Secular Trends And Exits From Fiat System Boost Precious Metals Outlook

by: Emmet Kodesh

Twelve, fifty and hundred year charts for gold and silver show that the precious metals remain undervalued and in a secular up-channel. The inflationary effects of the past decade's fiscal policies alone present a bullish case for the metals. So do official upgrades in moves toward gold as "tier 1" collateral and a trend for nations to conduct bilateral trade by barter of commodities (like gold for oil) or in currencies aside from petrodollars. Short term volatility or plunges in precious metals' prices are small relative to these significant macro shifts.

On June 12 last year the FDIC classified gold as a tier one or "riskless" asset inviting banks to acquire the metal as collateral to anchor their loans and speculation. In 2010, Basel III created a two-tier collateral system allowing each European nation to assign gold to its level of choice. It is clear from German, Dutch, Austrian and other sovereign initiatives to repatriate gold that they wish to avoid consequences of the currency wars' race to the bottom, a self-destructive path to short-term competitive advantages. This prompts German demands on Italy, Spain and Greece to pledge their gold reserves (Italy has 2452 tons, fourth most in the world) as collateral for further infusions of credit from the ECB. This will protect Germany and hedge ECB "outright monetary transactions" (OMB's) that keep the Euro project going. In US indices, short term volatility driven by hedge fund profit-taking and the algorithmic multiplier effect barely masks the trend to physical assets. Recent declines punctuated by last week's smack down of metals or Wednesday's slide after three green days should not push retail investors to panic selling.

This larger context urges adjusting allocations to profit from four months of shake out in metals and miners. Precious metals remain solidly within their twelve-year up channel, directly on their trend line. Massive purchases of gold by China (reported as much as six years after the fact and always understated), Russia and other nations European financial organization will clarify gold values going forward. While the correlation between US debt and the gold price is precise and will assert itself in markets, one also should watch other nations that are trading and even bartering goods to avoid the petrodollar system.

The trend of nations like Russia, Australia and others to have at least 10% of their reserves backed by gold will continue. More nations like China and Japan are getting outside the dollar by using their currencies for direct trade. China, India and Turkey have been using gold to trade for Iranian oil to avoid US-UN sanctions. China and Russia are in a mixed barter system of Russian natural resources for yuan and gold. These developments reflect economic more than political calculation. Last March 29 in New Dehli, the BRIC nations signed agreements to further uses of their currencies rather and limit dollar trade. As much as the currency wars, this bilateral commerce signals basic change coming to the petrodollar fiat monopoly and the growth of a new global financial structure. There will be significant disturbances in socio-economic structures in all major currencies, Japan, Europe, Britain and America that have engaged in liquidating debt by inflation.

The Euro project is more political-managerial than financial though the chaotic socio-economic results get the attention. Like the bilateral, outside-the-dollar trade agreements, the upheavals in Europe and the lingering recession here prepare a new economic order that will arise from the ruin of fiat currencies. Discussions of enhanced political integration and "re-inventing Europe" are widespread at top official levels. This is constructive for gold which strong hands mean to monopolize by shaking the tree as was done last week. That need not happen. Buying opportunities are present and, as my previous pieces explained the positive trend for the metals is clear.

Don't sweat gold's sideways range since December 2011. The 12-year price chart shows a 16-month consolidation from spring 2006 to summer 2007. It also shows an 80-90% devaluation of major currencies relative to gold. The 22% correction in 4th quarter 2011 remains the major drop in gold's ongoing secular bull built on huge monetary expansion and devaluation. In secular terms, precious metals will continue to rise with loose fiscal policies, bullion repatriation, Chinese buying and, in the case of silver, steadily increasing technology-based industrial demand. Not only China but other sovereigns are buying. The dollar's strengthening in recent weeks against the yen is part of gold's recent drop. Gold remains in its mid-bull corrective channel ($1525-1790) begun in December 2011. So while it is time to nibble at certain equities related to food and energy the case for metals is strong. The junior gold miners ETF (NYSEARCA:GDXJ) established new support at $15.60 - $16 and looks solid about 16% above that low. "Time is on the side of the longs and solidly against the bears" says Egon von Greyerz regarding sovereign insolvency and ongoing shake out of citizen wealth. Since the 1971 forging of the petrodollar currency, gold has matched inflation in gas and oil prices which the government has excluded for two decades from the CPI. Without any gold one falls behind.

My recent piece discussed gold's 100-year chart. Drawing a line from the 1933 spike through the 1980 top gives target values in the scores of thousands of dollars. Because of enormous socio-economic and fiscal changes between 1933 and '71 and the August 1971 creation of the USD as the world's fiat reserve currency, the petrodollar world-reorganization tool, 1971 is a more instructive fulcrum. Detaching fiat currencies from genuine valuations sparked a ten-year bull in precious metals whose rise was quashed when Volcker pushed the Fed rate to 20%. Before that change and the subsequent secular bear, a line through the 1979-83 spikes gives a summer 2013 price in the $20-30,000 range. This will be delayed by 0% interest rates and pre and post market intervention via COMEX. But Stephen Leeb notes that Ben Bernanke's latest dovish comments on QE make $20,000 gold likely. Moreover, accounting for devaluation - inflation would bring gold to about $8000/oz. This will happen. Note that this is not far from the roughly $10,000/oz some economists have urged as a means of balancing the national budget and returning sanity to the dollar's value. The expansion of the monetary base since 2008 has seen debt climb vertically. The same banks recently wrist-slapped by the Justice Department regarding foreclosures intervene to keep gold suppressed. While manipulation will continue till widespread systemic collapses discussed by Ben Davies of Hinde Capital, a substantial rise in gold (and thus silver's) value will occur. Leeb sees industrial demand for silver photovoltaics boosting prices and limiting consumer purchase opportunities. That could happen but silver prices will rise regardless of retail access to markets. One needs to be positioned for it according to one's time horizon and ability to tolerate short-term volatility.

Some data to consider in building positions in precious metals: Barrick Gold Corp (NYSE:ABX) has risen from its secular low at $30/share and has massive reserves, low costs, geographic breadth and yields 2.4%. It gained again Tuesday but slid late on heavy trading. It is 50% below is average price target. Eldorado Gold (NYSE:EGO) has come strongly off its 52-week lows, adding to gains on heavy volume. It is a top holding of Tocqueville Gold (MUTF:TGLDX), Gabelli Gold (MUTF:GOLDX) and other major funds. Vista Gold (NYSEMKT:VGZ) has properties in America, Mexico, Australia and Indonesia. After under-performing for a year it recently bounced strongly off a new secular low of $1.60 and now sits at $2. Often touted, watch it to make sure it establishes support. Gold streamer Sandstorm (NYSEMKT:SAND) moved powerfully off its 52-week lows but on Tuesday gave back some gains on double volume. McEwen Mining (NYSE:MUX) has held up better than most miners. It steadied about 40% above its 52-week low and is continuing to come back, adding 3.07% Tuesday. Silver Wheaton Corp (NYSE:SLW) has resumed its climb and also is 40% above its 52-week low last May. It consolidated its gains Tuesday. Sprott Physical Silver (NYSEARCA:PSLV) has made a strong rebound underscoring Leeb's comments on the metal. Junior miner Reservoir Minerals (OTCPK:RVRLF) was indifferent to the collapse and this week's recovery. Developing a rich property in Serbia with backing from Freeport McMoran (NYSE:FCX), Reservoir for weeks has traded between $2 - 2.50. Freeport itself had a bad few days as law suits based on its oil and gas acquisitions approach. But Leon Cooperman is buying, it rose Tuesday and has price targets 50% above its current level. Nova Gold (NYSEMKT:NG), a key holding of Seth Klarman at Baupost and of Thomas Kaplan's Electrum Group has come strongly off its recent 52-week lows buoyed by confirmed rich copper, gold and silver mineralization at its Galore Creek project in British Columbia. This project, held jointly with Teck Resources (TCK) will be used to fund Nova's massive gold project at Donlin Creek, Alaska. Turquoise Hill Resources (NYSE:TRQ) continues to search for a bottom. Country and electoral uncertainty is the joker in its deck. The Mongolian Mining Ministry has canceled licenses on TRQ's spin off, Entrée Gold (NYSEMKT:EGI) formed Rio Tinto (NYSE:RIO) and TRQ to develop gold resources at their flagship Oyut Tolgoi mine. TRQ and its junior affililiates like South Gobi Resources (OTC:SGQRF) and EGI will have entry points but political issues have blurred them. SilverCrest Mines (NYSEMKT:SVLC) was up 3.85% Monday on triple its average volume. Its Helena project exceeds production expectations. The conviction buying off its recent 52-week low is inviting. It has given up some gains but is a buy at $2.30 just below the level of Wednesday's renewed sell-down.

Investors should mix major with junior miners per your time horizon and tolerance for the volatility that goes with this sector which is a crux of cultural valuations in these unusual times. Regarding bio tech, Galectin Therapeutics (GALT) has surged 40% on heavy volume in recent days based on promising discoveries in treating fibrotic diseases and cancers. Learn its chart, watch its news and trade it. There is a lot of down time between new discoveries and partnerships and approach to approval and marketing.

Given the bubble in bond asset prices, those who need significant ongoing income streams should lessen their usual bond weighting and seek dividends tied to food and energy. Look at oil and gas LLC's like Vanguard Natural Resources (NYSE:VNR). It trades between $26-29 with a trend of higher lows, has average price target of $32 and pays monthly at 8.85% annualized. VNR acquires at discount mature properties with long production life. Sprott Resource (OTCPK:SCPZF) has farmland, fertilizer, oil and gas and gold. Its monthly dividend annualizes to 10.5% and it went ex 2/26. Saskatchewan Potash (NYSE:POT) like the other phosphates is tied to food. POT has sold off 50% in 2 years though analysts have buy ratings on it and it yields 2.86%. Mosaic (NYSE:MOS) is rated a stronger buy and yields 1.74%. Terra Nitrogen (NYSE:TNH) now yields 6.61% annualized and is a strong play 23%l below its March 2012 high. Mind the year-over-year volatility and align your holdings in these mineral-fertilizer assets accordingly. If the Timber ETF (NYSEARCA:CUT) were not so near its secular high it would be a good choice.

Yardeni Research shows that Consumer Staples is the one sector that continues to trend steadily higher relative to the S&P but now is not a time for heavy buying. We are in a week or two of politically-driven volatility. Further ahead, a significant correction is likely late in the third or fourth quarter. Keep stops suited to your circumstances in place on your individual stocks and ETF's. International equities' bad Monday was offset Tuesday and Wednesday but underscored the downtrend they have been in for two years. Be alert for buying opportunities but step lightly. For sector and asset class trends follow the weekly charts at Yardeni Assoc.

As Ben Davies of Hinde Capital argues, there is "monetary singularity," a pervasive and growing gap between values and prices. Only the most durable values will survive. So judiciously add precious metals and miners like those noted above and some resource and consumer staple related assets. I reiterate the merits of multi-use farmland: the times demand it as a durable value. And as always, your path to growth, income and livelihood must suit your needs.

Disclosure: I am long NG. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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