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As a general rule, the most successful man in life is the man who has the best
information
The first ever GAO (Government Accountability Office) audit of the US Federal Reserve was recently carried out due to the
Ron Paul/Alan Grayson Amendment
to the Dodd-Frank bill passed
in 2010. Jim DeMint, a
Republican Senator, and Bernie Sanders, an independent
Senator, while leading
the charge for an audit in the Senate, watered down the original language
of house bill (HR1207) so that
a complete audit would not be carried out. Ben Bernanke, Alan Greenspan, and others,
opposed the audit.
What the audit revealed was incredible: between December 2007 and June 2010,
the Federal Reserve had secretly bailed out many of the world’s banks, corporations, and governments
by giving them US$16,000,000,000,000.00 – that’s
16 TRILLION dollars.
The GDP of the
United States is $14.12 trillion, the entire national debt of the
United States government spanning
its 200 plus year history is $14.5 trillion. The
budget that is being debated in Congress and the Senate is $3.5 trillion.
In the past debt ceiling
votes have passed the House and the Senate without question by the majority party (remember there’s an election next year so
there’s a need for political grandstanding). When Republicans controlled the chambers they passed debt
ceiling hikes with the Democrats in
opposition. When the Democrats
are in power they up the debt
ceiling while the
Republican oppose it.
Obama opposed raising the debt ceiling when George W. Bush was President. The debt ceiling is simply
a limit of how much a government can borrow and owe regarding public debt. By increasing the debt ceiling, a President would be able to avoid spending cuts.
A default would only occur
if the US did not make payments on its debt so
not raising the debt ceiling will not result in default – a default can
only occur if interest payments were not made.
As the audit of
the Federal Reserve has just
shown whether the debt ceiling hike passes or not is a moot point. The unelected Federal Reserve will, without Congressional authority, continue to create
more money.
The majority of US debt is owned by the Federal Reserve.
The Dow on gold’s
terms is telling everybody something important is
happening:
In 2000 gold made its $260 per ounce low, in January 2000 the Dow was 10,900
10,900 / $260
per ounce = 41.9 ounces
to buy the Dow
Today at
12,592 DJII and $1,600 gold it’s 7.87
oz to buy the Dow.
Investors are starting
to realize that gold and silver are a storehouse of value and a safe haven in times of turmoil. Gold and silvers prices have risen because of the abuse and mismanagement
of our monetary and currency systems - throughout history, gold has always shone the brightest when trust breaks
down, confidence falls and fear
climbs.
The Dow/Gold
ratio has twice before
gone through corrections resulting
in a transfer of wealth from one asset class to another.
In 1928 the ratio peaked at 14.5 and then dropped to 2.9 as the
stock market crashed and
the U.S. entered a deflationary
depression. In 1965
the Dow/Gold ratio peaked at
27.6, then started a long correction to 1.57 in
1980 as Volker aggressively raised
interest rates and stopped
inflation.
As you can see
on the above chart we began a third
correction in 1999 when
the Dow/gold ratio peaked at
41.
It presently would be very hard to mount an argument against gold being clearly the winning major investment of the
last decade.
Latest demand
statistics from the World
Gold Council:
Gold Demand and Supply – First
quarter 2011
- Global gold demand
in the first quarter of 2011 totalled 981.3
tonnes, up 11% year-on-year
from 881.0 tonnes in the first quarter of
2010.
- The quarterly
average gold price
hit a new record of US$1,386.27/oz (as per the London PM Fix), its eighth consecutive year-on-year increase.
- During the first quarter of the year, investment demand grew by 26% to
310.5 tonnes from 245.6 tonnes in the first
quarter of 2010.
- ETFs and similar
products witnessed
net outflows of 56 tonnes.
- India and China, the two largest markets for gold jewellery,
together accounted
for 349.1 tonnes of gold jewellery demand or 63% of the total, a value of US$16bn. China’s jewellery demand reached a new quarterly record of 142.9 tonnes up 21% from 118.2 tonnes in the first quarter of 2010.
- In Q1 2011, gold supply declined by 4% year-on-year to 872.2
tonnes from 912.1 tonnes in the first quarter
of 2010. This was despite
an increase in mine production of 44 tonnes year-on-year, a growth rate of 7% from year earlier levels, and negligible net producer
de-hedging. The decline
in total supply was
due to recycled gold, which
was down 6% on year-earlier
levels to 347.5 tonnes from
369.3 tonnes in the first quarter of 2010 and a sharp
increase in net purchasing
by the official sector.
- Central bank
purchases jumped to
129 tonnes in the quarter, exceeding the combined total of net purchases
during the first three
quarters of 2010.
With the price
of gold at US$1600 it’s
definitely living up to its
oft proven history of acting as a safe haven in times of turmoil but after being the best performing major
assets of the last decade,
are the price of gold and silver
going to continue higher?
The settlement of the U.S. debt
impasse could see a sharp correction in gold’s
price - news of positive results
could trigger a temporary
price retreat.
Over a little longer term there exists reasonable, sound, and at least as far as I’m concerned, convincing
arguments, that precious metals and their stocks are undervalued:
- Central banks
are adding to their
official gold holdings
- The European
Union’s sovereign
debt problems are worsening
- The Federal
Reserve will continue to create
money
- Expanding Chinese,
Indian, and other Asian economies means growing wealth and rising
inflation. An historic affinity
to gold in the form of jewelry
and as a saving and investment
option means continued
demand growth coming from the East
- Gold mining
supply declining
Conclusion
Considering the seasonally
strong period for gold
and gold stocks is right around
the corner:
- Jewelry manufacturers
step up fabrication demand
ahead of Christmas gift giving
- Indian dealers begin
stocking up ahead of
the autumn festivals and the Indian wedding season
- Chinese lunar
new year
- Increased news flow from
junior work programs
- Resource and Investment
conferences
They might
be even more undervalued then we think.
History proves
the greatest leverage to
a rising gold price is gold mining stocks.
I think gold juniors are going to
be the most rewarding, the most lucrative way to garner the huge rewards from the coming freight train rush to gold. Those
golden tracks are being
laid today using the world’s currencies as ballast
- when your cash is trash your gold is shining.
Monetary and fiscal authorities around the world
are setting us up for an inflationary cycle. This will be the ultimate
driver of the gold bull market
going forward.
Gold, and gold
stocks should be on every investors radar screen. Are they on yours?
If not, maybe they should
be.
Richard Mills
Aheadoftheherd.com
If you're
interested in learning more about the junior resource market please come and visit
Richard at www.aheadoftheherd.com. Membership is free, no credit card or personal
information is asked for.
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