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Cheap Money Will Drive Gold Prices

Release Date: 
Friday, May 17, 2013

Gold and Silver Prices:

Gold prices retraced earlier gains to fall below $1400 this week on the New York Spot Market. Gold closed at $1361.20, down $87.90. Silver closed at $22.36, down $1.61 for the week.

Cheap Money Will Drive Gold Prices

Two analysts explained this week why current monetary policy support gold. Money manager and investment advisor Anthony Mirhaydari wrote, “The four largest central banks are abusing their currencies as fast as they can, with Japan going for broke with the "cheap money will save us" meme while the European Central Bank cut rates earlier this month for the first time since the middle of 2012. …When the world is being flooded with cheap money, Economics 101 tells you the prices of all tangible assets -- including gold and silver -- will eventually increase. And that's why this could be a great buying opportunity.” (“Why Gold Won’t Stay Down,” MSN Money, 5/15/13.)

Coxe Advisors Chairman Donald Coxe, a seasoned investor and strategist, issued a commentary on quantitative easing and gold. “What Ben Bernanke explained in a series of lectures last year was the core of his strategy; a dramatic expansion of the U.S. monetary base… At some stage there will be a transmission mechanism to move money from the fed’s monetary base, which is exploding at [a] 40% rate, and it will work its way into the money supply growth….As that mechanism works, [there's] a point in which it builds its momentum, that the fears of the conservative economists, and the fears of gold investors come into play. Because once money supply growth starts to expand off that powerful monetary base, what you get is a self-reinforcing process…. [For gold investors], there’s more pain in store…until [the market] concludes, that buying may have downside risk, but the upside is going to be enormous, once the inevitable result occurs, of money supply growth growing far faster then GDP growth—setting off inflationary pressures in the economy. You cannot expand the monetary base by hundreds of percents for a long time, having a no fault situation. Eventually a huge challenge occurs.” (“Don Coxe: Buying Gold May Have Downside Risk, ‘But The Upside Is Going To Be Enormous’,” Bull Market Thinking, 5/14/13.)

Grandich: $2000 Gold

Financial analyst and editor of The Grandich Letter, Peter Grandich, told The Gold Report that he believes gold’s bull market will continue with prices rising to $2,000 per ounce. “Even after this takedown, I still don't believe that the secular bull market that's been ongoing for 12 years has come to an end. I still believe we'll have a two in front of the gold price before it ends. We're going to have to get to $2,000/ounce ($2,000/oz) before there's any decision on my part about the end of the bull run.”

Mr. Grandich continued, “There will probably be some more shenanigans by the Federal Reserve to give another kick to the can, but the time will come when the world realizes that we cannot afford to pay back what we owe, much less the interest. That's when the financial markets will be hit hard… In the meantime, we will see $2,000/oz gold. The recent gold takedown was not driven by fundamentals. It was not fun living through it, but it was actually something that is going to fortify this secular bull market that's been underway for 12 years and is going to mark the next leg of the bull run for gold.” (“The worst junior market in 30 years and why there's still hope – Grandich,” Mineweb, 5/14/13.)

Central Banks Buy Over 100 Tonnes of Gold For Seventh Straight Quarter

The World Gold Council reported that central banks acquired over 100 tonnes of gold for the seventh straight. In all, central banks purchased approximately 109 tonnes of gold during the first three months of 2013, with Russia and South Korea being the two largest buyers. (“The World's Central Banks Added To Their Gold Stockpiles Even As Prices Tumbled,” Business Insider, 5/15/13.)

U.S. Facing “Unhappy” Economic Times

A United Nations World Happiness Report equates happiness with a country’s Gross Domestic Product (the total dollar value of all goods and services produced). If GDP is below 3%, people will be unhappy.

Based upon this report, a MarketWatch commentary explains why the United States will be a “very unhappy nation.”  “As Bond King Bill Gross put it in his recent newsletter: “Every investor will lose money.” Not just some. All losers. He blames it on The Fed’s cheap money. It’ll go on long after we dump Bernanke and his printing presses. How bad will it get? Recently CNBC reported that Dr. Doom, Nouriel Roubini, warned a “big market crash” would hit after another raging bull blows a massive bubble, like we did in the 1990s dot-com bubble, with subprime mortgages in 2008. CNBC then quoted former Morgan Stanley global strategist David Roche’s warning that the next crash will be ‘worse than the last one.” (“GDP killing the future of American capitalism,” MarketWatch, 5/13/13.)

Countries Continue To Devalue Their Currencies As Eurozone Continues Its Longest Recession

Last week, we discussed four countries, Australia, South Korea, Sri Lanka and Vietnam, that joined the larger global economies in cutting interest rates to devalue their currencies and attempt to stimulate their economies. This week, the Bank of Israel cut its benchmark interest rate to devalue the shekel which had increased 5.4% in the past three months in part due to quantitative easing and interest rate cuts from other central banks. (“Bank of Israel cuts rates, will buy currencies,” MarketWatch, 5/13/13.)

More countries are expected to follow suit according to J.P. Morgan which projects that Russia, South Africa and Romania will cut interest rates in the coming weeks. (“Banks Rush to Ease Supply of Money,” WSJ 5/13/13.)

The eurozone is now in its longest recession, surpassing the recession which followed the 2008-09 financial crisis with nine of the seventeen euro countries in recession. France, Europe’s second largest economy, recently fell into recession for the third time since 2008. “With a population of more than half a billion people, the EU is the world's largest export market. If it remains stuck in reverse, order books for companies in the U.S. and Asia will be hit. Last month, U.S.-based Ford Motor Co. lost $462 million in Europe and called the outlook there ‘uncertain.’” (“France joins 17-nation eurozone recession,” USA Today, 5/15/13.)

The dire economic crisis prompted European Central Bank President Mario Draghi to announce the ECB is considering buying asset-backed securities among possible options to support lending to small and medium-sized companies. (“Draghi Says ECB Considering ABS as One of ‘Many Options’,” Bloomberg, 5/11/13.)

Goldline provides a wrap-up of the week's precious metals news along with important commentary on the American Advisor Week in Review audio program. Click here to listen.

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†This material has been prepared for private use. Although the information in this commentary has been obtained from sources believed to be reliable, Goldline does not guarantee its accuracy and such information may be incomplete or condensed. The opinions expressed are subject to change without notice.

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