Exclusive August 2012 Market Update
Gabe Elton | Austin Rare Coins & Bullion
We think that the current correction in Gold and Silver prices could prove to be one of the best investment opportunities in our lifetimes. Corrections such as these have proven to produce tremendous gains in the near term and we believe this summertime lull to be no different.
As you will see in this market update, there are valid reasons for our conviction of much higher Gold and Silver prices to come. The United States Dollars status of being the Worlds reserve currency is clearly coming to an end. The constant measures taken by the Federal Reserve and other Central Bankers to pump liquidity into debt laden markets have been a failure. China has seized this opportunity to bolster their Gold positions and is doing so at a feverish pace. These developments are leading many to believe that the Chinese are positioning the Yuan to replace the Dollar as the Worlds Reserve Currency.
Exercise in Futility – Pushing on a String
It has become painfully obvious that you can’t solve a problem of debt by adding more debt. After increasing the budget deficit by more than 600%, even after the Federal Reserve’s balance sheet has been expanded by more than 200%, and even though Government Debt is up more than 72% since 2007 – the S&P and Nasdaq are still languishing below 2007 levels.
The Beginning of the End
The United States, since the end of World War I, has enjoyed the benefits of having the Worlds Reserve Currency. This recognition has allowed us to export our inflation to other areas of the world while building a nation of consumers who have been taught that credit is capital and debt is meaningless. Unfortunately though, at some point in this game of musical chairs the music stops, the debts must be paid and hard decisions must be made. However, instead of making these hard decisions, our policymakers have decided to kick the can down the road.
Should the World decide to shun American Dollars as its Reserve Currency we expect that the decline of the Dollar will be rapid and sudden. Such an event would undoubtably be highly inflationary and could drive Gold and Silver prices to unheard of levels. History says that this event will transpire sooner rather than later so prepare accordingly, before a rush to metals begins.
Just a Few Disturbing Trends Regarding the Dollar:
• China and Japan have reached an agreement to bypass the dollar for bilateral trade and will instead be able to convert each others currencies directly.
• Brazil, Russia, India, China and South Africa (BRICS) have all signed pacts promoting intra-BRICS trading in their own currencies rather than using the U.S. Dollar as settlement.
• Russia and China have entered into a currency agreement in which they are using their own national currencies to trade with one another.
• China and the United Arab Emirates agreed to bypass the U.S. Dollar and instead use their own currencies for oil payments.
• Chile and China have made a pact to bypass the U.S. Dollar and instead settle payments in the Chinese Remnimbi.
• Iran has agreed to accept Gold as payment for its Oil Exports.
• China, Russia, the IMF and the World Bank have pushed for the establishment of a new Reserve Currency.
China – The Elephant in the Room
As much as we would all love to look the other way and pretend it isnt happening, China is clearly attempting to become the worlds one and only superpower. Throughout the last 20 years China has been patiently buying our debt and has accumulated over 2 Trillion Dollars worth of Treasury Bills. Recently though, their purchases of U.S. debt have plummeted and it is becoming clear that China has shifted their focus to a much more reliable asset – Gold – and lots of it.
During the first four months of 2012 China’s Gold imports have skyrocketed an amazing 780% compared to 2011 a year in which China was the worlds largest Gold Importer! This is an amazing statistic, especially when considering that China also holds the title of the Worlds largest producer of Gold. Actions such as these lead many experts to believe that China is clearly positioning its currency to replace the Dollar as the Worlds Reserve Currency, and rightfully so. Amazingly, China is currently absorbing every single ounce of gold that they mine and ½ of the entire mining capacity of the entire world.
Larry Edelson, a financial writer who travels to Asia frequently says “I know for a fact that Beijing wants its Yuan to eventually become a gold-backed currency.” If this were to happen many people believe that it will lead to the destruction of the Dollar. Doug Casey of Casey Research comments that “If China introduced a gold-backed Yuan, for example, who on earth would want anything to do with Dollars?”
Even the Chinese Media is picking up on the story. Recently the World News Journal (Shijie Xinwenbao) wrote “According to China’s National Foreign Exchanges Administration China‘s gold reserves have recently increased. Currently, the majority of its gold reserves have been located in the U.S. and European countries. The U.S. and Europe have always suppressed the rising price of gold. They intend to weaken gold’s function as an international reserve currency. They don’t want to see other countries turning to gold reserves instead of the U.S. dollar or Euro. Therefore, suppressing the price of gold is very beneficial for the U.S. in maintaining the U.S. dollar’s role as the international reserve currency. China’s increased gold reserves will thus act as a model and lead other countries towards reserving more gold. Large gold reserves are also beneficial in promoting the internationalization of the RMB. (Renmibi)”
UBS Issues Hyperinflation Warning
We present the following warning from UBS without comment, it doesn’t need any:
“We think that a creditor nation is less at risk of hyperinflation than a debtor nation, as a debtor nation relies not only on the confidence of domestic creditors, but also of foreign creditors. We therefore think that the hyperinflation risk to global investors is largest in the US and the UK. The more the fiscal situation deteriorates and the more central banks debase their currencies, the higher the risk of a loss of confidence in the future purchasing power of money. Indicators to watch in order to determine the risk of hyperinflation therefore pertain to the fiscal situation and monetary policy stance in high-deficit countries. Note that current government deficits and the current size of central bank balance sheets are not sufficient to indicate the sustainability of the fiscal or monetary policy stance and thus, the risk of hyperinflation. The fiscal situation can worsen without affecting the current fiscal deficit, for example when governments assume contingent liabilities of the banking system or when the economic outlook worsens unexpectedly. Similarly, the monetary policy stance can expand without affecting the size of the central bank balance sheet. This happens for example when central banks lower collateral requirements or monetary policy rates, in particular the interest rate paid on reserves deposited with the central bank. A significant deterioration of the fiscal situation or a significant expansion of the monetary policy stance in the large-deficit countries could lead us to increase the probability we assign to the risk of hyperinflation.”
The Case for Owning Gold and Silver are Stronger than Ever
Don’t let these recent pullbacks in Gold and Silver fool you, the case for owning Gold and Silver are stronger now than they have ever been. China isn’t the only one that is massively increasing their Gold reserves, even the International Monetary Fund, the banker’s banker, has decided to increase their holdings. The IMF recently released a report saying “The Fund is facing increased credit risk in light of a surge in program lending in the context of the global crisis” adding that “there is a need to increase the funds reserves in order to help mitigate the elevated credit risk. The International Monetary Fund is planning to purchase more than $2 Billion of Gold on account of rising global risks.”
Societe Generale, the 2nd largest bank in France, (considered a powerhouse financial institution with substantial global presence) recently released a report that encouraged their clients to “Bolster their positions in Gold ahead of further Quantitative Easing.” The well respected bank goes on to say that Gold would have to rise to $1900 per ounce just to catch up with the expansion of the monetary base since 2007. They also point out that if the Gold Market adjusts to the expansion of the monetary base since 1920, as it did in 1979-1980, its price would rise to $8,500 per ounce.
Furthermore as illustrated in the chart, taking advantage of these temporary dips in price has proven to produce tremendous short term gains. As you can see, these corrections are normal and usually don’t last more than 18 months.
Gold – A New Discovery
For those that believe that this bullmarket in Gold and Silver may be reaching an end, we are here to say that, in fact, it is just being discovered.
Consider This: In the 1970’s gold increased in value by 2300%. By the end of the gold bull market, interest rates were at 20%, the deficit was 2.7%, US debt to GDP was 160%. At the time, gold represented 3% of all financial assets.
Fast forward to today: Gold is up 500% since the bull market in metals began, interest rates are at .025, the federal deficit is 8.1%, US debt to GDP is 360% and Gold only represents 1% of all financial assets.
These figures make it clear that gold is not in a bubble, it is in the infant stages of being rediscovered as an asset class. The average investor still owns no gold but many are considering it. All that it will take is a catalyst to get these new buyers into the gold market. The ensuing rally may catch people off guard which is why it is important to acquire your positions as soon as possible.
Take Action Now
It has become painfully obvious that the policies of the Federal Reserve have not worked. The reign of the dollar as the Global Reserve Currency is no longer a certainty. China is rapidly becoming the one and only superpower and their puchases of gold has led many to believe that they are trying to position their currency to replace the dollar as the worlds new legal tender.
UBS has recently issued a warning of hyperinflation in the United States. The current bull market in Gold and Silver seem to be just getting started and the current pullback in pricing offers advantages that historically have paid huge dividends.
Take this opportunity to contact your Gold and Silver Specialist. After 23 years in the business and serving tens of thousands of clients, Austin Rare Coins has the knowledge and advice to help craft a tailor made plan just for you. Thanks in advance for your business. We look forward to your phone calls and emails. Call Now – 1-800-928-6468.