Is gold going mainstream?

TheDailyGold - Thu, 2012-03-15 13:29

Is gold going mainstream?

Posted MAR 14 2012

Will Bancroft takes a look at the growing attention that gold is getting from investors and the media. Is this a flash in the pan? Is the attention justified? And, why are investors turning to gold? Read on for a discussion of why gold’s position in the investment landscape is growing.

Gold only makes up between one and one and a half per cent of global investments, and although gold’s recent bull market has lasted 12 odd years now, gold is still a relatively small and out of sight investment market. When considering gold, most people merely know that Gordon Brown sold most of our national loot in 1999 to 2002, when gold was at its lowest point in 20 years, in an event termed ‘Brown’s Bottom’. However, the attention and focus gold has been getting has grown considerably, even if few invest in gold.

Gold’s part in the investment landscape has been growing as the legitimacy of other investments has been declining. Gold is deemed an ‘alternative’ investment, but the fact is that the traditional investment world has disappointed us individual investors for too long now.

Comparing gold with equities

Investors in the world’s developed equity markets might feel mighty unimpressed with their returns since the turn of the millennium. The FTSE 100 is lower today than it was at the beginning of 2000, whilst the S&P500 is also down from the same start date. European equities maybe in a relatively softer period, but the EURO STOXX 50 are still in negative territory since the beginning of 2002.

Much retail wealth has gone unrewarded by the mainstream indexes, and inflation has quietly been picking the investor’s pocket further. Many retail investors have been sold the dream of ever rising equity markets. It’s been more of a nightmare. However, whilst equity indexes and fund managers have largely been disappointing, the gold price has been quietly putting in steady performances each year.

There are also more recent phenomena that have emerged these last few years that have compounded investors’ plight.

Inflation and dying money

Whilst inflation was not overly problematic during the calmness of the Greenspan era ‘Great Moderation’, it started to increasingly affect investors and savers immediately prior to and since the Credit Crunch. Inflation has consistently been above its target of 2% for a few years now. The Governor of the Bank of England, Mervyn King, has to write an explanation letter to the Chancellor each time inflation figures come in above target. This letter has become such a regular broadcast perhaps it is no longer an embarrassment to the ‘Old Lady’ of Threadneedle Street.

A growing awareness of inflation by the population, and changing future inflation expectations have contributed to the angst of today’s saver and investor. There are worried about the value of their money and purchasing power, and are increasingly noticing that gold investors have been sailing by rather nicely.

Compounding the notice we might take of official inflation figures, we in the developed West have witnessed another decline in the value of our money; when we try and spend it abroad. Western currencies have been steadily losing value against emerging market currencies, and against the currencies of places we often like to go on holiday.

Since 2007 the British Pound has lost value by approximately 40% against the Australian Dollar and the Vietnamese Dong, 31% against the Canadian Dollar, 25% against the South African Rand, 23% against the Thai Baht, 18% against the Brazilian Real and has even lost 25% against the euro. We have lost spending power on the international arena and it does not feel good.

Rethinking the housing bubble

Whilst much of the above was occurring, we were soothed by the fact that so many savers and investors were seeing the value of their homes rise each year. Our homes often represented by far the largest part of our personal portfolios and for some years the property market was our darling, and often our financial saviour.

The Credit Crunch and the bursting of the housing bubble, although to a lesser extend in the UK than US, provided a painful reality for many. According to the Halifax National house Price Index, in the UK, the average house price has fallen from £197,244 in January 2008 to £160,907 in January 2012. This represents a decline of more than 18%, and it was much worse in the US. The housing market’s wealth effect had become negative, and the sickly housing market with its confidence shot is propped up by incredibly low interest rates. This was even more painful when inflation is factored in.

Savers, investors and much of the population are now in a tighter financial bind. All the while the media was mentioning constantly rising gold prices, but often with a negative slant on gold and frequent mentions of gold being a bubble. Perhaps it is not surprising then that to this day very few in the UK own gold even though they know about rising gold prices. How many friends and family do you know that have a significant proportion (5%+) of their wealth in gold? (We’d be interested to read your thoughts in the comment section below.)

Growing appreciation of gold investment

Safe havens seem to be few and far between for investors today, but popular understanding of gold’s legitimacy as an investment is growing. Gold investment is first about capital preservation and maintaining purchasing power, and secondly about potentially achieving capital appreciation. It is best to see gold as a better way to save your money, not as a speculative bet to make lots more of it.

Gold cannot be printed, counterfeited or inflated. It has no time limit, counterparty risk, or shelf life. It is liquid, portable, divisible and consistent. This is why it has made such sound money for thousands of years of human progress. It sits there quietly doing its job depending on no-one.

One should not be put off by gold not being an income-producing vehicle. Gold is not meant to be like a stock.  Gold’s function is as money and a store of value. It should thus be compared to pounds, dollars, euros, gilts, treasuries, etc. The dollar and pound have lost over 95% of their value since 1913. Gold can be considered a superior savings mechanism and is now an asset class that it getting growing attention and acceptance.

Our leaders have boxed themselves into a corner behind mountains of debt, and continue to spend too much money. Monetary history has shown that this is not a sustainable state of affairs. The downfall of fiat (paper) currencies that are not backed by a commodity occurs due to debts and deficits. This is why it is sensible to put a percentage of one’s wealth into gold, and not be totally dependent on paper assets.

Swiss bankers have traditionally advised a minimum allocation of 10% to gold bullion to act as a solid foundation to our wealth and act like a financial insurance policy of last resort. Gold is one of the few assets that are not simultaneously someone else’s liability, and it could not be more relevant to today’s saver and investor. We insure our cars; our houses; our health; but too few currently insure their wealth. It’s not a case of doom-mongering, but of prudently preparing for the worst, whilst hoping for the best.

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Gold “Vulnerable” as Treasury Bond Sell-Off Worsens, Indian Demand Revives

TheDailyGold - Thu, 2012-03-15 13:25

Thurs 15 March, 08:45 EST

Gold “Vulnerable” as Treasury Bond Sell-Off Worsens, Indian Demand Revives

The WHOLESALE-MARKET gold price twice rose within a few cents of $1650 per ounce in London Thursday morning, adding 0.9% from yesterday’s fresh 8-week low as industrial commodities ticked lower again.

The price of silver bullion rallied 2.3% to $32.40 per ounce, but remained over 5% down for the week so far, being “very much influenced” by the gold price according to one Swiss precious-metals dealer.

Japanese and Hong Kong equities rose, but European stock markets were flat while US equity futures pointed higher.

The price of US Treasury fell for the seventh consecutive session, pushing the 10-year bond’s yield up to 2.29% – just shy of Wednesday’s 5-month high – and extending the longest period of price falls since 2006 on Bloomberg’s data.

“The [bond] market is on the back foot,” reckons head strategist Charles Diebel at Lloyds Banking Group in London.

“The catalyst seemed to be the Fed acknowledging the better growth.”

Analyst forecasts for today’s US jobless data pointed to a further drop in the number of people claiming unemployment benefits.

US manufacturing and consumer price data – due Thursday and tomorrow respectively – were forecast to show a slight rise.

“Overall, the [gold price] looks rather vulnerable with a likelihood of testing lower levels before it resumes it upward run,” says refinery and finance group MKS in its latest note.

“What seems to be surprising at these levels is lack of firm physical demand.”

Over in India, however – the world’s No.1 gold buying nation – “Demand has improved significantly in the past two days,” Reuters quotes a Mumbai dealer.

“Prices have fallen and there is also concern about import duty hike in tomorrow’s budget.”

New Delhi doubled gold import duties – and handed India’s domestic gold-recycling operators a strong price advantage – in January.

Despite yesterday’s fresh drop in the gold price, the quantity of physical bullion held to back the SPDR Gold Trust – the world’s single largest exchange-traded gold trust (ETF), now capitalized at $68 billion on the New York Stock Exchange – remained unchanged after slipping half-a-tonne Tuesday to 1293.3 tonnes.

Gold ETF holdings worldwide were unchanged Wednesday at a record high of 2409.7 tonnes, according to Bloomberg data.

Open interest in US gold futures crept 0.6% higher on Wednesday to 445,163 contracts – greater by 1.2% from a week before.

“Gold dropped bearishly [on Wednesday] through our Fibo support level,” says Russell Browne at bullion bank Scotia Mocatta, pointing to another Fibonacci level – based on a number series used by some technical analysts to spot important prices – for the “the next key support level at 1625.

“A definitive close below this support level opens up a full retracement to the December low of 1522.”

On the currency market Thursday morning, the US Dollar eased back from last night’s rise close to a 7-week high against the Euro, which slipped near $1.30.

That held the gold price in Euros below €40,600 per kilo (€1263 per ounce).

Spain today sold €3 billion in new debt, paying 3.37% annually on 4-year debt – just less than it paid at a sale in January, despite prime minister Mariano Rajoy saying last week that Madrid will breach the newly-agreed budget deficit limit for Eurozone members.

Europe’s benchmark Brent crude slipped but held near record-highs in Euro and Sterling terms.

The Reuters newswire claims that US president Obama and British prime minister Cameron yesterday discussed using emergency oil reserves to bring prices lower.

“The window for solving [Iran's nuclear program] diplomatically is shrinking,” Obama told a press conference.

Adrian Ash

Gold price chart, no delay   |   Buy gold online at live prices

Adrian Ash is head of research at BullionVault, the secure, low-cost gold and silver market for private investors online, where you can buy gold today vaulted in Zurich on $3 spreads and 0.8% dealing fees.

(c) BullionVault 2012

Please Note: This article is to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it.

China's Stock Market Continues to Lag - Thu, 2012-03-15 13:13

As the S&P 500 continues to make new bull market highs on a daily basis, China's Shanghai Composite continues to struggle.  As shown in the first chart below, the Shanghai index isn't even close to a six-month high, much less a multi-year high. 

A performance comparison between the S&P 500 and China's Shanghai Composite since the start of 2011 shows a stark contrast.  Over this time period, the S&P 500 is up 11.4%, while the Shanghai is down 15.5%.  In the mid-2000s, investing in Chinese stocks was all the rage, but we're far removed from those days right now.

"Curbs Needed to Avoid China Property Chaos" Says China's Premier; Chinese Economy Already in Hard Landing? Regardless, It's Too Late to Prevent Chaos

JPMorgan analyst Adrian Mowat says Chinese Economy Already in 'Hard Landing'
“If you look at the Chinese data, you should stop debating about a hard landing,” Mowat, who is based in Hong Kong, said at a conference in Singapore yesterday. “China is in a hard landing. Car sales are down, cement production is down, steel production is down, construction stocks are down. It’s not a debate anymore, it’s a fact.” His team was a runner-up for best Asian equity strategists in a 2011 Institutional Investor magazine poll.

Mowat said in May the risk of a hard landing was building in China as fixed-asset investment in real estate had increased even as property demand remained weak. That meant residential inventories will increase and lead to a contraction in construction activity, he said in a May 17 interview.

Gary Shilling, president of A. Gary Shilling & Co., a Springfield, New Jersey-based consultancy firm, said on Feb. 2 that China’s economy is headed for a “hard landing” this year as weaker demand overseas chokes off exports. Shilling, who correctly forecast the U.S. recession that began in December 2007, defines a hard landing as a growth rate below 6 percent.

Shilling and Mowat’s views are in contrast with Yale University Professor Stephen Roach, a former non-executive chairman for Morgan Stanley in Asia, who said on March 8 that concerns China will enter a hard landing are “vastly overblown.”

“I don’t think the banking system will collapse and the property bubble will burst,” Roach said at a conference in Shanghai. “These are all exaggerations.” Roach's Misses the Boat 

Bubbles always burst. Moreover, it should be plain to see

  1. China has a huge property bubble
  2. China's banking sector is unsound
  3. China's state-owned-enterprises (SOEs)  are in horrible shape
  4. China's over-reliance on investments with no genuine economic feasibility guarantee China's current boom is not sustainable.

"Hard Landing" Depends on the Definition

Shilling says growth under 6% is a hard landing. Michael Pettis at China Financial Markets makes a strong case for Only 3% Growth for Decade

I think Pettis' growth target is correct, but I am not sure he calls that result "a hard landing". I do, and it will shock a lot of people when it happens.

Jim Chanos is not one of those who will be surprised. He is betting on growth as low as 0% as noted in China's Growth Won't Last; Chanos on Chinese Property Bubble and Growth.

"Curbs Needed to Avoid China Property Chaos"  

Even Chinese Premier Wen Jiabao knows China has a property bubble, one that has already popped but has much further yet to fall.

Bloomberg reports Wen Says Curbs Needed to Avoid China Property ‘Chaos’
Chinese Premier Wen Jiabao said that home prices remain far from a reasonable level and relaxing curbs could cause “chaos” in the market, indicating no imminent relaxation of cooling measures.

“We must not slacken our efforts in regulating the housing sector,” Wen said at a press conference in Beijing today, according to an English translation. A bursting property bubble would hurt the entire economy, and the government wants “long- term steady and sound growth” in housing, he said. Too Late to Prevent Chaos

Chinese property bubbles and malinvestments are too big, and the Chinese economy too unbalanced to prevent chaos. Indeed the only way to prevent chaos is to not let bubbles form in the first place.

The only question at hand regards the strength and length of the slowdown. I think Pettis has things about right, but I would also caution that risks are far skewed to the downside.

Mike "Mish" Shedlock
Click Here To Scroll Thru My Recent Post ListMike "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction. Visit to learn more about wealth management and capital preservation strategies of Sitka Pacific.

NY Fed Manufacturing Survey At Highest Level Since June 2010 - Thu, 2012-03-15 12:36

This morning's release of the NY Fed monthly manufacturing survey rose to 19.53, which is the highest level since June 2010.  This survey conducted by the NY Fed measures the percentage of companies showing an increase or improvement in conditions.  Readings above zero are considered positive, while negative readings indicate that respondents are seeing deteriorating conditions.  As shown in the chart below, both the current general business conditions and the business conditions six months out are at or near their highest levels in more than a year.  Continue reading...


The Most Beloved Stocks - Thu, 2012-03-15 10:26

Below is a list of the S&P 500 stocks that have the highest percentage of analyst buy ratings.  (Only stocks that have at least 10 analysts covering them are included.)

As shown, Agilent Technologies (A) has the highest percentage of buy ratings at 94%.  Five other stocks have more than 90% buy ratings -- AMT, HAL, ESRX, BLL and NOV.

While Apple (AAPL) is tied for 7th place with 89% buy ratings, it's probably the most impressive stock on the list because its analyst coverage is so much higher than any of the others.  A whopping 55 analysts cover Apple. 

Below is a table showing the stocks that have seen the biggest increases in buy ratings so far this year.  For whatever reason, analysts have gotten more bullish on these names in 2012. 

LSI Corp (LSI) has seen its percentage of buy ratings increase from 38% to 69% so far this year, which is an increase of 31 percentage points.  This is by far the  biggest increase of any name in the S&P 500.  Varian Medical (VAR) ranks second with a gain of 20 percentage points, followed by AIV, BLL, DFS and WPI.  Other notable names that have seen an increase in buy ratings this year include Starbucks (SBUX) and Chipotle (CMG).

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First Decline in Jobless Claims in Four Weeks - Thu, 2012-03-15 09:13

Initial jobless claims for the week ending March 9th declined 14K to 351K.  This breaks a string of three weekly increases, and matches the post-credit crisis low we saw in February. Continue reading...

Executive Director of Goldman Sachs Resigns Over Parasitic Behavior of Goldman to Its Clients; Reflections on Chasing Performance

Greg Smith's op-ed in the New York Times "Why I Am Leaving Goldman Sachs" is precisely the catalyst that will eventually bring reform to the securities industry.

Denial Coming Up

Unfortunately, neither the Fed nor the SEC has any inclination to do anything about industry-wide fraud and corruption, therefore immediate results are not forthcoming.

Moreover, Goldman Sachs will deny the story every step of the way. Furthermore, it is safe to assume the SEC will turn a blind eye to these charges while preparing for the next headline case against another Martha Stewart on another meaningless charge.

With that backdrop, please consider these snips from Greg Smith, former Goldman Sachs executive director and head of the firm’s United States equity derivatives business in Europe, the Middle East and Africa.
TODAY is my last day at Goldman Sachs. After almost 12 years at the firm — first as a summer intern while at Stanford, then in New York for 10 years, and now in London — I believe I have worked here long enough to understand the trajectory of its culture, its people and its identity. And I can honestly say that the environment now is as toxic and destructive as I have ever seen it.

I was selected as one of 10 people (out of a firm of more than 30,000) to appear on our recruiting video, which is played on every college campus we visit around the world. In 2006 I managed the summer intern program in sales and trading in New York for the 80 college students who made the cut, out of the thousands who applied.

I knew it was time to leave when I realized I could no longer look students in the eye and tell them what a great place this was to work.

When the history books are written about Goldman Sachs, they may reflect that the current chief executive officer, Lloyd C. Blankfein, and the president, Gary D. Cohn, lost hold of the firm’s culture on their watch. I truly believe that this decline in the firm’s moral fiber represents the single most serious threat to its long-run survival.

What are three quick ways to become a leader? a) Execute on the firm’s “axes,” which is Goldman-speak for persuading your clients to invest in the stocks or other products that we are trying to get rid of because they are not seen as having a lot of potential profit. b) “Hunt Elephants.” In English: get your clients — some of whom are sophisticated, and some of whom aren’t — to trade whatever will bring the biggest profit to Goldman. Call me old-fashioned, but I don’t like selling my clients a product that is wrong for them. c) Find yourself sitting in a seat where your job is to trade any illiquid, opaque product with a three-letter acronym.

Today, many of these leaders display a Goldman Sachs culture quotient of exactly zero percent. I attend derivatives sales meetings where not one single minute is spent asking questions about how we can help clients. It’s purely about how we can make the most possible money off of them. If you were an alien from Mars and sat in on one of these meetings, you would believe that a client’s success or progress was not part of the thought process at all.
Brainwash and Promote

There is much more in the NY Times article, but that is the core of it, and clearly the core is rotten.

There is no fiduciary responsibility in the industry "in general". Of course, you can find a select few fund managers and subordinates that put their clients first but that is the exception, not the rule.

The fact remains, firms brainwash and promote from within those willing to tout the company line "you need to be 100% invested 100% of the time", in whatever garbage the firm wants to unload.

Over time, purposely brainwashed employees move higher and higher up the ranks. A trickle down effect ensures that subordinates believe they are serving clients' interests when they are in reality doing nothing of the sort.

I discussed this before, many times but the best example comes from  a conversation I had in January 2009.
Conflicts of Interest in "Stay the Course" Advice

In January of 2009 before the final 20% plunge in the stock market, an investment advisor from Wachovia Securities called me up and stated "Mish, I am sitting on millions because I see nothing I like".

I told the person I did not like much either and that Sitka Pacific was heavily in cash and or hedged. His response was "Well, I do not get paid anything if my clients are sitting in cash".

I called up a rep at Merrill Lynch and he said the same thing, that reps for Merrill Lynch do not get paid if their clients are sitting in cash.

Massive Conflict of Interest

Notice the massive conflict of interest possibilities. Reps for various broker dealers have a vested interest in keeping clients 100% invested 100% of the time, even if they know it is wrong. And so during every recession and every boom alike, bad advice permeates the airwaves and internet "Stay The Course".

By the way, that person at Wachovia mentioned above did the right thing. He did not see investment opportunities he liked, so he kept client funds in cash. Such action is not the norm.

Bullishness Sells

The fact that managers do not get paid if clients sit in cash accounts for a great deal of the long-term-buy-and-hold mentality you see. The rest of it comes from analysts who have a vested interest via relationships to broker-dealers to be optimistic.The allegations of Greg Smith are far more damning. What Smith describes is more along the lines of perpetrated fraud by representatives of JP Morgan against citizens of Jefferson County Alabama.

Please see Jefferson County Alabama Hires Bankruptcy Firm; Record Municipal Bankruptcy Coming; Death Spiral Swaps and JPMorgan Fraud Revisited for details.

Asking Broker for Advice

Unless you have $10 million or more to invest (and perhaps even then), it is a huge mistake to ask a large brokerage firm for an opinion. They will likely sell you GM bonds, bank stocks, or whatever total garbage the firm wants to short or the firm's big clients want to dump.

I made a blanket statement to emphasize a point. However, there are honest dealers and honest advisors out there. You may have one of them. Then again, you may have an honest but "brainwashed" dealer. It is important yet not easy to recognize the difference.

Flat out, if your broker advised you to load up on GM bonds prior to the collapse, or if your broker kept you fully invested in 2008, that person is not someone you can trust.

However, no one is perfect. It is important to look at overall track records and it is equally important to find someone that actually invests according to what they say, and according to a style of investment you desire.

Portfolio fluctuations over months (even years for long-term investors)  are inevitable. However, 50% portfolio declines are not.

Question of Style

If you have an advisor, do you really believe what they are saying, and does their long-term track record pan out with what they say? Alternatively, if you are short-term or swing trader, are you getting the advice and picks you need?

Whatever you do, don't trade out of your style. If you a a long-term trader, do not get caught up in short-term noise. If you are a short-term trader, the big macro picture is useless.

Know Your Time Horizon

Know your time horizon, style and the strengths of your advisor. If they do not match up, then find a new one, but don't arbitrarily chase the latest and greatest returns.

John Paulson made a billion dollars betting against the housing bubble, then the Paulson Flagship Fund Lost 50% of Assets Under Management in 2011.

On February 15, Forbes reported John Paulson Dumps Biggest Banks, Doubles-Down on Gold.
Paulson & Co. founder John Paulson wants to put 2011 behind him, given the huge losses his hedge fund amassed. The billionaire investor is seeking to rebound from an atrocious performance with new investments in companies including Delphi Automotive (DLPH) and United Rentals (URI).

After earning a record $5 billion for a hedge fund manager with the help of gold and bank stocks, Paulson is now slashing some of those holdings to reduce exposure. His flagship Advantage Plus Fund plummeted 51% last year, according to several media reports that cite investors in the fund.

Paulson took part in some dramatic sales during the fourth quarter, unloading his entire position in stocks like Citigroup (C), Bank of America (BAC) and Hewlett-Packard (HPQ), among others.Reflections on Chasing Performance

If you have a reason to change managers then please do so (management philosophy, long-term vs. short-term style is a potential reason).

However, if you are constantly chasing performance, the most probable result is you will perpetually be one step too late, forever chasing your tail.

Mike "Mish" Shedlock
Click Here To Scroll Thru My Recent Post ListMike "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction. Visit to learn more about wealth management and capital preservation strategies of Sitka Pacific.

The relationship between gold and interest rates

TheDailyGold - Thu, 2012-03-15 02:19

This week’s downside breakout in the T-Bond futures market and the associated rise in the T-Bond yield has prompted us to re-visit the relationship between gold and interest rates. In the process of doing so we’ll address the question: are rising interest rates bullish or bearish for gold?

We’ll begin by noting what happened to nominal interest rates during the long-term gold bull markets of the past 100 years. Interest rates generally trended downward during the gold bull market of the 1930s, upward during the gold bull market of the 1960s and 1970s, and downward during the first 10 years of the current bull market. Therefore, history’s message is that the trend in the nominal interest rate does NOT determine gold’s long-term price trend.

History tells us that gold bull markets can unfold in parallel with rising or falling nominal interest rates, but this shouldn’t be interpreted as meaning that interest rates don’t affect whether gold is in a bullish or bearish trend. The long-term trend in the nominal interest rate is not critical; but what is of great importance, as far as the gold market is concerned, is the REAL interest rate. Specifically, low/falling real interest rates are bullish for gold and high/rising real interest rates are bearish. For example, when gold was making huge gains during the 1970s in parallel with high/rising nominal interest rates, real interest rates were generally low. This is because gains in inflation expectations were matching, or exceeding, gains in nominal interest rates (the real interest rate is the nominal interest rate minus the EXPECTED rate of currency depreciation). Also, the first decade in gold’s current bull market occurred in parallel with generally low real interest rates.

Very low real interest rates are artifacts of central banks. In the US, for example, the Fed’s actions ensured that the real short-term interest rate on “risk free” (meaning: no direct default risk) debt spent a lot of time in negative territory over the past ten years. It was a similar story in the US during the 1970s. Also, despite a few “baby steps” towards tighter monetary policy, real interest rates in China are presently well below zero thanks to the People’s Bank of China having simultaneously pegged nominal interest rates at low levels and rapidly increased the money supply. In other words, “very low real interest rates” means “excessively loose monetary policy”. Excessively loose monetary policy will likely be with us for a quite a while.

Something else that affects gold’s price trend is the DIFFERENCE between long-term and short-term interest rates (the yield-spread, or yield curve), with a rising yield-spread (‘steepening’ yield curve) being bullish for gold and a falling yield-spread (flattening yield curve) being bearish. It works this way because a rising trend in long-term interest rates relative to short-term interest rates generally indicates either falling market liquidity (associated with increasing risk aversion and a flight to safety) or rising inflation expectations, both of which are bullish for gold.

As is the case with the real interest rate, under the current monetary system the yield-spread tends to be a symptom of what central banks are doing. If money were sound and free of central bank manipulation then the yield-spread would spend most of its time near zero (the yield curve would be almost horizontal) and would experience only minor fluctuations, but thanks to the attempts by central banks to ‘stabilise’ the markets the yield-spread experiences huge swings. Today’s large US yield-spread, for example, is due to the Fed exerting irresistible downward pressure at the short end of the curve while the discounting by the market of currency depreciation risk causes interest rates at the long end to be ‘sticky’.

Last but not least, gold is influenced by the economy-wide trend in credit spreads (the differences between interest rates on high-quality and low-quality debt securities). Gold, a traditional haven in times of trouble, tends to do relatively well when credit spreads are widening and relatively poorly when credit spreads are contracting.

In summary, gold benefits from low real interest rates, an increasing yield-spread (a steepening yield curve), and widening credit spreads, each of which can occur when nominal interest rates are rising or falling.

If the three main interest-rate drivers (the real interest rate, the yield-spread and credit spreads) are gold-bullish then there’s a high probability that gold will be in a strong upward trend in terms of all currencies and most commodities. By the same token, if the three main interest-rate drivers are gold-bearish then there’s a high probability that gold will be in a strong downward trend in both nominal and real terms. However, it’s not uncommon for the interest-rate conditions to be mixed. The past three years is a good example of a mixed interest-rate backdrop for gold in that during this period the real interest rate and the yield-spread were generally gold-bullish, whereas the credit-spread situation was generally gold-bearish. The result was that gold fared well in terms of US dollars, but traded sideways relative to industrial metals.
The interest rate backdrop hasn’t become any less bullish for gold as a result of this week’s downside breakout in the T-Bond and the associated rise in long-term interest rates, but the sharp decline in the gold price on 13th and 14th of March was almost certainly related to what was happening in the bond market. It seems that some speculators have exited long positions or initiated short positions in gold based on the belief that a substantial upward trend in the REAL interest rate has just begun. This belief is unfounded, because sustaining the illusions that the US economy is recovering and that the US government can make good on its debt requires that the real interest rate be kept in negative territory.
A higher real interest rate would actually help the US economy by precipitating a proper cleansing process involving the liquidation of all bad investments and insolvent corporations. However, anyone who has been paying attention over the past few years would realize that monetary policymakers in the US, as well as in Japan, Europe and the UK, are committed to doing whatever it takes to avoid such a process. The goal is to make the economic situation as painless as possible in the short run, regardless of the negative longer-term consequences.
This goal isn’t going to change anytime soon, which means that a negative real interest rate is here to stay and that this week’s drop in the gold price is just another blip in the long-term bull market.

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"Black Swan" author Nassim Taleb Cheers Ron Paul's Economic Platform on CNBC

Inquiring minds are listening to a CNBC video interview with Nassim Taleb, author of the book "The Black Swan".

Link if video does not play: Nassim Taleb Cheers Ron Paul's Economic Platform on CNBC

This quote says it all: "Only one candidate, Ron Paul, seems to have grasped the issues and offered the right remedies for the central problems we are facing. From my risk based standpoint, one candidate represents the right policies, at least from the big four, and that candidate is Ron Paul"

Mike "Mish" Shedlock
Click Here To Scroll Thru My Recent Post ListMike "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction. Visit to learn more about wealth management and capital preservation strategies of Sitka Pacific.

Risks Challenging Latin American Miners

TheDailyGold - Wed, 2012-03-14 20:15


Source: Sally Lowder and Brian Sylvester of The Gold Report   (3/14/12)

Mining companies face risks in Latin America, from nationalization to skilled labor shortages. The Gold Report sat down with several mining executives whose companies stand out among south-of-the-border silver producers. Sharing their thoughts in our “virtual roundtable” are Ross Beaty, chairman of Pan American Silver Corp.; Mike Callahan, president of Silvermex Resources Ltd.; Jorge Alberto Ganoza Durant, president and CEO of Fortuna Silver Mines Inc.; and Lenic Rodriguez, president and CEO of Aurcana Corporation.


Companies Mentioned: Aurcana Corporation – Bear Creek Mining Corp. – Fortuna Silver Mines Inc. – Pan American Silver Corp. – Silvermex Resources Inc.

“I’m not concerned about nationalization in Mexico,” Mike Callahan says, “but nationalization and increasing royalties are certainly concerns in other countries. There’s continued talk of putting royalties in Chile and nationalization in other places. And, that’s 3–4% right off the top.

In Jorge Ganoza’s opinion, “Argentina is not a mining country; it’s not a mining jurisdiction. At federal, state and local levels and municipalities, the governments have little understanding of the industry, so there are bigger risks. If you take bigger risks, you need bigger rewards.” Noting that “the cost structure in Argentina is much higher than in Peru,” Ganoza says that Fortuna Silver Mines Inc. (FSM:NYSE; FVI:TSX; FVI:BVL; F4S:FSE) would “really need a compelling reason to go to Argentina.”

Argentina, which has hamstrung Pan American Silver Corp. (PAA:TSX; PAAS:NASDAQ) in its efforts to capitalize on the Navidad property it acquired from Aquiline Resources in 2010, isn’t alone among Latin American countries exposing miners to jurisdictional risk. How about Peru?

Last June, the Peruvian government pulled the rug out from under Bear Creek Mining Corp. (BCM:TSX.V), canceling the concession it had been granted for its Santa Ana operation. The Santa Ana mine was slated to produce about 47 million ounces (Moz) silver over an 11-year mine life starting this year. Bear Creek has two other projects in Peru. Corani, a silver-lead-zinc deposit that’s nine times larger than Santa Ana but located in a jurisdiction where mining is less contentious, is expected to produce more than 13 Moz silver annually starting in 2014 for the first five years of a 20-year mine life. Bear Creek’s flagship project, Corani, represents 80% of the company’s value on a pure silver basis. Corani is proceeding toward permitting and construction.

According to Ganoza, a fourth-generation miner from a Peruvian family that has owned and operated several underground gold, silver, and base metal mines, “Peru has been, is and will continue to be a mining jurisdiction. But that is a generalization,” he admits. “Parts of Peru are very friendly and amenable to new mine developments. Others aren’t, and Santa Ana is in one such location. Bear Creek knew early on that it would face challenges and took a measured risk. We know what happened. I think the government is committed to a resolution of that problem—that is what it has been communicating consistently—but it will take time.”

Fortuna has been operating its Caylloma mine profitably in Peru since 2007, Ganoza says, having purchased it and related concessions in 2005. After a significant upgrading and modernization of the ore processing plant, the company returned the mine to production and the facilities are operating at a rate of more than 1,000 tons per day (tpd).

Commercial operations at Fortuna’s larger San Jose mine, located in Oaxaca, Mexico, achieved commercial production in September 2011 at a rate of 1,000 tpd. The mine produced 491,000 ounces (491 Koz) silver and 4.6 Koz gold in 2011; for 2012, those figures are expected grow to 1.7 Moz silver and 15 Koz gold. When planned mine expansion and processing plant capacity to 1,500 tpd are complete, annual production is estimated at approximately 3.2 Moz silver and 25 Koz gold. By 2014, Fortuna expects consolidated production to reach 6 Moz silver equivalent per year plus base metal credits.

Did jurisdictional risk in Peru or a desire for asset diversification lead Fortuna to the San Jose operation? “Going to Mexico was not driven by asset diversification or jurisdictional risk at all,” Ganoza says. “Mexico and Peru are established, good bases of operation for us. We went to Mexico not to diversify our Peruvian risk but rather because we thought there were good opportunities in Mexico and we had to be there if we wanted to be a world leader in silver production. So we have two anchor assets in these two great mining jurisdictions as a platform for growth moving forward.

“We’re not here to become the leading silver miner in Latin America,” Ganoza stresses, but “a force in world silver production. It is strategic in this stage of our evolution to focus on Latin America. Early on, we said, ‘If we want to be a world force in silver, where are the largest silver-producing countries in the world? Peru and Mexico. So we’ll try to establish ourselves as producers in those countries.’ We’ve been successful at that. So we’re executing a plan we laid out seven years ago. We differentiate ourselves from the pack based on the fact that we have quality assets that operate at low costs.”

Do any of the other executives see jurisdictional risks in Mexico?

Lenic Rodriguez, who became a Canadian citizen but remains a Mexican citizen as well, says, “I can tell you that Mexico’s political stability is wonderful. I don’t see any resource grab coming from the government. Foreign mining companies operating in Mexico in general are very conscious of their social responsibilities.” He talks about Aurcana Corporation’s (AUN:TSX.V) La Negra mine, purchased from Industriales Peñoles, the largest silver producer in the world. “Industriales Peñoles thought there were no more resources there and was not interested in copper, just silver,” Rodriguez says. “But copper comes associated with silver and we’re having wonderful results at La Negra. It still has a very long mine life, and on March 31 we’ll begin the second consecutive year of expansion of La Negra.

“As we inaugurate that expansion,” he continues, “we’ll be donating space for a clinic for the town of Macon, and we’ll be showing people how to build their own permanent housing. We have proprietary technology using concrete blocks whereby they can build houses very inexpensively, maybe $2,000 each.”

Considering the foreign investment mining brings to the country, the jobs it creates and the community support it demonstrates, Rodriguez says, “a politician would have to be quite crazy to do something against the mining industry.”

The highly publicized incidents of violence related to drug cartels and trafficking have presented no problems whatsoever to Aurcana or its people. “We have not had one incident,” Rodriguez says. “I go very often to Mexico, maybe six times a year, and I’ve never experienced any problems. Not me, nor any of our people, visitors, guests, analysts, people who have gone there. Quite the contrary. They find the people of Mexico very friendly and welcoming.”

Ross Beaty agrees heartily. “Mexico is an absolutely wonderful mining country. The drug-related violence is real but has nothing whatsoever to do with Mexico’s strength as a mining jurisdiction. It’s a wonderful country period. I love Mexico.”

But jurisdictional risk isn’t the only peril that these executives and their peers face.

What if financing dries up? “It’s a bit of a struggle to continue raising money to try to move something forward,” Callahan supposes. “If you have a project worthy of the financing, I think you can get it. People are betting on your management team and on the fact that you have a decent asset. If you have those I think financing is available.”

He considers it “a blessing that Silvermex Resources Inc. (SLX:TSX; GGCRF:OTC) probably has more financing available than it needs, and money in the bank.” Furthermore, he indicates that its $25 million (M) in gross revenue is enough to fund Silvermex’s development and exploration plans. We’re generating cash flow so we don’t need an infusion of capital investment now.

“We may or may not have to go back to the market,” he continues, “if we find an asset or a deposit that we want to put into production, but it depends on its scale and size, how far they are from the mine, and so forth. If they use the existing mill and/or tailings facility, we’d have to expand those.”

If Silvermex does find itself wanting to seek outside financing, he isn’t worried. “We have a tremendous amount of support in the equity markets,” Callahan says. “We have people looking to try and invest in Silvermex. We’ve been putting them at bay, saying we’ve got $60M in the bank. The markets are certainly available and open to us. We would just need that leap to the next production level to justify going to the markets.”

Ganoza considers the question of capital availability “a bigger risk for the explorers that don’t have established projects and are just pursuing ideas here and there and looking for seed capital to fund ideas. I think that’s where the main risk resides.” He’s not concerned about Fortuna’s dependence on the capital markets because “we have a low-cost operation and healthy cash flow. If we find an acquisition of sufficient merit, we will be able to fund that acquisition. We are not at a stage where we’re funding high-risk ideas.”

What if oil hits $150 a barrel? According to Callahan, that would be a particular concern in Mexico, “where most things are driven by diesel. That could drive costs up 30–40% for some producers. Thank God, we have electric power at our operations so that isn’t as big as a concern for us.”

What if you can’t find top talent? This is a biggie in Ganoza’s view, particularly as a company grows. “All of a sudden you find out how difficult it is to operate 20 mines, especially when they are small. It’s as if you’re a pilot who flies one of the larger planes and someone asks you to fly a small Cessna on a regional route. That’s not a career upgrade for either a young professional or a seasoned veteran with gray hair. It’s a career downgrade. It’s the same with mines. I hunt all the time for talented professionals, and it’s difficult to attract them to a small asset.”

The top talent “all want a technical challenge, size,” Ganoza states. “Bigger mines mean better mine conditions, more resources to run business and more intellectual capital. At the smaller mines, everything is more humble, more limited, fewer resources. You cannot run a business atomizing your property portfolio in this environment especially, because there are no people.”

Ganoza calls the people issue “a challenge we are clearly facing every day. Human resources (HR) management and organizational development are very crude in the mining industry. Other industries are much more sophisticated. At least among the midsize emerging producers, HR management doesn’t exist.”

To address the challenge, Fortuna hired a vice president of HR and organizational development. Ganoza made it clear to the headhunter that he wasn’t interested in a recruit from the mining industry to handle payroll. He wanted “truly to establish processes that come from industries such as services, banking, insurance, where HR is an established system that adds value to the business. We want to be able to attract good people.”

Ganoza considers the people issue a far bigger concern for the industry than jurisdictional risk. “You manage jurisdiction risk with people and money. There is no shortage of money these days, but there is a shortage of people.

“All of our team is seasoned, not only in mining but also mining in Latin America,” he continues. “They have been doing extensive work. I just hired as a chief project manager for a new project, a guy who has been working in Latin America for 15 years for Gold Fields Ltd. (GFI:NYSE) of South Africa. He’s one of the leading explorers in my experience, a truly tremendous guy, a true discover, excellent with geology, good technical skills, discovery driven.

“We are trying to get the talent that is residing in the bigger companies,” Ganoza says. “And we’re telling them, ‘With us you’ll be able to move quicker with not so much bureaucracy. We’ll give you the funding because we have money and we’ll let you run with your ideas. We will back you. Let’s go pursue those opportunities that you have in your head and couldn’t do.’”

Despite the perils, the opportunities appear boundless. As Beaty notes, “Silver’s gone from $5 to $40 per ounce in the last number of years. I don’t think we have to invent too many things to explain why that’s happening and express the likelihood that it’s likely to continue.”

The Gold Report Publisher Sally Lowder, in some cases joined by Brian Sylvester, conducted the interviews on which this article is based during the 2012 PDAC International Convention, Trade Show & Investors Exchange, held March 4–7 at the Metro Toronto Convention Center. The annual event, sponsored by the Prospectors and Developers Association of Canada, drew nearly 28,000 attendees from 120 countries last year.

Geologist and Entrepreneur Ross J. Beaty, loved by investors for whom he’s created more $4 billion in shareholder value over the years, currently serves as executive chairman of Alterra Power Corp. and chairman of Pan American Silver Corp.—but he’s founded, developed and divested a number of other public mineral resource companies over the course of 38 years in the international minerals industry. Born in Vancouver, Beaty has a degree from the Royal School of Mines, a Master of Science with Distinction in mineral exploration from the University of London, and bachelor’s degree in geology and a law degree from the University of British Columbia. Working in 50-plus different countries over the years, he speaks English, French and Spanish, as well as some Russian, German and Italian. Beaty is a past president of the Silver Institute in Washington, D.C., a fellow of the Geological Association of Canada and the Canadian Institute of Mining, a recipient of the Institute’s Past President’s Memorial Medal and a founder of the Pacific Mineral Museum in British Columbia.

Michael H. (Mike) Callahan has been the president of Silvermex Resources Inc. since November 2010, and began serving as a director a year earlier. Prior to Silvermex, Callahan spent 20 years with Hecla Mining Co. He joined the company in 1989; served as a senior financial analyst, financial manager of its Silver Valley operations in northern Idaho and director of accounting and information services. While serving as president of Minera Hecla Venezolana and leading Hecla’s Venezuelan operations, he also assumed duties as Hecla’s vice president of corporate development, after which he returned to Idaho as vice president of Silver Valley operations.

Jorge A. Ganoza Durant, whose work has earned him a spot among “Casey’s NexTen”—an exclusive collection of the “top 10 rising stars in the natural resource sector,” is president and CEO of Fortuna Silver Mines Inc. since January 2006, and a director of the company since December 2004. Ganoza holds of Bachelor of Science in engineering from the New Mexico Institute of Mining. A fourth-generation miner from a Peruvian family that has owned and operated several underground gold, silver, and base metal mines, he’s a geological engineer who has amassed more than 16 years of experience in exploration, mining and business development throughout Latin America, working for a number of private and public Canadian junior mining companies in Panama, Guatemala, Nicaragua, Honduras, Mexico, Dominican Republic, Haiti, Peru and Colombia.

Lenic M. Rodriguez, a Mexican businessman residing in Vancouver, has been the CEO and president of Aurcana Corporation since May 2009 and has been a director of Aurcana since 2006. He has over 15 years of experience in top management with one of Mexico’s 10 largest corporations. He has also served as a director of Alberta Star Development Corp. Rodriquez is a magna cum laude honors business graduate from one of Mexico’s top Universities, Universidad IberoAmericana. He holds a Master of Science and a Bachelor of Arts in business administration.

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Gold: Dark Clouds or Sunshine Profits?

TheDailyGold - Wed, 2012-03-14 17:45

Based on the March 9th, 2012 Premium Update. Visit our archives for more gold & silver analysis.

The recent precipitous plunge in precious metals was one of the biggest sell-offs in recent memory. The gold “Flash Crash” even prompted a serious newspaper such as the Financial Times to run a headline stating “Flash Crash Rouses Suspicions of Witchcraft.”

According to the Financial Times article; “Apparently, someone, or, rather, two someones with proprietary trading algorithms decided it was time to sell the futures equivalent of 31 tons of gold on the Chicago Mercantile Exchange. The crash happened between 10.40am and 10.54am eastern US time, with the biggest part of the decline taking place between 10.43 and 10.44, with a further drop in the couple of minutes before 10.54.”

Our comment is that even if it were two entities that ignited the downswing – wasn’t it the case many times in the past when only a few entities start a downswing?
Consequently, couldn’t it be that simply someone had to start it because the decline was very much in the cards based on emotional (a.k.a. psychological / technical) reasons that we outlined previously? Finally, couldn’t it be the case that the big entities that started the rally shared the same emotional approach that the rest of the market did?

This certainly could have been the case – in fact, it’s quite likely that it was actually the case and that’s why such “unpredictable” moves can be sometimes predicted (not all of them, but enough to make serious money on this phenomenon).

The bottom line of the crash is that somebody must have been happy to buy 31 million ounces of gold at a discount. The crash “shook out the weak hands”; the small investors and speculators who are flushed out of the market by stop loss sell orders and margin calls.

Let’s keep things in perspective. The crash was insignificant in the context of gold’s past performance – up some 500 percent or 19 percent annually over the past ten years and 14 percent this year through Tuesday evening before the flash crash.

If the Fed tightens monetary policy will that mark the end of gold’s decade-long rally?

At least for now the Fed has promised to keep rates at zero until 2014, which is very bullish for the gold market. Rates are on hold and it is not likely that it is going to change.

Let’s begin the technical part with the analysis of gold itself. We will start with the very long-term chart (charts courtesy by

We begin with a look at the very long-term chart (you can click the chart to enlarge it if you’re reading this essay on Last week saw several important developments as gold’s price decline approached the 50-week moving average while the RSI level remained slightly above the 50 level. This is a bit ambiguous with respect to what likely seemed to be needed for the final bottom to form.

It seems that the moves may be close enough to the final bottom if, in fact, it’s not already in. The risk of being out of the market appears to outweigh the risk of being in the market at this time, as the downside is limited and upside is huge. Even with the ambiguities in the trading patterns, we view the situation as bullish.

Looking back to gold’s 2006-07 chart, we have the most interesting analysis of today’s essay. We have attempted here to show how the trading patterns of gold in 2006 (red and black ellipses) may correspond to the upswings in today’s market. At this time, it seems that we are behind the one reflected by the red ellipse and about to see the second one. Please note that gold moved to the area between 50% and 61.8% Fibonacci retracement levels before finally bottoming.

Consequently, as of March 14th, the final bottom may already be in (or be in very shortly).

A few days ago (at the above chart’s cut-off point) we wrote that it seemed at first glance that the downside target level was not yet reached. It is important to note, however, that the upper border of this target level was in fact reached a few days earlier than expected. It appeared that this should be viewed as the bottom being in with the only question being “is it a local or final bottom?” It was too early to answer this with certainty, but based on today’s price action, it seems that gold is now very close to it’s final bottom for this decline.

The points made above are confirmed by our SP Gold Bottom Indicator, which flashed a long-term buy signal last Tuesday. We analyzed its indication in details in our previous essay on the possibility of a move up in the precious metals market:

(…) on Tuesday, our SP Gold Bottom Indicator flashed a long-term buy signal. The indicator is just one of the unique proprietary investment tools developed by Sunshine Profits, available only to our subscribers. We tend to take this particular signal seriously since it has proved to be uncannily accurate in the past.

Summing up, while it is not yet certain that the final bottom is in, it seems rather unimportant because gold’s price does not seem likely to decline much further and could actually move much higher very soon. The risk of being out of the market outweighs the risk of being in.

To make sure that you are notified once the new features are implemented, and get immediate access to my free thoughts on the market, including information not available publicly, we urge you to sign up for our free e-mail list. Gold & Silver Investors should definitely join us today and additionally get free, 7-day access to the Premium Sections on our website, including valuable tools and unique charts. It’s free and you may unsubscribe at any time.

Thank you for reading. Have a great and profitable week!

P. Radomski

* * * * *

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All essays, research and information found above represent analyses and opinions of Mr. Radomski and Sunshine Profits’ associates only. As such, it may prove wrong and be a subject to change without notice. Opinions and analyses were based on data available to authors of respective essays at the time of writing. Although the information provided above is based on careful research and sources that are believed to be accurate, Mr. Radomski and his associates do not guarantee the accuracy or thoroughness of the data or information reported. The opinions published above belong to Mr. Radomski or respective associates and are neither an offer nor a recommendation to purchase or sell securities. Mr. Radomski is not a Registered Securities Advisor. Mr. Radomski does not recommend services, products, business or investment in any company mentioned in any of his essays or reports. Materials published above have been prepared for your private use and their sole purpose is to educate readers about various investments.

By reading Mr. Radomski’s essays or reports you fully agree that he will not be held responsible or liable for any decisions you make regarding any information provided in these essays or reports. Investing, trading and speculation in any financial markets may involve high risk of loss. We strongly advise that you consult a certified investment advisor and we encourage you to do your own research before making any investment decision. Mr. Radomski, Sunshine Profits’ employees and affiliates as well as members of their families may have a short or long position in any securities, including those mentioned in any of the reports or essays, and may make additional purchases and/or sales of those securities without notice.

Gold Looking “Vulnerable to the Downside” as Fed Takes “Surprisingly Dovish” Stance, Stocks Hit 4-Year Highs as “Sentiment Turns” and the “Froth Leaves Gold”

TheDailyGold - Wed, 2012-03-14 16:49

Wednesday 14 March 2012, 09:15 EDT

Gold Looking “Vulnerable to the Downside” as Fed Takes “Surprisingly Dovish” Stance, Stocks Hit 4-Year Highs as “Sentiment Turns” and the “Froth Leaves Gold”

WHOLESALE MARKET gold prices dropped to their lowest level in 8-weeks, hitting $1641 an ounce shortly after US markets opened on Wednesday – 4.4% down on the week so far.

Stock markets gained while US Treasury bonds fell, following yesterday’s news that US Federal Reserve policy will remain unchanged this month.

The Dollar meantime added to recent gains, with the US Dollar Index – which measures the Dollar’s strength against a basket of major currencies – hitting its highest level in nearly 8 weeks on Wednesday.

Silver prices dropped to $32.77 per ounce as the US opened – just above last week’s low – while other industrial commodity prices also ticked lower.

As well as hitting their lowest level since January, gold prices also fell back through their 200-day moving average, which by PM London Fix prices was $1677 on Tuesday.

“Gold remains vulnerable to the downside,” says the latest technical analysis from bullion bank Scotia Mocatta.

The Federal Open Market Committee voted Tuesday by a majority of nine to one in favor of holding its main policy interest rate at 0.25%. Yesterday’s FOMC statement also noted that the Fed “expects moderate growth over coming quarters”.

“Knowing how dovish the Fed – especially [chairman Ben] Bernanke – is, for him to say we’re seeing growth is surprising,” says Ole Hansen, senior manager at Saxo Bank.

“Removal of [a potential increase in] quantitative easing and a higher rates forecast is not good for gold in the near term.”

The Fed also published the results of its annual bank stress tests yesterday, two days ahead of schedule. Based on the tests, the Fed says that 15 of the 19 banks tested would maintain their capital levels above the regulatory minimum of 5% of risk-weighted assets in an extreme scenario; specifically a rise in the unemployment rate to 13%, a 50% fall in stock prices and a 21% fall in house prices.

JPMorgan Chase, one of the 15 banks that passed the test, yesterday announced it is increasing the dividend it pays to stockholders by 20%. Shares in the bank gained 7% in US trading.

US stock markets rallied, with the S&P 500 hitting its highest level in four years, while the Dow hit levels not seen since late 2007.

“The froth is leaving gold to go into stocks,” one precious metals trader told newswire Reuters this morning.

“[Investors] see an opportunity there due to a slight improvement in the data. It’s not over yet, but overall sentiment seems to be turning.”

Britain’s chancellor George Osborne, who makes his latest Budget speech next Wednesday, is expected to ask the Debt Management Office to explore the possibility of offering 100-Year Gilts, which would potentially lock in prevailing low interest rates. Osborne is also expected to moot the possibility of so-called ‘perpetual gilts’, UK government bonds that have no maturity date.

Perpetuals were “first used in the wake of the 1720 South Sea Bubble crisis, to allow the government to borrow for as long as possible at record low rates”, newswire Bloomberg reports.

The longest-dated bond issued by the DMO during financial year 2011-12 was a 50-Year index-linked gilt. Britain tried issuing perpertuals to deal with its debt following the Second World War, though FT Alphaville reports that the so-called Dalton Bonds, named after the chancellor at the time, “flopped”.

“The political winds in countries with central banks are a long way from blowing in the direction of fiscal rectitude,” says today’s commentary from Societe Generale strategist Dylan Grice.

Grice contrasts countries like the UK and US with those like Ireland, which gave up its monetary sovereignty to join the Euro and which, he argues, has experienced a sufficiently severe crisis for people to accept the need for “draconian fiscal policies”.

Grice, who last year made a case for gold at $10,000 an ounce, goes on to argue that the time to sell gold will be when “majority opinion [accepts] the painful contractionary medicine”.

Elsewhere in Europe, Greece’s €130 billion second bailout was formally approved today.

Ben Traynor

Gold value calculator   |   Buy gold online at live prices

Editor of Gold News, the analysis and investment research site from world-leading gold ownership service BullionVault, Ben Traynor was formerly editor of the Fleet Street Letter, the UK’s longest-running investment letter. A Cambridge economics graduate, he is a professional writer and editor with a specialist interest in monetary economics.

(c) BullionVault 2011

Please Note: This article is to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it.

Apple Approaching Consensus Price Target - Wed, 2012-03-14 15:44

The consensus price target for Apple (AAPL) based on all of the analysts that cover the stock currently stands at $605.  With its share price trading north of $590 today, Apple is quickly approaching its price target. 

Below is a chart showing the consensus price target for Apple along with its actual share price going back to 2005.  As shown, the huge spike in the stock so far this year has pushed the price very close to its current price target.

Below is a chart showing the percentage spread between Apple's share price and its consensus price target.  At the moment, the spread stands at just 3.44%.  This is much lower than the average spread of 24.7% that has been seen since 2005. 

Whenever the spread has gotten close (or below in one case) to zero, it has typically been an inflection point, and the spread begins to widen out again.  This means that the stock either dips at a faster rate than analysts can lower their price targets, or that analysts begin to up their price targets because their prior targets are being reached.  In the case of Apple, the latter has mostly been the case in recent years.  Are we about to see a bunch of Apple price target increases in the coming weeks? 

Treasuries Hammered as "Operation Twist" Unwinds; Another Triumph of the 1% Over the 99%

On September 21, 2011 in a Federal Reserve Press Release the Fed announced "Operation Twist" purportedly to drive down long-term rates and drive up short-term rates.
The Committee intends to purchase, by the end of June 2012, $400 billion of Treasury securities with remaining maturities of 6 years to 30 years and to sell an equal amount of Treasury securities with remaining maturities of 3 years or less. This program should put downward pressure on longer-term interest rates and help make broader financial conditions more accommodative. The Committee will regularly review the size and composition of its securities holdings and is prepared to adjust those holdings as appropriate.Who Knew?

"Curve Watcher's Anonymous" has a report that shows how banks profited by front-running of the trade.

Banks Front Run the Trade

click on chart for sharper image
Time to Cash Out

click on chart for sharper image
"Operation Twist" a Success or Failure?

The stated goal of Operation Twist was to lower long-term rates and drive up short term rates. By that measure, the Fed's policy was a miserable failure. As the above charts show, 5-year, 10-year, and 30-Year yields are all substantially higher than when the program was announced on September 21.

"Operation Pad Bank Profits" a Stunning Success

However, banks knew this operation was coming and played for it in advance. With the program scheduled to end in June, it's time to take huge profits by selling the garbage back to the Fed.

That yields are higher now than when the Fed  announced the program is irrelevant. That those on fixed income have been hammered mercilessly by Fed policies is irrelevant as well.

The Fed's real goal was not the stated mission, the real goal was to find still more ways to bail out banks at taxpayer expense. The Fed clearly succeeded in the real mission. This is yet another triumph of the 1% over the 99%.

Mike "Mish" Shedlock
Click Here To Scroll Thru My Recent Post ListMike "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction. Visit to learn more about wealth management and capital preservation strategies of Sitka Pacific.

S&P 500 vs US Dollar Index - Wed, 2012-03-14 14:54

As we have noted in prior reports and posts, there have been a number of abnormalities taking place in recent weeks regarding the rally in the S&P 500.  Whether it is the recent underperformance of the Russell 2000 or the divergence in the DJ Transports, trends we typically expect to see as the market rallies haven't really transpired.

Another notable aspect of the rally over the last week or so is that it has been accompanied by strength in the dollar.  Over the last ten years, we have grown accustomed to rallies in equities being accompanied by a weak dollar, but over the last two weeks, both the dollar and S&P 500 are up.  Even over the last year, the inverse correlation between the two assets has not been as pronounced.  In fact, at the end of 2011, we saw a similar trend when the dollar and the S&P 500 both rallied in step with each other until the dollar took a breather in January.

While the divergence between the S&P 500 and small caps and transports is generally considered a negative, outside of the last ten years, rallies in equities usually occurred hand in hand with a run higher in the dollar.  So while continued divergence between the S&P 500 and small caps and transports would be a negative if it continues, we would view the strength in the dollar as a positive for equities.

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Ceridian Fuel Index Suggests "Recovery in Home Building has Not Yet Taken Hold"

The Ceridian-UCLA Pulse of Commerce Index®, a real-time measure of truck fuel usage, is up this month but down in its most recent three month period according to the March Pulse of Commerce Report.
The Ceridian-UCLA Pulse of Commerce Index® (PCI®), issued today by the UCLA Anderson School of Management and Ceridian Corporation, rose 0.7 percent in February but was not enough to offset the 1.7 percent decline in the previous month. The most recent three-month period from December to February is lower than the previous three months from September to November 2011 by 3.2 percent at an annualized rate.

With the first two months of the quarter known, the PCI must grow by over 4 percent from February to March to allow the PCI to grow positively in the first quarter of 2012 compared with the last quarter of 2011. “The continuing weakness of the PCI is signaling that, perhaps, the recovery in home building has not yet taken hold. The recent improvement in building permits and housing starts may get building going again and therefore, trucking as well, as it has been said that it takes 17 truckloads to build a home. If we get the saws and hammers going again, we will have a real recovery with much healthier job growth,” said Ed Leamer, chief economist for the Ceridian-UCLA Pulse of Commerce Index and Director of the UCLA Anderson Forecast.Ceridian Truck Usage vs. All Petroleum Usage

Regular Mish readers are not surprised by this report as gasoline and petroleum demand have collapsed. On March 10, I noted Another Plunge in 3-Month Rolling Average of Petroleum and Gasoline Usage.

The following chart shows U.S. petroleum and gasoline usage for December-February compared with the same three months in prior years. Chart is courtesy of reader Tim Wallace.

Note that petroleum usage is back to December 1995 thru February 1996 levels. Gasoline usage is back to December 2001 thru February 2002 levels.

click on chart for sharper image
Ceridian Index vs. GDP

To help explain this apparent anomaly, note that government spending, no matter how useless, is a direct add to GDP. For example, the more food stamps the government hands out and the more bombs the US drops in Afghanistan, the higher the GDP.

Deficit spending is out of control, and by definition, that adds to GDP.

With trillion dollar deficits coupled with easy money from the Fed and central bankers globally, the best we can say is GDP is hovering at stall speed while those on fixed income are clobbered by rising fuel and food prices.

This mirage won't last. I expect "real" (inflation-adjusted) GDP to take a nose-dive shortly unless home-building picks up sharply.

Mike "Mish" Shedlock
Click Here To Scroll Thru My Recent Post ListMike "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction. Visit to learn more about wealth management and capital preservation strategies of Sitka Pacific.

Argonaut Gold added to the S&P/TSX Composite Index

TheDailyGold - Wed, 2012-03-14 12:50

Toronto, Ontario – (March 14, 2012) Argonaut Gold Inc. (TSX: AR) is pleased to announce that Standard & Poor’s Index Operations will be adding Argonaut Gold to the S&P/TSX Composite Index effective as at the open on Monday, March 19, 2012.

One year ago in March of 2011, Argonaut Gold was added to the S&P Global Gold Index and the Global Mining Index. Argonaut has maintained inclusion in these two indices.

At the end of 2011, Argonaut Gold had a fully diluted market cap of $824 million (2010 ended at $383 million) and an average trading volume of 556,000 shares a day (2010 ended at 150,000 shares a day).

Mr. Peter Dougherty, President and CEO of Argonaut Gold, stated “The Company takes great pride in being able to announce we have been included in the S&P/TSX Composite Index.  The accomplishments our team has achieved in just two years are very gratifying, and it’s all because of the dedicated employees we have throughout every level of our organization”. Mr. Dougherty added: “Over that time period we have seen a continual increase in both our market capitalization and share liquidity. The company is focused on delivering on our objectives as we strive to continue Creating Value Beyond Gold.

About Argonaut Gold
Argonaut is a Canadian gold company engaged in exploration, mine development and production activities. Its primary assets are the production-stage El Castillo Mine in the State of Durango, Mexico, the La Colorada Mine in the State of Sonora, Mexico, the advanced exploration stage San Antonio project in the State of Baja California Sur, Mexico, and several exploration stage projects, all of which are located in Mexico.

Creating Value Beyond Gold

Cautionary Note Regarding Forward-looking Statements

This news release contains forward-looking statements that involve risks and uncertainties that could cause results to differ materially from management’s current expectations. Actual results may differ materially due to a number of factors.  Except as required by law, Argonaut Gold Inc. assumes no obligation to update the forward-looking information contained in this news release. Fully diluted market cap is based on statistics from for volume and yahoo finance for stock price as of the final closing price for 2010 and 2011 respectively.

For more information, contact:
Argonaut Gold Inc.
Nichole Cowles
Investor Relations Manager
Tel:  (775) 284-4422 x 101

Crude Oil Inventories Rise Again - Wed, 2012-03-14 12:33

This week's release of crude oil inventories from the EIA showed that crude stockpiles rose by a level of 1.6 million barrels for the fourth straight week of gains.  At current levels, crude oil stockpiles are at the highest level of the year.  Based on historical patterns, the fact that crude stockpiles are rising is not uncommon.  Traditionally, crude inventories typically rise through early May.  

What makes this year somewhat different, however, is that current levels are already above the levels we normally peak at in May.  At this rate, once May rolls around crude inventories will be way above normal.  Going all the way back to 1984, there have only been four other years where crude inventories were higher at this time of year than they are now. As we noted last week, whatever happens with regards to the ongoing tensions between Israel and Iran, at least the markets seem better prepared.


Ten-Year Treasury Yield Breaks Above 200-DMA - Wed, 2012-03-14 11:38

Following a pretty sizable move in interest rates, the yield on the 10-Year US Treasury (2.22%) is now above its 200-day moving average for the first time since last July.  Granted, 2.22% is still low by historical standards, but it still doesn't negate the fact that the US government has seen its borrowing costs increase by 12% in a week.  When your borrowing amounts are measured in trillions, every little basis point counts.  For every trillion the government borrows, a one basis point increase in interest rates translates to an extra $100,000,000 in annual borrowing costs.