Calculating the "Fair Value" of Gold

In the absence of cashflow, judging gold's present "fair value" means analysing it like an insurance actuary would...

WITH ITS incredibly constant supply and unsurpassed history as a store of value, physical gold is the wise choice for retained wealth during currency crises. But for new buyers, is today's price too high?

From post-war Austria to Argentina a decade ago, it is clear that holding gold offers insurance against many levels of currency crisis – something which a growing number of economic historians, such as Reinhard and Rogoff and Niall Ferguson, thinks increasingly possible in the developed West today.

Across long periods of history, from imperial Rome through to Elizabethan London and late 20th century America, the value of gold in terms of the goods and services that it can buy has remained remarkably stable. It is commonly noted that one ounce of gold could buy a good suit of clothes in each of those periods, a base value to which, over the ultra long-term, it's likely to revert at some point in the future. Gold's ability to defend wealth in periods of monetary crisis, whether strong inflation or deflation, can give it a valuable premium above its long-term base value. But today, this metric would mean gold is around 75% over-valued.

Is today's premium – over and above gold's long-term base value – excessive? In the absence of cash flow, we need to judge gold's present value in the way that an insurance actuary would, pricing it in terms of risk-adjusted outcomes. That, in turn, means estimating the likelihood of different degrees of currency meltdown. Doing this, I find that it is hard to push gold's fair value down to today's market-price of $1,400 per ounce without setting the probability of a serious inflation or even hyperinflation to zero.

I'm much more fearful of currency devaluation that the market is, in other words. But discounting to zero the probability of an event not experienced in our lifetimes is a classic mistake. Most recently, it caused the credit ratings agencies to incorrectly estimate the risk of a mass sub-prime mortgage default. In 1980, this same mistake caused the gold market to anticipate strong annual inflation rates, just as we'd experienced throughout the 1970s. Gold's then premium, over its base value, hit 240%. But the market hadn't reckoned with the shock of strongly positive real interest rates which the Volcker Fed – in the absence of large, structural government deficits – could and was about to deliver.

Today, historical inflation data shows that the risk of a serious currency devaluation in the next 15 years is most certainly not zero. (Since WWII, for instance, the Pound Sterling has lost between 80-90% of its purchasing power in nearly 11% of those time frames.) The historical record I've included in myGold Value Calculator also includes the currency collapses of Weimar Germany, post-war Austria, Peso-crisis Mexico and Argentina's bond default at the start of this century. Because Western Europe, Japan and the United States have now accrued a significant level of government debt, and I fear we are entering the same state of political denial which led those countries to lurch from crisis to crisis over the last 100 years. I think our future is likely to look a bit like their past.

Though small, the risk of severe inflation and currency devaluation is material at perhaps 0.5% in the next 15 years. Also critical to the Gold Value Calculatoris the discount rate used. Because it's not simply the headline rate of inflation, but the real return on currency which counts. Is your money on deposit losing purchasing power? Negative real rates of return on currency are what drove gold higher in the 1970s, and again in the last decade. Because why would you choose to store value in something which isn't retaining its purchasing power, and has no short-term prospect of doing so, when you can choose tightly supplied, indestructible gold instead?

Without today's large public deficits, risk-free returns to cash did not need to be suppressed below inflation at the start of the 1980s. Looking ahead today, in contrast, the Federal Reserve, Bank of Japan, ECB and Bank of England appear to have little choice.

Using the inputs we just looked at, I calculate gold's risk-adjusted value to be above $3,800 today. That's significantly higher than the market price, and well above 2011 price forecasts from bullion bank analysts . My present valuation seems outlandish, therefore, which is why you can download and judge myGold Value Calculator for yourself.

You can see the formulae and decide if the method, inputs and valuation are reasonable. And as the model shows, gold could of course go down substantially, as well as up, depending on the outcome path for inflation and the rate of return you can earn on cash savings.

Debunking Anti-Gold Propaganda

By Doug Casey
A meme is now circulating that gold is in a bubble and that it's time for the wise investor to sell. To me, that’s a ridiculous notion. Certainly a premature one.
It pays to remain as objective as you can be when analyzing any investment. People have a tendency to fall in love with an asset class, usually because it’s treated them so well. We saw that happen, most recently, with Internet stocks in the late ‘90s and houses up to 2007. Investment bubbles are driven primarily by emotion, although there's always some rationale for the emotion to latch on to. Perversely, when it comes to investing, reason is recruited mainly to provide cover for passion and preconception.
In the same way, people tend to hate certain investments unreasonably, usually at the bottom of a bear market, after they've lost a lot of money and thinking about the asset means reliving the pain and loss. Love-and-hate cycles occur for all investment classes.
But there’s only one investment I can think of that many people either love or hate reflexively, almost without regard to market performance: gold. And, to a lesser degree, silver. It’s strange that these two metals provoke such powerful psychological reactions – especially among people who dislike them. Nobody has an instinctive hatred of iron, copper, aluminum or cobalt. The reason, of course, is that the main use of gold has always been as money. And people have strong feelings about money. Let’s spend a moment looking at how gold’s fundamentals fit in with the psychology of the current market.

What Gold Is – and Why It’s Hated

Let me first disclose that I’ve always been favorably inclined toward gold, simply because I think money is a good thing. Not everyone feels that way, however. Some, with a Platonic view, think that money and commercial activity in general are degrading and beneath the “better” sort of people – although they’re a little hazy about how mankind rose above the level of living hand-to-mouth, grubbing for roots and berries. Some think it’s “the root of all evil,” a view that reflects a certain attitude toward the material world in general. Some (who have actually read St. Paul) think it’s just the love of money that’s the root of all evil. Some others see the utility of money but think it should be controlled somehow – as if only the proper authorities knew how to manage the dangerous substance.
From an economic viewpoint, however, money is just a medium of exchange and a store of value. Efforts to turn it into a political football invariably are a sign of a hidden agenda or perhaps a psychological aberration. But, that said, money does have a moral as well as an economic significance. And it’s important to get that out in the open and have it understood. My view is that money is a high moral good. It represents all the good things you hope to have, do and provide in the future. In a manner of speaking, it’s distilled life. That’s why it’s important to have a sound money, one that isn’t subject to political manipulation.
Over the centuries many things have been used as money, prominently including cows, salt and seashells. Aristotle thought about this in the 4th century BCE and arrived at the five characteristics of a good money:

• It should be durable (which is why, say, wheat isn’t a good money – it rots).
• It should be divisible (which is why artwork isn’t a good money – you can’t cut up the Mona Lisa for change).
• It should be convenient (which is why lead isn’t a good money – it just takes too much to be of value).
• It should be consistent (which is one reason why land can’t be money – each piece is different).
• And it should have value in itself (which is why paper money leads to trouble).

Of the 92 naturally occurring elements, gold (secondarily silver) has proved the best money. It’s not magic or superstition, any more than it is for iron to be best for building bridges and aluminum for building airplanes.
Of course we do use paper as money today, but only because it recently served as a receipt for actual money. Paper money (currency) historically has a half-life that depends on a number of factors. But it rarely lasts longer than the government that issues it. Gold is the best money because it doesn’t need to be “faith-based” or rely on a government.
There’s much more that can be said on this topic, and it’s important to grasp the essentials in order to understand the controversy about whether or not gold is in a bubble. But this isn’t the place for an extended explanation.
Keep these things in mind, though, as you listen to the current blather from talking heads about where gold is going. Most of them are just journalists, reporters that are parroting what they heard someone else say. And the “someone else” is usually a political apologist who works for a government. Or a hack economist who works for a bank, the IMF or a similar institution with an interest in the status quo of the last few generations. You should treat almost everything you hear about finance or economics in the popular media as no more than entertainment.
So let’s take some recent statements, assertions and opinions that have been promulgated in the media and analyze them. Many impress me as completely uninformed, even stupid. But since they’re floating around in the infosphere, I suppose they need to be addressed.

Misinformation and Disinformation

Gold is expensive.
This objection is worth considering – for any asset. In fact, it’s critical. We can determine the price of almost anything fairly easily today, but figuring out its value is as hard as it’s ever been. From the founding of the U.S. until 1933, the dollar was defined as 1/20th of an ounce of gold. From 1933 it was redefined as 1/35th of an ounce. After the 1971 dollar devaluation, the official price of the metal was raised to $42.22 – but that official number is meaningless, since nobody buys or sells the metal at that price. More importantly, people have gotten into the habit of giving the price of gold in dollars, rather than the value of the dollar in gold. But that’s another subject.
Here’s the crux of the argument. Before the creation of the Federal Reserve in 1913, a $20 bill was just a receipt for the deposit of one ounce of gold with the Treasury. The U.S. official money supply equated more or less with the amount of gold. Now, however, dollars are being created by the trillion, and nobody really knows how many more of them are going to be shazammed into existence.
It is hard to determine the value of anything when the inch marks on your yardstick keep drifting closer and closer together.
The smart money is long gone from gold.
This is an interesting assertion that I find based on nothing at all. Who really is the smart money? How do you really know that? And how do you know exactly what they own (except for, usually, many months after the fact) or what they plan on buying or selling? The fact is that very few billionaires (John Paulson perhaps best known of them) have declared a major position in the metal. Gold and gold stocks, as the following chart shows, are only a tiny proportion of the financial world’s assets, either absolutely or relative to where they've been in the past:

Gold is risky.
Risk is largely a function of price. And, as a general rule, the higher the price the higher the risk, simply because the supply is likely to go up and the demand to go down – leading to a lower price. So, yes, gold is riskier now, at $1,400, than it was at $700 or at $200. But even when it was at $35, there was a well-known financial commentator named Eliot Janeway (I always thought he was a fool and a blowhard) who was crowing that if the U.S. government didn’t support it at $35, it would fall to $8.
In any event, risk is relative. Stocks are very risky today. Bonds are ultra risky. Real estate is in an ongoing bear market. And the dollar is on its way to reaching its intrinsic value.
Yes, gold is risky at $1,400. But it is actually less risky than most alternatives.
Gold pays no interest.
This is kind of true. But only in the sense that a $100 bill pays no interest. You can get interest from anything that functions as money if it is lent out. Interest is the time premium of money. You will not get interest from either your $100 or from your gold unless you lend them to someone. But both the dollars and the gold will earn interest if you lend them out. The problem is that once you make a loan (even to a bank, in the form of a savings account), you may not even get your principal back, much less the interest.
Gold pays no dividends.
Of course it doesn’t. It also doesn't yield chocolate syrup. It’s a ridiculous objection, because only corporations pay dividends. It’s like expecting your Toyota in the driveway to pay a dividend, when only the corporation in Japan can do so. But if you want dividends related to gold, you can buy a successful gold mining stock.
Gold costs you insurance and storage.
This is arguably true. But it’s really a sophistic misdirection to which many people uncritically nod in agreement. You may very well want to insure and professionally store your gold. Just as you might your jewelry, your artwork and most valuable things you own. It’s even true of the share certificates for stocks you may own. It’s true of the assets in your mutual fund (where you pay for custody, plus a management fee).
You can avoid the cost of insurance and storage by burying gold in a safe place – something that’s not a practical option with most other valuable assets. But maybe you really don’t want to store and insure your gold, because the government may prove a greater threat than any common thief. And if you pay storage and insurance, they’ll definitely know how much you have and where it is.
Gold has no real use.
This assertion stems from a lack of knowledge of basic chemistry as well as economics. Yes, of course people have always liked gold for jewelry, and that’s a genuine use. It’s also good for dentistry and micro-circuitry. Owners of paper money, however, have found the stuff to be absolutely worthless hundreds of times in many score of countries.
In point of fact, gold is useful because it is the most malleable, the most ductile and the most corrosion resistant of all metals. That means it’s finding new uses literally every day. It’s also the second most conductive of heat and electricity, and the second most reflective (after silver). Gold is a hi-tech metal for these reasons. It can do things no other substance can and is part of the reason your computer works so well.
But all these reasons are strictly secondary, because gold’s main use has always been (and I’ll wager will be again) as money. Money is its highest and best use, and it’s an extremely important one.
The U.S. can, or will, sell its gold to pay its debt, depressing the market.
I find this assertion completely unrealistic. The U.S. government reports that it owns 265 million ounces of gold. Let’s say that’s worth about $400 billion right now. I’m afraid that’s chicken feed in today’s world. It’s only a quarter of this year’s federal deficit alone. It’s only half of one year’s trade deficit. It represents only about 5% of the dollars outside the U.S. The U.S. government may be the largest holder of gold in the world, but it owns less than 5% of the approximately 6 billion ounces above ground.
From the ‘60s until about 2000, most Western governments were selling gold from their treasuries, working on the belief it was a “barbarous relic.” Since then, governments in the advancing world – China, India, Russia and many other ex-socialist states – have been buying massive quantities.
Why? Because their main monetary asset is U.S. dollars, and they have come to realize those dollars are the unbacked liability of a bankrupt government. They’re becoming hot potatoes, Old Maid cards. But the dollars can be replaced with what? Sovereign wealth funds are using them to buy resources and industries, but those things aren’t money. And in the hands of bureaucrats, they’re guaranteed to be mismanaged. I expect a great deal of gold buying from governments around the world over the next few years. And it will be at much higher dollar prices.
High gold prices will bring on huge new production, which will depress its price.
This assertion shows a complete misunderstanding of the nature of the gold market. Gold production is now about 82.6 million ounces per year and has been trending slightly down for the last decade. That’s partly because at high prices miners tend to mine lower-grade ore. And partly because the world has been extensively explored, and most large, high-grade, easily exploited resources have already been put into production.
But new production is trivial relative to the 6 billion ounces now above ground, which only increases by about 1.3% annually. Gold isn’t consumed like wheat or even copper; its supply keeps slowly rising, like wealth in general. What really controls gold’s price is the desire of people to hold it, or hold other things – new production is a trivial influence.
That’s not to say things can’t change. The asteroids have lots of heavy metals, including gold; space exploration will make them available. Gigantic amounts of gold are dissolved in seawater and will perhaps someday be economically recoverable with biotech. It’s now possible to transmute metals, fulfilling the alchemists dream; perhaps someday this will be economic for gold. And nanotech may soon allow ultra-low-grade deposits of gold (and every other element) to be recovered profitably. But these things need not concern us as practical matters in the course of this bull market.
You should have only a small amount of gold, for insurance.
This argument is made by those who think gold is only going to be useful if civilization breaks down, when it could be an asset of last resort. In the meantime, they say, do something productive with your money…
This is poor speculative theory. The intelligent investor allocates his funds where it’s likely they’ll provide the best return, consistent with the risk, liquidity and volatility profile he wants to maintain. There are times when you should be greatly overweight in a single asset class – sometimes stocks, sometimes bonds, sometimes real estate, sometimes what-have-you. For the last 12 years, it’s been wise to be overweight in gold. You always want some gold, simply because it’s cash in the most basic form. But ten years from now, I suspect that will be a minimum. Right now it’s a maximum. The idea of keeping a constant, but insignificant, percentage in gold impresses me as poorly thought out.
Interest rates are at zero; gold will fall as they rise.
In principle, as interest rates rise, people tend to prefer holding currency deposits. So they tend to sell other assets, including gold, to own interest-earning cash. But there are other factors at work. What if the nominal interest rate is 20%, but the rate of currency depreciation is 40%? Then the real interest rate is minus 20%. This is more or less what happened in the late ‘70s, when both nominal rates and gold went up together. Right now governments all over the world are suppressing rates even while they’re greatly increasing the amount of money outstanding; this will eventually (read: soon) result in both much higher rates and a much higher general price level. At some point high real rates will be a factor in ending the gold bull market, but that time is many months or years in the future.
Gold sentiment is at an all-time high.
Although gold prices are at an all-time high in nominal terms, they are still nowhere near their highs in real terms, of about $2,500 (depending on how much credibility you give the government’s CPI numbers), reached in 1980. Gold sentiment is still quite subdued among the public; most of them barely know it even exists.
Some journalists like to point out that since there are a few (five, perhaps) gold dispensing machines in the world, including one in the U.S., that there’s a gold mania afoot. That’s ridiculous, although it shows a slowly awakening interest among people with assets.
Journalists also point to the numerous ads on late-night TV offering to buy old gold jewelry (generally at around a 50% discount from its metal value) as a sign of a gold bubble. But this is even more ridiculous, since the ads are inducing the unsophisticated, cash-strapped booboisie to sell the metal, not buy it.
You’ll know sentiment is at a high when major brokerage firms are hyping newly minted gold products, and Slime Magazine (if it still exists) has a cover showing a golden bull tearing apart the New York Stock Exchange. We’re a long way from that point.
Mining stocks are risky.
This is absolutely true. In general, mining is a horrible business. It requires gigantic fixed capital expense to build the mine, but only after numerous, expensive and unpredictable permitting issues are handled. Then the operation is immovable and subject to every political risk imaginable, not infrequently including nationalization. Add in continual and formidable technical issues of every description, compounded by unpredictable fluctuations in the price of the end product. Mining is a horrible business, and you’ll never find Graham-Dodd investors buying mining stocks.
All these problems (and many more that aren’t germane to this brief article), however, make them excellent speculative vehicles from time to time.
Mineral exploration stocks are very, very risky.
This is very, very true. There are thousands of little public companies, and some are just a couple steps up from a prospector wandering around with a mule. Others are fairly sophisticated, hi-tech operations. Exploration companies are often classed with mining companies, but they are actually very different animals. They aren’t so much running a business as engaging in a very expensive and long-odds treasure hunt.
That’s the bad news. The good news is that they are not only risky but extraordinarily volatile. The most you can lose is 100%, but the market cyclically goes up 10 to 1, with some stocks moving 1,000 to 1. That kind of volatility can be your best friend. Speculating in these issues, however, requires both expertise and a good sense of market timing. But they’re likely to be at the epicenter of the gold bubble when it arrives – even though few actually have any gold, except in their names.
Warren Buffett is a huge gold bear.
This is true, but irrelevant – entirely apart from suffering from the logical fallacy called “argument from authority.” But, nonetheless, when the world’s most successful investor speaks, it’s worth listening. Here's what Buffett recently said about gold in an interview with Ben Stein, another goldphobe: "You could take all the gold that's ever been mined, and it would fill a cube 67 feet in each direction. For what that's worth at current gold prices, you could buy all – not some, all – of the farmland in the United States. Plus, you could buy 10 Exxon Mobils, plus have $1 trillion of walking-around money. Or you could have a big cube of metal. Which would you take? Which is going to produce more value?"
I’ve long considered Buffett an idiot savant – a genius at buying stocks but at nothing else. His statement is quite accurate, but completely meaningless. The same could be said of the U.S. dollar money supply – or even of the world inventory of steel and copper. These things represent potential but are not businesses or productive assets in themselves. Buffett is certainly not stupid, but he’s a shameless and intellectually dishonest sophist. And although a great investor, he’s neither an economist or someone who believes in free markets.
Gold is a religious statement.
Actually, since most religions have an otherworldly orientation, they’re at least subtly (and often stridently) anti-gold. But it is true that some promoters of gold seem to have an Elmer Gantry-like style. That, however, can be said of True Believers in anything, whether or not the belief itself has merit. In point of fact, I think it’s more true to say goldphobes suffer from a kind of religious hysteria, fervently believing in collectivism in general and the state in particular, with no regard to counter-arguments. Someone who understands why gold is money and why it is currently a good speculative vehicle is hardly making a religious statement. More likely he’s taking a scientific approach to economics and thinking for himself.  

So Where Are We?

So these are some of the more egregious arguments against gold that are being brought forward today. Most of them are propounded by knaves, fools or the uninformed.
My own view should be clear from the responses I’ve given above. But let me clarify it a bit further. Historically – actually just up until the decades after World War I, when world governments started issuing paper currency with no relation to gold – the metal was cash, and it was used as money everywhere, on a daily basis. I believe that will again be the case in the fairly near future.
The question is: At what price will that occur, relative to other things? It’s not just a question of picking a dollar price, because the relative value of many things – houses, food, commodities, labor – have been distorted by a very long period of currency inflation, increased taxation and very burdensome regulation that started at the beginning of the last depression. Especially with the fantastic leaps in technology now being made and breathtaking advances that will soon occur, it’s hard to be sure exactly how values will realign after the Greater Depression ends. And we can’t know the exact manner in which it will end. Especially when you factor in the rise of China and India.
A guess? I’ll say the equivalent of about $5,000 an ounce of today’s dollars. And I feel pretty good about that number, considering where we are in the current gold bull market. Classic bull markets have three stages. We’ve long since left the “Stealth” stage – when few people even remembered gold existed, and those who did mocked the idea of owning it. We’re about to leave the “Wall of Worry” stage, when people notice it and the bulls and bears battle back and forth. I’ll conjecture that within the next year we’ll enter the “Mania” stage – when everybody, including governments, is buying gold, out of greed and fear. But also out of prudence.
The policies of Bernanke and Obama – but also of almost every other central bank and government in the world – are not just wrong. These people are, perversely, doing just the opposite of what should be done to cure the problems that have built up over decades. One consequence of their actions will be to ignite numerous other bubbles in various markets and countries. I expect the biggest bubble will be in gold, and the wildest one in mining and exploration stocks.
When will I sell out of gold and gold stocks? Of course, they don’t ring a bell at either the top or the bottom of the market. But I expect to be a seller when there really is a bubble, a mania, in all things gold-related. There’s a good chance that will coincide to some degree with a real bottom in conventional stocks. I don’t know what level that might be on the DJIA, but I’d think its average dividend yield might then be in the 6 to 8% area.
The bottom line is that gold and its friends are no longer cheap, but they have a long way – in both time and price – to run. Until they're done, I suggest you be right and sit tight.
[If you take the time to learn more about gold and silver, you’ll realize quickly that both still have a long way to go in this bull market. And with China – and other countries – ready to dump the flailing U.S. dollar, it’s imperative to protect yourself with precious metals. Learn more about China’s secret plot here.]

Gold & Silver Fall on US Jobs Data, But "Wealth Insurance" Needed as "Double-Dip Recession" More Likely

London Gold Market Report

THE PRICE OF GOLD and silver fell hard for Euro and Dollar investors Friday lunchtime in London, with gold unwinding this week's 1.2% gains as world stock and commodity markets jumped in response to new US jobs data.

August's Non-Farm Payrolls surprised analysts with a headline drop for August of 54,000 – half the losses expected – plus stronger-than-forecast growth in private-sector hiring, up by 67,000.

"The private sector has net created a total of 622,000 jobs since last November," noted Deutsche Bank analysts ahead of Friday's announcement.

"This is still fairly low compared to the 8.459 million private jobs lost during the previous two years."

Overall, the US unemployment rate crept up to 9.6%, with average earnings rising more slowly than expected from a year earlier.

"[Gold] is what I call wealth insurance," said Peter Hambro, mining-magnate and chairman of London-listed Russia gold miner Petropavlovsk Plc, to Bloomberg earlier this week.

"Everyone has health insurance, fire insurance...Gold is what is going to protect you from the ravages of government...There is no way out for these guys except to inflate away debt.

"I'm afraid that unless you have some real assets, you're going to be in trouble."

Elsewhere on Friday, new data showed Swiss consumer prices stayed flat in August, while German and UK service-sector growth was slower than expected.

Retail sales across the 16-nation Eurozone rose by 0.1% from July, the official data agency said – just half the tepid rate of expansion analysts forecast.

"The truth is that we have not had much of a recovery in the first place," says New York professor and economics consultant Nouriel Roubini, writing for Forbes magazine, "which might prevent the economy from falling enough to display what many would label a double dip [in the US] – although we are now assigning a 40% probability to such an outcome."

Back in the gold bullion market, overnight trading in Asia was "cautious" according to one dealer's note, but the US jobs data promised "an exciting close to the week", especially with New York heading into the long Labor Day weekend.

Over in Mumbai, "There are no [gold] deals at these rates," said a state-owned bank dealer to Reuters this morning. "There is an initial resistance from traders to accept near-record prices."

Gold prices for Indian consumers – the world's No.1 buyers, now entering the strong post-harvest festival season – held just shy of recent records at 19,200 Rupees per grams on Friday.

Ahead of the peak gold demand typically seen during Dhanteras in November, "We are expecting festivals like Ganesh Chathurti and Navratri may bring in sales," said another dealer.

A Reuters poll of 10 analysts and dealers says Indian gold imports (it has next-to-no domestic gold mining output) will rise 5% to 504 tonnes in full-year 2010.

Elsewhere in the commodities market, New York crude-oil futures jumped through $75 per barrel on the US jobs data, with the broad hard-asset indices reversing an earlier drop to show a 0.5% on the day.

"We are bullish on silver," says the latest technical note from bullion-bank Scotia Mocatta, "looking for an eventual test of the 2008 high of $21.35 an ounce.

Silver traded wholesale in London today gave back 1.1% from a new four-month high at $19.76. Supporting its bullish stance, says Scotia, the Gold/Silver Ratio "broke lower" on Thursday through August's bottom, meaning that one ounce of gold is worth fewer ounces of silver.

Moving down to 63.75, the gold/silver ratio looks bullish for Silver Prices while it remains "below 64.90," says Scotia, "and we see April's low of 62.66 as the next major [level]."

Feet of Clay

Wow!  Are you excited? 

The entire world is going through a generational and even a once in a hundred year cyclical change right before our eyes and we are witness to these historical events. All of these gold and financial sites for over 10 years have been predicting that this financial meltdown was coming. 

And don’t fool yourself here.  The most important element for survival for those who survived the 1930s were those who were out of debt and had assets that were paid for free and clear. 

And what about those feet of clay? 

One man comes to mind.  Alan Greenspan.  Remember when he was worshiped as a god?  He was the financial pied piper who successfully led the entire world to riches beyond their wildish dreams.  And where are those riches and treasures now?  In the dust bin of history.  I think they all moved to Japan to feel more at home. 

“Hi David, I really enjoyed your latest article…  I laughed at the tomato and bean with bacon soup idea. Not because it is a bad idea, rather, because it is so true. I am going to be the "toilet paper guy", so look for my booth at the big worldwide barter market. One can of soup per roll sounds about right. If you can't live without it, better get lots of it now!”  T. H.

But, really, don’t be angry at Allan Greenspan.  He is merely a puppet following a script written by others.  Same for every other financial and world leader.  As you watch CNN, CNBC, Fox, MSNBC and other news shows have you noticed the fear these commentators and analysts are showing on their face?  Yes, many of these fellows are rich including Bill O’ Reilly, Rivera, Lawrence Kudlow and others.  But they are still seeing their wealth cut in half.  It’s interesting that not one of these “experts” saw this meltdown coming.  But if you were a regular reader to these websites then you were up to date.  But these fellows will still have enough wealth to live comfortably even with a 60% portfolio decline.

But what about you? 

For those who were in debt to the stratosphere and cannot even refinance their homes they are in very difficult times.  Yes, as always it is the middle class that will bear the brunt of this financial pain.  The poor have nothing to lose and the rich will have plenty left over after all the losses.  But the middle class who are all living on the edge?  God help us all as this class generally has the greatest personal debt and whose every asset is financed 100%.

And what more can we learn about gold?  Kitco’s analyst, John Nadler, does an excellent job of defining gold’s role as portfolio insurance.  Listen to what he says below so that you might keep things in perspective as this market continues to meltdown.  Very important comments below.

Jon Nadler, Kitco - “By and large it (gold) has already proven its insurance attributes by virtue of the fact that it outperformed the S&P just sitting around stable.”  “…it’s certainly done its job.” “Gold doesn’t need to go to $1,200 or $2,200, as all of the doomsayers were saying, to prove itself. That would be more like proof that something has gone extraordinarily wrong in the global system and it’s a scenario you really don’t want to wish for.”  “…stability is preferable.”  Jon Nadler recommends  “…not [to] be focused so much on price performance, because most people ought to be buying gold as the allocation device that it really is, and then mobilize it only when absolutely needed, rather than buying because they think they’ll “make money.”  “The long-term 10% life-insurance type of allocation is the key here for many.” Jon Nadler, kitco.com/ind/GoldReport/oct242008.html, 10-24-2008

I like Jon Nadler’s commentary.  Did you catch that last text?

“The long-term 10% life-insurance type of allocation is the key here for many.”

Has a way of balancing things out and helping us to keep the proper outlook on gold. In a nutshell do not wish for this meltdown to grow, but pray for stability. Believe me, our lives will be much more complicated if we can’t achieve stability.

What is the one thing you should not be doing as this meltdown progresses?  It’s easy to get frightened and to become frozen and do nothing.  The news pundits are advising people, stupidly, to stay the course and sit back and to ride this storm out. Worst thing you should do.  Start thinking now what is immediately in the best interests of your family.  Don’t ignore what is going on.  This is hell in a hand basket. And you don’t want to remain in that hand basket. 

For years, a Congressional hearing with Alan Greenspan was a kingly pageant.  My, how things change.  Well, Alan Greenspan had to testify in front of Congress this past week.  Greenspan’s continued self defense was that he just put too much faith in the free market.   Just simple questions asked.  Why is the economy crashing? 

“…given the gravity of today's financial crisis, one name stands out above others. The "maestro…” “From August 11, 1987 to January 31, 2006, as head of the private banking cartel euphemistically called the Federal Reserve. That Ron Paul explains isn't Federal and has no reserves.” Stephen Lendman, countercurrents.org/lendman271008.htm, 10-27-2008

Greenspan doesn’t “understand.”  Totally confused.  Seems I remember him telling the world that regulation of the derivatives market was totally unnecessary.  He did it! No, she did it!  Sounded like a chorus of children during the Congressional interview. Alan Greenspan sat before Congress for four hours of questioning as they threw him off of his previously held throne.  During the questioning Greenspan admitted to making some very bad judgment calls and mistakes.  He acknowledged that these mistakes of his contributed very much to the present "once-in-a-century credit tsunami."  Mr. Greenspan was the primary fuel for the deregulation of financial institutions. 

“…he refused to accept blame for the current crisis…”  “Said he was in a "state of shocked disbelief." Unclear on what went wrong.”   “…he (Alan Greenspan) abhorred regulation and championed derivatives.” “The latter what investor George Soros won't touch "because we don't really understand how they work."  “His (Alan Greenspan’s) job was to transfer wealth from the public to the rich. In that he succeeded mightily but look at the cost.” “Now 82 and unapologetic to the end.” Stephen Lendman, countercurrents.org/lendman271008.htm, 10-27-2008

Greenspan could only sit quietly in his chair as committee Chairman Henry Waxman chewed him out for failing to do something in his last years as Fed Chief.  Mr Waxman told Greenspan that "The Federal Reserve had the authority to stop the irresponsible lending practices that fueled the subprime mortgage market."   "Over and over again, ideology trumped governance.” and “and now our whole economy is paying the price."

Greenspan sought to blame others for refusing to take action and presumed it best to also do nothing.  The pain! The pain!  "We have to do our best, but not expect infallibility or omniscience."  In the 1990s Greenspan fought a vigorous battle to prevent Congress from regulating intricate derivatives.  Greenspan just could not “understand” what went wrong with that ole’ market.  Wasn’t his fault.  Reminded me a lot of Bart Simpson’s famous line.  “I didn't do it. Nobody saw me do it, you can't prove anything!”

For the 18 years he held his post as Fed Chief he continually resisted tighter market regulation.  "…I was shocked, because I had been going for 40 years or more with very considerable evidence that it was working exceptionally well…”  “This crisis,” Greenspan told Congress, “has turned out to be much broader than anything I could have imagined.”  Blame, blame, blame!  Poor guy.  Now retired and an old man and having to fight for his very reputation and credibility.

Who, ultimately, is responsible for the financial meltdown occurring around our feet? While it’s great to point names, in reality, the type of culture we have become as a people is responsible.  Remember in 1987 (20 years ago) when Gordon Gekko made the following comment?  “Greed is good.” 

Gekko - “America, America has become a second-rate power. Its trade deficit and its fiscal deficit are at nightmare proportions.”  “The new law of evolution in corporate America seems to be survival of the unfittest.”  “The point is, ladies and gentleman, that greed -- for lack of a better word -- is good. Greed is right. Greed works. Greed clarifies, cuts through, and captures the essence of the evolutionary spirit. Greed, in all of its forms -- greed for life, for money, for love, knowledge -- has marked the upward surge of mankind.” Gordon Gekko (Michael Douglas), “Wall Street,” 1987

Our ancient grandfathers and grandmothers learned the excesses of greed as they worked to survive during the Great Depression of the 1930s.  It looks like now it is our generations turn to learn these same lessons.  The real price of raw, unadulterated greed.  And that lesson will be harsh and painful. 

What clarifies us today as a nation?  We do not build anything.  We do not produce anything.  What do we call ourselves today?  A service economy.  What a load of bunk.  We serve only ourselves playing financial games that will only benefit ourselves.  Is it any wonder that our factories all have left our shores to find more fertile ground?  What is America’s number one goal today as a people?  To retire with a rich 401K portfolio when we are even too old to enjoy it.  What a moral waste.

For the past 10 years we have stood around the money cable stations watching our portfolios climb and building larger houses and buying bigger cars more than we could afford.  But we counted on the guarantee of growing wealth that would eventually pay for these massive debts.  And what happened?  10 years later and we are poorer today than we were 10 years ago. 

Now, we have a 50 trillion plus market called “credit default swaps.”  Of course a lot of folks have made tremendous amounts of money, but like a ponzi scheme the bill is left to be paid by the average consumer. During the dying days of another great civilization the most powerful people in the world gathered to observe.  The end to unbridled free market capitalization.  The elite and super wealthy partied on their muti million dollar yachts in the Mediterranean as the Western worlds banking system ground to a halt. 

When we have an emotional involvement in an issue we are capable of suspending normal reasoning.  So, the unreal market conditions we have witnessed now for many years we have not even questioned.   And those unreal market conditions have led to a growing pile of illusory wealth.  The unreality and unsustainability behind the creation of that growing wealth are now tossed out with the bath water. 

The illusion these past five years has been abnormally growing real estate valuations. Our homes had become fat bank accounts.  Unreal.  Can’t last forever.  And so the illusion collapses.

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“We are in the midst of the worst financial crisis since the 1930s.”  George Sorus, The New Paradigm for Financial Markets, 2008

And let’s hear one more comment from George Sorus before we go.  Just a reminder that the days of the US dollar being the world’s reserve currency are coming to a gradual conclusion.

"… the current crisis marks the end of an era of credit expansion based on the dollar as the international reserve currency.”  “The current crisis is the culmination of a super-boom that has lasted for more than 60 years."  georgesorus.com/, 1-23-2008

Gold Re-Joins Euro as Dollar Destroyed; Offers Cheap Insurance Against Fed's Beggar-Thy-Neighbor Inflation

London Gold Market Report

THE WHOLESALE SPOT PRICE of gold continued to rise for US-Dollar investors early Thursday, hitting $951 an ounce in London as the greenback fell versus all asset classes.

Western stock markets also rose together with bonds, non-US currencies and all traded commodities after the Federal Reserve announced $1.25 trillion of "Quantitative Easing" late Wednesday.

Creating $300 billion to buy long-dated US Treasury bonds, Ben Bernanke's policy team also announced a further $750bn to buy government-insured USmortgage bonds.

"USD getting destroyed. Hearing Asian central banks buying Euro," said oneLondon dealer to BullionVault this morning.

"Stops going off on topside," he added, as bearish bets on gold got wiped out by the rising price breaking above traders' stop-loss levels.

Over on the currency markets, meantime – and for the first time since mid-Jan. – the Euro also jumped together with gold, adding to Wednesday's record one-session leap and hitting a fresh 10-week high vs. the Dollar above $1.3680.

Crude oil broke above $51 per barrel. Copper jumped to a four-month high.

The Fed's Nuclear Strike on US Treasury yields – which squished 30-year rates to new record lows – meantime rippled across government bond markets worldwide, with investors bidding up UK and German bonds so high, their 10-year debt yielded barely 3.0% by lunchtime in London.

"I am torn between deflation unleashed by a bursting credit bubble, and the inflationary pressures of the policy response," writes James Montier, strategist with Albert Edwards at SocGen in London.

Trying to identify "cheap investment insurance" for clients this morning, Montier cites inflation-protected government TIPS as one possible solution. His "second inflation/deflation hedge" is gold.

"From an insurance point of view, most obviously...gold is the one currency that can’t be debased. Thus it provides a useful hedge against the return of [the Fed's] sort of beggar-thy-neighbor policy. In the event of significant prolonged deflation [on the other hand], what is left of our financial system is likely to collapse.

"Thus holding a money substitute isn't such a bad idea against this cataclysmic outcome."

Voicing concern at the recent surge in media coverage ("not hugely surprising given that gold is up some 30% since late October"), Montier adds that "Gold is massively under-owned institutionally" even as it "may have been moving up the list of attractive assets.

"The mainstream institutional appetite for gold has remained depressed."

Recording an AM Gold Fix at $937.25 an ounce – its best level since March 2nd – the price of gold only stood sharply higher vs. the US Dollar, however.

Wednesday's London close – one hour ahead of the Fed's $1.25 trillion announcement – saw gold hit five-week lows vs. the Japanese Yen, commodity-rich Canadian and Aussie Dollars, and the British Pound.

Priced against the Euro, gold today traded 3.4% above Wednesday's 7-week low of €671 an ounce, but it failed to hold above the €700 mark – a level first broken on the way up in late January.

Ahead of Wednesday's late surge in Gold Prices, notes Walter de Wet for Standard Bank this morning, "Gold and other precious metals sold off despite equities falling in the US and Europe, and despite a depreciation in the Dollar against the Euro [as well as] US Treasury yields declining.

"All these factors should have been bullish for gold. The only real factor weighing on the Gold Price [was] scrap metal flooding the markets."

Recycled metal – originating from gold-jewelry owners taking profits to raise cash – began pouring onto the international market in mid-2008 as prices rose amid the global economic slowdown.

"[Although] many individuals expected to eventually re-acquire 22-carat pieces as the economy improved," reports Philip Newman, research director at GFMS in the consultancy's latest quarterly update, "Turkey switched from being a significant importer of gold in 2008 to a major net supplier of bullion."

The world's fifth-largest gold jewelry consumer, Turkey imported an average 232 tonnes of gold per year between 2003 and '07.

"Most startling of all," adds Gargi Shah, writing for GFMS from India – the world's No.1 gold jewelry consumer – "for the first time since the Indian gold market was liberalized over 10 years ago, we are starting to observe near-zero levels of net imports."

Back in the Western financial markets, meantime, and looking at Wednesday's $1.25 trillion injection of new money into US asset markets, "A lot of people thought the Fed didn't need to do this," notes John Authers for the Financial Times today.

"[Either] they know something we don't about the banks, or they think a lot more bail-out money will be necessary."

"Should quantitative easing continue," says Emanuel Georgouras at precious-metals dealer Marex Financial, "you can expect to see further gains in gold."

Gold Dips with Oil But "Pressure Stabilized"; Investors Now Seeking Insurance, Not Safe Haven

London Gold Market Report

The PRICE OF GOLD slipped back from yesterday's 1.2% jump in quiet Londontrade on Thursday, dipping below $940 an ounce as European stock markets rose for the third day running.

Government bonds were flat, with 10-year US Treasury yields staying near this week's lows at 3.48%.

Crude oil ticked back towards $72 per barrel after Wednesday's US inventories data sent prices higher with a surprise drop in reported stockpiles.

"Momentum for gold came from crude oil prices," says today's note from Standard Bank here in London.

"Gold is now finding support from its previous resistance level of $940."

Oil cartel Opec – which controls more than 40% of world output – will leave its production quotas on hold at next month's meeting in Vienna, reckons Barclays Capital.

The Gulf of Mexico's hurricane season "has gotten off to quiet start" however, the National Weather Service said this morning, predicting only a 10% probability of above-normal storms between Aug. and Oct.

"[Wednesday's move] seems to have stabilized the bearish pressure" on Gold Investing, say London market-makers Scotia Mocatta in their technical note, "but we are not convinced of a sustainable bounce until the unit can reclaim 949 on a close basis."

In Shanghai today, mainland Chinese stocks reversed all of Wednesday's 4.3% drop, but remained more than one-sixth below the peak of early August.

Tokyo Gold Futures recovered 1% to ¥2,871 per gram – some 4.3% below early August's three-month high – while the Yen rose versus the Dollar.

London's FTSE100 share index meantime reached a fresh 10-month high, while an auction of inflation-linked government bonds – due for repayment in 2032 – drew bids for just 1.75 times the debt on offer.

May's auction of the same UK security drew 2.08 times the bids required.

The UK Treasury said today that July's tax receipts lagged spending by £8 billion ($13.5bn). City analysts had forecast a monthly deficit of £0.5bn.

The Pound fell towards one-month lows versus the Euro. The Gold Price in Sterling held in a tight range above £570 an ounce.

"Gold Investment flows have eased off, but they are still running very, very strongly in historical terms," says Rozanna Wozniak, investment manager at marketing-group the World Gold Council.

Yesterday the WGC's latest Gold Demand report highlighted the gap between falling world jewelry demand and strong Gold Investment in developed nations – both driven by the on-going economic downturn.

"Investors who were looking for a safe haven are now starting to see gold as an insurance policy, as a way to provide diversification in their portfolio," says Wozniak. "Very few assets are able to remain resilient in an economic crisis, so it makes sense to have a bit tucked away just in case."

Private investment in Gold Bars, coins and allocated accounts rose 23% quarter-on-quarter between April and July, swelling by one-eighth from the same period last year.

Global jewelry purchases are running one-third below 2008 levels.

Gold demand in the first half of 2009 fell 55% on year in India, and jewelers expect the weakness to extend to the second half of the year despite major festivals.

"Demand is picking up from the last couple of weeks but sales will be still 50% below last year's levels during the coming festival season," said one Indian bullion dealer to the Wall Street Journal overnight.

Gold demand in India – now overtaken by China as the world's No.1 gold consumer – fell 55% between Jan. and July compared with the first-half of last year.

China is also the world's No.1 Gold Mining nation, overtaking South Africa in 2008 as the former leader's annual output sank by more than one half from the late 1990s.

Gold €1000 Crisis Insurance or Bubble?

Rising insurance premiums don't negate the need to insure...

IS GOLD in a bubble at €1000 an ounce? Let's hope so. Because if not, it would mean investors are right to keep bidding crisis insurance higher.

Buying gold is like buying an option that gives you security, liquidity and diversification when you need it most – which is when other stores of wealth fail.

Yes, the cost of insurance – the premium on gold's option – has risen since before the current crisis began. But that doesn't negate the need to insure your savings.

"First, security – the absence of any credit risk is an intrinsic quality of gold," as Hervé Hannoun, then of the Banque de France, now of the BIS, said at theFT's Gold Conference in mid-2000.

"Second, liquidity – in situations of political turmoil or high global inflation, gold's liquidity is unchallenged. [And third,] diversification – gold has shown a very low and even a negative correlation with the Dollar and US Treasuries...it enables you to improve your risk/return profile."

Now, glancing back across the 10 years (and 590 tonnes of French central-bank gold sales) since Hannoun spoke, that third factor – diversification – might seem the most valuable.

After all, gold has risen 350% vs. the Dollar since June 2000, while the S&P has lost almost one fifth. US Treasury bonds have paid less than half the real yield of the preceding two decades (1.8% vs. 4.4% on 10-year Treasuries).

But it's the first two attributes – security and liquidity – that make gold's long-term diversification possible. In periods of investment stress, its security and liquidity are unparalleled. They add up to outperformance when other, more normally productive stores of wealth either slump (like today) or deliver grinding losses (as they have over the last decade).

Gold insurance

If some one plans to go for some robbery then my advice will be not to runaway with cash but to run with a handful of gold. Yes run with a bagful of gold rather than running with currency. Since gold might show $3000 ounce in the next 2-3 years. Shocked and many of my readers might have acclaimed me by now. I am quite lunatic in making such a predictions.

Apart from huge list of fundamental and technical reasons some more stories is behind the future predicted prices of gold. Gold have already replaced the green back. Even as there are no other form of keeping investments other than currency, gold have replaced that place. But apart from these basic reasons behind the gold rally in 2009 we find further strength in the future price of gold.

When we dig in to the facts and figure we found some interesting facts and figures which depict a different invisible analysis behind the gold price of 2010.

China is mad at chasing and accumulating gold and it seems that will control the price of gold similar to control exercised over steel and other metals.

• According to the China Gold Association (CGA), the estimated demand for gold in the country was 450 tons in 2009, up 13.8% from 395.6 tons in 2008.

• On of the main reasons behind china to build reserves of gold are they are feeling shaky about the dollar free fall.

• China holds a reserve of 2 trillion treasuries which represents 60% of US treasury in dollar form. Any hiccups from that will save the china from the insurance cover of gold investments.

• Chinese household income is increasing resulting to Chinese consumers are buying more jewelry and investing in gold. This is also the reason behind the rising demand of gold in the international market.

• China is already the largest gold producer in the world with an output of around 282.504 tons in the first 11 months of 2009. The figure represents a 14.6% increase over the same period in 2008.

• According to China Gold Association, the estimated demand for gold in the country was 450 tons in 2009, up 13.8% from 395.6 tons in 2008.

• China is also expanding the mining segment.

• Chinese miners are also eyeing overseas resources to expand their footprint. The latest move is Zijin’s $498 million takeover offer for Australian mining company.

• A deal that will help secure copper and gold mining assets in the Philippines.

• Foreign governments have long stockpiled U.S. dollars to shore up their own currencies. And as the buck has sunk with our weakened economy, nations like China have been selling dollars to boost their gold holdings.

• Selling more dollars will increase the flow of dollar resulting further flow of dollar in terms of other currencies.

The below picture shows the price of gold in 1 year

We find that gold price on January 2009 was around $850 and it touched a high is November 2009 to $1200.Before that we find that gold was trading within a range of $900 to $1000 levels. During that time the world economy was struggling to stand up.

If we look into the 5 years gold chart.

We find that gold have been on a path of steady recovery once the world economies started their bull market rally with growth of economies in every country around 5% mark.

We have heard many times gold is being used to hedge against inflation. I think we need to explain this process so as to get the real picture of the gold price in future.

Gold is famous for being used as a hedge against inflation. We strike the chord when we dig and found that the most consistent factor determining the price of gold has been inflation. When inflation goes up, the price of gold goes up along with it. Since the end of World War II, the five years in which U.S. inflation was at its highest were 1946, 1974, 1975, 1979, and 1980. During those five years, the average real return on stocks, as measured by the Dow, was -12.33%; the average real return on gold was 130.4%.

Today, a number of factors are conspiring to support the perfect inflationary storm: extremely simulative monetary policy, a major tax cut, a long term decline in the dollar, a spike in oil prices, a mammoth trade deficit, and America’s status as the world’s biggest debtor nation.

Gold is bought and sold in U.S. dollars, so any decline/upward in the value of the dollar causes the price of gold to rise/fall. The U.S. dollar is the world’s reserve currency – the primary medium for international transactions, the principal store of value for savings, the currency in which the worth of commodities and equities are calculated, and the currency primarily held as reserves by the world’s central banks. However, now that it has been stripped of its gold backing, the dollar is nothing more than a fancy piece of paper. Gold is also called by “crisis commodity” since it tends to provide healthy return when other investments during periods of world tensions are incapable to generate returns. We have already witnessed this after the US and UK bank collapse.

Along with these their some more host of analysis justify the upward rally and $3000 ounce gold price.

• There is no doubt that the government’s efforts to stimulate the economy have pumped massive amounts of money into the financial system. This has also spurred the commodities prices in the sideways. From RBI to US FED all are concerned over this rising inflation which cannot be avoided.

• Rising fiscal deficit of US which is already floating at the rate of 12% of US GDP will keep the dollar under pressure. Even in the year of 2010 this pressure will continue as US government is less interested to go for a hike in cost of interest. This will also lead to flow of cheap money. Moreover the US government has less scope to impose measures and techniques by which they can increase the revenue at their end. So falling dollar will force the world economies to change their form of saving their investments in dollar form.

• So when their will be no profit of keeping investments in dollar form gold is the perfect replacement for dollar. More over rising interest cost in the future across the world economies and rising imbalances will make the fluctuation of currencies more volatile.

• This increases the risk of investments holding in the form of currency. In other words the biggest risk which is waiting for the market now is the massive fiscal and monetary stimulus packages adopted by world economies and the uncertainty about how governments will exit them. This will exert pressure currency particularly dollar.

• Rising inflation will be hedged by gold where as gold will have more increased valuation. Return over gold investments will be more as compared to keeping the investments in dollar.

But we will get correction in gold during those times when dollar will rise followed with every steps of interest rate hike and exit policies of stimulus by world economies. Those times will the buying opportunities of gold. We should not get surprised if gold rose to $3000 ounce riding on the dragon of china building reserves and world rising inflation. Gold is accumulated to protect against falling dollar as China and many countries hold dollar reserves. Rising inflation and uncleared exit strategies of stimulus will make currency to devaluate more. Gold is the insurance to cover and protect from all these risks. In 2010 we will find gold demand touching new heights followed with price hike.

Author:- Indranil Sen Gupta

Financial, Economic Writer and Research Analyst