What’s Behind Gold’s Latest Record

by Addison Wiggin

  • Gold reaches a record as trend that dominated 2010 finally falls apart

  • Gold’s next drivers: Obama and the Fed “doubling down”

  • Bank of Japan big-foots the forex markets… Chuck Butler on whether it can last

  • Chris Mayer on why natural gas is down, but not out

  • Update from Washington: Your retirement accounts are safe… for now

No, it wasn’t a one-day wonder. Gold is holding its own after reaching a record high.

The yellow metal’s spot price jumped $25 an ounce yesterday, topping out near $1,275 before pulling back — but not much. This morning, it sits at $1,268.

The immediate catalyst appears to have been some conference call chatter by Jan Hatzius, the chief U.S. economist at Goldman Sachs. He speculated another round of quantitative easing is on the way, with the Federal Reserve buying up more Treasuries. He threw out the number $1 trillion, and a target date of November or December.

Traders acted on the theory that if this is coming from Goldman, it might as well be coming from a Fed governor, or Ben Bernanke himself. Buy!

Then again, Hatzius merely confirmed suspicions that have been building for a while. Connect all the dots, and it adds up to much higher gold prices. Maybe not this week or this month, but sooner, rather than later…

For starters, gold and the dollar appear to be reverting to their traditional roles — one goes up, the other goes down. Certainly, that was the case throughout 2009, but we noticed in early February that this trend had begun to take a breather. Gold and the dollar became unusually well correlated.

But that correlation started breaking down in mid-June and fell apart a few weeks later.

“The dollar has benefited from the troubles in other countries [like Greece] in its role as a relative safe haven,” says U.S. Global Investors chief and Vancouver favorite Frank Holmes.

“But ‘relative’ is the key word — roughly $10 trillion is expected to be added to the U.S. federal debt burden through 2019, and the U.S. trade imbalances are huge. These trends stand to weigh on the dollar and support gold’s safe-haven status over the longer term.”

“Faced with voter anger at the failure of monetary and fiscal stimulus to stimulate, the Obama administration and the Federal Reserve are doubling down,” Alvaro Vargas Llosa explains further. He’s a senior fellow at the Independent Institute, and one of the experts Addison interviewed for his current documentary project.

“If almost $1 trillion of fiscal spending and a tripling of the Fed’s balance sheet have not done the trick, leaders should realize by now that the process of economic healing — paying down debts; liquidating redundant assets; saving; and, eventually, investing and consuming again — cannot be altered by political diktat.”

About that fiscal imbalance: On Monday, the Treasury Department said the federal deficit for the first 11 months of the fiscal year totaled $1.26 trillion. (Treasury lied. According to its own website, Uncle Sam ran up the national debt by $1.53 trillion.)

It’s only going to get worse, judging by figures out just this morning from the nonpartisan Tax Policy Center…

  • 44% of Americans live in a household where someone is receiving government benefits. That compares to 30% in 1983

  • An estimated 45% of U.S. households pay no income tax, compared to 39% just five years ago

  • 13% of households pay neither income tax nor payroll tax.

If numbers like that don’t awaken the bond vigilantes from their slumber now, it’s just a matter of time. Steven Romick, manager of the well-respected FPA Crescent Fund, reminds us that 48% of U.S. debt outstanding is due to mature over the next two years.

That’s $3.7 trillion that needs to be rolled over, on top of a ballpark $3 trillion in new debt Uncle Sam will run up during the same period. Who’s going to buy all that? “Will it be the foreigners who already own half of the U.S. debt?” asks Alvaro Vargas Llosa. “At what point do they realize that the U.S. government can actually go broke?”

That’s what’s dawning on the people buying gold now.

Current gold prices are starting to run ahead of mainstream forecasts:

  • Just a week ago, Citi revised its short- and medium-term forecasts to $1,300

  • Just yesterday, GFMS, the London-based metals consultancy, predicted $1,300 before year-end — on a day gold touched $1,275!

So how do you play the trend? Byron King has assembled a guide spelling out nine ways, including…

  • How to buy coins and bullion without getting ripped off

  • The absolute two best gold stocks for you to own right now

  • How to store your metals safely and without management fees

  • How to get Lloyd’s of London to insure your gold at no cost

  • Why one gold exchange-traded fund (ETF) beats the others.

There’s much more packed into Bullion and Beyond: Ultimate Wealth Protection Against the Coming Dollar Collapse. Learn how to get your own copy of this indispensable guidebook right here.

So much for those 15-year highs in the Japanese yen versus the U.S. dollar. The Bank of Japan, unwilling to see Japanese exporters continue taking it on the chin, started selling yen today in the foreign exchange markets for the first time since 2004. It did not specify how much money was involved, but whatever the amount, it was enough to move up the dollar 3% against the yen, to ¥85.6.

Can it last? “In most cases,” explains EverBank’s Chuck Butler, “a central bank intervenes, which ticks off the traders, and the traders push back, and eventually win, for the markets have far deeper pockets than most central banks… But this is the BOJ, it has a treasure chest of reserves from years of trade surpluses, so this push and pull between the markets and the BOJ could go on for some time, and in this case, I believe it will.”

Our currency trading specialist Abe Cofnas saw this coming… and shortly after the BoJ’s announcement, he issued a special alert urging his readers to collect up to four times their money on a dollar-yen trade they laid on just two days ago.

We’re still collecting feedback from a small circle of readers about Abe’s techniques before we relaunch our forex service and open it to new members. When that happens (we’re talking weeks, not months), you’ll be the first to know.

Stock traders have yawned in reaction to gold’s record high and the Bank of Japan’s intervention. The major indexes are mostly flat after 45 minutes of trading this morning.

Nor is the market reacting much to the Empire State Manufacturing index (down, when expectations were up) or industrial production numbers (up slightly, but last month’s increase was revised downward).

Don’t look now, but Big Oil is rapidly transforming itself into Big Nat Gas. Royal Dutch Shell expects more than half its output to be gas by 2012. Seven of eight projects Exxon Mobil completed last year were gas projects. ConocoPhillips has bought an Australian gas firm, and Chevron is aggressively pursuing a liquefied natural gas project down under.

“There are several things at work here,” explains Chris Mayer. “One is that new oil deposits, like pitchers who can hit, are becoming harder to find. They are also costlier. The Kashagan oil field, which was supposed to be a great find in the Caspian Sea, is seven years behind schedule and billions of dollars over budget.

“Another factor at work is that 90% of the world’s oil reserves are in the hands of national oil companies. They are off-limits for the likes of Exxon and others.”

In contrast, natural gas deposits are not only more plentiful, they’re getting cheaper to develop. “The cost to build an offshore LNG terminal,” says Chris, “is about half of what it was only two years ago.” On top of that, the world’s use of natural gas is growing at a faster rate than oil. And it has the lower-carbon thing going for it.

“However, I don’t expect the price of natural gas to rise in a big way anytime soon. There is simply too much of it.”

That won’t last forever. “Longer term, the current low nat gas price is not sustainable, as most of the industry seems to lose money at these prices. As old contracts (made when natural gas prices were higher) roll off, these producers will start to shut down production.” That means less supply, and then higher prices.

You can well imagine pure-play natural gas stocks can be an investing minefield. But readers of Chris’ premium advisory Mayer’s Special Situations have navigated it successfully: They collected a 107% gain in 2008, and they’re up 111% on a nat gas play bought just over a year ago — even as the price of gas has gone nowhere.

You can still get a 30-day trial of Mayer’s Special Situations for just $1… but this offer comes off the table in a little over 24 hours. Act now and you’ll get his special report The New Chinese Middle Class: 8 Tiny Stocks Set to Explode From the Largest Population Trend in History. (Don’t worry, they’re all available on U.S. exchanges.). Take advantage of this limited-time offer right here.

As promised, here’s some news from Day 1 of the Labor Department’s two-day hearing on “lifetime income options for retirement plans” — which a number of our readers suspect is a prelude to the eventual confiscation of 401(k)s and IRAs and their conversion to long-dated Treasuries.

In the event, nothing even hinting at such an eventuality was discussed. What was discussed was how employers might offer the option of annuities in their 401(k)s. Right now, employers are reluctant to do this because of 1) the fees and 2) the potential liabilities in choosing an insurer.

Insurers would like very much to have a law passed that would exempt employers from liability. Prudential’s chief of retirement testified this would be an excellent idea.

So at least this time around, the hearings aren’t about how the government can confiscate your retirement money; they’re about how the finance-insurance-real estate sector can skim more of your retirement money with the government’s blessing. It’s just business as usual. There, don’t you feel better? (If it’s lifetime income you’re looking for, we have a much better idea.)

Still, readers remain wary about IRAs and another recent topic in this space, health savings accounts. “The solution,” one writes, “is to stop participating in these government-sponsored plans. The benefits of tax deferral do not outweigh the risk that the government will change the rules and cheat you out of your own money. Get your money out of these plans now before it is too late!”

“I thought your valuation of the dollar was a little optimistic,” a reader writes in response to yesterday’s edition, “so I looked up the price of gold (real money) in 1913 — $20.67. Using today's $1,271 price for gold, I get the current value of the dollar equal to 1.6 cents.

“Maybe by 2012 they can get it down to an even penny; they're sure giving it a good go. At 1 cent per year, the dollar will go to ZERO in 2013. If the dollar goes to zero, gold will go to infinity!”

The 5: That’s definitely another way to look at it. Bill and Addison used the consumer price index — even as they concede its many flaws — to come up with the figure of 5 cents. (And they wrote that in 2005. Now it’s 4½ cents.)

“In your summary of futile ‘forever wars,’ writes our final contributor, “you forgot about the so-called war on drugs that has produced countless casualties; sent thousands to jail; cost untold billions of dollars; and destabilized many countries, most recently Mexico. To the best of my knowledge, drug usage today is not substantially different than when this ‘war’ was declared.

“Our current president and his predecessors have all admitted they used drugs during their misspent youths. One wonders how their lives would have been improved had they been caught and imprisoned.”

The 5: Their lives? Heck, how about ours?


Dave Gonigam

The 5 Min. Forecast

P.S.: Our friends at EverBank send along a reminder that tomorrow is the funding deadline for their MarketSafe Currency Returns CD. This is one of their most intriguing products, keyed to the Deutsche Bank Currency Returns Index. You can learn what it’s all about here.

Full disclosure: We have an ongoing business relationship with EverBank because the folks there have a viewpoint on the economy and markets that lines up with our own… and because they offer some of the most unique savings vehicles out there. Likewise, we’re likely to be compensated if you open an account with them.

If you’re one of our newer readers, the key to all of EverBank’s MarketSafe CDs is that you’re shielded from market risk. So even if the underlying index on the MarketSafe Currency Returns CD goes down, your principal is fully protected. Here’s where to learn more.


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