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Russell: Gold Moving “West to East”

Release Date: 
Friday, January 24, 2014

Gold and Silver Prices

Gold prices rallied late in the week following technical buying and a new round of weak U.S. economic data.  “Gold prices ended the U.S. day session sharply higher and hit a six-week high Thursday. The rally was fueled by short covering and technical buying, including pre-placed buy stop orders being triggered…Some weaker U.S. economic data Thursday also was friendly to the precious metals bulls, as it suggests the U.S. Federal Reserve may have to back off on its tapering of its monthly bond-buying program, also known as quantitative easing. The weaker U.S. data also helped to sink the U.S. dollar index.” (“Gold Post Sharp Gains, Hits 6-Week High, as Bulls Gain Technical Momentum,” Kitco News, 1/23/14)

Gold closed the week up $14.90, at $1,270.00. Silver prices moved lower $0.41, closing at $20.01.

Russell:  Gold Moving “West to East”

Veteran investor, newsletter writer and publisher of the Dow Theory Letters, Richard Russell, described gold’s migration from the West to the East. 

“While US citizens are spending their money on TV sets, washing machines, and new cars, the people of China are being encouraged by their government to load up on gold as fast as they can. China is now the world’s biggest producer and greatest hoarder of gold. Chinese leaders are well versed in history. They know that the nation that holds the greatest amount of gold and the nation with the most powerful military is the nation that historically has owned the world’s reserve currency. I’ve said for many years that China has plans to make its yuan the premier currency of the world. While the US is sleeping, the yuan is fast becoming a global currency. I believe in a matter of years or maybe months, a gold-backed yuan will be the currency used in most international trading. Furthermore, serious doubts have arisen as to how much gold the US actually owns. So far the US has refused an honest audit of its gold holdings. Many people doubt that the US owns as much gold as it claims it owns. The two nations whose citizens love gold are China and India.”

“What we are seeing is a massive transfer of gold from West to East. This is occurring while China leaders literally beg their population to buy gold. And while the US government does everything it can to discourage its citizens from buying gold. Now the question is: who will buy the US treasuries? When China stops buying US treasuries, the Federal Reserve will be the only remaining large buyer for US debt. This means that QE will have to be expanded, in spite of the contraction that Bernanke has announced while cutting its monthly purchase of bonds by ten billion a month. The Fed’s recent tapering may be a case of jumping the gun, and my guess is that there will be no more tapering in the year 2014. With the Fed being the only buyer of treasuries, Janet Yellen will be tempted to increase QE, but the Fed does not like to change courses midstream. This may mean a rise in interest rates as US Treasuries look for new buyers. My guess is that China has hauled in its buying of US Treasuries and is now using its huge hoard of US money to buy gold and other tangibles from the US. To put it mildly, I think the year 2014 will be historic from the standpoint of world change.”  (“Richard’s Remarks,” Dow Theory Letters, 1/22/14)

China’s Banking Crisis May Spark New Gold Buying

Analyst and TraderPlanet editor Kira Brecht wrote that China’s shadow banking system may be on the brink of a collapse that sparks a rush to gold by an already gold-hungry economy.

“Panic is spreading among emerging market investments, with currencies like the Turkish lira, South African rand, and Argentina peso posting sharp or record declines. The latest sell-off was triggered by news that China's manufacturing activity shrank for the first time in six months during January…This market action shines a big light on many questions surrounding the actual health of the Chinese economy and worries about a potential credit bubble brewing there.”

“Chinese consumers have always been large buyers of physical gold…Dynamics unfolding in China could potentially help increase the already high levels of gold demand there…A so-called ‘shadow banking’ sector has emerged in recent years in China, which includes non-financial companies (think profitable exporters or consumer product producers) that have offered loans to companies or individuals, as they seek a higher rate of return on their excess savings…JP Morgan offered a ballpark estimate that the entire shadow banking sector (which includes private non-financial lending, trust accounts and Wealth Investment Products) totals $6 trillion—just under 70% of GDP in China. That's a lot of debt flying under the radar. The key question about these products, which tend to guarantee a specific rate of return—is what if the underlying loans become non-performing—will the banks still guarantee that return or will there be a default?”

“Bottom line? There are a lot of uncertainties what investors will see this year from the Chinese banking system…If defaults were to arise or worse case—a bank were to fail—Chinese consumers may be inspired to pick up the pace of their already high level of physical gold purchases. There's nothing like a panic to remind investors about the safe-haven properties of physical gold.” (“Will Worries Over China Banking Sector Spark Increased Gold Buying?” Kitco Commentary, 1/24/14)

Japanese Buying Gold on Inflation Fears

Bloomberg reported on booming sales of gold bullion in Japan, due to rising inflation fears. 

“Gold sales by Japan’s biggest bullion retailer surged 63 percent to a five-year high as prices slumped and investors sought refuge from Prime Minister Shinzo Abe’s campaign to stoke inflation and weaken the yen…The yen’s 18 percent drop against the dollar since Abe became leader in December 2012 and a looming increase in the nation’s sales tax help maintain bullion’s appeal as a haven in Japan.”

Kazuhiko Saito, chief analyst at commodities broker Fujitomi added, “[g]old has been very attractive to individual investors as a hedge against inflation.  Investors became concerned as Abenomics weakened the yen.” (“Abenomics Spurs Gold Sales in Japan as Inflation Hedge,” Bloomberg, 1/22/14)

Zulauf:  “Gold Can Protect You Against Many Things”

Felix Zulauf, owner and president of Switzerland based hedge fund, Zulauf Asset Management, told a Barron’s Roundtable that investors should acquire gold, even in the absence of inflation. 

“[Scott] Black: In the absence of inflation, why should gold go up?”

“Zulauf: Gold can protect you against many things. Inflation is just one. There will be a panic that brings back systemic fears. Those who wanted to sell gold have sold it. China last year bought the world’s total production of physical gold. Western investors, asset-allocators, exchange-traded fund players have all sold their gold.” (“Zulauf: Short China, Own Gold and Gold Miners,” Barron’s, 1/21/14)

Goldline’s Express IRA Program

Many Goldline clients choose to include precious metals as part of their retirement planning especially during times of economic crisis and uncertainty.* Goldline’s Express IRA allows clients to acquire precious metals on their schedule; they no longer have to wait for your self-directed IRA to be funded before getting started.

Goldline's Express IRA not only provides clients with the ability to diversify their IRA on an expedited basis, clients can also qualify for Goldline's ground-breaking Two-Way Price Guarantee Program when they acquire $10,000 or more of our exclusive bullion coins.  When an Express IRA purchase qualifies for Goldline's Two-Way Price Guarantee Program, clients are protected on short-term upside and downside market movement: they can either call to reprice their coins if the selling price falls (up to a maximum of 28 days depending on the size of the purchase) or, if the selling price of the coins increase during the qualifying period, clients can call Goldline to acquire additional coins at the original selling price.

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.

*Federal IRA tax laws are complex and may change from year to year. Goldline believes it is appropriate to have 5%-20% of retirement portfolio allocated to precious metals. Other individuals and institutions may recommend different percentages. As with any investment, you should consult your tax advisor before making a decision regarding precious metals IRA investments.

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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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