Gold and the “Love Trade”

by Addison Wiggin – January 12, 2011

  • China, India go for gold: Frank Holmes on “the love trade” in emerging markets

  • $426 million into $10 billion? Patrick Cox on the awesome potential behind one “wealth quake”

  • Complacency rules… Jim Nelson on why the VIX is sure to rise, and a sure way to play it

  • “Clarify your gross assumption”… Readers unload on our Chinese correspondent, and call our letter to Harry Reid “a waste of time and effort”

On the surface, our favorite yellow metal isn’t doing much this week. The spot price has moved within a tight range around $1,380. But just below… we sense something lurking.

Retail buyers in China can’t get their hands on gold bars fast enough. The premium in Hong Kong, for example, has reached $3 an ounce over the spot price, a level last seen during the Panic of ‘08.

“I don’t have any gold,” one dealer told Reuters yesterday. “Premiums are very high. Some say they have no stocks on hand.”

Chalk it up to inflation — officially at 5.1%, but probably double that — and the run-up to the Lunar New Year. “The jewelry sector is gearing up,” another expert tells Reuters, “and giving gold bars as a gift has been getting very popular.”

Likewise, the first gold-oriented fund in China has had no trouble meeting its goal of raising $500 million. Lion Fund Management hung out its gold shingle barely six weeks ago, giving ordinary Chinese access to overseas gold ETFs for the first time.

In the limited space of funds allowing Chinese to invest overseas, this was the biggest offering in three years. Perhaps not a surprise for the world’s No. 2 consumer of gold.

Meanwhile, the world’s No. 1 consumer of gold likely set a record for imports last year. Final figures aren’t in yet, but Indian purchases totaled roughly 800 metric tons — a massive increase from the previous year’s 557 tons, according to the World Gold Council.

Investment demand for bullion surged 73% in the year ended Sept. 30, says the Council’s Ajay Mitra. “Price is no longer a factor,” he adds, reinforcing a point we made here last week: Indian buyers no longer wait for a 10% pullback before backing up the truck.

We have visited gold markets in Mumbai and Beijing over the past year and can attest to the irrational desire buyers have when they get near the stuff.

“There are two main drivers of gold demand,” says U.S. Global Investors chief and Vancouver favorite Frank Holmes, helping put the demand in perspective: “The Fear Trade and the Love Trade.”

The Fear Trade is what we have in the West, “driven by negative real interest rates — where inflation is greater than the nominal interest rate — and deficit spending. Whenever you have negative real interest rates coupled with increased deficit spending, gold tends to rise in that country’s currency.

“In the U.S., we’re in the middle of an extended period of negative real interest rates that will likely last through the year.”

By contrast, “The love trade is significant and unique to gold,” Frank continues. “People buy gold out of love and those in emerging markets are especially amorous of the metal. It is customary in most emerging countries to give gold as a gift to friends and relatives for birthdays, weddings, and to celebrate religious holidays.

“What is important to remember when looking at the history of gold is that in the 1970s, China, India and Russia were isolationists with no significant global economic footprint. The world’s population was 3 billion, and today we have witnessed an awakening of epic proportions.

“These countries are growing with free market policies and massive infrastructure spending. In the 1970s, gold rose on the fear trade and the Cold War. Today, the world is significantly different and the love trade drives gold.

“It’s impossible to predict where gold prices will be 12 months from now,” Frank concludes, “but we think gold prices could double over the next five years. This would mean roughly a 15% return if you compounded it annually.

And that’s just the bullion. If you haven’t checked out Byron King’s report on ways you can still get rich with gold, he has a list of nine right here.

“At long last,” Patrick Cox wrote his Breakthrough Technology Alert readers yesterday, “we can begin to view the No. 1 cause of death — aged hearts and vascular systems — as a preventable disease.

“The ability to restore the heart, vascular and immune systems to full youthful health, using the donors’ own cells, has so many enormous implications.” One of the tiny companies Patrick follows unveiled plans last week to accelerate the development of a revolutionary treatment for both heart disease and autoimmune disorders.

How much will this breakthrough treatment cost? Patrick compares it favorably to a biotech darling of the recent past: “I don’t believe it will be more than Dendreon’s anti-cancer vaccine Provenge, which costs about $93,000 per customer.

“Dendreon estimates $400 million in U.S. sales this year. If you divide total expected revenues by the cost of the therapy, that amounts to only 4,301 prostate cancer patients. Analysts are predicting sales of over a billion annually. That’s 10,752 patients buying a therapy that on average extends life by about four months.

“Now think about the market for a nonsurgical cardiopulmonary therapy, delivered through transfusion, which could easily extend life by a decade.

“Let’s pretend this firm charges $200,000 for the procedure, clearing $100,000 per procedure. Also, pretend that only 5% of the world’s high net worth individuals buy rejuvenated cardiopulmonary system every year. One clinic in Hong Kong could perform that many transfusions easily.

“Regardless, that’s 100,000 procedures at a profit of $100,000 each, for a total profit of $10 billion a year.” All for a company with a market cap today of $426 million. No wonder Patrick sees this as one of the five “wealth quakes” coming in 2011. To learn more about all five, check out Patrick’s predictions for the year. Don’t hesitate; this presentation goes offline at midnight on Friday.

U.S. stocks are adding to yesterday’s gains, traders cheered by the news Portugal pulled off a bond issue successfully. The S&P 500 just topped 1,280.

Canada’s TSX is also up for a second straight day, driven by acquisition news: Cliffs Natural Resources, the country’s largest iron producer, is buying out a smaller competitor, Consolidated Thompson.

This is sweet news for readers of Mayer’s Special Situations. Chris recommended Consolidated Thompson in July 2009 at C$3.11 a share. Cliffs’ offer is for C$17.25 a share. That’s a 455% gain in just 18 months. Did you buy it?

If you’re interested in Chris’s favorite special situations of the moment, he lays out the story on four of them in this presentation.

The Volatility Index is down over 3% this morning — not to the ultra-complacent lows of last month, but as Chris would put it, “fear is still cheap.”

“As you’ll recall,” writes Lifetime Income Report’s Jim Nelson, “the VIX measures how much implied volatility investors foresee in the S&P 500 through the volume of puts on the index.

“This is based on the idea that investors buy more puts on stocks when they think the stocks could fall. It’s the easiest way to hedge investments. So the higher the VIX, the more hedging there is on the S&P.”

Jim sees a number of speed bumps facing the market this year. “The number of objections we often list — continued stubbornness in real estate, weak commercial financing, energy prices on the rise, the muni bond market’s ticking time bomb, etc. — are just the start.

“With the endless lists of potential mini-crises about to unfold in the next several months, we’re going to see investors begin hedging their bets. The VIX should fly.”

Last year, Jim uncovered a one-of-a-kind way to play a rising VIX. And it has nothing to do with VIX-oriented ETFs, which do a notoriously awful job of tracking the movements of the index. Best of all, this one pays you a dividend; that’s right, you collect checks as market volatility takes off.

Jim lays it all out in the current issue of Lifetime Income Report, released just yesterday. If you’re not yet a subscriber, here’s where to go.

After a week in which the Chinese notched a record buildup of forex reserves, test-flew a stealth fighter jet and completed the world’s longest bridge, what’s next?

They’re taking one more step toward making the renminbi a global currency.

Starting today, the Bank of China is allowing U.S. firms to trade in renminbi. Heck, even individuals can open renminbi-denominated accounts (minimum balance: US$500).

On first glance, there’s no real point. There is still something of a yuan-dollar peg; the yuan can move no more than 0.5% in a day. Standard Chartered figures the people’s currency might appreciate 6% this year.

But the general manager of Bank of China’s New York branch makes it clear. Echoing a trend we first identified in the 2005 edition of Demise of the Dollar, Li Xiaojing explained, “We’re preparing for the day when renminbi becomes fully convertible.”

Tim Geithner, call your office.

“I’ve been enjoying your letters…”

[And the inevitable ‘but’]

“however, sweeping the Tea Party into the tragedy in nearby Tucson is a real reach and insult to [your readers]. There was NO reference by anyone to the Tea Party re the tragic events in Tucson.

Mein Kampf, The Communist Manifesto, etc., were among [Jared Loughner’s] reading. There wasn’t a scintilla of reference directly or indirectly to the Tea Party. I am shocked and disappointed.

“You might care to clarify your gross assumption, which was totally ungrounded in fact.”

The 5: We assume nothing about the mind of an assassin who’s clearly unhinged. But you missed our contributor’s point: To those on the outside, the Tea Party smacks of populism fueled by anger. He made the leap to violent ultra-nationalism from there. And suggests whether the association is accurate or not, we will see more violence in the future.

“I know you had the wisdom to say you didn’t necessarily agree with the ridiculous comment from China about the Arizona gunman and his (nonexistent) connections with the Tea Party. But you spread the lie, so you should also spread the truth. Here it is:

“A friend described him as decidedly ‘left-wing’ as recently as 2007. On YouTube, he flagged as a favorite a video of a person dressed as a terrorist burning the American flag. Only a lunatic or a leftist would do that. His favorite work was a staple of every left-wing bookshelf, The Communist Manifesto.

“If we take the evidence as presented and not as the media and the left would have it presented, the gunman is clearly not of the right. More precisely, the shooter is neither left-wing nor right-wing. He is crazy and evil — a word not used enough.

“By the way, as an exit thought, the Tea Party movement won in November. Winners don’t go on shooting sprees.”

“Who cares what China thinks about our political system?” asks another. “We have no intention of allowing our system to deteriorate to the point that China has.

“For them to equate what a insane jerk did to a political view is just what a radical left-wing nutjob wants you to believe, I am dismayed you give such viral a platform.”

The 5: You have no intention of letting the system deteriorate… how do you propose to stop it?

For the record, it was one reader’s point of view. While he’s a high school teacher in Beijing, I don’t think he can be thought of as speaking for the entire Chinese nation.

Having said that, what makes “their” point of view interesting is the $900 billion pile of U.S. debt the Chinese government holds… on top of the other $1.4 trillion pile of U.S. dollars.

Addison’s letter to Congress is excellent, and I agree with every word. However…”

[Here we go again.]

“sending it to Harry Reid and most members of Congress is most likely a waste of time and effort. Too many in Congress only care about their next election, and the easy path is to give things to people ‘for free.’

“Since most people know there is no such thing as a free lunch, they fool people into believing they are entitled to these ‘free’ things, that they have earned them or paid for them, when the cost is just being passed on to others.

“If all this spending results in a disaster, many politicians just see that as an opportunity to expand their power and influence. As Rahm Emanuel says, ‘Never let a serious crisis go to waste.’

“Nothing will really change until the people understand Addison’s message and recognize the promises of something for nothing and ‘entitlement’ for what they are, lies to buy votes and power. I applaud I.O.U.S.A., but wish it had been seen by more people. It should go to colleges and high schools.

The 5: Amen.

Cheers,

Addison Wiggin

The 5 Min. Forecast

P.S.: Tomorrow, we hear from the attorneys representing both the kingdom of Spain and Odyssey Marine regarding the WikiLeaks cables that reveal a shifty deal proposed by the then-U.S. ambassador to Spain offering to turn over the coins Odyssey found in their ‘Black Swan’ shipwreck find in exchange for a painting (stolen by the Nazis), which now hangs in a museum in Madrid.

The painting reportedly belonged to a California family with some weighty political connections in Washington. That said, we’re told the WikiLeaks cables will have no bearing on the court case currently in progress regarding the “ownership” of the $500 million cache. Uh, right. We’ll see.

[Program Note: We’ve been granted an extension on our deadline to submit the film we’re making about the Black Swan treasure to the Tribeca Film Festival. This week remains a critical week in the development of this first festival cut, however. Wish us luck. We’ll continue to let you know how things develop.]

rspertzel

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