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2014 to be a better year for gold prices

In US dollar terms gold fell 28% in 2013 and in Euro terms gold topped out in September 2012 at just over €1380 before falling back to the €900 area by December 2013. Silver did even worse and while it has been as high as €34 euro in 2011 by the end of 2013 it was breaking below the €15 level. All of this has happened while the Federal Reserve was fully engaged in QE3 and pumping billions a month in government debt and mortgage backed securities.

In contrast to the poor performance of gold and silver in 2013 the stock markets had a great year and the US property market showed real signs of life. Both of these markets relied almost entirely on the Federal Reserve’s money printing to make headway however, as Bernanke felt that driving momentum in property and stocks was key to US economic recovery. Ironically precious metals got hammered as the Fed’s QE program drove investors to follow momentum in equities and real estate. Furthermore, analysts pointed out that a taper was coming at the end of 2013 and this compounded poor sentiment in the metals markets.

But since the start of 2014 when the Fed has actually started the tapering process equity markets have stalled and metals prices have moved up quite strongly. The economic data over the December January timeframe has been generally below expectations and this has been explained away as a result of poor weather conditions. However, we believe that the US economy is set once again to underperform dramatically over 2014 as the Fed tries to reduce QE and that the current weakness is not just a temporary blip. Since we believe that money printing was the prime driver in equity prices last year we also predict that equity markets will go nowhere this year as the Fed tries to bring its balance sheet under some control through the taper process.

If the stock market stalls out this year then we also expect to see some weakness in property prices in the US as a consequence of the attempted taper. General weakness in the US economy will be more difficult to explain away as spring approaches (doubtless many manufactured explanations will be made however!) and this lack of momentum on the general economy, stocks and property is likely to swing the pendulum of momentum back in favour of the metals. Unless a ‘black swan’ emerges gold and silver are likely to make consistent progress back to higher levels and erase much of the losses from last year. However if a ‘black swan’ event was to occur (e.g meltdown in derivatives markets…) gold and silver could both move rapidly past their previous highs in this cycle.

10 key points about gold

1.- It costs 7.8c to create a C note(100 USD bill), 2 grams of gold(spot price roughly $80) costs roughly $75 to mine.

2.- US national debt is increasing by between 1/2 and 1 trillion USD annually.

3.- Annual gold production for the past few years has averaged 2500 tonnes. 1 metric ton is 32150 troy ounces, equalling 80,375000 troy ounces or 99 billion USD, a relatively trivial amount in comparison with the debt numbers in point 2 above!

4.- 1 trillion USD(1000 billion) is over 10 ten times annual gold production.

5.- China is the number one gold producing country at roughly 320,000kg of gold annually, South Africa was consistently number 1 until recently, it currently sits at number 4.

6.- South Africa, once the powerhouse of global gold output is fading fast, the major mines in RSA are depleting so fast that they are 2 miles underground in dangerous conditions, analysts say that once the mining stops in these mines it will not be cost efficient to re-open many of them. Estimates say RSA gold mines are 75% mined.

7.- The Krugerrand, the worlds number 1 gold coin come under such a squeeze this year(with the price drop in 2013 causing a huge surge in demand)that the rand refinery upped premiums and a billion dollar purchase of scrap gold was made in USA by an un-named RSA corporation. South Africa has never before imported gold on this scale.

8.- More than 1/3 of annual gold production is via scrap and recycling, this source is coming under significant pressure as it is diminishing significantly, scrap tonnage is down year on year for the the last few years, although the price drop has influenced this, the general consensus amoung scrap dealers is that the supply is just not there.

9.- Gold is subject to the law of diminshing returns similar to oil(i.e it becomes more expensive to mine the same oz in a location over time),however gold mining is more labour intensive than oil drilling, it is also harder to estimate quantity on location and often yields disappoint more so than with oil.

10.-If there is one country that understands the value of gold it is China, they have risen to number 1 gold producer worldwide, while dramatically increasing annual purchases and inflows via Hong Kong in particular. Whilst China's holding are still less than the USA, there is an increasing realisation that the US does not have/own all the gold it reputes to. China on the other hand significantly down plays its holdings, its production and its inflows. He who holds the gold holds the power!

Fed fails to taper - implications for gold and silver

Last week the Federal Reserve announced to a surprised financial community that there would be no reduction in money printing this month. The markets had priced in a 5 to 10 billion reduction in the Fed’s 85 billion USD a month of QE which has been channelled into mortgage backed securities and US treasuries to support the US housing and government debt markets and thus keep interest rates at abnormally low levels. Since there has been such a strong drum roll of media commentary about the apparently improving prospects for the US economy and Bernanke has been talking about reducing QE for the last few months there was a consensus on wall street that the the Federal Reserve would act to taper in September.

This didn’t happen as Bernanke acknowledged that economic data was not firm enough to suggest the US economy could move forward without its sugar high of 85 billion every month. Bernanke is dead right in his assessment. Without the 85 billion, interest rates would accelerate their move higher – a trend which began as soon as the taper talk began to emanate from the Fed. This would quickly cause cracks and a new more spectacular collapse in the housing sector as mortgages become completely unaffordable for new buyers and house owners with large mortgages are forced to default on their loans. Given the already bad data on loan defaults for homeowners it’s clear that housing is one of the most vulnerable sectors when interest rates start to rise. And rise they will – nothing goes on forever and the lowest rates in history will not continue indefinitely.

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Bond yields up, gold and silver up and stocks down...

Exciting price moves for silver and gold

Both silver and gold pushed up strongly in the last few days with Thursday the 15th August being notable as silver moved up 70 cents from 16.50 euro to the 17.20 area. This is hugely interesting because the silver price has been anchored down around the 15.00 euro area for most of the summer and just 2 weeks ago it was down to 14.80 as the Fed issued new commentary regarding tapering. In our opinion this is just an opening salvo from stocks bonds and metals as all three asset classes flash red warning lights over the strength of the US economy and its trajectory minus massive bond purchases from the Federal Reserve.

With positive new jobs data yesterday in the US the market hammered stocks and bonds downward as yields on US treasuries continued to rise. All this while gold and particularly silver had one of their best days of the year in terms of price movement. The talking heads on CNBC and Bloomberg attributed the metals strong performance to disturbances in Egypt where they bothered to note it at all. But it is our belief that the metals strong showing yesterday had nothing do with the middle east and everything to do with the market warning the Federal Reserve not to get off the QE tightrope. If the Fed allows the free market to set the proper interest rates for US debt there is a crisis looming that will make the issues in the Eurozone look like a cakewalk!

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Is the Gold Bull Market Over?

For those who are disillusioned by the recent downturn in the price of gold and silver, it is worth re-visiting the fundamentals of what exactly has been driving the current bull market.

Ask yourself the 13 questions below and then ask yourself is the perceived bull market decline based on a change in the facts or on simple sentiment:

 

1.       Are the PIIGs reduced their debt burdens? Or have they increased further since recent crises?

2.       Does the US bond market look healthy or does it look like a 30 year bubble ready to bust?

3.       Are western consumers debt burdens dealt with?

4.       Are real interest rates positive or negative?

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