What’s Up With Gold?

by Addison Wiggin – December 10, 2010

  • A bad week for gold… and why we’d like more of them

  • “Popular”… “Attractive”… Chinese load up on gold, Arabs urged to do the same

  • “The gold was not there”… Scary tales of the uber-wealthy trying to take delivery from Swiss banks

  • How the White House and Congress slaughtered municipal bonds this week

  • “Dump it!” Readers offer advice on all kinds of things: from our friends at Odyssey Marine to a wealthy food stamp recipient… and finally… some last words about WikiLeaks, Assange and Vancouver…

Hmmm… gold whacked again this morning. The moment the trade deficit figures came out (they’re now the lowest since January), the spot price fell below $1,380.

Gee, we barely know what to do with ourselves. A week in which gold touches its all-time high and then pulls back 3% to hand us another buying opportunity? We’ll take it!

More, please.

And so will much of the rest of the world, it seems. From China to the Middle East, the buying signs are all there.

Chinese gold imports are on a pace to quintuple this year, according to figures from the Shanghai Gold Exchange. Last year, the Middle Kingdom imported 45 metric tons of gold. Through October of this year, the figure was 209.7 metric tons.

Meanwhile, the volume of gold traded on the exchange is up 43% from a year ago.

“Uncertainties in domestic and global economies, and increasing anticipation of inflation, have made gold as a hedging tool very popular,” says exchange chairman Shen Xiangrong.

Coupled with the news we mentioned yesterday — Chinese regulators approving the first mutual fund to invest in gold-backed ETFs — we see Chinese gold demand is going to a whole new level.

Two leading economists in the Persian Gulf region are urging central banks to boost their gold reserves.

They just issued a report on behalf of the Dubai International Financial Centre Authority. Their advice to the nations of the Gulf Cooperation Council, including Saudi Arabia: Back up the truck.

"When you have a great deal of economic uncertainty, going into paper assets, whatever they may be — stocks, bonds, other types of equity — is not attractive," writes economist Nasser Saidi. "That makes gold more attractive."

Five of the six GCC members peg their currency to the dollar. And all six haul in a lot of revenue from selling oil priced in dollars. The dollar’s fall over the last six months is a big deal to them.

"The value of paper money is being debased by injections of quantitative easing in Europe, Japan and the U.S," adds Saidi’s co-author Fabio Scacciavillani. "Gold is a means of exchange not dependent on any political decisions and has a role as a hedge against inflation and economic risk."

Are Swiss banks getting tightfisted about handing over the gold they stash on behalf of their clients when those clients decide they want to stash it themselves? That’s what we’re hearing from the top echelon of the world’s wealthy.

First comes a story related by Jim Rickards of Omnis Inc., the man perhaps best known for negotiating the rescue of the hedge fund Long-Term Capital Management in 1998. He tells about a client of a major Swiss bank who was refused access to his $40 million of gold.

“It took lawyers, it took threats of publicity, it took a lot of pressure,” before the bank would relent, Rickards says. “This is something that should have taken two days, three days, a week at the most, although I would say even a week is a long time. But it took 30 days.

“My inference is that that gold was not there. The bank had to scramble, go out and find it somewhere before they could make good delivery.”

“I could tell you several stories of similar experiences,” says our friend James Turk from GoldMoney. He cites the example of an individual with $550,000 of silver stashed in a Swiss bank — not exactly a super high roller like Rickards described.

This individual bought his silver more than a decade ago. And yet he’s been struggling for two months to collect his bullion. The bank is insisting he take cash. This one’s not yet resolved.

“People increasingly want to own the real thing,” says James, and not some paper substitute like an ETF, or even physical gold held in an “unallocated” account (where your gold is mingled with other peoples’ gold).

All of this underscores the final part of Energy & Scarcity Investor editor Byron King’s long-standing advice about precious metals. “Buy gold. Buy silver. Take delivery.”

While gold is down 3% from its highs this week, gold stocks have pulled back nearly 5.4%. The HUI index, which topped out Tuesday morning at 596, trades this morning below 565:

“I like gold,” Byron says. “I like gold miners. I'm generally bullish on gold and gold mining. I love technically competent, well-run gold mining firms.” So whatever’s going on this week is short-term noise, and a reminder that nothing moves straight up.

Of course, the HUI is made of big mining companies, solid buy-and-hold plays. But Byron also has a taste for the more speculative… like the potential 30-bagger (you read that right) that he recently identified.

Byron doesn’t throw out a figure like that lightly: He knows full well Mark Twain’s definition of a gold mine — “a hole in the ground with a liar standing on top.” That’s why he likes to take his geology degree and take a look 2 miles deep…

Bottom line… The mine Byron saw could hold 10 times as much gold per ton of rock as the best mine in South Africa. And he sees two short-term catalysts that could rocket the stock price of the company sitting on this mine.

We won’t tease you any more. You can learn all about it right here.

Major U.S. stock indexes are going nowhere today, which is what they’ve done since Tuesday.

Traders yawned at the news that China is raising the reserve requirements on its banks for the third time in a month — another toothless and symbolic move against the growing Chinese inflation menace.

A crisis in the municipal bond market that we warned about several days ago is gathering pace, thanks to the wrangling in Washington over whether to extend the 2001 and 2003 tax cuts.

Whatever the result of the congressional sausage making, it looks as if Build America Bonds are toast.

“BAB,” explains Lifetime Income Report’s Jim Nelson, “is a program that guarantees federal subsidies on certain taxable municipal bonds. So for each of these bonds sold to investors, the federal government pays 35% of the interest payments.”

“This eases the budget pains that states and local governments have been feeling since the economy hit the rocks in 2008. And it's only going to get worse.”

News that BAB was left out of the Grand Bargain between President Obama and top Republicans in Congress “crushed the muni market this week, continuing a trend that started in early November.”

Don’t look for BAB to magically rematerialize in the final bill. “So bond funds and munis look like they hit a wall,” says Jim. That’s on top of Treasuries’ miserable performance we told you about earlier this week. All this reinforces the need for alternative sources of income like the ones Jim seeks out.

We just looked over a spreadsheet of the open positions in Lifetime Income Report. They’re up an average 25%. And the positions he’s sold during 2010 rose an average 23%. If that’s the kind of consistency you’d like for the income part of your portfolio, look here.

From Pennsylvania comes just about the worst idea we’ve seen in… well, maybe a week.

It’s a vending machine that sells you wine. Well, it sells you wine as long as you take a breathalyzer test, swipe your driver’s license and confirm your purchase with a bureaucrat on the other side of a closed-circuit TV camera.

This is Pennsylvania’s idea of “liberalizing” its liquor laws. For decades, the only place you could buy booze was a state-run liquor store. More recently, you could actually buy wine at a grocery store (which is more than we can do here in Maryland, but that’s another story)… as long as you contend with one of these contraptions.

Now comes word that Pennsylvania’s Liquor Control Board has approved these machines for use at Wal-Mart. So you can jump through all the hoops of your state-approved purchase while you listen to a pre-recorded message from Janet Napolitano urging you to narc on your fellow citizens if you see something “suspicious.”

It’s enough to drive you to drink, no?

“I read with dismay,” writes a reader, “about the double-dealing that went on with the Black Swan treasure. Sounds very similar to what Mel Fisher went through with the Atocha.

“If I were Odyssey, I would dump every last doubloon to the bottom of Davy Jones before I gave any of it to any government. I personally hope that they are considering that option.

“Better to get nothing than to allow the parasites in government to get their greedy hooks on any of it. But that's me. Best of luck to them come what may, but don't give in without a fight.”

The 5: The intrigue has caught on with the mainstream press, too. Here and here. We haven't heard yet what Greg plans to do about it.

“Yes,” a reader writes, “go ahead and invite Julian Assange to speak in Vancouver, if he is still alive or hasn't gone insane from torture, and if the nameless ‘they’ have not yet told Agora, as they have told an increasing number of other businesses, to shut up or close down.”

“With regard to the uproar over WikiLeaks,” writes another, “it is perhaps worth noting that in this government ‘of the people, by the people, for the people,’ the people have essentially no power to limit what the government may demand to know about their personal affairs, nor do they have any right to know the ‘personal’ affairs of government officials.

“On the other hand, as private citizens, we have been told that we must reveal to government officers all details of our financial affairs, even those parts that are held and accessed totally outside the legal jurisdiction of the United States.

“It is now deemed a crime to lie to any officer of the government, even when not under oath, but said officers are permitted to pile whopper on whopper in an effort to induce us to speak an untruth, yet they incur no penalty, even if they testify in court that they did so.

“And finally, it now appears that the charges of rape were grossly overstated, that instead a woman involved believes that she suffered ‘sex by surprise.’ But now that Mr. Assange is in the hand of the authorities, it seems exceedingly unlikely that he will be allowed to go free, even as the original charges which brought about his arrest fade into the background.

”In the face of all this, it is hard to defend the idea that the citizens control the government. Rather, government officials appear to view us as something between subjects and property, and they exercise the power to make it so.”

“You, my friend, are more correct than you know,” writes a reader addressing the New Zealander who unloaded on American “cretins” demanding Assange’s head.

“Every time this country gets in trouble, whether it be in world affairs or economically, the so-called leaders begin to manipulate (dare I say brainwash) people into believing their rhetoric. But the more insidious and covert action here is to create a ‘push button’ Pavlov's dog response to anything they say.

“The government is carefully crafting a mechanism whereby they just have to spew key words to get these poor idiots to salivate; “patriot,” “freedom,” “terrorist,” “national security,” “our troops,” and the list just keep getting longer. Mind control is more powerful than anything to the people susceptible.

“We are becoming the 'Cult of The United States of America.' Too bad the Founding Fathers couldn't foresee this destruction of democracy.

“So Mr. Assange, I wish you well, and I'm grateful for your courage to expose the real danger to our ‘freedom and Democracy,’ secrecy and manipulation.”

The 5: Without being too presumptuous, we believe the Founders did foresee the problems with democracy. That's why they founded a republic. It's our bad for turning it into a democracy.

“To the classless scumbag that makes $600,000 a year," writes another, "and forced his wife to apply for food stamps: I say take the $600,000 and try and buy some integrity, you double-dipping f _ _ _er! It's people like you that makes me ashamed to be an American.”

“You smart… but ruthless [expletive],” adds yet another. “You’re pulling in over a half-mil annually and you’re going to have your (I'm-not-committed-enough-of-a-man common-law) wife get food stamps. You, sir, are part of the problem and should be ashamed!

"Written by an out-of-work welder that turned down extended unemployment benefits so that I would not be part of the problem.”

The 5: Yikes… we always figured welding is one of those jobs for which there’d always be demand. Your comment makes us even more suspicious of the bureau's unemployment numbers.


Addison Wiggin

The 5 Min. Forecast

P.S.: Books are flying off the proverbial shelves at Laissez Faire.

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