Gold

As of August 2008, both silver and gold are taking their cues from the oil and dollar markets, just like everything else. Last week, for example, silver endured a nasty intraday selloff of more than $2 an ounce. Although it bounced during the day, much of the damage held. A $2 move in silver is equal to a $10,000 change in equity – huge for one day’s worth of trading. And this is on top of the large drop it endured the two weeks before that.

This mass liquidation means silver really is extremely oversold from a technical perspective. If the dollar starts to sell off and the oil market starts to move back up, we could possibly see silver have a very nice rebound.

Because both gold and silver tend to move in tandem, the gold market has dutifully followed silver downward.

The yellow metal topped out near $1,000 an ounce back on July 15 and has since shed $200. That’s a $20,000 move in equity – and yet another big swing.

Where to from here? Well, just like silver, gold is way oversold and could also see an impressive bounce if investors start to pile in.

The bright side to the long darkness of the impending recession/depression is that whether cyclical, secular, or black swan event, these troughs form the valleys from which new periods of prosperity emerge. Maybe its going to take 18 months, maybe its going to be more like 5 years. But considering the banking system’s response to the evaporation of ersatz liquidity with exponentially more of the same, the bubbleomic boom and bust phases will be the legacy of such ham fisted fiscal policy.

Doug Casey, another famous newsletter writer, likes to point out that the Chinese symbol for “crisis” also means “opportunity”. If ever there was a chance to put that theory to the test, now is it.

Here’s where opportunity is going to present itself in the ensuing chapters of our financial de-evolution.

First of all, its key to understand that the Federal Reserve Board of the United States is essentially fabricating money out of thin air to inject “liquidity” into the credit system. The market’s reaction to the announcement that the Fed was going to replace the banks in the short term commercial credit market is just the lubricant required to solidify the impression that the commercial infrastructure through which all goods move will continue to function, rendering the predictions about complete food system collapses irrelevant….for now.

However, in that this imaginary cash that is providing the liquidity has essentially the effect of further eroding U.S. dollar purchasing power, the opportunity here is the dollar-negative gold-positive influence of such moves.

Right now, the dollar is looking strong because of the massive repatriation of U.S. dollars now underway as a result of global U.S. denominated asset de-leveraging. So it looks like the dollar is strengthening. This is however a temporary illusion, and the fact is that this is a perfect opportunity to unload U.S. dollars and everything denominated in same. When the export of dollars to the U.S. eases, the greenback will plunge.

As all of the world’s currencies weaken in tandem with the U.S., since they are all tied to some degree to that ailing foreign reserve standard, gold will slowly at first, and then suddenly, surge into new record territory. These are the events that have irrevocably set the stage for $2,000 gold, and though many skeptics may marvel at the audaciousness of this sentiment still being echoed after all these years, it is now imminent and definite.

So the first great opportunity presented by this crisis, besides the last minute premium available for USD, is in physical gold. Not only is this the best strategy for capital preservation versus holding cash, it’s the next great opportunity to buy low and sell high.

There will be the usual resistance to swapping cash for gold on the part of mainstream investing America, and as usual, Americans will be the last to cotton on to the fact that all of the anti-gold messaging they’ve been spoon fed over the last decade is actually just an exit strategy for the cannibals of Wall Street.

But once the broad retail market understands that gold is the only game in town as far as value stores are concerned, the demand and flight to it will start to form a new bubble driven by fear.

Buyers of gold below $1,000 an ounce now will see their money double within 18 months, at which time, if not sooner, it will be time to take profit from the physical in time to ride the next bull, which will be in the producing gold companies. If you were extremely liquid, it would be a great time to start acquiring producers, but the immediate term opportunity is in the physical. And this does NOT include ETF’s. In this environment, and with all of the murky connections among banks, funds and insurers, you want to be sure you’re holdings can’t be part of some other weak institutions liquidation sale.

If you don’t want to have gold hidden on your premises, consider fractional bar ownership with a trusted provider of vaulting services. My recommendation is anywhere except within the United States.

Once the physical metal is bid up to astronomical proportions, and it will ultimately be over-bought, then the slowest herd mentality investors will crowd in and provide the exit for the early birds.

Then they will crowd into the producers, and the net effect of that stampede will be to return interest to the junior explorers – especially those with high quality, nearer term projects, strong cash positions, and sound management.

Then there are the two phases of consolidation ahead.

The first, which could conceivably start with the onset of the gold bull market, will see cashed up juniors start to swallow market decapitated fellow juniors. There is already clear evidence of this happening, as discussions are underway at some of the Canadian investment banks with the stronger junior companies they’ve financed.

Phase two will see mid-tier producers swallowing juniors, and senior producers swallowing mid-tiers. This is the best scenario for nimble investors to profit while others sit on the fence and watch their cash depreciate.

At any rate, timing will be key. Now is the time to start buying the stronger juniors with plump balance sheets and dynamic management. Expect to hold them for 24 months or more, but the reward for your patience will be a healthy return on your investment.

Investors have been buying up vast quantities of Gold so far in 2009. While remaining in the sub $1,000 price range, the US Mint sold 92,000 ounces of its American Eagle Gold Coins in January, 2009. This quantity is more than the mint sold during the entire first half of 2007. However, the price of gold ($942/oz. as of 2/14/09) is below the price that it peaked at nearly a year ago. With all this increased demand for Gold and no great price increase yet, the prices are lagging and as more investors turn to physical assets such as precious metals, the price will spike.

Investors have already begun fleeing from riskier assets to higher quality and safer assets such as U.S. Treasuries. This has already bid the yield on the treasuries down from the low 2% range a year ago to 0.25% today on the 3 month treasuries. However, the 'risk free' treasuries are subject to the currency risk caused by all of the borrowing that the U.S. Government plans to do in 2009. The massive levels of government borrowing lead to erosion of the value of the dollar. With yields of nearly zero and currency risk associated with the U.S. Treasuries, investors seeking safe investments will have to look outside of government bonds. Gold is the perfect alternative. It holds its value and is protected against the currency risk associated with the dollar denominated government bonds. It also hedges against inflation, something of concern in the current low interest rate environment. Some investors have already flocked to Gold, as indicated by the rise in purchases of U.S. Gold American Eagles. However, this has not been fully reflected in the current price, and as more investors flock to the safe investment of Gold, the price will climb quickly.^[1]

I'll add one other reason to like gold stocks here: They did pretty well in Great Depression I. And history may repeat. Even at their lowest prices in 1933, the stocks of Alaska Juneau Gold Mining and Homestake Mining were still well above their 1929 highs. At their highest prices, they were 230% and 300% higher, respectively.

Legendary investor Bernard Baruch was a principal stockholder in Alaska Juneau. It was his largest holding in 1931. He knew where the soup would stick to the spoon after Roosevelt's New Deal policies. It would mean a devaluation of the dollar and a rise in the gold price.

Eventually, gold did surge, and so did gold stocks. "Baruch reaped an especially large profit," his biographer James Grant writes, "for he had been buying stock and bullion."

Obama's stimulus plan smells a lot like Roosevelt's New Deal. And if this is the greatest financial test we've faced since the Great Depression – as I believe it will ultimately be – then gold stocks may also be among the few stocks to make new all-time highs in 2009.

Gold trades for around $900 an ounce, and the average cost to produce it is around $450 an ounce or so. And as I pointed out above, the gold price has stayed up and costs should fall in 2009. You don't have to know much about economics to know that's a nice combination. That's why I think right now is a great chance to pick up cheap gold stocks.

In the mid-1990s, four countries made up more than half of global gold production. They were Canada, Australia, South Africa, and the U.S. But by 2006, these four producers made up only about one-third of global production. Today, you see China produce a lot of gold, as well as Peru, Mexico, Chile, and countries in Africa. (This is according to Frank Holmes' book The Goldwatcher – a must-have manual for gold investors.)

Many gold mining stocks today have assets in countries where the currency is falling against the dollar. As Doody says, "All the commodity nation currencies – the Canadian dollar, the Australian dollar, the South African rand, the Brazilian real, the Mexican peso – they're all down 20%-40%. When your mining costs in those countries are translated back into U.S. dollars, they'll be 20%-40% lower."

Everybody is ranting and raving about the value of gold these days, and with good reason since the U.S. is printing money at an alarming rate.

Setting politics aside along with the argument over whether we need the large influx of fresh bills or not, a natural consequence of President Obama’s policies - and President Bush’s to a lesser degree before him - is going to be inflation, and possibly even hyperinflation.

That’s part of the reason why gold is mostly heading north these days. Yeah, there will be pullbacks along the way, but overall, don’t expect gold to slump anytime soon.

That foresight might give all the reason in the world to buy gold, but it opens up a whole new can of worms in its place. For example, should you invest in gold bullion? Gold coin? Gold mining stocks? What are the risks of each? And what are the potential rewards?

Here’s a rundown of some of the more common ways of investing in the hot commodity…

• Jewelry: While jewelry investing in Europe is fairly popular, it isn’t so much in The States, and there is a very good reason to support that trend. American “gold” jewelry often times doesn’t have a high content of the material it’s sought for. Either gold-plated, or mislabeled, the jewelry you find in an average store probably isn’t the 20 karat gold you think it is. Also, jewelry’s value depends on the craftsmanship, designer, and rarity, all of which make each individual piece worth something… or nothing. Sometimes deciding which category a gold design fits into isn’t worth the hassle.
• Junior Mining Stocks: Yes, you can make a heck of a lot, but you can also lose the same or more. And the truth is that the odds are against you. That’s the game you play though when you select a mining company that is banking on finding gold, but doesn’t actually have it yet.
• Senior Mining Stocks: Obviously an established company with its own gold-laden mine sounds like a good choice, but the mining industry is a very dangerous one. It might not be where it was a century ago during the Industrial Revolution, but that doesn’t mean that accidents don’t happen. All it takes is one bad flood or cave-in to do serious damage on the individual stock.
• Futures and Options: Betting on the probability that any particular stock will do not only well or poorly, but at what exact price it’s going to hit is risky business to say the least. Especially when there’s always somebody or something like a corporation on the other end dangling the price in front of individual investors. Just because it looks tempting doesn’t mean it should hold that appeal.

NEW DELHI: At the time of crisis, bank on gold that is the advice Australian stock brokers are giving their clients now.

So, equity investors are likely to head for gold now in Australia.

According to Joseph Palmer and Sons, gold has performed well in the current financial markets slowdown, while other investments have suffered.

The firm expects gold to stay up until the world comes out of the credit crunch and it suggested that investors consider buying physical gold rather than stocks.

Experts also said gold is a safe haven and prices are expected to rise further during 2009.

Meanwhile, gold will feature prominently in the forthcoming Chinese New Year celebrations, with gold coins viewed as a symbol of wealth and prosperity.