Why Record Gold Now?

by Addison Wiggin – April 6, 2011

  • Gold hits a record, for no obvious reason: Tocqueville’s John Hathaway on why that’s a good thing
  • Washington fiddles over $33 billion while $14.2 trillion national debt burns: Frank Holmes with a stunning chart tracking the national debt and the gold price
  • Saudi’s legendary oil minister emerges from retirement: Why he sees “$200-300” oil
  • 1099 repeal hits another snag… An electric Rolls-Royce… an inquiry into the secrets of Strategic Currency Trader …and praise for the “mellow wisdom” of Bill Bonner

0:00The spot price of gold is touching $1,460 as we write and on its way to another new high. Silver is now 43 cents away from the $40 mark.

On days like this, we love to peruse the financial media and read their explanations for these precious metals’ historic run. Yesterday was particularly entertaining:

  • “Crude and corn prices flamed inflation fears”
  • “A downgrade of Portugal’s credit rating drew attention to eurozone problems”
  • “Fears of a potential U.S. government shutdown”
  • “Conflict in the Middle East and North Africa”
  • Ben Bernanke “suggesting he was committed to completing a $600 billion stimulus program as scheduled in June”
  • Kirstie Alley “tumbling to the floor” on Dancing With the Stars.

Hey, the last one makes as much sense as any of the others.

0:25“To me, it’s always best when you don’t have a knee-jerk reaction to some news headline that would explain gold’s move,” says John Hathaway, manager of the $2.6 billion Tocqueville Gold Fund. “I think a lot of people are still mystified and basically out of the game.

“It looks to me like there were people on the sidelines,” Hathaway tells radio host Eric King, “waiting for it to come in to buy it on a pullback or maybe to cover shorts on a pullback. To me, this is great action.”

If it stays above $1,440, Hathaway sees a potentially quick move to $1,600.

0:32“Naysayers started calling gold a bubble back when prices hit $250 an ounce,” observes U.S. Global Investors chief and Vancouver favorite Frank Holmes, “and though gold’s bull market has tossed and flung the bubble callers around for almost a decade now, their voices have only gotten increasingly louder.”

But where, asks Frank, are the usual signs that accompany bubbles? “The recent run-up to today’s $1,460 represents only a 0.7 standard deviation move for gold prices, according to Credit Suisse (CS).”

Don’t worry about the methodology used to arrive at that number. The point is that 0.7 is nothing compared to 5.3 — which is the average for historical bubbles like Japanese stocks in the late 1980s and U.S. tech stocks in the late ’90s.

0:43In addition, “Gold as an asset class is far from being overbought by speculators,” Frank adds. He passes along a variant of a chart we’ve shared before — how gold stacks up as a percentage of financial assets worldwide:

“In 1968, gold represented nearly 5% of financial assets. In 1980, the level had fallen below 3%. That figure had shrunk to less than 1% by 1990 and has remained there since.”

1:07 — We’re writing this morning from a cafe in Union Station in Washington, D.C. A few hundred yards to the south, Congress is working their way toward a “partial government shutdown.”

The two parties are arguing over a $33 billion “bar tab on the Titanic.” $33 billion, by the way, is 0.89% of the $3.7 trillion they plan to spend this year. It is also 0.23% of the national debt, which this morning totals $14.24 trillion.

Mr. Holmes took a chart of the national debt over the last 48 years and overlaid it with the price of gold. Here is the intriguing result:

“You can see from the chart that gold’s bull run began in 2002,” Frank writes “about the same time federal debt began to rise significantly. Gold played catch-up at first, but the two have tracked each other rather closely.

“Since 2002, gold prices have risen 308%, versus a 119% increase in federal debt. This means that gold’s sensitivity to a rise in federal debt is just over 2-to-1. With lawmakers in Washington, D.C., still squabbling over where and by how much to cut the budget, it’s unlikely the federal debt level will recede anytime soon.

“In conclusion,” says Holmes, “we believe gold could double over the next five years.” In other words, it’s not too late to get in. Here are nine ways to play this long-term bull.

[Ed. Note: We’re meeting later today with Rep. Ron Paul. Among the topics we’ll discuss: the U.S. Mint’s inability to keep up with demand for Gold and Silver Eagles, the document dump by the Federal Reserve revealing who borrowed from its “discount window” during the 2007-08 crisis and reminiscences of Dr. Paul’s time on the U.S. Gold Commission. That last experience, in the early ’80s, begat a book — long forgotten, but now back in print. Learn how to get a free copy here.]

1:22After pausing yesterday to catch their breath, the major U.S. stock indexes are up again today. The S&P 500 is a few decimal points away from 1,339.

1:30 — Ditto for oil. After hovering around $108 yesterday, a barrel of West Texas Intermediate has tacked on a few more cents, to trade at $108.64.

1:41Oil could zoom to $200 or even $300 a barrel if political unrest hits Saudi Arabia, predicts the country’s former oil minister, Sheik Ahmed Zaki Yamani.

Americans of a certain age remember Yamani as a villainous figure during the oil shocks of the 1970s. He speaks English well and thus was a fixture on the network news. Many a third-tier comedian of the era recycled the line, “Yamani or your life?”

“If something happens in Saudi Arabia, it will go to $200-300,” says Yamani now, still kicking at 80. “I don’t expect this for the time being, but who would have expected Tunisia?”

What’s more, he implies the only reason we don’t see more protesters taking to Saudi streets is that they know they’ll be crushed before they can find strength in numbers. Or in his words: “Some people relax about the situation in Saudi Arabia because the Saudi Islamic brand prohibits people to go to the street and to talk.”

Yamani has upped the ante of our own Byron King, who’s calling for $220 oil once the country’s Shiite minority — who happen to reside in the oil-rich part of the country — revolt against their Sunni rulers. Watch the scenario unfold here.

2:33Less than a month after our return from Colombia, we see progress on a long-stalled trade deal with the United States.

The deal was first done in 2006. It would lift a variety of mutually imposed tariffs. For instance, Colombian textiles could freely enter the United States, and U.S. cotton could freely enter Colombia. Unions hated it, as is their wont, so they’ve managed to stall it in Congress for five years.

President Obama has dithered, citing union objections like violence against labor leaders in Colombia. The Washington Post said last month those issues “were never as serious as he contended, and are well on their way to resolution.”

Now comes word the White House and the administration of Colombian President Juan Manuel Santos have been tweaking the deal to try to push it through. Yesterday, U.S. Trade Representative Ron Kirk reported “very strong progress,” and a deal could be done by week’s end.

That would make some already-attractive opportunities in Colombia even more so. We’re writing up some of them for the next issue of Apogee Advisory. If you’d like to be on board — and snag a free book in the bargain — here’s where to go.

2:49 — “The silence is, if not deafening, then at least spine-tingling,” writes the BBC’s auto writer Jorn Madslien, “as the 2.7-tonne Rolls-Royce Phantom effortlessly takes off down the drive of the carmaker’s Goodwood factory.”

It’s come to this. Rolls has built an electric car.

An electric car fit for a Saudi Prince

Over the next few months, Rolls will invite about 500 current owners of gas-powered models to try out the 102EX Phantom Experimental Electric — just to see if an electric Rolls will fly with any of them.

Top speed is a mere 100 miles an hour… although it can go 0 to 60 in eight seconds. It houses the biggest battery yet in an electric car… and for all that, it still has a range of about 125 miles.

A conventional Phantom will run you about $480,000. But as Rolls CEO Torsten Muller-Otvos points out, “If you look at electric cars today and at what their price increase is, it’s 50% — often more than 50% — and some of them are 100% more expensive.”

Cost aside, the BBC auto writer is smitten by how quiet the thing is. “The only sound is a slight tire noise, and even that is barely audible inside the luxury car’s insulated cabin.”

In 1958, advertising legend David Ogilvy did a famous magazine ad for Rolls that began, “At 60 miles an hour the loudest noise in this new Rolls-Royce comes from the electric clock.”

“Three mufflers tune out sound frequencies — acoustically,” it explained. To us, that still sounds like a more significant technical achievement.

3:01The Senate has passed a measure repealing the infamous 1099 provision of the health care law. It now goes to President Obama for his signature — which it may or may not get.

Effective next year, the law would have required businesses to issue an IRS Form 1099 to anyone from whom they buy $600 or more in goods every year. Which means a three-person office that buys $600 or more in supplies from Staples would have had to issue Staples a 1099.

Yes, it’s every bit as intelligent as it sounds. There was broad support for repealing it, both in Congress and the White House… save for a disagreement over how to make up for the $22 billion in “lost” revenue. Not your lost revenue… theirs.

3:25“You know it bothers me immensely,” writes a reader about the Form 1099 fiasco, “that Washington cannot agree on the repeal of a bureaucratic nightmare due to the failure to make up for the revenue.

“Tell me if I am wrong. There has never been any actual revenue generated from this regulation and the regulation is not currently in effect, yet the government is acting as though there is somehow lost revenue if this regulation is repealed.

“This is the typical smoke and mirrors that comes from inside the Beltway. People in government are acting like they will lose something that they never had in the first place. What do you expect from people who don’t even account for all spending or appropriation on a balance sheet or income statement.

“Why don’t they just place it ‘off-balance sheet’ and repeal the damn law. In addition, the staffers are talking about reporting payments to the IRS. That appears to indicate the people who passed the law assume that people running businesses are liars, cheats and thieves, like the members of Congress and the executive branch of government, who either accept bribes in the form of political contributions or fail to report income on their tax returns.

“None of the members of Congress that passed this monstrosity knows anything about business, and their staffers are in a fantasyland and believe reporting is synonymous with actual revenue collected and flowing down to adjusted gross income, and hence to taxable income. These items are mutually exclusive. If this thing gets to its implementation date, there will be a significant black/shadow market that will develop and all the reporting in the world will not catch it.”

The 5: Amen.

3:58“I’m very intrigued by Strategic Currency Trader,” a reader writes, “but uncertain about joining. My uncertainty lies with not knowing what brokerages are useful for this service. Could you divulge what major online brokers are suitable for Abe’s service?”

The 5: The market Abe tracks is so unique that no major online brokerage can handle it. That’s the “bad” news. The good news is that setting up the account you need is as easy as could be. We’ve watched other people do it. It takes as little as five minutes.

Once you’re set up, you’ll be ready to collect the sort of gains readers did last week — an average 104%, and that’s including the one losing play out of four total. As always, those plays take place within a five-day span — or less. And we’re making it as easy as possible to join up — as publisher Joe Schriefer explains right here.

4:17“I have been following Bill Bonner for over seven years,” writes an Amazon reviewer who’s weighed in on Dice Have No Memory. “He not only gives me FREE commentary every day, but is also very funny…

“Even though funny, so much is true. Seems like he helps us laugh as ‘Helicopter’ Ben is running the U.S. dollar in the toilet. I agree with him 1,000% to sell the stocks and buy gold.

“The only thing is I bought 25% gold and silver 75%, silver up over 300% in the last two years… Maybe he will change his statement to include the silver.

“He surrounds himself with so many experts who have done nothing but make money… Laughing all the way to the bank with Bill.”

5:00“I would like to say Bah! Humbug! (Grinch) in April,” adds a reader who wrote to The 5‘s inbox, “for all those readers that don’t want to believe in your work.

“I came on board way back in 1999 (when you published the dot-com implosion), and all I can say to all of your nonbelievers is open your eyes to the best financial news anyone could ever receive!

“I got sidetracked financially seven years ago for things anyone in the world could go through. Agora and all the wide variety of investment news that is offered will (I say will) put wealth into anyone’s pocket regardless of risk. You have to choose what risk is right for you and choose the advice.

“I have been investing into a variety of Agora’s services, and over time (in short order) feel I will be 10 times ahead of where I was seven years ago.”

The 5: Thanks for the kind words.

Readers who are newer to who we are and what we’re all about can’t get any better introduction than Dice Have No Memory. This collection of Bill’s essays will be like reliving the last 10 years of economic and financial histor… only this time, you’ll get insights you’ve never run across before, salted with generous chuckles and the occasional belly laugh.

“It is immensely to the credit of the author,” writes another Amazon reviewer, “that this history of crying in the wilderness — albeit with much better compensation than locusts and honey — has not left him sour and shrill, like many another libertarian prophet without honor. On the contrary, a mellow wisdom comes through even the more cynical passages of this collection.”

We couldn’t have said it better ourselves. Get your copy of Dice Have No Memory by William Bonner.


Addison Wiggin

The 5 Min. Forecast

P.S. Rising gold prices yesterday had a spillover effect on gold stocks, with the benchmark HUI index rising 5%.

Readers of Penny Momentum Trader did even better, with a gold play for conservative traders up 8% after 12 days… while a gold recommendation for more aggressive traders was up 26%, also in 12 days.

It’s another textbook play for Jonas Elmerraji’s S.T.O.R.M. system. He explains the five elements behind it, and how they deliver fast gains, in this presentation.

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