Two Critical Yardsticks for Gold

Addison Wiggin – July 21, 2011

  • Gold hovering at $1,600: Frank Holmes with two ratios that point to still higher prices from here
  • “China Flash,” Day 2 of the slowdown: Chris Mayer on a spillover effect you want to avoid…
  • The next Latin American powerhouse… and why it’s still too early to jump in…
  • The government can seize his property but it can’t shut him up: We take our good news where we can get it
  • More on-site reports about ID requirements to buy gold… a plea on behalf of “working stiffs” — we oblige… plus, is America’s “unique blend” enough to avert disaster?

  After Tuesday’s beat-down and Wednesday’s recovery, precious metals are holding steady. At last check, gold is at $1,598.

Of course, the short correction brought with it the usual cries of “bubble” in the gold market. Even here in our own household, we fielded questions on the subject…

“Don’t believe what you read about record-high gold prices,” advises our friend Frank Holmes not a moment too soon. “Yes, gold hit a high in nominal terms, but the price is more than 30% below the 1980 peak of $2,400 an ounce if you adjust for inflation.”

And that, we believe, is only the beginning of the story.

  “Gold is about to get even more attractive because we are heading into the fall and winter gift-giving season,” Frank continues. “This is the time of year when gold jewelers typically do their biggest business. The kickoff is the Muslim holy month of Ramadan, which starts next month and ends with generous gift giving in early September.”

As with recent years, the drivers of this seasonal strength are China and India:

“Back when the average per capita income in China and India was well below $1,000 a year,” says Frank, “gold prices hovered just above $200 an ounce. As average incomes have approached $3,000 a year over the past decade, gold prices have followed.”

“With the long-term outlook for wages in both these economies rather rosy, gold demand should continue to feel the trickle-down effect.”

  Another indication gold is still a good buy: the gold-oil ratio is still three points below its historic average.

The gold-oil ratio measures the number of barrels of Brent crude it would take to equal one ounce of gold. Citing research from Capital Daily, Frank points out the ratio is currently 13.5.

Since 1970, the average has been around 16.

“Gold prices would need to rise to $1,870 an ounce,” Mr. Holmes calculates, “in order to reach historical ratio levels with $117 per barrel Brent crude oil.”

But that’s only the beginning. Frank is a perennial favorite every year at our conference in Vancouver. This year promises to be no different. He told us he plans to reveal scenarios in which gold could reach $2,358 an ounce… or $3,675… or even $7,931… with the customary barrage of hard data to prove his assumptions.

The time is ticking down. Frank delivers the goods one week from today. If you’re unable to join us this year, you can still hear that talk a mere 10 days after the fact with the high-quality audio files we deliver to interested readers. You also get a PDF write-up of all the investment recommendations.

Look for it in your inbox around Friday, Aug. 5… but only if you sign up here.

  A day after Chris Mayer warned that Chinese manufacturing is slowing down, HSBC tells us its China “flash” purchasing managers index fell to 48.9 this month… the first month of contraction in a year.

The China “flash” is considered a preview of the “official” manufacturing number due Aug. 1.

Aside from steering clear of sectors vulnerable to a Chinese slowdown, there’s another factor to consider.

“Certain countries have been riding the coattails of China’s buying binge,” Chris explains. “Brazil, for one, is a big supplier of China’s raw material needs. No surprise it has been among the worst-performing markets in the second quarter, down more than 5%. As goes China, so goes Brazil.”

“The same might be said of Canada (also down 5%) and Australia. Russia, another big commodity market, was down 7% in the quarter.”

  Hopscotching elsewhere around the world, we see Peru’s stock market is up nearly 2% today after President-elect Ollanta Humala tried to prove he’s not the second coming of our favorite Latin American caudillo, Hugo Chavez.

Humala picked the previous deputy finance minister to become the new finance minister. In doing so, “he bypassed the academic economists he relied on during the campaign,” according to a Reuters report, “who generally favored more government intervention.”


“Governing is a lot different than campaigning,” comments our income specialist Jim Nelson. “There’s no telling how successful Humala will be in power.”

During the campaign, “Humala actually moved in the direction of the moderate-left Brazilian President Lula’s party,” says Jim. “He clung to that moderation so much that he even worked with a number of Brazilian advisers from Lula’s (and current President Rousseff’s) Workers’ Party.”

Brazil has been very kind to Jim’s readers — delivering gains of 50% and 137%. And he got them out just as Brazil started slowing down this year. Now he’s keeping an eye on a Peruvian income play.

  The outcome of the Peruvian election had also cast a shadow over the MILA agreement we’ve been eyeing since our trip to Colombia in March. The agreement will eventually combine the stock exchanges in Colombia, Peru and Chile, creating the third largest in South America behind Brazil and Mexico.

“Watching investment ideas develop like this is how smart moneymakers grow their wealth,” Jim concludes.

  Stocks are up today for no obvious reason.

As of this writing, the Dow has added nearly 100 points, to 12,668. Financials are leading the way — Morgan Stanley’s quarterly losses were less awful than expected.

  Some of the gains came after the Conference Board’s leading economic index came out: It rose 0.3% in June, signaling growth ahead.

But even a cursory reading of the report reveals nearly all the gains were goosed by money supply growth and low interest rates. Factors like average workweek and manufacturers’ orders were flat to lower.

  Meanwhile, first-time unemployment claims rang in higher last week at 418,000. As usual, the previous week’s figures were revised upward. If you’re keeping score at home, this is the 15th straight week with a number above 400,000.

  “We need to figure out how to make computer circuits work more like our brains,” says Ray Blanco of our tech team, anticipating a problem that, frankly, hadn’t occurred to us yet.

“The human brain is an incredible piece of natural engineering,” he explains. “Not only is it the most powerful computer known, it also has incredible resilience.” A computer, by contrast, can be knocked out by the failure of a single element on the processor.

As computer circuitry becomes ever smaller, “It will become necessary to devise a way to build large complex computer circuits that operate satisfactorily even when a percentage of their elements don’t work,” says Ray.

Thus, the University of Manchester plans to build a massive network of 1 million processors — mimicking the activity of 1 billion neurons. “Modeling the brain’s functions will also provide valuable insights into treatment of a variety of neurological disorders.”

The chips come from one of Ray’s picks in Technology Profits Confidential. “This project is just one more example,” he concludes, “of how biology and computer science are rapidly converging.”

[Ed. Note: If your investing approach is eclectic — you’re game for anything from convergence technologies and emerging markets to “set ’em and forget ’em” investing and natural resources — we offer a unique suite of services for a breathtakingly low one-time fee. You can learn all the details right here.]

  The dollar index is sinking toward the low end of its recent range, now at 74.3. The euro is rallying on news of yet another agreement on yet another can-kicking rescue plan for Greece.

Details haven’t been disclosed yet, but no matter: The euro is up to $1.433.

  You can chalk up a small victory for the little guy this morning. A federal appeals court has ruled in favor Jim Roos in his battle of attrition against the city of St. Louis.

Mr. Roos runs a nonprofit housing ministry. The city took away several of his buildings using “eminent domain” as its justification. The land wasn’t used to build a bridge or a drainage ditch or for some other “public” use; it was handed over to developers in a sweetheart deal.

Unfortunately, the U.S. Supreme Court sided with governments and against property owners in the now infamous Kelo case of 2005. So Roos was out of luck.

Jim Roos, entrant in our “local heroes” file

He painted a two-story protest sign on the side of one of the buildings the city didn’t take. It’s visible from two Interstates. The city then cited him for violating a zoning code.

This morning comes word a federal appeals court has struck down part of the ordinance, citing First Amendment grounds. A sign of similar size would be exempt if it were a “national, state, religious, fraternal, professional and civic symbol,” the court reasoned.

The sign stays. With any luck, so will his remaining buildings.

  “Might be nice,” a reader chides us, “if you mentioned Appleton, Wis., police issued an apology to the little girls whose lemonade stand was busted.”

The 5: We weren’t aware. Wonder if the same happened in the Great Rockville, Md., and Atlanta, Ga., Lemonade Standoffs…

Fight the power!

  “I checked my usual local coin store,” writes a reader from the Tri-Cities area of Washington state, continuing our informal survey of ID requirements around the country to buy precious metals. “They do not require ID to purchase from them, but do require ID if you sell to them.”

  “I just bought three gold eagles last week in El Paso, Texas, with no ID request,” writes another. “Almost $5,000, all cash.”

  “I went to my coin shop to sell some gold. The dealer told me he could not buy more than $10,000 worth if I wanted to be anonymous.”

“He’s very worried as, apparently, there is a threat they could just come in with handcuffs and no warrant and take him away and close his store if he violated that rule. Talk about your police state.”

  “After reading The 5 yesterday,” writes a California reader, “I decided to stop by my bullion dealer and buy junk silver with the cash I had in my pocket. I grilled them on ID requirements and asked if any such requirements are on the horizon. They weren’t asking for ID and were not eagerly looking forward to such a thing.

“The owner of the shop said, jokingly, on my way out, ‘We do, however, send in video daily.’”

  “It might be a good time,” writes one more, “to remind readers of the best (if not purest) idea I’ve heard in a long time from one of your readers.

“Sure, give officials your name when you buy gold and silver. Then, if it all goes to hell in America someday, report your coins stolen to local authorities and keep it safely buried in the backyard for the ‘Day of Reckoning.’”

  “Recently, somebody wrote in and asked about advice for ‘working stiffs’ and you referred them to the nonpremium investment letters Agora offers. I was wondering if all the advice coming our way about the impending crisis applies to us working stiffs too.

“Somehow the idea of having enough gold to store under an airport in Switzerland or to move my cash ‘offshore’ before it’s too late seems more suited for your bigger investors. Could you clarify whether there is an assumed asset value in some of the recommendations?”

The 5: “Why would someone go to the trouble of stashing gold bars in the ‘free zone’ at the Zurich airport?” we ask rhetorically in the current issue of Apogee Advisory.

“The answer, it turns out, has a lot to do with your financial future — no matter what your net worth. Even if you’re a person of modest means and you merely want to ‘spread the risk around’ by putting a portion of your wealth outside U.S. banks and the U.S. dollar… it’s becoming harder and harder to do so. But not impossible.”

The guidance in the special reports applies whether you drive a ’11 Bentley or a ’95 Taurus… and includes more strategies for protecting or growing your wealth during a crisis than offshoring your money.

We daresay it’s equally, if not more, important if you’re part of the ’95 Taurus set… because in a debt crisis, it’s the middle class who get picked clean first.


Addison Wiggin
Agora Financial’s 5 Min. Forecast

P.S.“Our spending is unsustainable, our entitlements are out of control and our children will inherit a nation worse off than we did,” writes Gary Shapiro, chief of the Consumer Electronics Association , in a recent column at Huffington Post.

“But neither cutting spending nor raising taxes is a total solution. We need growth. As U.S. economic history has shown time and again, growth comes from innovation. Innovation is our past, and it must be our future…”

“Americans lead the world in innovation. Our unique blend of free-market capitalism, democratic governance and our immigrant heritage that compels us to ‘do it better’ form the foundation of America’s innovative infrastructure.”

[Ed note. Gary will be joining us next week in Vancouver to debate the merits of fighting for the U.S. historic role as leading innovator. Mr. Shapiro is also one of the leading interviews in our documentary film Risk!… also showing in Vancouver on Tuesday night.

If you were unable to join us this year… you can still hear every session, nearly in real-time. You can get hear every opinion… scope out every strategy and review the key investment recommendation, nearly in real-time. Sign up today for the audio recording and a handy write-up of all the investment tips. For the moment anyway, you can still lock in the best available price.]

P.P.S. We sent an urgent notice to many of our readers yesterday about a mistake that might have affected their account. Unfortunately, a small but significant percentage of those emails bounced back to us.

In case you missed this notice, you can review it in full at this link.


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