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Simply a correction, or the start of something harder for gold bulls…?

"The modern mind dislikes gold because it blurts out unpleasant truths."
 – Joseph Schumpeter

SINCE HITTING a high of just over US$1260 in June, the Gold Price declined to trade around $100 lower per ounce, notes Greg Canavan of Sound Money, Sound Investments.

While the correction occurred in stages over the past few weeks, the biggest impact was felt during US trading on 27 July, where the Gold Price fell $25. This rather hefty fall had ill-informed gold bears salivating, calling an end to the decade long bull market and apparently, the ‘gold bubble’.

But if last month’s high represented the gold market peak, it’s the most unassuming bubble I’ve ever seen. No hysteria, no scrambling for Gold Coins, gold stocks well of their highs…is this how bull market’s end? I don’t think so.

Gold is simply experiencing a correction. None of the fundamentals that have driven gold’s price higher over the years have changed. In fact they are getting stronger.

To understand gold and why it is likely to continue to rise, you must first understand that gold is money. It has been for thousands of years and will be for thousands more. Despite the best efforts of governments and central bankers to discredit gold (a practice that has become more prevalent since paper money has come into use) gold’s place in the international monetary system is as strong as ever.

Let’s look at a few (relatively) recent examples of gold v government.

1. The term ‘greenbacks’ first made an appearance in the American Civil War. Treasury Secretary Salmon P. Chase (Tim Geithner’s equivalent) printed up a whole bunch of them to finance the war effort. Not surprisingly, they immediately fell in value against gold. Demonstrating the hubris of officialdom, Chase thought gold was the problem (rather than his trying to finance a war with paper) so he tried to outlaw the gold market. This caused havoc. He soon recanted and had to live with a depreciated currency;
2. In the depths of the Great Depression, the US Dollar was tied to gold at $20.67 an ounce. Influenced by Keynes, US President Roosevelt thought the precious metal was holding the economy back. So he confiscated the public’s gold and soon after revalued it to $35 an ounce. It was an attempt to create inflation amidst the falling price environment of the Depression. The policy has some success…paid for by the public who exchanged their real money for (soon to be depreciated) US Dollars;
3. Following WWII, the Bretton Woods system of international finance came into existence. The US Dollar was tied to gold at US$35 an ounce, with the other major currencies tied to the US Dollar. This worked ok for a while but rising US deficits (to finance the Vietnam War) put upward pressure on the Gold Price, as US creditors swapped their excess Dollars for gold.

A group of central banks tried to maintain the US Dollar Gold Price at $35 an ounce through what was known as the London Gold Pool, but it broke down in 1968 when the French bailed out. (De Gaulle wasn’t a fan of the US’ spending habits).

From there, an artificial, two-tier market was established to control the price of gold and mask the debasement and mismanagement of paper money. Needless to say it didn’t work. US President Nixon abandoned gold in 1971 and throughout the decade, gold went from $35 to $850 an ounce.

Since 1971 gold has played no ‘official’ role in the global economy, and total debt in most developed economies has exploded. In the absence of gold, there has been no balancing or stabilising influence in the international economy. This is why debt was allowed to get to the extraordinary high levels that eventually caused the credit crisis.

Unfortunately, that debt is still with us, and governments around the world are creating more of it to try and ‘fix’ the problem. This is the wrong course of action but if history is any guide, it will be pursued until the even the village idiot – whoever that is – notices.

In other words, the monetary mismanagement that the rising Gold Price has been signaling for years will likely continue for a few more yet. Betting that the gold bull market is over is akin to betting on the wisdom of governments. I’ve happily taken the other side of that bet and following the recent sell-off, have just advised my subscribers to buy up a number of attractively priced gold companies. Investors with a little patience should do very well.

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Source:Gold's Unassuming Bubble

Western central banks continue to hold gold. Now Eastern central banks are buying gold…

EVER SINCE the demise of the Gold Standard, monetary authorities have tried as many ways as possible out there to sideline gold as part of the monetary system, writes Julian Phillips at the GoldForecaster.

Since the early Eighties, they have succeeded to some extent, but this was by discrediting gold and by emphasizing the benefits of paper currencies. Paper money in a paper system was working very well, and everybody felt that much more prosperous, and so ignored gold’s departure. The developed world then had a full twenty-five years of solid growth.

But then began the real rise of the east, in particular East Asia. And then, in mid-2007, a ‘credit crunch’ knocked the stuffing out of the solidity of the Western banking and financial system.

Seven years before that crunch, when booming assets were enriching the developed world the most, the Gold Price also started to rise, when it was realized that central banks were not keen to sell all their gold at all. Only small amounts were sold and the bulk stayed in the vaults of central banks. So why is gold still in the system at all?

In 1999 the announcement of the ‘Washington Agreement‘ laid emphasis on central bank held gold, stating that "Gold will remain an important element of Global Monetary Reserves".

This commitment has been emphasized in subsequent agreements. Yet if central banks were so keen to get gold out of the way, why didn’t they keep selling gold constantly until, like silver, it was out of their reserves entirely? The purpose of that statement is critical to the understanding of gold in the monetary system.

A nation’s foreign currency reserves serve two prime functions:

1. To act effectively as the savings of a nation and to earn their keep;
2. It must be sufficiently liquid to supply 3 months or more international trade obligations for a nation facing difficulties in its international trade.

Many analysts state that gold is a useless reserve item because it does not earn any income. Quite frankly this is a fatuous argument, because as any good fund manager knows, investments are measured on the basis of ‘total return’, not just on income. A glance at gold’s total return puts it a huge distance ahead of other reserve assets in central banks.

As for liquidity, asset managers are often prevented from buying a great company share, simply because there is not enough liquidity in its market to get in without sending the price skyrocketing and to get out without sending the price into a tailspin. The same applies to currencies. Liquidity in all situations is vital.

When a currency loses credibility it is unacceptable as an international asset. It is not accepted in payments for goods. It is sold quickly by foreign holders and becomes an entirely localized means of exchange. A look into the history books shows us many examples of currencies that have become unacceptable outside their borders and many that failed miserably inside their borders. With politics and local demands influencing money management, a solely paper money system has been subject to debilitating influences often. Even a look around the currency world today highlights many currencies that are not managed solely with their international exchangeability and value in mind. The US Dollar leads the way in that herd.

When this happens to the point of damaging the international reliability and value of a currency a real danger exists, because that ‘reserve tank’ of reserves becomes a lifeline to that country in the event that other nations start to turn away from the currency.

To clarify, imagine if Europe and Asia stopped accepting the US Dollar and oil and Chinese goods were priced in other currencies? The US would have to try to sell Dollars to buy other currencies. We assume that US power would have waned at this point and other governments would not be keen to even ’swap foreign currencies for US Dollars. The US would have to use gold as collateral to raise these foreign currencies (through swaps) rather than sell it outright.

Now we have perspective on the value of reserve assets, "in extremis". Take a look at US gold reserves as a percentage of their reserves…

Please note that the percentage that Gold Bullion occupies in reserves rises with any rise in the gold price. That’s why a swap is preferable to an outright sale when it uses gold to raise cash. It allows the central bank to benefit from such a rise, receiving its gold once again at the end of the swap’s duration.

Here at GoldForecaster, we expect the Gold Price to keep on rising, reflecting falling confidence in all currencies and acting as one would want a reserve asset to act. While a local currency will fall against all currencies gold will rise against all currencies, even the ones deemed sound, as in the last decade. But in extremis, look back across the last three years and note these points about the developed world’s monetary system:

• Downgrades are reducing the pool of eligible assets internationally, whether they are government bonds or currencies;
• Currently, significant planned bond issues together with the contagion risks we saw made government bonds increasingly unattractive.
• When this happens, gold’s rising price and liquidity add to its value as a reserve asset. Last year for instance the US’s gold was only 57% of its reserves, now it is 72.8%

Gold should not be measured for its liquidity and value in times of growth and global financial health because that’s not when gold is likely to be used as reserve assets are designed to be used. Reserve assets are there for times of financial stress or worse. In really extreme times (not necessarily as bad as wartime), what counts in a reserve asset is its ability to settle foreign obligations quickly. It is at that time that gold as a reserve asset comes into its own.

One of the situations we believe is possible in the monetary world is very extreme. Let’s imagine that oil producers decide to accept all ‘hard’ currencies and likewise China does so for its export goods. Let’s imagine too that the Yuan invades the currency markets of the world. What will lie ahead for the US Dollar? With the quantitative easing that is needed currently, it is possible that the Dollar will lose a significant portion of its global use and will tumble on foreign exchanges. The currency turmoil ensuing would encourage other nations to ask for more than simply the Dollar in payment. Its gold reserves would have to come into play, even as backing to a Dollar/foreign currency swap. By that time, the Gold Price would be considerably higher than at present, possibly even multiples of present prices. Would gold be liquid enough to satisfy foreign obligations then?

Thanks to the excellent work of the World Gold Council in London we can see in measured terms just how liquid it is. At the moment, before the scene we drew exists, gold liquidity is third after US Treasuries and Japanese bonds. Gold is two to 6 times more liquid than UK gilts and twice as liquid as US federal agency securities. This measure is against the gold recently traded on the London gold market alone. If we were to add the rest of the gold traded worldwide its liquidity would jump still more, today.

Now factor in the above scene. Japan is heavily dependent on the US for its own financial stability, so the liquidity of its bonds would follow that of the States. Gold would then undoubtedly be the most liquid reserve asset out there.

We believe this scene is possible, not yet probable, but possible. That would certainly move gold confiscation onto the agenda of the US economy if it had not already happened.

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Source:Why is Gold a Reserve Asset?

Can the Pound stand up to the reliability and safety of Gold Bullion…

NOWADAYS, DUE to the unstable financial market and meddling politicians, people want to have a regular source of money, but also a stable currency, Says Antonio Pancorbo of The Cobden Centre.

Where can we find good quality money? For centuries, and civilization after civilization, Gold Bullion and Gold Coins have consistently won out in the long-running contest against livestock, grain, cowrie shells, feathers, etc., to find an economic good that people can use as “money” for their trades. Something valuable and stable in its value to organise complex divisions of labour in societies. So if the Pound and the other fiat currencies want to replace gold as money for the next 3,000 years, they had better listen to what this “barbarous relic”, in Keynes’ words, has to teach them.

First of all, no rulers or brilliant minds ever had the great idea that Gold Bullion could play the role of money in society. Instead, they had to accept what people used and agreed to in their trades. In fact, rulers have always hated gold as money because of the power it has taken from them. They tried to bypass the laws of physics and chemistry and create gold from nothing, but the most they achieved was to debase their currencies, a blatant trick that has been condemned since time immemorial.

They also tried to replace gold with something of low value they could control. Something that they could give to people (or force them to accept) in exchange for their properties and labour so they could continue with their grandiose schemes, wars and white elephants. Rulers had to wait until they invented fiat money (backed only by governments’ promises to maintain its purchasing power) for their dreams to come true.

We accept fiat money and the rationale behind it. It is true to say that if central banks print paper money, an economic good devoid of any other utility (except for collectors), this fiat money releases gold from its social function as money, and becomes more available for other purposes. Jewellery, ornaments, medallions and many other beautiful things you can make with gold are, thus, more affordable. However, we accept this rationale with a serious note of caution. Behind fiat monies there are governments historically eager to indulge in public spending and irresistibly tempted to create money by simply running the central bank’s printing press.
If we compare fiat money with Gold Bullion, there are a few lessons that fiat money has already learnt from gold –namely, its physical characteristics. Fiat monies, like gold, tend to be scarce, valuable, divisible, transportable and incorruptible, which makes them as efficient means of exchange as gold.

However, physical characteristics alone were not all that made gold the most efficient means of exchange. Gold production is also limited and not manipulable. To produce this scarce, valuable, divisible, transportable and incorruptible substance it must be mined from the ground, which is a slow, expensive and risky business. In stark contrast, producing fiat money is not a slow, expensive and risky process. It is simply a political decision that only requires an accounting entry in the central bank’s books. This makes fiat currencies political creatures more than anything else, which gives them a nasty taste (except for those in with the political power). And here is where the serious lessons from gold start kicking in.

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Source:Gold Bullion or the Pound?

Fears of inflation, or worse, fuel gold price rise. But wait. USA Today Governments have always had critics, and opponents of paper money have been griping since the government ceased making gold coins in 1932. … and more »

Source:Fears of inflation, or worse, fuel gold price rise. But wait. – USA Today

Silver and Gold Investing highlighted by the Greek Eurozone crisis…

WHAT A SPECTACLE, writes Porter Stansberry in Daily Wealth…

In an utter and complete repudiation of its founding principles, the Eurozone central bank (ECB) has decided to copy the US Federal Reserve’s 2008-2009 strategy of "papering over" Europe’s massive debt problems.

The ECB will provide nearly unlimited credit to Europe’s sovereign borrowers, while also buying troubled assets from Europe’s largest banks.

This latest development has caused a significant change in what I call "the most important chart in the world".

Readers of my investment advisory are familiar with the chart by now…as we’ve been publishing it nearly every month…and even more frequently in the daily S&A Digest. It shows the value of US government long bonds (represented by the bond fund, ticker TLT), the price of gold (represented by the GLD Gold ETF), and the Silver Price (represented by the SLV silver trust fund).

This is the battle for monetary supremacy. Because the market is arguing over a fundamental question: What is money? Dollars? Gold? Or silver?

For more than 60 years, the US Dollar has unquestionably been the world’s safest, most liquid form of money – its reserve currency. During times of economic trouble, investors rush to buy US bonds as a safe haven, causing their value to rise sharply.

And that’s what happened – briefly – during the Greek crisis last month. But then, something changed. As soon as the ECB announced its big bailout and established a swap line with the US Treasury (more about this below), investors realized there’s no real difference between the US Dollar and the Euro. They are simply different names for the same thing: paper money. And investors understand the value of paper money may finally collapse under the weight of these massive sovereign debts.

What did investors buy when they sold the US Dollar in this crisis? Where did they run? As you can see, in reaction to the ECB announcement, investors bought gold…and to an increasing degree, silver. I believe this preference for metallic money will continue to strengthen as the financial problems of the US Treasury begin to mount.

If you ignore this trend, you will be financially destroyed over the next several years. If you act now to protect yourself and your family, it will be the greatest single investment decision of your life.

Now, let’s look more closely at what the Europeans have done to stave off the collapse of the European Union…

To maintain a veneer of legality, the ECB will create an off-balance-sheet entity to "borrow" roughly $1 trillion from itself, the US Federal Reserve, and the IMF. Europe’s member states agreed to guarantee these debts, which the ECB claims will be "riskless" because they’re simply loans between central banks.

At the root of every paper currency arrangement is a simple scheme to grant credit where none is due. In this case, the scheme is designed to give credit to bankrupt governments in the European Union, via guarantees from those same bankrupt governments and additional credit from the US Treasury, which is itself a troubled creditor at best.

In short, the ECB is going to print up lots of Euros and give them to the least creditworthy states and the worst bankers in Europe.

The politicians apparently believe this massive infusion of new money and credit will "jumpstart" the European economy, which will then produce enough tax revenue and banking profits to finance these new debts. Don’t laugh…

Meanwhile, to ensure this action doesn’t result in a collapse of the Euro currency, the Federal Reserve has agreed to open a "swap" line, which will allow the ECB to fund as much of these news "loans" with Dollars as is necessary to prevent a run on their currency.

Will this work? At the risk of dramatic future inflation, will creditors really be willing to accept devalued Euros, which offer investors almost nothing in interest payments? I don’t think there’s a chance in hell.

The reason paper money systems always fail is because they provide no practical limit to credit. New currency reserves can always be printed. Bad debts – credit defaults – can be "papered over" rather than restructured. The stability of paper money systems seems like a virtue. The ability to simply manufacture money – without a deposit or true asset as collateral – is the ultimate financial sinecure. As long as confidence in the system remains, the amount of credit that can be manufactured seems limitless.

Unfortunately, this always leads to more debt. At some point, the whole system simply collapses. The debts become so large, they create an untenable economic imbalance, overwhelming the real economy. And when the credit bubble finally bursts, it doesn’t destroy just one or two banks’ house of cards. It wipes out the entire system, which is linked together by the currency itself.

Remember…this just isn’t about problems in Europe. The United States is in the same situation: under huge debts we cannot hope to repay.

I recommend you protect yourself by holding real assets like energy, gold, and Silver Bullion.

Source:Silver & Gold: "A Sure Bet"