Gold & Precious Metals

Intermarket Explanation for Coming Gold Bubble

As we travel to Toronto for the Cambridge House conference, we thought we’d share a few points from our upcoming presentation titled “The Setup for a Gold Bubble.” There are many different ways we can analyze this. By that we mean fundamental triggers, historical ratios, valuations and potential money flows, etcetera can explain the setup for and why this bull market will become a bubble. Today, we focus on intermarket analysis, which is one of our favorite subsets of technical analysis.

For a bull market to become a bubble, it needs to attract excess money flows from other asset classes. In other words, during a bubble, money flows from various asset classes into a single one. Prior to the bubble the market must be an under-owned asset class with room to absorb the massive flows. This chart, from Pierre Lassonde’s recent presentation shows Gold’s share of global asset allocations. It currently is below 3%, which is extremely low in comparison to the 1980 figure of 14% and considering that the bull market is in its 13th year.

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Moreover, and this a point others have made, Gold’s increasing share as part of the global financial pie is more a result of an increase in Gold’s value than an increase in actual ownership. Back in 1999-2001, Gold’s share was less than 0.5%. Now it is six or seven times higher. Yet, Gold’s value is roughly six times higher!

While some of the newly created money and debt will find its way into Gold, the biggest inflows into Gold will come from other markets and particularly bonds. The bond market, which dwarfs the equity and commodities markets, is by far the biggest market in the world. In recent years and in response to the global economic malaise the average investor and average institution has shifted funds out of equities and into bonds. Inflows into bond funds have been gargantuan while inflows into equity funds have been negative. Thus, in an intermarket sense, the trigger for the coming bubble in Gold will be the shift of funds out of bonds and into Gold and the like.

One way to monitor this is to graph Gold against bonds. Below we show Gold against bonds (bottom) and Silver against bonds (top). Both charts are at an interesting juncture. The next breakout in both charts would surpass the 1980 peak and result in all time highs. Gold and Silver have outperformed bonds for a number of years but the outperformance would accelerate upon breakout in these charts.

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n the meantime, Gold and Silver and the shares have begun to correct and digest the strong gains from the recent rebound. October is the only bearish part of the seasonally bullish period. Interim bottoms typically occur in the middle of or near the end of October. Thus, the coming days and weeks could be an opportunity to shed some bonds in favor of bullion and to pickup some stocks, which you may have missed at the last bottom. If you’d be interested in professional guidance in uncovering the producers and explorers poised to outperform then we invite you to learn more about our service.

Good Luck!

Jordan Roy-Byrne, CMT
Jordan@TheDailyGold.com

About Jordan Roy-Byrne, CMT (Trendsman). Jordan is a Chartered Market Technician, a member of the Market Technicians Association and from 2010-2011 an official contributor to the CME Group, the largest futures exchange in the world. He is the publisher and editor of TheDailyGold Premiuma publication which emphaszies market timing and stock selection for the sophisiticated investor.

Since January 2010, The Daily Gold Premium Model Portfolio is up 82% compared to GDX (-6%) and GDXJ (-14%).  Jordan’s work has been featured in CNBC, Barrons, Financial Times Alphaville, BusinessInsider, 321gold, Gold-Eagle, FinancialSense, GoldSeek, Kitco and Yahoo Finance. He is quoted regularly in Barrons. Jordan was a speaker at PDAC 2012, the largest mining conference in the world. Jordan earned a degree in General Studies with a concentration in International Economic Development. Jordan also lived and worked in Southeast Asia for 3 years in order to study economic development from an emerging market perspective. In his spare time he enjoys spending time with Mrs. Trendsman.

Contact: Jordan @ TheDailyGold.com

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British Columbia’s Golden Triangle

A corner of Canada’s western-most province hosts one of the richest mineral belts in the world.
Few investors yet appreciate the enormous value of that region.

goldentriangle

A New Bull Market & Economic Upturn

With some of the “Mind Boggling” numbers coming out of the United States, the mess in Europe and a Sovereign Debt Crisis on the horizon, Michael Campbell decided to ask what the legendary James Dines had to say about current conditions. Ed Note: You can also listen to the 43 minute exclusive interview between James& Mike right below if you prefer:

{mp3}Jamesdines_michaelcampbellsept22{/mp3}

Mike Campbell: Despite those “mind boggling” financial numbers coming out of the US, falling wages, European debt problems, an economic slowdown in China, the US Stock Market keeps going up. What is your perspective on that?
 
James Dines: Climbing a wall of worry is a stock market saying that describes a rising market in the teeth of bad news. The current situation is one of ghastly economic news from Europe, especially the financial insolvency of one country after another. You’ve got soaring unemployment anywhere from 25% and a horrifying 50% that’s not only in Europe but also in America amongst African American youths, and the so-called China slowdown certainly describes a wall of worry. Its cause is a function of the stock market being a discounting mechanism, in other words you get no reward and you make no money in capital gains from knowing the past. Far sighted investors spend a great deal of time energy and resources trying to figure out what’s coming next, and then the stock market begins to adjust to that upwards.

Therefore the market is probably telling us an economic upturn is in its purview, believe it or not. However on this show, and every single year this last decade I have predicted the coming great deflation, and what’s going on now has definitely been a deflation. When I first made that prediction nobody was talking about deflation, all were worried about inflation and how to guard against it. But in a deflation wages decline, as do the prices of real estate and commodities. Virtually everything declines, which is why resource stocks were hit so hard early in 2012.
 
Another one of the long standing predictions on your show has been the coming debt liquidating depression. The function of a deflation is the liquidating of the excessive debt, as for example in Greece they are writing off huge chunks, billions of dollars in unwise loans made during inflationary times.
 
What I make of it that’s different from the mainstream economic thinking, is this World wide malaise is fundamentally a currency crisis. Which is why I was able to predict this coming second Great Depression would be international in scope. Why? Because every Government on the planet is printing too much paper money and liquidation of that fake paper is being corrected by drops in various currencies. Currencies shouldn’t even fluctuate at all as we need a stable standard of value to measure prices and a store of value for savers. Tthat is why we predicted one year ago in  Sept 2011 a bear market for China. That prediction was a shock given I became the original China Bull after returning from a long visit to China shortly after Mao died. Personally, even though everybody is talking about a slowdown in China I am looking for an economic crash there based on the nations internal debts. Also a real estate crash there due to overprinting of money especially in 2008.
 
The majority view is China is merely experiencing a slowdown of historic growth and is still a powerhouse. That Germany is the growth engine of Europe.That looks wrong. Both of them are exporting nations whose customers are experiencing economic hardships. Whether either are being forthcoming or are “even lying” about their economic status, either way I expect both to join the international economic decline.
 
Despite all this, all is not pessimism actually. Indeed I can think of a number of reasons to take a positive view of the world economic situation. For example:
 
1. The rampant pessimism of many investors. Understandable due to the loss of money in the last year with the plunges in stock values, like in mining for example. The result is unusually low volume on world stock markets, a phenomenon I have noted in previous bottom formations. Its not just investors who are discouraged, hedge funds have been running losses the last two years so even the most professional investors have gotten hurt. But new bull markets are born amidst that kind of pessimism. The key question is whether or not these drops are a sign of a huge market top or merely a group rotation typical of new bull markets. I think the odds favor group rotation, which means mining shares should have more upside soon. Those mining shares could have a short term pullback after the pretty sharp rise they’ve recently had while the former favorites like Facebook and Groupon plunged. In short I think we are getting a Group Rotation instead of a unified top.
 
2. Another positive sign is that despite the bad news, America’s leading market averages like the S&P 500 and the Dow are actually up 16% and 11% respectively this year.
 
3. Aside from the classic ingredients of a bull market, the prices of commodities (except for some agriculturals due to weather) have been coming down. Labour has been cowed as they realize that there are no jobs available at all, and far to many applicants for any jobs that do come up. Real estate is cheap, interest rates are low, housing is depressed and even turning up. This is a formula I’ve seen spawning new bull markets in the past.
 
4. Corporate sales are flat but profits are up. Which suggests to me that costs are under control so in any upturn profits would flower big-time.
 
5. There is lots of cash available in corporate treasuries. People have been hoarding cash because they are afraid, which is typical of deflations. It drives the Keynesian economist’s crazy that money is not being put to risk, but people are afraid of debt.
 
6. Finally, stocks are depressed, undervalued, underpriced, oversold, and debts are getting paid. Even paid off and  liquidated.

 
Mike Campbell: I’m glad to get that perspective which is in variance to the news. Bad news that is government dominated bad news. What do you think of the interference by Central Banks and Governments?
 
James Dines: I have never lived through anything like this, but as a student of history I pulled together all of the details of the last time this happened in the 1920’s. What’s happening right now is just a re-run of that. As George Santayana said, “Those who cannot remember the past are condemned to repeat it.”

Fathers of Keynesian economics would not agree that it was a currency crisis that cause the 1929 crash. But I think that when events like the European money supply being doubled at the Genoa conference in 1922 to pay for WW1, that that bloated currency caused the roaring 20’s, and the deflation that followed in the 1930’s was natural to eliminate all that paper. Its  all happening again only in slow motion and less visible.

 
This is what is happening. The whole world is suffering because they have printed too much paper money. Their cure for that is to print even more paper money which is nothing more than pouring gasoline on the fire instead of solving it. Typically at this stage of a deflation what’s going to happen when the government continues to add money to the system first there is what looks like a recovery. Then it kicks in to something much worse. When they poured money into the system in 2008 what followed was a couple of years of recovery in 2010- 11, which was just that extra money flushing through the economy. Now what’s happening again is that we are going through another round of money printing so we will have something that looks like growth again as money sluices through the system, but then its going to come down even harder.
 
Mike Campbell:  On August 22nd/ 2012 with Gold in the low $1,600’s and Silver just over $29 you flashed a signal to your subscribers that you where back on the buy side of Gold & Silver. Now that Gold is $130 higher and silver is $5 higher what do you  think?
 

James Dines: Q3 and the declaration that they are going to print money without limit primed the pump in my opinion and I’m now looking for a resumption of the Super Major Bull Market that I’ve been looking for since my major buy signal 11 years ago on September 25th, 2001. Gold has been up every single year for the last 11 years and there has been no other investment area that’s done as well. It is important to understand that with all this money being printed,  Gold has no price. Gold is money. In each country it will sell for a different number of pieces of paper based on the amount that they print. In my interim bulletin of August 22nd/ 2012, I said I was looking for Gold and Silver to challenge their all-time highs, which means at least $1,900 for Gold and $50 for Silver. My initial target on Silver is $120 an ounce if they continue to print all that paper.

The problem is that there is no safety in this environment and its Delusionary to think that there is. When the currency itself is corrupt were can you hide. Maybe the only really safe place would be Gold and Silver on pullbacks because a coin of them made back even in Caesars time is still good anywhere in the World today. I think everyone should put a small amount of money into some Gold coins and put them, never on your person or near your residence, but in a bank or safety deposit box and preferably in more than one country. If you have more money than a small amount you can buy stocks also on pullbacks. They’ve had a big jump here and I am looking for a bit of a pullback before the next upwave.

About James Dines:

jimdines1

James Dines has become legendary for having made correct forecasts that were in complete contradiction to the rest of the financial community.

In an industry where it takes courage and conviction to go against the crowd, Mr Dines defiantly warned investors of the “invisible crash” that would bring down stocks in 1966, the unexpected gold boom of 1974, the Internet revolution of 1996, and the market top in 2000, a 2001 call for a Super Major Bull Market in Gold.  Now he warns of “The Coming Uranium Boom” that is steadily approaching.

His subscribers to The Dines Letter have profited so much that subscriptions are handed down to second generations. – read more HERE

 

 

 

Bernanke Put: Beware of Easy Money

Central bankers around the world may be providing a backstop to the financial markets in much the same way Greenspan did during the “Goldilocks” years, but when the short-term euphoria wears off, will the negative repercussions be even more severe? Bernanke’s Federal Reserve (Fed) appears to specifically target equity market appreciation as part of its offensive in bringing down the unemployment rate; expectations are high: every time the market sells off, the Fed might simply print more money. We fear central bankers have overstepped their reach, and the implications of their actions may be much worse than the anticipated benefits.

To an extent, the effects of today’s monetary policies resemble the “Greenspan Put” (named after former Fed Chair Alan Greenspan) in the years leading up to the crisis. Today’s central bankers have been quite straight forward in communicating their stance: they appear willing to step in with evermore liquidity should the global economy show any signs of further weakness. Bernanke’s Fed has gone even further: the Fed has stated it’s accommodative policies will “remain appropriate for a considerable time after the economic recovery strengthens”. In other words, financial markets will be awash with liquidity for an extended period, even if we see signs of a sustainable economic recovery.

BPut

At first glance, this may appear a positive development for investors holding stocks and other risky assets. After all, Bernanke appears willing to underwrite your investments over the foreseeable future. Indeed, Bernanke appears to specifically target equity market appreciation, on many occasions noting one of the key benefits of quantitative easing (QE) has been to increase stock prices. Notably, while he believes the Fed’s QE policies have had a positive impact on stock prices, he considers it has not caused increases to inflation expectations or commodity prices. We disagree, which we elaborate below. Ultimately, the Fed may have reached too far, bringing risks to economic stability and elevated levels of volatility; the full implications of its actions may be somewhat dire down the road.

From the Bank of Japan and the People’s Bank of China to the European Central Bank (ECB), the Bank of England (BoE) and the Fed, central bankers are either putting their money where their mouth is (quite literally) or strongly insinuating that continued, ongoing easing policies are needed to prevent another significant downturn in global economic activity. While all the excess printed money may or may not have the desired effect of stimulating the global economy, the money does find its way somewhere; unfortunately, most central bankers appear to fail to realize that they simply cannot control where that money ends up.

Fed Chair Bernanke’s Achilles’ heel since the onset of the financial crisis has been the housing sector. It’s no surprise why the Fed bought over a trillion dollars worth of mortgage backed securities (MBS) since 2009: to re-inflate home prices and in so doing, bail out all those underwater with their mortgages. The problem was, it didn’t work – house prices continued to weaken across the nation, and have stagnated to this day. Now, the Fed has announced another MBS purchase program, this time open-ended, under the auspices of “QE3”. Do they believe the time is now ripe for MBS purchases to positively impact the housing market and thus the economy? Unfortunately, the first MBS purchase program failed to have its desired effect; we do not foresee how QE3 will be any better at stimulating house price appreciation.

One of the things we believe such actions do stimulate are inflation expectations. Indeed, the jump in market-implied future inflationary expectations in reaction to the Fed’s QE3 decision was quite remarkable:

BPut2

In contrast to Bernanke’s views that QE does not cause commodity price appreciation, in our assessment, much of the freshly printed money only serves to inflate the value of assets that exhibit the greatest level of monetary sensitivity: commodities and natural resources. These are essential in the manufacture and production of goods and services purchased by U.S. consumers on a daily basis. As such, inflated commodity and resources prices ultimately pressure consumer price inflation, as the consumer’s “everyday basket of goods” becomes evermore expensive. The ongoing weakness in the U.S. dollar only serves to compound these inflationary pressures. A weak dollar, we believe, is part of Bernanke’s strategy to stimulate the U.S. economy through stimulating exports. While we fundamentally disagree that this is sound monetary policy for the U.S. to pursue, the inflationary ramifications are clear: the U.S. imports a great deal from abroad; every time the dollar depreciates against a currency of a country from which the U.S. imports, the price of those imports rises.

Not only have the Fed’s actions heightened inflationary risks, but we also believe it implicitly heightens the risk that the Fed gets monetary policy wrong. For instance, Fed Chair Bernanke believes that the Fed’s non-standard policies since 2008 may have helped lower 10-year Treasury yields by over 1.5%1. In so doing, the Fed has taken away a key metric used to gauge the economy and thus set appropriate monetary policy: free market interest rates. The Fed has historically relied on long-term yields, such as the 10-year and 30-year Treasury yield, as part of its assessment of the overall health of the economy. In manipulating those same yields, the Fed can no longer rely upon them to provide valuable information on the health and trajectory of the economy. In other words, the more the Fed meddles in the market through non-standard measures, the more the Fed is in the dark regarding the appropriateness of monetary policy. Such a situation inherently creates an additional level of uncertainty over the U.S. economy, U.S. monetary policy, and may continue to underpin weakness in the U.S. dollar.

The vast amounts of liquidity provided via the Fed’s quantitative easing programs will, at some point, have to be reined in. Whether due to inflationary pressures or a sustainable recovery, only time will tell, but the need to rein in liquidity may create massive headaches down the road. Given the ongoing high level of leverage employed in the economy, such monetary tightening runs the risk of undermining any economic recovery and potentially causing it to crash back down, as the likelihood of it negatively affecting consumer spending is high. With a still-leveraged consumer, rising rates may be overly painful, dramatically slowing consumer spending and, in turn, the economy. Such dynamics may have an outsized impact on the U.S. economy, given consumer spending makes up approximately 70% of U.S. GDP.

All of which underpins our view that there is a significant risk that the Fed has gotten monetary policy wrong. We consider the Fed’s actions have not only heightened inflationary risks, but have also inherently created risks to appropriate monetary policy going forward. Both of which will likely contribute to ongoing high levels of market volatility over the foreseeable future.

With so many dynamics yet to be played out globally, and with central bankers becoming evermore active in meddling with economic dynamics around the world, investors may want to consider preparing for the potential ramifications of such policies. While we may disagree with the policies being pursued, central bankers appear to be at least predictable in their decisions. We believe the currency market provides the most effective way to position oneself to protect and profit from the implications of such monetary policies.

In the current environment, the general equity market seems to be moving on the back of the next anticipated move of policy makers, and less so on fundamentals, but company-specific risks remain. With the outlook for the economy still on tenterhooks, many companies have been missing earnings forecasts. Currencies don’t have this additional layer of risk. As a result, currencies may be the “cleanest” way of positioning oneself for the next policy move. Historically, currencies have also exhibited much lower levels of volatility relative to equities, when no leverage is employed. As such, investors may want to consider adding a professionally managed basket of currencies to their existing portfolios.

Please sign up to our newsletter to be informed as we discuss global dynamics and their impact on gold and currencies. Engage with me directly at Twitter.com/AxelMerk to comment on Merk Insights and to receive provide real-time updates on the economy, currencies, and global dynamics.

Axel Merk & Kieran Osborne, CFA

Axel Merk is President and Chief Investment Officer, Merk Investments
Merk Investments, Manager of the Merk Funds. 
Kieran Osborne is Senior Analyst at Merk.

 

 

“The prettiest horse in the glue factory”

US DOLLAR AND CURRENCIES- SUMMARY 

The Dollar moved slightly higher on Tuesday on more safe haven buying.

The US Dollar Index gained.034 to settle at 79.552. 

Spain successfully sold 4 billion euros of 3 and 6-month bills on Tuesday, although yields were higher than the previous auctions. Spanish Prime Minister Rajoy on Thursday is expected to unveil additional austerity measures when he presents his 2013 budget. Italy today successfully sold zero-coupon 2014 bonds at 2.532%, down from 3.064% on Aug 28. 

Spanish ten year bond yields rose over 6 bp to 5.745%.

The GfK Oct German consumer confidence index of 5.9 was unchanged from September’s 5.9 and was in line with market expectations. 

The Euro was up .22% against the Dollar.

Japan’s Sep small business confidence index rose slightly to 45.1 from 44.8 in August. 

The Yen was down .05% against the Dollar.

China’s Aug leading economic indicator rose 1.7% m/m after a +0.6% m/m gain in July, which was a possible sign that the Chinese economy is stabilizing. Positive factors in the leading indicator included a rebound in real estate and credit growth, and an improvement in consumer expectations. The market consensus is that Chinese GDP likely eased to about +7.4% in Q3 from +7.6% in Q2. 

China’s central bank today injected a record 290 billion yuan ($46 billion) into the banking system to address a liquidity squeeze ahead of next week’s Chinese holiday week.

As long as there is faith in the dollar and fiat money as a whole-and by and large there is, I see the system holding together for quite a while. I think it’s Ian McAvity who calls the dollar “the prettiest horse in the glue factory.” This became dramatically evident this week.

Owning Dollars other than for trading purposes is a fool’s bet in my opinion. As a long term plan, you should be looking to exit Dollars and move into hard assets or strong natural resource based currencies. I particularly favor the Canadian Dollar. Other choices include the Australian Dollar, the Singapore Dollar and, of course, the Chinese Renminbi. My view is that we’re ultimately headed back to the March 18, 2008 low of 70.698 and will later see 66.00 or much, much lower, possibly even the 30.00 area. This could occur between 2014 and 2018. Short-term (between now and early 2013) we should see the 73.00-74.00 area. For political reasons we may never experience the sudden overnight sudden devaluation as seen by Argentina, Brazil or Mexico in recent decades, but instead continue to see a slow diabolical deterioration. -Ed Note: Try Mark Leibovit’s Special Trial Offer HERE

Prettiest Horse