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We have three items for you this month: 1) Inflation and the general trend of stock values of the next few months. 2) An article from GATA about the IMF rejecting bids for its gold 3) Analysis regarding the direction of gold and mining company shares over the next few months
1) What is “Quantitative Easing” Quantitative Easing is another term for printing money. It sounds so eloquent, yet it is very deceptive. For 2009, the deficit that the US government is running is approximently 1.4 trillion dollars (the total accumulated debt is now approaching 12 trillion dollars). Who is, therefore, buying the debt? Because when people are not buying the debt, interest rates go higher, and the higher the debt the higher the debt service ratios. So, the Federal Reserve purchases US treasuries by printing money. In order to create a false sense of security, these Fed transactions are not audited. Basically quantitative easing occurs when the government, having run out of legitimate buyers for their treasury bonds at current interest rates, then commissions the federal reserve to step in and buy the bonds buy creating/printing money. Where does the money come from? Because the federal reserve has never been audited, this should raise red flags as to the legitimacy of the true value of the US dollar and its debt. An interesting scenario as to why the Euro has weakened in the last few months is that Germany, one of the world’s largest exporters who has the most influence on the European monetary system, has the most to benefit from a lower currency. We feel that this is only the beginning of a drastic currency devaluation amongst most nations because of unmanageable debt loads that will become almost impossible to service. 
Refering to the adjacent chart (found in Barron’s March 15, 2010 pM16) (do click on charts to enlarge), even though world wide stock markets have one of the best one year returns from the lows, corporate insiders of the S&P 500 are still holding on to their shares. What we believe is that the people who control the largest corporations understand their business and their future business better than anyone else. Even though the markets have had a tremendous upside run in the last year, the bull run is not over, and we see no reason to panic regarding selling during the next few months. In related news, PE ratios have come down dramatically (see November’s report). Current PE’s for the S&P500 are around 22 times current earnings. The Dow Jones is now around 16 times current earnings. What this translates into is that the multi nationals of the world are now making real money relative to the price of their shares. Also, regarding the general shape of stocks, the S&P dividend yield is almost 2%. What this means is that money put into a corporation is paying much better than almost any current bank interest returns. This helps explain why the stock market is going up in value i.e. money is trying to find a home! Lastly, a point that leads us up to our discussion on gold, is this: Central banks added the most gold to its reserves this year since 1964. 1125 metric tons of the shinny yellow metal were added were added to have a total over 30,000 metric tons of gold in reserve. This is an increase of over 13 billion dollars. This is also the first expansion of the central bank’s gold reserves since 1988. (Currently central banks hold appoximently 18% of total above ground available gold.) 2) IMF rejects investment house bids for gold
Submitted by cpowell on 02:53PM ET Friday, March 26, 2010. Section: Daily Dispatches www.gata.org/node/8471
5:56p ET Friday, March 26, 2010
Dear Friend of GATA and Gold:
Today we welcome Frank Holmes, CEO of U.S. Global Investors in San Antonio, Texas, to the ranks of tin-foil hat wearers, rent-seeking parasites, and charlatans, on account of the interview he has just given to Alex Steele of Kitco News.
First, Holmes disclosed that his friend Eric Sprott, CEO and senior portfolio manager for Sprott Asset Management in Toronto, who may own Canada's largest collection of tin-foil hats, recently tried to buy gold from the International Monetary Fund and was refused. Coincidentally, GATA learned this week on the best authority that a financial house far bigger than Sprott also recently tried to purchase gold from the IMF, also was refused, and wasn't very happy about the refusal.
Ever since its unsatisfactory correspondence with the IMF in April 2008 GATA has maintained that the IMF has no gold at all and that the IMF's supposed gold sales are merely bookkeeping entries between central banks enveloped in endless agitprop to scare the gold market down: www.gata.org/node/6242
If you doubt this, try asking the IMF yourself: Exactly where is the IMF's gold kept? In exactly what quantity in what vaults? What are the refineries of the bars and the bar numbers? Is the IMF's supposed gold segregated from the gold reserves of its member countries or just mixed in with those reserves? When the IMF recently claimed to have sold gold to India, Sri Lanka, and Mauritius, did any gold leave any vault and move to another vault? If so, how much was moved from where to where? Can anyone outside the IMF even see the IMF's supposed gold? Will the IMF provide public access to its gold records, or will it conceal those records just as the U.S. Federal Reserve admits concealing its gold swap agreements with foreign banks?
Fortunately for the IMF, the financial press never goes beyond reprinting IMF press releases.
In addition, Holmes told Kitco News that the gold market is manipulated by central banks. He remarked: "There's a lot of manipulation done by governments around the world in the currency markets, which affect the bond markets. It's the normal course because gold is the ultimate money. They're going to do what's in their best interest."
You can hear Holmes' interview with Kitco News at the link below. It carries a series of videos. The interview with Holmes is activated by clicking on the gold bar image in the series of images at the right side of the page.
www.kitco.com/Exclusive-News 3) Daily and weekly charts and analysis for GDX (American precious metal mining index)   By looking at the weekly chart on the right, the 50 day moving average is above the 200 which generally indicates that the trend is up. On the daily chart, the 50 & 200 daily moving average is about to cross over to the sell side but we think it will bounce higher instead. Also, from the weekly chart, when you look at the volume for the last two months, what one can ascertain is that the volume has been enormous. So one question is: where is the selling coming from? From a technical prospective, when looking at the 3rd week of January 2010, on both charts, one can see that there was record volume. This also coincided with a small dip in the price. Record volume often is an indication of a bottom or a top. Since, on the weekly chart, the 50 day moving average crossed the 200 day moving average a couple of months before this price dip, we think that this indicates that a (high volume) bottom was made and that prices are headed upward. Daily and weekly charts and analysis for GLD (ETF for physical gold price on the NYSE) 
 The GLD is one of the largest holders of physical gold in the world that just came into fruition within the last five years (which in itself tells the story of the huge recent demand for physical gold). On the daily chart, you can see the triangle formation similar to the GDX daily chart. Through looking at the 200 & 50 day moving averages on the weekly chart, one can see that gold is still in a serious long term uptrend. We believe that the recent consolidation of gold prices and gold mining company shares is due to explode to the upside. Also gleamed from the charts is the question: why is the gold mining index underperforming the physical price of gold? We don’t know, but what we can ascertain is that due to the mining index being down about 20%, versus the gold price being down by only approximently 10%, this, in conjunction with all of the above analysis, suggests that this is one of the best opportunities to accumulate shares of the precious metal mining companies. |
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HAS GOLD PEAKED? Silver is gold's alter ego or shadow. Wherever gold goes silver usually follows, often in larger increments. We can see by the above two charts that over the last 4 years the peaks in gold corresponded to the peaks in silver. This was most prevalent in the 1980 gold/silver bull market. Gold topped out around 850 whereas silver followed but much more dramatically to a 50 dollar an ounce excess. Currently (last December) gold topped out around 1220, an all time new high while silver only managed a 19 dollar top, just shy of the March 2008 high. Because silver is the 'speculative' partner to gold and over time seems to peak when gold peaks we feel that silver will not have stopped its bullish run until it reaches a new high. As silver has this pressure to make a new high, and as the two metals are so linked, we then feel that gold will march higher too. - currently the market cap of all the publicly traded gold and silver companies is approximently 200 billion dollars. - the market capitalization of AIG before its financial collapse was about 300 billion. - China's foreign reserves is roughly two trillion dollars. Annual gold production is around 80 million ounces. 80,000,000 ozs X $1,100 = 88,000,000,000. 88 billion dollars will go into two trillion dollars 22 times. Therefore China alone currently with cash in the bank can buy 22 years of current gold production. Obviously this shows that even at today's close-to-record prices gold is still a bargin. - Investor demand for gold is double what it was last year. Many people say that the current decline in jewelery demand (approximently 25%) should weaken the gold price. Central banks have dramatically cut down on gold sales due to the current mistrust of the fiat currency system that the lack of selling and increased investor demand will mitigate the decline in jewelery sales. 
Currently, according to our gold XAU (philidelphia gold index) ratio, gold stocks are historically undervalued, selling at approximently 1/7th the price of gold. The only time this ratio was higher was during the 2008 market meltdown where everything was lower except the US dollar and US treasuries. This is why we feel the current market correction in precious metal securities has been tremendously oversold. Looking back to March 2008 and May 2006 gold and silver stocks peaked around 1/5th the value of the price of gold. Thus, at 1/7th the current gold price, shares seem to have tremendous value.   - The peak in the US dollar corresponded to the market bottom. This inverse relationship seems to be a false sense of security. The recent market decline has also shown an increase in the US dollar index. Somehow the investment community seems to think that the US$ implies security. Continued US$ weakness should help support the markets in the short term. Dollars that are flooding our world need to find a home and large cap american companies seem to offer better value then zero interestrate coupons. - Volitility and volume do not seem to imply a market top. The large volitility and huge trading surges back in March and the fall of 08 are not prevolent. Even though certain trend lines have been broken we don't feel that another meltdown is immenant; more likely a consolidation or correction. - Obama triples loan guarantees for nuclear power projects to 54 billion dollars. Olympic dam, world's largest uranium mine, is having current production problems and has reduced output by 20%. This is one of the reasons we added Denison mines to our portfolio. |
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THE DOW THEORY goes back to Charles Dow, the originator of the Dow Jones Industrial Index back around to the turn of the century. The theory goes that the transports and industrial indices must go up or down in unison in order to validate a bull or bear move. If the nation's transportation companies are not making money shipping goods of the population, then the nation itself is starting to face economic hardships while the transportation index seems to be topping out relative to its industrial counterpart. A sign of caution should be observed. Next We Take A Look At Current Price to Earnings Ratios: P.E.'s * Market/Book Values * D.J. 17.9 4.6 (double the average) S&P 500 85 (overpriced) 2.4 * figures from: Barron's Nov.23, 2009 
A clear distinction can be seen with regards to P.E. ratios and book values within the S&P 500 and the Dow. The Dow Jones earning ratios are relatively conservative (historically both P/E values average around 15:1) while the S&P's seem to be heading into the stratosphere. The large international presence can clearly be felt in the Dow as much of those corporations are obtaining international revenue that is increasing as the U.S. dollar depreciates. Besides increasing profits on U.S. currency debasement, it is showing that the international community is not having the same problems as the Americans. S&P companies that have less international exposure are clearly earning less money than the huge multinationals. This shows the divergence between the developing world where credit is valued and hard to obtain and the U.S. where anybody can get and abuse credit, especially the government! When we compare market to book value for the S&P, they are almost half those of the Dow. Therefore it seems from an earnings perspective that the S&Ps are extremely overpriced, yet from a book value it would indicate fair market value. Historically, price to book has been around 2 times net asset value in normal markets. The logic behind this is that to raise capital, build infrastructure, hire people, market products, etc., takes an incredible amount of time, money and management. As such, if you have capital and want to own a business, you should pay more than its liquidation price. Paradoxically, if we look at the trend of the market, it is clearly higher. Program trading has become a major player in this age of technology, in other words, people will buy just because prices are going up. On the other hand, during the meltdown, they will sell just because prices are dropping. This "herd mentality" creates extreme excesses at tops and bottoms. But it can provide tremendous opportunities for the astute investor. The market clearly should have never went as low as it did last March. We were looking for a correction last month, but every time that the market fell, the rebounds were strong and swift. This caused us to cover a small short position to limit our loss because stocks tend to have an upward bias. Markets don't always make sense so it becomes difficult to argue with a trend. Taking a small loss soon is better than losing a lot of money later. Most people have a very hard time taking losses and generally will suffer the consequences. Get used to losing money on some transactions as long as you are making money in your portfolio, a few losses is normal. Pyschologically, people have a very difficult time making decisions out of fear. Other Points of Trading Interest: - China's economy continues to grow between 8 and 9 percent in the third quarter. Oil demand was up over 12% year over year and they produced more than a million cars last month. This was greater than the total U.S. auto production. Who would have thought 10 years ago that backwards, communist China would produce more vehicles than the United Sates of America? This movement will continue to keep the resource industry buoyant even though the American economy will continue to suffer.
- The IMF put up 200 tonnes of gold for sale this week. Usually in times past, this would cause a drop in the gold price. Major institution selling a large amount of gold! Well, just the opposite happened. The precious metal price jumped up $30 as the Reserve Bank of India bought the whole lot for $1,045 U.S. per ounce. A few days later, gold was trading around $1,100 U.S. per ounce. A 4% increase in less than a week! This situation implies that the bull market is far from over in the yellow metal. Here you have one of the best performing asset classes in the world, over the last decade, and yet very little media attention. This means most people do not own physical gold or shares of companies that do. Ask a co-worker, neighbor, relative or financial advisor and, probably, the response is somewhat muted. In simple terms, gold is not being publicized heavily in the media and, if anything, sometimes pronounced as a "bubble". Without all of the attention from the majority, and the strong performance in its price, gold in our view still has tremendous upside potential.
- The Bank of England was forced to bail out Lloyds of London and the Bank of Scotland for approximately $42 billion U.S.! This is the second bailout of both prestigious financial icons. The $6.7 billion U.S. purchase of gold by India seems rather pale by comparison. Yet the purchase by India had such a positive effect on the gold price. What will happen to the price of gold when people really start to vacate fiat paper assets in favor of tangible, physical assets?
- The Equadorian government ratified the new mining laws within their country on Wednesday, November 4. This has taken away a lot of the political uncertainty within the companies doing business there. Our picks of CTQ and DMM should benefit in the long term from the uncertainty being removed.
- Another yellow flag in the commercial real estate market. Banks will not have to move loans into the high risk category when the collatoral falls below the loan value. These are new guidelines released by the Federal Reserve and the F.D.I.C. (Federal Deposit Insurance Corporation). This is provided that the loans are current, even if restructured, and the clients are credit worthy. Another accounting loophole to try to delay the coming commercial real estate problem.
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September 2009
A quick example of the U.S. housing dilemma will give a good overall view of caution in today's financial markets. The U.S. banking system was using lending ratios of about 25 to 1, which means that for every dollar in deposits, they would lend out up to $25. Bank A: $100,000 in deposits Lends out 25 $100,000 mortgages, with minimum down payments of 0 to 5% Total liabilities of 25 x $100,000 = $2.5 million If all works out, and everybody pays, it is a very profitable business. They will be collecting about $125,000 per year ($2.5 million @ 5%) in interest and paying out maybe 1% on $100,000 which is $1,000. But, with just a 10% foreclosure rate, the situation drastically changes. 10% foreclosure rate = 2.5 households (30% market decline, 10% selling costs and 10% legal costs = 50% of original value which is 2.5 x 50% = $125,000 in losses). 
This is from an asset base of $100,000 which means that their capital is completely wiped out. So how do you pay back your original depositors? TARP money, Federal Reserve, loans, FDIC, taxpayers, etc.? Many states have distressed loans that have passed 15%, so our example is rather conservative as well as many markets have declined more than 30% from their peak. This situation has created the greatest amount of money being printed that the world has ever seen in order to prevent a banking and currency meltdown. Precious metals should continue to prosper in this economic environment. The FDIC (Federal Deposit Insurance Corporation) has required all member banks to pay their insurance fees 3 years in advance. This amounts to $46 billion. When was the last time that you were required to pay anything 3 years in advance? This is another accounting shenanigan to keep the financial system afloat. The Georgian Bank, based in Atlanta, has just become insolvent and they weren't even on the FDIC's watch list! If the price of real estate does not stabilize, we forsee more institutions following the same fate. After all, house prices were down nationwide 14% year over year. This does not even take into consideration all of the commercial mortgages that are currently outstanding which could be a very serious problem going forward. Go to some of your local strip malls and see if there are any vacancies, or talk to some of the business owners about their current business environment. Commercial loans in default last year were approximately $3 billion and today one year later stand at around $22 billion, a seven-fold increase. We have witnessed 20 consecutive months of job losses, with an unemployment rate nearing 10%. Where are the jobs coming from? Government spending is probably the #1 source of new capital expenditure. That means that more money is being printed that artificially inflates the economy. This has helped the financial markets post one of the quickest and largest advances on record. The problem that we see is that it is being done on decreasing volume with much of the trading being done in the financial sector, as now the government and Federal Reserve are a very large shareholder in many of these institutions. - The decline in India's jewelry demand has been taken up by 4 new ETFs (Electronically Traded Funds)
- Gold jewelry demand in China is up 30% year overy year.
 This week apparently confidential meetings were held with officials from China, Russia, Japan, France and middle eastern nations. The topic was trying to find alternative payments for oil other than U.S. dollars. This could help explain the rise in gold prices and another reason for the bull market to continue.
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