If Ever There Was A Need For An Inflation Hedge Like Gold Or Silver - It Is Now

Includes: GLD, SLV
by: Moneyline

Be most cautious when there is a growing optimism regarding the trajectory of global economic recovery. Calamity generally hits when the least expected. The need for safe haven investment seems more acute "Now" than ever before. All global money printing presses are still going at full speed. The Eurozone region, Japan and China are very likely to continue stoking their economies. That should eventually boost demand for gold as an inflationary hedge. Gold prices climbed Tuesday as escalating inflation in China boosted attraction of the metal as leverage, and increased demand for gold jewelry, coins and bars. The National Bureau of Statistics reported China's consumer price index rose 2.7% from a year ago. Estimates were for 2.5%. There is probably no better time to consider diversifying one's portfolio into a depressed asset classes like gold and silver when the crowd is optimistic about a vigorous and self-sustaining economic recovery and when the world's stock markets are at record high prices.

Gold futures climbed for the second straight day as accelerating inflation in China boosted the appeal of the metal as a hedge, while demand increased for jewelry, coins and bars. China's consumer-price index rose 2.7% from a year earlier, government data showed. I had mentioned in a previous article that - When you pump massive amounts of money into an economy, as the U.S. Federal Reserve has done with QE1 through QE3, you're supposed to get some measure of inflation. And yet despite some $2.3 trillion of quantitative easing since 2008, the core inflation rate has actually fallen over the past year from about 2.25% to 1.7% as of May. It defies both common sense and monetary theory - or at least until you find out where all that QE3 money ended up.

Take a look at The Perils Of Exiting - an interesting article posted at Zerohedge, which emphasizes the catastrophes caused by money printing & low interest rates.

Presenting some excerpts:

In its annual report last month, the BIS invited central bankers to consider what the implications would be of an interest rate shock occurring as central banks seek to quit their current ultra-accommodative monetary stances. The BIS drew attention to the risks that crystallized in 1994 as the Federal Reserve exited a prolonged period of unusually low short-term interest rates. We should recall that the FOMC decided to move to a less accommodative policy at its meeting on 4 February that year. Between February and May, the federal funds target rate rose from 3.0% to 3.5% but that precipitated a surge in the Treasury 10-year benchmark yield from 5.81% to 7.49% in that same three-month period.

Further noted - If bond yields were to escalate, as the BIS is warning, it seems unlikely that central banks would fail to respond. They might be expected to try to counter this movement by indicating that, in moving away from accommodation, they intended to pursue a gradualist strategy. If that were not enough to contain the rise in yields within acceptable bounds, they might even declare that they were postponing their exit.

There is a further potential source of financial instability in central banks' exiting ultra-accommodation. They will not be moving together. The economies of the USA, the UK, the Eurozone and Japan are at different stages of recovery from the 2008-09 episode and its aftermath. Their respective central banks are operating under differing constraints. These central banks are very unlikely to adhere to the same schedule as they attempt to withdraw accommodation. In a global financial system awash with mobile capital principally seeking yield on investments, this situation creates a clear risk that massive international capital flows will occur, back and forth, during the central banks' exit process. These flows could well be reflected in extreme volatility in exchange rates between the major currencies. Doubtless, the G7 will issue statements claiming that what is happening is fine because central banks are acting with purely domestic monetary goals in view. Nevertheless, the impact of exchange rate fluctuations on international trade and economic growth, even if there is no ill intent, could be so severe as to give significant impetus to protectionism. Further, we have so far assumed that central banks would have it within their power to moderate upward pressure on long-term rates during the exit process. This might not be realistic.

If central banks keep tacking and trimming as they edge away from accommodation, it may come to pass that none of their statements will carry much credibility. They could then lose control of long rates or, at best, stability in long rates might call for ever greater market intervention on their part. The end-result would be to render monetary measures largely useless as instruments of policy because central banks, with their controls jammed open, could never be sure of effecting any intended plan. Mr Bernanke and his co-thinkers may soon discover that, in taking a different line in coping with the current depression from that followed in the 1930s, they have fallen unsuspectingly into a trap from which escape will be painful.

Just this week, the International Monetary Fund (IMF) trimmed its estimates of U.S. and world growth by 0.2 percentage points for this year and next.

In his latest article, Graham Summers said:

In the last six months, China has pumped roughly $1.6 trillion in new credit (that's 21% of GDP) into its economy. Despite this incredible monetary expansion, Chinese GDP growth is slowing. This is truly astounding: a country has expanded its credit by 21% of GDP in just six months and is barely able to generate positive GDP growth. Small wonder then, the Chinese stock market has taken out its post-2009 trend line. China is giving us a taste of what will be spreading throughout the global economy: a collapse in spite of massive monetary expansion. The entire "recovery" since 2009 has been based Central banks pushing money into the financial system… which did little more than allow corporations to borrow even more debt. Indeed, globally the leverage in the financial system today is as bad if not worse than it was going into the 2008 Crash. Can you imagine what would happen if we suffered another collapse now, when Central Banks are already pumping their brains out trying to push market higher?

Hong Kong Jewelers and Banks Face Gold Supply Issues

Last quarter's record slump is leading to continued physical demand especially in Asia. China in particular continues to see record demand and premiums on the Shanghai Gold Exchange are now at $24 over spot. The feverish buying has left many of Hong Kong's banks, jewelers and even its gold exchange without enough yellow metal to meet demand according to the FT. In mainland China, the Shanghai Gold Exchange saw record volumes on Monday, while queues formed outside some jewelry shops in Beijing. China's net gold imports from Hong Kong increased from 80 tons in April to 108.8 tons in May or a 35% increase and May was the second highest total on record.

China is set to become the world's No. 1 gold buyer this year - and it may be already. So far net imports through Hong Kong for the first five months of the year have totaled over 413 tons - double those of a year earlier when China imported just over 830 tons in the full year. China's domestic gold consumption was 776.1 tons in 2012, down from 779.8 tons the previous year, according to the producer-funded World Gold Council. The world's largest jewelry group, Chow Tai Fook Jewellery Group Ltd. (1929) posted a 48% gain in same-store sales for the first quarter.

Goldcore said that jewelers in China and throughout Asia are benefiting from soaring demand for gold products after the recent price falls. This has led Chow Tai Fook and jewelry outlets having to buy gold bars and rebuild gold inventories. Retail sales of gold tripled across China after the mysterious "flash crash" of April 15-16 when gold fell 10% in two days. Demand has remained robust and the recent weakness has seen continued demand. Asia, excluding India this month, is witnessing one of the strongest waves of physical gold buying ever, with bargain hunters using the drop in prices to secure jewelry and gold coins and bars which is creating liquidity and supply issues in the global gold market. The price gains seen post Lehman bankruptcy in September 2008 (see chart) seem quite likely in the coming months given increasing supply issues in the gold market. The paper price may be pushed lower in the short term and therefore dollar cost averaging and gradually accumulating physical remains prudent.

If You Own Gold, You Must See This Chart…

Another post caught my attention regarding gold buying by China, which again points towards gold demand and it being given vital importance in any investment portfolio today.

The chart below tells a story - a big story. In fact, I encourage you to forward this to anyone you know who serious about his money. What I found here, with the help of Frank Holmes from U.S. Global and one of the smartest people on earth on the potent combination of Asian markets and commodities, is a chart that shows a truly astounding fact about gold. Let me walk you through it, and what it could mean to your money, your gold and your financial future.

china gold

The grey backdrop is total world mining production. The blue vertical lines represent COMEX gold deliveries. And the big long vertical red lines? That's physical gold delivery on the Shanghai gold exchange. The takeaway? - Chinese demand for physical delivery all by itself is nearly equal to total worldwide gold production.

That's not a misprint.

In fact, so far this year Chinese deliveries through the Shanghai exchange account for nearly 50% of total global production all by themselves. The COMEX that's part of the New York Mercantile Exchange is almost an afterthought. This is about as bullish as it gets because the basic laws of supply and demand stipulate that whenever supply is reduced but demand remains constant or accelerates, higher prices result.

This is as immutable as the sun coming up tomorrow or the grass turning green in the spring. This is good for the markets in general, especially with Bernanke hell bent on keeping the "bad is good theme alive" when it comes to further stimulus. And this is positively great for gutsy gold investors at a time when others want to relegate it to the scrap pile.

Imagine what happens when people actually figure out that China is buying so much gold that physical deliveries there could account for 100% of worldwide production by year's end? The first will be additional opportunities that I expect current volatility to create in the weeks ahead. My Geiger Index is flickering yellow on a handful of solid gold related opportunities as I type this. The second are simply related to capturing profits. I expect the pace to pick up as gold becomes an important part of that annual money management right of fall passage - "window dressing" when entire portfolios are rotated in an effort to build in bigger Wall Street bonus checks. Savvy Investors could be very busy and incredibly profitable a few months from now.

All said and done and with the gloomy prospects regarding the immediate future - the need for a safe haven investment like gold and/or silver seems more acute now than ever before….I would bet my money on silver though.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I am long in silver and will add more on declines (if seen). Also holding some gold.