by Jeff Clark, BIG GOLD
What will happen to the U.S. economy and the dollar in the near term? Will inflation increase dramatically? What is the outlook for gold, and where should you put your money? BIG GOLD asked a world-class panel of economists, authors, and investment advisors what they expect for the future. Caution: strong opinions ahead...
Jim Rogers is a self-made billionaire, author of the best-sellers Adventure Capitalist and Investment Biker, and a sought-after financial commentator. He was a co-founder of the Quantum Fund, a successful hedge fund, and creator of the Rogers International Commodities Index (RICI).
Bill Bonner is the president and founder of Agora, Inc., a worldwide publisher of financial advice and opinions. He is also the author of the Internet-based Daily Reckoning and a regular columnist in MoneyWeek magazine.
Peter Schiff is CEO of Euro Pacific Precious Metals (www.europacmetals.com) and host of the daily radio show The Peter Schiff Show (www.schiffradio.com). He is the author of the economic parable How an Economy Grows and Why It Crashes and the recent financial bestseller The Little Book of Bull Moves: Updated and Expanded. He’s a frequent guest on CNBC, Fox Business, and is quoted often in print media.
Jeffrey Christian is managing director of CPM Group (www.cpmgroup.com) and a prominent analyst on precious metals and commodities markets. CPM Group produces comprehensive yearbooks on gold, silver, and platinum group metals, and provides a wide range of consulting services. Jeffrey published Commodities Rising, an investors’ guide to commodities, in 2006.
Walter J. "John" Williams, private consulting economist and “economic whistleblower,” has been working with Fortune 500 companies for 30 years. His newsletter Shadow Government Statistics (shadowstats.com) provides in-depth analysis of the government’s “creative” economic reporting practices.
Steve Henningsen is chief investment strategist and partner at The Wealth Conservancy in Boulder, CO, assisting clients interested in wealth preservation. Current assets under management exceed $200 million.
Frank Trotter is an executive vice president of EverBank and a founding partner of EverBank.com, a national branchless bank that was acquired by the current EverBank in 2002. He received an M.B.A. from Washington University and has over 30 years experience in the banking industry.
Dr. Krassimir Petrov is an Austrian economist and holds a Ph.D. in economics from Ohio State University. He was assistant professor in economics at the American University in Bulgaria, then an associate professor in finance at Prince Sultan University in Riyadh, Saudi Arabia. He is currently an associate professor at Ahlia University in Manama, Bahrain. He’s been a contributing editor for Agora Financial and Casey Research.
Bob Hoye is chief financial strategist of Institutional Advisors and writes Pivotal Events, a weekly market overview. His articles have been published by Barron’s, Financial Post, Financial Times, and National Post.
BIG GOLD: A lot of economists, including the government, believe the worst is behind us economically. Do you agree? If not, what should we be on the lookout for in 2011?
Jim Rogers: It is better for those getting all the government largesse, but the overall situation is worse. More currency turmoil. State and local problems, plus pension problems.
Bill Bonner: None of the problems that caused the crises in Europe and America have been resolved. They have been delayed and expanded by more debt and more money printing and will lead to more and worse crises. Deleveraging takes time. 2011 will, most likely, be a transition year... not unlike 2010. But the risk is that one of these latent crises will become an active crisis.
Peter Schiff: To me, it's like watching someone walk into the same sliding glass door again and again. Wall Street must know by now that large infusions of liquidity from the Fed spur present consumption at the expense of investment for the future. We are an indebted family going out for an expensive meal to celebrate getting approved for a new credit card. It might feel good (at the time), but we're still simply delaying the inevitable.
Jeffrey Christian: We believe the worst is behind us economically, in the short term. The recession ended in late 2009, and 2010 saw U.S. economic growth in line with what CPM had expected, but higher than the more pessimistic consensus had been. In 2011 we expect continued expansion. We think some economists and observers are too enthusiastic about economic prospects right now.
For the U.S. in 2011, we are looking for real GDP of 2.5% - 2.8%, inflation to remain low, and for the economy to avoid deflation. Interest rates are expected to start rising, perhaps significantly in the second half of 2011. The dollar is expected to be volatile, rising somewhat against the euro but continuing to weaken against the Canadian and Australian dollars, the rupee, yuan, rand, and other currencies.
European sovereign debt issues will continue to plague financial markets, but market reactions will be less severe than they were regarding Greece in April 2010.
John Williams: An intensifying economic downturn – what formally will be viewed as the second dip of a double-dip depression – already has started to unfold. The problem with the economy remains structural, where household income is not growing fast enough to beat inflation, and where debt expansion – encouraged for many years by the Fed as a way to get around the economic growth problems inherent from a lack of income growth – generally is not available, as a result of the systemic solvency crisis. Accordingly, individual consumers, who account for more than 70% GDP, do not have the ability, and increasingly lack the willingness, to fuel the needed growth in consumption on which the U.S. economy is so dependent.
Steve Henningsen: The governments worldwide (I don’t pay much attention to economists) want us to believe that the worst is behind us because the financial system is built upon the foundation of trust and confidence. Both of these were battered badly when it was shown that much of the world’s prosperity over the past few decades was simply a mirage that, once dispersed, left behind only debt with no means of future production. Now they want us to believe that they fixed the problem via more debt.
What I will be watching for this year is sovereign and U.S. municipal debt corpses floating to the surface sometime in the months ahead.
Frank Trotter: Right now I have a somewhat dark but not dismal outlook. I think that over 2011, we will continue to experience a Jimmy Carter-style malaise that combines continuing high unemployment, tentative business investment, rising prices, low housing numbers when looked at on an absolute basis, and creeping interest rates.
As a very large mortgage servicer, we are not seeing significant improvements in payment patterns that would indicate the worst is fully behind us, and with mortgage rates moving upward, we see less ability for current mortgage holders to refinance and reduce payments.
Krassimir Petrov: No, the worst is yet to come. No structural changes have been made, no problems have been fixed. Printing money, a.k.a. Quantitative Easing, is a quick fix that has postponed the problem, yet also made it a lot worse. I would say that we are still in the early stages of the crisis and have another 4-8 years to go.
Bob Hoye: The worst of the post-bubble economic adversity is not behind us.
BG: Price inflation is creeping up, but the enormous amount of money printing hasn't really hit the system yet. Does that happen in 2011, further down the road, or not at all?
Jim Rogers: It is happening. The U.S. and CNBC lie about it. Most other countries do not lie and acknowledge it is worsening.
Bill Bonner: Most likely, substantial consumer price inflation will not show up in 2011. The explosion of money printing is being contained by the bomb squad of deleveraging. That will probably continue in 2011. But not forever.
Peter Schiff: 2010 was the year that China began cutting back its Treasury purchases in favor of gold, hard assets, and emerging market currencies. The Fed has stepped in as a major purchaser of Treasuries. This represents a new phase on the path to dollar collapse, and it will manifest in 2011 in the form of more "unexplainable" inflation – as we are now seeing in the prices of everything from corn to gasoline.
Jeffrey Christian: We are now beginning to see some increases in monetary aggregates, suggesting that some of the monetary accommodations are beginning to filter into the economy. We expect this trend to accelerate over the course of 2011. This will bring some increase in inflation, but we expect the major manifestation will be through higher U.S. Treasury interest rates as the Fed and Treasury seek to sell bonds to sterilize the inflationary implications of the monetary easing and to finance ongoing massive federal deficits.
John Williams: The problems of the money creation will become increasingly obvious in exchange-rate weakness of the U.S. dollar. Related upside pricing pressure already is being seen on dollar-denominated commodities such as oil. There is high risk of consumer prices rising rapidly before year-end 2011, setting the stage for a hyperinflation. The outside date for the onset of a U.S. hyperinflation is 2014.
Steve Henningsen: My guess is further down the road, as the deleveraging cycle continues with deflationary-housing winds in our face and the banks still hoarding money like my 9-year-old daughter stockpiles American Girl doll paraphernalia. I still expect inflation to continue in areas such as energy, bread, circuses, and whatever else provides sustenance to the Romans – I mean people.
Frank Trotter: Most research has shown that over time the increase in money supply is not a short-term economic stimulus, but rather has a moderate effect in the 18- to 36-month range. In addition, this theory contends that a growth in the monetary base – which is what has happened so far – only increases economic activity when accompanied by a decent multiplier; this is not occurring. The real risk is that with rising rates and continued soft economy, the Fed will feel obliged to continue to QE3, QE4, and so on, all of which may have a significant inflationary impact.
I am more concerned about general price inflation here in the U.S. and the potential it has to reduce global growth.
Krassimir Petrov: This is a tough one. I would have thought that price inflation would have been raging by now, but this is obviously not the case. I have the feeling that 2011 will be a repeat of early 2008, with commodity prices (CRB) making new all-time highs. A falling dollar will trigger a rush into commodities as a hedge against inflation. I am really tempted to make a totally outrageous forecast that oil could make a run for $200 as QE3 unleashes another dollar scare, or maybe even a dollar crisis.
Bob Hoye: Massive "printing" has been widely publicized and is "in the market."
BG: The U.S. dollar ended 2010 about where it started; does it resume its downtrend in 2011, or are fears about its demise overblown?
Jim Rogers: No, but further down the road.
Bill Bonner: No opinion. But there is more risk in the dollar than potential reward.
Peter Schiff: It's hard to pinpoint exactly when the dollar will collapse, but it will take a miracle to avoid that outcome in the near term. It really depends on when the creditors of the United States realize that they are not going to get their principal returned to them in real terms, but rather in grossly devalued dollars. We have already seen the average duration of U.S. Treasury debt drop below that of Greece. No one wants to buy a 30-year bond with negative real interest rates as far as the eye can see.
Jeffrey Christian: We expect the dollar to be volatile against most currencies in 2011, but that its demise has been prematurely predicted. The dollar may move sideways to slightly higher against the euro, yen, and pound, while continuing to deteriorate against the Canadian and Australian dollars, the rupee, yuan, rand, and other emerging economy currencies.
John Williams: There remains high risk of a dollar selling panic unfolding in the year ahead, as the U.S. economy tanks anew, as the Fed continuously expands its easing, and as dollar holders dump the U.S. currency and dollar-denominated paper assets. Such would be a precursor to the inflation problem.
Steve Henningsen: Similar to my thoughts last year, I still believe the dollar is headed down long-term, but it could bounce around over the next year. If sovereign debts become a problem again, like I think they will later this year, then everyone will go running back to “Mother Dollar” once again for one last hug before she lies back down on her sickbed.
Frank Trotter: As the economy waffles and the global investing community's attention is drawn from one crisis to the next, I expect the U.S. dollar to bounce up and down in the current range. After that, however, my analysis suggests that measured by the key factors of fiscal and monetary policy, combined with a significant trade deficit, the U.S. does not look as good as our major trading partners, and I thus expect the dollar to decline, perhaps significantly, in the intermediate term. Big geopolitical events may accelerate this or create a flight to U.S. dollar quality, so hold on to your hats.
Krassimir Petrov: I think the dollar resumes lower. I expect QE3 and QE4 – a dollar-printing fest that will eventually sink the dollar. Sure, all fiat currencies are in deep trouble and prone to overprinting, but the reserve status of the dollar actually makes it more vulnerable now. Whether the dollar sinks against other currencies is a fool's game not worth playing. It is like being in the hospital, where all patients are suffering from cancer, and trying to guess who will feel best at the end of next year, or trying to guess who will succumb first. That's why it is so much safer to play the dollar against gold.
Bob Hoye: Fears of the dollar's demise have been widely discussed and are "in the market." The dollar, itself, will not be repudiated – just the mavens that have been "managing" it.
BG: Gold has risen 10 years in a row, so some are calling it a bubble, yet it's roughly $1,000 below its inflation-adjusted high. What's your outlook for the metal in 2011?
Jim Rogers: It is hardly a “bubble” when very few own it still. Who knows? Overdue for a correction, but who knows?
Bill Bonner: The smart money is in gold. It will stay in gold until the bull market that began 10 years ago finally reaches its peak. It is extremely unlikely that the top will come in 2011; it's probably years in the future. In the meantime, gold is bound to have a losing year or two. Don't worry about it. Buy gold. Be happy.
Peter Schiff: The funny thing about a bubble is that when it's real, no one can see it. The same commentators who were blind to the tech bubble, the housing bubble, and now the Treasury bubble are quick to call gold a bubble. The truth is that many of them have a personal aversion to gold because they directly benefit from our fiat money system. Goldman Sachs was paid 100 cents on the dollar in the AIG bailout, which never would have happened in a gold-based system. It's a lot easier to print a billion paper dollars than dig up a million ounces of gold.
Gold will continue to climb in 2011 as the currency war continues and investors continue to seek stability. Unless there is a major sea change in the way the U.S. does business, I think the gold trade is a safe one.
Jeffrey Christian: A price of $1,550 is possible, although given the enormous investor buying pressure, prices could spike to almost anywhere. After that, we expect prices to fall back, initially to around $1,340 or $1,380. We expect gold prices to stay above $1,280 or so for most of 2011, and to average around $1,369 for the full year.
John Williams: As the U.S. dollar increasingly is debased, and where gold tends to preserve the purchasing power of the dollars invested in it, the upside to gold in the year ahead is open-ended, restricted only by any limits to the massive downside potential for the U.S. dollar. Any intermittent gold price volatility, extreme or otherwise, will be short-lived. There is no bubble – only increasing weakness in the U.S. dollar – with the gold price fundamentally headed much higher in the years ahead.
Steve Henningsen: I believe gold will once again prove the bubble-boys wrong and end the year positive (I have no idea by how much and don’t really care). However, I think this year will be more volatile and that Gold Bugs better remain seated on the precious metals express or they might get squished.
Frank Trotter: I still think that with price inflation on the rise and big political events occurring, there may be room to continue to rise. If stock markets take off, then there will be a reduction in appreciation or even a significant decline, but based on the factors I mentioned above, I don't see that as highly likely.
Krassimir Petrov: Gold still has outstanding fundamentals. I believe that over the course of 2010, the fundamentals have strengthened significantly: (1) "No Exit [Strategy] for Ben" as he unleashed QE2, and will likely unleash QE3, QE4, etc., (2) no more central bank selling of gold, (3) more central banks become buyers of gold, and (4) trial balloons for a global gold-backed currency.
I have no idea how people could even claim that gold is in a bubble – barely 1 out of 100 people have any idea about investing in gold. During the real estate bubble, every second person was involved in it. Maria "Money Honey" Bartiromo has yet to report from the COMEX gold pits; gold fund managers and analysts have yet to obtain rock-star status; and glamorous models are not yet dating the gold guys. Who is the Henry Blodget [co-host of Tech Ticker] of the gold sector, do we have one yet?
Yes, gold will eventually become a bubble, but that feels 5-8 years away.
Bob Hoye: In 2011, gold's real price will resume its uptrend.
BG: What's your best investment advice for 2011?
Jim Rogers: Buy the rmb [renminbi, the Chinese currency].
Bill Bonner: We are in a period much like the period following WWI, in which the great debts and losses of the war had to be reckoned with. It is an era of great risk. The U.S. faces many of the same challenges faced by Germany and England after WWI. Like England, it has huge debts. It is a waning imperial power. And it has the world's reserve currency. And like Germany, it is attempting to fix its problems by printing more money. This is not a good time to be long either U.S. stocks or U.S. bonds.
Peter Schiff: Don't be suckered into the idea that recovery is just around the corner. The current climate is like living in a hurricane or earthquake zone; it's important to stay vigilant because you never know when disaster will strike. Physical gold is the financial equivalent of a flashlight, first-aid kit, and store of canned goods. It's a basic way to protect yourself from any eventuality. From there, if you're looking for returns, there are plenty of foreign markets with strong fundamentals, as well as commodities that feed those markets.
Investing in the U.S. is now driven largely by force of habit. It's a habit you should resolve to break.
Jeffrey Christian: Do not invest based on what you believe, but on what you know. Gold is a market, like other markets. It rises and falls. You probably want to stay long gold on a long-term basis, but may want to cull the weaker gold assets from your portfolio in the first quarter, and put some hedges in place to protect a long-term core long gold position against the potential of significant price weakness over the next two years or so. Such a period of weakness would be an excellent time to add to one’s gold assets.
John Williams: As an economist, I look for the U.S. dollar ultimately to lose virtually all of its current purchasing power. Accordingly, for those living in a U.S. dollar-denominated world, it would make sense to move to preserve wealth and assets over the long-term. Physical gold is a primary hedge (as is silver). Holding some stronger currencies outside the U.S. dollar, as well as having some assets outside the United States, also may make sense.
Steve Henningsen: Dramamine (for volatile markets), a stash of cash (for potential investment opportunities), and move some of your assets offshore if you haven’t already.
Frank Trotter: My advice is first to look at the other side of your balance sheet – the liability and risk equation – before seeking out absolute gains. What are your goals, what resources do you already have to meet those goals, and what events (health, income stream, upheavals) might impact these risks? Place some assets to hedge these risks directly, then look to diversify globally into markets with higher growth potential than we see here at home, and that may balance your global purchasing power risk. Almost like a religion, we have had the phrase "Stocks are the only legitimate hedge against inflation" beaten into our heads. I say, look at assets that define inflation like commodities and currencies and evaluate where these fit into your risk portfolio.
Krassimir Petrov: Last year I recommended silver, and I would stick to silver again, despite the phenomenal run in 2010. Then it gets tricky. I usually don't recommend diversification, but now I would again recommend a broad portfolio of commodities. Investing in 2011 should be easy: stay out of real estate, out of bonds, out of fiat currencies, and out of stocks; stay fully invested in commodities, overweight gold and silver.
What to watch in 2011: stay focused on the sovereign debt crisis and bond yields. Spiking yields will trigger the next stage of the crisis.
Bob Hoye: Once past the early part of 2011, the best returns are likely to be obtained from the junior gold exploration sector.
[These world-class experts are right to bank on gold and silver – because the U.S. dollar keeps losing more and more of its value. Watch this eye-opening video on how China and Russia are plotting to dump the dollar… why you should be worried… and what to do about it.]
Showing posts with label gold. Show all posts
Showing posts with label gold. Show all posts
Thursday, March 24, 2011
Thursday, April 29, 2010
Investing in Gold Stocks: So When Are We Gonna Get Rich Already?
As gold again approaches it's all-time high, gold stocks continue to be the source of frustration for many gold investors. Exactly how bad does the financial situation need to get before gold goes to the moon?
Casey Research's Jeff Clark takes a look at the historical performance of gold during previous bull markets, as he pieces together a guess about when he believes gold will take off...
Gold Stocks: Math Today, Magic Tomorrow
By Jeff Clark, Senior Editor, Casey’s Gold & Resource Report
Here at Casey Research, we eagerly awaited the release of quarterly reports from the companies in our favorite sector. Why? The gold price was substantially higher last quarter than during the comparable meltdown quarter of 2008, so we were anxious to find out if it would lead to a spike in profits.
Gold and silver producers posted substantially higher net profits, and yes, much of it due to higher metals prices. But amazing to many, higher profits did not lead to higher – or at least not significantly higher – stock prices.
While most saw their stocks rise the day of their respective announcements, some actually fell if gold or the broader markets were down on the day. And they certainly didn’t jump like you might expect when “soaring profits” splashed the headlines of their press releases.
What gives?
We have some answers straight ahead, including a big fat clue as to when gold stocks will take off and give us those “magical” price levels we think are coming.
Gold Stocks Are Still Going to Take Off, Right?
We think that at some point the public is destined to participate in precious metals stocks, and when they do, we’ll see volumes jump and share prices take off.
But for now, gold stocks are playing follow the leader…
… rising and declining in tandem with the S&P since last April. So, until gold stocks separate from the overall market, we should anticipate they’ll tag along if the markets slide. And we think the path of least resistance for the stock market is down, not up, so caution is warranted about going overweight our stocks.
But just as we showed with gold last month, gold stocks will similarly propel higher when the general public crowds in, regardless of what the markets are doing. Here’s what gold stocks did in the last great bull market, compared to the S&P.
As measured by the Barron’s Gold Mining Index (a good substitute for the HUI that didn’t exist), gold stocks rose 652% during the 1970s (through January 1980), while the S&P returned a wimpy 22%. The action in the ‘70s was definitely in gold and gold stocks, despite two recessions that decade, and we think a repeat is in the cards.
When the masses finally wake up, it’s highly probable our returns will match the chart above or the late ‘90s surge in Internet stocks.
Is Now a Good Time to Buy?
As investors, our goal is to get positioned in the best stocks at the best price. And buying low assures us of more profit when we eventually sell. So, are gold stocks “low” right now?
We have a couple clues to help answer that, with gold itself offering the most important hint. Let’s compare how gold stocks are performing in relation to gold to see if they’re overvalued or undervalued or somewhere in between.
The chart shows that gold stocks, as measured by the HUI Gold Bugs Index, outperformed gold until 2008. Since then, gold stocks have underperformed gold by a fairly wide margin.
This gold-stock-to-gold ratio tells us that in our bull market, gold stocks are currently undervalued relative to the gold price. This doesn’t mean they can’t get cheaper, of course, but it does signal they represent good value and that compared to their underlying asset, there’s lots of room to the upside.
So, if you have a long-term perspective and the patience to wait until gold stocks begin outperforming gold again, today’s prices are good prices.
So, do we buy? The answer depends on your current exposure to gold stocks, how much gold and cash you have, and your outlook. If you own equities exceeding one-third of your total investable assets, we wouldn’t rush to buy. If you have limited (or no) exposure and a patient mindset to see you through until the big payday, even enduring temporarily lower prices along the way, then buying some now is probably a good move. If you have very little in the way of savings and gold, we’d put money there first before committing a big chunk to gold stocks.
Basically, the larger your stable of gold stocks, the more stubborn you should be about price. And we wouldn’t go “all in” just yet. Your risk in loading up now is if markets were to take another nosedive. But if you’re light on stocks, adding some of the best of the best at this time should work out well, as long as you don’t panic into selling on general market weakness.
Just Tell Me When!
The #1 indicator that will tell us when gold stocks will take off has nothing to do with charts and is something you can monitor yourself: it will be when your neighbors and co-workers begin to express curiosity. You obviously want to be invested before them, but that’s when things will start to get exciting.
So when might “gold fever” strike your neighbor? History holds the best clue:
►In the 1970’s bull market, gold stocks began their big ascent when the gold price hit about $450/ounce. Adjusted for inflation, that would equal roughly $1,340 today. So, when we see gold rise decisively above $1,300 and stay there, that just might be the trigger that spurs the interest of the masses in gold stocks. That’s not a prediction, but it does give us an idea of what to look for.
Casey Research chief economist Bud Conrad was right when he called for gold breaking through the $1,150 barrier in 2009 – and now he’s calling for gold to break over $1,450 by year’s end. Weighing in as well, Doug Casey himself sees precious metals as the only asset class worth buying now, and gold stocks as being the best way to add speculative leverage to those investments.
Exciting? You bet. We’re convinced that, sooner or later, higher prices are ahead for the best gold- and silver-producing companies, along with the “magical” levels that can happen in a mania. So, while we encourage caution, we also encourage selective participation so you don’t get left behind. Waiting for the “perfect” time to buy is an exercise in self-deception; nobody can time the market.
Let’s be honest: no one can guarantee when or if a gold mania will happen. But all of our research points to higher prices for gold (and silver), so we remain confident we’re in the right sector. And we can make money before the mania gets here.
To learn where to buy physical gold and where to store it… and which major gold stocks, mutual funds, and ETFs are the safest while giving you handsome upside… read Casey’s Gold & Resource Report. At $39 per year, it’s a steal for the value you get out of it. Click here for more.
Casey Research's Jeff Clark takes a look at the historical performance of gold during previous bull markets, as he pieces together a guess about when he believes gold will take off...
***
By Jeff Clark, Senior Editor, Casey’s Gold & Resource Report
Here at Casey Research, we eagerly awaited the release of quarterly reports from the companies in our favorite sector. Why? The gold price was substantially higher last quarter than during the comparable meltdown quarter of 2008, so we were anxious to find out if it would lead to a spike in profits.
Gold and silver producers posted substantially higher net profits, and yes, much of it due to higher metals prices. But amazing to many, higher profits did not lead to higher – or at least not significantly higher – stock prices.
While most saw their stocks rise the day of their respective announcements, some actually fell if gold or the broader markets were down on the day. And they certainly didn’t jump like you might expect when “soaring profits” splashed the headlines of their press releases.
What gives?
We have some answers straight ahead, including a big fat clue as to when gold stocks will take off and give us those “magical” price levels we think are coming.
Gold Stocks Are Still Going to Take Off, Right?
We think that at some point the public is destined to participate in precious metals stocks, and when they do, we’ll see volumes jump and share prices take off.
But for now, gold stocks are playing follow the leader…
… rising and declining in tandem with the S&P since last April. So, until gold stocks separate from the overall market, we should anticipate they’ll tag along if the markets slide. And we think the path of least resistance for the stock market is down, not up, so caution is warranted about going overweight our stocks.
But just as we showed with gold last month, gold stocks will similarly propel higher when the general public crowds in, regardless of what the markets are doing. Here’s what gold stocks did in the last great bull market, compared to the S&P.
As measured by the Barron’s Gold Mining Index (a good substitute for the HUI that didn’t exist), gold stocks rose 652% during the 1970s (through January 1980), while the S&P returned a wimpy 22%. The action in the ‘70s was definitely in gold and gold stocks, despite two recessions that decade, and we think a repeat is in the cards.
When the masses finally wake up, it’s highly probable our returns will match the chart above or the late ‘90s surge in Internet stocks.
Is Now a Good Time to Buy?
As investors, our goal is to get positioned in the best stocks at the best price. And buying low assures us of more profit when we eventually sell. So, are gold stocks “low” right now?
We have a couple clues to help answer that, with gold itself offering the most important hint. Let’s compare how gold stocks are performing in relation to gold to see if they’re overvalued or undervalued or somewhere in between.
The chart shows that gold stocks, as measured by the HUI Gold Bugs Index, outperformed gold until 2008. Since then, gold stocks have underperformed gold by a fairly wide margin.
This gold-stock-to-gold ratio tells us that in our bull market, gold stocks are currently undervalued relative to the gold price. This doesn’t mean they can’t get cheaper, of course, but it does signal they represent good value and that compared to their underlying asset, there’s lots of room to the upside.
So, if you have a long-term perspective and the patience to wait until gold stocks begin outperforming gold again, today’s prices are good prices.
So, do we buy? The answer depends on your current exposure to gold stocks, how much gold and cash you have, and your outlook. If you own equities exceeding one-third of your total investable assets, we wouldn’t rush to buy. If you have limited (or no) exposure and a patient mindset to see you through until the big payday, even enduring temporarily lower prices along the way, then buying some now is probably a good move. If you have very little in the way of savings and gold, we’d put money there first before committing a big chunk to gold stocks.
Basically, the larger your stable of gold stocks, the more stubborn you should be about price. And we wouldn’t go “all in” just yet. Your risk in loading up now is if markets were to take another nosedive. But if you’re light on stocks, adding some of the best of the best at this time should work out well, as long as you don’t panic into selling on general market weakness.
Just Tell Me When!
The #1 indicator that will tell us when gold stocks will take off has nothing to do with charts and is something you can monitor yourself: it will be when your neighbors and co-workers begin to express curiosity. You obviously want to be invested before them, but that’s when things will start to get exciting.
So when might “gold fever” strike your neighbor? History holds the best clue:
►In the 1970’s bull market, gold stocks began their big ascent when the gold price hit about $450/ounce. Adjusted for inflation, that would equal roughly $1,340 today. So, when we see gold rise decisively above $1,300 and stay there, that just might be the trigger that spurs the interest of the masses in gold stocks. That’s not a prediction, but it does give us an idea of what to look for.
Casey Research chief economist Bud Conrad was right when he called for gold breaking through the $1,150 barrier in 2009 – and now he’s calling for gold to break over $1,450 by year’s end. Weighing in as well, Doug Casey himself sees precious metals as the only asset class worth buying now, and gold stocks as being the best way to add speculative leverage to those investments.
Exciting? You bet. We’re convinced that, sooner or later, higher prices are ahead for the best gold- and silver-producing companies, along with the “magical” levels that can happen in a mania. So, while we encourage caution, we also encourage selective participation so you don’t get left behind. Waiting for the “perfect” time to buy is an exercise in self-deception; nobody can time the market.
Let’s be honest: no one can guarantee when or if a gold mania will happen. But all of our research points to higher prices for gold (and silver), so we remain confident we’re in the right sector. And we can make money before the mania gets here.
To learn where to buy physical gold and where to store it… and which major gold stocks, mutual funds, and ETFs are the safest while giving you handsome upside… read Casey’s Gold & Resource Report. At $39 per year, it’s a steal for the value you get out of it. Click here for more.
Monday, May 11, 2009
How to Time the Gold Market
I've learned - the hard way - that the best way to time the gold market - is not to time it at all. Remember last summer after the government bailed out Fannie/Freddie, and it looked like a sure bet that gold was heading to the moon?
Gold Stocks – the Best Strategy for Portfolio Building
by Jeff Clark, Editor of BIG GOLD
October 27, 2008 was the gold mining sector’s Black Monday, the day nearly every stock hit rock bottom. Hindsight makes it plain they got caught in the violent deleveraging that sucked down every equities market in the world.
The broader markets were of course making year-to-date lows at the same time, and unlike gold stocks, they continued falling after a short intermission. In fact, the Dow fell 2,000 points after Obama was elected. In sharp contrast, the mining stocks went on a tear. Between November ’08 and January ’09, many of our BIG GOLD picks made substantial gains, rising anywhere from 45% to 149%.
This good news isn’t the whole story, of course; many mining stocks saw percentage losses greater than the broader market averages during the Big Selloff. But given the fact that gold stocks started rebounding while the broader markets continued lower, the BIG GOLD portfolio ended the year down 24% while the S&P lost 38%. We were also glad to see our portfolio responded better than the HUI; the broad-based mining index lost 32% on the year. Meanwhile, the demand for physical gold and silver was surging, likely attributed to investors who’d been spooked by the broad meltdown.
We held on to our shares throughout the selloff and advised our readers to do the same – and subsequently watched our stocks rebound mightily. And we fully expect these kinds of surges to repeat as gold pushes higher. Keep in mind that the real mania is yet to come. Once inflation responds to the Federal Reserve’s ongoing monetary foolishness, gold will need a space suit and our miners oxygen masks.
A key point to remember going forward is that gold mining shares constitute a minute fraction of the global equities market, and a small shift in investor interest toward our sector can move gold stocks sharply higher in a big hurry. The market cap of the fifteen largest gold producers in the world -- combined -- is a paltry $125 billion. That’s barely more than a single company such as General Electric, at $116B; much less than Microsoft ($175B); and waaay less than Exxon Mobil at $400B.
Miners have also had a temporary respite from high energy costs due to the collapse in the price of crude oil. Energy is one of the biggest expenses a miner has to carry. As energy prices came down, the cost of producing gold also declined, fattening the bottom line. Oil is likely to get back to and then beyond $143 per barrel at some point, but not for a while. We doubt it will top $75 this year, which is enormously helpful for our companies.
Recently, gold stocks have outperformed bullion, a trend we’re keeping an eye on and one we’re confident will continue in the future, especially when we see the certain emergence of serious inflation and the dollar resumes its downtrend.
So… what to do now?
What we hope you’ve been doing all along. Our general rules: If you’re already fully committed to this sector, stay the course; you will be well rewarded.
For those with money still to invest, accumulate well-run, sound companies on weakness. Volatility will continue; we expect days and weeks marked by retracement in the prices of even the best companies. The dips will be your buying opportunities. Place below-market bids and let the price come to you. Take positions with half or so of the funds you’ve allotted for this sector, then fill out your portfolio with whatever bargains come your way.
Whether you’re already full-up with gold stocks or are just getting started, you should be well positioned before the all-out mania for gold stocks hits.
The Quandary of Timing
It may surprise some to hear that we are not “all-in” yet with our portfolio. Why? Because our attitude is one of caution, and because we know that our big gains since October could get clawed back, partly or wholly, by another reversal – which would lead to another buying opportunity we wouldn’t want to miss.
But caution can be expensive when the market runs away from you. What if the train has already left the station? In that case, those waiting on a pullback will be disappointed. Just as all below-market bids placed on October 28 of last year went unfilled, so could today’s, or tomorrow’s.
Looking as little as a year out, our money is confidently on our stocks going higher – much higher. We expect the government’s assorted “stimulus” packages to fail to deliver as advertised, and usher in high inflation. This will push gold and gold stocks much higher.
But the question is, if the broader markets head lower, will gold stocks follow them down or ride on gold’s coattails?
That question leaves you in a quandary only if you’re looking at the short term. Or if you get emotional about this stuff. Those with no stomach left after the gut-wrenching selloff into last October probably shouldn’t deviate from the cautious strategy outlined above. If you’re one of those who see the big picture and ignore the gyrations along the way – which is what Doug Casey does – then you’re drawn to the idea of placing a bet when you judge that the odds are in your favor. It’s when you see the price of something is far less than its value that you can have the confidence to load up, whether that’s today or perhaps later this summer.
Whether you buy today or wait in hopes of a pullback, we believe you’ll be looking at profits a year from now. In the big picture, our stocks are still deeply undervalued, even after so many of them have doubled off their lows. But could they retreat again? In a general market pullback, definitely. Could they tread water for a while? Certainly. And could they leave present levels in the dust and double again from here? Absolutely.
There are times when one must put away the crystal ball and simply prepare for more than one scenario. This is one of them. Whether you respond more conservatively or more aggressively, keep your eye on the endgame. We think you’ll be glad you did.
Prudent precious metals strategies for conservative investors – that’s what BIG GOLD is all about. And now that the gold price is going up again, you shouldn’t wait to jump on the bandwagon. Read in our latest report why super-low interest rates mean we could see $1,500/oz gold this year – click here to learn more.
Well that didn't pan out - yet. But if you believe, as we do, that printing money will eventually lead to inflation (as it always has every other time it's happened in history), then you may want to position yourself ahead of the herd into some gold positions, if you haven't already. So if you don't yet have a full position size, is now the best time to load up? Read on to see what Casey's Jeff Clark has to say.
Gold Stocks – the Best Strategy for Portfolio Building
by Jeff Clark, Editor of BIG GOLD
October 27, 2008 was the gold mining sector’s Black Monday, the day nearly every stock hit rock bottom. Hindsight makes it plain they got caught in the violent deleveraging that sucked down every equities market in the world.
The broader markets were of course making year-to-date lows at the same time, and unlike gold stocks, they continued falling after a short intermission. In fact, the Dow fell 2,000 points after Obama was elected. In sharp contrast, the mining stocks went on a tear. Between November ’08 and January ’09, many of our BIG GOLD picks made substantial gains, rising anywhere from 45% to 149%.
This good news isn’t the whole story, of course; many mining stocks saw percentage losses greater than the broader market averages during the Big Selloff. But given the fact that gold stocks started rebounding while the broader markets continued lower, the BIG GOLD portfolio ended the year down 24% while the S&P lost 38%. We were also glad to see our portfolio responded better than the HUI; the broad-based mining index lost 32% on the year. Meanwhile, the demand for physical gold and silver was surging, likely attributed to investors who’d been spooked by the broad meltdown.
We held on to our shares throughout the selloff and advised our readers to do the same – and subsequently watched our stocks rebound mightily. And we fully expect these kinds of surges to repeat as gold pushes higher. Keep in mind that the real mania is yet to come. Once inflation responds to the Federal Reserve’s ongoing monetary foolishness, gold will need a space suit and our miners oxygen masks.
A key point to remember going forward is that gold mining shares constitute a minute fraction of the global equities market, and a small shift in investor interest toward our sector can move gold stocks sharply higher in a big hurry. The market cap of the fifteen largest gold producers in the world -- combined -- is a paltry $125 billion. That’s barely more than a single company such as General Electric, at $116B; much less than Microsoft ($175B); and waaay less than Exxon Mobil at $400B.
Miners have also had a temporary respite from high energy costs due to the collapse in the price of crude oil. Energy is one of the biggest expenses a miner has to carry. As energy prices came down, the cost of producing gold also declined, fattening the bottom line. Oil is likely to get back to and then beyond $143 per barrel at some point, but not for a while. We doubt it will top $75 this year, which is enormously helpful for our companies.
Recently, gold stocks have outperformed bullion, a trend we’re keeping an eye on and one we’re confident will continue in the future, especially when we see the certain emergence of serious inflation and the dollar resumes its downtrend.
So… what to do now?
What we hope you’ve been doing all along. Our general rules: If you’re already fully committed to this sector, stay the course; you will be well rewarded.
For those with money still to invest, accumulate well-run, sound companies on weakness. Volatility will continue; we expect days and weeks marked by retracement in the prices of even the best companies. The dips will be your buying opportunities. Place below-market bids and let the price come to you. Take positions with half or so of the funds you’ve allotted for this sector, then fill out your portfolio with whatever bargains come your way.
Whether you’re already full-up with gold stocks or are just getting started, you should be well positioned before the all-out mania for gold stocks hits.
The Quandary of Timing
It may surprise some to hear that we are not “all-in” yet with our portfolio. Why? Because our attitude is one of caution, and because we know that our big gains since October could get clawed back, partly or wholly, by another reversal – which would lead to another buying opportunity we wouldn’t want to miss.
But caution can be expensive when the market runs away from you. What if the train has already left the station? In that case, those waiting on a pullback will be disappointed. Just as all below-market bids placed on October 28 of last year went unfilled, so could today’s, or tomorrow’s.
Looking as little as a year out, our money is confidently on our stocks going higher – much higher. We expect the government’s assorted “stimulus” packages to fail to deliver as advertised, and usher in high inflation. This will push gold and gold stocks much higher.
But the question is, if the broader markets head lower, will gold stocks follow them down or ride on gold’s coattails?
That question leaves you in a quandary only if you’re looking at the short term. Or if you get emotional about this stuff. Those with no stomach left after the gut-wrenching selloff into last October probably shouldn’t deviate from the cautious strategy outlined above. If you’re one of those who see the big picture and ignore the gyrations along the way – which is what Doug Casey does – then you’re drawn to the idea of placing a bet when you judge that the odds are in your favor. It’s when you see the price of something is far less than its value that you can have the confidence to load up, whether that’s today or perhaps later this summer.
Whether you buy today or wait in hopes of a pullback, we believe you’ll be looking at profits a year from now. In the big picture, our stocks are still deeply undervalued, even after so many of them have doubled off their lows. But could they retreat again? In a general market pullback, definitely. Could they tread water for a while? Certainly. And could they leave present levels in the dust and double again from here? Absolutely.
There are times when one must put away the crystal ball and simply prepare for more than one scenario. This is one of them. Whether you respond more conservatively or more aggressively, keep your eye on the endgame. We think you’ll be glad you did.
Prudent precious metals strategies for conservative investors – that’s what BIG GOLD is all about. And now that the gold price is going up again, you shouldn’t wait to jump on the bandwagon. Read in our latest report why super-low interest rates mean we could see $1,500/oz gold this year – click here to learn more.
Sunday, April 26, 2009
China Admits It's Been Secretly Stockpiling Gold
On Friday, China admitted to something it's long been suspected of - secretly stockpiling gold.
Of the countries that disclose their gold holdings, China is now ranked fifth in the world, ahead of the Swiss, the former beacon of a solid currency.
Since 2003, China has increased it's gold holdings by 75%. Over the same time period, the Chinese have been gradually moving their foreign reserves out of US assets.
I can't think of any reason why these trends would reverse themselves anytime soon. And apparently, neither can traders, as they bid gold back up above $900 on the news.
There's probably a decent chance any gold the IMF sells will never hit the market, as the Chinese may be waiting to gobble it up.
Sunday, March 01, 2009
How to Own Physical Gold Through Your IRA
As we watch the governments of the world engage in a competitive devaluation of their respective currencies, you may be starting to think about putting some of your investment dollars into gold.
Buying gold stocks are one way to do it. However if the world's monetary system starts to come unraveled, you can't beat owning physical gold bullion as the ultimate insurance. In this guest article, the editors of Big Gold share the logistics of how this can be done.
By the editors of BIG GOLD, Casey Research
Within the last year, 401(k)s and IRAs have ceased to be a safe haven for Americans’ nest eggs. In 2008, employees lost on average 14%, or about $10,000, of their retirement money. Those with more than $200,000 are even worse off – they lost more than a quarter of their savings. No wonder that more and more people are asking whether they can, or should, use an Individual Retirement Account (IRA) to hold physical gold. Our answer to the first part of the question is yes, indeed you can. The tax rules governing IRAs leave room for gold. But our answer to the second part is equivocal.
Background
In 1986, as the U.S. Mint began issuing gold coins for the first time since 1933, a tax rule against holding “collectibles” in an IRA was relaxed to allow gold and silver Eagles. Later, in 1997, the Tax Payer Relief Act opened the IRA door for a broad spectrum of precious metals (gold, silver, platinum, and palladium), whether in the form of bullion or coin. The easier rules now apply to all types of IRAs, including traditional, Roth, Simplified Employee Pension (SEP) and Simplified Incentive Match Plans for Employees (SIMPLE).
The only stipulation is that all bars and all coins other than Eagles must be .995 fine. Thus Canadian Maple Leafs and Austrian Philharmonics qualify, but the South African Krugerrand, minted with an alloy, does not. Numismatic coins are also impermissible for an IRA.
Mechanics
The procedure for putting gold into an IRA is somewhat more complicated than with paper assets, but the requirements aren’t onerous.
To begin with, you have to find an IRA custodian that handles investments in metals, and they are few. Don’t look to your discount broker or a fund family like Vanguard; they won’t touch the stuff. Instead, you’ll need a specialist like the two original gold IRA custodial companies, American Church Trust (acquired by GoldStar Trust in 2007) and Sterling Trust. These are the most respected names in the business. An Internet search will turn up others, and if you do your due diligence on them, you might find one that works for you.
But remember that it’s especially important to choose a custodian with a solid reputation, because your gold will be stored at a location twice removed from you. A firm such as GoldStar or Sterling would be merely your IRA’s legal custodian; for vaulting your IRA gold, it will employ a certified depository, likely either HSBC Bank USA (which is also a COMEX gold depository) or Delaware Depository Services.
So chances are you’ll have to open a separate IRA for physical gold, which will be a matter of doing a little paperwork and paying some fees. Then you put money into your account and tell the custodian what to buy. (Dropping in coins you already own is against the rules – a “prohibited transaction.”) And if you want to mix in some paper – for example, to consolidate your gold, ETF, and mining stock holdings into one account – that’s fine, too.
The custodian will charge either a fixed annual fee or a percentage of the IRA’s value, with a ceiling. And the depository will charge its own fee for safekeeping. There also may be a transaction fee each time you add to your IRA. In all, you can expect the basic cost to run between $160 and $340 per year, depending on the fee structure of the custodian you choose.
You can make the same tax-deductible contribution each year to a gold IRA as with any other IRA. The current limit is $5,000, or a “catch-up” limit of $6,000 for those 50 and over. Custodians generally set their minimum initial investment at that $5,000 mark but will accept smaller subsequent contributions.
When the time comes to withdraw from your gold IRA, you can choose to so in cash or bullion. If you take cash, the custodian sells the gold and distributes the proceeds, with the money then taxed at your ordinary income rate, just as with any other asset held in an IRA. If you take physical gold from your IRA account, it’s called an “in-kind distribution.” For tax purposes, your withdrawal will be assessed at the “fair market value” for gold on that day. This will not be the spot price but a judgment made by an independent assessment company that your custodian contracts with for that purpose.
Who Should Consider It
That takes care of the how-to. The trickier part is whether it’s a good idea. For most readers, the answer is likely no. Here’s why.
The idea behind a traditional IRA is twofold. First, reduce present taxes by taking a deduction upfront for your yearly contribution of $5K or $6K. Second, defer taxes on the investment income and gains that build up inside the IRA until after retirement.
Physical gold, of course, doesn’t generate income. So you might be wasting part of your IRA’s tax-saving power by filling it with gold instead of investments that earn interest, dividends, or trading profits.
Does that mean it never makes sense to have physical gold in an IRA? No. There are some situations when an IRA may be the right place to hold part or all of your investment in physical gold.
No-income portfolio. If you’ve decided that the outlook for bonds and dividend-paying stocks is so bleak that you don’t want any at all, then putting gold into your IRA won’t crowd out any income-earning investments.
Strategic switching. Perhaps you plan at some point, when you judge that the gold bull market probably has run its course, to liquidate part of your gold. Whatever gold you have in an IRA then could be sold and reinvested, with no loss to current tax, in something else.
IRA Only. If your IRA is the only investment vehicle you have, and you want gold, then using funds within the IRA to buy gold may be the only way for you to hold it.
Transfers and Rollovers
In researching this, we chatted with Glen Kirsch of Asset Strategies International, who has been dealing with gold and gold-related investments for more than thirty years. We asked Glen what would be the benefit of a gold IRA. His experience accords with our analysis of when putting gold in an IRA makes sense.
He said he rarely if ever sees people open a gold IRA just to deposit that five grand a year. What he does see is individuals making the flight to quality with their accumulated retirement assets. Say, someone with most of his wealth in a pension fund limited by a menu of poor investments is searching for a way out. If the individual is generally suspicious of paper investments, a gold IRA will look attractive.
Making the move is simple if the pension fund is already an IRA. You’re free to transfer funds from an IRA that’s invested in stocks or anything else directly into a gold IRA.
Or if the pension fund is run by your employer, when you leave (quit, retire, or get fired), you can roll your interest in the pension fund over into an IRA, without tax consequences, and use the money to buy gold.
***
Sunday, January 25, 2009
How to Buy Physical Gold
Interested in buying physical gold to protect yourself from the coming inflationary holocaust? Here's a quick primer on the ins and outs of buying, and taking possession of, physical gold.
Going Long
Finding Elusive Gold in This Market
By the editors of BIG GOLD, Casey Research
At this writing, gold is still 15% off its peak, at least in U.S. dollars. Yet at the same time, the metal is cruising at or near all-time highs against a host of other currencies, including the Swiss franc, British pound, Canadian dollar, Australian dollar, and Indian rupee.
That currency disparity means buyers around the world are prepared to pay much more for gold, relative to their own currencies, than is reflected in the New York spot market, which prices gold in dollars.
Demand for gold coins in particular is running so high that there were severe shortages in 2008. Dealers’ shelves emptied, mints either rationed their output or stopped producing entirely, and premiums over the spot price rose dramatically. All of which implies that the metal’s bull market is far from over. Yet taking advantage of the trend becomes problematic if you can’t get what you want.
Sure, you can buy as much paper gold as you like, through the SPDR Gold Trust ETF (NYSE.GLD), which is bullion-backed and will be sensitive to an advancing price. But what if you simply want physical metal and want it in quantity – say, a hundred ounces?
Well, you could buy 100 coins. If you could find them. Or you could buy a single 100-ounce bar.
Take heed: if you are buying in 100-ounce, 400-ounce or 1-kilo sizes, you want a good delivery bar, one that carries a hallmark from a recognized refiner. And buy only from a source you have a good reason to trust. The gold trade has been replete with con artists since ancient metalworkers began hammering on the shiny stuff and found they could increase their profit margins by adding in a little silver, copper, or even lead. With 100 ounces going for upwards of US$85,000, caution is in order.
Once you’re ready to commit to a 100-ounce buy, the next logical question is: Is there any way to avoid the big premiums and acquire what you want at spot? The answer, fortunately, is yes. You can elect to play with the big boys and get your 100-ounce bar on the COMEX, where the bullion banks and giant funds do their trading.
Playin’ the COMEX
The COMEX is primarily a paper market, with speculators going long or short on contracts for future delivery. 99.9% of those contracts get settled in cash and are closed out before the delivery date arrives, with participants pocketing profits or taking their lumps. Very little physical gold changes hands through COMEX trading.
But some does, because every participant who goes long has the right to pay in full and insist on actual delivery. And every participant who goes short has the right to deliver the goods and get paid. Those trades represent the other 0.1% of the contracts.
The Casey COMEX User's Manual
First, get a little more acquainted with the topic. Log on to the COMEX gold section at (http://www.nymex.com/gol_pre_agree.aspx) and have a look around.
Pay close attention to the Current Session Overview. It gives you a real-time picture of trading, with the various delivery months displayed, along with the price per ounce being bid. (With gold, the months further out nearly always have higher prices, a situation known in the commodities trade as contango. The opposite, when near-term prices exceed those down the road, is called backwardation, and for gold it’s extremely rare.)
If you decide to proceed with the idea of buying on the COMEX, you have to open an account with a futures broker. To do that, you’ll need to answer some questions about your financial status and then make a deposit. We spoke with an agent at Lind-Waldock in Chicago, one of the oldest and most active futures brokers, to learn about their requirements.
First, at Lind-Waldock, you must have a yearly income and net worth of at least $25,000 and $50,000, respectively; anyone who can afford a hundred ounces of gold will surely qualify. Then you must deposit a minimum of $5,000 with the broker. Finally, you choose from among several levels of service, which affects the amount of commission you’ll pay.
Once the futures account is in place, you’re set to go.
Let’s say the bid price three months out is $850/oz., and you like gold at that price. You call your broker and place an order at $850, for one gold contract (which represents a single 100-oz. bar of good delivery metal). As with bidding on a stock, you may not get what you want if the market is heading up and runs away from your price. The alternative is to place a market order, trusting that it gets filled at close to your target price, but that can be risky in a fast-moving market.
Let's assume you get your contract and lock up what you’ll pay for the gold, most of which will be due at expiration. What next? There are two possibilities. You can just deposit the full cost of the gold, sit back, and enjoy the wait for your prize. Or you can deposit the minimum amount required (the minimum “margin”), which varies and is set at the exchange’s discretion. For a single gold contract at the moment, it’s $5,800, or about 7% of the contract’s value.
That’s how the speculators play the market, putting up as little front money as possible. For you, that won’t be a problem if the price of gold rises, since the broker will be crediting a matching amount of cash to your account on a daily basis. But you have to be careful if the price of gold falls, because the broker will then charge your account for a matching amount of money day by day – and to keep the balance from going below the minimum margin requirement, he’ll send you a margin call, insisting that you deposit more cash. If you fail to do so, the broker will enter a sale order for you, and you’ll be out of the market.
Changes in the value of a futures contract, with their attendant shifting cash requirements, are of critical importance to traders who are simply playing with paper. Since you’re only interested in acquiring a physical gold bar, the fluctuations shouldn’t affect you. Just make sure you have enough money in your account that you’re not inadvertently sold out.
Then, on the settlement date, your account will be charged for an amount equal to the settlement price multiplied by the exact weight of the particular bar that’s been assigned to you (a “100-oz.” COMEX good delivery bar can actually vary in weight between 95 and 105 ounces). This is when everything gets squared up.
Taking Delivery
If you keep your position open until delivery, the COMEX will hand your broker a warehouse receipt with the details of your specific bar (hallmark, serial number, and weight to one-thousandth of an ounce). The broker can either hold the receipt in your account or mail it to you. (If you take possession of a warehouse receipt, be aware that it’s an irreplaceable bearer instrument. Don’t lose it!)
Your bar will be sitting in the vault of one of the four designated COMEX depositories, all of which are in or near New York City. If you want to bring the bar home, you’ll have to pick it up at the depository or arrange for third-party delivery. If you intend to hold it until gold reaches a certain price and then sell, your best bet is probably to leave the bar in the COMEX depository and leave the receipt with your broker.
We called Scotia Mocatta, which operates one of the COMEX-designated vaults, and were quoted a storage fee of $15/month per bar. If, however, you want the bar in your hands, you’ll have to pay a $150 delivery fee to get the bar released by the depository. Then you’re responsible for retrieving it, which could be a problem.
Unless you want to put the bar in your suitcase and fly home with it, you’ll have to have it delivered. You can’t ship a gold bar via the U.S. mail, FedEx or UPS; you have to hire an armored car service, such as Brinks.
Shipping costs depend, of course, on how far your gold will travel from the City. VIA MAT International (USA) gave us a ballpark figure of $150 to transport one gold bar from New York to California – a heckuva lot cheaper than airfare, and you get to keep your shoes on.
One final note: armored carriers won’t deliver to a house address. You would have to arrange to receive the shipment at a business, which could be an additional worry if neither you nor a trusted friend owns one. Or you could have it delivered to your bank and slide it into a safe deposit box, provided you don’t mind the bank’s employees knowing what you’re doing.
Will You Need an Assay?
If you leave your gold bar in the COMEX depository, it will be easier to sell. You just go through the above procedure in reverse, going short a contract instead of buying one.
However, if you take physical delivery and later wish to sell through the COMEX (or through a private dealer), you will need to have the bar reassayed. A prospective buyer of such a costly item must be certain that it was genuine to begin with and hasn’t been tampered with while in your possession.
The COMEX provides a list of approved assayers on its website. The one we contacted, Ledoux and Co., quoted us $300 per bar for the service.
And that’s all you need to know to get gold wholesale.
When it comes to anything gold, the BIG GOLD experts have the inside scoop on it… an invaluable service, especially in times like these, with gold serving as a crisis hedge. For just 22 cents a day, you’ll learn everything you need to know about gold, the physical metal, as well as the safest stocks of major gold producers, royalty companies, the best gold ETFs, and much more. Learn more about our 3-month, risk-free trial subscription with 100% money-back guarantee.
Going Long
Finding Elusive Gold in This Market
By the editors of BIG GOLD, Casey Research
At this writing, gold is still 15% off its peak, at least in U.S. dollars. Yet at the same time, the metal is cruising at or near all-time highs against a host of other currencies, including the Swiss franc, British pound, Canadian dollar, Australian dollar, and Indian rupee.
That currency disparity means buyers around the world are prepared to pay much more for gold, relative to their own currencies, than is reflected in the New York spot market, which prices gold in dollars.
Demand for gold coins in particular is running so high that there were severe shortages in 2008. Dealers’ shelves emptied, mints either rationed their output or stopped producing entirely, and premiums over the spot price rose dramatically. All of which implies that the metal’s bull market is far from over. Yet taking advantage of the trend becomes problematic if you can’t get what you want.
Sure, you can buy as much paper gold as you like, through the SPDR Gold Trust ETF (NYSE.GLD), which is bullion-backed and will be sensitive to an advancing price. But what if you simply want physical metal and want it in quantity – say, a hundred ounces?
Well, you could buy 100 coins. If you could find them. Or you could buy a single 100-ounce bar.
Take heed: if you are buying in 100-ounce, 400-ounce or 1-kilo sizes, you want a good delivery bar, one that carries a hallmark from a recognized refiner. And buy only from a source you have a good reason to trust. The gold trade has been replete with con artists since ancient metalworkers began hammering on the shiny stuff and found they could increase their profit margins by adding in a little silver, copper, or even lead. With 100 ounces going for upwards of US$85,000, caution is in order.
Once you’re ready to commit to a 100-ounce buy, the next logical question is: Is there any way to avoid the big premiums and acquire what you want at spot? The answer, fortunately, is yes. You can elect to play with the big boys and get your 100-ounce bar on the COMEX, where the bullion banks and giant funds do their trading.
Playin’ the COMEX
The COMEX is primarily a paper market, with speculators going long or short on contracts for future delivery. 99.9% of those contracts get settled in cash and are closed out before the delivery date arrives, with participants pocketing profits or taking their lumps. Very little physical gold changes hands through COMEX trading.
But some does, because every participant who goes long has the right to pay in full and insist on actual delivery. And every participant who goes short has the right to deliver the goods and get paid. Those trades represent the other 0.1% of the contracts.
The Casey COMEX User's Manual
First, get a little more acquainted with the topic. Log on to the COMEX gold section at (http://www.nymex.com/gol_pre_agree.aspx) and have a look around.
Pay close attention to the Current Session Overview. It gives you a real-time picture of trading, with the various delivery months displayed, along with the price per ounce being bid. (With gold, the months further out nearly always have higher prices, a situation known in the commodities trade as contango. The opposite, when near-term prices exceed those down the road, is called backwardation, and for gold it’s extremely rare.)
If you decide to proceed with the idea of buying on the COMEX, you have to open an account with a futures broker. To do that, you’ll need to answer some questions about your financial status and then make a deposit. We spoke with an agent at Lind-Waldock in Chicago, one of the oldest and most active futures brokers, to learn about their requirements.
First, at Lind-Waldock, you must have a yearly income and net worth of at least $25,000 and $50,000, respectively; anyone who can afford a hundred ounces of gold will surely qualify. Then you must deposit a minimum of $5,000 with the broker. Finally, you choose from among several levels of service, which affects the amount of commission you’ll pay.
Once the futures account is in place, you’re set to go.
Let’s say the bid price three months out is $850/oz., and you like gold at that price. You call your broker and place an order at $850, for one gold contract (which represents a single 100-oz. bar of good delivery metal). As with bidding on a stock, you may not get what you want if the market is heading up and runs away from your price. The alternative is to place a market order, trusting that it gets filled at close to your target price, but that can be risky in a fast-moving market.
Let's assume you get your contract and lock up what you’ll pay for the gold, most of which will be due at expiration. What next? There are two possibilities. You can just deposit the full cost of the gold, sit back, and enjoy the wait for your prize. Or you can deposit the minimum amount required (the minimum “margin”), which varies and is set at the exchange’s discretion. For a single gold contract at the moment, it’s $5,800, or about 7% of the contract’s value.
That’s how the speculators play the market, putting up as little front money as possible. For you, that won’t be a problem if the price of gold rises, since the broker will be crediting a matching amount of cash to your account on a daily basis. But you have to be careful if the price of gold falls, because the broker will then charge your account for a matching amount of money day by day – and to keep the balance from going below the minimum margin requirement, he’ll send you a margin call, insisting that you deposit more cash. If you fail to do so, the broker will enter a sale order for you, and you’ll be out of the market.
Changes in the value of a futures contract, with their attendant shifting cash requirements, are of critical importance to traders who are simply playing with paper. Since you’re only interested in acquiring a physical gold bar, the fluctuations shouldn’t affect you. Just make sure you have enough money in your account that you’re not inadvertently sold out.
Then, on the settlement date, your account will be charged for an amount equal to the settlement price multiplied by the exact weight of the particular bar that’s been assigned to you (a “100-oz.” COMEX good delivery bar can actually vary in weight between 95 and 105 ounces). This is when everything gets squared up.
Taking Delivery
If you keep your position open until delivery, the COMEX will hand your broker a warehouse receipt with the details of your specific bar (hallmark, serial number, and weight to one-thousandth of an ounce). The broker can either hold the receipt in your account or mail it to you. (If you take possession of a warehouse receipt, be aware that it’s an irreplaceable bearer instrument. Don’t lose it!)
Your bar will be sitting in the vault of one of the four designated COMEX depositories, all of which are in or near New York City. If you want to bring the bar home, you’ll have to pick it up at the depository or arrange for third-party delivery. If you intend to hold it until gold reaches a certain price and then sell, your best bet is probably to leave the bar in the COMEX depository and leave the receipt with your broker.
We called Scotia Mocatta, which operates one of the COMEX-designated vaults, and were quoted a storage fee of $15/month per bar. If, however, you want the bar in your hands, you’ll have to pay a $150 delivery fee to get the bar released by the depository. Then you’re responsible for retrieving it, which could be a problem.
Unless you want to put the bar in your suitcase and fly home with it, you’ll have to have it delivered. You can’t ship a gold bar via the U.S. mail, FedEx or UPS; you have to hire an armored car service, such as Brinks.
Shipping costs depend, of course, on how far your gold will travel from the City. VIA MAT International (USA) gave us a ballpark figure of $150 to transport one gold bar from New York to California – a heckuva lot cheaper than airfare, and you get to keep your shoes on.
One final note: armored carriers won’t deliver to a house address. You would have to arrange to receive the shipment at a business, which could be an additional worry if neither you nor a trusted friend owns one. Or you could have it delivered to your bank and slide it into a safe deposit box, provided you don’t mind the bank’s employees knowing what you’re doing.
Will You Need an Assay?
If you leave your gold bar in the COMEX depository, it will be easier to sell. You just go through the above procedure in reverse, going short a contract instead of buying one.
However, if you take physical delivery and later wish to sell through the COMEX (or through a private dealer), you will need to have the bar reassayed. A prospective buyer of such a costly item must be certain that it was genuine to begin with and hasn’t been tampered with while in your possession.
The COMEX provides a list of approved assayers on its website. The one we contacted, Ledoux and Co., quoted us $300 per bar for the service.
And that’s all you need to know to get gold wholesale.
When it comes to anything gold, the BIG GOLD experts have the inside scoop on it… an invaluable service, especially in times like these, with gold serving as a crisis hedge. For just 22 cents a day, you’ll learn everything you need to know about gold, the physical metal, as well as the safest stocks of major gold producers, royalty companies, the best gold ETFs, and much more. Learn more about our 3-month, risk-free trial subscription with 100% money-back guarantee.
Wednesday, December 03, 2008
Gold Buyers Smash Records
By Doug Hornig, co-editor of BIG GOLD, from Casey Research
The spot price of gold has fallen more than 20% from its all-time high, reached in March of 2008. But if you think that means demand has declined, think again.
Gold demand has in fact exploded, and not just here and there. Everywhere. Around the world, customers have been queuing up to strip coin shops’ shelves bare. Mints have been running 24/7 and still have been forced to ration coin shipments to their dealers. ETF vaults are bulging.
Now, the World Gold Council has confirmed the trend with hard numbers for the third quarter of this year. In a page-and-a-half press release summarizing 3Q2008 activity, the WGC had to use the word “record” ten times. Some highlights:
- Dollar demand for gold in Q3 was a record US$32 billion, 45% higher than the previous record, set in 2Q2008.
- Identifiable investment demand, which incorporates demand for gold through exchange-traded funds (ETFs), bars and coins, rose to $10.7 billion (12.3 million ounces), double year-earlier levels.
- Retail investment demand rose 121% to 7.5 million ounces, with strong bar and coin buying in the Swiss, German, and U.S. markets. Europe as a whole saw an all-time record 1.64 million ounces of bar and coin buying. France became a net investor in gold for the first time since the early 1980s.
- Gold ETFs posted a record quarterly inflow of 4.8 million ounces in Q3. After the collapse of Lehman Brothers in late September, ETF inflows shot higher by an unprecedented 3.6 million ounces in only five days.
- Demand for gold jewelry hit a record $18 billion. Leading the way was India, which witnessed a rise of 65% in dollar value (1.3 million ounces) compared with 3Q2007. The Middle East, Indonesia, and China all experienced increases of more than 40% in value or 10% in weight, year over year.
At the same time that demand is setting records, supply has been unable to keep pace, falling 9.7% from year-earlier levels, the WGC reported. The drop was largely due to inaction on the part of central banks, which have increasingly shut their vault doors.
Heavy demand, declining supply… small wonder that gold prices have remained near record highs in most of the world’s currencies; that dealers have been marking up coins by 10% or even 15% (when they can get them); and that one-ounce coins still fetch bids close to $1,000 on eBay.
When will the spot price in U.S. dollars, which is set by the futures market, catch up? No one knows. But it will.
The world’s hunger for gold will only grow into a future awash in fiat currency. Gold is the ultimate and, at day’s end, the only safe haven from the kind of currency destruction that is being visited upon the dollar, the euro, even the renminbi, as governments everywhere desperately try to stave off a deflationary depression the only way they know how: by turning on the printing press.
We are in a period of intense monetary inflation. It will be followed, inevitably, by a long period of price inflation. People will be desperate to preserve the buying power of their dollars, euros, etc., and they will turn to the one thing capable of doing just that. Gold.
As gold rises, it will lift the shares of selected mining companies with it. The ones that prosper the most will be those that have positioned themselves to survive the credit crisis -- by stockpiling cash, keeping production costs down, and locking up borrowed money on favorable terms.
Companies that have failed to do this will go under, unable to get credit in a frozen market. That will both diminish competition and further curb supply, and those that properly planned ahead will rake in enormous profits as gold goes through the roof. Or more likely, as Casey Research founder Doug Casey puts it, gold “heads to the moon.”
But which are the companies poised to profit the most? The ones we cover in our monthly newsletter for conservative investors, BIG GOLD.
We are dedicated to bringing you the information that will allow you profitably to pick your way through the present economic minefield. We search the world of producing gold miners, to find the best of the best. We pinpoint the investments that will not only hold on through a market downturn, but will rebound spectacularly as the commodities market recovers, which it must.
In addition, we bring subscribers the best ways to invest in physical gold, including where to find coins and bars at affordable prices in times of extreme scarcity -- like right now, when mints are not minting, most dealers are out of stock, and those still taking orders are charging exorbitant premiums.
While we specialize in producing companies, we also cover such alternative gold investments as ETFs, mutual funds, royalty companies, and closed-end funds. We strive to find what’s best for you. And we answer your specific questions, each month in our BIG GOLD Responds section.
The elaborate world financial structure that has been erected over the past two decades created a humongous bubble that has now popped. What will come in the aftermath of this cataclysm cannot be foreseen, but it will be different. One thing is for certain, though, gold has been money, in all times and places, for thousands of years. The people of the world are already returning to it as the sole store of value, and that’s a trend that will accelerate in the coming years. You can count on it.
Learn how to make the trend your friend with a 3-month, no-risk subscription to BIG GOLD… and as an added bonus, receive our hot-off-the-press special report “The Crisis in Pictures” absolutely FREE of charge. Click here to continue…
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