Until recently, gold was rising mainly as the U.S. dollar fell. Since June 2005, however, gold has been decoupling from the dollar (as have many foreign currencies) and is now rising in all major currencies independently of the dollar.
This landmark change, reflected in the foreign currency charts below, signals a true international bull market and opens the door to much higher gold prices. Factor in such bullish fundamentals as record-high U.S. trade and budget deficits, expensive oil, ongoing geopolitical instability, and a weaker dollar, and today’s momentous bull market shows the potential to run for years to come!
Tuesday, August 4, 2009
The dollar-gold-inflation relationship
While the recent rash of government spending hasn't propelled gold prices to new highs, it has contributed to a decline in US dollar.
Having reached a high of 89.70 less than two months after President Obama took office, the dollar index has since pulled back to around the 80.00 level. It could easily be lower, but because it's measured against a basket of other currencies, the price is relative.
For example, the euro makes up about 60% of the dollar index weighting, since there are 16 nations using Europe's single currency. And because Europe is also battling fiscal problems, in addition to Japan and Britain (whose currencies are also weighed against the dollar), the greenback has held its ground.
Most of the time, a weaker dollar will cause gold prices to rise, while a stronger dollar usually sees gold decline.
Add in the prospect of inflation (or hyper-inflation) at some point and the scene is set for gold to potentially make new, all-time highs.
Except we're not even close to that point yet. Inflation is nowhere to be found - as evidenced by the Consumer Price Index falling by 1.3% in the 12 months through May. That was the largest drop in 50 years.
So how do we play gold in the short-term?
Don't blindly follow the crowd into gold
The main reason why the gold market concerns me at the moment is that despite almost everyone being bullish, the metal hasn't been able to set new highs.
The long side is crowded with bulls, just like the technology sector was back in 1999. And we all know how that turned out.
That said, the gold market is much different than the tech sector. I believe every investor should have some gold or another precious metal in his or her portfolio… but there's a better way to do it than by simply buying it outright at the moment.
How to make savvy investments in gold
Since the Obama administration took office in January, we've seen hundreds of billions pumped into the economy and the US budget deficit now forecast to top the $1trn mark in the coming years.
Many believe it's only a matter of time before we also see much higher inflation - perhaps even hyper-inflation.
That prospect has kept the gold bugs banging the drum to buy the metal, with the television and radio cluttered with ads that tout the benefit of doing so.
Last week, Lou Basenese noted the numerous reasons why the price of gold should be moving higher - but countered with the reasons why the price has continued to languish around $935.
Many believe it's only a matter of time before we also see much higher inflation - perhaps even hyper-inflation.
That prospect has kept the gold bugs banging the drum to buy the metal, with the television and radio cluttered with ads that tout the benefit of doing so.
Last week, Lou Basenese noted the numerous reasons why the price of gold should be moving higher - but countered with the reasons why the price has continued to languish around $935.
The Gold Price Has Now Broken Above $954-$955 Resistance
Gold Price Close Today : 956.60
Change: 2.90 or 0.3%
Silver Price Close Today : 14.245
Change: 31.2 cents or 2.2%
Platinum Price Close Today: 1,238.40
Change: 24.00 or 2.0%
Palladium Price Close Today: 273.00
Change: 8.00 or 3.0%
Gold Silver Ratio Today: 67.15
Change: -1.296 or -1.9%
Dow Industrial: 9,286.56
Change: 114.95 or 1.3%
US Dollar Index: 77.59
Change: -0.56 or -0.7%
The GOLD PRICE has now broken above $954-$955 resistance, which now becomes support. Gold has pointed its nose at $980 this week, unless it closes below $954.
The SILVER PRICE mirrored gold's performance today. It traded above $14.40 from 8:30 to 12:30 EDT, then -- surprise, surprise -- it fell at 12:30 to close up only 31.2 cents, fully 20 cents lower than it had been trading all day. It settled back to $14.25 - $14.30.
If, as I suspect, $14.25 becomes the new floor of support for silver, then silver has completed an upside-down head and shoulders bottoming formation. Above silver, $16.00 stands like US$1,000 above gold. Silver will move strongly higher this week.
Today the treacherous US dollar proved that last week's rise was only a sucker rally. The US DOLLAR INDEX answered all the rest of our questions today by dropping through 78.33 support to close down 56 basis points at 77.589. That lies below the 77.69 intraday low in December 2008, pointing to a rapid drop to 75.89, the Sept. 2008 intraday low. A drop through 75.89 will carry to 74 support, or, at the worst, to the May 2008 all-time low at 70.70. What a way to run a currency!
Bernanke, Paulson, and Geithner ought to be issued mops and buckets and put to work doing a job suited to their peculiar talents.
STOCKS today rose sharply. The Dow climbed 114.95 to close at 9,286.56, and the S&P500 rose 15.15 to close above one thousand at 1,002.63. Dow will no doubt reach 9,700 on this rally. All sorts of gurus and hungry stock brokers will be crowing this up as a new bull market. Listen not, neither harken to their empty blandishments! Sell stocks and roll the proceeds into silver and gold. This really is your last chance.
It arrests my attention that the Dow in Gold Dollars (DiG$) fell today, in spite of a 115 point rise in stocks. More, the DiG$ cannot pierce G$202 (9.772 oz). Face is, stocks are struggling to hold its own against gold -- and losing.
From 8:30 a.m. to nearly 12:30 p.m. Eastern time, gold stayed above $960. Then it dipped abruptly, suddenly, deeply, for the Comex close, and bounced back over $960. About 1:30 p.m. it fell to the $956 - $958 range. Now I'm not saying that was manipulated, but it certainly looked funny, and shows how little it's worth to watch the Comex close alone. Besides, even if the Nice Government Men didn't meddle in gold (and we know they do) the black shirts who trade on the Comex floor are going to help their own, and after a strong up day let it trade down enough to let their caught-short buddies out with a little skin left.
In any event, a Comex close that shows gold up only $2.90, when most of the day it traded up six or seven dollars, leaves a false impression of the day, and of gold's strength. They're cooking the books.
Change: 2.90 or 0.3%
Silver Price Close Today : 14.245
Change: 31.2 cents or 2.2%
Platinum Price Close Today: 1,238.40
Change: 24.00 or 2.0%
Palladium Price Close Today: 273.00
Change: 8.00 or 3.0%
Gold Silver Ratio Today: 67.15
Change: -1.296 or -1.9%
Dow Industrial: 9,286.56
Change: 114.95 or 1.3%
US Dollar Index: 77.59
Change: -0.56 or -0.7%
The GOLD PRICE has now broken above $954-$955 resistance, which now becomes support. Gold has pointed its nose at $980 this week, unless it closes below $954.
The SILVER PRICE mirrored gold's performance today. It traded above $14.40 from 8:30 to 12:30 EDT, then -- surprise, surprise -- it fell at 12:30 to close up only 31.2 cents, fully 20 cents lower than it had been trading all day. It settled back to $14.25 - $14.30.
If, as I suspect, $14.25 becomes the new floor of support for silver, then silver has completed an upside-down head and shoulders bottoming formation. Above silver, $16.00 stands like US$1,000 above gold. Silver will move strongly higher this week.
Today the treacherous US dollar proved that last week's rise was only a sucker rally. The US DOLLAR INDEX answered all the rest of our questions today by dropping through 78.33 support to close down 56 basis points at 77.589. That lies below the 77.69 intraday low in December 2008, pointing to a rapid drop to 75.89, the Sept. 2008 intraday low. A drop through 75.89 will carry to 74 support, or, at the worst, to the May 2008 all-time low at 70.70. What a way to run a currency!
Bernanke, Paulson, and Geithner ought to be issued mops and buckets and put to work doing a job suited to their peculiar talents.
STOCKS today rose sharply. The Dow climbed 114.95 to close at 9,286.56, and the S&P500 rose 15.15 to close above one thousand at 1,002.63. Dow will no doubt reach 9,700 on this rally. All sorts of gurus and hungry stock brokers will be crowing this up as a new bull market. Listen not, neither harken to their empty blandishments! Sell stocks and roll the proceeds into silver and gold. This really is your last chance.
It arrests my attention that the Dow in Gold Dollars (DiG$) fell today, in spite of a 115 point rise in stocks. More, the DiG$ cannot pierce G$202 (9.772 oz). Face is, stocks are struggling to hold its own against gold -- and losing.
From 8:30 a.m. to nearly 12:30 p.m. Eastern time, gold stayed above $960. Then it dipped abruptly, suddenly, deeply, for the Comex close, and bounced back over $960. About 1:30 p.m. it fell to the $956 - $958 range. Now I'm not saying that was manipulated, but it certainly looked funny, and shows how little it's worth to watch the Comex close alone. Besides, even if the Nice Government Men didn't meddle in gold (and we know they do) the black shirts who trade on the Comex floor are going to help their own, and after a strong up day let it trade down enough to let their caught-short buddies out with a little skin left.
In any event, a Comex close that shows gold up only $2.90, when most of the day it traded up six or seven dollars, leaves a false impression of the day, and of gold's strength. They're cooking the books.
The real price of gold
One thousand dollars doesn't buy what it used to – not for non-US investors, at least.
Back in March 2008, when the gold price first broke $1,000 an ounce, the euro equivalent peaked just shy of €660. Sterling investors here in the UK saw the price touch £515 an ounce.
Yes, both of those figures – like the USD gold price – were then new record highs. But come the next test of $1,000 per ounce, four months ago in February 2009, the euro price reached 20% higher to touch €795. The UK value-of-gold peaked 35% above that previous $1,000-equivalent, up at £700 per ounce.
Today, however, and with analysts watching for less than a 2% move in gold before it re-tests that $1,000 mark for the third time, Eurozone and British investors are well off the mark. February's all-time peaks in euros and sterling stand almost 15% higher from here.
All of which shows what, exactly? First, anti-inflation and crisis insurance just got cheaper for European savers. So second, the $1,000 mark may not prove quite the hurdle it did in March '08 and again in Feb. this year.
But third, and most crucially, the volatile value of US dollars – the no.1 reserve currency in central-bank vaults and foreign-trade agreements worldwide – is only growing more volatile still as 2009 unfolds.
Quite what this volatility means for the dollar – now twice as volatile since March 2008 as its 35-year average – who can guess?
But to strip out the noise of dollar up, dollar down... and dollar both up and down at once...the chart above may offer some help.
Updating BullionVault's number-crunching from Gold vs. the World (July 2008), it shows the daily gold price against each of the world's top ten currencies, averaged by weight of the issuing economy (GDP) and indexed back to the start of January 2000.
As you can see, the slide in euro and sterling gold prices since the last record peak hasn't yet made gold cheaper – in terms of all major world currencies – than it was at the first $1,000 breach. Nor has this decade's bull market to date mirrored just the decline of the dollar, even if the last five weeks' rally has clearly been built on that trend.
The world's money en masse has shed nearly two-thirds of its value in gold since the start of 2000. And we guess here at BullionVault that strong, positive real rates of interest – after inflation – would be needed to reverse that loss of value in cash and cash-savings worldwide.
Back in March 2008, when the gold price first broke $1,000 an ounce, the euro equivalent peaked just shy of €660. Sterling investors here in the UK saw the price touch £515 an ounce.
Yes, both of those figures – like the USD gold price – were then new record highs. But come the next test of $1,000 per ounce, four months ago in February 2009, the euro price reached 20% higher to touch €795. The UK value-of-gold peaked 35% above that previous $1,000-equivalent, up at £700 per ounce.
Today, however, and with analysts watching for less than a 2% move in gold before it re-tests that $1,000 mark for the third time, Eurozone and British investors are well off the mark. February's all-time peaks in euros and sterling stand almost 15% higher from here.
All of which shows what, exactly? First, anti-inflation and crisis insurance just got cheaper for European savers. So second, the $1,000 mark may not prove quite the hurdle it did in March '08 and again in Feb. this year.
But third, and most crucially, the volatile value of US dollars – the no.1 reserve currency in central-bank vaults and foreign-trade agreements worldwide – is only growing more volatile still as 2009 unfolds.
Quite what this volatility means for the dollar – now twice as volatile since March 2008 as its 35-year average – who can guess?
But to strip out the noise of dollar up, dollar down... and dollar both up and down at once...the chart above may offer some help.
Updating BullionVault's number-crunching from Gold vs. the World (July 2008), it shows the daily gold price against each of the world's top ten currencies, averaged by weight of the issuing economy (GDP) and indexed back to the start of January 2000.
As you can see, the slide in euro and sterling gold prices since the last record peak hasn't yet made gold cheaper – in terms of all major world currencies – than it was at the first $1,000 breach. Nor has this decade's bull market to date mirrored just the decline of the dollar, even if the last five weeks' rally has clearly been built on that trend.
The world's money en masse has shed nearly two-thirds of its value in gold since the start of 2000. And we guess here at BullionVault that strong, positive real rates of interest – after inflation – would be needed to reverse that loss of value in cash and cash-savings worldwide.
Monday, July 20, 2009
How Is Gold Mined?
The definition of gold mining is the removal of gold from the
Earth, done through various techniques. There are three main types of gold
extraction: placer mining/sediment mining, hard rock mining, and byproduct gold
mining. Placer mining/sediment mining is the extraction of gold from the ground
with little or no excavation. Most other metals are not mined using placer
mining techniques, but since gold is so valuable even in small quantities,
placer mining has been used to obtain it, particularly during the California
gold rush. It is still used to a limited extent today.
The main technique of placer mining is gold panning. A pan is
filled with sand and pebbles that may include small pieces of gold. You add some
water to the pan and shake it, and since gold is a very dense mineral it quickly
settles at the bottom of the pan. This is done at placer deposits, stream beds
where gold settles. Gold panning might have been viable for the independent
miner during the gold rush, but is not viable for large gold deposits unless
done in a place where labor costs are extremely low. An aid to gold panning is
the use of a metal detector, which the miner can use to locate gold below the
surface.
Another placer mining technique is sluicing. A sluice box is a box placed in the
water stream that collects gold particles as water washes through it.
The next major type of gold mining is hard rock mining. This
is what we most typically think of as "mining", with pits or tunnels dug into
the earth to extract gold ore from the hard rock. The largest amount of new gold
supplies come from hard rock mining. Then there is byproduct gold mining. This
means that the main metal being mined is not gold, but that some gold is
extracted along with the main metal. For example, copper mining often results in
the extraction of some gold. (It should be noted that silver is largely a
byproduct of copper mining as well).
Once the miners have extracted the gold ore, how do they
extract the gold from the ore? The most common method is gold cyanidation. The
gold-bearing ore is finely ground, and then sodium cyanide solution is added to
it. The gold and cyanide form a solution that can be separated from the rock.
Then zinc is added to that extracted solution, which separates the gold from the
cyanide. The zinc is then removed from the gold using sulfuric acid, leaving a
gold sludge that is then ready to be smelted and refined. That’s quite a long
process just to obtain gold. It is precisely because of gold’s undying prestige
and status as true money and preserver of wealth that we go to such lengths to
obtain the precious yellow metal.
Gold as Currency
“Speaking of the currency that can’t be printed, gold saw a potentially earth-shaking pronouncement yesterday at a conference in London. Dennis Gartman noted the following quote from Juan Basco, who heads up market operations at the Central Bank of Argentina: ‘We don’t rule out increasing our gold holdings in the future, which would depend on the economic environment. Gold is recovering its role as an asset protecting the portfolio against inflation and international financial crises.’
According to Dennis: ‘Mr. Basco went on to say that the bank had been selling gold rather aggressively from 1997 onward, for it had gotten far-better returns on its assets elsewhere . . . until now. In 1991, he said that gold was 19% of the bank’s total reserves. That had dwindled to only 3% in recent months, and that the bank is now in the process of reversing that trend. What was even more stunning was the added statement that other central banks ‘in the region’ were looking at doing the same thing.’
Wanting to know more, I scanned the Financial Times, where I found the following paraphrase of a comment by Mr. Basco: ‘He considers gold a liquid asset, which could be bought and sold easily and help meet any international debt repayments.’ In other words, ladies and gentlemen, gold is in fact a currency, and one possessing features superior to the paper variety (even if it’s a pain to lug around or try to make change with).
Thus, the thought process whereby central banks decide to become buyers of gold, not sellers of gold, is now under way. Mr. Basco and his friends cannot be the only group of people to have undergone this transformation. Prospectively, I would expect to see more central banks buying gold and fewer selling gold - exactly the recipe for dramatically higher prices over time.”
This could be the most important investment concept for the next couple of years. Gold is beginning to return in the thinking of central bankers as an asset that should be bought rather than sold.
There are other reasons why things continue look up for gold. Katrina’s cost to the US government may exceed the wars in Afghanistan and Iraq combined. There is no fiscal discipline on the part of any political party, so the costs will be from debt. As Alan Abelson puts it in this weeks Barron’s column, “The nation’s budget deficit is a cinch to go from merely staggering to positively stupendous.”
Consider the supply/demand characteristics of gold. The supply of gold and gold mining stocks is low compared to other assets. For example, the market value of every gold mining company in the world is $200 billion. For comparison, the market cap of General Electric is $300 billion.
Most investors are underweighted in gold. How often do you hear pension funds mention their asset allocation to gold? Never - because they do not own any. This is just one source of potential demand. Demand for gold comes from every corner of the globe. One can expect that speculators will begin to rush to gold in the near term, probably before the central banks and pension fund people get in.
In the meantime, in spite of the recent advance, the price of gold is at record lows relative to oil. And gold is not far from historic lows versus the stock market averages.
Fortunes have been made in gold from time to time. I remember as a young Merrill Lynch broker in the 1970’s, we had a customer that would come into our office and buy shares in obscure gold mining companies. This chap was a dapper gentleman who always wore a high-dollar sport coat, a dress hat, and a smile. He would stand at the back of the boardroom and rummage through the constantly humming paper newswire. Occasionally he would walk over to his broker and give him an order to buy a few thou sand shares of some obscure South African gold mining stock selling for pennies a share. This went on for months.
This guy was not my client, so I do not know how much money he made when the gold boom hit. But I am sure it was millions, because all those little gold stocks went up in value by enormous percentages.
There is tremendous leverage in small junior gold mining stocks. When the price of gold goes up, gold reserves that were not economic to mine become, well, a veritable gold mine.
It could happen again. A major change in the perception of gold by investors, traders, and central bankers may be in the cards. Don’t be surprised if we see gold having some days with the yellow metal up $10-20 per ounce.
In the meantime, stay with or add to the gold stocks and bullion on our Special Situations list. The average annualized rate of return on all positions closed from this list is in excess of 100%. I think our gold positions, which have lagged our industrial plays, have the potential to exceed this rate of return for a period of time.
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