Casey, and other leading experts. Click here for your free subscription.

There’s a plausible path to $10,000 an ounce gold. And it doesn’t require a breakdown in civil society…

Speculators see central bankers as modern-day superheroes, able to push markets around with a single phrase. In the minds of most investors, Ben Bernanke, Mario Draghi and Masaaki Shirakawa might as well be wearing tights, masks and capes. These superhero central bankers continuously swoop down into the financial markets to defend them from downticks…and to insure that they always deliver capital gains.

The reality, of course, is that these superheroes are frauds. They have no superpowers…other than the power of mass delusion. The powers of Mario Draghi and the other central bankers in Europe are waning. Excess debt is like kryptonite: Each new wave of printing has less impact on markets. As the popular phrase goes: “This is a solvency problem, not a liquidity problem.” 

In other words, new money supply cannot restore health to sick loans and government bonds. The only way to restore solvency to the system is to deflate the economy or slash the amount of debt in the system through mass bankruptcy.

Or is there another way? Is there a “reset button” that central bankers can push (with the approval of political leaders) that would restore balance to the system?

We know central bankers would never want to deflate the economy or crash the value of debt, which would destroy the banking system. So how about inflating the money supply to dilute the value of debt? All in one fell swoop?

Right now, central bankers are diluting the value of debt very slowly by pushing interest rates below the rate of inflation. Some call this “financial repression.” It’s an unspoken policy that has many negative consequences. What is an alternative, since all attempts to “fix” the current system with more borrowing and printing are failing?

How about the classical gold standard, which stands out as the least flawed of all the systems we’ve tried. Each nation could choose to peg its local currency to gold at a price that allows for enough growth in bank reserves to greatly reduce the burden of public- and private-sector debts.

Re-pegging a currency like the US dollar to gold at the current price (about $1,550) has its pitfalls. Most notably, it would not deleverage an overleveraged banking system. But re-pegging the dollar to something like $10,000 an ounce might do the trick.

Hedge fund managers Lee Quaintance and Paul Brodsky from QB Asset Management wrote a fascinating outline on the potential reintroduction of gold into the monetary system, while simultaneously implementing what one might consider a debt jubilee. I recommend reading the entire outline. Zero Hedge posted it at this link. QB explains the mechanics of how it could work in the US:

Using the US as an example, the Fed would purchase Treasury’s gold at a large and specified premium to its current spot valuation. The higher the price, the more base money would be created and the more public debt would be extinguished. An eight-to-10-fold increase in the gold price via this mechanism would fully reserve all existing US dollar-denominated bank deposits (a full deleveraging of the banking system).”

Below is what the remonetization of gold would look like in chart form. The yellow line would rapidly approach the blue line. And the blue line will keep rising as we see further growth in the money supply. QB’s “Shadow Gold Price” divides the US monetary base by official US gold holdings. Policymakers, who always feel the need to manage something, would appreciate that this is the same formula used during the Bretton Woods regime to peg the dollar at $35 per ounce. In other words, the Shadow Gold Price is the theoretical price of gold after the Fed inflated the supply of dollars to a level that would cover systemic bank liabilities and then re-pegged the dollar to gold. Behold the path to $10,000 gold:

Shadow Gold Price

This path would weaken the economy-sapping effects of debt created since President Nixon closed the gold window. It would transform a debt-based currency into an asset-backed currency. No longer would one ask the unpleasant question “What backs the dollar?” and come away with even more questions (and a headache). Right now, the dollar is backed by Treasuries held on the Fed’s balance sheet, which are in turn backed by dollars, which are in turn backed by faith in fiat money — i.e., nothing!

QB’s monetization scenario would impose losses on certain parties as the reset button is hit, but unlike most of the policy prescriptions we’ve seen lately, it seems to solve more problems than it creates. Most notably, politicians could argue that this reset would involve “migration of value, in real terms, from leveraged assets to unleveraged goods, services and assets.” Wage earners would be winners relative to asset owners, because “stable to higher nominal asset prices would require even higher nominal wage and consumable pricing looking forward.”

This scenario argues for holding some shares in producers of physical commodities (especially gold miners), even if it feels like we’re in a deflationary environment. A gold standard, after a one- time debt monetization, would make for a more-balanced, efficient global economy less prone to violent booms and busts.

As an added bonus: Central bankers would no longer be viewed as superheroes! Just meager servants, pegging the money supply to gold and letting the free market determine the price of money. After all, when in history has central planning worked better over time than the free market?

We can hope the central bankers of the world stumble their way to a solution like that proposed by QB Asset Management before they inflict even more damage to the foundation of the global economy. Unfortunately, conditions may have to get much worse in financial markets, banking systems and economies before such “outside the box” ideas are considered. A defensive portfolio with exposure to gold and other real assets seems like the right mix in today’s environment.

Regards,

Dan Amoss
for The Daily Reckoning

Editor’s Note: We like it when things make sense, fellow reckoner. And at a time when those in charge of the world’s money seem to have little of it themselves, we’re increasingly happy to have gold on our side. As Dan points out above, there are numerous reasons why a gold-backed currency simply makes sense, and after seeing this presentation, we can tell he’s in good company.

Click here to discover a long-lost gold “bible” penned by none other than Congressman Ron Paul…and how you can snag a copy for yourself.

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Here at The Daily Reckoning, we value your questions and comments. If you would like to send us a few thoughts of your own, please address them to your managing editor at joel@dailyreckoning.com” title=”joel@dailyreckoning.com” target=”_blank”>joel@dailyreckoning.com

The many followers of Mr Gold Jim Sinclair whose earlier predictions have proven uncannily accurate a decade out will be extremely interested to hear his latest forecast. Certainly it jibes with the view of Byron Wien’s interview with the “Smartest Man in Europe”

Here is Jim Sinclairs Letter:

My Dear Friends,

Gold will go to and above $3500. This is the most important message I have sent you since 2001.

There are very few of us dynamic thinkers that see everything as a trend constantly in motion. Anyone can be a static thinker, quoting recent economic figures or news headline (MSM), and coming up with a usually wrong opinion.

The change today is that the “Rig Is Up.”

The Bank of England turning their backs on Barclays, the company who did their bidding, will be the event in time marking the trend change.

Many of us in our areas of activity will successfully fight the Riggers. The many complaints that so many of you kindly sent in to fight manipulation released the Kraken in me.

The Kraken is back in its cage where it belongs. The paper trail is there. The worm has turned. Even more importantly is that this fight in the $1540 gold price area was not for regaining the old high in gold. The six attempts to kill gold, supported by some gold writers looking for favors from the riggers was a now failed attempt to keep gold from trading above $3500.

The battle to stop gold has been lost.

The start, like all starts towards the old high and well above, should be slow with more unfolding drama. It will build on itself but gold will trade at and above $3500. I am now as certain of this as I was over ten years ago when I told you gold was headed for $1650. I knew that as fact and to me from $248 gold was trading at $1650.

My job now is to define gold’s full valuation for you when it occurs. The timing is no less than one year from now to a maximum of three years from now. I believe I will be able to do that for you.

This is the most important message I have written you since early in 2001. I write this with total intellectual and spiritual certainty.

Respectfully,
Jim

….read more including a July 4th post at Jim Sinclair’s Mineset HERE

Gold, Worsening Deflation & the Biggest Catalyst for Precious Metals

Posted by Jordan Roy Byrne via Daily Gold

on Tuesday, 3 July 2012 15:01

By now, everyone has seen the chart of Homestake Mining and its bull market run from 1924 through 1935. Hence, there is no need to repost it. In this editorial, Frank Barbera shows a handful of charts of gold stocks and gold stock indices during the Depression era. US Gold producers apparently bottomed in 1929 while the Financial Times Gold Index bottomed in 1931. The time to buy the gold stocks was when deflation set in. More recently, the time to buy gold stocks and physical (Gold or Silver) has coincided with fears of deflation.

Below is a chart that that shows the Google search volume for “deflation.” Predictably, there is a big spike at the end of 2008. There is also a mini-spike in 2010. Unfortunately Google doesn’t have search data pre-2004. Policy makers had a fear of deflation during 2002 and 2003.

june30deflationsearch

Below we plot Bonds, Gold, Silver and the HUI Gold Bugs index. We highlight the periods in which deflation fears emerged. That would be 2002-2003, October 2008 and briefly in the spring of 2010. All of course were buying opportunities within the bull market in precious metals. Note that the peak in Bonds in 2005 coincided with a major bottom in precious metals.

june30pmsbonds

So why does the onset of or fear of deflation act as a catalyst for the precious metals sector?

….read more HERE

 

 

“It is amazing that billions of dollars in speculative money is invested every year by a retail market that really does not know the basics of simple geology…”

PRESIDENT of niche consultancy Exploration Alliance, Chris Wilson believes education is an investment basic. In this interview with The Gold Report, Chris Wilson shares his guidelines for winnowing out the crowded junior Gold Mining sector to find the companies worth serious investigation and urges investors to know their porphyries from their narrow veins. 

The Gold Report: Chris, you have described the junior mining industry as being “in disarray.” Do you have any ideas for investors who might want to participate in the space, but may be a bit confused or discouraged?

Chris Wilson: Well, upfront I would say do not lose heart, but do not go throwing your money at just any junior at the moment. 

We have to find 80 million ounces (Moz) of gold a year just to replace what is being mined. That is equivalent to the whole of the production from the Carlin Trend. Clearly, any company with a significant discovery will be extremely valuable. That value will grow exponentially moving forward because new discoveries are getting harder to find. The value most likely will be unlocked by the major companies buying the juniors out. 

It is a big leap for a junior trying to be a miner. When the major companies are mining successfully, but not exploring successfully, acquisitions have to become part of the future. The trick will be finding juniors that have a commodity and a deposit style that are attractive to the majors. 

There are probably 3,000 junior explorers on the Toronto, Australian and London stock exchanges. So, you have to do your homework. First, you discount the 20% that have managements with a reputation for pumping and dumping or that lack technical prowess. Next, you eliminate companies working in countries you do not like for reasons of geopolitical risk. 

With a little bit of research you can see where mines are being built successfully and where potentially good mines are not being built. 

Once you discard management and geopolitical risk, you have 1,500 or 1,000 names left. Next, you have to look at deposit style. Irrespective of grade, major companies do not buy small vein deposits with often complex and discontinuous ore shoots. Such deposits will always remain the remit of junior explorers who may struggle to stack together resources or commercialize production. 

Neither do major companies want small copper mines with difficult metallurgy. It may take $4 billion to put a big copper porphyry into production. As an investor, you have to target companies with the potential of finding a deposit in the commodity of choice, probably copper, silver or gold, that has the chance to get the attention of the majors. 

Of course, you want to look at the number of shares a company has out there and how much cash it has in the bank. If a company is going to have to raise money in the near term, that will be dilutive and something you want to steer away from. 

You can go on to the System of Electronic Disclosure by Insiders (SEDI) to see if management has been selling their shares and have a look at the stock curve. If it is a typical up and down parabolic curve, it probably does that for a reason. Juniors with good assets tend not to have that parabolic curve up and down. They may have come off 20% or even 50%, but they are holding steady. What percentage of the shares is held with management? Put that into the equation.

By now, the list of 3,000 companies is probably down to about 100, and that is a manageable number of companies to do your due diligence on. 

The last thing I would say is go and talk to a geologist. Not necessarily the company geologist, who will sell you any story the company wants. If you are going to invest in this commodity and you do not understand geology, you need to find a geologist that can help you. 

TGR: Why are you convinced that gold will increase in value? 

Chris Wilson: Gold is a finite resource. You’ve got to find 80 Moz a year to be ahead of current annual production. So, from a supply and demand perspective, each year we’re spending more in exploration yet finding less. All things considered, that means that good discoveries will be increasingly valuable.

In addition, politics today works in gold’s favor. Recent elections prove that people do not want to vote for austerity. People vote for an easier life. In some respects, this forces governments, if they want to be reelected, to print money to keep things humming along pretty much as they have been. That is going to lead to inflation and to paper money being devalued. 

TGR: You have years of experience traveling the world, exploring for gold deposits. Some people believe all of the big deposits have been found. Do you agree? 

Chris Wilson: Not all, but a large number of the big gold deposits have been found. Professors Roger Taylor and Peter Pollard, consulting geologists and good friends, are fond of saying that big deposits generally stick out of the ground. That is because big deposits require very large fluid circulation cells capable of carrying the metal endowment, and these hot fluids generally alter the rocks around the deposit, resulting in large and obvious alteration systems. Moreover, large deposits are generally associated with major structures and may present large geophysical targets.

TGR: Based on your years with your boots on the ground, where do you think the remaining big discoveries might happen?

Chris Wilson: You need both a discovery and a good environment to develop a project. There are countries where you clearly should not invest even if they have good geological potential. China, for instance, has excellent potential, but I have yet to see a mining company succeed. Many people are fans of the former Soviet Union republics. They are very difficult places to get ahead. There are a lot of insider deals and corruption. 

Then you go to the other end of the spectrum to great mining jurisdictions where investments are safe: Canada, Australia, Peru and Chile to name a few. But, those countries have been through several cycles of exploration over the last 100 years, which means it is getting harder to find deposits there. 

So, where do you go for new discoveries and what would those new discoveries be like? This is a personal choice, but I favor less explored countries with excellent geological potential that have a manageable degree of political risk. Colombia is an obvious choice, parts of northeastern South America fit the bill, as do countries in West Africa that are emerging from conflict.

West Africa has some of the greatest mines on earth. For example, Obuasi has produced 30 Moz and probably has about 35 Moz left. To date there has been over 200 Moz of gold discovered in approximately 30 mines and the potential remains excellent.

West Africa was joined to northeastern South America for much of its history and shares the same geology. In comparison to West Africa, northeastern South America is significantly under-explored, so all things considered, countries such as Brazil, Suriname and Guyana have excellent potential. Venezuela also has excellent potential but the politics are problematic.

There also is potential in past-producing mines. There have been some very good discoveries recently, such as the  past-producing Omai mine of 4.5 Moz in Guyana. A few weeks ago, a company announced a resource of 1.22 Moz. 

TGR: So, you are talking about a contiguous greenstone belt that existed millions of years ago that now extends from West Africa across the Pacific and into South America.

Chris Wilson: Correct, although it was actually formed 2.1 billion years ago. My point is that greenstone-hosted gold mineralization is well understood and has been the focus of successful exploration in West Africa, Canada and Australia. 

Greenstone belts of the Amazon have not been explored to the same extent. 

As long as you are prepared for the geopolitical risk of certain countries, you will probably get a lot of bang for your buck. There will be more world-class discoveries there than in some of the countries that have had more exploration.

TGR: What are you doing to reach out directly to investors with your expansive knowledge base?

Chris Wilson: A lot of people who invest in the junior exploration space, the midtier and to a degree in major producers have a fundamentally poor understanding of geology and key concepts. Too often, when I talk to investors, they have no idea of what a strike extension is or what makes for a great intercept. They do not know what the difference is in exploration potential between a porphyry and a narrow vein system.

It is amazing that billions of dollars in speculative money is invested every year by a retail market that really does not know the basics of simple geology. That is a huge issue that needs addressing. 

TGR: Chris, thank you for your time.

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