June Blog Archives 2014

Gold prices end the day lower on profit-taking and technical correction. U.S. stocks sharply lower as investors react to softer-than-expected economic data. Gold last traded at $1,317 an ounce. Silver at $21.11 an ounce.

A noted technical analyst is reporting that the technical picture for gold is promising.

Gold is trading around its two-month highs but legendary technical analyst John Bollinger thinks the run has only just begun.

“If you look at the chart you can see we’ve just finished a really long decline,” said Bollinger. “It started in April of 2011 and really ended in May of last year. That sort of epic ‘backing and forthing’… has existed since then. We call this building a base ... There’s a lot of bullishness building up.”

Rising inflation risks and seasonal factors have also compelled global investment firm Canaccord Genuity to upgrade its outlook on the gold market earlier than expected.

In a May 29 report, they said they were expecting to see higher gold prices in the second half of the year, when the gold market traditionally performs better.

However, the analysts upgraded the gold market to outperform from neutral on June 18, following a bigger-than-expected increase in the U.S. Consumer Price Index. Because of rising inflation expectations in the medium-term, the firm sees the potential for gold to reach its 200-week average around $1,500 an ounce. Currently gold is trading around $1,315 an ounce.

The firm believes Fed policies have laid the foundation for increased risk of inflation, which will send gold prices higher--even if the higher inflation does not materialize. In other words, just the rise in inflation fears is enough to spark a rally in the price of gold.

Federal Reserve policies are also the focus of a renowned economist.

Yale lecturer and former chairman of Morgan Stanley Asia, Stephen Roach, believes the Fed's "wildly accommodative" super-low interest rates and bond-buying program have the potential to trigger the next world financial crisis.

"As long as the Fed remains as widely accommodative as a $4.25-4.50 trillion dollar-balance sheet would suggest, there is good reason to question the Fed's commitment to financial stability and there is good reason to believe that we could, in the not too distant future, find ourselves in another mess," says Roach.

Roach's fears echoed those of U.S. billionaire Wilbur Ross, who warned that ultra-easy monetary policies by major central banks had created the "ultimate bubble" in sovereign debt.

"I've felt for some time that the ultimate bubble, when we look back a few years from now, is going to be sovereign debt, both U.S. and other, because it's way below any sort of reversion to the mean of interest rates."

So, what's the solution?

One possible solution could be a return to the Gold Standard. Unfortunately there is virtually no one at the Fed or elsewhere in the Obama administration even remotely interested in such a solution.

Such a case was made by Keith Weiner of Forbes:

"The gold standard is neither barbaric nor impractical, and it is more urgently needed every day. This is because the standard of paper money is failing. It has set in motion an accelerating series of crises, each worse than the previous. The nation cannot continue to borrow to infinity, nor can the U.S. endure zero interest much longer."

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Gold prices settle higher for a fifth straight session on continued turmoil in Iraq. U.S. stocks lower in a late afternoon selloff. Gold last traded at $1,321 an ounce. Silver at $21.04 an ounce.

Gold continues to edge higher on worries over warfare in Iraq, as well as disappointing economic performance in Germany; the European Union's largest economy.

Gold is now at its highest level in two months, after posting its biggest weekly rise in three months last week. Silver is also at its highest levels since March.

One of Europe's elite, investment advisory firms released a positive forecast for gold this week, predicting it will rise to $1500 per ounce, or nearly $200 per ounce above current levels.

Incrementum AG of the tiny, wealthy nation of Liechtenstein issued a report entitled “In Gold We Trust 2014.” In the report, the firm says gold remains a good hedge against price inflation and potential "worst-case scenarios" and may rise to $1,500 an ounce in 12 months.

Incrementum suggested gold is nearing the end of a long consolidation period, with a stable bottom having formed. "Our 12-month price target is the USD 1,500 level," the firm said. "Longer-term, we expect that a parabolic trend acceleration phase still lies ahead. In the course of this event, our long-term target of USD 2,300 should be reached at the end of the cycle."

The return of inflation as an investment factor is also something giant congolmerate JPMorgan Chase & Co. sees ahead. Like JPMorgan, Societe Generale SA economist Aneta Merkowska told clients last week to “prepare for the return of U.S. inflation.”

Those signs of inflation are not new to everyday Americans. Even if Wall Street is only now waking up to inflation, Main Street has seen its effects for some time.

Starbucks announced this week that it is raising its prices for coffee.

Heidi Moore, U.S. finance and economics editor at The Guardian says that inflation is one of America's biggest economic concerns right now, with meat prices rising 7.7% this year, dairy up 4.2%, car insurance up 5% and tuition and public transportation up more than 3%.

Finally, a new sign has emerged of which investors should take note. There is new reason to be fearful of a stock market top as the Credit Suisse's "Fear Barometer" has hit a new all-time high.

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Gold prices surge above $1,300 to two-month high on continued tension in Iraq. U.S. stocks ended mostly higher after choppy session. Gold last traded at $1,314 an ounce. Silver at $20.65 an ounce.

Yesterday afternoon, the Federal Reserve Open Market Committee (FOMC) ended two days of meetings and Fed Chair Janet Yellen then faced the media to discuss the US economy.

When asked if she's confident the economy is finally gaining steam, she replied, "When you say confident, I suppose the answer is no, because there is uncertainty."

It's not surprising, then, that gold jumped to a four-week high as the dollar fell in the wake of her comments.

The Federal Reserve remains committed to accommodative measures and low interest rates. In other words policies that will undermine the value of the dollar and lay the groundwork for future inflation.

The Fed cut its U.S. growth forecast for 2014 from 2.9 percent to a range of between 2.1 percent and 2.3 percent.

Tensions over Iraq and Ukraine are still attracting safe-haven demand for gold, having lifted crude oil prices to nine-month highs.

The demand for gold comes despite the usual efforts to talk it down.

Famed money manager Marc Faber advises that investors should always have "some exposure to gold."

Faber has been adding gold to his own holdings recently as gold is so much cheaper than over-inflated stocks. Faber holds around 25% of his assets in gold because he believes the monetary policies of central banks will eventually lead to a further loss of purchasing power in the value of paper money.

A frequent guest on CNBC, Faber probably didn't make the on-air personalities happy with this comment:

Investors have been shunning gold "because the media doesn't like gold, nobody at CNBC owns gold. Nobody at Bloomberg owns gold. Gold is being constantly talked down by the media, and Fed officials, and economists, who also don't own any gold. They're all stocked up in equities. When people talk about people who are optimistic about gold, they call them 'gold bugs.' A bug is an insect. I don't call equity bulls 'cockroaches.' Do you understand? There is already a negative connotation with the expression of 'gold bug.'"

Faber is not the only investor adding gold to his portfolio. An anonymous investor bough nearly $500 million of gold futures in the wake of Fed chair Janet Yellen's comments to the media.

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Gold prices end lower, weighed down by inflation reports. U.S. stocks slightly higher, shrugging off concern over Iraq and disappointing government data. Gold last traded at $1,272 an ounce. Silver at $19.73 an ounce.

American investors woke up to news that indicates stagflation is upon us.

Consumer prices recorded their largest increase in more than a year in May as costs for a range of goods and services rose, pointing to a steady firming of inflation pressures.

The Labor Department reported its Consumer Price Index increased 0.4 percent last month, with food prices posting their biggest rise since August 2011.

Last month's increase in consumer prices was the largest since February 2013 and above economists' expectations for a 0.2 percent gain. It followed a 0.3 percent advance in April.

Stripping out food and energy prices, the so-called core CPI rose 0.3 percent, the largest increase since August 2011.

Economists had forecast the core CPI rising 0.2 percent.

Food prices increased 0.5 percent in May, rising for a fifth consecutive month. Prices for meat, dairy, fruit and vegetables rose. Poultry and fish prices also increased as did the cost of eggs.

Gasoline prices increased 0.7 percent. Prices for electricity also rose.

There were also increases in medical care costs, apparel, new cars prices and airline fares.

In other words, inflation is rising across the board. The problem with inflation is, once it gains momentum, it becomes very difficult to control. It's been compared to trying to get toothpaste back into a tube.

This is especially true when stagflation--a combination of a rising cost of living and a stagnant economy--is at hand.

Based on a new report on housing starts, the US economy is anything but robust.

U.S. housing starts and building permits fell more than expected in May, suggesting the housing market will likely remain slow for a while.

Groundbreaking for homes fell 6.5 percent to a seasonally adjusted annual pace of 1 million units, the Commerce Department reported this morning.

Federal Reserve Chair Janet Yellen said last month there was a risk a protracted housing slowdown could undermine the economy.

Despite these continual negative economic reports, the stock market seems to be climbing to the sky. But there are certainly signs of trouble ahead.

Excess cash created by loose monetary policy has gone more or less straight into the equity market, even as more and more investors now realize the asset class is very overvalued.

Global stock markets have consistently broken record highs this year, supported by that loose monetary policy.

However even as the equity bull-run continues, traders have worried about low volumes.

Something may be coming that could derail that bull market: rising interest rates by the Fed. In other words, the fuel that has artificially boosted stocks could be going away.

A new Bloomberg survey of economists predicts that the Fed will probably raise its benchmark interest rate faster than investors anticipate. This could produce a negative surprise down the road.

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Gold prices ends near three-week high on growing unrest in Iraq and weakness in U.S. equities. U.S. stocks fall on softer-than-expected economic data. Gold last traded at $1,274 an ounce. Silver at $19.53 an ounce.

Geopolitics have taken center stage in the investment world. As a result, stocks are falling across the board and both oil and gold are rising.

The turmoil stems from the news late Tuesday that Jihadist forces of the ISIS had routed Iraqi army forces and seized Iraq's second largest city, Mosul. Since then, ISIS has all but seized another city, Tikrit. They had previously seized Fallujah a couple of months back, a city they still hold.

Now, reports indicate ISIS forces are gathering for an assault on Baghdad amid rumors the government there may dissolve.

All of this is sparking worries that Iraq could descend into "failed state" status with Jihadist elements forming a base of operations there.

Given Iraq's resources and geographical position in the middle east, this could have far-reaching implications beyond the local situation there. For instance, the possibility of a disruption in oil supplies. That's why the financial markets are reacting negatively.

Unfortunately, the geopolitical situation in Iraq is far from the only news for the investment world to digest.

There were two disappointing economic reports released by the US government today.

Retail sales rose less than expected in May, according to Commerce Department data, which had sales up 0.3 percent last month. The median forecast of 83 economists in an independent survey called for a 0.6 percent advance.

Additionally, the Labor Department reported the number of Americans filing new claims for jobless benefits unexpectedly rose last week. This news was accompanied by the usual claims of an anomaly. Americans are no doubt becoming weary of such excuses.

The combination of chaos in Iraq and disappointment over economic conditions is helping to extend gold's rally as investors once again seek the safe haven benefits gold offers.

Market conditions also appear to be very close to turning bullish for silver as well.

Dow theory guru Richard Russell has recently gone public in stating that $19.25 an ounce is the price silver must beat to start its next upward leg. As this bulletin goes to press, the price of silver is trading right at that level.

As if the financial world didn't have enough to worry about, yesterday, as we reported, the World Bank warned the world to prepare for the "next financial crisis" and today the International Monetary Fund (IMF) issued a warning of its own.

The world must act to contain the risk of another devastating housing crash, the International Monetary Fund warned yesterday as it published new data showing house prices are well above their historical average in many countries.

The warning from the IMF shows how an acceleration in global house prices from already high levels has emerged as one of the major threats to economic stability.

Given the experience of the 2007-2009 financial crisis, touched off largely by a housing bubble in the US, this is a warning investors should heed.

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Gold prices settled above $1,260 on weakness in U.S. equities as traders await economic data due later this week. U.S. stocks ended higher, U.S. job openings and wholesale inventories increased in April. Gold last traded at $1,260 an ounce. Silver at $19.17 an ounce.

Former head of commodities at the Abu Dhabi Investment Authority and GoldMoney.com founder James Turk and John Rubino are well known figures in the gold industry. They’ve just published a new book, The Money Bubble. It argues the price of gold is about to soar to $10,000 to 12,000 an ounce.

In a nutshell the authors contend that the major paper currencies of the world actually now have less gold backing them than previously thought. Turk and Rubino contend that in the event of a crisis, governments would probably seek to restore that backing, resulting in an unprecedented surge in the price of gold.

You can calculate what the price of gold needs to be to restore gold backing to paper currencies to solve a crisis of confidence in several different ways. This is where the future price of $10,000 to $12,000 per ounce is derived.

This may seem far-fetched to some, but when one considers that the price of gold appreciated 6-fold from 2000 to 2012, it isn't so difficult to fathom. To reach $10,000 an ounce, gold would simply have to repeat that performance.

There are a variety of factors that could contribute to a crisis scenario and today's news includes a few.

Liz Ann Sonders, the chief investment strategist at Charles Schwab Corp., has warned of early signs of inflation that could cause a correction in the bull market in stocks. Sonders singled out rising rents and non-supervisory wages.

U.S. apartment rents have climbed this year at the fastest pace since the recession, property-research firm Axiometrics Inc. said last month. Effective rents increased 3.4 percent from a year earlier.

Another concern for Sonders is what she called “frothy” investor sentiment:

“When investors hear ‘secular bull market,’ sometimes they think it goes on and on forever without any corrective phases."

Last week’s survey of newsletter writers by Investors Intelligence showed bulls increased to 62.2 percent, the highest reading since January 2005, suggesting what the report said was “near fully invested positions amongst professionals.”

“I don’t think you have a lot of room for error,” Sonders said. “I think the market is set up so that if we were to get some sort of problem, geopolitical or inflation scare, sentiment is frothy enough that that probably is a problem for the market.”

“We’re at the fifth birthday” of the bull market, she said. “And 5-year-old birthday parties can erupt in tears at any point.”

Some observers believe we're in a new tech bubble and they cite a recent report to confirm their theory.

App company Uber last week raised $1.2 billion in venture capital on terms that valued the company at $17 billion, which is about as much as Hertz and Avis combined.

It's plausible to see Uber's valuation not as an artifact of its genuine potential, but of growing inflation within the high-tech bubble. There have been other examples that haven't worked out so well.

Groupon, for example, was valued at $16.6 billion back when it launched its IPO in 2011. Today its valuation is at $4.2 billion.

Maybe Uber will live up to its lofty valuation. But maybe not...

Speaking of US stocks, the companies that make up the S&P 500 are now more dependent than ever on China and that has created a vulnerability. Allegations of hacking and cyberspying threaten to disrupt business.

The U.S. Justice Department charged five Chinese military officials May 19 for allegedly hacking into the computers of American companies and stealing trade secrets.

We have pointed out repeatedly that the record stock prices do not reflect the underlying economic fundamentals in the US, which are mixed at best.

No where is this more true than in the jobs market.

The U.S. may have regained all the jobs destroyed by the Great Recession, but the new jobs that replaced the old ones aren’t better — and that helps explain why the five-year recovery has seemed so anemic thus far.

The economy has replaced a sizable number of good-paying jobs with ones that offer less than the average wage. Altogether, the U.S. has 4 million fewer jobs in well-paid sectors vs. January 2008.

While the overall jobless level has dropped the number of the working-age people with jobs is barely over 6 in 10, hovering at a level reminiscent of the late 1970s, hardly times when the economy was doing well.

In May, the U.S. workforce participation rate—the combination of those with jobs and unemployed workers actively seeking them—was just 62.8 percent. Recent surveys suggest more and more long-time unemployed workers are abandoning the search for another job and leaving the nation's workforce.

The Federal Reserve has been tasked with trying to fix America's unemployment problems through monetary policies, something that ignores other fundamental factors impacting the job market. A new study done by economists at the University of Chicago Booth School of Business and the University of California at San Diego indicates the Fed's efforts have not really had much success.

Under Ben Bernanke, the Federal Reserve’s extraordinary measures to fight the financial crisis cut the unemployment rate by about 1 percentage point from what it would otherwise have been. That’s not a huge success given all the bullets fired by the Bernanke’s Fed, including purchases of assets that ballooned the central bank’s balance sheet to more than $4 trillion.

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Gold prices settle higher after the ECB cut interest rates. U.S. stocks hit fresh highs after ECB revealed new stimulus measures. Gold last traded at $1,253 an ounce. Silver at $19.08 an ounce.

This morning, for the first time ever, the European Central Bank cut interest rates to an all-time low; well into negative territory in real, inflation-adjusted terms. It also announced a program similar to the US Federal Reserve's failed Quantitative Easing program in a futile attempt to jump start the European economy using monetary policy. This could be the beginning of the end for the euro.

The price of gold is on the rise due to the ECB's announcement as a weakening euro will increase the price of gold in terms of the euro. It will also negatively affect fixed income investments and deposit accounts in Europe.

The euro is not the only major currency in trouble. So is the dollar.

The Chinese, the Russians and the Iranians are all moving to replace the US dollar as a medium of exchange, as everyone knows. But when US corporations start having to replace the dollar with China's renminbi, it is an indication of a far more serious trend that will only hurt the value of our dollar.

The U.S. dollar is being increasingly dropped as the currency for settling international trade. The Financial Times reported today that U.S. corporations are using the Chinese renminbi to buy imports over three times more than they did last year. China’s renminbi is rapidly displacing the US dollar as a trading currency not only in Asia and Europe but also in the US home market.

US importers have found they can slash the cost of imports from China by agreeing to trade in renminbi rather than US dollars.

Not only is the US dollar weak, but so is the US economy.

The Federal Reserve and the Obama administration keep telling the American people the US economy is improving, but the economic statistics--employment figures in particular--tell a far different story.

The number of Americans filing new claims for unemployment benefits rose last week. This is just the latest in a long parade of disappointing labor reports.

Initial claims for state unemployment benefits increased 8,000 to a seasonally adjusted 312,000 for the week ended May 31, the Labor Department said this morning.

In addition, the prior week's claims were revised to show 4,000 more applications received than previously reported.

In today's world, entire national governments become subservient to power brokers who hold financial controls. Never has there been a better example of this than what happened this week with Ecuador having to relinquish half of its official gold reserves to Goldman Sachs in return for promised "liquidity." This amounts to gold confiscation from a whole country. What the Ecuadorians may learn the hard way is that gold is the only asset not dependent on anyone's promises. They traded 5,000 years of security for a promise to repay.

The Ecuadorian government had no choice. They were compelled to give up the gold.

Individual investors should take this as a lesson for their own portfolios and financial security and jealously guard their gold holdings as their financial insurance policy.

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Gold prices end slightly higher as traders look ahead to this week's economic events. U.S. stocks retreat from records as investor sentiment has sunk over the past month. Gold last traded at $1,244 an ounce. Silver at $18.76 an ounce.

Ultimately, the key to successful investing is to buy low and sell high.

Right now an opportunity to do just that exists in the financial world as it relates to gold and the stock market.

Gold is currently trading at 4-month lows. As we have pointed out, this alone represents a terrific buying opportunity as the basic, fundamental fiscal and monetary conditions that make gold so vital have not changed.

But there is another aspect to this scenario that some have been ignoring:

As CNBC.com pointed out this morning, one reason for the correction in gold is that investor demand has been diverted to equities. This, in and of itself, is interesting because the current bull market in stocks, driven largely by Fed pumping, is already substantially older than most bull markets last.

How long can the stock market continue to rise?

With the S&P 500 near all-time highs and gold at four month lows, where do the opportunities exist to buy low and sell high? The answer to that question is clear.

There are other factors that indicate the correction in gold won't last too much longer.

Ned Davis Research’s John LaForce and Warren Pies point out that real interest rates have stopped increasing. Real rates, at least historically, enjoy the single strongest correlation to gold prices, and they leveled out in 2014. Lately they’ve even pulled back a bit. “Gold normally reacts favorably to falling real yields."

Meanwhile, Chinese gold purchases remain massive and India has made changes in laws that seem set to rekindle demand on the subcontinent as well.

LaForce and Pies are telling investors that gold's bull market cycle does in fact remain intact. In other words, this correction won't last forever.

There are some esteemed financial experts who recognize gold's importance. Influential financial publisher and former presidential candidate Steve Forbes is out with a new warning that the U.S. faces an economic catastrophe due to the Federal Reserve's loose dollar policy. He believes returning to a strict “gold standard” is the only way to avoid disaster.

"[The Fed's] vastly misguided monetary policies are now setting the stage for a new economic and social catastrophe — one that could rival the financial crisis and horrors of the 1930s,” he wrote in the book Money: How the Destruction of the Dollar Threatens the Global Economy -- and What We Can Do About It co-authored by Elizabeth Ames.

"The best way to achieve monetary stability: linking the dollar to gold,” Forbes writes.

As many other critics have pointed out, the Federal Reserve seems to be acting to boost Wall Street, without much care for the broader economy. There is certainly ample evidence that this is what Fed Chair Janet Yellen has been doing ...

Yellen has spoken publicly on the economic outlook or monetary policy seven times since becoming the Federal Reserve chief. Each time her remarks have sparked a rally in stocks, so much so that Yellen’s effect has introduced a new fowl to central-banking euphemisms ... add to the doves and hawks, our first goose.

Blame Allan Meltzer, a historian of the Fed and a professor at the David A. Tepper School of Business in Pittsburgh, who has warned for the better part of five years that Fed interest rate cuts and asset purchases were going to trigger inflation. He says Yellen’s Fed is “goosing” equities with its provision of easy money.

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