I must confess that I’d been a gold bear for many years. When I reevaluated my position, I surprised myself when my conclusions made a 180-degree turn. On average gold has an 18-to-20-year life cycle, which implies the bull run will run until 2018-20. The cycle doesn’t necessarily mean a huge run-up, but it does mean there should be very little downward pressure. The other factor that is encouraging is how most gold cycles, when there are strong signs of upward movement, terminate with an even larger and steeper rise near the end of the cycle. If history is a guide, we should therefore expect the most dramatic phase of the rally to occur six to eight years from now.

My longstanding macro view has been that as debt became unsustainable, a severe deflation period would ensue. That argument still holds. However, I did make some unsubstantiated assumptions that because of the severity of this debt cycle, the deflation cycle would be deep and long. As it turns out, that has never been the case. On average deflation has an 18-month window. It is during times of strong contraction that cash outshines all other investments. I also believe that gold will experience a downturn as well, but not as steep as most other assets, and that it should recover quickly as governments re-inflate their economies.

Risk of Confiscation

Pondering future scenarios, it seems likely to me that gold will be one of the best investment vehicles. However, there are two scenarios that could be disheartening to gold owners. One has to do with confiscation, or placing government restrictions on ownership or price. If you are inclined to believe this worse case, I would suggest you hold your gold investments overseas in the most stable of countries. In the end, though, if you invest early enough, with the price of gold below $3000, there is little chance of losing. The second scenario will not fare as well. If we have total collapse of world economies gold might not be an easily bartered commodity. Barring that last scenario, gold should be the top investment choice till 2020.

More immediately, perhaps next year, I expect major defaults to play out that will go unremedied by world banks and governments that are either disinclined to step in or unable to do so. All lenders will quickly retrench, just like the banks did four years ago. This time, however, would-be rescuers will make clear that there will be no safety-net and no subsidy for interest or principle. New government rules will be enacted in an attempt to stabilize the financial system. Real write-offs will be placed on ledgers; no more issuing of bonds and government bailouts. No winners, whether lender or borrower. A forced period of across-the-board austerity will be put in place. For the masses, there will be a global depression that will last for more than a decade. For the economies of the world, it will be much briefer. Businesses will quickly do what they have to do to survive and then thrive. Just as nearly everyone has been flabbergasted by the way corporations have sustained strong earnings over the last four years, they will underestimate the ability of companies to adapt in a more severe economic downturn.

The Normalcy Trait

The reason gold has not already taken off has to do with a human psychological trait that clings to the notion that everything will be as it was. It’s called the normalcy trait, and it makes it hard for us to acknowledge that drastic, unwelcome change can occur. This of course assumes you have lived in a stable environment all your life. That was why Jews clung to the notion that Hitler’s regime would be short-lived, and that its citizens would not attack one another. While most can understand the logical conclusion to this debt crisis, we still cling to the notion that somehow it will end without much change in our lives. We can see the datapoints and the almost irrevocable conclusion, but somehow manage to skirt reality and accept that our lives will continue in the “normal” way they always have.

Then again, perhaps my slanted, cynical outlook on life has over dramatized the possible scenarios that lie ahead. I surely hope so, but just to be safe I will be hedging my bet with gold.

Normally catching a bottom is not difficult. Bottoms tend to occur instantly while market tops form during a process. Yet, I’ve found that bottoms of long-term significance do not occur instantly. Like tops, they take time to develop. For example, think about late 2008 to early 2009. Commodities hit their price low in December but the bottoming process began in October and wasn’t complete until May. Emerging markets hit their low in November but the process began in October and ended in March. Returning to the present, we see that Gold and Silver look set to retest their late December lows. Our work leads us to argue that the metals will successfully retest their lows and soon emerge from what in the future will be considered a major bottom in-line with 2008, 2005 and 2001.

We begin with a daily chart of Gold which shows its daily closing prices and a volatility indicator. The percentage figure refers to the percent bullish reading from the daily sentiment index. As we noted recently, each bottom in Gold (except 2008) has come during a period of low and declining volatility. Volatility is currently at a 9-month low while only 7% of traders are bullish on Gold.

Next, let’s take a look at the current Commitment of Traders Report (COT) for Gold which shows the commercial short position and open interest at the bottom. The current commercial short position has reached a 3-year low while open interest recently touched a two and a half year low.

Moving to Silver, we see the metal is nearing significant support at $27. Silver closed at $28.93 and has a bit of room to fall before testing $27 and the 600-day moving average, which has been an important pivot point since late 2008. The current daily sentiment index is 16%. We think, with another day or two of weakness in Silver, the daily sentiment index would decline to single digits. We also want to note that $26 is the 50% retracement of the entire bull market.

Silver, unlike Gold, has seen more interest recently as open interest has increased since late last year. However, open interest would have to rise 40% to reach the old high. Commercial traders are net short 17.9K contracts, which is a within a whisker of the 10-year low which was reached at the end of last December.

We remain encouraged that a bottom is developing in the mining equities. Below we show a weekly chart of GDX. Last week GDX bounced from $41, which is the 50% retracement from the 2008 low to 2011 high. $41 also marks the strongest pivot point since $52. Furthermore, GDX’s volume was very close to a 3-year high. Note how strong volume has market past bottoms.

Breadth indicators suggest the gold stocks are near a major bottom. The chart below is from SentimenTrader.com. The McClellan Summation index is near levels last seen at bottoms in 2008 and 2006. The bottom row shows the percentage of stocks in the sector that closed above their 200-day moving average. The figure has been at zero percent for more than a month. The last time that happened? 2008.

The next chart, also from SentimenTrader.com, shows the assets in the Rydex Precious Metals Fund. Since the late 2010 peak, the fund has dropped by 40% while the assets in the fund have declined by 70%! Interestingly, the assets in the fund declined by 70% in 2008. The difference is the fund’s price declined by 73%. In other words, we are seeing the same amount of outflows as in 2008 yet the market has declined by 40% and not 73%.

While technical analysis and sentiment indicators make a convincing case that a major bottom is near, it is important to note the fundamental considerations which support our thesis. In recent editorials we’ve noted the trend of weakening data in the US. Obviously, should it continue into the summer, then it would raise the odds of Fed action. Shifting east, Europe is headed for a recession and monetization is badly needed first to prevent debt contagion and second to prevent economic contagion. Germany, the lone hold out against monetization, indicated last week it might budge a little bit. Continuing eastward, China cut the reserve ratio for its banks and is likely to do so again reports the Wall Street Journal. Also, India and Australia recently cut interest rates.

Consider these emerging fundamentals with our technical analysis. Technicals always lead fundamentals and markets tend to look six to nine months into the future. We are not predicting imminent action from the Fed or imminent money printing from the ECB. However, we are noting the emerging positive developments which will drive precious metals higher into 2013. Policy from the east is shifting towards easy. Europe will have to embark on some major money printing likely by the end of the summer. Finally, continued weakness in US data along with the strength in US Bonds and the US Dollar will facilitate the environment for the next round of Fed action.

We anticipate a bottom this month to be followed by a higher low in July or August. The fundamentals should become more clear by the end of the summer and would drive the precious metals complex much higher during the seasonally strong period. Remember, major bottoms take some time to develop. We believe a bottom is at hand and that is why last week we began to scale into some positions

Yesterday’s AM fix was USD 1,661.25, EUR 1,253.02 and GBP 1,024.70 per ounce.

Gold fell $4.40 or 0.26% in New York yesterday and closed at $1,661.70/oz. Gold rose to over $1,670/oz in early US trading prior to selling capped price gains and the price then fell back to the $1,660/oz level.

Gold gradually fell during trading in Asia and this weakness has continued in European trading where gold looks set to test the $1,650/oz level or $1,646/oz, the price low after the $1.24 billion sell trade on Monday.

Cross Currency Table – Bloomberg

Gold’s weakness yesterday may have been due to the positive manufacturing data in China and the US leading to traders being hesitant to commit to the long side.

The slowdown in demand from India and data showing holdings in ETFs dropped to the lowest level in 3 months and US Mint monthly gold coin sales fell in April falling to the lowest level since June 2008 may have may have also tempered enthusiasm.

However, central bank demand is likely to be continuing at these levels and central banks are almost certainly still buying on the dips. Bullion coin and bar demand and ETF demand is likely to pick up in the coming weeks when the global debt crisis deteriorates again.

Data from Europe this morning was very negative with Italian industrial production (PMI) falling off a cliff, German manufacturing shrinking, Irish exports faltering on slower global growth, the Greek economy still floundering and Spanish unemployment figures appalling.

The Chairman of the White House Council of Economic Advisers, Alan Krueger, said yesterday that the European crisis poses “some risk” to the US and global economy. Four US central bankers said that more stimuli probably won’t be needed. The Fed bought $2.3 trillion of bonds in two rounds of so-called quantitative easing from December 2008 to June 2011 thereby debasing the dollar.

HSBC Securities on April 29 downgraded its forecast for average gold prices this year to $1,760/oz from $1,850/oz, with analyst James Steel citing “a steep reduction in market expectations of further quantitative easing or other monetary stimulus.”

America’s “Safest Long Term Investment” Is Gold – Gallup

Americans feel “gold is the safest long term investment” today, a Gallup survey has found.

Gold was favoured over four other types of investments perceived as the best long term choice for American investors today.

28% of the American public choose gold as their favoured investment of choice today.

Gold in USD – 3 Days (3 Minute) – Bloomberg

Real estate followed in second place, with 20% seeing it as the best long term investment.

Paper assets were less popular with savings accounts and certificates of deposits (CDs) tied with stocks and mutual funds at 19%.

Bonds came last at 8%.

This suggests that the American public may not be as uninformed when it comes to investing as is often suggested.

According to Gallup, “investing in gold has gained in popularity in recent years as low interest rates have made traditional savings instruments less attractive, and instability in the stock and real estate markets has undermined the mass appeal of those options.”

“Meanwhile, the rising trajectory of the price of gold over the past several years apparently offers more of the returns and stability investors seek.”

While some may find the Gallup poll findings worrisome from a contrarian perspective, it is not.

Gold ownership remains very low amongst the public in most of the western world.

The poll’s findings suggest that this may change in the coming months and years.

While surveys often show that people are favourably disposed towards and instinctually trust gold, there remains a massive lack of knowledge about how to “invest in” or buy gold for financial insurance reasons. This lack of knowledge and awareness leads to the low levels of gold ownership in the western world today.

Gold in USD (White), EUR (Orange) and GBP (Yellow) YTD – Bloomberg

The non-specialist financial media continues to rarely, if ever, cover gold. When it does cover gold it is often in a negative light – with frequent suggestions that it is a “bad investment” and a “bubble”. Also, gurus or experts are often allowed to voice their negative opinions on gold without seeking plurality of opinion and getting the other side of the argument.

There are rarely comprehensive articles looking at the best, most cost-effective and safest ways to own gold as there are with other asset classes such as bank deposits, bonds and equities.

This will change in the coming years when there is less of a bias against gold and a realisation of the importance of gold as a diversification, and gold is treated and covered in the same way that equities, bonds and cash are covered today.

OTHER NEWS

(Reuters Global Gold Forum)

It looks like some appetite for gold coins has returned in the United States, with 10,000 ounces of American Eagle gold coins sold on May 1, according to the U.S. Mint. That’s already half the total amount recorded for the whole of April (though that was the weakest month in nearly four years).

(Bloomberg) — India’s April Gold Imports Plunge to 30-35 Tons, Group Says

Gold imports by India, the world’s biggest bullion buyer, plunged to 30 metric tons to 35 tons in April from 90 tons a year earlier after higher import taxes weakened demand, an industry group said.

Demand remains dull in India as prices trade near record levels due to a decline in the local currency, Prithviraj Kothari, president of the Bombay Bullion Association, said in a phone interview today. Imports in 2012 are expected to be 700 tons to 750 tons, he said.

(Bloomberg) — Comex Suspended Gold Trading in N.Y. Yesterday After Price Drop

CME Group Inc.’s Comex halted trading in gold futures for about 10 seconds yesterday at 8:31 a.m. after prices declined, said Damon Leavell, a spokesman in New York. The so-called Stop Logic halt, engineered by the exchange, is designed prevent excessive price movements, according to the Comex website. Gold futures for June delivery, which settled 60 cents lower at $1,664.20 an ounce yesterday, dropped about $14.50 shortly before 8:30 a.m. local time, data compiled by Bloomberg show.

The market was given a short period of time to regain its equilibrium, Leavell said in a telephone interview. CME declined to comment on the size of the trade that led to the halt.

“The stop-logic functionality happens across all markets at different times and can even happen several times in a day,” he said.

Copyright 2012. Paul Mladjenovic. All rights reserved.

In late 2008, when silver was massacred in the futures pit and saw its price fall from over $20 to under $10, I told my readers at that time that silver entered into a “reverse bubble”. I know it sounds odd, but let me re-visit the concept.

As you know by now, a “bubble” is when an asset reaches an unsustainably high level due to artificially stimulated demand. In 2004, I wrote that housing was entering a historic bubble because government policies such as excessively (artificially) cheap credit inflated the price of real estate to nose-bleed levels. The real estate mania was everywhere in 2004-2006 as buyers were going berserk.

At the time, I had done a seminar with my favorite real estate expert (David Corsi…look him up!) entitled “Housing Bubble Profits” and detailed my bearish rationale for why I thought that housing was entering a dangerous phase and that real estate investors and speculators would get hammered. The bottom line is that when an asset (real estate, stocks, whatever) gets bid up to high levels artificially (a level way above its’ true market price), the next step will be a painful plunge. I go into greater detail in prior essays on the anatomy of a bubble.

In late 2008, I initially wrote about what I thought was a “reverse bubble” in silver. In other words, artificial selling pushed the price of silver below its true market price. For a brief moment toward the end of 2008, the price of silver on the futures market was actually lower than a silver miner’s cost of mining it. The culprit was excessive shorting on the futures exchange by several large financial institutions. This excessive short selling in silver futures has been painstakingly documented for many years by one of the world’s leading silver analysts, Ted Butler.

I consider Ted Butler, David Morgan and Jason Hommel to be the world’s best silver analysts and I highly recommend their research for anyone serious about silver.

Whenever an asset’s price is artificially pushed down below its true market price, the resulting move boomerangs to the upside sooner or later (usually sooner). This is essentially a “reverse bubble”. What happened to silver?

Silver hit a mind-boggling low of $8.88 (spot price) on November 24, 2008. It then went on a strong rally hitting $48.70 on April 28, 2011. It did touch $49.85 overseas during April 29th. That 29-month rally resulted in a gain of about 461% before a sharp correction in May 2011 took silver to the $30s.

As I write this, silver is hovering around $31 and has been consolidating since mid-2011. Massive shorting by a handful of large institutions had again entered the picture. Has silver entered its second “reverse bubble”?

Judging by the supply/demand data and market machinations (including excessive shorting in the silver futures market), I believe that the answer is a resounding “YES”. I won’t punish you with the latest data since others do a much better job of analyzing and presenting it (see the latest research from Ted Butler and David Morgan…again, look them up!).

What will silver’s price look like a year from now…or 29 months from now? I am on record as forecasting that silver will hit $100 during 2012-2013. If silver were to mirror its percentage run from 2008-2011, then you are talking about silver’s price being in the general vicinity of $142. There are some that offer compelling views that silver could easily exceed $200 in the same general time frame.

In the coming months, I will be reviewing and discussing silver’s fundamentals in venues such as preciousmetalsinvesting.com and in my free newsletter so I look forward to silver’s next rally. How much longer will a buying opportunity still be available?

Given so many positive factors for silver, I think that triple-digit silver is not an “if’…it is a “when”.

Got silver?

(1) People that Buy Gold and Silver WANT the Economy to Collapse.
This argument is illogical and confuses cause and effect. This is analogous to warning people not to cook and eat raw meat that has been unrefrigerated for days, and when people eat this meat and become deathly ill, blaming the people that warned the others not to eat the meat for the epidemic of salmonella that is happening.

(2) Gold’s Price is Too High
People that make this argument have no idea why they say this. Just because the price of an asset is high does not mean it is expensive. One has to understand the asset’s value before one can make the valid argument that the price is “too high”. People that argue that gold’s price is “too high” routinely pay 2,500 times more than the price of gold for the comparable weight in diamonds yet never believe they are paying too much for diamonds. Yet, the facts are that the banking cartel artificially raises the price of diamonds and artificially suppresses the price of gold and silver on a routine basis.

(3) Gold is Useless During Economic Collapse Because You Can’t Eat It
Perhaps the dumbest argument yet. In every instance when fiat currency has collapsed, and EVERY fiat currency in history has eventually collapsed because it is akin to monopoly money, people that owned physical gold and physical silver were able to use these precious metals to buy food, including most recently in Zimbabwe and during post WWI Germany. People argue that you can’t eat gold and silver, but yet hold fiat currency of which about 98% of it exists ONLY in the form of digital credits that reside on the banking cartels’ computers. Hmmm, I wonder how delicious those imaginary digital credits taste? Furthermore, silver has anti-bacterial properties that keep water and milk pure for months, so whole you may not be able to eat, it, you can store liquids necessary for survival in it that will keep liquids pure for months.

(4) The Gold Standard Will Not Work Because Bankers Own All the Gold
The Bankers own all the fake imaginary gold and silver in the form of the GLD and SLV ETFs and paper futures contracts that are backed by almost no real physical gold and physical silver but just air. But certainly they do not own ALL the real physical gold and physical silver. If this were the case, then the banksters in Turkey would not be begging Turkish citizens to turn over all their REAL physical gold over to their fake banking system to save it. In the video below, I use the analogy of Poker to describe why a Gold Standard DOES work in protecting the citizens’ rights and consequently explain why Banksters hate the Gold Standard, using a real life history example of post WWI Great Britain.

Please share the below video with everyone you know as destroying the bankster propaganda campaign against gold is the first step to toppling the immoral global banking cartel. Sharing the below video with everyone you know is also one small way to stand in solidarity with Irish citizens that have refused to pay the newly banker imposed property tax. Spreading knowledge and breaking bankster lies is a necessary step towards breaking free of their immoral criminal fiat currency system. If you have a twitter account, I encourage you to tweet this message: “I stand in solidarity with 50% of Irish that have refused to pay bankster imposed property tax to bailout banks. Please RT if you agree!” Even if you do not agree with everything in the below video, I still encourage you to share it with your friends as open debate of the points I raise in the video is the first step towards eradicating misinformation and building a true knowledge base about our monetary system to replace the lies that banksers have taught us through control of our institutional academic system. If you disagree with the points in my video, perhaps by sharing it with others, someone with whom you share it may also better be able to articulate my points in a manner that makes more sense to you. Please stay tuned as I will post part 2 with five more gold myths tomorrow.

The government’s bottomless sponsorship of these TBTF institutions, Rosenblum writes, has created a “residue of distrust for government, the banking system, the Fed and capitalism itself.”

The report (PDF), entitled, “Choosing the Road to Prosperity: Why We Must End Too-Big-To-Fail Now,” is written in a surprisingly readable style and is illustrated with reader-friendly cartoons and pictographs. It uses rhetoric that, for the Fed, is extremely candid and colorful, going beyond an arcane analysis of monetary policy to focus on the cultural damage of Too-Big-To-Fail.

“These psychological side-effects of Too-Big-To-Fail can’t be measured, but they’re too important to ignore,” Rosenbaum writes. “People disillusioned with capitalism aren’t as eager to engage in productive activities. They’re likely to approach economic decisions with suspicion and cynicism, shying away from the risk-taking that drives entrepreneurial capitalism.”

Much of Rosenbaum’s report sounds like it could have been written by Dylan Ratigan, Nomi Prins, Tyler Durden, Barry Rithotz, or any of the other countless critics of Wall Street that have grown out of the crisis era.

He sounds many of the same themes pressed by all of these critics: He calls for higher capital requirements, hammers home the notion that capitalism can’t work without failures, and talks at length about the moral hazards of the Fed’s limitless zero-interest-rate lending, which he notes can be seen as “taxing savers to pay for the recapitalization of banks whose dire problems led to the calamity.”

Moreover, he talks about an inherent perversion of the system that has led to a two-tiered regulatory environment: a top tier where the misdeeds of TBTF banks are routinely ignored and unpunished (“virtually nobody has been held accountable for their roles in the financial crisis,” he writes), and a lower tier where small regional banks are increasingly forced to swim upstream against “the law’s sheer length, breadth and complexity,” leading to a “massive increase in compliance burdens.”

To me, the dichotomy outlined by Rosenbaum helps explain the appearance of two seemingly contradictory major protest movements: a Tea Party movement fulminating against a repressive, overweening regulatory regime, and the Occupy movement railing against an extreme laissez-faire system bordering on lawlessness.

The situation described by Rosenbaum explains how both movements could be right. Just as Tea Party leaders argue, there really has been an enormous flowering of new regulatory burdens in recent decades. It’s just that one group of actors has been given de facto license to ignore those burdens, while everyone else has not. Thus two movements protesting lawlessness on the one hand and an excess of laws on the other – that doesn’t necessarily strain the imagination.

Rosenblum lists many reasons why he thinks the TBTF banks must be broken up, but the one that might be the most damning is his criticism of the Dodd-Frank financial reform bill, which ostensibly created a mechanism for winding down troubled TBTF institutions with reduced cost to the taxpayer. Under Dodd-Frank, banks are supposed to create “living wills” that contain plans for orderly wind-downs in the case of a Lehmanesque disaster.

But in his criticism of Dodd-Frank, Rosenbaum points to what Josh Rosner in our recent Bank of America piece called “the worst-kept secret on Wall Street”: the high probability that when “the big one” finally hits, no one in government will have the guts to let a TBTF company go down the drain. Why? Because these firms are so deeply intertwined and interconnected that when one of them starts taking water, they essentially all do — and so any president who chooses to refuse to reach into the cookie jar for a big bailout would likely be signing off on the political suicide of a broad systemic collapse.

“In all likelihood,” Rosenbaum writes, “TBTF could again become TMTF – too many to fail, as happened in 2008.” He adds that, “For all its bluster, Dodd-Frank leaves TBTF entrenched.”

The significance of the Dallas Fed report isn’t that yet another person has come out to make public note of the impossible-to-miss, gigantic, oozing wart on the face of American capitalism that is the TBTF system. What’s significant is that we’re moving closer to a time when the extremely critical view of TBTF, and the demand for an end to the system, becomes bipartisan consensus.

On what we call the far ends of the political spectrum, in Occupy and the Tea Party, there are people who obviously have sharply contrasting views on all sorts of things. Your average Occupy protester and your average Rand Paul devotee probably couldn’t make it through a game of Boggle without getting in a loud scrap about something, whether it’s Obamacare or gay parenting or whatever.

But whether you think modern American capitalism needs to be fundamentally reformed or whether you think it just needs a few tweaks here and there, you probably can at least agree, for starters, that our system definitely can’t work if corrupt, failing companies escape consequence by leaning on an endless supply of bailouts and low-interest financial patronage by the Federal Reserve.

The conservative argument on TBTF is beginning to blend in with, and become indistinguishable from, the progressive argument. You can say the current system is private enterprise corrupting government, or you can call it repressive government corrupting private enterprise, but it increasingly amounts to the same thing.

By now, virtually everybody who has an informed opinion on the matter thinks the TBTF system makes no sense and must end — the only people who really disagree are the leaders of those firms, the politicians who depend on their money. There may not be many more papers like this Dallas Fed report coming down the pipe from influential political sources, but there will be even fewer arguing the converse, i.e that TBTF is a good idea that’s been great for America. There isn’t anyone outside Jamie Dimon’s inner circle who’d even think about writing that paper.

Reports like this one by the Dallas Fed are important because they add legitimacy to the argument for breaking up TBTF. Intellectually, pretty much everybody likely agrees with Rosenbaum. But they need someone with the right credentials to tell them that saying so isn’t revolutionary socialism. Once people on both sides of the aisle start realizing they agree about breaking up these banks, who knows? It might even happen.

By Jerry Bowyer

In the previous article in this series I pointed out that even after recent dramatic sell-offs gold prices are still higher than one would expect if one saw them as being driven only by money creation. And this state of affairs has been sustained for a period of years, which suggests that it is not driven by a panic reaction, because panics by definition tend to last for a short period of time.

Having noticed that although gold did fall to the top end of my expected value range using money metrics, I wondered why it did not fall at least to the middle range.

Trying to solve the puzzle, I reasoned that perhaps gold is not just a function of domestic money creation, but of international money creation as well. In other words, gold prices might go up in dollar terms even more than the excess creation of dollars alone would dictate. If other countries also debased their paper currencies, the citizens of those countries would similarly demand gold as a hedge against inflation. And since much of the world seemed to be at least partially following the U.S.’s lead in weakening their currencies, perhaps global gold demand was driving gold even higher than dollar devaluation would suggest.

This is an interesting theory, but there are some problems with this view.

First, the view that global inflation drives domestic gold prices has an obvious theoretical problem. Yes, global inflation would lead to global growth in demand for gold, but it would also lead to growth in global supply. Gold is a commodity with both a demand curve and a supply curve, and if it has both curves it has an equilibrium price and the equilibrium price for gold and dollars is a function of the comparative demand and supply of each of those.

If among the three billion new capitalists around the world there is a certain proportion of gold buyers and consumers, then among those three billion capitalists around the world there is also a certain proportion of gold producers and sellers. As gold goes up in price, the incentives to discover it increase proportionately. That’s how the global economy kept its monetary equilibrium for millennia before the emergence of the global fiat money system.

Second, the biggest problem with the global inflation as driver of domestic gold price theory is that it doesn’t work. If one had used global inflation to try to predict dollar gold prices, or used dollar gold prices to try to predict dollar inflation, one would have had very little success. Global inflation does not seem even to explain the times in which gold prices detach themselves from currency debasement factors.

It seems that gold investors are not just concerned about how much money the Fed has created, nor are they principally concerned about how much money the Fed-wannabes around the world have created; they are worried about something else, and they might have good reason to be. What they are worried about, and what seems to be driving current gold prices, is that public debt levels have risen to the point where the debt will be paid off in highly debased currency. In other words, they’re afraid of what is called ‘debt monetization’.

Debts are monetized when governments decide to use their monetary authorities (in the U.S. context, that is the Fed) to create new money which is then lent to the government. This tends to happen when the government has borrowed up to its capacity and decides to continue borrowing above its credit capacity. When that happens, private lenders are no longer willing to take the chance of lending to an over-indebted government. At that point, governments often attempt to verbally intimidate private lenders, especially banks which are subject to very high levels of government oversight. Sellers of bonds are verbally assaulted as vigilantes and speculators, and in more extreme cases attacked for their ethnicity or religion. Jews have been frequent targets of this type of attack.

In some cases regulators require financial institutions to lend to the government anyway, often for reasons other than the stated ones. For example, recent changes in regulation associated with Dodd-Frank and the Basel Accords purport to act in the interest of financial stability by requiring banks to hold larger proportions of ‘Tier 1 capital’, such as Treasury Bonds, for the purpose of risk reduction. But the problem is that this public Tier 1 capital is in many cases riskier than, for example, the corporate bonds which it replaces. That’s one reason why the European sovereign debt crisis has been so devastating to the private banking system, because earlier versions of risk reduction forced extremely risky public bonds down the throats of the private system. What’s even more maddening is that after suffering through all of that, we still have to sit through political sermonizing about market failure in the banking system.

So, once private lenders have been brow-beaten, and then eventually law-beaten into buying as much public debt as they can possible stand, the rapacious public spending beast’s hunger remains un-slaked. That’s where monetization comes into play. Gigantic piles of money are simply created and then shoveled into the mouth of the Leviathan.

Of course, public spending is not the stated reason for money creation. The Keynesian rationalizations are ceremonially invoked as the beast is fed (by the Fed): “lowering marginal propensity to consume”, intone the priests, “counter-cyclical expansionary fiscal policy” respond the acolytes. The ‘hoarders’ are punished according to their sins. Yet nothing changes except higher levels of inflation and lower levels of real growth, and so the ritual is repeated.

That ritual, it appears, is what gold investors are concerned about, and although they have in the past rung that alarm bell early, for example in the gold price peak in the early 80s which probably underestimated the degree to which Volcker and Reagan would slay the stagflation monster, that doesn’t mean that we don’t have better reason to be concerned now. Gold is a both a store of value against current devaluation and also a hedge against the threat that debt will be monetized and devaluation will get even more out of hand. With net debt standing at roughly 90% of GDP, that doesn’t seem like such a crazy scenario anymore.

South Carolina residents would be able to use gold and silver coins as currency under a bill advanced Tuesday by a House panel.

The measure approved by the House Judiciary Committee would let people use the precious metals as money as long as businesses agree to take them. Legislators had made the argument that they didn’t want to force businesses to take the metals and have to figure out the worth of the coins from one day to the next and amended the bill to remove such a requirement.

Advocates of the measure say the metal coins are more stable than the dollar, although Rep. Greg Delleney, who chaired the subcommittee that studied the bill, has previously warned that, if the dollar collapses, people will be in trouble no matter what the metals are worth.

The bill that advanced Tuesday would also exempt the coins from any sales tax, a provision also included in the only other similar bill to become law in the country. Last year, Utah became the first state in the country to legalize gold and silver coins as currency, exempting the sale of the coins from state capital gains taxes. Several other states including North Carolina have explored similar bills.

The U.S. and many other countries largely abandoned gold-backed money during World War I because they needed to print more cash to pay for the war. Later, during the Great Depression, President Franklin D. Roosevelt took steps that essentially prohibited gold and silver as legal currency to prevent hoarding.

In 1971, President Nixon formally abandoned the gold standard. The U.S. Mint later began producing the gold and silver American Eagle coins, primarily aimed at investment portfolios and allowing people to trade them at market value but with capital gains taxes on profits.

The bill now moves to the House floor. Delleney has said that, while he sees no downside in the measure, putting blind trust in the value of gold and silver is misplaced.

“We’re basically creating an alternative currency,” Delleney, R-Chester, said Tuesday.

(Copyright 2012 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.)

Posted: March 26, 2012

A bill that a South Carolina House committee will debate Tuesday would allow you to use gold and silver as currency instead of dollars.

Rep. Rick Quinn, R-Lexington, one of the co-sponsors of the bill, says,

“With the economy the way it is and with the amount of debt, the amount of national debt we have, many people are investing in precious metals, gold and silver specifically, to protect the value of their investment. And so this is really kind of an effort to look at possibilities of how we would have an alternate currency if that would kind of work for the state.”

The bill would set up a 9-member study committee to work out the details. That committee would be made up of three state senators, three House members and three members of the business community, at least one of whom would have to be a certified public accountant.

E. Ray Moore, Jr., a member of the SC Money Committee, a citizens’ group formed in 2010 to advocate and lobby for a return to the gold standard, says, “It’s basically a form of discipline, so we can anchor our South Carolina economy in a time of great difficulty if the dollar continues to erode and inflation increases, which it inevitably will. So South Carolina could have a stable economy with this legislation. It would anchor our economy and gives us a stable currency.”

South Carolina would be just the second state to allow gold and silver to be used as an alternate currency. Utah is the only state that has passed a law. Other states are talking about forming study committees similar to the one the South Carolina bill would create.

There are inherent problems with the bill, says Rep. Jim Harrison, R-Columbia, a member of the House subcommittee that passed it last Thursday. One problem is whether businesses would be required to accept gold and silver, since the bill would make gold and silver legal tender in the state. Supporters of the bill want to leave it up to each business to decide whether to accept gold and silver, and the bill is written to make it voluntary.

“If you look in Black’s Legal Dictionary or whatever, ‘legal tender’ means it must be accepted for a debt. So in the first paragraph we’re saying it must be accepted for a debt and then two paragraphs later we’re saying it doesn’t have to be,” Harrison said Thursday. But he said he’d vote for the bill in an effort to keep it moving through the legislative process.

Federal Reserve Chairman Ben Bernanke said last week that a return to the gold standard would not be practical, since the U.S. doesn’t have enough gold to cover its debts. And he says it wouldn’t make sense from a policy standpoint, because the federal government wouldn’t have the flexibility to respond to inflation, deflation or unemployment by controlling the amount of money in circulation.

And he says the U.S. economy was much more vulnerable to economic downturns when it was on the gold standard, with the U.S. having five major recessions from 1890 to 1905.

Yesterday’s AM fix was USD 1,705.25, EUR 1,299.93 and GBP 1,088.57 per ounce.

Click here or on video to watch

Gold fell $12.40 or 0.72% in New York yesterday and closed at $1,700.80/oz. Gold rose in Asia initially touching $1707/oz prior to falling in Europe to below $1,700/oz.

Trading was slow as investors await the outcome of a Federal Reserve meeting, which could offer clues over the direction of interest rates in the world’s largest economy.

Bernanke may again try and “influence the mood” by suggesting that QE is not imminent which could lead to further short term weakness in the gold price.

However, analysts who have been accurate regarding Fed policy in recent years believe that Bernanke is in affect bluffing and the fragile US economic recovery is now massively dependent on near zero percent interest rates and QE.

Contrary to the oft repeated assertion that rising rates will be negative for gold – the opposite is of course the case as was seen in the 1970’s when rising rates were correlated with rising gold prices.

Rising interest rates are bearish for stocks, bonds and property and bullish for gold. A prolonged period of rising interest rates and the assertion of positive real interest rates again would be bearish for gold but the Fed would risk a Depression if it attempted to move interest rates up to even the historically low levels like 3% or 4%.

Buy Gold Because A Currency Crisis is Coming

We have long warned that a consequence of a sovereign debt crisis in various countries and coming in the US , would be currency devaluations and an international monetary crisis. Slowly but surely various commentators are now coming to that conclusion.

According to a new book launched this month, ‘In Gold We Trust?’ a currency crisis is coming and people should buy gold to protect themselves.

Michael Green, co-author with Matthew Bishop of ‘In Gold We Trust?’, explains to Gregg Greenberg of The Street in the video why a currency crisis is unavoidable and investors need to protect themselves with gold.

Bishop is the US Business Editor and New York Bureau Chief of The Economist and Green is an economist and an author who has written books with Bishop.

“There is a crisis going on in money that is going to run and run and run. So there is a pretty good case for being long on gold” says Green.

“We have got used to the idea that paper money issued by governments is what money is but if you don’t have confidence in that money people are going to be looking for alternatives.”

“So I think the point we want to make in the book about gold is don’t think about gold is going back to some historic past, some true money. Think of gold as being the first mover in the new evolution of money where we are going to have to find lots of different monies if government backed money collapses.”

Green says that he believes that “the crisis is only really starting”.

“There is a whole debate that goes on between economists as to whether inflation is coming true or not … Alan Greenspan says that it is about 12 or 13 quarters before the expansion in QE will lead to inflation.

“I don’t think that argument matters so much the real argument is political. Whoever has to deal with the deficit problems, the economic problems, this whole deleveraging crisis – I think at some point it is going to have to reach for the inflation button. It’s going to be the only way we get out of this. Because cutting down, austerity, European style austerity is not going to work with the voters so the political drivers for inflation are much stronger than this monetary story.”

“When asked by Greenberg what Green thinks the triggers will be for governments to start paying attention to the crisis – whether it will be a jump in interest rates or a total abandonment of US Treasuries by the Chinese and “what is going to cause them to finally get their heads out of the sand and focusing on the currency crisis and then to gold?”

Green refers to gold investor Thomas Kaplan’s view of paper currencies as Kaplan said that “all paper currencies are toilet paper but the dollar is double ply” toilet paper.

Green concludes by warning that a dollar and currency crisis is coming.

“In a sense the dollar is insulated. So you have got this paradox that even though nothing is being done about the deficit in the US, because of the euro troubles the dollar is actually rising and gold has been falling as a result.”

“So the day when this crisis comes keeps being put off because of the unique nature of the dollar as global reserve currency but it is coming at some point and what we are going to see is investors looking for alternatives and gold is the first alternative … it won’t be the last.”

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SILVER
Silver is trading at $33.59/oz, €25.63/oz and £21.45/oz.

PLATINUM GROUP METALS
Platinum is trading at $1,690.25/oz, palladium at $692./oz and rhodium at $1,450/oz.

The last few weeks have seen a larger consolidation pattern forming, pointing to a much bigger consolidating pattern that implies far more than just a short-term trading move just ahead of us. The forces that drive both supply and demand in the very short-term are just about in balance, so it is appropriate that we look at these forces to see how they influence gold prices in the short, medium, and long term.

The forces that influence the gold and silver markets are very different from those that affect industrial and base metals. They go far beyond simple prices and the technical picture of demand and supply. They encompass trust, confidence, dependability, and protection that have little or nothing to do with gold’s uses. Warren Buffett is quite right about the “uselessness” of gold. But he has missed the point as to its value. Such a master of management and investment must find such an unmanageable metal virtually useless to him. But therein lays its value as an investment.

Over the long term gold cannot be managed or controlled. It’s the last investment standing when push comes to shove and silver is its lesser sidekick. We mentioned the saying in an earlier article that people don’t buy gold to make money but because they have money. That’s why central banks hold gold. They wish they didn’t have to but they know that their currencies are vulnerable to mismanagement and that over time are almost inevitably mismanaged. Gold is bought to get away from people and their games in the knowledge that when those games are played gold stands at much higher levels than before the games started. During the time that these events are played out, the gold and silver prices reflect each step made.

At Gold Forecaster and Silver Forecaster, we track these influences as much as we track the fundamental and technical pictures. Failure to do this would make our work directionless as well as inadequate. After all, one cannot exclude any facet of the influences on gold or silver if you want a professional understanding of these markets.

Gold Supply

The supply of both gold and silver is rising but not in nearly sufficient amounts to satisfy the growing demand coming from all sides of the world. The production of gold is more difficult than that of gold because miners have to go to more and more different countries to extract gold. The governments of those areas may be friendly at the start of the operations, but if they feel that profits being made by miners are too large, then they move in with higher taxes and in some cases, nationalize the mines. With all the easily reached and exploited gold deposits having been mined out in the last century, miners are seeing costs jump inordinately; however, with the prospect of higher gold prices, even the far flung deposits are becoming profitable.

Bear in mind that miners first have to replace the deposits that they’ve mined out. After that their reserves can grow, but most miners are pleased simply to be able to replace mined-out ounces.

What is clear is that newly-mined ounces will prove insufficient to supply demand in the future. The only other source of supply has to come from what is badly termed, “scrap” gold. When this term is used it does not always mean gold that has to be re-refined like steel from a scrap car. It usually means that this is gold sold by current owners, who for some reason feel it necessary to sell it. This can be for reasons as simple as they need the cash with which to buy something else, pay something off, or because the owners feels the price is too high, wants to profit and buy it back after the price has fallen back to a level where it forms a base from which to rise again. Such sellers are confined to the retail side of gold and not to central bankers any more. That makes gold very different from silver.

This leaves the supply of gold relatively inelastic.

Only when prices ‘spike’ do we see dishoarding or scrap sales in volume. Such a ‘spike’ has to be significant because gold now has a habit of falling less than expected before consolidating ahead of the next rise. Many times traders are caught wrong-footed and pay a similar price to the one they exited at.

Gold Demand

The emerging world investors in a debt-distressed Eurozone and central bankers comprise the backbone of the demand for gold and will do so for many years to come. All three of these types of investors are driven by factors pertaining to the retention of value. Their buying reflects a need to counter the falling values of paper money not because they use gold or consume gold. This makes gold an entirely different metal from all others.

For gold to keep this quality it must not be consumed in significant quantities; it must persuade its owners to keep it out of reach of others in vaults or personal safes and the like. It is money when all else fails.

It is this facet that keeps its price rising and always will so long as paper money, over time, continues to cheapen.

Silver Supply

The supply of silver is mainly confined to the Americas, particularly Central and South America and Mexico. Apart from pure silver mines, silver is mined as a by-product of other metals. Where it is a by-product, its supply is reliant on the demand for the metal of the mine that the owners are targeting (i.e. nickel etc.). But there is a rapidly rising group of mines that are targeting silver alone. The supply from these mines again is insufficient to supply the rising demand from investment demand. It is growing and will continue to do so, but so is the demand, not just from the investment side of the market, but from industrial demand.

Silver Demand

From supplying photography and jewelry demand for decades, the changing face of silver demand is remarkable. Today, its qualities in the electronic and medical field have burgeoned. Solar Panels, price tags, silver in clothes, in medicine, in computers and similar uses have moved silver from a metal related to discretionary wants to important needs. The demand for silver has moved to a much less price and economic conditions, sensitive metal, to one where demand remains strong when economic conditions weaken.

In these uses, unlike photography and jewelry, silver is consumed once and for all and does not come back to the market re-cycled nearly so much as it used to.  This is ensuring that industrial demand is now rising, taking from the market significant amounts of newly-mined silver, which never returns.

Silver has set a pattern of moving alongside gold as monetary metal too. Do not expect silver to be accepted as a monetary metal by monetary authorities for the foreseeable future, but this has not stopped retail demand from treating it as such. As the price of gold has moved up and away from the poorer investor, so they turned to silver to fulfill the same requirements of retaining value. Silver’s track record is as remarkable as that of gold having moved up from $6 to the current level of $33. This has assured the place it found in the past, in the future. Silver too, is money in the hands of poorer investors. You will not see a central banker anywhere near silver, but you will see huge numbers of emerging world investors newly rescued from poverty. With the emerging world numbering above 4 billion people, this demand has not even been dented, let alone satisfied.

Relationship between Gold, Silver

The relationship we are talking about here is not the gold silver ratio; it is simpler than that. The price performance of the two metals since 2005, in particular, is roughly the same as ‘both have risen over five fold since then’. The question that investors should ask is, “Will this change?” We believe not! There is a likelihood that silver will outperform gold in the future, but remember why the two are rising in the first place.