Feb 26, 2009

Worried investors want gold on hand

Carolyn Cui and Allen Sykora
The Wall Street Journal
Wednesday, February 25, 2009

Some investors are so worried about the prospect of economic collapse that they are buying gold and having it delivered to them, rather than holding the precious metal in the form of futures contracts or other securities.

The global recession and worries about the stability of the financial system have sent the price of gold to $1,000 an ounce. But more surprising is that buyers are taking the unusual and expensive step of taking possession of it.

"We're having some of our strongest months ever," said Scott Thomas, president and chief executive of American Precious Metals Exchange, a precious-metals dealer in Edmond, Okla. "The bottom line is our numbers are probably double what they were last year, and last year was very busy."

Bob Coleman, who runs a bullion fund out of Nampa, Idaho, has taken multiple deliveries of gold and silver since last fall for his clients. The fund, Dollars and Sense Growth Fund, primarily invests in precious metals for high-net-worth individuals.

"It's more of a trust issue," says Mr. Coleman. "Given all the turmoil in the market, people prefer to have access to the metal."

Sales of American Eagle gold bullion coins at the U.S. Mint in Philadelphia more than doubled in the first two months of this year.

Investors are also flocking to gold coins. At the U.S. Mint, a total of 147,500 ounces of American Eagle gold bullion coins were sold in the first two months this year, a surge of 176% from the same period last year.

Demand is rising at the Comex, the metals division of the New York Mercantile Exchange, where investors increasingly are choosing to take physical delivery of gold, rather than cash, once their futures contacts expire.

Rising delivery orders have kept Brink's Inc., a major carrier for the Comex, busy. The Richmond, Va., company said it saw a large spike in clients shipping gold and silver from the exchange over the past few months.

Tony Klancic, an account executive at Lind-Waldock, a Chicago commodities brokerage, says he has been taking calls since September from individual investors wanting to buy physical gold.

These are "real people in rural America with money under the mattress, and wealthy individuals coming to the futures market strictly intending to take delivery," Mr. Klancic said.

In December, 4.5% of gold contracts ended in delivery, compared with 3.4% a year earlier, according to the exchange. Investors also are taking delivery of silver, with contracts ending in delivery rising to 7.3% from 4.7%. December is typically a big month for deliveries, and in January, deliveries remained higher than the year before.

Jewelers and other users of metals are among the buyers who take possession of gold and silver. But with sales of jewelry down and other industrial users cutting back, it appears that investors are causing the increase.

Gold deliveries peaked at more than 8% in the early 1980s, when Mexico defaulted on its foreign debt and the world economy was in recession. Deliveries dropped and have gradually fallen back to the range of 2% in recent years.

Gold pierced the $1,000 level last Friday, the first time since March 2008. On Tuesday, the February contract closed at $969.10 per troy ounce. So far this year, the precious metal is up 9.7%.

Taking physical delivery of gold can be costly and complicated. Investors typically buy gold on exchanges using futures contracts. Since each contract represents 100 ounces of gold, an investor would have to pay $96,910 per contract, based on Tuesday's close, in order to take delivery. By contrast, investors need to put down only $3,999 up front to trade such a futures contract.

"It is an expensive proposition," says Jeff Christian, managing director at CPM Group, a New York precious-metal research firm.

Also, the logistics of buying a big lump of metal might be daunting for smaller players. Investors who decide to take delivery of gold contracts face high storage and insurance costs. And if buyers actually want the gold or other precious metals in their possession, they must arrange for delivery by armored truck. In a recent delivery of 100,000 ounces of silver, Mr. Coleman paid $3,000 to transport the metal from New York to Idaho.

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Feb 19, 2009

Somehow in the FT: Gold primed to be 'mania asset'

By Steve Ellis
Financial Times, London
Wednesday, February 18, 2009

Gold is exhibiting all the classic signs of being in a structural bull market. On fears of inflation in early 2008, it rallied. Then, on fears of deflation in late 2008, it rallied again.

So does gold perform better during inflation or deflation?

In our view, that question is the wrong starting point. On the contrary, the rationale for owning gold, as it once again approaches the $1,000-an-ounce level, is the prospect of mounting monetary disorder.

The US Federal Reserve, having flooded the market with liquidity by more than doubling its balance sheet in less than six months, may be unable or unwilling to withdraw it in time for fear of precipitating a secondary relapse in economic activity. Other central bankers will also face intense pressures to "support" their domestic economy by weakening the currency, leading to competitive currency devaluations.

The race to the bottom in fiat currencies has begun and hard assets, particularly gold and silver, should be the primary beneficiaries.

Gold is a prime candidate to become a "mania asset" once its demand becomes chiefly financially driven as opposed to jewellery and/or industrial demand driven where its upside could be capped by "sticker shock."

In fact, gold is currently one of the few remaining major asset classes where a case could be made for it to rise in a parabolic fashion. Once the psychologically significant $1,000-an-ounce is breached convincingly, the speed of the move beyond that level could accelerate sharply. One precondition for a mania is there must be uncertainty about how the asset is properly valued which allows "new era" thinking to take hold. This is very true for gold.

Price explosion might not be imminent, however. Gold is experiencing unprecedented buying by exchange-traded funds, offset by substantially reduced jewellery demand. The fall in the Indian rupee has meant Indian gold prices have reached record levels. This is causing a slowdown in jewellery purchases (even though rupee expenditure levels are holding up, the tonnage of gold imports is suffering).

The long-term story for gold, however, is as a remonetisation play as investors lose faith in fiat currencies. Keep an eye on gold lease rates; a spike would be a good lead indicator that gold is about to punch higher as this would reflect a shortage of lendable bullion. Rising lease rates will cause gold to go into backwardation as holders of gold may not want to sell their gold forward under any circumstances a trend currently evidenced by the high physical premium being paid for gold coins.

Rising lease rates prefigured the last big move in gold back in the spring of 2007 just as the two Bear Stearns hedge funds were blowing up. Central Banks feared counterparty risk for the first time in 20 years and substantially curtailed gold lending and sales. This led to a 40 per cent rally in gold from $700 to over $1,000.

How high can gold ultimately go? A Dow Jones Industrial Average/gold ratio of 2:1 would be a good sign the bull market in gold is getting well advanced. We saw this in 1932 and 1980. Only nine years ago in 2000, however, this ratio reached over 40:1.

Arriving at 2:1 again does not necessarily mean the Dow must decline significantly from here; more likely gold prices surge and the Dow stays range-bound but volatile. Investors are looking for good risk/reward investments.

I cannot say with any confidence that gold will not be without risk and volatility but at least it offers early participants plenty of upside reward to compensate them for the wild ride.

Speaking to central bankers, this is the first time I can recall them actually favouring a high gold price. Normally they see high gold prices as a lack of trust in the financial system (not to mention their ability as central bankers). Alan Greenspan, the former Fed chairman, for example, used to target a gold price of around $400 to $500 an ounce.

Recently, the central bankers have become more enamoured of higher gold prices as it would suggest that their attempts to stave off deflation were starting to work.

Central bankers in favour of higher gold prices? Things really have changed.


The writer is manager of the RAB Gold Strategy.

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Feb 17, 2009

The CFTC Appreciation Medallion

This is from an excellent idea presented to Jason Hommel for the production of a new one ounce silver round. It can only be described as really "very fitting"...

"CFTC Appreciation Medallion.

Let us pause and give thanks to the CFTC for willfully refusing to recognize or end the low silver price manipulation of futures contract prices by several large banks that have sold short silver positions that far exceed all historic norms of position limits and concentration limits on the short side of the market.
The CFTC has all the data on who is manipulating. They know the names of the large banks who have such concentrated positions, and several writers in the private sector have fingered J.P. Morgan, but the official "investigation" lingers for months, if not years now, but that's not important.
What's important is that we show our thanks and appreciation for such criminal neglect in high places by buying the silver while it remains available. Also, why not immortalize such bold incompetence, ironically, in the very silver that they despise, for future generations so that they can understand our angst at this peculiar time in history, because otherwise, future generations would never believe it.
I really don't expect the CFTC to pull their head out

Click for larger version Click for larger version

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Feb 16, 2009

William Rees-Mogg: In crisis never forget value of gold

The dollar is simply a piece of paper. Gold is a much better store of value and is the best insurance against future shocks

By William Rees-Mogg
The Times, London
Monday, February 16, 2009

Last week was a bad one for bank shares; after the HBOS L8.5 billion loss, Lloyds shares fell by a third and other bank shares fell as well. Yet it was a very good week for the gold price, which closed on Friday at $935 an ounce, after reaching what was nearly a seven-month high of $953.30 on Wednesday.

Barclays Capital commented that gold prices were resuming their long-run bull trend after eight consecutive years of gains. For longer than the past eight years I have been arguing that investment in gold is an essential insurance against financial shocks. Last week was a classic example. Respectable British bank shares have now fallen by up to 90 per cent, while the gold price has risen by more than 200 per cent since Gordon Brown began selling the Bank of England's gold reserve.

I have been following the gold price since I published "The Reigning Error," a short book on inflation, in 1974. I have not consistently advised people to buy gold -- like all other assets, gold can become significantly overvalued, as it did in 1980. However, I have found that the movements of the gold price are one of the most useful pieces of evidence about the health of the world economy. Mr Brown's sale of gold was an avoidable error. My friend the MP Peter Tapsell repeatedly warned him in Parliament not to do it.

People buy gold when they are nervous about the economy, and they are right to do so because gold is a unique commodity. It has to a high degree two qualities that are seldom found together: liquidity and reality. It has strong liquidity; it can almost always be bought, sold, or exchanged. There are other liquid assets, of which the US dollar is probably supreme, but they lack gold's quality of real value.

Dollars do not constitute a real asset, such as property or "real estate." The dollar is simply a piece of paper. Gold has been a much better store of value than the dollar.

In 1873 one of the leading British economists, William Stanley Jevons, published a short book, "Money and the Mechanism of Exchange." By 1887 it had reached its eighth edition. Unfortunately, there are few modern economists who do not suffer from the delusion that new truths make old ones obsolete.

Great mistakes could have been avoided in 2008 if bankers and politicians had studied Jevons, even though his little book was written 136 years ago. Jevons quotes Herbert Spencer as observing that "it is the grave misfortune of the moral and political sciences that they are continually discussed by those who have never laboured at the elementary grammar or the simple arithmetic of the subject." That was true then, and it is true now. Indeed, there are still some people who believe that poverty can be abolished by the issue of printed bits of paper.

Nowadays such people usually call themselves Keynesians, though their doctrine is not to be found in the works of Maynard Keynes, a much less simplistic economist than some of his modern followers. These so-called neo-Keynesians are hostile to gold, usually for two reasons. They see gold as the natural enemy of the paper money in which they put their trust; and they see gold-related systems as imposing a discipline on the unlimited issue of paper money, and they reject that.

World trade depends on the existing global system, which is one of paper currencies, separately managed and largely unconvertible. These currencies float in terms of each other, sometimes with a fixed rate in relation to a larger currency. Since President Nixon closed the gold window in 1971, there has been no fixed-rate convertibility between any of these paper currencies and gold. In the past 40 years the world exchange system has suffered from two periods of high inflation and is now suffering from the worst depression since the 1930s.

In 1873 Jevons could already write: "It is hardly requisite to tell again the well-worn tale of the over-issue of paper money which has almost always followed the removal of the legal necessity of convertibility. Hardly any civilised nation exists which has not suffered from the scourge of paper money at one time or another. ... Time after time in the earlier history of New England and some of the other states now forming part of the American Union, paper money had been issued and had brought ruin."

Daniel Webster's opinion should never be forgotten. Of paper money he says: "We have suffered more from this cause than from every other cause or calamity. It has killed more men, pervaded and corrupted the choicest interests of our country more, and done more injustice than even the arms and artifices of our enemy."

In the 1930s some nations tried to beat the slump by competitive devaluations. In the present crisis, Britain has already experienced a very big devaluation of the pound, taking it down by a quarter against the dollar. Every country, led by the United States, has been issuing money, often in very large amounts, in order to bail out its banks. No one knows the total value of these national injections of cash into the banking systems. As the earlier injections have not restored stability to national economies, further injections inevitably will be made. All will be made in unconvertible currency, and overissue will occur.

Sooner or later the world's governments will have to reconsider Keynes' two real achievements, Britain's low inflation finance of the Second World War, and the world currency system that he negotiated at Bretton Woods.

Both Jevons and Keynes believed in the need for what Jevons called "a worldwide system of international money." Without it, recurrent crises, such as the present one, will be inevitable. Governments need to create a new world system, in which gold, as a stabiliser, should play its part. For individuals, gold remains the best insurance against future shocks and the best store of value.


William Rees-Mogg is a former editor of The Times of London who now writes a column for the newspaper.

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Feb 15, 2009

Jim Sinclair: Let's Make it Official, It's Out of Control

Dear Friends,

I have sent you certain emails that I consider to be the most important communications issued in my career which started in 1958.

I am the son of the man that I consider to be the greatest Lone Wolf trader in Wall Street history, Bertram J. Seligman. He was a past master at his business and was naturally sensitive to market conditions. I apprenticed to him, learned from him and inherited some of his ability. But not all, however.

From this background of experience, understanding and sensitivity to the market the following flows.

I want to bring your attention to the following emails of note:

1. Said: "This is it."
2. Said: "It is now."

This communication is to inform you as of 2/13/09 that "It is totally out of control." There is no longer any means of reversal of the beginning of the final phase of the downward spiral now solidly set in motion. For your sake, protect yourselves immediately.

Be prepared for disruptions in distribution common to hyperinflation.

1. You should have already distanced yourself from your financial agents. If you haven't, you are headed for significant displeasure and strain.

2. Make sure you stay three months ahead on necessary items that could experience distribution delays such as prescribed medicine and preferred foods.

3. Even though real estate is far from a buy, if you can afford a second home outside of major cities it would serve a good purpose.

4. Own gold.

5. Consider that good gold shares of non-US companies incorporated in a non-US country, operating in a third country and traded on multiple exchanges are a means of money expatriation legally and in broad daylight if required.

6. For currencies, all you can do is own a spread held by a true custodialship wherever that might be.

Simply said, as of Friday February 13th, 2009 the situation is confirmed as being in "Out of Control" mode as this well engineered downward spiral enters into its terminal phase.

The root cause of this mess was profit and the degree of disintegration it caused in the pursuit of this goal was not anticipated.

The key event that set things in motion was when Lehman was flushed - all hell broke loose. The hell cannot be contained in any practical manner.

I seek nothing of you but the protection of yourselves.

Respectfully yours,

Jim Sinclair

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Feb 12, 2009

Peter Schiff Lays it Down Again

Peter D. Schiff is the president of Euro Pacific Capital Inc., a brokerage firm based in Darien, Connecticut.
Schiff is an Austrian school economist and supporter of the Ludwig von Mises Institute. Schiff frequently appears as a guest on CNBC, Fox News, CNN, CNN International, and Bloomberg Television and is quoted in major financial publications...

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Judy Shelton: Capitalism needs a sound-money foundation

It would be rather unthinkable a few years ago for articles like the one appended here to appear in the mainstream media. The grim present day economic conditions, though, are ripe with new possibilities for the perennial attributes of gold as a monetary metal to shine again with a new brightness through the darkened monetary skies of fiat.
Gold as Money of last resort...

The following article is worth its weight in gold:

By Judy Shelton
The Wall Street Journal
Thursday, February 12, 2009

If the very idea seems at odds with what is currently happening in our country -- with Congress preparing to pass a massive economic stimulus bill that will push the fiscal deficit to triple the size of last year's record budget gap -- it's because a gold standard stands in the way of runaway government spending.

Under a gold standard, if people think the paper money printed by government is losing value, they have the right to switch to gold. Fiat money -- i.e., currency with no intrinsic worth that government has decreed legal tender -- loses its value when government creates more than can be absorbed by the productive real economy. Too much fiat money results in inflation -- which pools in certain sectors at first, such as housing or financial assets, but ultimately raises prices in general.

Inflation is the enemy of capitalism, chiseling away at the foundation of free markets and the laws of supply and demand. It distorts price signals, making retailers look like profiteers and deceiving workers into thinking their wages have gone up. It pushes families into higher income tax brackets without increasing their real consumption opportunities.

In short, inflation undermines capitalism by destroying the rationale for dedicating a portion of today's earnings to savings. Accumulated savings provide the capital that finances projects that generate higher future returns; it's how an economy grows, how a society reaches higher levels of prosperity. But inflation makes suckers out of savers.

If capitalism is to be preserved, it can't be through the con game of diluting the value of money. People see through such tactics; they recognize the signs of impending inflation. When we see Congress getting ready to pay for 40% of 2009 federal budget expenditures with money created from thin air, there's no getting around it. Our money will lose its capacity to serve as an honest measure, a meaningful unit of account. Our paper currency cannot provide a reliable store of value.

So we must first establish a sound foundation for capitalism by permitting people to use a form of money they trust. Gold and silver have traditionally served as currencies -- and for good reason. A study by two economists at the Federal Reserve Bank of Minneapolis, Arthur Rolnick and Warren Weber, concluded that gold and silver standards consistently outperform fiat standards. Analyzing data over many decades for a large sample of countries, they found that "every country in our sample experienced a higher rate of inflation in the period during which it was operating under a fiat standard than in the period during which it was operating under a commodity standard."

Given that the driving force of free-market capitalism is competition, it stands to reason that the best way to improve money is through currency competition. Individuals should be able to choose whether they wish to carry out their personal economic transactions using the paper currency offered by the government, or to conduct their affairs using voluntary private contracts linked to payment in gold or silver.

Legal tender laws currently favor government-issued money, putting private contracts in gold or silver at a distinct disadvantage. Contracts denominated in Federal Reserve notes are enforced by the courts, whereas contracts denominated in gold are not. Gold purchases are subject to taxes, both sales and capital gains. And while the Constitution specifies that only commodity standards are lawful -- "No state shall coin money, emit bills of credit, or make anything but gold and silver coin a tender in payment of debts" (Article I, Section 10) -- it is fiat money that enjoys legal tender status and its protections.

Now is the time to challenge the exclusive monopoly of Federal Reserve notes as currency. Buyers and sellers, by mutual consent, should have access to an alternate means for settling accounts; they should be able to do business using a monetary unit of account defined in terms of gold. The existence of parallel currencies operating side-by-side on an equal legal footing would make it clear whether people had more confidence in fiat money or money redeemable in gold. If the gold-based system is preferred, it means that people fully understand that the purpose of money is to facilitate commerce, not to camouflage fiscal mismanagement.

Private gold currencies have served as the medium of exchange throughout history -- long before kings and governments took over the franchise. The initial justification for government involvement in money was to certify the weight and fineness of private gold coins. That rulers found it all too tempting to debase the money and defraud its users testifies more to the corruptive aspects of sovereign authority than to the viability of gold-based money.

Which is why government officials should not now have the last word in determining the monetary measure, especially when they have abused the privilege.

The same values that will help America regain its economic footing and get back on the path to productive growth -- honesty, reliability, accountability -- should be reflected in our money. Economists who promote the government-knows-best approach of Keynesian economics fail to comprehend the damaging consequences of spurring economic activity through a money illusion. Fiscal "stimulus" at the expense of monetary stability may accommodate the principles of the childless British economist who famously quipped, "In the long run, we're all dead." But it shortchanges future generations by saddling them with undeserved debt obligations.

There is also the argument that gold-linked money deprives the government of needed "flexibility" and could lead to falling prices. But contrary to fears of harmful deflation, the big problem is not that nominal prices might go down as production declines but rather that dollar prices artificially pumped up by government deficit spending merely paper over the real economic situation. When the output of goods grows faster than the stock of money, benign deflation can occur -- it happened from 1880 to 1900 while the U.S. was on a gold standard. But the total price-level decline was 10% stretched over 20 years. Meanwhile, the gross domestic product more than doubled.

At a moment when the world is questioning the virtues of democratic capitalism, our nation should provide global leadership by focusing on the need for monetary integrity. One of the most serious threats to global economic recovery -- aside from inadequate savings -- is protectionism. An important benefit of developing a parallel currency linked to gold is that other countries could likewise permit their own citizens to utilize it. To the extent they did so, a common currency area would be created not subject to the insidious protectionism of sliding exchange rates.

The fiasco of the G-20 meeting in Washington last November -- it was supposed to usher in "the next Bretton Woods" -- suggests that any move toward a new international monetary system based on gold will more likely take place through the grass-roots efforts of Americans. It may already be happening at the state level. Last month Indiana state Sen. Greg Walker introduced a bill -- "The Indiana Honest Money Act" -- which would allow citizens the option of paying in or receiving back gold, silver or the equivalent electronic receipt as an alternative to Federal Reserve notes for all transactions conducted with the state of Indiana.

It may turn out to be a bellwether. Certainly, it's a sign of a growing feeling in the heartland that we need to go back to sound money. We need money that works for the legitimate producers and consumers of the world -- the savers and borrowers, the entrepreneurs. Not money that works for the chiselers.


Ms. Shelton, an economist, is author of "Money Meltdown: Restoring Order to the Global Currency System" (Free Press, 1994).

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Feb 11, 2009

Russia's biggest bank notes surging demand for gold

By Dmitry Sergeyev
Wednesday, February 11, 2009

MOSCOW -- Russia's biggest lender, Sberbank, saw retail precious metal accounts double in 2008 as people rushed to protect their savings in a time of financial and economic crisis, a bank official said on Wednesday.

Russians opened 170,000 new accounts which track the price of precious metals last year, taking the total number of such deposits at the state-controlled bank to around 300,000, said Vladimir Tarankov, the director of Sberbank's currency and non-trade operations department.

"We have clients who bought 200-300 kilograms of gold and a 10-kilogram gold coin only spent two days in our safe," he said.

The instability of Russia's 1000-plus banking system, a 30 percent depreciation of the rouble against the dollar since August 2008 and double-digit inflation have left Russians seeking lasting value for their investments.

Sberbank sold the equivalent of 55 tonnes of precious metals in 2008, including 40 tonnes for precious metals accounts, and the peak of sales came in the second half of the year when the global crisis gripped Russia with full force.

Russians are not alone in their rush for gold. Investors and ordinary people all over the world are buying precious metals to hedge against currency volatility.

The U.S. mint sold 2.6 tonnes of popular Golden Eagle Coins in January 2008, or four times as much as during the same period of 2007, Russian Vedomosti daily paper reported on Wednesday.

Tarankov said Sberbank has never seen such a great demand for Russian investment coins as in 2008.

"Gold coins are simple and clear and we have an order for as much as 3,000 coins from one client," he said.

"If you bought gold in the end of last October and sold it yesterday, it could give you a return of almost 58 percent" in roubles, Tarankov said.

In dollar terms, such an investment would have made around 30 percent.

As the global financial crisis seems far from its end, the demand for precious metals remains strong, Tarankov said. This January Sberbank's retail clients purchased the equivalent of 6 tonnes of precious metals.

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Feb 3, 2009

Eric Sprott: we have a Global Economic Catastrophe...

Eric Sprott of Sprott Asset Management is (as always) no word mincer in his January missive "Markets at a Glance" when he writes:

"The problem isn’t just the banking system anymore. The problem is the banking system and everything else. This year, the financial crisis of yesteryear is morphing into an altogether different animal. It’s morphing into a financial crisis that has an economic crisis layered on top of it. In fact, to call the current environment an economic crisis is likely understating the situation. What we really have is a global economic catastrophe. One where weakness only begets more weakness, causing a vicious circle that is proving nigh impossible to reverse in spite of all the world’s financial, economic, and political brain trust throwing everything they have, including the kitchen sink, at the problem."

To read his report "So You Think 2008 Was Bad?..Welcome to 2009" in full technicolor pdf format please click HERE

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Sprott says U.S. at start of depression that will boost gold

By Stewart Bailey
Bloomberg News

NEW YORK -- Eric Sprott, the Canadian money manager who last year predicted banking stocks would collapse, said the U.S. is at the beginning of an economic depression that will help gold prices more than double.

Bullion may top $2,000 an ounce in coming years amid a series of financial catastrophes, the chairman and founder of Toronto-based Sprott Asset Management Inc. said yesterday in an interview. Banks will battle to replenish capital, Treasury auctions stand the risk of failing and the moribund economy will create a dire operating outlook for many companies, he said.

"The trend is down, and there's not one signpost that says it's changing yet," Sprott said yesterday from Toronto. "We'll stand by to wait to see those, and until it does, you have to assume it gets worse."

Sprott, who manages $4.5 billion, said in March that the world was in a "systemic financial meltdown," a call that presaged the collapse of financial institutions including Bear Stearns & Co. and Lehman Brothers Holdings Inc. Since then, the U.S. has entered the worst economic slowdown since the Great Depression, credit markets have tightened and asset prices have dropped as companies and funds sell portfolios to raise cash.

The 81-company Standard & Poor's 500 Financials Index has dropped 62 percent since Sprott said on March 6 he was buying bullion and gold-producers' shares, while shorting financial-sector stocks. Gold slipped 6.3 percent during the same period.

So-called short-selling allows speculators to profit from a stock's decline by borrowing shares, selling them to raise cash and buying them later when the price drops to repay the debt.

Sprott now favors buying more gold stocks and bullion while selling the entire equity market short. Most at risk in the current climate are banks and discretionary consumer stocks and any companies that have debt to refinance, he said.

Sprott believes there is a chance that a U.S. Treasury auction will fail as countries use their resources to quell financial turmoil in their home markets, leaving less to help finance the world's largest economy. That outcome will have a "catastrophic" impact, he said.

"When do people stop buying the credit of the country? That's a tough question to answer, but it's on a lot of its own financial problem, so there's no funding for anything external."

Such concerns have driven investors to the gold market, propelling the metal higher as other commodities have slumped and helping gold-producers' stocks almost double in the past three months.

Greenlight Capital Inc., a $5.1 billion New York-based hedge fund, has started investing in gold for the first time, while Federated Investors Inc.'s $1.3 billion Federated Market Opportunity Fund, which outperformed 99 percent of rivals last year, now counts Yamana Gold Inc. and Goldcorp Inc. among its largest investments.

Gold companies such as Newmont Mining Corp. and Kinross Gold Corp. have taken the opportunity to issue stock to bolster their own balance sheets.

Barrick Gold Corp. Chairman Peter Munk said last week he has been inundated with calls from wealthy investors seeking to buy gold to protect their capital.

"The window to raise money for gold stocks has blown open," Sprott said. "The investing public has started to go to that one thing that they think it's safe to invest in."

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Feb 2, 2009

Gold rally fills vaults with bullion as bank stimulus increases

By Pham-Duy Nguyen and Nicholas Larkin
Bloomberg News

The same unprecedented steps that central bankers are taking to rescue the banking system are driving investors to gold, the commodity investors buy when they lose confidence in financial assets.

David Einhorn, manager of the $5.1 billion Greenlight Capital Inc. hedge fund, bought gold for the first time. Steven Lehman, the Federated Investors Inc. fund manager who beat 99 percent of his peers last year, is betting on bullion with Toronto-based Yamana Gold Inc. and Goldcorp Inc.

The combination of central banks spending trillions of dollars to prop up the banking system in the worst financial crisis since the Great Depression will cause gold to appreciate at least 17 percent this year from $882.05 an ounce on Dec. 31, surpassing the record of $1,032.70 in London, according to 16 of 24 analysts surveyed by the London Bullion Market Association. The metal traded at $909.10 yesterday.

"The government can print endless money, but they cannot increase the supply of gold," said Michael Pento, chief economist at Delta Global Advisors Inc. in Huntington Beach, California, who is doubling holdings of the precious metal to 8 percent of his $1.5 billion in assets. "Anything the government cannot replicate by decree, I want to own."

Investors typically buy gold during times of financial turmoil as a store of value. The commodity has gained in five of the past six U.S. recessions.

To rescue the U.S. economy, the Federal Reserve reduced its target interest rate for overnight loans between banks to as low as zero percent, more than doubled its total assets during the past year and agreed to buy long-term Treasuries. The government pledged $8.5 trillion on behalf of American taxpayers and spent $350 billion so far under the Troubled Asset Relief Program to bail out banks.

The U.S. House passed an $819 billion economic stimulus package this week, Germany pledged 80.3 billion euros ($104 million) over two years and China is spending 4 trillion yuan ($585 billion) on infrastructure projects.

George Soros, the billionaire hedge-fund owner, said the economy "will deteriorate" and the International Monetary Fund said growth this year will slow close to zero. Analysts predict that the U.S. contracted 5.5 percent in the fourth quarter, the fastest pace since the start of 1982.

Only 20 percent of 1,124 chief executive officers surveyed by PricewaterhouseCoopers LLP expect revenue to increase this year, according to a report released as leaders met at the World Economic Forum in Davos, Switzerland, this week.

The U.S. Mint suspended sales of American Buffalo 1-ounce gold coins in September after supplies ran out. The Perth Mint, producer of so-called Kangaroo and Nugget coins in Australia, said in October that it doubled output in six months. Muenze Oesterreich AG, the Austrian mint, almost quadrupled production of its Philharmonic coin in the first nine months of 2008.

Holdings in the SPDR Gold Trust, the largest exchange-traded fund backed by bullion, exceed the gold reserves of all but five central banks and the IMF. Switzerland's Zuercher Kantonalbank in October said its gold vault was full.

Investment demand for gold bars may climb 49 percent to 201 metric tons in the first half of 2009, according to London-based researcher GFMS Ltd. Frederic Panizzutti, senior vice president at Geneva bullion refiner MKS Finance SA and the most accurate forecaster in the 2008 London Bullion Market survey, said the peak will be breached before July.

Greenlight's Einhorn, in a Jan. 20 letter to clients, said he was buying bullion and shares of the Market Vectors Gold Miners exchange-traded fund in response to the Federal Reserve's "exploding" balance sheet. Steven Lehman's $1.3 billion Federated Market Opportunity Fund beat the Standard and Poor's 500 Index by 30 percentage points last year.

The Fed's assets grew by $1 trillion over the past year after the central bank provided $416 billion in term loans to banks and purchased $350 billion of commercial paper issued by U.S. corporations.

Bullion is already up 16 percent since December 2007, the date that the Cambridge, Massachusetts-based National Bureau of Economic Research says was the start of the current recession. The biggest gain came in the 1973-1975 slowdown, when gold advanced 88 percent.

This year, the world economy will expand 0.5 percent, the IMF said Jan. 28, predicting that more than $2 trillion of bad assets from the U.S. will sink economies from Russia to the U.K. The majority of American banks are insolvent, Nouriel Roubini, the New York University professor who predicted the financial crisis, said in an interview in Davos.

While economists expect the U.S. to return to growth in the second half of this year, they also predict the return of inflation as soon as the fourth quarter. Consumer prices will rise 1.25 percent in the U.S., according to a Bloomberg survey.

The difference between rates on 10-year notes and Treasury Inflation Protected Securities, which reflects the outlook among traders for consumer prices, widened as the House passed the $819 billion economic stimulus.

The spread increased to 98 basis points from nine basis points at the end of last year. The U.S. recession brought the figure down from 2.34 percentage points six months ago.

Treasuries, which typically decline when inflation accelerates and diminishes the value of their fixed payments, fell 2.3 percent in January, according to Merrill Lynch & Co.'s U.S. Treasury Master index. The Standard and Poor's 500 Index dropped 6.4 percent, following its worst year since 1937.

"Gold is the ultimate currency hedge," said Michael Darda, chief economist at research company MKM Partners LP in Greenwich, Connecticut, who expects gold to surpass $1,000 this year. "If central banks are going to shovel massive amounts of paper out there, gold will ultimately respond to that."

Gold rose 5.8 percent last year as the Reuters/Jefferies CRB Index of 19 raw materials fell 36 percent, the worst year in a half-century. The metal was one of four commodities to gain, along with cocoa, sugar and lean hogs, and the only one to extend its winning streak to eight years. Oil and copper fell 54 percent.

The risk for investors is that government efforts to revive growth take hold. Seventeen months after seizing up at the onset of the credit crisis, the $1.69 trillion commercial paper market may be the first to cut its reliance on federal bailout programs.

About $245 billion of 90-day commercial paper that companies sold to the Federal Reserve will mature this week and next, central bank data show. As much as $50 billion to $70 billion of the debt may be rolled over and bought by investors, according to Barclays Capital in New York.

The difference between what banks charge each other for three-month loans and the rate the Treasury pays, the so-called TED spread, narrowed to 0.95 percentage point yesterday, down from 4.64 points on Oct. 10.

The Chicago Board Options Exchange Volatility Index, a measure of investor concern about stock market declines, lost 47 percent from its record close in November, according to data compiled by Bloomberg. That was the steepest 10-week retreat since the gauge began in 1990.

Gold has disappointed investors before. While the metal reached a record in 1980, the closing price in 2005 was little changed from that in 1979. On an inflation-adjusted basis, gold costs about the same as in 1981.

Fed officials warned this week of a prolonged global economic slowdown that may push the U.S. to the brink of deflation.

"Maybe this excessive easing will one day become inflationary, but we don't see inflation this year," said James Steel, an analyst at HSBC Securities in New York. "The climate is deflationary. Gold has never had a sustained rally in an era of deflation."

Steel expects gold to average $825 this year. The metal averaged $872.25 last year in London and $873.98 in New York.

Bullion rose 11 percent in euros last year and 44 percent in British pounds, protecting holders of those currencies as the dollar strengthened. Gold reached a record in pounds on Jan. 23.

The gain in gold denominated in euros and pounds "represents a mistrust of global economies," said Gerry Schubert, a director at Fortis in London.

Fed Chairman Ben S. Bernanke, who has said he prefers the inflation rate between 1 percent and 2 percent, will miss his target as the economy recovers, said John Brynjolfsson, a managing director and the chief investment officer at hedge fund Armored Wolf LLC in Aliso Viejo, California.

"It would be absurd to think that Bernanke would be able to nail a 1 to 2 percent Goldilocks inflation rate coming out of this," Brynjolfsson said. "What you have is competitive devaluation of all currencies around the world. Precious metals are the only hedge in this kind of environment. The trend of gold over the next five years is a straight line toward $1,700.'

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