This week is going to be a very slow one, as much liquidity has left the market for year end book squaring. It is going to be interesting to see what shakes out though, as “interests” try to have their way in this environment. After a few days away, it is refreshing to get “back in the groove”.
Of particular interest to me is what is going on with the debt that US must sell. Credible sources suggest that the Fed is monetizing approx. 40-50% of the new issuance that is hitting the markets (source: Zero Hedge). It is a fact that foreign central banks lack the dollars necessary to fund the US’s voracious appetite for new spending, as they attempt to plug the holes in the economy. As the US dollar falls in value, and our exports rise as a result, they will have ever fewer dollars with which to buy new Treasury issuance.
There are only 2 possible outcomes. The first would be a repeat of last year, where the market collapsed and money rushed into “safety” i.e. Treasuries. Politically, the Obama administration cant allow that to happen as the mid-term elections are fast approaching. The second option is for the Fed to continue to purchase as many Treasuries as is necessary in order to give the appearance of a fully functioning market (no failed auctions). It is this second option that appears to be the course we are on.
That fundamental reality is placing a floor under the precious metals and in due course will be the rocket fuel that enables their advance to truly astronomical sums. You would be well advised to ignore those that talk about gold returning to $850, $905, etc… it just isnt going to happen. Central banks around the world would jump at the chance to buy gold in quantity at prices far above that level. And once they do, that would stimulate traders of every persuasion to follow suit, thus propelling it much, much higher.
China has an announced plan of acquiring 5000 tons of gold in the next 3-5 years, and a total of 9000 tons over the next 10 years. Domestic production will only enable a partial fulfillment of that goal. The rest must be purchased from abroad. With most central banks ceasing to sell any gold in quantity, and in fact becoming buyers, that only leaves the IMF and the open market as the 2 sources of supply. Once the IMF sells the other 200 tons they have available, there will be no more supply forthcoming from that source. So, that will leave the open market as the only viable source of supply that China has indicated they require. That will require that China be the buyer on any dips in the price which will act as a very strong supporting influence on the gold price. And that is just China. Dont forget about all the other central banks in the world that have a desire to increase the percentage of reserves they hold in gold bullion. All of these CBs will be trying to outmanuever one another as they seek more gold.
Now consider the actions of John Paulson, widely recognized as a very astute hedge fund manager. He made billions shorting the real estate market. Now, he has his eyes fixed firmly on gold (and the related mining companies) and is starting a new fund that commences next month. He will be purchasing physical gold and certain mining companies. Because of his success in the real estate sector, his actions will be followed by a multitude of other fund managers as they seek to share in his prescient insight.
Next consider the reactions of governments all over the world as it relates to taxation. The rich in every country are a target. Higher taxes, fees, duties, etc… are surely coming, as surely as the sun rises in the East. These people whom have been targeted are very astute at the ways and means of tax avoidance and minimization. A central strategy is to convert, as much as is possible of your wealth into physical bullion and to store it out of reach of the money grubbers.
These above highlighted groups of buyers are what will propel the price of the precious metals much, much higher over the course of the next several months/years. And then, and only then, will the public wake up and try to jump on board – driving prices absolutely parabolic and to unfathomable levels.
It is important from time to time to remind oneself of the fundamental factors that are drivers of price in the asset class one wishes to invest in.
Disclosure: gold, silver, mining companies
Disclosure: All my positions in gold and silver are in physical form - no ETFs.