Now Is the Time to Buy Gold

14 comments

Posted on 3rd February 2014 by Administrator in Economy |Politics |Social Issues

Now Is the Time to Buy Gold

By Bud Conrad, Chief Economist

Gold has been in a downturn for more than two years now, resulting in the lowest investor sentiment in many years. Hardcore goldbugs find no explanation in the big picture financial numbers of government deficits and money creation, which should be supportive to gold. I have an explanation for why gold has been down—and why that is about to reverse itself. I’m convinced that now is the best time to invest in gold again.

 

Gold Is the Alternative to Non-Convertible Paper Money

If you’ve been a Casey reader for any length of time, you know why gold is a good long-term investment: central banks are expanding paper money to accommodate the deficits of profligate governments—but they can’t print gold. Since the beginning of the credit crisis, the world’s central banks have “invented” $10 trillion worth of new currencies. They are buying up government debt to drive interest rates down, to keep countries afloat. The best they can do is buy time, however, because creating even more debt does not solve a credit crisis.

Asia Is Accumulating Gold for Good Reason

Since 2010, China has been buying gold and not buying US Treasuries. China’s plan seems to be to acquire a total of 6,000 tonnes of gold to put its holdings on a par with developed countries and to elevate the international appeal of the renminbi.

In 2013, China imported over 1,000 tonnes of gold through Hong Kong alone, and it’s likely that as much gold came through other sources. For example, last year the UK shipped 1,400 tonnes of gold to Swiss refiners to recast London bars into forms appropriate for the Asian market.

China mines around 430 tonnes of gold per year, so the combination could be 2,430 tonnes of gold snatched up by China in 2013, or 85% of world output.

India was expected to import 900 tonnes of gold in 2013, but it may have fallen short because the Indian government has been taxing and restricting imports in a foolish attempt to support its weakening currency. Smugglers are having a field day with the hundred-dollar-per-ounce premiums.

Other central banks around the world are estimated to have bought at least 300 tonnes last year, and investors are buying bullion, coins, and jewelry in record numbers. Where is all that gold coming from?

COMEX and GLD ETF Inventories Are Down from the Demand

The COMEX futures market warehouses dropped 4 million ounces (over 100 tonnes) in 2013. The COMEX uses two classes of inventories: the narrower is called “registered” and is available for delivery on the exchange. There are other inventories that are not available for trading but are called “eligible.” I don’t think it’s as easy to get holders of eligible gold to allow for its conversion to registered to meet delivery as the name implies. Yes, that might occur, but only with a big jump in the price.

The chart below shows the record-low supply of registered COMEX gold.

Meanwhile, SPDR Gold Shares (GLD), the largest gold ETF, lost over 800 tonnes of gold to redemptions. At the same time, central banks have provided gold through leasing programs (but figures are not made public).

Why Has Gold Fallen $700 Since 2011?

In our distorted world of debt-ridden governments and demand from Asia, gold should continue rising. What’s going on?

The gold price quoted all day long comes from the futures exchanges. These exchanges provide leverage, so modest amounts can be used to make big profits. Big players can move markets—and the biggest player by far is JPMorgan (JPM).

For the first 11 months of 2013, JPM and its customers delivered 60% of all gold to the COMEX futures market exchange; that, surely, is a dominant position that could affect the market. By supplying so much gold, they are able to keep the price lower than it would otherwise be.

A key question is why a big bank would take positions that could drive gold lower. Answer: Banks gain by borrowing at zero rates. But the Federal Reserve can only continue its large quantitative easing programs that bring rates to zero if gold is not soaring, which would indicate weakness in the dollar and the need to tighten monetary policy. Voilà—we have a motive. Also, suppressing the price of gold supports the dollar as a reserve currency.

The chart below shows the month-by-month number of contracts that were either provided to the exchange or taken from the exchange by JPM. For a single firm, the numbers are large, but the effect across all gold markets is greater because so many gold transactions follow the price set in the paper futures market.

What jumps out from the chart above is the fact that while JPM had been selling gold into the futures market for most of the year, it made a major shift in December, absorbing 96% of all gold delivered.

That is a radical shift and, I believe, an indicator that JPM‘s policy has shifted. In my opinion, their deliveries of gold were suppressing the price during 2013, but now their policy has shifted in a way that will support gold going forward.

This leaves a vital question unanswered: Why? Has the motivation to suppress the price of gold gone away? Not likely, and we may never know the full truth of what is happening, but I suspect the main reason for the shift is that they have done their damage. The $740 drop from top to bottom, a 39% decline, has shaken confidence in gold as a financial “safe haven” among many investors, especially those new to precious metals. At the same time, continuing to lean on gold at this point could become very costly. JPM delivered $3 billion (about 2 million ounces of gold) into the market up to December in 2013, and may not have ready sources of gold to keep that up. It is dangerous to put on big short positions unless you have gold or some future gold deliveries as a hedge.

By now, everyone knows of the shortages in the gold market; JPM has to be as aware of that as the rest of us. It just isn’t safe for them to continue to lean on the market. Being aware, it looks like they are taking the bet that gold will rebound, so they could do well on the other side of the trade.

Another confirmation of the shift by big banks comes from data provided by the US Commodity Futures Trading Commission (CFTC) that shows the net positions of the four biggest US banks in the futures market. There has been a dramatic change from being short the market to now being long.

Crisis Brewing in the Gold Market

Germany claims to hold 3,390.6 tonnes of gold, about half of which is held by foreign central banks. Over a year ago, they announced a plan to repatriate 674 tonnes of gold from France and the United States. The US said it would comply, but told the German government that it would have to wait seven years for all the gold to be delivered. The news out last week was that after a year, Germany had only obtained 37 tonnes of its gold—and only five of them were from the US. That is a trivial amount (only 160,000 ounces).

So why can’t Germany get its gold? Explanations of having to melt down existing gold and recast it just don’t make sense. The most logical conclusion, and the one I’ve come to, is that the United States simply doesn’t have the gold it says it has—neither Germany’s nor its own.

Of course, the US government isn’t going to admit that there’s a problem, but I say there is.

More evidence: JPMorgan’s COMEX warehouse contained 3.0 million ounces of gold in 2012, but that had dropped to 0.5 million ounces by mid-2013. Its registered inventories are a razor-thin 87,000 ounces. These kinds of swings are indicative of shortages and instability.

Further, JPMorgan sold its gold vault in New York City—located next to the Federal Reserve’s vault—to the Chinese. The banking giant also just announced the sale of its commodities trading business (although it may not have sold the precious metals part of that business). Perhaps they were concerned about new regulations of banks with deposit insurance from the government.

In another relevant development, Deutsche Bank recently surprised the gold community by quitting its position on the committee that sets the London a.m. and p.m. fixings. This came a few weeks after a German regulatory body called BaFin started investigating how these prices were set. BaFin also gave an indication that the process appeared worse than the LIBOR fixing scandal, which resulted in billions in fines.

Putting Inventories and Traders Together

The futures market looks fragile to me. The basic problem is that there are many more transactions that could put a claim on gold than there is gold registered for delivery in the COMEX warehouses.

The chart below gives a dramatic picture by simply dividing the open interest of all futures contracts by the registered inventories. The black line at the bottom shows the big jump in the ratio as the registered inventories declined. There are 107 times more open-interest positions than there is registered gold.

The futures markets operate on the expectation that only a few big traders will demand delivery. JPMorgan has shown that it is in a position to demand almost all (96%) of the gold for delivery. They are big enough that they could cause a collapse of the market, if they were to force delivery of more than is available. They know better than to do so, though, and I would guess that they will just manage to try to gain back what gold they have been delivering over the last several years. That should support the price of gold.

Gold Will Rise, and It’s on Sale Now

Now is the time to stake your claim in gold. In the long term, we know that paper money will become worthless; in the short term, the biggest seller has just shifted its actions to becoming a buyer. That makes this a good time to accumulate gold and gold mining stocks before a major shift upward in price.

Speaking of gold mining stocks: My Casey Report co-editor Doug Casey, as well as other famous gold speculators, are also convinced that a turnaround in the gold market may be upon us. If you haven’t yet, do yourself a favor and watch “Upturn Millionaires,” Casey’s online video event with eight well-known resource speculators and investment experts that premieres Tuesday at 2:00 p.m. EST. It’s free, so you just have to sign up to register.

14 Comments
  1. card802 says:

    I’m only half complete with the Money Bubble, this shit is starting to happen too fast.

    3rd February 2014 at 2:34 pm

  2. Bullock says:

    Read The Money Bubble over the weekend. If you stay up with the news on gold the book really doesn’t tell you many new things. But for those who want to learn more about gold it’s a decent book for that.

    Been nibbling on gold for several years. Gold is a good buy right now. Starting to dip into some silver.

    3rd February 2014 at 4:23 pm

  3. MikeG says:

    Thoughts on buying Gold:
    – you are spending your widely accepted currency for a (currently) not widely accepted currency.
    – If gold sky rockets to $20,000.00 an ounce, how are you going to use that coin to buy anything you need? even if you bought a 1/10th ounce coin.
    – The economic situation where gold wins is a very narrow band on the spectrum of what can happen.
    I just don’t think people understand what kind of post-apocalyptic wonderland they are dialing up for when they bet on gold to be their ticket to being rich just like the people they hate.
    – In just about every situation where gold wins, investing in yourself, home, and property wins more.

    When ever I read an article on money the author always puts whether or not they have a vested interest what they are talking about, so here’s mine:

    4 ounces of gold in 1, .5 .25 and .10 denominations
    100+ ounces of silver in various “junk” silver.

    So its not like I don’t think it’s a good idea to buy, I just see a lot of better alternatives.

    3rd February 2014 at 5:31 pm

  4. archie says:

    mikeg, you make a lot of good points. i tend to think of gold as something you would not ever have to trade for the foreseeable future. so, like you, i think it is wiser should you have spare cash, to invest in your own house and hearth, and things you need. junk silver is also good in my view. physical cash is good. only then, if you have any spare nickels, it’s wise to buy a few gold coins in small denominations. it’s the one hard asset that the uber-rich have that any normal person can buy.

    3rd February 2014 at 6:09 pm

  5. PrisonerofZelda says:

    Asking Casey if its a good time to buy gold is like asking my neighbor the car dealer if today is a good time to purchase a Mercedes.Holding a 10% gold position may or may not make sense. Should gold go to the moon we will be living in a world of shit.

    3rd February 2014 at 8:56 pm

  6. Fool on the hill says:

    Drove an old neighbor to a small Post Office today.

    He took a pink slip out of his PO box and gave it to the clerk.

    She had us drive round to the loading dock and I loaded ten fifty odd pound registered boxed into the back of his SUV.

    We then drove down state to a row of storefronts and went around back,

    Entering thru a back door we went down a long hallway to arrive at a very large vault.

    He sent me out for coffee and when I returned the door was open and he produced a hand truck I used to transfer the boxes to the vault.

    He then closed the vault door and gave the combination knob a spin.

    Over a couple plates of linguini al OLIO he intimated to me the boxes contained JUNK SILVER COINS.

    A quarter ton of them!!!

    These raised a four by four foot stack of identical boxes to chest height.

    Today he had on a Harris tweed jacket that sported several large moth holes!

    He might need a shave but he is no dope and grows the best figs.

    He probably trusts me because years ago he overpaid me for some work I did for him and I brought the fact to his attention.

    I sure could have used the extra dough at the time and I am sure he was aware of the fact.

    He grew up during the great depression and I think he is on to something.

    3rd February 2014 at 10:39 pm

  7. card802 says:

    I understand what MikeG is trying to say, but, you don’t put all your faith into gold.

    What I mean is you don’t own gold to trade for food. You already have food, water, ammo, other goods. And you don’t need to even believe in gold or silver as a store of wealth, what matters is what the majority believe, or want if they don’t have it.

    Let’s say you bought at today’s price and gold shoots to $20k a ounce, all other prices are depressed. Bad you say?
    Let’s say you want a $200k sailboat to sail away from the shit storm. The owner doesn’t want paper, he wants metal, you have 10 pieces of metal that cost you $24k in paper.
    Let’s say you want to get a chunk of land to get away from the shit storm, the owner doesn’t want paper, he wants metal, you have metal. And so on. What if silver hits $100 or $200 an ounce? Those that bought at today’s price will be happy. I also bet they wont be trading their metal for food or ammo because anyone who thinks that far ahead is already prepping.

    4th February 2014 at 7:23 am

  8. efarmer says:

    Gold is going to plummet in price in the next few years, IMHO. The issue is compared to what? If all asset values tank, if bonds become worthless, if equities are worth a fraction of current value, then is it such a bad store of money?

    I honestly am rather befuddled as to where to invest right now other than be in cash. For the time being anyway.

    EF

    4th February 2014 at 1:46 pm

  9. MikeG says:

    @efarmer I think any sort of asset that produces value on a personal level is better store of wealth than cash. cash is easily the worst investment plan out there, it will always lose value over time.

    @card802 I get that much, but in a world where paper money is now worthless, the havoc that would ensue is going to be catastrophic. Its going to be a rare situation where things are like that in a post-shit-storm world. for the peg on the meter to be between bartering and no cash accepted, its a very narrow band to have precious metals accepted.

    @fool-on-the-hill that’s interesting and all but what is the point? had he in his lifetime took half of that money and put it into conservative stocks, he would have at least enough money to buy a new tweed jacket and get a hair cut.

    4th February 2014 at 3:01 pm

  10. Wyoming Mike says:

    All nonsense. I think what Casey is saying is…Buy NEWSLETTERS!

    4th February 2014 at 5:11 pm

  11. IndenturedServant says:

    @MikeG, most of the rational preppers I know, meaning NOT the Alex Jones type, are not planning to get rich with PM’s. This applies to most of TBP regulars and more than a few lurkers I suspect. We’re buying protection.

    The Alex Jones type preppers are mentally masturbating when they talk of $200 AG and $20k AU. I’m not saying it can’t or won’t go that high but if they think those numbers will deliver them to the promised land in dollar terms, they will be sadly mistaken. What they don’t realize is that when metals reach those prices, chaos and uncertainty will reign.
    I_S

    4th February 2014 at 5:36 pm

  12. Anonymous says:

    @MikeG, most of the rational preppers I know, meaning NOT the Alex Jones type, are not planning to get rich with PM’s. This applies to most of TBP regulars and more than a few lurkers I suspect. We’re buying protection.

    The Alex Jones type preppers are mentally masturbating when they talk of $200 AG and $20k AU. I’m not saying it can’t or won’t go that high but if they think those numbers will deliver them to the promised land in dollar terms, they will be sadly mistaken. What they don’t realize is that when metals reach those prices, chaos and uncertainty will reign.
    I_S

    4th February 2014 at 5:46 pm

  13. MikeG says:

    @IndenturedServant: I agree. But I feel like any protection that gold affords is only a very small piece of the puzzle, whether it be AU 4k or 20k. If you’ve drank the bitter financial danger koolaid by the gallon, or even just had a sip of it, today’s gold prices still force it to a last priority if you’re being serious about Prepping. I’m not saying you should be eating silver pills, buying trucks of MRE’s and Radiation suits. I’m saying that maybe your home would benefit from a wood burning stove, better insulation or new windows, a better hot water heating system, a year-round raised garden bed. These types of purchases buck economic down turns, provide immediate return on investment, and improve quality of life. Nothing that a broker or coin shop offers can do any of those things.

    4th February 2014 at 9:24 pm

  14. IndenturedServant says:

    @MikeG, I agree completely. Most of the regulars here are doing exactly as you suggest. Funny thing is I just bought a new hot water heater last weekend just to set aside for when the current one craps out. I’m sure it will be cheaper now than in 5-10 years when I might need a new one. I’ve also got two 7 gallon propane water heaters salvaged from old RV’s. I think you’ll find that most of the regulars here are prepping in all areas including learning new skills.
    I_S

    5th February 2014 at 6:13 pm

Leave a comment

You can add images to your comment by clicking here.