Friday, June 29, 2012

A Good Time to Buy Gold, by Adrian Douglas

Adrian Douglas, Chairman of GATA and author and founder of Market Force Analysis has given me permission to republish this excellent article titled: “A Good Time To Buy Gold”. I hope you enjoy reading it as much as I did.  I have a deep respect for Adrian's work and analysis on the gold and silver market.  He has received accolades from John Embry and Eric Sprott about his unique algorithm and methodology for analyzing the precious metals markets, and the conclusions he's drawn about the suppression of the price of gold and silver.  When Adrian goes out of his way to send a specific message like this one, I urge everyone to read it.

A Good Time to Buy Gold, By Adrian Douglas

Many investors are unsure as to whether gold is a good investment and if gold will continue its rise in price that started twelve years ago. Those who have not invested in precious metals may well be thinking that their investment is too late. Other investors who hold the metal are wondering if gold will fail to reach new highs.

A reassurance that precious metals are nowhere near their potential is that the world has in no way started to resolve the massive debt burden that has been created. Precious metals are one of the few things that can be purchased that have no counter party risk. I prefer to look at precious metals from the different view point that paper money is being debased at an alarming rate due to excessive issuance of paper and it is the precious metals that are not altered. By holding precious metals, one is able to preserve purchasing power. In fact, when panic sets in, the rush for precious metals will actually increase purchasing power.

It is important that investors understand the function of gold. Gold is unlike any other commodity that exists; it has the unique property of having no other use except as being held for intrinsic value. Almost all the gold ever mined in the world is still available above ground. This is the purpose of gold in that it is held as an asset. Some gold may be used for jewelry or electronics, but this is a small portion of the available gold and, in any case, it is always recycled because it is so valuable. The most important thing to understand about the mechanism of gold buying and selling is that it is central to the world of finance. If there were to be a drought in the U.S., reducing grain harvests, the price of grain would rise. Gold, however, is not consumed, and is unaffected by seasonal variations.  Furthermore, the total stock of gold is large compared to the yearly addition which makes the supply extremely stable.

In searching for the rationale for investing in gold, there is undisputable proof as to why gold is the most valuable asset on earth. This evidence comes from the central banks themselves. The central banks only hold two assets; one is paper assets, the second is gold. They do not hold soybeans, oil, orange juice, or any other asset. The only intrinsic asset they hold is gold. The central banks prefer to operate in terms of paper currency. This gives flexibility to expand their provision of credit far beyond the ability to repay it. When the cycle of money expansion comes to an inevitable collapse, the central banks must return to the ultimate money of gold. Once excessive credit has been eliminated or reduced, the cycle of credit expansion will begin again. This is how the central banks operate. We have just entered a cycle of excessive credit expansion and so the massive credit excess must now be eliminated. They must also return the gold that has been leased on a leveraged basis. This is the environment in which precious metals reach their potential. All around the world, central banks are increasing their holdings of gold. The central banks are the masters of the universe when dealing with the world’s finances. When the central banks are owners of only paper money and gold, it is clear that following in their footsteps must be the most intelligent strategy. The central banks try to slow down the move into gold by creating sudden and violent sell-offs. Such take downs are effective against leveraged traders but not those who are serious buyers of gold. While the central banks are net buyers of gold, we can be certain that the gold market will continue higher. As I write this article, gold is trading at $1552. This is likely to be a turning point as gold continues higher. As stated previously, it is paper money that is losing purchasing power rather than gold increasing in value. This is assured by the fact that central banks are showing a preference for gold over paper money. This preference is in its infancy and the equilibrium has a long way to go to reach its true balance.

By: Adrian Douglas
June 28, 2012

Tuesday, June 19, 2012

Infation Vs. Deflation. James Rickards and Harry Dent's Debate at Casey Research Conference

Because I lean to the inflation side of the debate in the most terribly biased way possible, I have shamelessly indulged my tendencies and summarized and paraphrased only James Rickards presentation.  I personally love the art of debate and enjoyed listening to Mr. Rickards as he effortlessly explains complex issues to a largely non-academic and lay-investor audience. The irony is not lost on me that I only quoted Jim.

This part of the debate opens where James Rickards replies to Mauldin’s preamble question “What makes you think the Fed will get out of control?”  Rickards explains that the Fed will unintentionally destroy the currency as they don’t understand the statistical properties of risk.  He used this very useful analogy to demonstrate the Fed’s actions in pursuing more money printing:  The difference between dialing a thermostat and working in a nuclear reactor.  If the house is too warm, you can dial the thermostat down; if it’s too cold you can dial it up.  You can dial a nuclear reactor up or down also, but if you get it wrong you have a catastrophic outcome. Here lies the problem: The Fed thinks their dealing with a thermostat, so they’ll act in good faith but they’re actually playing with a nuclear reactor.  He goes onto say there cannot be deflation the way Harry Dent presents it.  Rickards agrees that deflation is the natural state of the world and left to its own devices, the world would be in a highly deflationary period and he added, “That might not be such a bad thing in terms of future growth”.  He gave two reasons why deflation will not happen:

The first reason: Deflation destroys the banking system.  The Fed was created to prop up the banks and always acts in accordance to support banks.   Some might say with deflation the nominal value of debt goes up and because the banks are creditors, this would be advantageous to them. Rickards went onto say that it’s good for them up until the moment of default. The problem is the nominal value of the debt goes up so high that people default. Default is an instantaneous wealth transfer from the creditor to the debtor, so the disadvantage will then lie with the creditor.  The banks will be destroyed in this case and the Fed simply won’t allow this to happen.

The second reason deflation will not take place is the government will not allow untaxed capital gains.  Rickards likens it to everyone getting a raise in salary.  He said if we have deflation of the kind Harry is presenting, the price of goods and services will go down and at the same nominal income, the outcome will be increased wealth for all. It’s just like getting a pay rise with one important difference.  The government can tax the increased income on a raise, but they haven’t figured out how to tax the deflation. So there are no capital gains in deflationary wealth and that’s another reason why the Fed will not allow deflation. An important thinking point here is that not only do the Fed and the government not oppose inflation, but they are solely responsible for its existence through ongoing debt-backed money creation.

Rickards response to Mauldin’s question if he thinks the government has the “cajones” to put 10 trillion $ more on their balance sheet over 3 or 4 years. James replies there’s a limit to what the Fed can do and what Harry chooses to ignore is that the Fed will soon become a relatively minor player in all this. The cleanest balance sheet in the world and the one that will expand is the IMF. They have the capacity to create SDR’s in unlimited quantities. So the next time the physical crises reaches an acute stage, they’ll just flood the world with SDR’s so you’ll get your 10’s and Trillions to prevent what Harry’s describing. Rickards acknowledged that Harry has got the natural dynamic right in terms of assets bubbles need to be deflated and people in distress will need to sell assets, but he points out what Harry is missing is the "force majeure". He’s underestimating the capacity of governments and their blunt force to dictate the outcome and if the Fed can’t do it, the IMF can and will and already is with its own printing press.

You can listen to the rest of the video for Harry Dent’s response to James.  I personally didn’t have the patience to wade through the ranting, curse words and emotionally charged language of Harry’s presentation.

Sunday, June 10, 2012

Interview: David Morgan. Why Invest In Silver?

Kirsty Hogg from GoldBullReport interviews David Morgan, the Silver Guru about what is going on with silver today as well as what we can expect in 2013. David also answers the question; "Why invest in silver?".