- Gold proves itself as only
true alternative for the dollar
- Confidence in currencies
shaken to the core
- Gulf countries are keen to
break away from the link with the US dollar
- Chinese appetite for US debt in decline
- Former Bank of England official expects dollar collapse
- Investors fleeing into gold
as US prints trillions
- HSBC, Citigroup, Merril
Lynch, Goldman Sachs all turning bullish on gold
- Senior gold shares ready to
move higher after impressive 100% bull run since October 2008
- Junior gold shares waking
up - bottomed out in December 2008
Eric Hommelberg
February 06, 2009
This piece is an update on "GoldDrivers 2009 - Extraordinary bullish outlook for gold" so I would urge readers to read
that piece in case they haven't done so.
The year of 2009 started as how it ended in 2008. The inflation/deflation
debate intensified and still there seems to be no agreement whether we're
heading into a deflationary or hyperinflationary depression.
I've stated many times that hyper
inflation will be the tune of the day coming years. The deflationists can
argue what they want but the simple truth is that the US government will default sooner or later on its inability to service its ballooning debt which
makes the US dollar worthless overnight. This happened to the Reichsmark,
this happened to the Zimbabwe dollar and this could happen to the US dollar. Once
confidence gets into a steep decline foreign investors will dump their
worthless dollar holdings which will translate itself into the death of the
dollar.
Deflationists may argue that
governments can't keep up with printing money as fast as credit is being
destroyed through means of weapons of financial mass destruction called
derivatives so the net result would be deflation, yet they still miss the
point that no government ever managed to create the strongest currency in the
world by means of default. The US government is adding debt at the fastest pace
ever but no one seems to be willing to take on that debt. The only
alternative would be (and will be) to monetize that debt which will
eventually lead to a confidence collapse for the dollar. Any currency facing
a confidence collapse will eventually seek its intrinsic value which is zero.
Needless to say what inflation figures would look like by then.
Maybe I’m too pessimistic so
let’s see who could come to the rescue here. The Japanese perhaps?
"The dollar may lose as much as
40 percent of its value to 50 yen or 60 yen from the current spot rate of
90.40 today in Tokyo"
Japan Should Scrap U.S. Debt as Dollar May Plummet,
Mikuni Says
Bloomberg, Wednesday, December 24,
2008
TOKYO -- Japan should write off its holdings of
Treasuries because the U.S. government will struggle to finance increasing
debt levels needed to dig the economy out of recession, said Akio Mikuni,
president of credit ratings agency Mikuni & Co.
The dollar may lose as much as 40
percent of its value to 50 yen or 60 yen from the current spot rate of 90.40
today in Tokyo unless Japan takes "drastic measures" to help bail
out the U.S. economy, Mikuni said. Treasury yields, which are near record
lows, may fall further without debt relief, making it difficult for the U.S. to borrow elsewhere, Mikuni said.
"It's difficult for the U.S. to borrow its way out of this problem," Mikuni, 69, said in an interview with
Bloomberg Television broadcast today.
END.
No Japanese help to be expected here
but what about the Arab states then? Will they be keen to keep their
currencies pegged to the dollar? Will they come to the rescue and buy up US paper in ever increasing quantities? Well, don't count on it since the answer is NO! The
Arabs have their doubts on the dollar as well, that's why they will issue a
new currency themselves which might include gold as well:
"Gulf countries are keen to break
away from the link with the US dollar because it ties them to inappropriate
monetary policies that exaggerate the boom-to-bust cycle in their
economies."
Will the New GCC Single Currency
Include Gold?
Peter Cooper
January 3, 2009
Gulf
Cooperation Council leaders yesterday concluded their 29th annual summit
meeting in Muscat, Oman with a final approval for the creation of a single
currency for the six-nation economic bloc, still targeted for 2010.
Saudi Arabia is the largest economy in the GCC and boasts
substantial gold reserves. But whether gold will be included in the currency
basket has not yet been decided.
The creation of the GCC single
currency - likely to be known as the Khaleeji which means Gulf in Arabic - is
a major gold event for two reasons.
First, the breaking of their dollar
pegs by the Gulf Arab nations is clearly dollar negative. Secondly, any inclusion
of gold either as a part of the monetary basket, or in the reserves of the
new GCC Central Bank will create additional demand for the precious metal.
END.
So no Japanese and Arab help for the
dying dollar, will the Chinese be coming to the rescue then? Unfortunately
the answer is no again!
The declining Chinese appetite for United States debt, apparent in a series of hints from Chinese policy makers over the last
two weeks comes at an inconvenient time."
China Losing Taste for Debt From the U.S.
By KEITH BRADSHER
January 7, 2009
HONG KONG
— China has
bought more than $1 trillion of American debt, but as the global downturn has
intensified, Beijing is starting to keep more of its money at home, a move
that could have painful effects for American borrowers.
The declining Chinese appetite for United States debt, apparent in a series of hints from Chinese policy makers over the last
two weeks, with official statistics due for release in the next few days,
comes at an inconvenient time.
On Tuesday, President-elect Barack
Obama predicted the possibility of trillion-dollar deficits “for years
to come,” even after an $800 billion stimulus package. Normally, China would be the most avid taker of the debt required to pay for those deficits, mainly
short-term Treasuries, which are government i.o.u.’s.
END.
China settling its trade with Yuan instead of the dollar wouldn't be a
big help for the dollar either:
"Chinese
exporters might face losses if they continue to be paid in US dollars"
China tries settling trade with yuan instead of dollar
Yuan-Settlement Test to Start
From Shanghai Daily
Wednesday, January 7, 2009
China
Those moves are expected to facilitate overseas trade, as Chinese exporters
might face losses if they continue to be paid in US dollars, analysts said.
END.
So what we see here is the US government facing years of trillion-dollar deficits but no foreigners willing to take on
that debt. The only option left is to monetize that debt and ask the FED to
buy US Treasuries.
Surprise surprise:
Fed Keeps Rate Near Zero, Is Ready to
Buy Treasuries
Jan. 28 (Bloomberg) -- The Federal
Reserve left the benchmark interest rate as low as zero, said it’s
prepared to purchase Treasury securities to resuscitate lending.
The purchase of Treasuries would
extend the Fed strategy of using its balance sheet to reduce borrowing costs.
The new program may benefit several types of borrowers, because long-term
government bond yields influence interest rates on mortgages, corporate bonds
and municipal debt
END.
Sounds good right? The FED purchasing
Treasuries which will bring rates down. I don't believe however that the FED
is bigger and more powerful than the world markets. The FED can buy all it
wants but the bottom line remains when confidence is gone, the dollar is
gone. When confidence is gone investors will start selling their long-term
Treasuries which will drive up long term rates. It seems we find ourselves at
this critical juncture where investors start losing confidence in US paper:
"The gap between two- and 10-year
rates widened at the fastest pace in a year last month as traders demanded
more compensation for longer-term debt"
Treasury Real Yields at 16-Month High
as Deflation Bets Die
By Dakin Campbell
Feb. 2
(Bloomberg)
— For the first time since 2007, Treasury investors are betting that
inflation will accelerate.
The yield on 10-year notes exceeds the
consumer price index by 2.74 percentage points, the most since December 2006.
The gap between two- and 10-year rates widened at the fastest pace in a year
last month as traders demanded more compensation for longer-term debt. Treasury
Inflation Protected Securities that signaled falling prices as recently as
Nov. 20 show they will increase in the U.S. this year.
Deflation was the growing concern for
investors in 2008 as government bond yields fell to historic lows in December,
the Reuters/Jefferies CRB Index of commodities tumbled 53 percent since July
and home prices plunged 18 percent amid a deepening recession. Now, the bond
market is saying Federal Reserve interest rates at zero percent, President
Barack Obama’s $819 billion planned stimulus package and $8.5 trillion
of U.S. initiatives to revive credit markets will reignite inflation.
"When
the Fed gets finished here they will have an inflation nightmare on their
hands,"said Mark MacQueen, who helps oversee $7 billion as co-founder of
Sage Advisor Services Ltd. in Austin, Texas. "There is a lot of downside
in conservative government bonds."
MacQueen
is selling 30-year Treasuries, which are more sensitive to inflation
expectations than shorter-maturity debt.
END.
The message is crystal clear,
investors and foreign countries are losing their appetite for US debt which could result in a dollar collapse, former Bank of England official Willem
Buiter seems to admit:
"Americans must prepare
themselves for a massive collapse in the dollar as investors around the world
dump their US assets, a former Bank of England policymaker has warned. "
Former Bank of England official expects dollar collapse
By Edmund Conway
The Telegraph, London. Monday, January
5, 2009
Americans
must prepare themselves for a massive collapse in the dollar as investors
around the world dump their US assets, a former Bank of England policymaker
has warned.
The long-held assumption that US
assets -- particularly government bonds -- are a safe haven will soon be
overturned as investors lose their patience with the world's biggest economy,
according to Willem Buiter.
Professor Buiter, a former Monetary
Policy Committee member who is now at the London School of Economics, said
this increasing disenchantment would result in an exodus of foreign cash from
the US.
END.
So investors world wide are losing
their appetite for the dollar but what's the alternative then?
The answer is simple, the one and only
true safe haven remains gold. It seems that more and more investors are
picking upon it:
"Investors are largely shunning
everything from U.S. Treasuries to stocks, which are down 10 percent and 7.5
percent so far this year, respectively, while pouring cash into gold"
Gold gaining investors as U.S. prints trillions
By Frank Tang and Jennifer Ablan
Reuters, Wednesday, January 28, 2009
NEW YORK -- Gold, the traditional safe haven in
times of economic turmoil, proved to be more a commodity that everyone loved
to hate last year even amid the turbulence that engulfed world markets.
But as 2009 gets under way the yellow
metal has found huge traction with money managers.
The furious rally in the bullion stems
from expectations that the U.S. government will need to borrow about $2
trillion of debt this year to finance its rescue packages for the battered
banking sector. Already, outstanding Treasury debt stood at $5.5 trillion at
the end of September.
Against this backdrop, investors are
largely shunning everything from U.S. Treasuries to stocks, which are down 10
percent and 7.5 percent so far this year, respectively, while pouring cash
into gold.
END.
So gold is gaining investors, yes, one
of them is Greenlight founder David Einhorn:
"The $5.1 billion hedge fund is
buying gold for the first time amid the threat of inflation from increased
government spending"
Greenlight Founder Takes
Grandfather’s Advice on Gold
By Stewart Bailey and Saijel Kishan
Jan. 28
(Bloomberg) --
Greenlight Capital Inc. founder David Einhorn is finally taking his
grandfather's advice. The $5.1 billion hedge fund is buying gold for the
first time amid the threat of inflation from increased government spending.
Since Einhorn was 10 years old, his
grandfather has warned him that investing in bullion and gold-mining stocks
was the only "sensible" thing to do given the threat of inflation
and the risks of so-called fiat currencies, New York-based Greenlight said in
a Jan. 20 letter to clients. The firm had never before considered buying
bullion or mining-company shares.
"To everyone's dismay, we believe
some of Grandpa Ben's predictions are playing out," Greenlight said in
the letter, a copy of which was obtained by Bloomberg News.
"The size of the Fed’s
balance sheet is exploding, and the currency is being debased." Greenlight
is turning to the centuries-old currency to mitigate the effects of the
economic collapse and government efforts to end it. Bullion gained for the
eighth straight year in 2008 as governments in Europe and the U.S. rescued banks from collapse.
END.
So investors are turning en mass to
gold but what about foreign countries like eg China? China isn't quite happy about the dollar's prospects so what are they going to do with
their excessive dollar holdings? What could happen to the gold price if some
of these holdings were to be converted into gold?
According to Barrick CEO gold
could treble or more from here in case China would switch from dollar
holdings to gold:
"central banks, including China's, might start to switch from dollar holdings to gold, which could cause the metal's
price to treble or more."
Gold likely to hit new highs on dlr
fear-Barrick
DAVOS,
Switzerland, Jan 29 (Reuters) - Gold is likely to hit new record highs, spurred by serious
concern about the U.S. currency and doubt about the state of the world
economy, the chairman of Barrick Gold Corp. said on Thursday.
There was even a possibility, although
not a probability, central banks, including China's, might start to switch
from dollar holdings to gold, which could cause the metal's price to treble
or more.
END.
In part I we noted that HSBC and Citigroup became bullish
on gold exactly for reasons well outlined above:
HSBC Fund Returns to Buying Gold to
Hedge Against Inflation
Dec. 3
(Bloomberg) --
HSBC Investment Management's $2.6 billion Absolute Return Service started
buying gold again on expectations that inflation will accelerate and may
start adding coffee, sugar and grains next year.
END.
Citigroup says gold could rise above
$2,000 next year as world unravels
Gold is poised for a dramatic surge
and could blast through $2,000 an ounce by the end of next year as central
banks flood the world's monetary system with liquidity, according to an
internal client note from the US bank Citigroup
END.
It seems that Merril Lynch has jumped on the gold wagon as well, Merril's CIO
expects gold prices to hit $1500 in the next 12 to 15 months:
"With confidence in currencies
shaken to the core, the yellow metal is increasingly assuming the role of
"the most trusted currency"
Gold prices could hit $1,500, fears
Merrill Lynch CIO
Gold prices may hit $1,500 (Dh5,509)
an ounce in the next 12 to 15 months, Gary Dugan, the Chief Investment
Officer (CIO) of Merrill Lynch, said yesterday.
Dugan termed his apprehensions of gold
striking such a high as a "fear" that may come true. He reasoned
that such a price would mean the other commodities and streams of investments
have been shunned by investors.
With confidence in currencies shaken
to the core, the yellow metal is increasingly assuming the role of "the
most trusted currency", Dugan said. "We have never seen such a rush
to buy gold. It's bringing in security and it's still affordable.
END.
Goldman Sachs joining the gold bulls,
well, at least they finally get it after being on the short (wrong) side of
the trade for more than a decade:
Goldman Sachs Lifts Gold Price
Forecast to $1,000
By Lewa Pardomuan
Reuters, Thursday, February 5, 2009
SINGAPORE -- Investment bank Goldman Sachs
raised its forecast for the price of gold to reach $1,000 an ounce in the
next three months from its previous forecast of $700 due to rising investor
demand for safe haven assets.
"The gold price rally has been
driven by surging demand for gold in all forms: physical gold,
exchange-traded funds, and futures contracts as investors seek 'a safe store
of value' amid the financial distress and inflation risks," it said in a
report.
END.
$1000 an ounce in the next three
months, well, that's exactly what we said in our dispatch of January 26. Let's
turn to the charts and see what we said and why:
On January 16 we send out the chart below to our members in which we stated
that gold would break-out any time soon from its 10 months down-trend that
started in March 2008:
Then just 10 days later we got our
break-out and send out the chart below.
In the chart above we mentioned that
after a break-out new all time highs within the next three months wouldn't be
unlikely at all. We did however warned that break-ours are often being
characterized by short pull backs to the break-out level. That's exactly what
happened indeed, the 15 min spot chart below shows us that we got that pull
back and as expected it was very short lived indeed.
So here we are, the break-out of the
10 months down-trend has been confirmed but as we now the short players have
digged in their heels in the $920 - $925 range. Gold challenged the $920 mark
for the second time in a week now but every time it popped up above $920 our
beloved short sellers forced it back. The battle of $920 is clearly visible
in the spot chart of February 05 below:
It's obvious that the short sellers
drew a line at $920 so we have to be a bit patient here until that resistance
has been taken out. Once it does then new all time highs are within the cards
before summer.
Senior gold shares:
So gold sailing towards new all time
highs, what about the gold shares? It wasn't that long ago that most
investors swore never to touch a gold share in their life time again. That
was in October 2008 when the HUI crashed all the way down to the 150 mark. Now
three months later the HUI has rallied by a stellar 100% and is struggling
now to take out some key resistance levels in the 300 - 325 area. Once it
does then the HUI could continue its impressive bull run, see charts below:
HUI daily chart:
The HUI daily chart clearly reveals
the resistance area from 300 - 325. Once that hurdle is cleared the only way
to go is up. There is a tremendous upside potential here which becomes
clearly visible in the HUI monthly chart below:
HUI monthly chart:
The HUI monthly chart shows us a tremendous
upside potential. The HUI could move up for more than a year without getting
overbought (on a monthly basis). Key here is to overcome its 50 mma (319),
see chart above.
Junior gold shares:
As
mentioned above it looks quite good for gold and the senior gold shares but
what about the junior gold shares? Will they go out of business en masse as
we're hearing almost on a daily basis now? Should we avoid the juniors like
the plague these days?
Let's first take a look at how the
juniors have been performing since October last year. As mentioned above the
senior gold shares bottomed out in October last year but it seems that most
juniors are still comatose.
The CDNX index (although not perfect)
tells us how juniors are performing in general. What we would like to know
however is how juniors are performing against gold. Needless to say that
since mid 2007 juniors were terribly underperforming gold. In order to see
how juniors are performing against gold we plot the CDNX index against gold,
the CDNX/Gold ratio. What we would like to see is this ratio going up since
that would translate itself into juniors outperforming gold.
I would like to start with the monthly
CDNX/Gold ratio chart since this 10 year overview show exactly the extreme
damage the junior sector has suffered over the last two years:
CDNX/Gold ratio chart - monthly
This chart leaves no doubt. The
juniors do find themselves in their most depressed levels ever. Period!
Fortunately though, it seems that the worst could be behind us and that we
might have seen the bottom in December last year. It's a natural event, the
senior shares take the lead after bottoming out, juniors tend to follow a few
months later. There's no doubt that the senior shares bottomed out in October
last year so the thesis of juniors bottoming out in December could be very
true indeed. This monthly chart not only demonstrates the extreme damage to
the junior sector but also shows us the extreme upside potential. If juniors
would go back to historic averages then they could triple or more even
without gold doing anything.
Now let's zoom into the last year of
this chart and see if we can determine a bit more precisely if we did bottom
out or not.
CDNX/gold ratio chart - daily
This chart shows us that December 2008
most likely marked the bottom indeed for the juniors. The CDNX/Gold ratio
started rallying sharply by end of December and managed to take out its 50
dma to the upside which is very encouraging.
Believe it or not but many juniors
already doubled or tripled from their December lows. Now does that mean you
should you go out and start buying juniors like crazy? Despite the fact that
many analysts are warning for massive upcoming bankruptcies in the junior
sector?
The answer is not that easy. Although
I would suggest to go for safety first which means the physical metals followed
by some senior gold shares I still hold the view that some high quality
juniors will come out of this mess with stellar returns within a year from
now. Simple fact is you'll be buying juniors at bankruptcy levels. This is
all caused by the junior's inability to secure the financings necessary in
order to advance their exploration projects. But here's the thing to
watch for. The supply chain for gold starts with the junior gold exploration
sector, 75% of all discoveries are made by juniors. It won't be long before
major companies will start to acquire promising projects from juniors or
start to joint venture them. They simply have to since senior gold companies
can't replace their mined reserves through own exploration so they have to
open their checkbooks and buy it! Juniors holding exciting properties and
sitting on enough cash in order to do their exploration thing for years to
come will do well.
Other things to watch for are the
juniors priced at bankruptcy levels but able to secure their own finances in
short order. There's obviously a trend prompting juniors to start up small
scale mining operations themselves in order to finance their own ongoing
exploration efforts. They simply have to since if they don't they will be out
of business pretty soon. If you'll be able to pick a junior holding good
properties priced at bankruptcy levels and able to secure its financings
through small scale mining operations odds are you'll be rewarded well.
An exciting year ahead of us indeed,
hope you'll stay tuned with us!
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Comments are welcome at: ehommelberg@golddrivers.com
Best Regards,
Eric
Hommelberg
Editor,
the Gold Discovery Letter, the Gold Drivers Report
www.golddrivers.com
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