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Update on Guns, Gold … and More Gold

by Sean Brodrick   04-29-09

Support is holding, and it looks like Ruger could be ready to make an even BIGGER move to the upside.

Why? Because guns are flying off the shelves! Sales at Sturm Ruger surged from $144 million in 2007 to $174 million in 2008. On top of that, the company had a $48-million backlog of orders at the end of the year.

If you didn’t buy Ruger the last time I mentioned it, you might want to consider adding it to your portfolio now.

Update #2:
Then There’s Gold …

In my February 11 column “Gold and the Fear Trade,” I talked about how gold was tracking the U.S. dollar. Both had become refuges for investors worried about the stock market.

It’s unusual for gold to move with the dollar. And sure enough, that relationship has changed. Now, the dollar may be entering another slump. And gold is at an important inflection point that could send it much higher.

Take a look at this weekly chart …

I thought gold’s recent downtrend would find support at around $800, maybe as low as $765. But it doesn’t have to go that low, and could break out either way – UP or DOWN – from its recent consolidation.

And last week, there was a very interesting development: China announced that it had nearly DOUBLED its gold reserves over the past five years.

I gave a more detailed analysis on my blog. But with China, the facts are never the whole story. We have to ask ourselves: “Why is China announcing this move into gold now?”

I think China is sending a clear message to the United States that:

A. It is sick of the way our government is printing dollars to paper over our banking problems.

B. It won’t take any guff about how it values its currency.

C. Maybe it is seriously looking at buying something other than U.S. Treasuries. China’s Treasuries-holdings climbed 52 percent in 2008 and now stand at about $740 billion, according to U.S. government data.

I think that when gold surges, the big stocks will move first. But juniors like Timmins have a lot of value that could fuel explosive moves when the time is right, too.

I’ll keep my eye on Timmins. And you can look for updates at my new home at Uncommon Wisdom.

I’ll have a new video for you every Tuesday at Uncommon Wisdom … you can check out this week’s video by clicking here. I’ll also have a new column every Friday.

And of course, my videos AND columns will be stuffed full of the charts you like and the insight you expect.

u ask me a question i dont know how to reply, even tho they are co relate..that is gold px up ,,,this one up...but the px is not tally...anyway u are looking at the wrong thing...

what i mean is that why go for something that is not as liquid and movement is more or less together with spot px...

why not go for more leverage type like stock...even fund perform better than this ETF..

historically, one time up in the px of gold, stock move 3 times...

i am not boostful..i have vest in some stock wayback in 2002 and 2003 at 1 to 2 buck and they worth 1000% to 1800%..only at that point of time i vest small, and since 2004 on i vest heavy...

1000% to 1800% it is true, but phy gold fr 250 to 900 a mere 260%...go for stock..i believe this gold bull end, the next one will be 20 to 30 yrs fr nw...dont miss..

take a look at stock if you are really interest...imagine if gold is just 1500..what will be the px of PAAS, or Yamana Gold...

But it is volatile..you must be able to take punch and like any stock esp. gold.stock.there are alot of lousy one out there..be careful..

And i believe u to be more risk avert and of some good experience in the stock market, if not the next thing will be fund...unit trust relate to precious metal..safer..

I am more nw into silver...

I dont know whether i am doing the correct thing by this post...it could bring on $ and it could bring on disaster for u....but 2 to 3 yrs i am confident..i hope the postive of course as i personnally vest heavily...

pls do  due diligent like as if u are investing in SGX....dont buy penny silver or penny gold stock..read their financial statement....that is the same over at SGX...unlike u speculate like i do, on jade and centillion..

and pls dont bother to ask me what stock i buy..u know why? dont you?.DYODD..

and even that i buy what i afford to lose, the whole capital of course....

Hih Cheongwee

If gold ever hit $9000,  War will follows.   Pray hard this will not be the case.

Can you advise the following :

The stock exchange GLD 10US$ is trading now at $88.00. How is this price pegged to US gold spot??  Tks!

In recent days the Canadian and Swedish central banks have joined the majority of other G10 central banks by indicating that they too may engage in quantitative easing now that the interest rates have been reduced to 25 and 50 basis points respectively. The ECB is wrestling with ways to extend its own form of quantitative easing and an announcement is likely at its next meeting on May 7th.

While some observers have focused on the potential debasement of the US dollar by the aggressive monetary and fiscal policies of both the Bush and Obama Administrations, many investors are worried about the viability of the whole universe of paper money.

As Gillian Tett, award-winning journalist at the Financial Times, put it earlier this month, there has been a four-decade long experiment with fiat currencies not backed by gold or silver. This crisis is so profound that increasingly it appears to have shaken confidence in the experiment. At the same time, the crisis looks to have widened the range of possibilities.

The Special Drawing Rights that the Chinese and others have suggested to eventually replace the dollar does not get beyond paper money. The SDR is a basket of fiat currencies. It is not and cannot be a serious alternative to the US dollar.

Consider that 44% of an SDR is the dollar. The IMF’s figures show that roughly two-thirds of the world’s reserves are in dollars. If countries' reserves were allocated according to the SDR, the dollar’s share of reserves would fall by about a third. While the euro would pick up some slack the big winners would be the yen and sterling, whose share of the SDR is 11% a piece, two to three times larger than their reserve allocation.

If there has been a shift in reserve allocation over recent years, it is not away from the dollar, as so many wrongly claim, but rather away from the yen and toward sterling. And even this shift has been marginal at best. Reserve managers generally want, in order of importance: Security, liquidity, and yield. Japanese bonds are often seen as deficient in both liquidity and yield.

All that Glitters

Can gold return to its role as the anchor for currencies? The advocates of gold are a passionate and vocal minority which appear to be second only to Ayn Rand devotees in terms of intensity. Of course there is a large overlap as Alan Greenspan’s 1966 essay “Gold and Economic Freedom” illustrates.

Top Gold Holders:

US..................8,133.5
Germany........3,412.6
IMF.................3,217.3
France...........2,508.8
Italy.................2,451.8
China.............1,054.0
Switzerland...1,040.0
Japan...............765.2
Netherlands.....621.4
ECB.................553.0

Data from World Gold Council and China
Figures in Metric Tonnes

To appreciate though why gold is ill-suited today to once again back paper money, we need to consider why the gold standard ended in the first place. Simply put, the gold standard provided an economic barrier to the political agenda. That political agenda called for rapid growth to resist the spread of communism. It called for “guns and butter” in the US with the Great Society and the war in Vietnam. The European political agenda included the expansion of the welfare state—from cradle to grave.

Jettisoning gold not only allowed for the pursuit of the political agenda, it helped create the conditions for the rapid and dramatic expansion of trade, capital flows and globalization. What is all too often lost amid the despair and cynicism that the crisis has wrought is the amazing success of that regime. Since 1980, for example, the world economy has grown by 145%. Taking into account the increase in the world’s population, roughly 1.6% per annum, there has been a nearly 40% increase in per capita income.

How such wealth is distributed is an important issue beyond the scope of this discussion. Yet it is interesting to note that longevity, a measure that subsumes numerous other metrics, has risen sharply in both developing and developed countries and that gap between the two has narrowed.

Not Enough

The same problem exists with a new gold standard that existed with the old. There is simply an insufficient amount of gold. Or to say the same thing, the price of gold necessary to put the international monetary regime back on a gold standard is so astronomical as to make it unworkable.

There are different ways to go about conceptualizing the magnitude of the challenge. As the table above indicates, the US has more gold than Germany, France, and Switzerland combined. Given that foreign investors own about $2.5 trillion more of US assets than Americans own of foreign assets, what price of gold is necessary for the US to no longer be a debtor? Answer: More than $8,500 an ounce.

Another approach, suggested by a Swiss investment bank, is to relate the price of gold needed to cover some measure of money supply. By its reckoning, the US would need gold to be worth about $6,000 an ounce to reintroduce a gold standard. However, it may not be sufficient to simply have the US adopt a gold standard. For the US, China, and Japan, the three largest economies as measured by purchasing power parity, to back their money with gold would require a price closer to $9,000 an ounce.

The current price of gold is just above $900 an ounce. Peaking in March 2008 near $1,032, it has averaged $638 over the past five years and $473 over the past ten years. For the yellow metal to reach the kind of levels necessary to make a gold standard mathematically feasible in the present day, the protracted period of deflation necessary would not be politically acceptable.

Where Does that Leave Us?

There is no realistic alternative to the dollar. Not SDRs. Not gold. Not the euro. Not the yuan. That might not be deducible from macro-economic first principles, but it is proven by what central banks are actually doing.

This does not mean that there is no role for gold in individual portfolios, though often people seem to confuse a paper claim on gold for the actual bullion. Also, the touts for bullion often do not include the costs of storage and insurance for gold which has gone decades without appreciating and, of course, generates no income stream.

Central banks that have accumulated large holdings of foreign currencies, like those in Asian and Middle Eastern countries, tend to have relatively little gold. European central banks, which could not get enough gold during the late 1960s and early 1970s, have turned into sellers over recent years. Paradoxically, as they sold off their gold in an orderly way, the price of gold trended higher. Yet many seem to believe that it is a given that the dollar will fall if these same or other central banks sell dollars. Huh?

On April 24th China revealed it has dramatically increased its gold holdings since 2003. In 2001, China said it had roughly 500 tonnes of gold. By 2003, it had risen to a little over 600 tonnes. Now it says it has 1,054 tonnes of gold, more than a 75% increase. Still this means that gold accounts for only about 1.6% of China’s reserves.

China is the world’s largest producer of gold, but it also refines scrap gold. As part of the standard arguments, gold advocates assert that all the gold that has ever been mined is still here. That is true up to a point and it is at that point that it gets interesting. China is exploiting the fact that a ton of computers and cell phones contain several times more gold than a ton of gold ore has.

Central banks in Asia and the Middle East may buy more gold going forward and European sales seem set to slow (though the IMF sales will reportedly go ahead), but it will be barely noticeable in terms of the international monetary regime and the role of the dollar.

GoldMoney Alert - 26 April 2009

Gold's Strong Technical Position

The Gold Bull Market is Still Here!

Gold has been sitting on the brink of a break-upwards since the 17^th February 2009.   We believe it broke resistance on the 23^rd April and is now on its way higher.   The period of consolidation since then has been more protracted than most thought.   While the fundamental reasons why we are in the gold Bull Market have strengthened and investor interest in gold widened, the gold price has slipped to some extent as scrap sales came into the market.   These are now drying up.    Between $850 and $870 sits a huge block of support for the gold price.  We believe that the sub-$900 gold prices are coming to an end.

·         We believe that jewelry demand and imports into India are returning [slowly at first] to the market, now that broad acceptance of these price levels has taken place.

·         Central Bank selling from the signatories to the Central Bank Gold Agreement has virtually ceased with at least one already a small buyer of gold.   Russia and now it is revealed, China have been steadily buying gold for its reserves.  Russia has aimed at holding 10% of these in gold.   China and perhaps soon Russia are buying from local production so as not to be seen visibly in the open market.   Overall and on balance central banks are buyers of gold now.

·        Large, long-term investment demand has driven the gold price to date and will continue to do so after the present pause in the demand for the shares of the gold Exchange Traded Funds ends.