Bank Analyst & Commentator Opinions
Last Update : December 27, 2009
Information has been redacted from the articles as they originally appeared and some information has been bolded for
emphasis.
Gold Trends: The Mirage of Wealth
By Chris Vermeulen
Benzinga
December 27, 2009
How did your Dad pay his college tuition with a part-time summer job? Why does it take two breadwinners to support a family these days? What with all the recent fuss about gold?
The answer to these seemingly unrelated questions have a common answer.
Cause and Effect
Governments have a curious tendency to run deficits; and when they do, they have two options.
1) Decrease disbursements...
2) Increase receipts...
3) Monetize the difference...
So what is the effect of money creation?
Inflation....
Gold Trends
This explains why even though we are being paid more, our standard of living is plummeting. Mom and Dad have to work full time to make ends meet. Summer earnings become insufficient to cover tuition and students are forced to take out massive student loans. The benefactors are the politicians who get their hands on the hot-off-the-press cash while it still has full value. By the time the new money gains velocity and consumer prices rise sharply they are long out of office collecting their pension checks.
This vicious cycle has perpetuated itself for decades and is reaching a tipping point in many countries. The United States in particular has raised the stakes with bailouts, stimulus packages and promises to insure virtually every American mortgage and bank account. Of course, tax hikes and spending cuts are not funding these bold initiatives; the monopoly-money maker at the Fed is.
Unless the fundamental laws of economics are magically repelled, inflationary pressures will ultimately engulf deflationary ones. Unfortunately, no nation is immune from the cause and effect nature of economics. Governments who venture away from the principals of sound money and create grotesque amounts of unbacked cash are locking their currency into a long-term downward trajectory.
Hyper inflation has many precedents in modern society and has crippled a myriad of robust economies.
Gold Holds Value
Gold
Gold is a dynamic metal. Aside from being industrially useful, gold has a variety of attributes that naturally lend itself as a medium of exchange. Gold is easily divisible, fungible, has a superb value to weight ratio and never decays or rusts. It is rare, difficult to mine, nearly impossible to counterfeit, and has a magnificent track record of holding its value.
In fact, according to Jeff Clark at Casey Research, in 1935, when an ounce of gold was worth $35, you could buy:
• a top-quality tailored suit for $19.75 – or 0.56 ounces of gold
• a family car for $500 – or 14.3 ounces of gold
• a house for $7,150 – or 204.2 ounces of gold
Today, with an ounce of gold worth north of $1000 an ounce:
• that same top-quality, tailored suit costs $600 – or 0.56 ounces of gold
• the family car now costs $15,000 – or 14.2 ounces of gold
• the house averages $181,100* – or 204.6 ounces of gold*
• *average house price from 2008 / gold at 2008 price of $880/ounce
If your grandfather locked $7,000 USD – the approximate value of an early 20th century home- in a vault when he was young, the state-run printing press would relentlessly dilute the purchasing power of his saved money. 75 years later, you would be hard-pressed to find a decent used car for the same amount. Conversely, if he instead purchased 200 one-ounce gold coins with his $7000 in cash and locked it in the same vault, his hard earned wealth would be remarkably preserved. With proceeds from your grandfathers gold coins you could buy an average American house, just like he could have back in 1935....
In essence, the fuss about gold is really just a reaction to drastic government spending programs...
The prospects of gold look increasingly bullish.
• Gold as a hedge against inflation is becoming more mainstream. It is only a matter of time before inflation rears its ugly head.
• Central banks are expected to be net buyers of gold in 2010 for the first time in decades.
• Gold production is in a state of perpetual decline...
• China is allowing and even encouraging its citizens to buy physical gold....
This all adds up to gold turning the corner in 2010 and cementing its bull-market status...
[ TOP ]
Bank of America/Merrill Lynch
Commodity Strategist
2010 Commodity Outlook
December 9, 2009
...We forecast an average WTI crude oil price of $85/bbl in 2010 and believe oil will break through $100/bbl as we approach 2011... Our $1500/oz target for gold over the next 18 months remains intact...
We expect the Fed and other G10 Central Banks to maintain a very lax monetary policy in 1H10 to fight off deflation. In our view, an important side effect of these policies could be further gold purchases by Emerging Market central banks. In turn, the greatest global fiscal and monetary policy stimuli ever should result in a sharp rise in energy and industrial metals consumption, particularly in Emerging Markets, lending support to spot prices....
6.1 Gold
As we first discussed in our October 13 2008 Metals Strategist, the price of gold can reflect several macro variables at once. This is because gold has been the ultimate store of value over thousands of years. In the last decade, we found that three variables alone could explain fluctuations in the price of gold: risk, currency and commodity prices. In a nutshell, our analysis showed that gold is sometimes a currency, sometimes a commodity and sometimes a store of value...
The three stages of gold price appreciation to $1500/oz
Departing from this analytic framework, we argued back in October 2008 that gold prices would move up to $1500/oz in three steps. The outburst of the credit crisis in August 2007 marked the start of the first stage, with gold rising from $650/oz to about $950/oz. The second stage of gold price appreciation, we argued well over a year ago, would primarily be about USD weakness and lack of confidence in fiat currencies. We argued gold could break through $1200/oz in this second stage and strengthen against all currency crosses. The third and final stage will be driven, in our view, by a strong cyclical recovery in energy and commodity prices.
... we find that USD depreciation and currency risk have been the key contributors to higher gold prices in the last eight months... the weak dollar is pushing gold prices higher in USD, and the increase in global money supply is driving gold prices up in every currency.
Compared to the expansion in the money supply ...
In our view, the massive expansion in money supply observed in 2008 represents a competitive debasement of fiat currencies relative to gold (Chart 66). With the exception of the JPY, broad money in local currency expanded at rates between 8.5% for the EUR and nearly 25% for the TRY, compared to an expansion in the global stock of gold of 1.18%. For the time being, however, the rapid increase in real money has not been accompanied by a broad-based increase in consumer prices as the credit multiplier has remained rather muted in most countries.
...there is just not enough gold to go around
Top holders of currency reserves like China, Russia or India will likely need to increase their exposure to gold (Chart 67) as the value of fiat currency reserve holdings like the USD or the EUR comes into question. The obvious problem with Emerging Market Central Bank (EM CB) diversification is that there is simply not enough gold to go round...
Further USD weakness requires a CNY revaluation
Of course, further dollar weakness may be required to drive gold prices higher, but there are natural limits to floating G10 currency appreciation against the USD. Our EM Fixed Income and FX Strategy team argues for EM FX appreciation against G10 currencies (and against the USD) next year. But most floating EM FX currencies have already surged tremendously in recent months. In the case of the commodity exporters, the risk of catching the “Dutch disease” is increasing very rapidly. In our view, further weakness in the trade-weighted dollar would require a CNY revaluation. In turn, as EM CBs can not accumulate CNY, the only practical way to avoid adding EUR at these levels to EM CB portfolios is to buy gold.
The point of fiat currencies is to debase them as needed
While some investors remain concerned that lax monetary policy could end up resulting in inflation sometime down the road, we would argue instead that the whole point of having a fiat currency is to be able to debase it when the economic conditions require it (Chart 68). As the combination of monetary and fiscal policy measures help create an upswing in economic activity over the next two years, cyclical pressures will come back into the system, likely resulting in a lot more money chasing the same oil barrels. As we expect gold to maintain its long-run relationship with other commodities, we see a third stage of gold price appreciation where prices push above $1500/oz on the back of higher oil and commodity prices.
[ TOP ]
DJ AL'S EMPORIUM: Gold Glitters Because Central Bankers Do Not
By Al Lewis
Bloomberg.com
November 5, 2009
I wish I had an ounce of gold for every time somebody told me an ounce of gold was a dumb thing to buy.
I wish I had listened to Pierre Lassonde.
I first wrote about Lassonde in August 2003 when gold prices soared to a then-unthinkable $375 an ounce.
Lassonde told me he had 60% of his liquid assets invested in the precious metal and claimed it had nowhere to go but up. By up, he meant, $500, $1,000 and then maybe even $6,500 an ounce.
"One thing I know for sure is that gold is going to have three zeros after the first number," he said. "I just don't know how big that number is going to be."
Some of my colleagues, sources and readers, scoffed as I touted this bold speculation.
Lassonde was then president of Denver, Colo.,-based Newmont Mining Corp. (NEM), one of the world's largest gold companies...
In 2005, when gold had safely crossed the $500 mark, as Lassonde predicted, I wrote about him again. And I still heard from naysayers....
This week, gold hit record highs again, nearing $1,100 an ounce.
The run-up came on news that India's central bank bought 200 metric tons for $6.7 billion from the International Monetary Fund. China, flush with U.S. dollars, also has been stocking up on gold.
Lassonde, who is now chairman and the largest shareholder of a Toronto-based royalty company, Franco-Nevada Corp. (FNV.T), says India's move highlights a critical shift. This year is the first in decades when more gold will be purchased for financial reasons than for jewelry.
"The naysayers haven't clued in," Lassonde said Wednesday. "People are buying gold as a financial instrument. And they think it's a better instrument than the U.S. dollar, or the euro, or the pound or any other currency."
The IMF, as it sold the gold to India, warned of an asset bubble in everything from real estate to precious metals. All that money printed to shore up the banks is looking for something to buy.
"This is a hard-asset cycle," said Lassonde, referring to commodities like oil and precious metals vs. financial assets. "The cycle still has five to 10 years to go. ... Don't bet against the cycle."
Central banks around the world are becoming net buyers, as opposed to net sellers, of gold, perhaps setting a new floor for gold prices in a once unthinkable range....
"People are coming to realize that gold isn't the barbarous relic people thought it was," Russell Ball, chief financial officer of Newmont, told me Wednesday. "With the collapse of Lehman Brothers ... we saw triple-A-rated debt become worthless over a very short time frame. Now we're seeing high-net worth individuals ... put a significant portion of their portfolios into gold."
Lassonde has been sharing his good fortune, giving away about $65 million over the years to the arts and education, and founding The Pierre Lassonde Entrepreneur Center at the University of Utah....
So where does Lassonde think gold will go from here?
He believes it will settle when the Dow Jones Industrial Average and the price of gold are at a 1-to-1 ratio. It's currently trading at roughly a 10-1 ratio. So how much will Dow fall vs. gold rise to meet this prophecy?
"That's the unanswered question," Lassonde said.
India's recent move may be a sign of things to come. China will eventually tire of buying oh-so- many U.S. Treasuries and shift toward buying more gold.
"The Chinese have this incredible ability to turn things into mania," Lassonde said. "If China develops a mania for gold ... we'll see prices we cannot even imagine."
[ TOP ]
Be Prepared for the Worst
The large-scale government intervention in the economy is going to end badly.
By Ron Paul
Forbes Magazine
November 16, 2009
...A false recovery is under way. I am reminded of the outlook in 1930, when the experts were certain that the worst of the Depression was over and that recovery was just around the corner. The economy and stock market seemed to be recovering, and there was optimism that the recession, like many of those before it, would be over in a year or less. Instead, the interventionist policies of Hoover and Roosevelt caused the Depression to worsen, and the Dow Jones industrial average did not recover to 1929 levels until 1954. I fear that our stimulus and bailout programs have already done too much to prevent the economy from recovering in a natural manner and will result in yet another asset bubble.
... Rather than allow the market to correct itself and clear away the worst excesses of the boom period, the Federal Reserve and the U.S. Treasury colluded to put taxpayers on the hook for trillions of dollars. Those banks and financial institutions that took on the largest risks and performed worst were rewarded with billions in taxpayer dollars, allowing them to survive and compete with their better-managed peers...
What is more likely happening is a repeat of the Great Depression. We might have up to a year or so of an economy growing just slightly above stagnation, followed by a drop in growth worse than anything we have seen in the past two years. As the housing market fails to return to any sense of normalcy, commercial real estate begins to collapse and manufacturers produce goods that cannot be purchased by debt-strapped consumers, the economy will falter. That will go on until we come to our senses and end this wasteful government spending....
As for Treasury debt, the Chinese and other foreign investors are more and more reluctant to buy it, denominated as it is in depreciating dollars. The only remaining option is to have the Fed create new money out of thin air. This is inflation. Higher prices lead to a devalued dollar and a lower standard of living for Americans. The Fed has already overseen a 95% loss in the dollar's purchasing power since 1913. If we do not stop this profligate spending soon, we risk hyperinflation and seeing a 95% devaluation every year...
[ TOP ]
$5,000/oz gold? Rob McEwen says it's coming in 2014 or 2015
By Dorothy Kosich
Mineweb
September 15, 2009
In a
presentation to the Denver Gold Group on U.S. Gold Monday, McEwen was somewhat
subdued as he only briefly mentioned he thought gold could hit $5,000 an ounce
before the end of the gold cycle. As this reporter scrambled for
a clarification of his remarks in a brief interview, McEwen stuck by his
prognostication, forecasting the end of the gold cycle would occur either on
2014 or 2015....
As the
years roll by, McEwen's legendary penchant for marketing to the max remains
intact as he offered audience members trillion dollar notes as an impromptu
raffle prize at the conclusion of his talk.
[ TOP ]
China's Central Bank Renews Call for New World Reserve Currency
Bloomberg.com
June 27, 2009
China's central bank renewed its call for a new global currency and said the
International Monetary Fund should manage more of members'foreign-exchange reserves, triggering a decline in the U.S. dollar.
"To avoid the inherent deficiencies of using sovereign currencies for reserves, there's a need to create an international reserve currency that's delinked from sovereign nations," the People's Bank of China said in its 2008 review released yesterday. The IMF should expand the functions of its unit of account, Special Drawing Rights, the report said.
The restatement of Governor Zhou Xiaochuan's proposal in March added to speculation that China will diversify its currency reserves, the world's largest at more than $1.95 trillion. Chinese investors, the biggest foreign owners of U.S. Treasuries, cut holdings by $4.4 billion in April to $763.5 billion after Premier Wen Jiabao expressed concern about the value of dollar assets. That reduction came a month after China boosted its holdings
by $23.7 billion to a record....
IMF First Deputy Managing Director John Lipsky said on June 6 it's possible to take the "revolutionary" step of making SDRs a reserve currency over time.
SDRs were created by the IMF in 1969 to support the Bretton Woods exchange-rate system that collapsed in 1971. They act as a unit of account rather than a currency. The cash is disbursed in proportion to the money each member nation pays into the fund.
[ TOP ]
Medvedev Shows Off Sample Coin of New 'World Currency' at G-8
By Lyubov Pronina
Bloomberg.com
July 10, 2009
Russian President Dmitry Medvedev illustrated his call for a supranational currency to replace the dollar by pulling from his pocket a sample coin of a "united future world currency."
"Here it is," Medvedev told reporters today in L’Aquila, Italy, after a summit of the Group of Eight nations. "You can see it and touch it."
The coin, which bears the words "unity in diversity," was minted in Belgium and presented to the heads of G-8 delegations, Medvedev said.
The question of a supranational currency "concerns everyone now, even the mints," Medvedev said. The test coin "means they’re getting ready. I think it’s a good sign that we understand how interdependent we are."
Medvedev has repeatedly called for creating a mix of regional reserve currencies as part of the drive to address the global financial crisis, while questioning the U.S. dollar’s future as a global reserve currency. Russia’s proposals for the G-20 meeting in London in April included the creation of a supranational currency.
This is a sample coin as shown on the www.futureworldcurrency website.
[ TOP ]
Why China wants to buy $93 billion worth of gold
CommodityOnline
March 1, 2009
...In China, investors have been rushing to gold following the crash of global markets....
According to analysts, gold can be a very good product for holding its value. But the risks for paper gold and gold futures are nearly 10 times bigger than real gold investment. Buying gold related stocks can also be a risky move.
"Gold is a very solid asset. Buying physical gold does have advantages compared with other investments. Investments in gold-backed financial products and paper gold should be left up to the professionals," says Mark Robinson, a bullion analyst based in Dubai.
According to Robinson, gold investment in China is starting to look like a crowded marketplace. It's being boosted by the rising prices and market demand. And the unpleasant performance of the US stock market, low expectations for the US dollar, as well as investors' concerns over the banking crisis have also pushed up people's need for gold....
...China has nearly $2 trillion in surplus reserves. Beijing's piggy bank is overflowing with money. In fact, at nearly $2 trillion, China has the largest foreign reserves of any country in the history of the planet.
Whereas Washington now has nearly $11.4 trillion in debts, not counting the contingent liabilities of the real estate crisis....
But, over the next few years China is essentially going to corner the world's gold market.
Beijing knows that the dollar's status as a reserve currency is soon going to be history. Just like the pound sterling lost its status as the world's reserve currency in the early 20th century.
And authorities in Beijing also believe that as China rapidly progresses toward superpower economic status, the yuan should be a world-class, stable medium of exchange.
They envision the yuan as a major international currency some day, with as much (or more) status than the US dollar. That's why they're going to back the yuan with gold.
Plus, there's another reason for Beijing to buy more gold as part of China's piggy bank. China has an estimated $1.3 trillion invested in dollar-denominated investments. They can't get out of the dollar quickly. It would destroy the US economy which would have a direct negative impact on China.
So the smart thing to do: Hedge and diversify existing dollar holdings with gold....
Just to up its reserves to 5% in gold, Beijing would have to purchase $93 billion worth of bullion. That could easily send the yellow metal skyrocketing to more than $2,000 an ounce.
[ TOP ]
