NEW YORK (MarketWatch) — Gold futures edged higher on Wednesday, adding to the prior session’s modest comeback, as traders sought refuge from risk ahead of a half-trillion euro payback due by banks to the European Central Bank later in the week. Gold for August delivery, the most active contract, gained 70 cents, or 0.1%, to $1,243.10 an ounce on the Comex division of the New York Mercantile …
The outlook for gold and Gold Mining stocks as real interest rates stay below zero…
A PROFESSOR of economics for nearly two decades, John Doody became interested in gold through an innate distrust of politicians, says The Gold Report.
In order to serve those that elected them, politicians always try to get nine slices out of an eight slice pizza, debasing the currency via inflationary economic policies. Success with his method of finding undervalued Gold Mining stocks led John Doody to leave teaching and start the Gold Stock Analyst newsletter late in 1994. In the last decade, Doody has seen his top-listed equities skyrocket a combined 1000%, including an eye-popping 130% in 2009.
Subscribers pay a lot for his knowledge and expertise in the Gold Stock Analyst; but in this exclusive interview with The Gold Report, you get a few of his favorites Doody-free.
The Gold Report: We’re about 1.5 years into the Obama administration’s multi-trillion dollar bailouts and expansion of the Fed balance sheet to $2.3 trillion from about $800 billion. What are your thoughts on that?
John Doody: I think it’s a bailout that continues with $1 trillion-a-year deficits as far as the eye can see. There’s no end to it; unless we get some significant tax increases and/or spending cuts, there’s no hope to ever to pay down the debt. The best hope is to get the economy growing faster than the debt so that, as a percentage of GDP, the debt level shrinks.
TGR: Do you agree with the administration’s fiscal policies?
John Doody: Oh, yeah. I really don’t know where we’d be if we didn’t undertake all these remedies from the Treasury side on the deficit side, as well as the Federal Reserve side. The mess that this economy was in as a result of the Wall Street and housing collapse continues. You go by a strip mall here in South Florida with 10 stores, and at least one or two are empty. Almost 10% of workers are still without jobs. I was surprised to read that about 11% of all prime mortgages – these are the best mortgages – are either in foreclosure or delinquency. People are hurting.
TGR: How do you see all of this affecting the gold market?
John Doody: Everything that’s being done creates inflation. You don’t really care if somebody gives you a $1000 government bond as payment for a debt or $1000 cash. They’re equivalent. We’re creating a tremendous amount of money trying to get the pump primed to get the economy moving, but it’s obviously a very difficult task.
TGR: You mentioned inflation and, in your last interview with The Gold Report, you said: "Bernanke and the Fed are pursuing a loose monetary policy with a 0% interest rate. There’s actually no way we cannot end up in inflation." We’re starting to see signs of it now. How is gold going to act in an inflationary environment and, perhaps, even in a hyperinflationary environment?
John Doody: Gold’s going up now; it’s going to go up more. One of the uses of gold is to protect your purchasing power from inflation, and it’s done a damn good job! It always drives me crazy when these talking heads on TV talk about gold now vs. $850 in 1980. They say, "Oh, look where it’s gone!" It’s gone nowhere. That was a one-day high. The next day the Gold Price was $738. More important is to look at the Gold Price from when it was set free in 1968. It was fixed at $35 for over 30 years. If you just took that $35 from March ‘68, and I did in a recent issue of the Gold Stock Analyst, and adjusted it by the Consumer Price Index (CPI), gold would have grown from $35 to about $225. That’s your inflation protection; everything above $225 all the way up to the current price and the next $1000 – that’s all investment gains. From ‘68 to the present, gold had had an 8.6% compound annual growth rate that was 4.4% above the inflation rate for the period.
TGR: But you hold Gold Mining equities, and you don’t hold bullion. In the last market crash, everything crashed – even the gold equities.
John Doody: That’s true. The reason that I hold gold equities is because you get better leverage to the Gold Price. We always have to remember that while the stocks are derivatives of gold, they are stocks first. If the buyers disappear for stocks, they disappear for gold stocks too. But when they come back, they come back with a vengeance. In 2009, the Gold Price was up 28% and the XAU was up 37% but the Gold Stock Analyst’s Top 10 was up 130%. That’s the leverage you can get from owning the right stocks.
Investors in exploration stocks got killed in the 2008 crash. There were no fundamentals underneath those stocks. All the stocks I cover are producers or very near producers. We know there’s something there, so we’re not just arm waving over some drill results. That’s one of the things that makes Gold Stock Analyst unique: We don’t cover the exploration stocks, because I’m not a geologist. I can’t interpret drill results. I want data. I want data that you can analyze and that’s productions and reserves.
TGR: In a recent issue of Gold Stock Analyst you said: "As we’re in a bull market underpinned by negative real interest rates, loose monetary policies and exploding government deficits, it’s best to keep riding the bull and don’t let it throw you off." How high can the bull ride through the end of 2011?
John Doody: First we’ve got to understand what the real interest rate is. That’s the risk-free return on money, such as short-term US Treasuries. The US Treasury can’t default. They can always print more dollars and give them to you. I like to use 90-day T-bills. Or you can use savings-account rates, which are about 0.1%. It’s trivial. If you have in a savings account or in 90-day Treasuries and you start the year with $100, at the end of the year you’re going to end up with $100 plus 0.1% interest. But if inflation is 2%, the money is going to buy you only $98 worth of goods. When real interest rates are negative, and people can’t get positive return on their money by putting it in the bank or risk-free situation, they naturally flock more to gold to protect the purchasing power of their money. Gold has been a sanctuary in monetary crises and inflation for centuries. In the 2000s, Chairman Greenspan lowered the Fed Funds rate to 1% and the inflation rate has generally been higher. That’s why gold has done so well.
TGR: What Gold Price will we be looking at through the end of this year and 2011?
John Doody: Well, I’m not a guy who predicts the Gold Price because my philosophy is I can find value at any Gold Price. I’m just looking at the next $100 ahead. People who predict $1,500 or $2,000 or $5,000 are foolish because there’s no basis for that. I don’t doubt gold will get to those levels, but I have no idea when. I find undervalued stocks now and profit as Mr. Market discovers them. So, if gold does nothing, we can still profit. If gold goes up, then we’ve got two ways to profit.
TGR: Alright, how long do you think gold’s bull run will last?
John Doody: I think it’s got a lot longer to run because the negative real interest rate environment is going to run a lot longer. When’s the Fed going to raise interest rates significantly? They can’t raise them now. We’ve got almost 10% of the country unemployed and that much, again, underemployed. So, until the economy gets going, we’re not going to see any real change.
TGR: What about holding Gold Bullion vs. equities?
John Doody: The reason the stocks give you more leverage than Physical Gold is because all of the ounces are yet to be mined. Typically, a gold mine is going to have 10 times or more reserves in the ground than what they’re producing in the current year. If a company is producing one million ounces a year and the Gold Price goes up by $1, that dollar falls right to the bottom line. That’s $1 million more in profits. But because they’ve got 10 million ounces still in the ground, those ounces are now worth $10 million more than before.
That’s what gives you the leverage that owning bullion just doesn’t give you. If you own bullion and gold goes up $1, your coins are worth $1 more. No big deal.
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Source:Risk-Free Return vs. Gold
Greece risks the first, not last, sovereign bond default of our times…
HOW TO FIX the Euro? asks Eric Fry from Laguna Beach, California for The Daily Reckoning.
This troubling question has vexed the financial markets for the last several weeks. One week ago the Eurocrats amassed a $1 trillion war chest (of borrowed money) to "fix" the Greek debt crisis and stabilize the Euro. Seven days into the mission, the Greeks are as bankrupt as ever and the Euro has tumbled to a new four-year low.
The European Central Bank – like British Petroleum – can’t seem to figure out how to contain the mess they made, much less how to clean it up for good. Just like the crude oil gushing out of BP’s underground well, Europe’s sovereign debt crisis continues to gush out of control and threatens to wash up on the shores of Italy, Spain and Portugal.
One week is not enough time to judge the success of the ECB’s $1 trillion "Euro Defense Plan", but one week is plenty of time to judge its failure. This $1 trillion fix did not fix anything. It merely annoyed short-sellers for a couple of days and inspired enthusiastic Gold-Buying.
Rome wasn’t built in a day, of course. So we should not expect Athens to be rescued in a week…or ever. The country’s fiscal condition is beyond repair. Either Greece slips into the Mediterranean, figuratively speaking, or the Euro does…or both. Borrowing $1 trillion to fight against the consequences of excess debt does not seem like a winning strategy.
In a worst-case scenario, the ECB will exhaust its cash, credit and credibility trying to save Greece…and will destroy the Euro in the process. Best case, the "fix" will persuade a few Wall Street strategists that the "worst of the Euro crisis is over" and will suck a few more suckers into the European sovereign debt markets before the situation gets REALLY ugly.
And it will get ugly…one way or another.
Many investors behave as if sovereign defaults are like polio: eradicated forever. These investors are half right. Polio has been eradicated.
Greece may not actually default, depending on the rescue measures that come its way. But Greece is already bankrupt. The creditors to Greece should understand that history is not on their side. In fact, the creditors to every sovereign borrower should understand that history is not on their side.
"While a European sovereign default has appeared inconceivable in recent history," a recent Wall Street Journal article observes, "defaults and debt re-schedulings were actually a common feature of the European financial landscape throughout the nineteenth century and up until the end of World War II, according to the economists Carmen Reinhart and Kenneth Rogoff.
"Greece has defaulted or rescheduled its debt five times since gaining independence in 1829, the economists wrote in their paper This Time Is Different, published in 2008 and recently expanded into a book. Spain has the lead in Europe at 13 times since 1476. Germany and France have both done it 8 times, while the UK has never done it since William the Conqueror invaded in 1066.
"Greece has existed in a ‘perpetual state of default’ since its independence," the Journal concludes, "having spent 50.6% of those years in default or rescheduling, easily tops in Europe. Russia is next highest, with 39.1% of years spent as a bad debtor after defaulting or rescheduling five times."
Governments default. That’s what they do. They tax; they squander the tax revenues; they default. This is the established unnatural order of the governmental world. The Greek crisis may be the first sovereign debt debacle of recent times, but it won’t be the last.
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Source:Fixing the Unfixable
Why Europe’s $1 trillion bail out could make Gold Investment vital today…
JUST UNDER $1 trillion…that’s what the European Union has promised in an emergency rescue package to stabilize the Euro currency and Europe’s financial woes, writes Steve Sjuggerud at Daily Wealth.
The result? Nothing so far.
On Friday, the Euro hovered around $1.27 all day. As I write…$1 trillion later…the Euro is hovering around $1.27. Like I said, nothing.
In fact, the result turns out to be worse than nothing. It may prove to be the worst $1 trillion ever spent.
To me, this $1 trillion spells the end of the Euro as a credible "threat" to the US Dollar. And it brings gold one step closer to being at least the world’s No. 2 reserve "currency" (behind the US Dollar).
You see, before the $1 trillion promise (along with new promises from the European Central Bank to spend money to prop markets up), the Euro currency had some semblance of credibility.
The Euro’s credibility goes back to the predecessor of the European Central Bank – Germany’s "Bundesbank". For decades, Germany’s old currency (the Deutschemark) was one of the world’s strongest. The Bundesbank had a reputation for not sacrificing the value of the deutschemark for political needs, so investors wanted to hold Germany’s currency.
With the start of the Euro, financial markets assumed the new European Central Bank would inherit the legacy of the Bundesbank. That’s what kept the Euro up as a credible threat against the US Dollar’s world dominance.
But the $1 trillion promised over the weekend – along with promises to prop up the markets – killed the idea that the European Central Bank would act like the Bundesbank. It horribly damaged the Euro’s long-term credibility.
Now, the Euro is just like a Dollar – politicians are willing to sacrifice its value. Wait… a Euro is now worse than a Dollar. The Euro is less traded (less liquid) than the Dollar. And if the Euro fails, there is nobody to blame.
It gets worse…
Yesterday, in his excellent Gartman Letter, trading guru Dennis Gartman asked, essentially:
What is the propensity of the reserve banks of China and India to add Euros to their reserve assets now? We have to think it is somewhat reduced from what it was only a short while ago…
On the other hand, what is their propensity to own gold now? Almost certainly it is enhanced.
The numbers are showing it. Gold Prices are hitting highs in BOTH Dollars and Euros. In short, paper money really lost credibility over the weekend.
The Euro is now a garbage currency. It deserves even less credibility than the US Dollar. But the US Dollar doesn’t deserve a lot of credibility, either.
It’s easy to sit in the States and see the problems over there. But the thing is, we have the same problems. We have too much government spending…and we have too many future promises we can’t fulfill, like Social Security.
What makes our government’s problems that much different than the countries of Europe? They’re just ahead of us.
What we need is change. We need countries to commit to changing their ways.
You don’t fix a drug addict by giving him more money. He’ll go spend it on more drugs. Instead, you need to get him to rehab, to give him a fighting chance to change his ways.
You don’t fix someone who’s overspent on their credit cards and is living beyond his means by giving him more money. He’ll simply get himself deeper in debt. Instead, you need to cut up the credit cards and force him to live lean for a while.
What can you do? Two obvious things:
Buy Gold instead of paper currencies. The US and Europe have made it crystal clear their "release" valve is the value of our paper currencies;
Make your presence known to your government representatives. Do your best to "take their credit card away" and "send them to rehab" to prevent the US from becoming the next Greece.
Both the Dollar and the Euro will be weak against gold, as politicians the world over have now proven they’ll sacrifice the value of their currencies for short-term political gain.
Trade and invest accordingly.
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Source:A Waste of $1 Trillion
Is the Eurozone just one U-turn away from a 20-fold rise in the value of Gold…?
HAPPY SELLERS a decade ago – back when Gold hit rock-bottom – might the Eurozone states now facing financial meltdown sell gold at all-time highs to help settle their debts.
Doubt it. Here’s why…
Lumped together, the 16 Eurozone nations, plus the supra-national European Central Bank, hold almost 11,000 tonnes of gold between them. That’s more than three times the central-bank hoard in Asia (3,008 tonnes all told). It’s greater again than the United States’ world-beating stash of 8,133 tonnes.
But even at today’s record-high prices, selling the Eurozone’s entire 10,797 tonnes of gold would raised some €338bn. That’s not enough to cover the first €440 billion they’ve pledged to each other in cross-border loan guarantees. And it would barely dent the real problem – the union’s €7 trillion national debts…
Had the 16 Eurozone states, together with the ECB, placed an order through their London dealers to "sell at the Fix" on Wednesday afternoon, gold’s new record high would have helped, but not much.
Wednesday saw the London Gold Fix in Euros hit a record €974.41 an ounce. But at that price, even the Eurozone’s collective gold hoard – the world’s largest, remember –would have equaled less than 4.7% of the Eurozone’s collective €7 trillion in debt.
Going alone, Portugal would do best (9.3%). The Big Three (of Germany, Italy and France) could settle just over 5% of their respective debt burdens.
Outside the Eurozone – but inside the EU-27, and thus exposed to the Eurozone’s debt crisis – Bulgaria and Romania (40 and 103 tonnes) might think their gold hoards better used as cash than as metal (23% and 11.5% of national debt respectively). Whereas the United Kingdom, despite being Europe’s sixth-largest gold hoarder, joins the Czech Republic, Estonia, Hungary, Ireland, Malta and Slovenia in being able to pay less than 1% of its national debts with its gold reserves.
Please note: This is all entirely frivolous, of course. Desperate leaders may do desperate things, but selling gold at a time of crisis won’t be one of them – especially when, as shown above, it would prove futile…and especially after they made a policy, a decade ago, of selling at the bottom instead.
Perhaps, as BullionVault suggested to TheStreet last week, the Eurozone might pledge its gold as collateral for IMF loans – a move that would, in fact, only accelerate the re-monetization of gold…mobilizing its value, not denting it, by pawning it rather than selling.
But to pay off Europe’s debts in full, the Gold Price in Euros would need to reach above €20,344 an ounce. And such a 20-fold gain would most likely mean the ECB had taken that final U-turn, agreeing to swap newly-printed money for government bonds and thus devaluing the currency to devalue its debt.
The equivalent Dollar gold price, by the way, needed to settle the US Treasury’s debts with its current gold hoard, would be $47,080 an ounce. And again, selling gold to repay the national debt would require the same expedient first:
Runaway inflation in Gold Prices, fuelled by ever-more money creation.