Green Light Turns Yellow

It was all going so swimmingly for gold investors: The European Central Bank had thrown out another €529.5 billion in easy-money accommodation for eurozone banks, and Federal Reserve Chairman Ben Bernanke had publicly indicated that his quantitative easing gun was loaded and he had an itchy trigger finger.

Then it all fell apart. It started with Bernanke’s most recent testimony before Congress, which was then firmly backstopped by last week’s policy statement from the Federal Open Market Committee. Both strongly suggested that further quantitative easing is off the table in the short term.

After riding high for much of February on bullish news, precious metals prices hit the skids following Bernanke’s testimony on Feb. 29 in front of the House Financial Services Committee.

How dramatic was the fall in gold? Consider that the metal hit its monthly high… and its monthly low… in the same day.

This was a major, bearish technical signal that simply had to be acknowledged. And in doing so, we must also admit that the rally of the previous weeks was much more fragile, and more dependent upon speculative trading funds, than anyone had imagined.

The fact that the markets nose-dived so quickly upon Bernanke’s testimony indicates that some very big money, in a limited number of hands, had been betting that Bernanke was going to outright endorse a third round of quantitative easing in a very clear and direct fashion.

In the end, the markets reacted not so much to what Bernanke said, but what he didn’t say. In short, he didn’t come right out and publicly endorse more quantitative easing. And last week’s FOMC statement did not do so either.

Other factors have played a role in gold’s correction, most notably the brightening economic picture in the United States and at least a temporary resolution to the European credit crisis. In other words, the market believes that even Bernanke can’t find sufficient cause for another round of quantitative easing.

Looking Forward

At the very least, the downdraft in gold has been accompanied by significant short-selling. And this infers a short-covering rally to follow at some point.

Regardless, the correction in gold seems to be well overdone and unjustified, given the broader monetary backdrop. There’s already far too much liquidity in the global system, along with obvious inflation in Asia and “stealth” inflation in the West, to see a collapse in gold demand.

As the Wall Street Journal editorial board put it:

In addition to the European Central Bank’s liquidity burst, China is easing its reserve requirements to stimulate more bank lending. The Bank of England has been all-in for some time, and the Bank of Japan recently joined the party. Lesser central banks have been following suit, as the world takes its cues from the grandest monetary maestro, Mr. Bernanke, who has announced that the Fed will keep interest rates at near-zero for another three years.

Does this sound like a tight-money policy? Purely on monetary momentum alone, the future looks bright for gold and tangible assets over the long term.

In addition, we can’t forget about the $1.5 trillion in excess banking reserves that is being held by the Fed right now. This money officially doesn’t exist… until the Nation’s banks start withdrawing the funds to make loans and thereby insert the money into the economy.

Sustained U.S. economic growth, in other words, won’t be the end of liquidity injections. Instead, it will mark the beginning of a new phase, as the velocity of today’s huge, overhanging money supply accelerates and inflation truly kicks in.

And finally, does anyone really believe that the Fed and the ECB are going to drain the punch bowl anytime soon? Is Bernanke going to suddenly stop printing money?

In fact, one can put forth a very credible argument that more quantitative easing will be necessary — unemployment is still at record levels in the eurozone and the economic data in the U.S. continues to be mixed. In his Senate testimony, Bernanke claimed that the record for quantitative easing was “positive,” and he maintains that his previous two monetary injections didn’t spark inflation at all.

Rest assured, Bernanke still has his finger on the QE trigger, and it’s itchy.

The technical damage that has been inflicted on the gold chart cannot be ignored, of course. The market’s swift reaction to last week’s FOMC statement, for example, sent gold below its widely watched 200-day moving average.

So in the short term, dollar-bullishness based on improving U.S. economic data and a consensus that the worst is over in Europe may continue to hamstring gold prices.

But over the long term, an improving U.S. economy has the potential to unleash massive amounts of price inflation, which will result in a weaker U.S. dollar and stronger gold and commodity prices.

In short, the future may be a bit choppier than we had hoped, but I’m confident that the metals are headed much higher once the current correction has run its course.

The Potential For Economic Armageddon In November

While gold should slowly but surely resume its climb soon, there’s a very real possibility that the metal could absolutely explode higher. And it’s actually getting more likely every day.

You see, the Republican primary contest has lasted longer, and been more vitriolic, than anyone had imagined. The candidates are doing the opposition research for the Democratic Party, and spending their war chests attacking each other. At this point, I think the odds of unseating President Barack Obama in November are 50/50 at best.

And that means American investors are precariously balanced on a fence. Fall on one side with a Republican victory, and we still have problems… but they’re solvable. Fall on the other side with a Democratic victory, however, and there’s big, big trouble ahead.

We’ll see our debt burden continue to grow with massive spending and no entitlement reform, rising taxes and other attacks on the productive sectors of society, and monetary inflation to a degree that will make recent dollar- and euro-printing pale in comparison.

Make no mistake: This will be economic Armageddon. And the odds of it occurring grow more likely with every day that the Republican nomination remains contested.

That’s one reason why many investors are looking at the current correction in gold and silver as a major buying opportunity. And I agree with them.

In fact, I’m going to provide some specific, bargain-priced recommendations in upcoming issues of my free e-letter, Golden Opportunities.

In the meantime, with Rick Santorum having recently won Mississippi and Alabama, the calls for Newt Gingrich to withdraw from the race are growing more strident. If he remains in the contest, it should help decide the nomination more quickly for Mitt Romney, since Gingrich will split the anti-Romney vote with Santorum.

But don’t count on Gingrich running away from the spotlight he loves so much. To be fair, Gingrich has some great ideas. I’ve discussed many of them with him over the years, as he has appeared at our annual New Orleans Investment Conference.

In fact, as you’ll see below, he presented much of his future platform at our 2010 New Orleans Investment Conference.

[youtube http://www.youtube.com/watch?v=x19FnqkQh40&w=420&h=315]
 

Why there? Because the New Orleans Conference is famed for bringing in the world’s top experts in geopolitics, economics and investments together with today’s most successful and opinionated individual investors.

History has shown that there’s simply no better place for investors to get actionable strategies to protect and build their wealth, and there’s no better place for the most accomplished experts to present their views.

Gingrich gave a rousing presentation at the 2010 New Orleans Conference. It’s the speech that’s widely credited with having launched his Presidential campaign, and you’ll see why.

So, enjoy Gingrich’s inspiring speech. But also be sure to protect yourself from the dangers he foresees, and which are growing more real with every day that passes.

–Brien Lundin

Riding The Silver Bullet

Silver investments are becoming increasingly attractive in an uncertain economy. With good timing and the right strategy, you could reap huge profits on the expected gains in silver.

As an investment tool, silver enjoys unique advantages. In its dual role as both an industrial commodity and a monetary asset, silver’s impressive industrial qualities make it more than just another shiny metal. Its malleability, ductility and sensitivity to light ensure its value in a variety of industrial, medical, decorative and monetary applications.

Silver is used to make ball bearings for jet engines and electrical switches of all types, and it is used as a soldering material. Many plastic-manufacturing processes require silver as a catalyst, and it forms an essential component of corrosion-resistant batteries and solar panels. In the medical field, silver serves as both an ingredient in diagnostic imaging procedures and as an antibacterial agent.

Profitable Supply Gap

The consistent gap between silver mine production and silver demand represents an essential fact that continues to drive the bullish silver market. This gap, which began about a decade ago, arises because most silver is mined and extracted as a byproduct of zinc, lead and gold operations. The fact that the amount of silver needed for industrial processes consistently outstrips the amount that is mined means old silver scrap and net government sales are continually necessary to close the gap between supply and demand.

Fortuitously for future silver investors, the supply of silver scrap, while plentiful, is finite. Since silver is annually drawn from government sales and scrap to fulfill the demand for the popular metal, the available scrap supply keeps diminishing. Consequently, the gap between what mines can produce and the fabrication demand for silver has recently kept silver prices at the high end of historical levels.

A look at the recent history of silver prices shows that they have moved up in concert with gold, but silver’s wide range of practical uses offers an upside sensitive to both a strong economy and the inflationary pressures from economic growth and loose monetary policies.

The economic recovery of the past two years, centered in continuing strong growth in China, has pushed silver prices up significantly. In silver’s favor is its relative low profile in the overall cost of most of the industrial processes that involve this metal. Silver’s unique properties make it an indispensable ingredient in many of these applications, so there’s no adequate substitute. Therefore, manufacturers are resigned to paying the asking price for silver.

Playing The Silver Market

The best way to play silver is to employ a three-tiered approach that combines the leverage-generating power of options and equities with the safety of physical silver. This “Silver Bullet Strategy” incorporates the best features of the options, the physical and the equities market for silver.

In using options, you can invest in Comex (Commodity Exchange) silver options to gain big leverage with limited risk. This entails buying a long-dated silver call option and simultaneously selling a similarly dated call option at a strike price at least $4 per ounce higher. This strategy is the equivalent of owning a “mini hedge fund” in silver. It allows you to profit from an advance in silver prices but limits your losses in a retreating market.

In playing silver, you should also have a position in physical silver. This is best accomplished by purchasing United States 90 percent silver coins, known as “bag silver.” These bags are typically traded in increments of $1,000 in face value and come in denominations of either 10,000 dimes, 4,000 quarters or 2,000 half dollars. In these purchases you receive silver coinage (90 percent silver, minted before 1965) with a circulation value of $1,000. Each bag contains 715 ounces of pure silver.

Building A Silver Stock Portfolio

Building a portfolio of companies that explore for or produce silver can deliver substantial leverage on rising silver prices. The most promising silver recommendations in the junior mining space include:

Great Panther Silver (GPL: Amex; GPR.TO; $3.31) is a fast-growing company that owns two operating mines in Mexico: the Topia and Guanajuato mines. The properties are 100 percent owned and have no lingering royalty concerns.

In 2010, Great Panther generated $5 million in net income at a low cash cost of $6.50 to $7.50 per ounce of silver. With 71 percent of revenues coming from silver production (and the balance coming from gold, lead and zinc), Great Panther definitely qualifies as a primary silver producer.

As a growth-focused company, Great Panther has turned in four straight years of production growth, a period of time that included the huge economic downturn of 2008 and 2009.

The company’s latest avenue for growth is the San Ignacio Mine, an offshoot of its Guanajuato operations. The company is looking to increase production at both its Topia and Guanajuato mines to 3.8 million silver-equivalent ounces by 2012. Its low operating expenses, combined with sky-high silver prices, should produce substantial profits.

The company’s three-year, $57 million capital expenditure program will be entirely financed by cash flow from Topia and Guanajuato. It’s a strong buy at or near current levels.

South American Silver (SAC.TO; SOHAF.PK; C$1.94) lays claim to one of the world’s largest undeveloped silver-indium deposits.

Its flagship Malku Khota deposit in Bolivia boasts 230 million ounces of measured and indicated silver and another 140 million ounces of inferred silver, for a combined silver hoard of 370 million ounces.

A  recently updated Preliminary Economic Assessment on Malku Khota projects the deposit there can deliver a pre-tax net present value (NPV) at a 5 percent discount rate of $704 million and an internal rate of return (IRR) of 37.7 percent. These are eye-popping numbers — which is even more impressive when you consider that they use very conservative, base case metals prices of $18 per ounce of silver and $500 per kilogram of indium. But if you take into account recent silver prices of $35 per ounce for silver, those numbers balloon to a pre-tax NPV (at 5 percent) of $2.571 billion.

Since the company currently trades at a market capitalization of around C$234.6 million, South American Silver offers huge upside potential. Even getting valued at the “base case” NPV projection would deliver almost a triple on its current share price.

Perceived political risk in Bolivia has held back the company’s share price. But that perceived risk has created an unprecedented buying opportunity. Silver deposits this large in a dynamic silver market make this company significantly underpriced. Eventually, the market will realize that Bolivia cannot afford to turn away foreign investment. And as the perceived political risk dissipates, early investors in this large silver project should reap lucrative returns.

Silver Returns

The savvy investor recognizes that silver offers the promise of huge profits. For 17 consecutive years, silver demand has outstripped supply: The cumulative supply deficit in silver tops 1.75 billion ounces. In fact, silver almost always outperforms gold in bull markets. So if you’re looking for a relatively inexpensive way to take advantage of today’s shaky economic times, an investment in silver offers a relatively cheap investment that can pay big returns.

–Brien Lundin

All that glitters isn’t gold! In fact some of the most profitable opportunities for precious metals investors can be found in silver. In my complete Silver Bullet Strategy Report, I’ll reveal why I think “poor man’s gold” is the best investment in today’s turbulent and uncertain markets… plus give you six rock-solid reasons to start investing in silver today… as well as reveal three simple silver strategies that have the potential to make you a killing! Claim my FREE Silver Bullet Strategy Report and I’ll send you my periodic Golden Opportunities e-newsletter where I share some of the best market intelligence, tips and red-hot opportunities that cross my desk.
— Brien Lundin • Editor, Gold Newsletter

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Gold Rush

Gold’s explosive move to new nominal heights reflects more than an expansion of the European sovereign debt crisis and Standard & Poor’s downgrade of the U.S. sovereign credit rating. It also reflects the expectation of massive liquidity injections — in the U.S., in Europe and around the world — to pay off the massive debts that have been accumulated.

“The United States can pay any debt it has because we can always print money to do that,” former Federal Reserve Chairman Alan Greenspan recently noted on Meet the Press.

It was one of the most succinct statements ever uttered by this master of obfuscation. But Greenspan knows better than most people that the thing being questioned today is not whether the U.S. can pay its debts with dollars, but what those dollars will be worth.

Consider that the greenback has been rapidly losing value against gold, its true barometer of value, since the moment S&P announced its downgrade of the U.S. sovereign credit rating.

When the world learned late Friday that S&P was, indeed, going to downgrade the U.S., it was obvious that the next Monday was going to be a wild trading session. It was that, and more.

The U.S. stock market began a nosedive at the opening bell that steepened as the day wore on. At one point, while President Barack Obama was addressing the nation, the Dow slipped more than 600 points. A late rally regained some lost ground after Obama had stopped talking and the market had begun to calm down a bit. This ended up looking like a failed intervention effort, however, as the market resumed its slide going into the close.

Equity sell-offs such as this, and those we endured last week, have the smell of the type of margin-call-driven liquidity vacuum seen during the credit crisis of late 2008 and early 2009, except for one thing. Unlike the liquidity crunch back then, there has been plenty of money left to buy gold.

In fact, gold has been rocketing higher, setting new record highs in nominal terms on a daily basis and blowing away even silver in terms of performance.

In times like these, it’s important to look beyond the blaring headlines and mind-numbing stats to search for the real meaning of these events.

As far as the precipitating events behind the current market turmoil, most analysts are placing equal weight on the S&P downgrade and the European sovereign debt crisis, which saw the European Central Bank moving into the market for Italian and Spanish debt in a last-ditch effort to stem their crises.

Many are drawing parallels between the current situation and 2008, when we also saw the effects of a massive credit crunch. But there are important differences this time around — and these differences harken back not as much to 2008 as to 1978.

For example, in 2008 we saw the dangerous potential for cascading bank failures leading to a failure of the global financial system and a slip into a depression. In the view of the Treasury and the Fed, the banks simply had to be bailed out by a massive injection of liquidity into the monetary system.

Today, we see the potential for a more frightening scenario: the cascading failures of nations.

In 2008, the banks were bailed out. Today, nations are being bailed out. The difference is not only of kind, but also of degree. It will take much, much greater liquidity to bail out Italy, Spain, Portugal… and the U.S.

This is why the spikes higher in gold during the 2008 crisis were also accompanied by sharp drops, as margin calls in other assets forced speculators to sell their gold for the cash needed to settle up with the margin clerks.

Today, no one is desperate enough to sell gold. Instead, they’re buying the metal hand over fist. Because, as uncertain as today’s turmoil may be, there is one long-term certainty: It’s going to take a lot more money to bail out nations today than it took to bail out banks in 2008.

Thus, the current situation is more analogous to 1978. Two years into the Jimmy Carter Presidency, it was patently obvious that the guy had no clue as to how the real world worked, and his Administration’s Keynesian schemes to juice economic growth through money-pumping were being exposed as futile and ineffective.

While it’s obvious that the current Administration is equally ignorant of free-market operations and that its Keynesian experiments have also failed, there are differences between today and 1978.

Of course, we have yet to see the double-digit interest and inflation rates that typified the 1970s. At least not yet.

In addition, the current bull run in precious metals has already lasted longer than that of the 1970s and, depending on where you mark the starting points, today’s run has been arguably greater in percentage terms.

But I believe these differences are a function of the maturation of the gold market and investors’ assimilation of the 1970s experience.

We haven’t seen the price-inflation results of this period’s monetary inflation, but smart investors know the effects are coming. (They also know that inflation is being measured by a longer yardstick today.)

Thanks to Carter, investors today also know the financial damage that can be done over two years of an incompetent Presidency is nothing compared to what can be done in four years.

So, today’s flight to the safety of gold is due not so much to what is happening now, as to fears of what will happen over the months to come.

As readers of Gold Newsletter know, my view has been that we have at least 18 months left in this gold bull market, or until about the time of the 2012 elections. If, however, Obama regains the Presidency and Democrats retain control of the Senate, then all bets are off: The next four years would be very bad for the fiscal health of our nation, but very good for gold prices.

Instead of Carter’s 1970s, the analogy would shift to Franklin D. Roosevelt’s 1930s.

In view of either scenario, I continue to recommend the steady accumulation of gold and silver. I advise you to do it on a dollar-cost-averaging basis, buying the same dollar amount each month, with an effort to concentrate your purchases during any price dips during the month.

As prudent investors, we must consider the dangers of the latter scenario, wherein the Obama Administration retains the White House and, in its last term, unleashes its collectivist tendencies free from the restraints of an impending election.

Frankly, I don’t see this scenario and the worst dangers it would entail as being very likely at this point. But it is still something that smart investors will insure against by buying gold and silver in small denominations, purchasing from a number of dealers and keeping quiet about it.

I don’t think that gold confiscation is a very likely danger in this day and age. But I’m sure that citizens in 1933 didn’t consider it very likely in their day and age either.

For this reason, I’m also recommending that investors stay abreast of rapidly changing events in our geopolitical and economic situation. A great way to do this is by attending this year’s New Orleans Investment Conference, which features Glenn Beck, Dr. Charles Krauthammer, Peter Schiff, Dr. Mark Faber, Dennis Gartman and dozens of top experts in precious metals and mining stocks.

Of course, gold and silver mining/exploration stocks have not benefited from the current rally in the metals. Investors are buying for safety and not betting on returns. Thus, the summertime “buying season” that seemed to be ending has not only been extended, but the sales have gone to the clearance rack.

Granted, it takes courage to buy when blood is in the streets, and there will likely be more bloodshed in the days to come. But this is when the big profits are made. My Gold Newsletter readers will remember that I recommended Millrock Resources at 6 cents a share in November 2008; it subsequently traded well over $1 a share.

I expect similar profits to be created from the current crisis. However, I caution you against rushing into the market in pell-mell fashion; these are very volatile times, and there has been a tremendous flow of speculative money into gold in recent days. At some point, I expect this flow to reverse, resulting in a significant short-term correction in prices.

So pick up the best bargains in the junior resource sector, but do so prudently. (I am releasing some of the most irresistible bargains that I see in the market right now to my Gold Newsletter readers; if you’re a subscriber, pay close attention to these opportunities.)

–Brien Lundin

Gold is Recharging

We knew it would have to happen sooner or later. With the gold price rising in nearly parabolic fashion since late August… and with speculators itching to pocket their rich gains at the first excuse… any significant rebound in the dollar was likely to trigger a significant correction.

That trigger was pulled by a surprisingly positive November payrolls report (which raised the possibility of U.S. rate hikes) and by credit downgrades for Greece, Portugal and Spain (which lowered the chances for rate hikes in Europe). These developments, in combination with credit troubles in Dubai, were enough to halt the slide in the U.S. dollar.

It’s not that the prospects for the dollar are great. It’s just that the prospects for the rest of the world were suddenly judged much worse in comparison.

The result, as I write this, has been a fall of about 10 percent from gold’s high-water mark in the rally.

The return of risk aversion to the global markets is certainly not bullish for gold. That may sound strange to those steeped in the lore of gold as the safest of safe havens. But in this day and age, when massive speculative positions are built like houses of cards on foundations of cheap money and margin, reversals of such trades mean that accounts must be settled in currency. And that currency is usually the U.S. dollar.

Thus, exiting speculations means a search for liquidity. And gold, as the ultimate source of liquidity, is often the piggy bank that is robbed when speculators need cash.

Even in these situations, the metal can serve as a financial life preserver—it didn’t do nearly as badly as other assets during the financial crisis of 2008. But there’s no denying that a global stampede to liquidity seriously hurts gold and gold investors.

The current situation has not devolved into a stampede just yet. But you can bet that there will be more credit-agency downgrades of U.S. states, and countries, as well as other assorted crises, in the days ahead. So caution is advised.

With that said there is certainly no reason to be bullish on the dollar for the long term. If the trillions in debt and new currency created over the past year weren’t already enough to dissuade one from relying on the future value of the greenback, President Obama’s decision to “spend our way out of this recession” by applying funds from the Troubled Assets Relief Program (TARP) to another round of supposed stimulus only makes the upcoming monetary inflation more certain and menacing.

This scenario is, obviously, very bullish for gold. But an even more positive outcome, like a significant economic rebound, would help gold’s cause by unleashing pent-up excess banking reserves that are currently overhanging the economy. So, over the longer term, gold wins either way.

But what about the short term? On an economic basis, as I noted, I expect more bad news from overseas. But I also expect the bloom to come off of the rose in the U.S. as well. For example, the November payrolls report that everyone went crazy over could be reversed as soon as the next report is released.

As John Williams of Shadow Government Statistics (shadowstats.com) notes, the November report was victimized by highly variable seasonal adjustments, which are themselves the result of the wildly volatile economic environment of last year. He expects the positive November surprise to be reversed, with an equally surprising upturn in the unemployment rate, with December’s reporting.

As John puts it, “The short-term reporting of payroll data is misleading—virtually worthless—at the moment.”

As far as gold itself, we were waiting for, even hoping for, some break in the metal’s dizzying ascent. But as Mencken warned, we should’ve been careful what we asked for. We wanted a healthy little correction or brief respite. What we got was a pretty vicious sell-off.

Still, this should be good for the market. The speculators were overloaded on the long end, and the commercials were oversold on the short end. Just as the speculators jumped ship, we should begin to see short covering from the commercials come in to support the market.

More importantly, we should also see physical demand return in force upon the first signs that the price has bottomed.

This brings up the argument that, until recently, was raging amongst gold bugs and bulls. Some maintained that it was physical demand driving gold higher, while others held that a weakening dollar was behind the big rally.

In truth, it was a bit of both—and for gold to continue its rally, we will need both factors to contribute going forward. The good news is that both seem likely to remain in effect for some time.

Physical demand will remain robust as the global economy recovers and grows and, as I’ve noted, there is little reason to expect sustained strength in the U.S. greenback.

A Buying Opportunity
If this rally was to play out like the similar breakouts in 2005 and 2007, I was forecasting a gold price in the $1,350-$1,500 range by March or April. Yet gold’s recent trajectory had left me wondering if the metal was going to hit that mark much sooner… or overshoot it on the upside.

As it turns out, the sell-off put a much-needed squiggle in the price trend, and leaves gold back on track to hit our previous targets.

So is this a buying opportunity? I think so. We may see further weakness if there are further credit downgrades overseas, or if some other potential crisis frightens the market and sends investors running for cash. And the thin holiday markets can bring nerve wracking volatility—to both the upside and downside.

But when it’s all said and done I expect short-covering and physical demand to stabilize the gold price and set us up for a renewed ascent this year.

—Brien Lundin

Interesting Days Ahead For The Dollar And Gold

Almost daily the price of gold is reaching new heights. So where are we headed from here?

To answer this question, we need to recognize that there are still reasons to be cautious, in the near-term, for gold. The market really had gotten overbought, and the correction of late October probably didn’t release much of this pressure.

In addition, the greenback’s fall had gotten to the point where our trading partners were beginning to scream bloody murder. With a growing international consensus forming to abandon the dollar as a reserve currency, even the Obama administration must have been forced to pay it a bit of attention. So, despite the fact that a lower dollar is desirable in Washington (both as a supposed lubricant for the economy and as a payoff to various political constituencies), I wouldn’t doubt that the October respite in the dollar’s decline was orchestrated by official sources.

If so, the current dollar nosedive could lead to some sort of interventioneven mere jawboningthat might breathe some life back into the greenback and send gold tumbling.

And it wouldn’t take much movement in the dollar to knock the snot out of gold, because the yellow metal not only responds inversely to the dollar’s moves, it leverages those moves in the opposite direction. That’s why a very mild rally in the dollar in October led to a much greater decline in gold, on a percentage basis.

The new Kitco Gold Index, featured near the top of their home page, is a great tool for illustrating this effect. For any change in the gold price upwards or downwards, it shows the amount of change that relates to the percentage change in the U.S. dollar index. The balance of the change in gold is due to, as Kitco calls it, “predominant buying” (or “selling”).

This tool also shows how the leverage cuts both ways. On some recent days a fall in the dollar index of around a half of a percent would vault gold up nearly 2 percent.

The bottom line, both in the short and long term, is that the dollar will continue to drive gold, as well as the U.S. stock market. And, as a corollary to this, any positive economic news for the American economy will send the dollar tumbling… and those other two asset classes soaring.

Why? Because, as I’ve noted recently, there is a huge flood of liquidity, in the form of credit, currency and excess bank reserves, overhanging the economy, waiting to be put into effect.

Think of it as the contents of the Pacific Ocean, suspended above us in an enormous balloon. Any sign of sustained economic growthgrowth that can unlock the still-frozen credit marketswill serve as the pin that pricks this balloon.

When that happens, all this newly authorized money that has been hidden behind the scenes will suddenly pop into existence as new dollars and new liquidity. The end result, which the market clearly sees, is that the value of all currently existing dollars will be substantially diluted.

So, at least over the long term, any view of gold’s future must be intimately tied to the prospects for the U.S. dollar.

And, given the trillions in new deficits and debt… the prospects for an unleashing of unprecedented, pent-up liquidity… and the clear intent of the regime in Washington to continue expanding the role and expense of the Federal government, is there anyone who can be bullish on the dollar?

The Past Points To The Future
Assuming, as we clearly must, that the long-term trend for the dollar is down, where can that scenario put gold in terms of price?

The past may help guide us. As I noted in my speech at the recent New
Orleans Investment Conference, gold’s impressive breakout over $1,000 appeared to be very similar to previous rallies in 2005 and 2007. Both of those previous breakouts occurred after significant corrections marked by very similar patterns in their price trend lines and moving averages.

Most importantly, as you can see from the accompanying “analog” chart produced by our good friend Ron Griess of Thechartstore.com, the 2005 and 2007 rallies took the gold price up 75 percent and 57 percent, respectively. In 2005, the rally lasted about 240 trading days, while the run in 2007 was shorter, at about 180 trading days.

If you mark the beginning of all three rallies to the day each broke out of their consolidation triangles, then the current run in gold is about 90 trading days old, from its breakout on Aug. 17.

Again, assuming that the future will at least rhyme with the past, if not repeat it, then gold would have from 90 to 150 trading days left in its current rally. If the rallies are growing shorter, as our two-datapoint trend might indicate, then the rally may be of even shorter duration.

As to the degree of the rally, let’s project that it could take gold from 40 percent to 75 percent higher (again, assuming we see a performance similar to the 2005 and 2007 breakouts). From the Aug. 17 close of $937.30, that would translate to a gold price in the range of $1,312 to $1,640.

For this to happen, however, I’m convinced we would need an associated fall in the dollar. But, given gold’s leverage to the greenback, a fall of only 10 percent to 15 percent in the dollar index would likely yield the types of gains we’re talking about for gold.

So, a fun little exercise in math. Let’s hope it works out. In the meantime, suffice to say that I’m bullish on gold for the next few months, but a bit concerned about volatility along the way.

Price Inflation on the Horizon

As we noted last time in Gold Defying Expectations…and Gravity, we’ve seen gold and U.S. stocks marching in lockstep, in perfect opposition to the moves of the dollar.

So why does a weaker dollar translate to strength in gold and equities? Because, on balance, a weaker dollar is a lubricant for a U.S. economy saddled with debt and low growth. It eats away at debts; it helps boost trade, and generally makes for a more ebullient economic environment.

But I believe that one of the primary reasons behind this relationship has escaped most analysts. Namely, the fact that economic growth will help burst open the dam holding back enormous U.S. bank reserves.

Investors are watching closely for any signs of an economic recovery because such a recovery could unlock the U.S. credit market… and unleash a flood of liquidity that—so far—remains safely dammed.

U.S. bank excess reserves have skyrocketed to truly unprecedented levels. (Essentially, excess bank reserves are reserves on deposit with the Fed over and above what the bank needs to meet its reserve requirements.)

Now, these reserves don’t impact the money supply—as long as they aren’t loaned out by the banks and thereby put into commerce. And these funds by and large have not yet been put into commerce, and therefore have had no effect on the supply of money or the prices of goods and services.

That may not last for long, however, as economic growth in the U.S. would, eventually, lead banks that are now risk-averse to begin lending. This, in turn, could quickly burst the dam holding back the enormous excess reserves of the U.S. banking system.

Some argue that the Fed’s newly gained power to pay interest on banks’ reserves will forestall any unwanted increase in lending. In practice, however, this will have little effect, unless the Fed is willing to pay interest at rates far above the Fed funds target rate.

As Frank Shostak, chief economist of M.F. Global, notes, “We… suggest that paying interest on bank reserves is not going to stop banks from expanding credit… After all, there are always opportunities to lend money at much higher interest rates than the federal-funds rate.

“We can thus conclude that the massive increase in banks’ excess reserves is a potential threat for an explosive credit creation some time in the future. Contrary to popular thinking, we suggest that the new setup, which gives the Fed total freedom to pump money, can only destabilize the financial system and the economy.”

Of course, this isn’t the last word. Only time will tell how we exit the precarious monetary situation that the crisis, and the Fed’s response to it, have created.

But those who argue that the Fed will be able to mop up the massive liquidity they’ve poured onto the economy ignore the fact that this institution, and governments in general, have never been able to escape from a monetary expansion without significant inflationary after-effects.

And because the Fed is now treading new ground in many ways, they cannot rely on past experiences to clearly guide them.

If we pull back from the economic intricacies and simply look at the big picture, does it seem remotely feasible that the U.S. and the world can employ such monetary and debt expansion without considerable inflationary consequences?

While I have many reasons to be doubtful that we’ll see 70s-era price inflation as measured by the consumer price index (CPI), I am absolutely confident that we will see price inflation in commodities and other assets.

And that will be good news for investors in gold and resource stocks.

Fed Admits Hiding Gold Swap Arrangements
Our friends at the Gold Anti-Trust Action Committee (GATA) have scored another huge coup. In response to a freedom-of-information (FOI) request, the Fed has essentially admitted that it has gold swap agreements with foreign banks that it doesn’t want publically acknowledged.

GATA had requested from the Fed any information or correspondence on gold swaps, which are transactions in which monetary gold is temporarily exchanged between central banks or between central banks and bullion banks.

But GATA’s request was denied, and the organization’s appeal was answered by a Sept. 17 letter from Federal Reserve Board member Kevin M. Warsh, who was formerly a member of the President’s Working Group on Financial Markets.

Warsh wrote that, “In connection with your appeal, I have confirmed that the information withheld under Exemption 4 consists of confidential commercial or financial information relating to the operations of the Federal Reserve Banks that was obtained within the meaning of Exemption 4. This includes information relating to swap arrangements with foreign banks on behalf of the Federal Reserve System and is not the type of information that is customarily disclosed to the public. This information was properly withheld from you.”

As GATA secretary and cofounder Chris Powell notes, “The disclosure contradicts denials provided by the Fed to GATA in 2001 and suggests that the Fed is indeed very much involved in the surreptitious international central bank manipulation of the gold price particularly and the currency markets generally.”

GATA has the right to further appeal through the legal system, and plans to do exactly that. A federal lawsuit will be quite expensive, but well worth it for gold investors who need market transparency to unlock gold’s true value in today’s uncertain world.

As you may know, I’ve never been a big believer in day-to-day manipulation of the gold market by the “powers that be.” But I do believe that governments have and are acting over the long term to keep gold in chains. They’ve done it before, both covertly and openly. And they currently manipulate every other investment market. So why wouldn’t they also do it in gold, the very measuring gauge of their performance?

So I urge all serious gold and resource stock investors to help GATA out. It’s not just their cause—it’s a cause for all of us. GATA is recognized by the U.S. Internal Revenue Service (IRS) as a nonprofit educational and civil rights organization and contributions to it are federally tax-exempt in the United States.

Just as important, you can help by bringing this issue to the attention of news organizations and other investors. With the U.S. dollar at a crucial turning point, and with the International Monetary Fund (IMF) and other official organs needing to keep the gold price suppressed, it has never been more important to make the gold market open, transparent and honest again. To learn more about GATA, this issue and how to donate, visit www.gata.org.

—Brien Lundin

Running With The Bulls: Gold Bugs And Stock Bulls Find Themselves On The Same Team—Pulling Against The Dollar

Gold’s meteoric rise over $1,000 left even the most ardent gold bulls reeling from shock and awe. No matter what their bullish expectations may have been beforehand, few market watchers could honestly say they expected such a powerful run.

They weren’t alone. Investors and analysts were similarly surprised by the power and persistence of the rally in the broad U.S. equity market, and were left grasping for excuses.

The common denominator behind both bull moves: a declining dollar.

Bucking the Trend
Gold and stocks aren’t known as correlated asset classes, to be sure. So their almost perfectly choreographed moves in opposition to the dollar meant that analysts had to explain not only their individual moves, but why they were moving in unison.

Of course, it wasn’t too difficult to connect the stock and gold moves to the weakening dollar. But from there, most supposed experts were left scrambling.

They mentioned a growing dollar carry trade, wherein extremely low interest rates in the U.S. prompt investors to borrow dollars to fund riskier and higher yielding investments elsewhere.

This trade has, indeed, grown. And it will continue to have an impact, as long as the Federal Reserve Open Market Committee’s statements keep noting that “economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period.”

If dollar interest rates are going to be low for the foreseeable future, why wouldn’t you arbitrage those low rates against higher yields elsewhere?

Another excuse put forth for dollar weakness has been the comparatively stronger economic growth rates in China and the rest of Asia. It seems obvious that Asia is far ahead of the West in the economic recovery, and this relative strength has been attracting capital to the dollar’s detriment.

But the columnists and talking heads on CNBC missed some of the most compelling reasons for the dollar’s swoon:

  • The surprisingly broad push for a new global reserve currency to replace the dollar. China, Russia, Brazil, France and other nations have joined an international chorus calling for a new global reserve currency regime, one most likely based on a revamped International Monetary Fund (IMF) special drawing right (SDR).

The calls for talks on this issue have come so frequently, and the silence from the Obama administration has been so obvious, that what once seemed little more than bluff and bluster now appears to be the advance signs of an inevitable abdication of the dollar’s reign as the king of currencies.

I’ve covered this frightening development in recent columns so you know that if President Obama allows this to occur I’ll view it as one of the greatest foreign policy failures in American history. And the fact that the current administration doesn’t view it as such is what truly scares me.

  • The socialization of the American economy. From bailouts to nationalized health care, from more steeply progressive tax rates to the assumption that government can dictate private sector compensation…and the myriad other assaults on capitalism and individual liberty now coming out of Washington, it’s obvious that the America of tomorrow will no longer resemble the dream of our founding fathers.

This concerns not only freedom-loving Americans, but also anyone anywhere in the world with assets in the U.S. When foundational principles are ignored as a matter of political expediency, when the rule of law offers protection only to favored classes or industries, then capital will flee to regimes that offer greater safety and certainty.

This is, in fact, a big factor behind the diminishing role of the U.S economy, and the decreasing relative value of the American dollar.

  • The massive issuance of U.S. dollar debt and currency. I don’t want to belabor the point, but the world has been flooded with liquidity via the creation of unprecedented levels of new debt and currency.

The U.S. hasn’t been the only violator in this regard—only the most egregious.

Some argue that the Federal Reserve, having created much of the new liquidity with the figurative stroke of a pen, can mop it all up just as easily. They ignore the fact that if the Fed was so prescient and powerful it would have never been faced with having to create all that liquidity in the first place.

The Fed is so fearful of deflation, and has become so politicized, that it will almost assuredly overshoot the mark and leave its foot on the monetary gas pedal too long.

The bottom line is that the supply of fiat currency in the world at large has risen precipitously, but to a significantly greater degree in the U.S. While this will translate to higher asset prices generally, it will also translate to a lower relative value of the U.S. dollar.

The writing is on the wall, and investors know it.

A Battle Royale
In the meantime, the bulls and the bears have drawn the battle lines over gold and amassed on both sides what may be the most powerful forces we’ve seen for years.

Consider that the Large Commercial Net Short position in gold has risen to record levels, but on an absolute basis and as a percentage of total open interest. On the other side of the bet the speculative long position has also soared.

As long-time readers know, the large commercials are most often correct in their bets on gold. The reasons for this are two-fold: 1) Because they are so intimately involved in the gold market they understand the underlying forces much better, and 2) because they are typically hedgers who reflexively short gold in a rising price environment, their increasingly larger selling tends to create a self-fulfilling prophecy in lower gold prices.

So, again, when they pile on historically large short positions, gold usually heads south. However—and this is an important distinction—when they are wrong, they are wrong in a very big way.

As I noted last month, a prime example of this came in late 2005, when the large commercials were forced to cover their bets against gold en masse…with the result being a leap in the gold price from $450 to $700 over the coming months.

So the current situation is crucial. If the large commercials are forced to cover, they could send the price skyrocketing.

If the speculative longs are forced to sell out, gold could crater.

Ironically, some of the pressure has been let off by gold’s recent retreat below $1,000. The Commitment of Traders (COT) report for the week of gold’s highs shows that the larger commercials had added even more to their short positions, establishing a new record of 287,610 contracts net short.

However, this huge cumulative short position also acts as a cushion on any price declines. Undoubtedly, as the gold price fell from the recent heights, commercials began covering some of those short positions, helping to prevent further declines.

The physical gold market has also entered into this battle. Here we see a number of new factors coming into play…

First off, we saw the announcement by Barrick Gold that it had—finally, after a $750/ounce rise in gold from 2001—decided to buy back all of its remaining gold hedges.

Whether you think this announcement is bullish or bearish depends on your position in the market…and whether you’re a “glass-half-full” or “half-empty” sort of person.

In other words, once Barrick bought back all of its hedges (and it was rumored that they had already begun doing so in the preceding weeks), then that potential bullish factor would be removed. That’s the glass-half-empty view.

The glass-half-full view holds that Barrick’s upcoming buying will only add more pressure to an already drum-tight gold market.

Not long after Barrick’s announcement, we heard from the International Monetary Fund (IMF) that it was ready to begin the sale of 403 tonnes of gold. This didn’t have the bearish effect that similar announcements have had in the past when this issue has been trotted out to dampen gold price rallies.

It didn’t scare the market much this time because the sale would either come under the umbrella of the Central Bank Gold Agreement (where central bank sales had already slowed to a trickle), or the entire amount would be taken up by China or another central bank. The latter event would be net bullish for gold, by implication more than direct effect.

And finally, we’ve seen surprisingly strong physical demand from Asia, particularly India, despite the rising gold price. The reason? Festivals in India and government programs encouraging gold buying in China helped boost demand, and the weakening dollar meant that gold’s price rise was mitigated in local currencies.

So we can expect that any significant decline in gold, especially if it’s not accompanied by dollar strength of the same degree, will be met by increasingly large physical demand from Asia.

A Pressure Cooker About To Blow
So, the battle lines have been drawn, and it seems the gold price is destined to break strongly one way or the other.

Technically, the extensive consolidation pattern traced out by gold argues for a break to the upside. More fundamentally, the towering net short position of the large commercials seems to favor a correction, although the recent decline below $1,000 may have alleviated some of that pressure.

Regardless of the outcome, it seems safe to say that this rally has already demonstrated greater strength and resilience than anyone ever expected. Even if gold corrects, the price has spent enough time well above $1,000—setting new daily close price records in the process—to make this an important and confirming move.

Gold Defying Expectations…And Gravity

I have to admit it: Gold’s performance in recent weeks has amazed even me. And I’ve been one of the most ardent bulls over the past few months.

As I’ve written before, I fully expected gold to begin rising between late-July and mid-August, beginning a stealth rally before much of the market started paying attention again after Labor Day.

Then I expected the fall physical buying season to support the price into the holiday season, whereupon—at some point—investors would begin to realize how much currency and debt had been created across the globe and begin buying up gold as the only viable counterbalance to massive currency creation.

But I never expected this whole scenario to play out within a few short weeks. For the record, gold dipped—briefly—back below $1,000 a couple of times, as cynical investors bet that the metal would once again fail to hold the millennium mark…or as concerted forces worked to prevent it from doing so.

But then the metal broke free from the attempts to shackle it. It even established a new record price when it closed over $1,002.80. So what’s behind this latest spike in gold?

Short answer: No one knows for sure…but there’s been no shortage of speculation from pundits everywhere.

My view is that the important transition in investor expectations that we’ve been predicting is being completed. And the result is that investors now understand that the dollar simply must fall in value relative to other currencies—both the actions and inactions of U.S. officials over the last few months completely support that view.

Moreover, all currencies will fall in value relative to commodities, primarily gold, as debts must be inflated away…and as the oceans of new currency created during the bailouts are pulled into commerce by the nascent global economic rebound.

From another standpoint, gold bugs have to be comforted by the level of skepticism that still accompanies this rally. If a true bull market “climbs a wall of worry,” then gold seems to be advancing steadfastly up a near-vertical slope of concern. There has certainly been no shortage of naysayers and unbelievers during the metal’s ascent past the $1,000 plateau.

And, frankly, there have been some valid reasons for concern. The large commercial net short position in gold, for example, just shot to record levels, even as heated demand for gold forced prices into backwardation. As Gene Arensberg and I have noted, the large commercials are rarely wrong in their prognostications.

But when they are wrong and are forced to cover their massive shorts (as in 2005), they are spectacularly wrong—and the gold price explodes higher in a short-covering frenzy. Were they going to be right or wrong this time?

Then we had the announcement in September by Barrick Gold that it had—finally, after a $750/ounce rise in gold from 2001—decided to buy back all of its remaining gold hedges.

This blockbuster announcement left many wondering if a top in gold had been marked. Indeed, considering how Barrick’s market calls over the years had been so perfectly erroneous, it was understandable that some experienced traders, the esteemed Dennis Gartman among them, considered this an opportune time to exit some of their bullish gold bets.

But perhaps that conclusion was just too simple…to easy…to be correct. Perhaps Barrick, with their sources inside the most hallowed boardrooms of Wall Street and Washington, were tipped off that gold was about to break loose from all efforts to constrain it. Perhaps they realized that the commercials were going to have to cover their short positions. Perhaps they became aware that the bottoms of government vaults had finally been reached…or at least a decision had been reached that no more official supplies would be forthcoming to dampen the market.

We can wonder all day long. But, as my old friend Jim Dines is wont to say when pointing at a particularly compelling chart, “Don’t think. Look!”

And it doesn’t take a master of technical analysis to look at gold’s chart and marvel at the power and clarity of this bull run. In fact, gold’s remaining real resistance has most likely already been cleared. The old intraday “high” of around $1,030 was fairly ephemeral. With the old, March 17, 2008 record close on of $1,002.80 on a spot basis growing distant in its wake, gold is truly breaking out to new territory on a nominal price basis.

And yet, on a real, inflation-adjusted basis, there is plenty of headroom ahead—to at least $2,200 in current dollars.

Yes, anything can happen…and gold could be driven back below $1,000 at any time. Gold’s foes may not have much ammunition in terms of bullion, but they still have bull—and plenty of it. While the rally was largely sparked by Ben Bernanke’s pronouncement that the recession is technically over (a fact we announced in July), the right words spoken at the right time by the right person could throw a barrel of cold water on this gold rally.

Regardless, as I’ve stressed over and over again, we are on the right side of the long-term move. Stand pat in your general allocations, while taking profits where prudent.

A Golden Role Reversal

Sometimes, things aren’t what they seem on the surface.

Case in point: Pundits have been making a lot of hay recently over gold’s apparent role-switch. Instead of rising on bad economic news and acting as a safe haven, the metal has been falling. And instead of falling when the economic picture brightens, it’s been rising.

Of course, gold’s fortunes are tied to the U.S. dollar, which remains (at least for now) the reigning king of fiat currencies. But the dollar has also apparently reversed roles.

So what’s going on here? Have gold bugs entered some sort of Bizarro world where down is up, up is down and they need to start hoping for a rip-roaring economy instead of a fiscal catastrophe?

Good News Is Golden

When you dig just beneath the surface of the recent headlines, data points and trend lines, you see that things aren’t quite as confusing or misplaced as some might imagine.

Bottom line: The investing world is currently divided between those who think another economic crisis lies ahead and those who feel that “happy days are here again”… or at least will be soon.

So, follow the logic: Negative economic data raises the specter of another economic nosedive toward deflation. In that scenario, investors are assuming the U.S. dollar would rise in value as the prices of everything else fall. The dollar would also function, as we saw at the depths of last year’s credit crisis, as a safe haven investment, and would accordingly benefit from this demand.

Of course, gold could also do well in a deflation. In the Great Depression, for example, gold and gold stocks were about the best investments you could make (if you had any money left), because gold was also the official U.S. currency at the beginning of the downturn. And later, when the gold standard was abandoned by FDR, that decision was accompanied by a dramatic devaluation of the dollar and upward valuation of gold.

But forget about this for now. Few investors today realize that gold can do well in a deflation, and the rest wouldn’t believe it if you told them. So this doesn’t currently factor into the decision-making of the investing public at large.

Now let’s look at the other side of the coin. Positive economic data points toward a recovery, which in turn means an unlocking of the U.S. credit market.

As you know, the supply of U.S. dollars has been expanded—by trillions of greenbacks—thanks to the various bailouts, Federal debt issuances and monetization, corporate and mortgage debt buy-backs and other assorted efforts to liquefy the U.S. economy. But relatively little of this new currency has been put to use: Monetary velocity—money at work in transactions—has remained moribund.

Think of it this way: A veritable ocean of fiat notes has been amassed, but this flood of money remains trapped behind a dam. Banks are risk-averse and reluctant to lend. Consumers are concerned that unemployment is still high and are reluctant to spend.

But if things start to look up, as they appear to be doing now, the dam holding back this ocean of money will burst.

That means inflation… which means a lower dollar and higher gold prices.

And here’s another way to think of it: We may be seeing only a tiny spark of life in the economy. But if that spark is enough to rekindle risk-taking by lenders and consumers it will be as if a bucket of gasoline is being thrown upon the budding flame.

And then, at some point, we’ll see the stimulus spending finally hitting the economy. As with nearly all government meddling in the free market, it will hit at the worst time… and throw more gasoline on the fire.

Keep in mind that I’m not predicting either the positive or negative scenario in the discussion above; I’m only explaining the thought process of the market right now.

So what do I think? Frankly, I’m worried about the next couple of months, as the stock market is discounting much better economic performance than we’re going to see anytime soon. It might not be pricing in “perfection,” but it’s definitely pricing in “pretty damn good.”

The slightest hiccup in the recovery will send the longs running for the exits, eager to capture whatever profits they’ve amassed on paper. This would likely precipitate a very significant sell-off in the U.S. and global stock markets.

That prospect aside, I do think that an economic recovery is beginning to take hold, both in the U.S. and in the economies of our major trading partners.

As you know, I noted last month in the article Gold Quietly Marshalling Strength that the recession here was technically ending, although there would be considerable economic pain still ahead.

So it appears we’re going to dance along a razor’s edge for the next couple of months.

Gold Quietly Marshalling Strength

The gold market is just exiting the summer slowdown.

Simply put, the world has been on vacation. Yet, despite the inattention, gold has been quietly building strength throughout much of the summer. The month of July, for example, was quite good for gold, as the metal steadily rose before meeting resistance at around $955.

Still, as we enter the fall, it seems as if gold is sitting tight on a very strong foundation. The market continues to anticipate the return of physical demand in September, along with the impact of America’s loose-money policies and stimulus spending.

Some forward-looking speculators have already entered the market in anticipation of these factors kicking in, but there is still plenty of room left for more longs before the market could be considered crowded.

In the meantime, the large commercials, as our talented associate Gene Arensberg has been reporting in his “Got Gold Report” for Gold Newsletter readers, have been piling up their short positions during gold’s summer rally. But once the dollar begins rolling over again, these commercials will be in an increasingly dangerous position.

As I’ve noted before, these guys are usually right. But when they are wrong, they are spectacularly wrong.

In the past, when the commercials have been forced to cover large-scale short positions, gold has exploded higher to a new price plateau. As an example, consider late 2005, when the commercials were caught badly offsides, and gold catapulted from $450 to over $700.

I’m not saying this will happen anytime soon, but, with federal deficits now measured in trillions of dollars, with deficit- and debt-to-GDP ratios rising to levels that presage at least a doubling in long-term interest rates, and with proposed nationalized health care programs that would further inflate the national debt, the prognosis for the dollar is not good.

The federal debt is already far beyond manageable levels. The only way to control it at this point is to inflate it away. And investors know it.

As I said months ago, it seems we’re on a collision course to repeat the mistakes of the 1970s. But this time, “it will be like the ’70s on steroids.”

In the meantime, many of the resource companies we’re following are making news with their summer exploration programs. At the same time, there have been significant developments on the mergers and acquisitions front, as challenged companies merge to build strength through synergy, and as weak companies are consumed by the strong. Our readers have already multiplied their money on a number of these stocks, and there will undoubtedly be more to come.

It all adds up to an uncommonly interesting—and potentially profitable—market ahead.

If Recession End is Here, is it Time to Get Into the Market?

Unless this turns out to be a double-dip recession and the economy is simply giving us a head fake with recent data, economists will eventually look back and mark this period as the end of the recession that began in 2007.

As I noted in the July 27 article, Summertime Doldrums return as Old Adage Holds True, a number of bullish economists were predicting that last month would be the first this year to show growth in industrial production.

But looking at arguments from both the bulls and the bears, I thought the end of the recession was at least a few months away.

But positive news on housing starts (up 3.6 percent in June; 582,000 vs. consensus
531,000) was the last shred of evidence I needed to convince me otherwise. And I’m not the only one: Based just on jobs data showing a dramatic reduction in new jobless claims and the very recent up-turn in the Ratio of Coincident to Lagging Indicators, Dennis Gartman (thegartmanletter.com) was the first to declare an end to the recession.

To be sure, Dennis has been way out front on this for some time, noting how important these two indicators are, and how reliable they have been in determining the precise ends to previous recessions. If they are to be believed, they have done so again.

So what does this mean for investors?

From an economic standpoint, we will still see bad news aplenty, including an unemployment rate that will continue to rise for some time.

As far as our approach to the markets, the technical end to the recession is also less important than you might think. Trading in stocks and commodities will continue to be exceedingly volatile, as speculation drives them to levels far ahead of the economic data, only to see profit-taking and the occasional dropping-shoe send them hurtling back downward.

For gold and the rest of the metals complex, it will continue to be a case of watching the bouncing dollar. Whatever drives the greenback higher or lower, will push gold quickly and decisively in the other direction.

China Takes the Gold
In the world of gold, China has seized the lead in the two most important categories: supply and demand.

The Middle Kingdom had already captured the title of world’s largest gold producer, thanks to its surging production and South Africa’s tumbling output. But now, according to the World Gold Council, China’s economic recovery has vaulted it to the top rung among gold consumers.

The council notes that gold jewelry demand rose significantly in the first quarter of 2009, while gold demand in India plummeted. This allowed China to overtake its fellow developing juggernaut in terms of gold demand.

Specifically, Chinese gold demand rose from 103.3 tonnes to 105.2 tonnes, in the first quarter, while Indian demand fell 83 percent, from 107.2 tonnes to 17.7 tonnes.

We’ll see if this trend can hold true for the rest of this year, but gold bugs should hope it does not. Last year, India soaked up 650 tonnes of gold, compared to China’s 400 tonnes. While rising Chinese demand is good news, we’ll need India to return to the market to underpin this bull run.

Obama to Abandon the Dollar?

There is a growing movement in the international community for a new reserve currency system that would greatly diminish the role of the U.S. dollar.

China and Russia have been the loudest and most insistent anti-dollar agitators so far, but they’ve recently been joined by the rest of the “BRIC” gang (India and Brazil), while France and other European nations have also begun carping about the dollar’s dominance.

While acknowledging that such chatter can be bearish for the dollar (and therefore bullish for gold), I’ve dismissed the likelihood that the dollar will ever be deposed as the king of fiat currencies.

Now I’m not so sure. You see, there are many advantages that come along with having your national currency serve as the international medium of exchange. Primary among these is the ability to export many of your economic problems to other regimes. So it’s a good and desirable position to be in.

For this reason, throughout human history, the role of international reserve currency has naturally devolved to the dominant military power of the age.

During the Roman Empire, the visage of Julius Caesar could be found on coins circulated throughout the Western world. When England ruled the seas during the Victorian era, the pound was the standard-bearer for all the world’s currencies.

And after America grew to become the world’s most powerful nation in both military and economic terms in the first half of the 20th Century, the U.S. dollar became the top dog among the world’s fiat currencies.

It wasn’t easy to attain this lofty status. The price was dear in terms of treasure and blood. But at this point, with no other military superpower extant, it’s not that difficult of a position to maintain. All that’s needed is to maintain the current level of military might and reasonable economic growth.

In other words, given our current status, it would be very difficult to lose our role as the world’s economic bell cow. If it were to happen, history would judge the event as one of the greatest economic and political failures since the dawn of human civilization.

Frankly, the only way this could happen would be if we allowed it to happen. Which is why I’m worried now.

When you consider that President Barack Obama has traveled to Russia with an armful of concessions, eager to negotiate on equal terms with this second-tier nation, then you begin to think that perhaps he doesn’t understand America’s position in the world.

When you consider that he has already toured Europe’s capitals apologizing for our previous arrogance—and is pushing through “green” legislation that will unfairly burden our economy for no real gain in global carbon emissions and is generally trying his best to make sure our overseas friends and enemies like us—then you begin to wonder if Obama really wants America to keep its mantle of leadership.

Given all this, it seems at least plausible to me that, if presented with some new global reserve scheme with roles for the world’s major trading currencies, that the Obama administration might acquiesce in the interests of “fairness” or “justice.”

Remember, Secretary Timothy Geithner has already been guilty of a slip of the tongue along these lines.

Such a development would be an absolute travesty—a complete abandonment of duty to America’s best interests. And I’d have to judge it, still, as being highly improbable.

But it is more possible now than at any time since the dollar first achieved its lofty status as the king of fiat currencies. And that should worry us greatly.

Summertime doldrums return as old adage holds true

It seems you can’t fight the calendar after all.

In June, as you’ll fondly remember, gold and gold stocks were in full-blown rally mode. At the time, I was telling you how this summer was shaping up to be the exception to the rule of seasonality for gold and other investments.

That rule—capsulized by the adage, “Sell in May, and go away”—holds that buying demand for investments withers away during the summer months, as vacations and other pursuits distract attention from the markets. For gold the effect is even more pronounced, because physical demand from Asia also dries up during this time frame.

But, as gold and other commodities were rallying in April and May… as even the much-beleaguered U.S. stock market was marching steadily higher… it seemed that we might be in store for an exception to the rule. In short, the summertime doldrums were on the verge of being replaced by a very hot summer market.

That might still happen. But there have been some big shifts in market direction and sentiment since our last issue. As far as the commodity play goes, not only has the bloom come off the rose, but the entire plant has begun withering under the summer heat.

The Rally Falters…

The rally in commodities was based on the idea that the worst was over for the global economy and a rebound was either imminent or already under way.

This idea was helped along by a Chinese buying spree in commodities, particularly copper. While most recognized this for astute restocking at bargain-basement prices, it also helped build faith in a China-led global economic recovery.

The Middle Kingdom, after all, led the world in the relative size of their economic rescue plan and the speed in which they enacted it. Moreover, their spending was directed toward infrastructure projects that actually stimulated the economy—an idea that would seem obvious anywhere but Washington. Therefore, one would expect that China would lead the world out of the recession, and in fact economic data out of China, to whatever degree it was reliable, began to point toward recovery.

So, there was some basis for the argument that the tide had turned for the global economy. And there was enough basis to lead speculators to pile into commodities, driving prices to heights that discounted a far stronger economic rebound than could possibly be provided.

Money was finally being made again. And considering the depth of the bottoms from which stocks and commodities were bouncing, the profits were quite extraordinary.

Coming from a trying period when profits of any kind were scarce, investors began to take profits by early June. The momentum was dying, and all that was needed by mid-June was some kind of spark to send the crowds rushing for the exits.

On June 22, a World Bank report projecting a deeper global economic downturn through the end of the year provided that spark. Commodities plunged, extending a slide that had begun at the beginning of the month for the metals, and about mid-month for oil. This sell-off further bolstered the argument that the party had ended for commodity bulls.

Rebound…Or Double-Dip Recession?

The late-spring rally in metals faltered because there just wasn’t enough evidence supporting the argument for a significant and imminent economic rebound in the U.S. and the rest of the developed world.

Yes, China was looking better. But would it be enough to pull the entire world higher? Not likely.

At this point, investors are still torn between the prospects of an extended downturn (perhaps even a double-dip recession that would test previous lows), or a recovery beginning in the third or fourth quarter of this year.

The factors that would contribute to a continuance of the recession are painfully obvious, and it wouldn’t take much for them to destroy any hope of a rebound.

From an economic viewpoint, the U.S. remains in a precarious position. Housing must recover before any significant or sustained recovery will be possible, and the real estate market remains mired on the downward slope of the cycle. Prices have only begun to fall to levels that reflect reality, and massive inventories remain to be drawn down.

In addition, the credit markets, while improving upon the disastrous state of affairs last fall, are still dancing along the edge of a precipice.

Mortgage rates must remain low if there is any hope of a housing market recovery, which places the Fed smack dab into a vicious cycle. To keep rates low, the Fed will be forced to continually accelerate its purchases of Treasury and mortgage paper…thereby monetizing the debt, fueling inflation and pressuring interest rates higher.

The investment markets recognize the trick box Bernanke and Co. are locked into, and will certainly take full advantage of the Fed’s supporting bid.

From the viewpoint of the markets, the rally in stocks, and commodities, was obviously far ahead of any economic justification. In stocks, every standard of value, from P/E ratios to book values, show that the market has made the transformation from undervalued to quite expensive.

While the U.S. stock market has come up with more than its share of surprises over the past few months, the technical and fundamental underpinnings look exceptionally weak at this point.

Add it all up and you might consider the path to recovery as being uphill…and passing through a minefield. After all, while the pace of the U.S. economic decline is slowing, it is still in decline. Any negative development at all—from new interruptions in credit flows, to a crisis in commercial real estate, to a major banking default or any other “dropped shoe”—could collapse fragile consumer sentiment and send the economy back in the tank.

Conversely, we have to recognize that there are valid arguments for a rebound in the second half. Bulls on the economy argue that companies wasted no time cutting to the bone in this downturn. Employment and inventories are at barest minimums, and any increases in production will lead to dramatically improved inventory builds, employment and investment.

The auto industry is a prime example. Analysts estimate that auto production has fallen so low in the U.S., that it could increase by up to 75 percent without adding anything to inventories.

Because of this anticipated effect, some bullish economists are forecasting that July will be the first month this year to show actual growth in industrial production.

And, of course, companies also used the global economic collapse as an excuse to take massive write-downs and losses, which led to even worse earnings (and losses) over the last two quarters. Thus, any earnings at all in the quarters ahead will show dramatic improvement. While these earnings improvements will be somewhat misleading, they will still add fuel to a potential market rally and resulting positive sentiment.

Any positive sentiment will add to another factor many analysts are now banking on: pent-up consumer demand. The idea here is that consumers have put off many purchases that are temporarily discretionary but ultimately necessary. It’s the theory of a “threadbare economic recovery”—businessmen, for example, can put off buying a new suit for some time. But eventually, when they wear a suit down to bare threads, they simply have to go out and get a new one.

Those arguing for economic growth this year are banking on this effect helping to some degree.

But the most important factor may be the long-awaited arrival of stimulus spending. Granted, the stimulus package foisted upon us by Congress and the Obama administration was misdirected and hugely inefficient. But it was also stupendously large—so large that its sheer size ensures that the flood of spending will assuredly juice up the U.S. economy to some extent.

On balance, looking at both sides of the argument, it would seem that the prospects for an economic rebound in the near term remain dim, and that the summer slowdown in the markets—including the metals—will remain in force.

More Fallout From Uncle Sam’s Heavy Hand

In the June 23 article, “Money is Scurrying Away From the Dollar,” I touched on the radical lurch to the left that our nation is experiencing as Congress and the Obama administration proceed in their piece-by-piece dismantling of our capitalist system.

As any student of history could have predicted, this trend toward a more socialistic system of government is having a number of unintended consequences. The most immediate of these, of course, has been the growing disdain for the U.S. dollar (and a corresponding growth in affection for gold) among the world’s investors and savers.

But more repercussions are now becoming evident. The recent selloff in U.S. Treasuries sent rates spiking higher and pushed the yield curve to its steepest slope in history.

The problem is that traders have had to sell Treasuries to hedge against rising rates in mortgages. But now that selling in Treasuries is rippling into the mortgage market. That is sending rates higher and endangering the fragile healing process in the nation’s housing market.

The Fed simply cannot allow this to happen. But again, there’s a problem: The Fed has been buying mortgages and Treasuries through their quantitative easing program to keep rates low. Now, they’re going to have to ramp up that program, to a very large degree, to keep rates at levels conducive to an economic recovery.

“You can’t have a spike in interest rates in the long end without it impacting the economy,” warned Brian Edmonds, head of interest rate trading at Cantor Fitzgerald. “That’s why the Fed has been a supporter of the quantitative easing. They have a choice. They could walk away from it or they could increase it to the point where it’s meaningful. The $300 billion is not effective….You’ve got to start to talk trillions.”

The end result, of course, will be double-digit inflation rates, a collapse in the dollar, and a correspondingly large increase in the value of gold. There will be other unintended consequences of this new, more socialistic America. The most frightening of these will be the significant erosion of our individual rights. We need to prepare for these events, not only as investors, but as American citizens.

Money is Scurrying Away From the Dollar

It seems like every month brings up a new opportunity to point out how dramatically the world of gold is changing, and this month continues the trend.

It was only recently that we were fretting over proposed IMF gold sales, concerned over the metal’s inability to break out of a trading range with a low end of around $870, and wondering how the world could have so quickly forgotten about quantitative easing and the dollar destruction it would engender. Fast-forward a few weeks and we see a gold price about $90 higher and the dollar in a free-fall.

I’ve often employed a seesaw analogy to illustrate the relationship between gold and the U.S. dollar. As one rises, the other falls, and charts of gold and the dollar index show that this inverse relationship has reasserted itself over the past few weeks. The only break in the dollar’s fall has come amidst North Korea’s muscle flexing in the form of a nuclear test and assorted missile launches.

It’s ironic that “safe haven” investing now means a flight to the dollar, and the return of normalcy means flight from the dollar. We can take comfort in the fact that things eventually do return to normal… and today that means a far-sighted recognition of the tidal wave of dollars headed our way.

But it has also come to mean something else — something that is even more disturbing than an inflation-spawned dollar destruction. It has now become clear that the new regime in Washington is intent on inserting itself into every aspect of the economy and private business, without regard to the consequences, the rule of law, or even common sense.

It was bad enough when Congress tried to run roughshod over the law in their attempts to rescind the bonuses of AIG execs. But then the Obama administration decided the big banks that took TARP money—some which never wanted or needed it in the first place—wouldn’t be allowed to give it back.

Then it sacked the head of a private company (GM). Then it ignored the legal rights of secured creditors to hand over the lion’s share of Chrysler to a key political supporter, the United Auto Workers union. Then it set about to determine what is and isn’t reasonable compensation for executives in the financial services industry…and no one in the White House thought the idea was the least bit controversial!

It hasn’t ended there: Now we will be told what types of cars we can drive. Now we will be told, by statisticians ensconced in some shrouded Washington bureaucracy, what kind of health care we can have. And we’ll be forced to pay for all of it, in fortune and lives.

Now, obviously, many Americans agree with these political moves. And you might be among them. But there is no argument that the U.S. government is becoming increasingly invasive in relation to the economy, the markets and private business. And this can’t be good for America’s economic future.

What does all this have to do with the dollar and gold? Quite simply, we have to live with the consequences of the leftward tilt in American politics. But foreign capital doesn’t…and it won’t.

Simply put, capital flows to where it feels secure. Where free markets and the rule of law are respected. That’s why you don’t see investors flocking with fat wallets to Zimbabwe. They know that their capital would be subject not to law, but to whim. In short, their funds would be quickly and efficiently confiscated.

America is not Zimbabwe, of course. But we have seen some frightening similarities in recent weeks, as pure political power has repeatedly steamrolled the rule of law.

True, as an investment venue, America doesn’t present nearly the same level of risk as Zimbabwe. But it doesn’t have to be that risky to send capital flying away; it only has to present more risk than the alternatives.

And America currently represents greater political risk than, say, Canada, New Zealand, Australia and Switzerland. Even France can now be regarded as friendlier to capital and wealth formation than the United States.

In a world replete with better options, it doesn’t take much to send money scurrying away from America and the dollar. And that’s precisely what’s happening now.

As my friend and world-renowned trader Dennis Gartman (thegartmanletter.com) recently noted, “We do indeed fear that the U.S. dollar is in jeopardy of falling materially in the coming days, weeks and months in light of the actions taken, and likely to be taken in the future, by the Obama Administration…. “In other words, the tide has shifted. In other words, the tectonic plates are moving. In other words we’ve no choice but to err upon the side of dollar bearishness henceforth. In other words, the game has changed, with new rules to guide us from this point forward. In other words, money will flow from the US to other harbors, and we shall say yet again that the most logical harbors are those that look the most like the U.S. but which are not suffering from the same left-wing, ill advised policies of the present Administration.”

Which brings me back to the same point I’ve been making for months: We will have to endure a sometimes-painful transition from fear of financial catastrophe to fear of inflation. But once through it, we will see gold embark on the most powerful leg of its bull market.

From all appearances, that transition is progressing nicely.

China’s Gold Purchases Another Wild Card in Market

It wasn’t long ago that I was noting how the Federal Reserve’s sudden embrace of quantitative easing, combined with the orgy of spending in Washington and international calls for the usurpation of the dollar as the world’s reserve currency, had sent gold soaring.

In more recent days, the trend has accelerated. This time, Washington’s increasing involvement in the economy, and the politicization of American business, has sent overseas investors fleeing the dollar. Capital goes where it is safe and well-treated, and right now there are safer alternatives than the U.S. for foreign capital.

In short, investor sentiment has shifted from fear of financial collapse to fear of rampaging inflation and a dollar collapse. And gold has been the beneficiary, as it has taken off on a dizzying rally back toward $1,000.

While the long-term picture for gold remains very bright as the global supply of fiat currency is multiplied over the coming months and years, there has been another recent development with important implications not only for gold, but the entire world. To wit: China has announced that it has been secretly buying gold since 2003.

In an interview published by the official Xinhua news agency, Hu Xiaolian, head of the State Administration of Foreign Exchange, revealed that China had purchased 454 tonnes of gold since 2003, raising its gold reserves by about 75 percent, from 600 tonnes to 1,054 tonnes.

That ranks China fifth in official gold holdings among nations, although the IMF and the SPDR Gold Trust ETF (GLD) still hold more than the Middle Kingdom.

The gold bulls seized upon China’s revelation as having tremendous bullish implications for the metal.

After all, the nation increased its gold holdings by three-quarters, siphoning hundreds of tonnes from the market. But the gold bears were quick to assert that China’s gold purchases weren’t a big deal, since their foreign currency reserves grew at about the same pace. As a percentage of its overall foreign reserves, gold stayed virtually constant from 2003 to today, averaging around 1.6 percent to 1.7 percent.

I think both sides are missing the point here. The significance of China’s purchases is more bullish than the bears would admit, and less dramatic than the bulls would like. In short, the importance of China’s admission isn’t what it has done, but what it can now and likely will do in terms of gold purchases.

Prior to this announcement, analysts could only guess as to China’s intentions as far as gold purchases. Many bulls hoped the nation was buying, many bears dismissed the idea… but no one simply assumed that China’s inscrutable leaders were accumulating gold along with U.S. dollars.

Now that they’ve come clean, the outlook for global gold supply and demand is fundamentally changed, for a number of reasons.

First off, when you take this announcement in context with the recent, repeated calls by China’s leadership for the ouster of the dollar as the global reserve currency, it seems likely that the stage is being set for a reduction of their dollar reserves in preference for, well, gold.

The upside posed by such a development is significant, but not earth shattering. It’s true that Western nations hold an average of 15 percent of their reserves in gold, and an increase in China’s gold allocation to that level would set the market afire. But, from a practical standpoint, that just won’t happen, at least not in anything short of a glacial time frame.

China simply couldn’t buy gold in the quantities, or at the prices, appropriate to lift gold to 15 percent of their reserves. Still, it appears that China’s leadership is quite motivated to reduce their dependency upon the U.S. dollar, and increase their holdings of gold and other tangibles.

In fact, if there is any open secret regarding official Chinese purchases recently, it is their stockpiling of strategic commodities, particularly copper. Copper prices have benefited greatly from China’s aggressive purchases this year.

One can rightly ask, is gold next on the shopping list? And has the official chatter regarding gold and the dollar simply been Beijing’s warning to Washington and the rest of the world of what is coming?

Good questions. And we’ll get the answers when China wants us to get them, and not before. You can bet any announcement will come after their major purchases are done.

A second interesting point regarding China’s purchases is that all of the supply/demand analyses of the past six years have been wrong. Because China’s purchases were unknown, and therefore couldn’t be credited to that nation or official purchases in general, other demand categories were credited with the 454 tonnes China was buying.

Hu stated that the purchases came from domestic production, but it seems likely that some significant percentage had to come from outside the local market. Regardless, assuming that aggregate global supply and demand figures over the time period are accurate, then it makes no difference whether the purchases came from gold inside or outside China’s borders.

So we can assume that global jewelry and investment demand totals since 2003 weren’t as high as originally envisioned — because we can subtract 454 tonnes, in some mix, from these categories.

One can argue that this is bearish. I’ll take a more optimistic viewpoint: It shows that these demand sources have been less significant so far, and therefore have more room to grow.

And if China’s purchasing program accelerates, or even if it remains constant, then increases in other demand categories will have a much more pronounced effect on the overall market.

All in all, it has to be encouraging that China has been buying gold, and is likely to continue doing so, while the nation publicly bashes the dollar.

IMF Gold Sales May Be Reality This Time

This week we begin a new feature on Personal Liberty Digest which will appear the second and fourth Tuesday of each month. It is a column by Brien Lundin, president of Jefferson Financial and editor of Gold Newsletter. Brien has been editing Gold Newsletter since 1993, and during that time has provided readers with timely and profitable analysis of the precious metals and mining share markets and the economic and geopolitical issues that impact them.

We urge you to read Brien’s columns and consider his advice as you adapt your wealth and asset protection strategies to today’s tumultuous environment. We are excited to bring you Brien’s twice-monthly contribution to Personal Liberty Digest.

Thanks,


Bob Livingston, Editor
The Bob Livingston Letter
Personal Liberty Alerts

The Federal Reserve’s decision in late March to dive into quantitative easing was a watershed event in the gold market. It meant that a tidal wave of newly created money was headed our way.

Gold soared on the news. But this shouldn’t make gold investors complacent. In fact, we knew the market was sure to test our convictions, and harshly.

The first of those tests came and was administered by our official sector headmasters. In retrospect, we should have expected it. As experienced gold investors know, whenever the authorities feel the yellow metal is getting “out of hand,” the same tired old canard of central bank/International Monetary Fund (IMF) gold sales is dusted off.

And so it was on the close of the G20 summit in London, just before the heads of state gathered for a round of back-slapping, glad-handing and ear-to-ear grins in front of flashing cameras.

The summit was a surreal blend of glitz, glamour, bluff and bluster—the kind of two-dimensional publicity event that usually has no significant effect or long-term relevance. But this time there may be some very real and dramatic consequences.

Of course, the trillions of dollars of fiat currency pledged to the IMF and sundry international banks and bureaucracies will end up in the pockets of corrupt government officials in developing nations across the globe. It will also line the pockets of the minions staffing the institutions doling out the cash. The result will be more economic harm than good, and more fiat currency sloshing around the world.

Granted, the trumpeted claims of progress toward a new, socialist world order arising out of the summit were a bit disturbing, given our president’s tacit support of such devolution. But these things take more time to develop than the typical leader remains in power, and there doesn’t appear to be anyone—President Barack Obama included—with the necessary charisma to lead the entire world into socialistic decline.

So the most important development to come out of the summit was something most regarded as a minor side note: unanimous support for the sale of 403 tonnes of IMF gold.

The stated goal of the sales was to “use the additional resources from agreed IMF gold sales for concessional finance for the poorest countries.”

Apparently the original purpose of the funds when these sales were first raised months ago (to create an endowment to fund IMF salaries and keep these bureaucrats in high cotton) wasn’t polling well. You can rest assured, though, that the purpose will remain the same, regardless of the new packaging.

But, given the timing, the announcement was apparently intended to stymie a gold rally. And considering the unprecedented global monetary reflation now being perpetrated, it might seem especially important to push these sales through.

Of course, every time IMF gold sales have been proposed before, the announcements have had successively less effect on the market. It got to where you could almost hear the yawns from trading desks around the world.

The difference this time is that, with the Obama administration and the Democratic majority joining forces to expand government at the expense of individual rights, it seems very likely that IMF gold sales will receive the necessary approval by today’s left-leaning Congress. In fact, none other than the brilliant and entirely misguided Democratic Congressman Barney Frank has come out in support of the IMF gold sales, if about a third of the proceeds are dedicated toward “loans” that will further indenture poor countries.

As a side note, don’t be misled by those putting forth the bearish argument that, if the IMF is selling 403 tonnes (12.5 percent) of its 3,217-tonne gold hoard, what’s to prevent it from selling the remaining 2,814 tonnes?

The IMF’s founding Article of Agreement will prevent it. The remaining gold held by the IMF is actually owned by its member nations, according to their initial funding ratios and subsequent payments. IMF rules state that this gold cannot be sold to the market—it can only be sold back to the member countries that own it and the price of such a sale would be at the previously prevailing official price of 35 Special Drawing Rights (SDRs) per ounce.

An “SDR” is currently held to be worth $1.49783, so the IMF would be forced to sell its remaining gold to the respective countries at a price of $52.42 per ounce. It’s not likely that this bureaucracy will look to such an undertaking—which would concurrently destroy the value of its balance sheet—as a profitable venture.

While it remains to be seen whether the U.S. Congress will approve the 403-tonne IMF sale, much damage has already been done as gold investors were punished by the monetary overlords for being impudent enough to fight the oncoming inflationary tide.

In effect, resisting today’s political winds puts the average, freedom-loving investor in a worse position than if he were the victim of a mob protection racket. At least with the mob there is some honor among criminals…and there is the hope of justice through the legal system.

But when the U.S. government—and some “new world order”—are the ones robbing you blind, where do you turn for help?

Before giving up all hope, we need to remember that every previous attempt to rein in gold has only served to send the metal to greater heights.

Patience and persistence is the key, as the broad sweep of global events continues to turn in favor of gold.