Gold Gears Up for Next Move

Addison Wiggin – August 29, 2011

  • Relief rally: Post-hurricane party sends Dow up 200
  • Gold moves up after Bernanke speech… Michael Pento on why it’s set to rise more
  • Gold named “best long-term asset” in a Gallup poll… Why this is not a contrarian indicator
  • War on Fracking’s new front: SEC claims authority?!
  • Withholding sex for paved roads… our empty mailbag explained… and an invitation you don’t want to miss

   “Cable news is scaring the crap out of me,” tweeted Bloomberg TV Washington correspondent Lizzie O’Leary, “and I WORK in cable news.”

Yet for all the bluster, Irene turned out to be about as exciting as a cage match between a St. Bernard and a tortoise on a hot day. That is to say, well, underwhelming.

   Wall Street’s investment banks were not deluged by storm surge… as had been hoped by many on Main Street. There was no damage at the New York Stock Exchange. Unless you count the water tracked in by traders this morning, careless enough to forget they’d donned their galoshes.

The mere fact the Apocalypse had been averted sent up the major indexes 1.5% this morning. That, or the early news announcement pop diva Beyonce is pregnant. (Hey, you can’t be too sure these days!)

   Gold moved up big on Friday “on the belief that the Fed’s September meeting would offer even more monetary stimulus,” says Euro Pacific Capital’s Michael Pento.

After we went to press with our Irene forecast issue, gold powered its way up $50, to $1,830. Over the weekend, it settled back to $1,805. Still, gold sits higher this morning than it’s been any time in history before this month.

   “The chairman’s ‘tools’ all offer different variations of the same idea,” Pento continues, critical of the Fed’s insinuation they can add stimulus to the economy when needed. “That is, what is the best way to destroy our dollar?”

On Oct. 6, 2008, through the Economic Stabilization Act of 2008, the Fed began paying interest on excess “reserve balances” at banks, as well as on the cash reserves required for daily operations.

The stabilization act is credited with being one of the many reasons banks have been reluctant to lend: They get paid by the Fed to hold on to excess capital.

“This next meeting,” Pento speculates, “will most likely produce a reduction in interest paid on excess reserves, in an effort to force banks into” lending those reserves out.

“Just imagine,” Pento goes on, “the amount of inflation you’ll get when banks are compelled to start loaning money through the drive-through window.” That, too, will be a good day to own gold.

   Every year since 2002, Gallup pollsters have asked 1,000 or so Americans what they believe is the best long-term investment.

This year, for the first time, gold was added to the list of possibilities… along with more “conventional” assets like stocks, bonds, bank CDs and real estate.

This year, gold assumed the top spot:

Not a majority, to be sure, but a convincing plurality.

   Even more noteworthy was the demographic breakdown. Gold tops all political affiliations, income levels, age cohorts and genders:

The age progression is what caught Byron King’s eye. “Age is correlative,” he says. “Baby boomers are turning into gold bugs,” and so is Generation X. The older Silent Generation? “They’re already there.”

Meanwhile, real estate is waaaaay out of favor. So much for “buying as much house as you can afford,” as many old-timers were thought to have believed until yesterday.

   On any ordinary day, we might be inclined to view the Gallup poll with suspicion… even derision. Even the pollster seemed skeptical of the results:
“That one in three Americans see gold as the best long-term investment,” said Gallup chief economist Dennis Jacobe, “may indicate a bubble in the value of this precious metal.”

But the numbers might well have been skewed by when the poll was taken. Stocks had just reached 11-month lows, while gold had been on an almost nonstop run-up for seven weeks, from $1,500 to $1,750.

Gallup’s website doesn’t post the results from previous years, but somehow we suspect Mr. Jacobe was not saying the same thing about real estate in 2006… nor would he have of tech stocks in 1999, were there a survey taken that year.

   Perhaps the most compelling argument from the polling data to refute the “bubble” argument: the breakdown by income. The middle class sees gold as the best long-term investment by a far wider margin than those polled with higher incomes.

How many people living on middle-class incomes have actually bought gold?

The pollsters didn’t follow up… but our scientific wild-ass guess is “not much.” Folks with incomes of $30,000-75,000 aren’t responsible for pushing gold into record territory this month.

The conventional “smart money” is still investing in the last bull market… and, comparatively, loaded up on equities, and even real estate. Worldwide, the percentage of financial assets comprising gold bullion, ETFs and mining stocks is minuscule:

That tiny bar on the right doesn’t even begin to approach those previous peak levels until institutional investors get back in the gold game.

“Expectations of dramatic monetary easing in Europe and more QE from the Fed will keep a strong bid under gold prices,” our short strategist, Dan Amoss, writes. “These bids for gold are coming from institutions and the central banks of emerging markets.”

Indeed, central banks purchased 69.4 metric tons of gold during the second quarter of 2011, according to the World Gold Council. That’s quadruple the year-ago figure. Mexico and South Korea were the big purchasers.

With these factors gathering, Dan concludes, “it’s easy to imagine gold trading in a range of $1,800-2,200 in 2012.”

With that in mind, there is still time for you to grab the top six gold plays from our crack team of analysts. Full details here: Gold Stocks You Must Own Now.

   “Eurozone stress was a leading driver of the gold rally in July and August,” Strategic Short Report’s Dan Amoss continues, “and it will continue to be bullish for gold.

“The slow-burning crisis in the European banking system threatens to become a full-blown inferno, which would force a choice onto European fiscal and monetary authorities:

  1. Continue the current policy of procrastination on debt restructuring, only with an adjustment: Accelerate the European Central Bank’s (ECB) purchases of PIIGS debt, or
  2. Kick the weaker members out of the eurozone. This would create huge losses at banks in the core of the Eurozone — losses on the order of the 2008 losses in the U.S. banking system.

“I think No. 1 is more likely,” suggests Dan, “because of the self-preservation instincts of those managing the euro. The ECB will be forced by circumstances to dramatically increase its balance sheet, which would involve inflating the supply of euros and using them to buy PIIGS bonds in the secondary market.

“‘Rules’ against this type of debt monetization haven’t prevented it in the past, and rules tend to get ignored completely as panic reaches a fever pitch. The ECB could even offer long-term loans to the most stressed banks suffering from bank runs.”

Thus, “gold prices are likely to consolidate recent gains and then strengthen heading into year-end. Expectations of dramatic monetary easing in Europe and more QE from the Fed will keep a strong bid under gold prices.”

Be advised, in the next leg up, not everyone will share equally in the wealth. That’s why we’ve assembled the very best gold picks among all our editors. It’s still available as part of a unique benefits package available only to members of the Agora Financial Reserve.

If you’ve ever thought about joining, now’s the time. You can even join us for an “Emergency Summit” here in Baltimore Oct. 13-14… and we’ll pick up your hotel and a portion of your airfare. Details of this extraordinary offer are right here:

   “I admire Steve Jobs as one of the great owner-operators of our time,” writes Chris Mayer, with his own tribute to Apple’s now-former CEO.

Owner-operators are one of the four factors Chris uses in his CODE strategy to identify stocks ripe for the picking: A CEO who owns a good chunk of the shares is more likely to act in shareholders’ interests than someone looking to please the Street. Companies with owner-operators tend to outperform the broad market, and Apple is no exception.

“Without Jobs for over a decade,” Chris says, “Apple’s stock underperformed the market by 3% per year. When he took it over again in 1997, it was a company in trouble. Many thought it would go bankrupt in a matter of months.

“With Jobs at the helm, Apple’s stock beat the market by 28% per year.

“Think of all the people who sold Apple along the way — because they were worried about the stock market or the credit crisis or inflation or whatever — all the people who outsmarted themselves trying to play games and time the market. Simple patience won big in the end.

“People like Jobs don’t come around very often. When you find someone who has great talent — in whatever industry — and you have a chance to ride along with him, to invest right alongside him, you should give it some very serious thought. Brains and talent never go into a bear market. They are always valuable.”

Chris is always on the lookout for such players. He’s found one on the other side of the world — someone who started with $15,000 in seed money has built a powerhouse company in an essential industry. You can learn all about it right here:

   Because the Securities and Exchange Commission has proven itself so successful in sniffing out actual securities fraud — [cough, Bernie Madoff, ahem, sounds of throat clearing] — the agency has seen fit to expand its regulatory purview.

The SEC is now demanding information from natural gas drillers about their practices with hydraulic fracturing, or “fracking” — the high tech that pulls gas out of shale. Their motive? Drillers, the legal dicks say, aren’t accurately accounting for the costs of environmental damage on their balance sheets.

“Anything to slow down the shale gas boom in the U.S.,” says Byron King, who demolished the idea that fracking was to blame for last week’s East Coast earthquake.

“Now every SEC filing has to provide the entire list of fracking chemicals? The trade secrets, and entire lists of everything and every process for how to frack, without swelling the shale so it clogs the wells? Just give your competitive advantage away?

“I would like to meet the so-called ‘investor’ who is so stupid as not to know that oil and gas grilling — and fracking — have technical risks, such that the SEC needs to require additional disclosures beyond the basic truth that ‘this might harm the environment, and your share price may go down.”

“Of course, if the SEC requires these disclosures, it’ll create a cottage industry among the lawyers and consultants who ghost write all the materials.”

“It’s a war waged on every front,” says Byron of the opposition to fracking. “The opponents of fossil fuels in general, and shale gas in particular, do a darned good imitation of Winston Churchill: ‘We shall fight on the beaches, we shall fight on the landing grounds, we shall fight in the fields and in the streets, we shall fight in the hills; we shall never surrender.’”

“Just one more reason why I have so few U.S. companies in the portfolios of Outstanding Investments and Energy & Scarcity Investor.”

   WikiLeaks has turned up an interesting cable that might shed light on why the Colombia free trade agreement we’ve been following since our visit there continues to languish in Washington.

Dated Feb. 26, 2010 — about six weeks after the earthquake in Haiti — the cable reveals that the U.S. government approached the Colombian government about supplying small arms to the Haitian National Police.

“The officials responded,” says the cable, “that export of arms from Colombia is difficult, if not impossible, due to complex legal regulations. The officials also indicated that the [Ministry of Defense] does not currently have excess supplies of the lethal and less-than-lethal items requested.”

One small question: With U.S. naval ships already in the area offering legitimate assistance to the Haitians, why would the U.S. need to funnel small arms through Colombia?

Neither do we have any idea if this is why the White House continues to drag its feet getting the trade agreement done. But once again, it sheds light on the everyday backdoordealing we’ve noted with interest in the Odyssey Marine case.

   Also from Colombia, we see that a “sex strike” has achieved its objectives: The government has agreed to pave a road.

The “strike of crossed legs” began in late June, with 300 women in Barbacoa refusing their husbands sex until the road connecting the remote town to the rest of the country was paved:

Now that’s a protest…

The town of 40,000 is linked to the outside world via a treacherous mountain road stretching 35 miles to the nearest town. Even in the best of times, the trip took four to six hours. But after heavy rains and landslides in the last year, it’s more like 10-12.

Under pressure from the town’s deprived men, the National Roads Institute has given in: Construction is set to begin Oct. 11.

And just to make sure the government keeps its word, the strike is set to continue until then: “The Barbacoan community,” says a statement from the women, “is aware that there have always been many promises made here that have never been kept.”

Tough crowd…

   “The last few issues,” a reader writes, “have not included the invitation to give feedback. You mentioned that your ‘mailbag was empty’ on Friday… Well, if you omit the invitation to respond in your mailings, you won’t get any feedback.”

The 5: Hmmn… funny how that works, isn’t it? We’ve restored the link.

Cheers,

Addison Wiggin
The 5 Min. Forecast

P.S. We still have a few slots for existing Reserve members at our Emergency Summit, coming up Oct. 13-14 here in Baltimore.

It’s your opportunity to hear face-to-face from our editors about their very best ideas at what’s still a tenuous time in the markets. For details, please call Kristen Palmer between 9 a.m.-5 p.m. EDT at 1-800-708-1020.

P.P.S. “So hurricane Irene is over with,” writes Chris Mayer to readers of Mayer’s Special Situations today, “but it didn’t take long for economic commentators to make fools of themselves.”

“David Kotok is the chairman and chief investment officer of Cumberland Advisors. He was on radio with Larry Kudlow, who asked him about the economic impact of Irene. Kudlow noted how Irene tracked over one-tenth of the nation’s economic output. Here is Kotok writing about it to his investors afterward about Cumberland’s response:”

We are now upping our estimate of fourth-quarter GDP in the U.S. economy. Billions will be spent on rebuilding and recovery. That will put some people back to work, at least temporarily. We speculate that Washington may set aside the usual destructive and divisive partisan political wrangling and act in the interest of the nation. That means there will be a flow of federal financial assistance to the disaster areas.

“This is horrible, horrible reasoning. It is the old broken window fallacy, which we see trotted out by otherwise intelligent people anytime there is a natural disaster. These people say that destruction is an economic boost, as we busily rebuild what was lost.”

“It’s a shame people continue to repeat this. The great economist Frederic Bastiat killed this idea decisively in an 1850 essay, “That Which Is Seen and That Which Is Unseen.” It remains a classic essay on economic reasoning.”

“In his usual witty manner, Bastiat wrote a parable about a boy who breaks a window. The “seen” is the glassmakers who have new business they didn’t have before. That’s what people like Kotok focus on. But as Bastiat wrote:”

It is not seen that as our shopkeeper has spent six francs upon one thing, he cannot spend them upon another. It is not seen that if he had not had a window to replace, he would, perhaps, have replaced his old shoes or added another book to his library. In short, he would have employed his six francs in some way, which this accident has prevented.

“Kotok’s point about federal assistance is particularly depressing, because he seems unable to recognize that this is simply money taken from someone else.

“Please don’t fall for the broken window fallacy. And please correct anyone you hear using it. It seems the first step in basic economic literacy. Hurricane Irene was a dead loss for the economy. Period.”

“By the way, Frederic Bastiat is an old favorite of mine and was influential in shaping my economic views early on. I have a handsome two-volume collection of his works, put out by the Ludwig von Mises Institute. I highly recommend the set for anyone looking for sound logic applied to economic questions. Bastiat is enjoyable to read and not like any economist you’ve ever read.”

“Our friends at Laissez Faire Books will take 20% off Political Economy — collected Bastiat essays — including “That Which Is Seen and That Which is Unseen.” Claim your discount by going to this link.

“For those not inclined to read that much, I recommend Henry Hazlitt’s Economics in One Lesson. Hazlitt devotes a whole chapter to the broken window fallacy. His book is my No. 1 recommendation for anyone looking to learn the key ideas of economics. It’s a classic.

Laissez Faire Books will give you 20% off when you go here.

Order both books, and you’ll get plenty of great reading for under $25.

rspertzel

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