January was not a good month for gold. We don't expect February to be much better as overwhelmingly positive data (consumer credit and spending) in the US has stirred the sentiment pot. It has blinded many investors of the realities surrounding the dire fiscal situation the United States finds itself in. It is unprecedented times for the stock market. The economy is showing signs of positive growth, while at the same time the Central Bank is begging Congress to raise the debt ceiling - literally threatening default if its demands aren't met!
Like all historically profound periods of economic instability, you have to dedicate more time and far more research to your investing decisions. We remind ourselves this everyday at Pinnacle and so should you.
Our team will be focusing on gold and gold equities over the next several weeks as we plan on introducing two specific opportunities in that time period. We could very well be in one of the last and most significant pullbacks before gold makes its ascent to $1500 an ounce ( a very important psychological price for investors).
The Standard & Poor's GSCI Precious Metals Index dropped 6.5 percent in January, the most for the month since 1991. Gold itself retreated 6.2 percent and silver 9.3 percent on the month.
Gold is no stranger to monthly pullbacks and January's drop has given us the opening we were waiting for. We strongly believe gold will see new highs and that the precious metal bull market is alive and well. Over the past decade, gold has experienced 4 monthly slumps larger than January's 6.2% pullback. Think back to March of 2008 when gold fell 34% through the Spring and Summer, only to rally almost 50% from November through to February of 2009.
Silver did the same thing in that same time period. It lost 57% of its value only to rally 73% in the following months during the Winter of '08 through to '09. Precious metals are not in a bubble, contrary to what the media outlets try and tell you.
The only clearly identifiable bubble is the debt bubble of the United States which is accelerating at a dangerous pace. The National Debt in the US is increasing more than $4 billion per day and is expected to increase annually for the next few years.
Gold is More Than Just Another Investment
As an active, responsible investor we encourage you to constantly evaluate why you've bought specific assets (investments) and why you've chosen to allocate a portion of your capital to them. It is our belief that in respect to gold, investors need to shift from the mindset of "this is a speculative investment that I hope to make a certain percentage on" to "this is an insurance policy against the erratic spending of government."
Gold is insurance against the devaluation of the currency you hold in your bank account, the world's currency and your purchasing power. You can't control how the government decides to blow your money (tax dollars), but you can protect yourself against its irresponsible ways.
Fed Chairman, Ben Bernanke, has repeatedly commented that deflation is a far worse evil than inflation and that the Federal Reserve will do everything in its power to ensure inflation is the victor. A period of prolonged inflation is the only potential way the United States even has a minuscule chance of paying off its debt... but that's another story.
We Are Not Gold Bugs
We do not fall into the 'fanatic precious metal investor camp' who believe you should have upwards of 80-90% of your investments in precious metals and or precious metal equities. Although there is a potential for a complete financial collapse, we do not believe that will be the case. We are of the mind our economy will enter a period of prolonged inflation and potentially hyperinflation. We are already into the first wave of this as rising prices, especially in the commodities sector, can be seen all over the world. And it will get worse before it gets better.
We plan to increase our already significant exposure to precious metal equities over the next two months. The Fed's decision to implement never before used monetary policies is going to increase the likelihood of further inflation and, in the longer-term, potentially hyperinflation.
Ask yourself these two questions:
What would you do if the US dollar crumbled against its counterparts and inflation skyrocketed?
What would you do if you lost 50% of your purchasing power?
Now answer this:
Is it worth protecting yourself from the reckless spending of the government? We trust that your answer is YES.
Gold is insurance.
Well positioned gold and silver stocks will appreciate more than the actual precious metals themselves. This has been proven through countless bull markets in gold and silver. We've already seen it in this bull run. How many silver or gold stocks have exploded multi-hundred percentage points following a discovery or production launch.
It All Comes Down to the US Economy
If the US economy comes raging back, and the unemployment rate begins dropping like a stone, the Fed will have the confidence to raise interest rates. If that happens, the party is over for gold - for the short-term. Will it happen?
Not according to the Fed Chairman, Ben Bernanke. He stated in a press conference that employment levels will not normalize for several years. This means more stimulus is coming from the government in a desperate attempt to gain voters by creating jobs.
All is not Well in Bernanke's House
Federal Reserve Governor Kevin Warsh, recently resigned after five years at the central bank. Warsh was one of Chairman Bernanke's closest financial-crisis advisers, but as time went on, he began to question the expansion of record monetary stimulus in November. On Nov. 8, he said in an op-ed and speech that the Fed's treasury buying "poses nontrivial risks" even after he voted to support the stimulus. Perhaps someone's conscious is finally catching up with them.
The National Debt is currently over $14.1 trillion and is expected to cross the unthinkable 100% debt to GDP ratio sometime in 2011. The most recent budget forecast from the Office of Management and Budget (OMB) showed the 2011 budget deficit at $1.3 trillion, more than the $1.17 trillion deficit for FY 2010. This will catapult the US to more than $15 trillion in debt and over the 100% debt to GDP ratio. This has already happened. Nothing can prevent it. We know the US is going deeper into debt before they attempt to get out of it; another key reason this gold bull-market is intact.
Bernanke has spent his time recently begging and threatening Congress to allow the national budget deficit to increase once again. In Bernanke's first appearance before a committee of the newly Republican-led House, he made the ramifications of not cooperating very clear. He stated that, "If the United States defaulted, it would have extraordinarily bad consequences for our financial system and it would mean that we would face higher interest rates, essentially indefinitely, because creditors wouldn't trust us to make our interest payments. It would be very destructive."
Keep in mind, the United States has only been able to go this far into debt because it's home to the world's reserve currency. Central banks from around the world are still buying US debt. They are buying US treasury bonds because the US has been the world's currency for so long and no one likes change. These central banks believe that the US will have to pay them back and will pay them back at some point. This has allowed the Fed and the US government to manipulate and take advantage of these central banks and their interest rates at the same time. Any other country in the world, like Portugal and Ireland whose 10 Year Bond Yields are above 7 and 9 % respectively, would have seen their rates rise long before now.
The fact that the Federal Reserve is the largest holder (more than China) of US debt should be a major warning sign. Despite other countries reluctance to stop buying US debt, their demand is slowing, causing the Fed to purchase more and more of it.
Timothy Geithner, the US Treasury Secretary and Bernanke's right hand man, is already boasting around town that Congress has to give them the nod on increasing the deficit. He recently commented in an interview at the Newseum that, "I can say this with complete confidence - that the U.S. will meet its obligations, that Congress will act as it always has to make sure we meet those obligations. There's always a little political theater around this."
Nothing more than a 'little political theatre'. You can't help but shake your head.
There is no doubt in our minds Bernanke will have his way and the debt ceiling will be raised. This will allow the Fed to continue to expand its balance sheet as it sees fit and to keep easy money flooding the markets. Remember, it's all about interest rates and keeping them as low as possible until the economy actually recovers.
We aren't alone in our sentiment towards the gold market. Thorsten Proettel, an analyst at Landesbank Baden-Wurttemberg in Stuttgart stated that, "At the moment, people still have fear about inflation, about the debt crisis, and I don't see any resolution to the debt crisis when the Fed is buying debt again and again. Most people will be loyal to their investment because the fear doesn't evaporate."
Michael Cuggino, who helps manage $10 billion at Permanent Portfolio Funds in San Francisco, has reported having 20% of his assets in gold. He recently commented that, "I had to chuckle when I saw reports that it was over for gold. Some investors have taken money off the table after a significant run-up in 2010. If you look at the macro environment, the instability around the world, the worldwide currency devaluation, these factors all bode well."
The debt crisis is still intact both in Europe and America. The shoe will drop in Europe probably before America, setting gold afire once again and taking it to all new highs. Remember, for us, gold is not a greed play, but an insurance against a US dollar we have a harder and harder time believing in.
All the best with your investments,