|
As a general rule, the most successful man in
life is the man who has the best information
Gold no longer has a legal role in
the world’s monetary system, but because of a collapse of faith in
sovereign obligations - fiat currencies/paper money – and a coming
complete lack of trust in governments and financial institutions, gold is
going to quickly become a core banking asset.
So why do I believe gold is going to
become a core banking asset, what exactly does gold have going for it to make
this possible?
"Gold, measured out, became money. Gold's beauty, scarcity,
unique density and the ease by which it could be melted, formed, and measured
made it a natural trading medium. Gold gave rise to the concept of money
itself: portable, private, and permanent.” A brief History of Gold, onlygold.com
Historical
Risk
“The history of reserve currencies reveals that the
position of a country as a superpower (whose currency acts as a reserve
currency) tends to rotate in a natural cycle of around 100 years. Will
history repeat? From 1450 to 1530 it was Portuguese (80 years). From 1530 to
1640 (110 years) it was Spanish. From 1640 to 1720 (80 years) it was Dutch.
From 1720 to 1815 (95 years) it was French. From 1815 to 1920 (105 years) it
was British. And then the US dollar gradually dominated the
scene….” Richard Russell
A Fiscal Cliff
“Gold has firmly established itself as a portfolio asset.
Investors are not likely to abandon it…Gold is the only insurance
available to protect one from the Obama fiscal cliff set to cause the U.S.
economy to fall into recession in January.” Gold Thoughts, Ned W. Schmidt
Increases in taxes and, to a lesser extent,
reductions in spending, the infamous $600 billion “Fiscal Cliff”
that’s looming in the new year, will reduce the US federal budget
deficit by 4 - 5.1 percent of Gross Domestic Product (GDP).
The US Congressional Budget Office (CBO)
analyzed two different scenarios if the fiscal cliff was left in place:
- As measured by Fiscal Year - the combination
of policies under current law will reduce the federal budget deficit by
$607 billion, or 4.0 percent of gross domestic product (GDP), between
fiscal years 2012 and 2013. The resulting weakening of the economy will
lower taxable incomes and raise unemployment, generating a reduction in
tax revenues and an increase in spending on such items as unemployment
insurance. With that economic feedback incorporated, the deficit will drop
by $560 billion between fiscal years 2012 and 2013.
- If measured for calendar years 2012 and
2013, the amount of fiscal restraint is even larger. Most of the policy
changes that reduce the deficit are scheduled to take effect at the beginning
of calendar year 2013, so budget figures for fiscal year
2013—which begins in October 2012—reflect only about
three-quarters of the effects of those policies on an annual basis.
According to CBO’s estimates, the tax and spending policies that
will be in effect under current law will reduce the federal budget
deficit by 5.1 percent of GDP between calendar years 2012 and 2013 (with
the resulting economic feedback included, the reduction will be
smaller).
Under those fiscal conditions, which will occur
under current law, growth in real (inflation-adjusted) GDP in calendar year
2013 will be just 0.5 percent, CBO expects—with the economy projected
to contract at an annual rate of 1.3 percent in the first half of the year
and expand at an annual rate of 2.3 percent in the second half. Given the
pattern of past recessions as identified by the National Bureau of Economic
Research, such a contraction in output in the first half of 2013 would
probably be judged to be a recession.
Safe Haven/Preservation of Purchasing power
Institutional investors tend to
prefer investments that are thought to contain the potential for growth,
growth = sprouts. An investment has to produce a growing revenue stream - if
it doesn’t grow it doesn’t compound. Gold is rejected as an
investment because it doesn’t produce sprouts, meaning the steady
income and systematic growth so sought after by institutional investors just
isn’t there.
Gold performs two jobs that fiat
currencies, or any other financial innovation, cannot do; gold acts as a safe
haven in times of turmoil - to escape Nazi Germany, or buy food and water in
a crisis. Perhaps even more important gold preserves your purchasing power.
In 1913 (the year the US Federal Reserve was born) the US dollar was well a
dollar and gold was US$20 an ounce. Today, at almost the 100 year anniversary
of the Fed the dollar has lost over 95 percent of its purchasing power and
gold is almost $1800.00 an ounce.
In 1913, US$1000.00 would of bought
you 50 ounces of gold (that’s $88,150.00 worth of today’s paper
money). A thousand of today’s dollars will buy you 17 grams –
just over half an ounce of gold.
Gold, sprout-less yes, but
irreplaceable in its functions.
“The FED’s QE3 will stoke the stock market and
commodity prices, but in our opinion will hurt the US economy and, by
extension, credit quality. Issuing additional currency and depressing
interest rates via the purchasing of MBS does little to raise the real GDP of
the US, but does reduce the value of the dollar (because of the increase in
money supply), and in turn increase the cost of commodities (see the recent
rise in the prices of energy, gold, and other commodities). The increased
cost of commodities will pressure profitability of businesses, and increase
the costs of consumers thereby reducing consumer purchasing power.” Credit Rating Agency Egan-Jones
Collateral
Lenders loan money based on the
criteria of:
• The
borrower’s ability to service the debt - cash flow
• The
borrower’s collateral
• A
combination of both cash flow and collateral
“Given the regulatory pressure
to collateralize exposures, regardless of transaction type, there is a
greater need for collateral. But going forward, there may be a risk of a
shortage of good-quality collateral.” Olivier de Schaetzen, director, Euroclear
Debt has a maturity, and when
maturity is reached borrowers look to roll it over. Unfortunately for
borrowers the value, and high levels of esteem, of what has traditionally
been thought of as good collateral (sovereign obligations – currencies)
has collapsed.
According to Bloomberg borrowing
costs for G-7 nations in 2012 will rise as much as 39 percent from 2011.
“The great corollary of over
indebtedness is the relative scarcity of good collateral to support the debt
load outstanding. This imbalance of debt to collateral is impacting the
ability of banks to make loans to their customers, for central banks to make
loans to commercial banks, and for shadow banks to be funded by the overnight
Repo market. Hence the growth of gold as a collateral asset to debt heavy
markets is inevitably in the cards and is de facto occurring. Gold is
stepping up to the plate as “good” collateral in a world of bad
collateral.” Professor Lew Spellman, former economist at the Federal Reserve
and former assistant to the chairman of the President’s Council of
Advisors
In February 2011, J.P. Morgan Chase
& Co. said gold is at least as good an investment as triple-A rated
Treasuries. J.P. Morgan started allowing clients to use gold as collateral in
some transactions where traditionally only Treasury bonds and stocks have
been accepted.
On May 25, 2011, the European
Parliament's Committee on Economic and Monetary Affairs (ECON) agreed to
accept gold as collateral.
Real Interest Rates
The demand for gold moves inversely
to interest rates - the higher the rate of interest the lower the demand for
gold, the lower the rate of interest the higher the demand for gold.
The reason for this is simple, when
real interest rates are low, at, or below zero, cash and bonds fall out of
favor because the real return is lower than inflation - if your earning 1.6
percent on your money but inflation is running 2.7 percent the real rate you
are earning is negative 1.1 percent - an investor is actually losing
purchasing power. Gold is the most proven investment to offer a return
greater than inflation (by its rising price) or at least not a loss of
purchasing power.
Gold's price is tied to low/negative
real interest rates which are essentially the by-product of inflation - when
real rates are low, the price of gold can/will rise, of course when real
rates are rising, gold can fall very quickly.
There’s a saying that
“six percent interest can draw gold from the moon,” undoubtedly
true, but rates below two percent draw investors to gold.
The Feds interest rate is 0.25
percent and the Fed, in starting its third round of quantitative easing, has
said rates will remain low for several more years.
 
“The FOMC is attempting to drive money out of bonds and
INTO equities based on the fact that they have guaranteed practically no
return as far as yields go on short term Treasuries for at least two years.
Think about that. As an investor would you want to lock up money for that
long for that kind of yield or would you want to buy stocks and attempt to
capture a bit better return on your investment capital. After all, something
beats nothing as far as returns go, especially if you think that this easy
money policy is going to feed into further asset appreciation as the Dollar
further succumbs to the news…the Fed is obviously sacrificing the
Dollar in an attempt to keep a low interest rate environment in which stocks
are rising.” Dan “Trader Dan” Norcini
Tier 1 Capital
“Tier 1 capital is the core
measure of a bank's financial strength from a regulator's point of view. It
is composed of core capital which consists primarily of common stock and
disclosed reserves (or retained earnings) but may also include non-redeemable
non-cumulative preferred stock. Banks have also used innovative instruments
over the years to generate Tier 1 capital; these are subject to stringent
conditions and are limited to a maximum of 15% of total Tier 1 capital." Wikipedia
The Basel Committee for Bank
Supervision (BCBS), the maker of global capital requirements and whose Basel
III rules form the basis for global bank regulation, is studying making gold
a bank capital Tier 1 asset.
“Gold has historically been
classified as a Tier 3 asset. When determining how much money a bank can
loan, the bank's gold holdings have traditionally been discounted 50 percent
of the current market value. With value cut in half, banks have little
incentive to hold gold as an asset.” Frank Holmes, usfunds.com
If gold is made a Tier 1 Capital
asset banks could operate with far less equity capital than is normally
required. Gold would be the new backstop for debt, currencies and bank equity
capital.
"Anyone who understands
gold’s historic role will grasp the importance of the argument behind
extra bank leverage. Direct ownership of bullion by a bank is superior to
holding the fiat money issued by a central bank. It should increase
confidence in any bank and the system as a whole. Given relative values, bank
purchases of bullion will drive the value of gold as Tier 1 capital up
relative to other qualifying assets, increasing its desirability for
regulatory purposes further without a gold-owning bank doing anything." Alasdair Macleod,
resourceinvestor.com
If the Basel Committee agrees to
banks using gold as Tier 1 Capital it would create substantial demand for
physical bullion and be an important step toward gold’s
re-monetization.
Central Bank Gold Buying
Following many years of net annual sales in
the 400 to 500 tonne range, central banks, underweighted in gold and
overweight in dollars and euro’s, became net buyers of gold in 2009.
In 2012 countries have continued the trend of
gold buying reducing the "free-float" available to meet future
demand.
Names on the list of recent central bank
buyers include:
Mexico, Russia, Turkey (bought 6.6 tons in August), China,
Argentina, Bolivia, Kazakhstan (bought 1.4 tons in August), Ukraine (bought
1.9 tons in August), Colombia, Venezuela, Thailand, Turkey, Belarus, Sri
Lanka, Mauritius and Bangladesh.
Paraguay is the latest country to begin buying gold, their
reserves went from a few thousand ounces to over eight tons.
South Korea’s gold reserves
increased nearly 30%, from 1.750 million troy ounces in June 2012 to 2.260
million troy ounces in July - a 70 metric ton increase.
North Korea has exported more than
two tons of gold to China over the last year.
Russia increased its gold tally to
30,113 million troy ounces in July 2012 from 29,516 million troy ounces in
June.
In 2009 China purchased four tonnes of gold
bullion from Hong Kong. In 2011 China purchased 46 tonnes of gold bullion.
China is also buying up the production from
its own gold mines, as is Russia.
According to the
World Gold Council (WGC) nations bought 96.7 tonnes of gold in the first
quarter of 2012. Gold buying accelerated in the second quarter with central
banks buying 157.5 tonnes of gold, up 63 percent
quarter-over-quarter and up 137.9 percent year-over-year.
The European
Central bank kept its gold reserves at 16,142 million ounces.
The U.S. kept its reserves the same
from June to July - 261,499 million ounces.
The IMF said that central bank demand in 2012 may
be even higher than the 456.4 tons they bought last year – the most in
almost fifty years.
“The International Monetary Fund (IMF)
is planning to purchase more than $2 billion worth of gold on account of
rising global risks. The IMF currently holds around 2800 tonnes of gold at
various depositories.
The Fund is facing increased credit risk in
light of a surge in program lending in the context of the global crisis.
While the Fund has a multi-layered framework for managing credit risks,
including the strength of its lending policies and its preferred creditor
status, there is a need to increase the Fund’s reserves in order to
help mitigate the elevated credit risks. Bloomberg quotes a report by an IMF
staff while also adding that a $2.3 billion gold purchase is in the
planning.” IMF to buy Gold worth
$2.3 billion as credit risk increases, inverlochycapital.com
Gold and Drunken Sailors
"It will come as no surprise to those who know me that I
did not argue in favor of additional monetary accommodation during our
meetings last week. I have repeatedly made it clear, in internal FOMC
deliberations and in public speeches, that I believe that with each program
we undertake to venture further in that direction, we are sailing deeper into
uncharted waters. We are blessed at the Fed with sophisticated econometric
models and superb analysts. We can easily conjure up plausible theories as to
what we will do when it comes to our next tack or eventually reversing
course. The truth, however, is that nobody on the committee, nor on our
staffs at the Board of Governors and the 12 Banks, really knows what is
holding back the economy. Nobody really knows what will work to get the
economy back on course. And nobody – in fact, no central bank anywhere
on the planet – has the experience of successfully navigating a return
home from the place in which we now find ourselves. No central bank –
not, at least, the Federal Reserve – has ever been on this cruise
before.
This much we do know: Our engine room is already flush with $1.6
trillion in excess private bank reserves owned by the banking sector and held
by the 12 Federal Reserve Banks. Trillions more are sitting on the sidelines
in corporate coffers. On top of all that, a significant amount of
underemployed cash – or fuel for investment – is burning a hole
in the pockets of money market funds and other non-depository financial
operators. This begs the question: Why would the Fed provision to shovel
billions in additional liquidity into the economy's boiler when so much is
presently lying fallow?...
One of the most important lessons
learned during the economic recovery is that there is a limit to what
monetary policy alone can achieve. The responsibility for stimulating
economic growth must be shared with fiscal policy. Ironically, and sadly,
Congress is doing nothing to incent job creators to use the copious liquidity
the Federal Reserve has provided. Indeed, it is doing everything to discourage job creation. Small wonder that the respondents to my own inquires and the
NFIB and Duke University surveys are in 'stall' or 'Velcro' mode.
The FOMC is doing everything it can to encourage the U.S.
economy to steam forward. When we meet, we consider views that range from the
most cautious perspectives on policy, such as my own, to the more accommodative
recommendations of the well-known 'doves' on the committee. We debate our
different perspectives in the best tradition of civil discourse. Then, having
vetted all points of view, we make a decision and act. If only the fiscal
authorities could do the same! Instead, they fight, bicker and do nothing but
sail about aimlessly, debauching the nation's income statement and balance
sheet with spending programs they never figure out how to finance.
I am tempted to draw upon the hackneyed comparison that likens
our dissolute Congress to drunken sailors. But patriots among you might take
umbrage, noting that a comparison with Congress in this case might be deemed
an insult to drunken sailors.
Just recently, in a hearing before the Senate, your senator and
my Harvard classmate, Chuck Schumer, told Chairman Bernanke, "You are
the only game in town." I thought the chairman showed admirable
restraint in his response. I would have immediately answered, "No,
senator, you and your colleagues are the only game in town. For you and your
colleagues, Democrat and Republican alike, have encumbered our nation with
debt, sold our children down the river and sorely failed our nation. Sober
up. Get your act together. Illegitimum non carborundum; get on with it. Sacrifice your political ambition for the good
of our country – for the good of our children and grandchildren. For
unless you do so, all the monetary policy accommodation the Federal Reserve
can muster will be for naught." Dallas Fed President Richard Fisher
Banking Up the Wrong Tree With the Phillips Curve
The Phillips Curve
refers to the inverse relationship *thought by many to exist between
inflation and unemployment - when inflation is high, unemployment is low, and
vice-versa.
*Since 1974 seven
Nobel Prizes have been given for work critical of the Phillips curve.
“Instead
of adopting a "pure" monetarist target -- say a 5pc trend growth
rate for nominal GDP -- the Fed is implicitly arguing that a little more
inflation is a worthwhile trade-off if it creates more jobs.
Bill
Woolsey from Monetary Freedom says we are back edging back towards the
`Phillips Curve' temptations of the 1960s and 1970s, which ended with
stagflation and the misery index.
"Targeting
real variables is a potential disaster. Expansionary monetary policy seeking
an unfeasible target for unemployment was the key error that generated the
Great Inflation of the Seventies," he said.
Bernanke's
attempt to push down borrowing costs is at odds with monetarist orthodoxy.
Woolsey argues that successful QE should cause rates to rise -- not fall --
because the goal of such policy should be to put money into the hands of
businesses that then invest, spending on machinery and real expansion.
The
Fed is barking up the wrong tree with its doctrine of credit yield
manipulation, or "creditism", straying far from the quantity theory
of money.”
Ambrose Evans-Pritchard, International business editor, The Telegraph
Global
Production Flat, Costs Jump
Investments are not made on profit, investments
are made on sustainable margins.
According to the Thomson Reuters GFMS's Gold Survey 2012 Update, global mined gold production was flat, in the
first half of 2012, for a variety of reasons:
- Declining grades
- Construction and commissioning delays
- Extreme weather
- Labor strikes
"These are not
the only headwinds producers have to face. The relative stagnation of the
gold price, coupled with further rises in production costs, has seen producers'
cash margins eroded by 16% over the past nine months, while upward revisions
to capital expenditure forecasts will place additional pressure on free cash
flow going forward." GFMS
GFMS's ‘all-in cost’ metric reflects the full
marginal cost of mine production, it has recently risen to $1,050/oz.
Danger
Will Rogers Danger
Consider also:
- A high risk of default of sovereign states
- Gold’s bull market has been stealthy -
most investors and institutions have not participated
- Geo-political risk is climbing and there are
very few deposits of over one million ounces in geopolitically safe
areas
Conclusion
Gold is unique, it is the only
non-Tier 1 asset to be universally regarded by investors the world over as a
flight to safety asset. Gold, if moved from a Tier 3 to Tier 1 asset would be
competing as a safe haven investment against un-backed bonds yielding less
than zero in inflation adjusted terms and issued by over indebted
governments.
Gold is set to become the new
“good collateral.”
Central banks, while endlessly
creating their own fiat currencies, continue to buy up, and hold in their
vaults, the world’s gold. A few countries are buying up their domestic
gold production - even the IMF is buying more gold to reduce their risk
exposure. All of this gold buying is drastically reducing the number of gold
ounces/grams available to the world’s citizens.
The world’s central banks and
their respective governments are out of sync, monetary and fiscal policies
are not being coordinated.
Governments can’t print gold,
or silver, and no government controls them, that’s why precious metals
are the only medium of exchange that have survived throughout history.
"QE is not a rising tide that will
take all boats. It is good for gold. Gold will move from one of the weakest
commodities this year to one of the best performers over the next few
quarters.” Paul Horsnell, head of commodity research
at Barclays
The people who find gold and silver,
and the companies they run, should be on every investors radar screen. Are quality
management teams on yours?
If not, maybe a few should be.
Richard (Rick) Mills
rick@aheadoftheherd.com
www.aheadoftheherd.com
Richard is the owner of Aheadoftheherd.com and invests in the
junior resource/bio-tech sectors. His articles have been published on over
400 websites, including:
WallStreetJournal, SafeHaven, MarketOracle, USAToday,
NationalPost, Stockhouse, Lewrockwell, Pinnacledigest, UraniumMiner,
Beforeitsnews, SeekingAlpha, MontrealGazette, CaseyResearch, 24hgold,
VancouverSun, CBSnews, SilverBearCafe, Infomine, HuffingtonPost, Mineweb,
321Gold, Kitco, Gold-Eagle, The Gold/Energy Reports, Wealthwire,
CalgaryHerald, ResourceInvestor, Mining.com, Forbes, FNArena, Uraniumseek,
FinancialSense, Goldseek, Dallasnews, SGTReport, Vantagewire, Resourceclips
and the Association of Mining Analysts.
If you're interested in learning more about the junior resource
and bio-med sectors, and quality individual company’s within these
sectors, please come and visit us at www.aheadoftheherd.com
***
Legal Notice / Disclaimer
This document is not and should not be construed as an offer to
sell or the solicitation of an offer to purchase or subscribe for any investment.
Richard Mills has based this document on information obtained
from sources he believes to be reliable but which has not been independently
verified; Richard Mills makes no guarantee, representation or warranty and
accepts no responsibility or liability as to its accuracy or completeness.
Expressions of opinion are those of Richard Mills only and are subject to
change without notice. Richard
Mills assumes no warranty, liability or guarantee for the current relevance,
correctness or completeness of any information provided within this Report
and will not be held liable for the consequence of reliance upon any opinion
or statement contained herein or any omission.
Furthermore, I, Richard Mills, assume no liability for any
direct or indirect loss or damage or, in particular, for lost profit, which
you may incur as a result of the use and existence of the information
provided within this Report.
|
