Friday, August 10, 2012

Is Gold A Dud Investment This Year???


Despite a lot of gold bashing out there, its been a pretty good investment even though, for the first time in a long time it hasn't posted double digit far this year.

Let's take a look:

Click to enlarge

As you can see, since the financial crisis of 2008, gold has had the best return next to corn futures. Notice, to the right of the yellow rectangle is the S&P 500. Staying invested in the US stock market has not even kept up with real inflation, especially as measured by Shadow Stats. This may be surprising news if you've been listening to the mainstream financial media lately who have been busy bashing gold. The Financial Times has an article titled, "Cash out of gold and send kids to college", where they say gold is a bubble and that gold is at "inflation adjusted highs". But I would ask, "By what measure?"

Sure, if you measure by the US government's ever changing measure of inflation which was changed  twice since gold hit its last highs you'd get this graph:

But when you compare apples to apples by keeping the inflation calculation constant and consistent you get a graph that looks like this:

Not exactly the same is it?

If you are a new reader or need a refresher on the Fed's inflation calculations and how they have changed click here to review.

And of course, CNBC as usual is gold bearish but makes some surprisingly unconvincing arguments. First they same gold when up on QE and another round of QE is not a given. Gold did in fact go up on QE, but this completely ignores the period from 2001 to 2008 that gold went up double digits each year without any quantitative easing (aka Fed printing). They also erroneously point to China:

Meanwhile red-hot buying in China, which has emerged as a challenger to number one consumer India in recent years, has also cooled.
 But then their only evidence is a reduction in gold derivative trading which completely ignores the massive physical gold buying going on. Remember this recent story on China's new gold vault being built to hold 1,000 metric tons of gold? The evidence seems to indicates there is less paper gold trading and more physical gold buying.

As a reminder of what the biggest factor is in moving gold I'll remind you of this:

Seems to be a correlation there. And look closer. Its a little out of date.

The US debt is now almost $16 Trillion and gold is at $1619. That would mean the two, highly correlated variables are out of alignment just as they were towards the end of 2008. You can see the sharp jump up in the gold price from the end of 2008 into 2009 as the gold price begins to track US debt again. Wouldn't we expect this relationship to resume? Especially with the debt cliff at the end of the year?

Finally, what are market veterans seeing?

 Today forty year veteran of the metals markets Bill Haynes told KWN, “Right now we are seeing very large physical orders for both gold and silver.  It is very interesting because these are entities with large existing holdings of both physical gold and silver, but for some reason, right here, right now they are adding sizable quantities to their existing positions.”

“These are wealthy individuals that are very strong hands and they are taking the metal right out of the market, and believe me, these individuals are never sellers.  They see gold and silver as a hard asset that has been money for thousands of years, and they are pulling it out of the market and putting it away.

It is also very interesting that we are seeing an equal amount of money going into both gold and silver....

“I can tell you this is money that has been waiting patiently on the sidelines for weeks, and even months in some cases.  The belief by these strong-handed buyers is that the bottom for gold has been achieved and it is now time to add to their positions.  Savvy buyers know that summer is historically a great time to buy and that’s exactly what they are doing.”

Haynes also noted:  “Another interesting thing was an editorial that was in the FT yesterday.  One of the writers started trashing gold in the Financial Times.  He said it’s time to sell your gold and send the kids to college, buy an automobile or take a vacation because this bubble is over. 

Eric, this is the type of nonsense we see in the mainstream media when a bottom is being put in, and the Financial Times has been one of the greatest contrarian indicators for the gold market.  I also find it interesting that this is the week the big buyers are making a statement with their physical gold and silver purchases.  They are doing their buying right into the face of this ridiculous nonsense coming out of the Financial Times.”

Haynes also added: “I would also like to note that the world is waiting on Germany to bail out the rest of Europe.  Perversely, if that happens I believe we are going to see tremendous strength in the euro.  I don’t think it’s logical, but as the euro strengthens I expect to see a further boost in the price of gold.

What KWN readers need to be aware of is this is the worst financial crisis the world has ever seen.  This is a financial crisis supreme, and the universal solution continues to be the printing of money.  This will eventually lead to massive destruction of both the economies and the currencies that participate in this madness. 

It will also lead to massive inflation.  I know some financial managers have told their clients to have 10% or 15% in gold, but for the financial climate that we are living through right now, I firmly believe people should have 50% to 60% of their assets in the physical metals.”

As I pointed out before, there will come a time when its time to transition from precious metals back into stocks and other traditional investments. That time is not now and likely won't be for a few more years. Be patient, and keep accumulating gold, silver and cash. If you have a 401k, and are not retiring in the next ten years, you can invest in "growth & income funds" but keep plenty in cash. You may have an amazing chance to buy the market much much cheaper price, similar to the lows of 2008.

No comments:

Post a Comment