Tuesday, August 23, 2011

Going Down With The Ship: The Dumb Money Continues To Warn That Gold And Silver Are Bubbles

Stocks rose around the world on Tuesday as investors shrugged off signs of deteriorating economic sentiment in Europe and hoped the Federal Reserve would act to keep the U.S. from sliding back into recession.

If the US Federal Reserve has become the last hope to "save the US economy", then the US economy is officially hopeless.  What kind of economy do you have if it relies on handouts from it's central bank to keep it afloat?  A DEAD ECONOMY.  A stock market pumped up by funny money?  Why bother?

Only the dumb money is lining up for a Fed rescue that probably is not going to arrive, and is ignoring the fact that recent Fed "stimulus" has proven to be impotent.  While spending close to $900 BILLION  between Jan 1 and June 30, 2011 to resuscitate the US' lifeless economy, GDP "growth" struggled to stay above the flat line at 0.85%.  Stock markets today are lower than when the Fed began QE2 in Novemebr 2010.

Bernanke's much-awaited speech during the central bank's gathering at Jackson Hole, Wyo., later this week is setting up as a potential lose-lose situation: The chairman may not provide the market's desired signal for a third round of quantitative easing -or QE3-and even if he does it may not help.

That's the sentiment of a number of economists and strategists, despite a Monday market rally that appeared to be fueled by speculation that Bernanke will ride to the market's rescue at the same time and under similar circumstances in 2010.

"The market's sending a signal to Bernanke saying, 'We want QE3 and we want it this week, or we're going to hammer you and the market will get absolutely killed,' " said Keith Springer, president of Springer Financial Advisory in Sacramento, Calif. "The stock market is addicted to QE."

Bumbling Ben Bernanke has become the Pied Piper of global investors, throwing money out of helicopters as he leads them on a long walk off a short pier.  Has it not become clear to investors that the US Economy is "dead in the water" as they fall into the stillness of it?  Do they not yet realize that Captain Bernanke is only interested in keeping his floatilla of zombie banks afloat on a sea of printed money, while investors and American taxpayers slip below the surface and drown under the weight of their nation's bad debt?

The smart money is now lining up, in ever longer lines, for the few life rafts available as the US' Titantic economy begins to sink.  Gold and Silver, two of the World's smallest markets, offer more than the "hope" of survival in a sinking economy, they offer "life after death" of the economy.

Many Americans, desperate and not paying attention, are lining up, in ever longer lines, beneath the bright banner "We Buy Gold" to sell their Gold in the misguided belief that "Gold is in a bubble".  They might as well eat a three course meal and desert before they go swimming because they are going to go down with the ship. 

Gold is not in a bubble, neither is Silver.  A GoldCore blog post sums up the Gold Bubble fears:

The dumb money continues to warn that gold and silver are bubbles.

Their simplistic bubble thesis is based almost exclusively on the nominal US dollar price and recent price movements and on the assumption that (to paraphrase) ‘gold has gone up in price a lot - therefore it is a bubble’.

There is a continuing failure to look at the important supply and demand fundamentals of the gold and silver markets which leads to unsound reasoning and irrational conclusions. There is also a failure to adjust for inflation.

There is little knowledge of the very small size of the physical bullion markets vis-à-vis the stock, bond, currency and other markets.

There is also very little knowledge of financial, economic and monetary history and a continuing ignorance regarding ‘investment 101’ which is diversification.

Being prudent and having an allocation of 10% to gold will protect no matter what economic and monetary scenario develops in the coming months. If one is not leveraged and is prudently diversified and owns gold bullion (coins and bars in the safest way possible), it does not matter if gold is a bubble or not as you own a range of other quality assets.

From a purely investment point of view - an allocation of 5% to 10% makes sense.

From a financial insurance or store of wealth point of view – having a higher proportion of your overall net worth makes sense.

Especially given the risks posed to the dollar, euro, pound and fiat currencies and to deposits “guaranteed” by insolvent states.

Not putting 10% of your wealth in gold is extraordinarily imprudent today and a recipe for further financial destruction.

Gold is certainly due a correction after it's $300 run-up from the July 1st low.  After all, nothing goes straight up.  A 10% reaction/correction would be welcome, and actually make the Gold market even stronger by shaking out the weak handed "speculators".  It would NOT signal that a Gold Bubble had burst, far from it.  But a 10% move lower just doesn't seem likely amidst the uncertainty overwhelming financial markets at this moment in time.  [Barring a string of CME/CRIMEX margin hikes of course.]

By Frank Holmes
A more important driver that will keep gold prices elevated over a longer time period is the Love Trade. Marcus Grubb, managing director of investment at the World Gold Council (WGC), highlighted the significant aspects of this trend in his interview with Andrew Bell on the Business News Network (BNN). He says investors need to consider the issues outside of the euro zone, the debt-ridden countries and fiscal deficits.

More important to him is what he calls the “transfer of wealth from west to east” and the accumulation of wealth, particularly in China and India. This is what is driving the longer term strength in the gold price.

He states that the demand for gold is particularly strong in China: The country has a $3 trillion surplus, with some of it in gold, and he estimates that household wealth will most likely rise by five times. China and India also share a strong cultural affinity for gold as an investment and jewelry. For these reasons, Grubb believes this will drive gold demand.

September has traditionally been the beginning of the gift-giving season for gold. This is the time of year when gold jewelers are the busiest. The Muslim holy month of Ramadan begins in August and concludes with generous gift-giving in early September. Then it’s Diwali, known as “the festival of lights” in India, Christmas in the U.S., and Chinese New Year. The key to this seasonal strength over the past few years has been demand from China and India.

With approximately fifty percent of the world’s population controlling the Love Trade, we’re in for an exciting period.

If the economic ship is sinking, why are investors busy rearranging the chairs on the deck instead of seeking out a life raft?  If Gold and Silver represent the only life rafts available to investors fleeing a sinking ship, what happens when the life rafts are full, and there are still people left standing on the deck of the Titantic?  How can there be a bubble in Gold when the life rafts remain virtually empty.  So empty infact, that passengers are actually selling their seats in the hope that the party on the deck can go on forever...even as the ship sinks!

by Eric Sprott and Andrew Morris
As our analysis has revealed, gold is actually a surprisingly under-owned asset class - and one that has generated far more attention in the media than it probably deserves. While its exemplary performance since 2000 is certainly worthy of discussion, gold simply hasn't commanded enough investment to warrant the bubble fears it seems to have aroused among market pundits and business commentators. The truth about gold is that most people simply don't own it...yet.

To be clear, a speculative bubble forms when prices for an asset class rise above a level justified by its fundamentals. For this to happen, increasing amounts of capital must flow into the asset class, bidding it up to irrational levels. Gold may be trading at all-time nominal highs, but a look at investment flows proves that it isn't anywhere close to being overbought.

In their Gold Yearbook 2010, CPM Group noted that in 1968, gold held by individuals for investment purposes represented approximately 5% of global financial assets. By 1980 that amount had fallen to roughly 3%. By 1990 it had dropped significantly to 0.6%, and by the year 2000 represented a mere 0.2% of global assets. By the end of 2009, nine years into the gold bull market that began in 2000, they estimate that gold had increased to represent a mere 0.6% of global financial assets - hardly much of an increase. Gold ownership didn't change much last year either, as we estimate that this percentage increased to 0.7% of global financial assets in 2010.1 So despite gold reaching record nominal highs, the world holds about the same portion of its wealth in gold as it did over two decades ago. While this probably says more about the proliferation of financial assets over the past decade than it does about gold investment, it is surprising to note how trivial gold ownership is when compared to the size of global financial assets. The increase in gold ownership from 0.2% in 2000 to 0.7% in 2010 is also misleading. If you consider the approximate $227 billion that was invested in gold bullion in 2000, that level of investment would have grown to $1.18 trillion, or 0.6% of financial assets, by the end of 2010 - based purely on gold appreciation alone.2 In other words, the actual amount of new investment into gold since 2000 represents only 0.1% of current global financial assets, or about $250 billion. Although this number may seem large, consider that roughly $98 trillion of new capital flowed into global financial assets over the same period, so gold's approximate 0.3% share of global investment flows is essentially trivial.3

The 0.7% ownership data point also has interesting implications for global gold ownership going forward. Consider that to return to a meaningful level of gold investment, say to the 5% level of 1968, it would require over $9 trillion of gold investment today, or about 6.5 billion ounces of gold at the current gold price. This would represent well over 1.3 times the amount of gold ever produced throughout history and four times the amount of known gold reserves.4,5 So not only is the public relatively underinvested in gold, but at current prices it isn't even possible to increase our gold holdings back to a meaningful level.

Based on our findings, this notion of a gold bubble is patently false. The current investment interest in gold relative to other financial assets remains surprisingly low - about where it was two decades ago. Moreover, the modest valuations of gold equities highlight the absence of unbridled investor enthusiasm for gold investments. The fact is, despite all this talk about the gold bubble, the capital flows into gold vis-a-vis other financial assets have simply not been large enough to indicate any speculative mania. Investors can rest assured that they are not participating in any speculative bubble by owning gold. They are merely protecting their wealth.

If Gold investment "worldwide" accounts for only 0.7% of global asset allocations, how can Gold be in a bubble.  If Silver is a smaller market than Gold, how can Silver be in a bubble?

John Hathaway, manager of the Tocqueville Gold Fund, has estimated that in 1935 the market value of above ground gold reached 15% of US financial assets, while in 1980 – the year the Gold Price hit its inflation-adjusted all time high – it hit as high as 29%.  Today, Gold is not even close to being in a bubble.  Gold could not be further away from a bubble than it is today.

In 1980, one ounce of Gold was 7.6 times greater than the S&P 500, according to Gold Stock Analyst.  Currently, gold’s value is roughly 1.6 times greater than the S&P 500.  In order for gold’s relative value to return to 1979-1980 peak levels of 7.6 times the S&P 500, Gold Stock Analyst’s John Doody says gold prices would have to hit the $10,000 mark.  And Gold is called a bubble at $1900 by the mainstream media at every opportunity...

By KB Gold
The effect of suddenly moving a substantial amount of investment money into precious metals… would be like shoving an elephant into a mailbox. All the gold in the world—all the jewelry, coins, bars, molars, and church art—is worth an estimated $6.5 trillion but the vast majority of global gold is not freely traded. In fact, perhaps only 5 percent of all physical gold actually trades each year, which would make the investment gold market around $320 billion. The mining industry produced around 2,500 metric tons of gold in 2009, worth around $80 billion at the average price for the year. A little over half of every year’s gold production is used for jewelry and industry, so less than $40 billion was available to the global investment community… With these numbers, a large shift of funds into gold would cause it to rise sharply and fast. If it rose from the minuscule part it represents in the world’s largest portfolios today to just 1 or 2 percent of global assets under management, the price increase would be substantial. A rise to $10,000 an ounce is not out of the question. It wouldn’t be the first time gold has risen in such a way: The price of gold jumped 23-fold in the nine years ending in 1980 – and at that time there was no question about the solvency of the U.S. government nor about the health of the banking system.Many times throughout history, governments across the world have driven their countries to the brink of ruin in the name of “saving the economy” by printing money to cover climbing public expenditures. In times like these, decisions regarding what percentage of wealth to hold in stocks versus bonds should be considered alongside the questions “How much money do I want to have in the financial system itself?” and “Am I adequately protected from government errors that could harm my wealth?” Today’s situation is singularly dire, but it won’t last.

Investors Should Seriously Consider Owning Gold
Gold will never outperform stocks and bonds over the long run, because it does not grow or produce a cash flow but in light of the challenges facing most other investment classes at present, investors should think carefully about gold. There are no reliable models to determine if it is “overvalued.” What if the world’s investors decided to transfer 3 to 5 percent of wealth out of cash and into hard money? Considering that only 0.6 percent of global financial assets is currently held in the metal, such a movement could push gold prices into the tens of thousands of dollars per ounce. If we reached that point, [however,] would it finally mean that gold had become insanely expensive—or simply that the world had less faith in the printed paper debentures of profligate governments?

The life rafts representing the "great escape" from America's sinking economy remain virtually empty.  If you haven't purchased a seat to safety before our Titantic economy goes completely underwater, taking the US Dollar with it, your chance of survival will be greatly diminshed.  The window of opportunity for investors, for individuals, to control their chances for survival in a complete economic collapse is closing quickly.

In early June, Gold sage Jim Sinclair gave a final warning as to what lied ahead for the US equity markets and Gold.  The man's accuracy ceases to amaze me:

Eric King, KingWorldNews.com
“Quantitive easing is the only tool that the Fed has had available to them. The Fed has pumped in trillions of dollars and the result of that pump-priming in the monetary sense has been only at best a modest recovery, and certainly making trillionaires out of some bankers, billionaires out of many of them.

We’ve come to a point now where if QE were to be stopped, you would see an implosion in the general equity markets...And yes gold would go down, the market would go down hard. The dollar would go up slightly to begin, but then fall back down again as the management of the economy was seen to have been ineffective and inefficient.

Gold would then start moving back up again and I think if QE was to cease, the recovery on gold from a modest reaction would be multiples upon multiples of that reaction and would lead the way to Harry’s $2,400, to Alf’s $3,000 to $6,000.

You can’t stop quantitive easing. If you stop quantitive easing the stock market will return to its recent low or lower. That alone by its impact on decision making will cause an economic implosion. We’re tied into this monetary stimulation, there is no way out of monetary stimulation. If there was any attempt to get out of monetary stimulation it would cause an economic accident which would require central banks to go right back where they were. That would be again, loss of control...

So because loss of control could be this summer’s event, the potential is gold could have a very serious run to the upside this summer.

If QE is continued then the basic uptrend in gold now so solidly intact, will continue in its power uptrend, and you could expect a stronger gold market this summer. I’d be very careful about seasonality in gold...There’s every possibility that gold could put on a summer rally of distinction.

...A cessation of quantitive easing could open up the black hole of Calcutta for the general equities markets in a way that very few really understand. You could see thousands of points taken off that market in a very short period of time.
The only way to overcome that would be by whatever name you called it to start the QE again. That would be indicative of a total loss of control. So the question is what would the price of gold be if it became publicly undeniable that control of the economic functions for the believers no longer resided in Federal Reserves and central banks?

The answer is gold would do what it historically attempts to do and that is to balance the balance sheet of the United States of America’s external foreign debt...and when we do the calculations we come up with a figure that is in excess of $12,500.”

And so, with summer nearing an end, the markets tread water waiting on QE3 from the Fed...exhausted.

And Gold is in a bubble?

Do you need just a little more proof that Gold in nowhere near to being in  bubble?  I've got some.  The following video presentation by Mike Maloney of GoldSilver.com, is not only proof that Gold is NOT in a bubble, but that by simply continuing to rearrange the deck chairs on the deck of our sinking economic ship, those without seats in the life rafts Gold and Silver face financial catastrophe in the not to distant future.


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