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Panning Gold


(April 30, 2014) When there's news about gold, the mainstream media seemingly always "pan" it, giving it a negative slant.  Such was the case as the Financial Times reported on the release of the respected Thompson Reuters GFMS Gold Survey 2013 Update 1, which forecast that the price of gold would average $1,225 in 2014, ". . . with a distinct possibility of a slump towards $1,100."

To make the gold situation look even more ominous, FT also noted that Goldman Sachs and Credit Suisse, two noted players in the gold market, expect a "downward drift" in prices in the coming months.

The GFMS report also noted that ". . . seasonal strengthening physical demand (later this year) could then propel prices towards $1,400 again."  Then comes another caveat: Without strong Investor demand, ". . . the price is expected to resume a downward course in 2015."

Even the title of the FT April 19 article, Bumpy ride in store for gold with price forecast to fall 15%, was negative.

FT used the first three-fourths of the article to pan gold, then in the last quarter acknowledged some really positive news for gold with next to no elucidation.  For example, the article revealed that the demand for physical gold in 2013 rose to a record 4,957 tons and that Swiss refineries were at maximum capacity to meet the demand for the smaller bars that were shipped to Asia.  There was no mention that annual gold mine production is less than 3,000 tons, which would have countered the negative tone of the article.

To further paint the gold picture bleak, the article noted a World Gold Council report that China's demand for gold would slow from 2013's record off-take.  That China's demand would slow in 2014 should come as no surprise because the demand in 2013 was HUGE.

To give a more accurate assessment of the China's relationship to gold, FT could have noted that although the world's largest gold producer (as well as consumer) China prohibits the exportation of gold.  Seems the Chinese have a greater understanding of the importance gold than do Western nations, many of which dumped gold over the past ten years.

The most inglorious and famous sale came with the Bank of England's dumping half of the Bank's gold reserves at prices below $300.  Other Western gold sellers in recent years include Switzerland, Netherlands, Austria and Germany.  The West sells and the East buys.  In the mid-1970s, the US Treasury, along with the International Monetary Fund--which the Treasury undoubtedly coerced, sold gold in attempts to keep the price from rising.

Most physical gold buyers couldn't care less about gold's supply-demand fundamentals.  Investors buy gold (and silver) because they are concerned about the financial affairs not only in the United States but around the world.  Without trying to name all the problems, let's take a look at a few.

First, but not necessarily the most important as it really is only one of many problems, the United States is currently operating without a debt ceiling, which means that it can spend (and borrow) as much as it wants.  Under current law, it can do this until the end of March 2015.  US total "official debt" stands at $17.53 trillion.

I note "official debt" because what the Treasury has borrowed on behalf of the DC's profligate spenders is only the tip of the iceberg.  "Off-balance sheet" US liabilities dwarf the official $17.53 trillion.  Estimates of US government liabilities range from $70 trillion to in excess of $200 trillion.

A good example of how off-balance sheet liabilities come about is my friend Sam, who in October will retire from the Air Force.  When he retires, the government will owe him a sizeable pension, but at present the government does not recognize his pension liability.  It will be recognized only when Sam retires.

Meanwhile, last year the Treasury spent approximately 26% of available tax revenue just to pay interest.  In the past, such numbers have meant the end of empires, but today's it's a different story.  Empires of old (but not too old as for the British Empire) had to pay their interest in gold.  Today the Treasury, working with the Fed, pays debt with freshly created dollars, which means inflation and further debasement of the dollar.

The US trade with foreign nations has now been in deficit literally for generations.  In February, it was $42.3 billion, the largest monthly deficit in five years.  Yet no one paid much attention because again there is an abundance of freshly created dollars with which to pay the deficit.  Someday the dollars shipped abroad because of our trade deficit (and foreign aid) will come home and then the US will suffer massive price inflation.

Now for a quick and brief of problems other than in the United States.

In Japan, "Abenomics" has sunk the yen in an effort to fillip exports.  When Abenomics was implemented 18 months ago, it took only 78 yen to buy a dollar; now it takes 102.  And, Japan, which historically ran huge trade surpluses (with which it accumulated $1.2 trillion in US Treasuries), now is running trade deficits, but its economy still can't get moving.

Nearly all the China talk is about its economy, which is expected to shrink this year to a growth rate of 7.5%.   In past years, China has seen 9% to 10% growth.  But what's not much talked about is China's shaky banking system.  Many of the assets carried on some of China's largest banks' balance sheets are valued at cost while their real values on the market are only a fraction of their carried costs.  Someday the Bank of China (China's central bank) will deal with the problem the same way that the Fed dealt with the 2008 crisis: by printing money.

In Europe, economic activity varies from country to country, but overall it's failing to reach expectations set years ago.  In early April, European Central Bank (ECB) president Mario Draghi signaled that the ECB was prepared to deploy quantitative easing (QE) if necessary to guard against deflation.  QE, of course, is a central bank's buying of bonds, mostly government bonds but not always as in the Fed’s QE that buys mortgage debt along with US treasuries. Christine Lagarde, managing director of the IMF, wants the ECB to begin bond purchases immediately.

The countries and regions discussed above comprise about 65 percent of the world's Gross Domestic Product, and all of them are facing problems that look likely to cause more money creation, which will lead to serious price inflation.  In the United States, the European Union, and Japan, the stated goal is 2 percent inflation.  When that goal is reached, will the politicians and bankers have the guts to stop printing?  Or, will they rationalize that a little inflation helps more people that it hurts and continue to print.  After all, if a nation can endure 2 percent inflation, it can endure 3 percent.  If it can endure 3 percent, it can endure 4 percent.  Thus still higher rates of inflation will be justified.

As the rate of inflation rises, the public will come to expect still higher rates and will plan and spend accordingly.  This is a climate in which gold and silver should do quite well.

Meanwhile, expect the establishment media to continue to attack gold.  By doing so, they hope to keep the price down—because that’s what the establishment wants.  The media have panned gold since gold and silver started on their bull runs now nearly fifteen years ago.  Still the metals put in stellar performances.

As no market goes straight up, gold and silver now are consolidating after natural corrections, which define the end of the first leg of a bull market and the beginning of the second leg.  Typically, bull markets have three "legs."  This precious metals bull market has a long way to go despite the media's panning it.


-Bill Haynes, April 30, 2014



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