Why A Rising Gold Price Is Bad News

We have written about our concern that high annual deficits and accumulating public debt will lead to higher mortgage rates and to higher interest rates in general, burdening future generations with the interest cost and jeopardizing the country’s credit rating, continuing to burden economic growth, and adversely impacting employment.

The Fed has temporarily countered the interest rate risk by artificially keeping interest rates low by inflatiing the money supply, thus discouraging savings and investment, causing long-term misallocation of resources, and leading to higher commodity prices and living expenses down the road. This note explains why a rising gold price is bad news.

But many businesses are not interested in borrowing to finance expansion, given the difficult economic situation. They are concerned that consumers are paying down debt rather than spending, are burdened by ever more regulation, and are unsettled by temporarily extended and unknown future tax rates on income, capital gains, dividends and estates.

Add in the higher costs of employment benefits — particularly health care insurance costs — and you have an economic environment in which established businesses have no incentive to expand and entrepreneurs are not keen to take the risk of starting new businesses.

Trouble Ahead

Unfortunately, a rising gold price signifies trouble ahead. It’s a kind of canary in a coal mine. As more individuals become concerned that their dollars will buy less in the future and exchange them for hard assets, commodity prices such as food and fuel and metals and building materials will continue to rise. Foreign central banks that hold large quantities of depreciating dollar-denominated debt will demand higher interest rates to compensate for their loss in value or will swap out of dollars to buy gold, and the gold price will continue under upward pressure, while the value of the dollar declines.

Investors Can Hedge Against The Risk Of Hyperinflation

As an individual you can protect yourself to a large extent against the erosion of your purchasing power and economic disaster by adding gold and silver to your investment portfolio. Owning gold can provide security and opportunities not available with other investments.

But few American investors are familiar with gold. Its high value, its need to be stored somewhere secure, and the fact that it is available in sundry forms by a broad spectrum of sellers including bullion dealers, commodity brokers, stockbrokers, coin dealers and mutual fund managers lead to exaggerated claims, myths and general confusion.

Fed’s Straitjacket

The only way out of the problem is to expand the economy, to get businesses to hire and put Americans back to work. People with stable jobs pay taxes, pay their mortgages and buy goods and services. The Fed has limited tools to accomplish this: injecting money into the economy and lowering interest rates, both of which they have done with little benefit. As noted, businesses are reluctant to hire and expand regardless of the availability of short-term credit.

The main reason that businesses will not expand and hire: Administration policies that result in more expansive government, entitlements and regulation, which mean both higher cost of doing business and higher government debt. Which brings us back to the depreciating dollar, the reluctance of foreign holders to hold more US government debt, higher bond interest rates (when they are allowed to rise), and higher gold prices.

Gold's Shifting Floor Price

While the re-election of Barak Obama to the US presidency has created a positive backdrop for gold, as we head toward Diwali some debate remains about the level of buying seen in Asia.
While Indian traders remain positive about gold demand in the country during this festive season, as my colleague Shivom Seth writes in the piece Indians head for gold as Diwali closes in, some commentators, like Barclays Capital, have been disappointed by levels of demand.

Standard Bank, however, writes in its latest Commodities Daily report that "Although there was some selling of gold, the metal is finding support on approach of $1,700. We continue to see good physical buying, not only from India ahead of Diwali but also from South East Asia. ETF holdings also reached new all-time highs yesterday, with total holdings standing at 83.33m oz - up almost 8m oz since the start of the year."

But, as James Steel pointed out on Mineweb.com's Gold Weekly podcast earlier this week, the phyiscial market has definitely been eclipsed by investment in recent years. 10 or 15 years ago, he says, the physical jewellery market was 75% or more of physical demand - that has dropped to something like 45% now.

With India and China now dominating the market - different economic drivers also come into play. As he says, "those economies are more price sensitive whereas in the west we think there's a stronger relationship between jewellery demand and employment and income rather than price."
Jewellery is still Steel points out, the single biggest component of demand, but he says "you have to take into account that investment is very important in determining near-term prices."

Steel adds that another thing to bear in mind about the jewellery side of the market is the shift in locus that has taken place in the last 10 to 20 years from West to East.

"This is important because it means that when gold has traded higher, we get a quicker response on the demand side from the emerging world because they cut back purchases more quickly and so that's why we are not in the massively bullish camp because over $1900 we'll begin to see some reduction in jewellery demand. Correspondingly you fall down to $1550 or so and we're likely to see an increase in jewellery demand," he adds.

German Crisis: European Commission Cuts 2013 Growth Forecast For Eurozone

The European Commission cut its growth forecast for the Eurozone as the debt crisis ravages southern Europe and gnaws at the economic performance of export-driven Germany. The 17-nation euro economy will expand 0.1% in 2013, down from a May forecast of 1%, the Brussels-based commission said. It cut the forecast for Germany, Europe's largest economy, to 0.8% from 1.7%. Europe's "economy continues to deal with a difficult post- financial crisis correction," Marco Buti, head of the commission's economics department, said in a statement.

Next year's near-stagnation across Europe masks a north- south divide, in which the economy ekes out positive numbers along an arc from Finland through the Low Countries to France, and contraction grips Greece, Spain, Italy, Cyprus, Portugal and Slovenia.

North-south tensions over the debt crisis will bubble up on November 12, when finance ministers judge whether Greece has made enough budget cuts and economic reforms to deserve the next installment of 240 billion in aid offered since 2010.

"The distress in more vulnerable member states has progressively started to affect the remainder of the union." The economic falloff may make it harder for European governments to pull Greece back from the brink and deal with a possible aid program for Spain, leaving the debt crisis to fester for a fourth year. Technically, the euro area will avert a recession, defined as two consecutive quarters of contraction, though the overall economy will still shrink 0.4% in 2012, ending a two-year expansion, the commission said.

Euro governments are aiming to wrestle it down to 120% by 2020. Germany is becoming less resistant to the economic woes of southern Europe just as Chancellor Angela Merkel, the dominant figure in handling of the debt crisis, embarks on a campaign for athird term in elections in late 2013.

Buti pointed to "wide cross-country divergences in economic activity and labor market dynamics" in a common-currency area meant to bring Europe together, not fracture it. The commission predicted "moderate" growth of 1.4% in 2014 that leaves Cyprus alone in negative territory.

How To Buy An Investment Property In Hot Markets?

Investing in real estate is a time-honoured method of achieving financial success. Throughout the ages, investment property has helped a lot of people make a great deal of money - sometimes quickly, sometimes over the long term. Those who invest for the short term are generally known as property speculators, and they play a dangerous game. Long term property investment is for forward thinkers who have an investment horizon of at least five years. The objective of a long-term property investor is to buy a property at a low price and sell it at a higher price. To be successful at this, one needs to know what is going to happen in a certain location over the next few years.

Real estate gains its value because of new infrastructure projects, shopping centres, public transport facilities, etc. These can happen only in new growth areas, because established areas tend to have reached saturation point in these respects. If you look at the central locations of Pune, you will see that nothing more can happen there. These areas are saturated. In many of them, residents are facing a lot of problems because of overcrowding, lack of parking, open spaces, playgrounds for their kids, pollution and traffic clogging.

Even with the best of intentions, the city planning authorities cannot do anything to make life better for them - there is simply no space left. Though the property rates in Pune's prime areas are high, they cannot rise much further because the future has nothing to offer there. Long-term property investment means buying real estate in an area while it is on the rise - not when it is in saturation or decline mode. Buying investment property means buying it where people are going, not where they have already been for generations.

You will need to invest in a growing location, not an established one. This is especially true if you are a middle-class person living off a middle-class income. There are two reasons for this. First of all, properties in established locations cost a lot of money. At the same time, their long-term investment value is lower. The reason for this lies in the nature of the real estate market. The costly (or 'prime') areas gained their value over a certain period of time but will eventually stagnate or even down.

Even with the best of intentions, the city planning authorities cannot do anything to make life better for them - there is simply no space left. Though the property rates in Pune's prime areas are high, they cannot rise much further because the future has nothing to offer there. Long-term property investment means buying real estate in an area while it is on the rise - not when it is in saturation or decline mode. Buying investment property means buying it where people are going, not where they have already been for generations.

A hot property market is one where there are upcoming changes in the infrastructure, and where homebuyers are headed. In the case of Pune, this would especially include areas like Undri, Baner, Kharadi and Wagholi. Infrastructure can include things like major highway construction and shopping and entertainment facilities. Look for areas that have a lot of employment options, because people always want to live close to where they work.

Also keep your eyes open for areas where large corporations are relocating or already exist and have room to expand. When this happens, the real estate market in that area will boom due to demand for housing and small businesses. Business is one of the most reliable drivers for real estate prices.

Silver Price Projection – For 2013

An objective and reasonable estimate for the price of silver at the next intermediate peak (estimating 2013 – Quarter 2) is $50 to $60 per ounce (current price is about $28). This is not a prediction based on wishful thinking and hope, but a best estimate based on rational analysis of data stretching back to 1975. The actual price for silver at its next peak could be higher or lower, and the peak might be earlier or later, but this price range and approximate time is, by this analysis, the most probable.

Until the last century, silver and gold had been money for thousands of years. During the long history of gold and silver, the price ratio of gold to silver has averaged, depending on analysis, around 15 to 20. Since 1975, it has been as low as 17 and as high as about 102. The ratio is low when silver is expensive compared to gold – which occurs at peaks in the price of silver, such as in early 1980. 

Silver is a smaller market and much more volatile in price than gold, so the ratio can stretch one way or the other depending on the degree of speculative fervor in the market or the degree of price depression and disinterest in precious metals, such as in 1991. Extremes in the ratio usually occur at highs and lows in the prices of both metals.  

How is this useful? 

Instead of working with the gold to silver ratio, invert it and use the silver to gold ratio. That ratio peaks with price peaks in silver and bottoms with price bottoms in silver. However, there is no simple answer as to what ratio is “high” or “low” since the ratio might be very different between the decade of the 1970s and the 1990s. 

There is, however, a technical indicator called the Relative Strength Index that is normalized between 0 and 100. The RSI can be used with any time scale, such as 5 minute price data, or 50 month data. The result is the same, a number between 0 and 100, with low numbers (such as 14) indicating a severely “oversold” condition and high numbers (such as 80) indicating a severely “overbought” condition.

The problem is that the silver market, while overbought, could rally further and become even more overbought, and the RSI of the ratio might rise even higher, say to 85, while the price of silver jumps even higher. If you had sold silver (when the RSI was 78), you missed some profit, and if you sold short, you incurred some losses. This is the dilemma of all traders: when to buy and when to sell. (Few people can buy at the lows and sell at the tops, so they need other tools to help time their trades.) I don’t know of any simple and fool-proof answer.

What I do know is that we can delve deeper into the above SI/GC ratio analysis and come to some high probability predictions that will give us a reasonable degree of safety and security in our quest to buy low and sell high.

• Run the same Relative Strength Analysis for the SI/GC ratio, but use a longer time scale – like 40 weeks. Further, average the 40 week RSI numbers over a centered 11 week period, using the current week’s number plus the 5 weeks both before and after the current week. The result is a smoothed RSI that is centered about the relevant week in the analysis. (Clearly the last few weeks in the series are not using the future RSI values.) This removes much of the short term “noise” – the weekly fluctuations that mean nothing in the long term.

• Calculate the 7 week simple moving average of the actual silver prices. This gives a short term average that is much more volatile than the 65 week moving average.

• Calculate the 65 week simple moving average (add the prices for the last 65 weeks and divide by 65) of the actual silver prices. This produces a long term trend for silver prices that has removed all but major fluctuations in price.

• Subtract the 65 week average from the 7 week average. Then divide by the 65 week average. This produces a percentage above or below the long term trend of the 65 week moving average for silver. 

         This is important because it measures a deviation from average in percentage terms, 

          but not in actual silver prices, which have varied over the past 12 years from $4.01 

          per ounce to nearly $50 per ounce. Further, it relates the percentage (over or 

         under) to a long term moving average, which accounts for both bear and bull 

         markets in silver prices.

• Examine the graphs of both the RSI and the percentage of price deviation. You will find that major lows in the RSI and percentage price deviation (PPD) occur approximately every 2 years, and similarly, highs occur about every 2 years, but the timing is not consistent enough that you would trade on these cycles. A chart since 1975 will not display well due to the amount of data. However, the following chart (data since 2004 is more manageable) shows the correlation between the RSI of the SI/GC ratio and the percentage of price deviation in silver.

• Graph the 40 week (centered) RSI of the SI/GC ratio against the percentage that the 7 week moving average of prices is above or below the 65 week moving average of prices (percentage of price deviation or PPD). The graphs of both are similar as to direction, highs, and lows. In fact the correlation since 1975 is 0.69 and since 1/1/2002 (silver bull market) is 0.85, a high degree of correlation.

Why Invest In Gold?

Investors should have some gold in their portfolio, according to a recent research report from Trinity College. The report found that buying gold is a good hedge against declines. That's because gold prices increase dramatically after a stock market crash, but only for about 15 days. 

After that, gold prices tend to lose relative value against stocks, which often rise again shortly after a crash. For similar reasons, gold also tends to gain in value as the value of the dollar declines. Many investors also buy gold as a hedge against inflation. 

This research showed that gold prices increased from 1999 through 2006, while the stock market declined from 2000 to 2003. Gold prices spiked when the stock market crashed, as scared investors panicked, sold their stocks and bought gold. However, when panic was over, the money moved back into stocks, and gold was no longer a better investment.

Gold should not be bought alone as an investment. Gold itself is speculative, and can have high peaks and low valleys. That makes it too risky for the average individual investor. Furthermore, despite the peaks and valleys, over the long run the value of gold doesn't beat inflation. Instead, gold should only be part of a diversified portfolio which includes other commodities such as oil, mining and investments in other hard assets. 

The Bulls Are Back: Several Factors Lead To Gold And Silver Rally

For months, gold seemed to languish in the $1600 range, while silver hovered around $28 per ounce.
Many wondered what in the world was going on, while others questioned the metals’ resilience as an investment.
Was the bull market finally over?

Over He Last Two Weeks, The Bulls Have Come Roaring Back.

Since our last market update on 8/23, gold has continued its run, adding another $95/oz!
As of today (9/19), gold has run to over $1765/oz. While we’ve seen some profit-taking by institutional investors – which typically follow a run like this – gold has held strong at $1730 for the last few days.

With the information available at the time, it was too early to tell. One analyst speculated that gold would cross the $1700/oz mark in three months.
While that price forecast was certainly correct, the analyst was off on his timing.

So what’s driving This Gold-And-Silver Running Of The Bulls?

In reality, there wasn’t one, singular event that spurred the sudden rally.
Several factors – each with its own significance – have combined, determining what markets will do at any given time.

Here are a few of the factors we believe – along with many analysts – are responsible for the growth of gold and silver prices:

1.    Weak U.S. Jobs Report:

Last Friday, the Bureau of Labor Statistics released its monthly jobs report for August, and the news was not good.
Last month, the economy added a dismal 96,000 private sector jobs, down from 141,000 new jobs in July.

The unemployment rate did drop from 8.3% to 8.1%, but mainly because nearly 370,000 people stopped looking for work altogether. Bleak employment growth is a bad omen for the economy, which fuels speculation about further monetary stimulus.

2.     New Steps Taken By The Fed To Invigorate The Economy:

Ah yes, the old fable, “quantitative easing.”
Fed chairman Bernanke, along with other officials, has been quietly discussing just that.
While they may announce a new round of bond purchasing this week, aimed at lowering long-term interest rates (once again), and hoping to spur borrowing and spending, many don’t expect this to happen until later in the year.

Yet the mere rumor of a third round of monetary stimulus is enough to fuel a gold and silver rally. One analysis forecasts that gold will soon re-test its all-time high of $1920/oz if the Fed pumps the markets with added cash.

3.     U.S. Presidential Election:

Last but (certainly) not least, this year’s presidential election is part of the equation.
With the race at a dead-heat, many investors feel uncertain about the upcoming year, especially in terms of political leadership in Washington, DC.

While the election’s outcome is unlikely to have a major impact on the long-term price of gold or silver, uncertainty surrounding the race has been a short-term catalyst for growth in the metals’ prices.

After all, investors turn to goldcoins and silverbullion in times of grave uncertainty.
There are countless explanations for the recent rally – and current outlook – of gold and silver prices, and we have named but a few. Indeed, some are less obvious, even to the trained eye. (For instance, central banks in China and India have increased their gold-purchasing in the last couple of years.)