Gold poised for upside breakout

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The post below is a guest contribution bt Simon White, head of risk management, at Hinde Capital.

Gold has been caught in a very tight range since the 16% rally at the start of the year and the subsequent sharp sell off in late February and March. Often when prices in any asset become compressed, they invariably break out of the range emphatically. With gold, the fundamentals remain supportive which suggests that gold should break out from its range to the upside.

Specifically, global liquidity conditions are very accommodative and global interest rates are being lowered ubiquitously.

Currently, the VP Expected Real Interest Rate is -2.75% which implies a subsequent year-on-year return for gold of over 20%.

Furthermore, gold is strongly underperforming relative to the rule of thumb provided by Gibson’s Paradox.

The rule states that for every percentage point the real interest is below 2%, gold returns 8% year-on-year times that multiple. Real rates are currently -1.45%, which implies a 28% performance for gold over the next year.

Finally, China has sharply ratcheted up its imports of gold. In Q2 this year, China imported 248 tonnes of gold, an increase from 43 tonnes in the same period last year. 248 tonnes is equivalent to the entire annual gold output of Australia. To May this year, China has imported more gold than the entire official gold holdings of the UK.

With supply being swallowed up by the official sector, mainly in Asia, and central banks moving to the next chapter in the search for effective monetary policy in the from of negative nominal interest rates (see previous post on this), gold will soon be on the rise once more.

Source: Simon White, HindeCapital, August 7, 2012.

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Precious metals are on the cusp of breaking out, says John Embry

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Source:, March 2, 2012.

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The enduring popularity of gold

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The article below is a guest contribution by Frank Holmes, CEO and Chief Investment Officer of U.S. Global Investors.

The World Gold Council (WGC) reaffirmed the power of the Love Trade in its 2011 Gold Demand Trends report released this week. Gold demand grew 0.4 percent in 2011 despite a 28 percent year-over-year increase in bullion’s average price.

After flirting with the top spot for some time, China emerged as the world’s largest gold market for jewelry and investment during the fourth quarter of 2011 as demand in India weakened. This is the first time China’s demand outpaced India’s in 11 quarters. However, India did retain the gold demand crown for the entire year, purchasing 933 tons compared to China’s demand of 770 tons.

I always say the trend is your friend, and I believe China’s increasing demand for gold is one trend that is just getting started. Although gold imports from Hong Kong were cut in half in December, HSBC Global Research reports that overall gold imports from Hong Kong were 10 times the historical average from January through November 2011. HSBC expects a continued rise in Chinese incomes will keep demand at a robust pace. The WGC sees domestic demand for gold jewelry and investment driving 20 percent growth in Chinese gold demand during 2012.

China should consider its leadership as the No. 1 gold market a short-term position, though. While China’s presence in the bullion market is strong and growing for jewelry and investment, India’s ancient relationship with the yellow metal is such that “domestic drivers of demand are largely independent of outside forces,” says the WGC. The WGC does not see India’s role in the gold market diminishing over the long term.

Ajay Mitra, the WGC’s managing director for the Middle East and India, recently expressed India’s strong ties with gold in a 60 Minutes feature. Gold has always been a part of India’s history, culture and tradition. I have witnessed firsthand the strength of this bond many times over the years. As the famous saying goes, “no gold, no wedding.”

Don’t Forget About the Fear Trade

The Fear Trade was also recently reaffirmed by the Federal Reserve when it publicly stated its intention to keep inflation at “exceptionally low levels” through 2014. Inflation is the kryptonite to the Fed’s monetary efforts and it’s likely the Fed will take any measures necessary to prevent inflation spikes.

The Fed has targeted a 2 percent inflation rate, which means the U.S. dollar will lose 33 percent of its value over the next 20 years, says The Daily Reckoning’s Charles Kadlec. In the next four years alone, nearly 10 percent of the “value of Americans’ hard earned savings” will be destroyed, says Charles.

Put another way, Charles estimates that it will take $150 in the year 2032 to purchase the same amount of goods you could get for $100 in 2012.

Charles isn’t the only one opposed to the Fed’s “monetary manipulation.” In his latest letter to shareholders, Warren Buffett faults the government and its “systemic forces” for destroying the purchasing power of investors. He argues stock investments offer the best long-term investment opportunity because interest rate levels don’t offset the loss of purchasing power due to inflation.

However, there is one group that benefits from the low interest rate environment—borrowers. This means the largest borrowers in the world, developed world governments, will be able to service their enormous amounts of debt more easily. This year alone, the U.S., Japan and Europe will roll over $8 trillion in federal debt.

CIBC World Markets sees the secular bull market in gold continuing for “several years,” as the firm believes debt in major economies have reached a point “where financial and economic pressures will manifest themselves in ways that have up until now only been dreamed about.” With these manifestations, Ian McAvity equates gold to insurance. He suggests to readers that they wouldn’t cancel fire insurance because their house hasn’t had a fire. “Gold proffers the best ability to protect long-term purchasing power against deliberate devaluation of the paper alternatives,” he concludes.

Continue reading The enduring popularity of gold

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Gold: 1980 versus today

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The micro documentary on gold bullion below comes courtesy of

Source: YouTube, February 17, 2012.

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“PLEASE MOVE INTO GOLD,” urges Richard Russell

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Since its precipitous decline of more than $350 from August to December last year, gold bullion has regained almost $100 of its loss. The yellow metal two days ago managed to climb above its 200-day moving average in what appears to be an upside break from a mini inverse head-and-shoulders pattern.


I remain bullish on the fundamental outlook for gold for, among others, the following reasons:

  • Stress in sovereign debt markets.
  • A likely recession in Europe (and commensurate quantitative easing in whatever form).
  • L0w real interest rates.
  • Central bank buying.
  • The least bullish positioning of investors in gold since 2008. (Also see yesterday’s post “Gold bounces off most oversold level since ’08 – buying time?“)

Having said this, I believe gold has more consolidation ahead before resuming its bull market. Pull-backs during this period should be used for adding to positions.

I often get asked what Richard Russell, 87-year old writer of the Dow Theory Letters, nowadays says about the outlook for gold. In short, he sees a world “economic train wreck” ahead, and views gold as the “last man standing”. A few of his comments are below.

“For a decade I have been urging my subscribers to move into gold – either physical bullion or otherwise. Now I am at it again PLEASE MOVE INTO GOLD. Those who think gold has lapsed into a bear market simply do not know what they are talking about. Gold has simply been correcting in an on-going bull market.

“This is a time when almost every central bank in the world is grinding out paper currency, grinding it out by the car-load. This is a time when people are searching for safety. People are frightened and confused. Where is the land of safety?

“There is only one safe asset on the planet: that safe asset is gold. Uninformed people believe gold is just a commodity. Wrong, gold is absolute money. Gold alone is the world’s only completely safe currency. Gold has no counter-party against it, and no central bank has ever found a way to create gold.

“Almost every nation on earth has indulged in the same kind of fiscal madness. To cover the insane spending, nations have had to create an almost endless amount of fiat currency. This avalanche of “money” has steadily reduced the buying power of almost every currency. The result is that it takes increasingly more paper currency to buy one ounce of real money – gold.

“Gold may now be ending its latest correction. If I am correct in this, gold is in a buying zone.”

The long-timer has spoken!

Source: Dow Theory Letters , January 11, 2012.

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Gold bounces off most oversold level since ’08 – buying time?

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The gold price has been working its way higher since hitting bottom in late-December and yesterday managed to breach its rising 200-day moving average. To put matters into perspective, friend Chris Puplava, portfolio manager of Puplava Financial Services and contributor to the Financial Sense website, agreed to Investment Postcards sharing the article below with its readers.

In September of last year we saw gold jump two standard deviations above our gold intermediate-term risk indicator’s average, a feat only seen on three prior occasions (2006, 2008, 2009). Since then, gold has significantly worked off its overbought condition and fallen by over 20% to its recent low on December 29th. Now, the recent decline has been sufficient enough in both time and magnitude to drop our gold indicator to a very oversold reading of more than 1 standard deviation below its historical average. The last time gold was this oversold was back in 2008 and represents the second most oversold reading since gold’s secular bull market began, and likely represents a major buying opportunity as the long term fundamentals (negative real interest rates, global currency debasement) remain.

As with gold bullion, the same can also be said for large cap gold stocks as seen by the NYSE Arca Gold BUGS Index (HUI). Our intermediate term risk indicator for the HUI is also at extremely oversold readings of more than one standard deviation below its historical average. Readings in this vicinity have served as major buying opportunities in the past as gold stocks have soon recovered after finding a footing.

It has been remarked by many analysts that gold stocks have significantly lagged behind the price performance of gold bullion. This action has significantly depressed the values of gold shares which are selling at valuations last seen in 2008 when viewed by the price-to-sales ratio (P/S). Given the elevated price of gold, gold miners are flush with cash and represent bargain values. It is typically readings near 6.5 in the P/S ratio that gold miners run into trouble. Also, holding the price of gold constant, with the current P/S ratio for the HUI coming in at 4.0681 the mining index would need to rally 60% before gold stocks would begin to become overvalued, which would give a price target of $832 for the HUI Index.

For investors who continue to believe in the secular bull market for gold bullion and have a decent level of patience, today’s miners represent an attractive long-term entry level given their significantly oversold condition and cheap valuations.

Source: Chris Puplava, Financial Sense, January 10, 2012.

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