Why Gold is Falling Despite Global Crises

by Addison Wiggin & Ian Mathias

  • Behind the gold takedown… How central banks might have knocked $40-plus off the Midas metal

  • Inside yesterday’s mega rally in stocks… A factor we called three months ago

  • A rerun of gold’s 1980 blowoff rally? Rick Rule on how soon to expect it

  • The Eagle has yet to land… Mint records another month of strong coin sales

  • Marc Faber on a form of diversification too few people consider


  Mystery solved. We think.

Given the news cycle and the buying habits of the world’s central banks of late, we’ve been wondering why gold has traded down nearly $40 bucks from its near-historic high last Thursday. And has stayed there…

Today, we believe, despite becoming net buyers of gold for the first year since 1988, central banks are “pawning” that gold at the Bank for International Settlements (BIS) — the central bankers’ central bank — and helping to depress the price.

  “When Reserve Bank of India bought 200 tonnes of International Monetary Fund (IMF) gold in November last year,” confirms a report from International Business Times, “the bullion market received one of the biggest boosts ever and the gold prices soared in the subsequent weeks to new record heights. Reason for this was that all central banks across the globe have been increasing their gold holdings fearing the recession looming large over the world.”

Commercial banks, too, appeared to be getting into the game. For individual buyers of the yellow metal, the arrival of the big global institutions signaled the next phase of a sustained bull market in gold that would, in turn, vindicate years of nail-biting insecurity and the endurance of hushed cocktail party snickers.

Why then the reversal in the price over this past week?

  While it’s not clear if India’s is among them, central banks have swapped 349 metric tons of the yellow metal with the BIS, according to The Wall Street Journal — 82% of all the gold that central banks snapped up last year.

In exchange, the BIS has handed out $14 billion in paper cash, agreeing to sell the gold back to the central banks sometime in the future, just like your friendly neighborhood tattoo parlor/pawnshop.

“At this rate,” IBT asserts “the BIS holdings represent the biggest gold swap in history.”

As you well know, “gold is often regarded as a protection against inflation and is thought to benefit from the inflationary impact of governments’ economic stimulus packages. It has also been used as a haven against another financial meltdown.”

The fear is now if banks that lent their gold are for any reason unable to make good on the loan, “the BIS could opt to sell the gold in order to get its money back, which would amount to flooding the market with an unexpected boost to the global supply.”

Worth keeping an eye on.

  “I am bullish on gold,” our friend Rick Rule comments, sticking to his guns. “I’m bearish on social promises, and as a consequence, bearish on currencies. I suspect that in the near term, gold will do well, because it doesn't go down. Then gold will start to do well because people will perceive it as going up, rather than merely holding its own in terms of purchasing power.

“I came of age in investing in the '70s — a great gold bull market. Beginning about 1978, when gold began its hyperbolic rise, it was going up from both greed and fear buyers. I'm a fear buyer of gold; I buy it as catastrophe insurance. What happened at the beginning of 1978 is that the fear buyers would buy it, creating momentum that caused the greed buyers to step in.

“The uptick then reinforced the fear of the fear buyers, and there was this sort of stereo buying in gold that caused a true hysteria, taking the gold price from $400 to the $850 blowoff. It wouldn't surprise me to see the same set of circumstances take place in the next two or three years.”

That would be outstanding news for the tiny gold miners Rick knows and follows so well. He’ll identify several of his favorites — along with some choice picks in the energy sphere — at the Agora Financial Investment Symposium in Vancouver, convening in less than two weeks.

(More on how to get “in tune” with Mr. Rule, Marc Faber and other world-renowned speakers — even if you’re not attending the sold-out event… below.)

  Demand for U.S. Gold Eagles doesn’t appear to be slacking in light of BIS revelations.


The U.S. Mint’s authorized dealers ordered 97,000 of them in June. That’s down big-time from May’s stratospheric figure, but still one of the strongest months this year. It’s also impressive when you consider June was the first month this year the Mint offered fractional (half-ounce, quarter-ounce and one-tenth ounce) Eagles.

Sales of Silver Eagles topped 3 million — the fourth time that’s happened this year. (It happened only once in 2009.) Based on sales for the first half of the year, total sales for 2010 should set another record — easily.

Thus, it’s looking even less likely the Mint will issue proof and uncirculated 2010 Silver Eagles for collectors. “With such elevated demand in place for the bullion coins,” said a report by Silver Coins Today yesterday, “the Mint may be hard-pressed again this year to find a supply of silver blanks to be used for the collector strikes.“

That ought to drive collectors into the graded bullion coins. Our friends at First Federal Coin are still offering reader’s of The 5 MS-70 Silver Eagles — one dated 2009, another dated 2010 — for the same attractive price offered before the Mint released the above new data. You can get yours here. (Agora Financial may receive compensation if you place an order, but you know that we do business with First Federal specifically because Nick Bruyer and the crew do well by our customers.)

  As gold goes, so goes the dollar, still. Since early February, gold and the dollar have moved mostly in lock step… up through early June, and down since then.

A month ago, the dollar index sat above 88. This morning, it’s 83.8. A lot of that has to do with the euro, which has firmed up 6% in the last month, to $1.26 this morning.

That trend is working out very nicely for followers of our new forex specialist Abe Cofnas. Over the last four weeks or so, he’s capitalized on the strength of the euro (and the pound) to deliver gains of 82%, 104% and an out-of-this-world 1,329% using some unconventional plays. We’re on the verge of relaunching this service, but in the meantime, you can learn more by going here.

  Major U.S. stock indexes are building on yesterday’s rally. They opened up roughly 0.5%, largely on news that first-time jobless claims fell last week.

Yesterday, the Dow added 2.8% — good enough to poke its head back above 10,000. The S&P was even stronger, powering just past 1,060. But why? Volume appeared no stronger yesterday than on any of the last few trading days, so everyone grasped at straws for a cogent explanation. Our favorite was “retail sales growing at the fastest pace in four years.”

Didn’t we hear the same refrain around this time three months ago? Why, yes, we did. “One reason the retail numbers have appeared so healthy of late,” we wrote here in The 5 at the time, “is that a fair number of homeowners are skipping out on their mortgage, and the bank is playing along because it doesn’t want to foreclose and book a loss.”

Lo and behold, we noticed celebrity analyst Meredith Whitney suggesting the same thing on CNBC a couple days ago. Hmnn. If this is the stuff of which rallies are made these days, we cringe at what the next sell-off might look like.

  “Rather than worry 24 hours a day about whether stocks will move up or down 10% in the next three months,” writes Marc Faber in the latest Gloom Boom, & Doom Report, “I think that investors should consider the geographical distribution of the ownership of their assets very carefully.”

In other words, it’s not enough to think about how you split up your investments among various asset classes. “Given my ultra-negative view of the world,” Faber says, “I want to hold assets in different jurisdictions in the hope that I won’t lose everything all at once.”

In other words, Dr. Faber is taking defensive measures to prepare for the Assault on Enterprise — the theme of this year’s Agora Financial Investment Symposium. He’ll be back for the second year in a row to share his latest strategies, refined after a mountaintop summit he recently held with economists Gary Shilling, David Rosenberg and Nouriel Roubini.

You can learn about his strategies within a couple of hours of his presentation in Vancouver. You’ll be missing out on the “Vancouver experience,” but you don’t have to miss out on the actionable recommendations from any of our speakers. Not if you sign up for an exclusive series of e-mails we’re offering for the first time ever. We’ll issue them direct from conference headquarters at the Fairmont Hotel. Here’s where you can learn more.

  “Until Congress quits micromanaging the Postal Service” — a reader passes on this comment from an insider at the USPS — “and allows offices to be consolidated and closed, this will likely continue. It's tough to cut costs like a business when you have to serve 1-2 million new business and residential addresses each year (so-called universal service mandate) and Congress won't allow any layoffs or closures.’”

  “I read your letter religiously,” another comments, “so I greatly value your opinions. [Uh-oh.] I recently read that ‘the Treasury has announced its intention to shift new issuance away from short-term T-bills into longer-term notes and bonds, which could apply upward pressure on longer maturity yields.’

“I understand the Government is trying to lock in rates while they are low, but what about people who have their money in T-bills because they don't want to purchase notes or bonds? What are the alternatives, our mattress?”

The 5: With a 6-month T-bill yielding 0.19% as we write, the First Bank of Serta doesn’t look half-bad.


Addison Wiggin

The 5 Min. Forecast

P.S. “You know that a growing economy, one delivering prosperity to many, requires policies that are friendly toward capital formation and growth, right?” Byron King asked Outstanding Investment readers on Tuesday, baiting them for a doozy. We thought you might enjoy reading over their shoulder.

“You need a stable regulatory climate, right? You need stable energy policies, right? You need a world in which you can plan and invest for the long term, right?


“Yeah, well too bad. Mr. Stability doesn't live here anymore. He moved away. It pains me to say it, but we don't live in that growing, optimistic, can-do America of old. Today, it's all about paying more taxes, getting more regulated and not being able to do what you want without a series of permits from an alphabet soup of government agencies — usually staffed by know-it-alls.”

And that is exactly why we themed our Investment Symposium Assault on Enterprise: How to Invest in an Age of Rising Taxes, Wall Street Crooks and Government Boondoggles. Byron will be joined by regular 5 characters Chris Mayer, Dan Amoss and Patrick Cox as well as the rest of the Agora Financial analysts just 12 days from now at our Vancouver Symposium. Along with our distinguished guests, they’ll be sharing dozens of actionable ideas on how to deal with this environment. We’ll have loads to report back here in these pages.

(The event is sold out. But we’ve addressed a concern passed on by many who cannot make it. In years gone by, you’ve had to learn about ideas from the symposium weeks later by ordering the audio CDs. But now, for the first time ever, you can learn about them in real-time — the same day they’re issued — from your own home. Here’s how.)


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