Keiser Report

This weeks Keiser Report discusses gold and the war on savers.

Is Gold The Best Hedge Against Tail Risk, When Uber-Wealthy Bank Clients Buy Up Tons Of Physical Gold?

From Zerohedge:

A question that has become very prevalent recently is whether in a world denominated in fiat ponzi equivalents, in which central banker intervention is hell-bent on devaluing this very system, whether gold (with a recent Sharpe ratio most portfolio managers can only dream of) is not currently the best hedge against tail risks. Conveniently, the World Gold Council has just released a paper, and, for those with a shorter attention span, a video clip, which provides an affirmative answer to that question. From the WGC: "In the analysis the WGC shows that during the period between October 2007 and March 2009—the height of the global financial meltdown—an investor with a portfolio of US$10 million experienced an additional US$500,000 financial loss simply by not maintaining a position in gold. The study used a composition similar to a benchmark portfolio, which included an 8.5% allocation to gold, to show that total losses incurred during the period reduced by 5% relative to an equivalent portfolio without gold." But before we get into the WGC paper's findings, we would like to point out a special report by Reuters which confirms what all the "goldbugs" have known all along: "The world's wealthiest people have responded to economic worries by buying bars of gold, sometimes by the ton, and moving assets out of the financial system, bankers catering to the very rich said on Monday... A banker said, "We had a clear example of a couple buying over a ton of gold ... and carrying it to another place."" Guess why JPMorgan is doing all it can to preserve as much physical gold within its system before it all runs out, and all those demands for physical delivery skyrocket (even more).

From the Reuters report:

Fears of a double-dip downturn had boosted the appetite for physical bullion as well as mining company shares and exchange-traded funds, UBS executive Josef Stadler told the Reuters Global Private Banking Summit.

"They don't only buy ETFs or futures, they buy physical gold," said Stadler, who runs the Swiss bank's services for clients with assets of at least $50 million to invest.

UBS is recommending top-tier clients hold 7-10 percent of their assets in precious metals like gold, which is on course for its tenth consecutive yearly gain and traded at around $1,317 an ounce on Monday, near the record level reached last week.

In a sign of the uncertain times, some clients go further.

"We had a clear example of a couple buying over a ton of gold ... and carrying it to another place," Stadler said. At today's prices, that shipment would be worth about $42 million.

Julius Baer's chief investment officer for Asia is also recommending that wealthy investors park some of their assets in gold as a defensive stance following a string of lackluster U.S. data and amid concerns about currency weakness.

"I see gold as an insurance," Van Anantha-Nageswaran said. "I recommend 10 percent as minimum in portfolios and anything more than that to be used for trading purposes, to respond to short-term over-bought or over-sold signals."

And below are the summary finding from the WGC report, via report author Juan Carlos Artigas:

In previous studies, the WGC has shown gold to be a highly effective and consistent portfolio diversifier. We can now demonstrate that gold does not only help increase expected risk-adjusted returns, it can also considerably mitigate the potential for wealth to be eroded by extreme events.

“In the last decade we have seen two of the worst bear markets in the last hundred years. As one might expect, sensitivity to risk still runs high for investors around the world, and as assets are rebuilt an ability to protect capital irrespective of market conditions is paramount. Considering portfolio diversification is clearly important, but protecting against systemic risk can be an entirely separate matter. This research shows that gold protects against tail risk events, but equally in more positive times reduces the volatility of a portfolio without sacrificing expected returns.”

The analysis suggests that even relatively small allocations to gold, ranging from 2.3% to 9.0%, can have a positive impact. On average, such allocations can reduce the Value at Risk (VaR) while maintaining a similar return profile to equivalent portfolios which do not include gold. Conceptually, VaR is a way of measuring the maximum amount an investor could expect to lose in a given period of time, with a certain degree of confidence, in the case of an unlikely, yet possible, event occurring.

Scrap Metal and Paper Recyclers

By Peter Souleles:

You may find this difficult to believe, but there are over 300 million scrap metal and paper recyclers in the United States. In Japan there are over 127 million, Europe 730 million and the list goes on. The truth is that just about every human being on the planet is a scrap metal and paper recycler by virtue of his or her usage of fiat currencies.

Despite the billions of recyclers only a small percentage has actually made money in the last 10 years. They are the ones who converted their scrap into hard assets and in particular precious metals. The rest are being played for fools and the evidence is there for all to see. The majority recycled their scrap into other forms of paper called junk bonds, municipal bonds, treasuries, equities and so on. The government on the other hand also recycled the scrap paper they collected as taxes into other metal products such as tanks, jets, bombs and clunkers which inevitably also become scrap in good time.

If the onward and upward march of gold and silver prices for over a decade is not proof enough, then consider the ongoing and relentless efforts of governments the world over to devalue their currencies. What that means is that your dollar is being attacked by your own government so that it can buy less and less. Now, is that a store of value?

If currencies are truly stores of value, it begs the question as to why their owners (i.e. national governments) are intent on devaluing them.

The US is currently successfully devaluing its currency which in any case is worth zilch. The effect though, is a desperate frenzy of US dollar buying by other nations in exchange for their own currencies. So we have more dollars, less value, but an even greater number of greenback tentacles in the world's financial system. Where do they end up? Probably in short term US treasuries so as to fund more US government deficit spending at close to zero rates of interest. This might be great for some form of global monetary easing (liquidity), but of questionable benefit to solvency. Just remember that the US is more interested in the position of its dollar in the world's financial system than its value.

When President Chavez of Venezuela devalued the Bolivar against the dollar in January, the people rushed to the supermarkets and emptied the shelves of televisions and refrigerators in anticipation of inflating prices for imported goods. Once again they were only half smart because since January their refrigerators (eventual scrap metal) have lost major value while the price of gold has rocketed.

Do you want more proof?

Well in Britain the deputy governor of the Bank of England came out in the last few days and urged the country to go on a shopping spree to boost the fragile economy. The governor's name is Mr Bean. Yes that's right, Mr BEAN. This one is not the real Mr Bean, he is just an impostor who believes that the profligate spending by the Brits which got them into trouble in the first place now needs to be repeated.

There is of course some method in his madness (even though it is just madness) because it is estimated that by slamming savers he will be depriving them of £18 billion whilst putting £26 billion in the pockets of consumers. Another misguided effort at injecting an £8 billion stimulus into the economy, for which the taxpayers of Britain pay him £250,000 a year. How much of his pay will he spend? I can assure you that he will be saving more than most of us.

The government of the UK is slashing its spending to bring down its debt but encourages Brits to do the opposite despite being near record levels of mortgage and credit card debt totalling £1.456 trillion.

Dear readers the currency you hold is not a store of value. You are simply holding onto a bucket that has a hole in the bottom. Scrap metal and paper fiat should be used only for necessities, getting a real education for your kids, paying off fiat debt and buying real assets of which gold and silver are presently the safest.

If the savers of Britain want to get their message through to Mr Bean, they only need to march down to their mint and convert the bulk of their savings to gold and silver. That should work wonders in no time at all. Better still they should form their own bullion bank which is open to customer inspection unlike Fort Knox (or should it be called Fort Nix?). In fact that is what savers the world over need to do to reclaim their right to a store of value. A 347% increase in the price of gold in British pounds over the last 10 years says it all.

As reported in the British press, Mr Bean admitted the economic recovery was being hampered by what economists call the "paradox of thrift" where savings may benefit individuals but not help the economy.

What the man does not understand is that periods of idiotic profligacy MUST be followed by painful periods of thrift (i.e. deleveraging) otherwise the subsequent downturn will be a collapse. As I wrote some time ago:

"Unless this deleveraging takes place people will not be able to deleverage their life styles and this is where the crux of the problem lies. This deleveraging will cause further pain and losses, but will stop when that which is left is productive rather than seductive, deserving rather than self-serving and needed rather than wanted. This is the simple formula that should be applied at all levels."

Is Mr Bean telling us that we can lose weight by eating more even though this will lead us to further financial illness and even though an estimated 140,000 Brits become insolvent this year?

In fairness to the man, he is but one of many clueless central bankers that believe that the financial system can be detoxed with the use of more toxins just like BP is doing in the Gulf of Mexico. What do you expect from men that have only two brain cells that spend their day trying to find each other to form a synapse.

Yes, currency is valuable as a medium of exchange, but each time we exchange it for something else, that subsequent purchase or payment for services must be for something that adds value to our existence and future, otherwise we are nothing more than rats on the bankers' treadmill.

The currency attempts at devaluations we are seeing are a zero sum game that will not aid or abet the economic recovery. The only purpose they serve is for a limited number of people to make serious amounts of money as a result of volatility. You just have to remember in May this year when the Euro crisis hit, how the Euro was predicted to hit parity with the dollar. Well we now see the result of that prediction.

We have also seen the result of volatility on the world's stock markets - profit for some and disappointment for most.

For the rest of us who have no great insights into or influence over volatility, I continue to recommend gold, silver and the repayment of debt.

In the meantime, will the real Mr Bean do something about his hapless relative at the Bank of England?

Gold hits another record high of $1,308

A good article from the Telegraph, seems they have all become Gold Bugs in the finance section - good for them, they might even become interested in silver one day. But I digress, gold is no where near its peak in the current bull market, the general public, especially the public of anglo-saxon ethnicity, has not even woken up to the fact gold has been the best performing asset class of the last 10yrs - most could not even tell you the price within $300. As to buying physical gold, well they haven't even started.

From the UK Telegraph:

Gold has surged to a new record price of $1,308.90 – the eighth time it has hit a new high in the past two weeks.

During the past year, the price of the yellow metal has risen by about 30pc.

Over the past two decades or so, gold prices have increased more than fivefold from a low of around $250 per ounce in 1999 and have almost doubled since the peak of the global financial crisis in late 2008.

Participants at the start of a two-day precious metals conference in Berlin organised by the London Bullion Market Association (LBMA) forecast on average that the price of would be $1,406 in September 2011.

At last year's LBMA conference in Edinburgh, participants were overly cautious, forecasting that gold would reach $1,181 by this year's gathering.

Adjusted for inflation, however, the price is still well below its all-time peak set in 1980, estimated at around $2,300 in today's money, giving investors hope for more upwards movement.

"Gold is going to continue to rise for the next one to three years because it's bedlam on the global currency markets right now," Josef Kaesmeier, chief economist at German bank Merck Finck, told AFP.

"The United States has an interest in the dollar staying weak, the euro is suffering because of debt problems in southern Europe and the yen is behaving in an inexplicable manner," he said. "The only currency that people want to buy is the yuan, but China doesn't want that. So gold is the only thing left."

The rise has been so strong that European central banks have recently put the brakes on their strategy of the past 20 years to offload their gold reserves in exchange for something offering a better return. It has also drawn new players to the market.

"The attitude towards gold has changed incredibly," said Shayne McGuire from Texas, one of the largest US pension funds, who have emerged as major buyers in recent years. Everyone wants it in their portfolio."

New investment tools like index funds giving buyers greater access to precious metals have also helped make gold "really accessible," McGuire said in Berlin.

But for Merck Finck's Kaesmeier, this is a worrying sign.

"Once pension funds start buying en masse, then I see the risk of a bubble," he said. "I see now that gold has started to become a big issue, front page news. I don't like that.

Graham Birch, the industry veteran who used to manage the BlackRock Gold & General fund, agrees. "If your taxi driver starts telling you to buy gold, you'd better sell it because this means the market has peaked."

A technical view of gold after record breaking run

From Mineweb.com:

After hitting new highs consistently over the past week technical analysts give their views on where the yellow metal is headed next Posted: Friday , 24 Sep 2010

SINGAPORE (Reuters) -

Here are comments from analysts on their technical views of gold:

WANG TAO, MARKET ANALYST, REUTERS

Spot gold XAU= is expected to rise to $1,539 per ounce by the end of this year, going by its wave pattern and a Fibonacci projection analysis, but a drop below a pivotal support at $1,234 would violate the bullish outlook.

A long-term perspective on the monthly chart back to the 1960s presents a bullish scenario, with the existing wave "C" progressing towards $1,539, the 161.8 percent Fibonacci projection level, based on the length of wave "A", as the 100 percent level at $1,046 has been surpassed in January.

The wave pattern on the weekly chart (here) supports a bullish outlook, because the rally from the Oct. 2008 low at $680.80 is labeled as an impulsive five-wave mode.

The extended wave (5) is pointing to $1,515, as indicated by two upper trendlines meeting at a point, and a 161.8 percent Fibonacci projection based on the length of wave "1". Both the wave pattern and a triangle pattern on the daily chart (here) confirm the bullish views derived from the monthly and the weekly charts, as the rally from the Jul 28 low at $1,156.90 adopted an impulsive wave mode, with the wave "3" capable of pushing the price higher above the upper trendline of a big triangle, after which, gold will speed up the rally towards $1,539.

For a graphic showing the long-term gold technical outlook: here

TOSA ANASTASIOUS, TECHNICAL STRATEGIST, UBS

The medium term trend in gold remains bullish as the metal continues to post fresh historic high's. Momentum and trend studies still appear healthy and this supports the outlook for further gains in gold.

The focus is on $1,300.00 which is the next psychological resistance. Over the medium term, a bull channel gold has been in since Oct 2008 projects gains to $1450.00 over the coming months."

It is worth noting that at current levels, gold is overbought and this raises the chances of a correction over the near term. Key support has been defined at $1157.60 which is the July 28 low although support around $1220.00 should provide a firm foundation on any pullback. Dips would be seen as a buy.

JOHN SCHOFIELD, DIRECTOR, TEMPUS INVESTMENT CORP

As you know Gold is in a very nice long term uptrend, albeit punctuated by regular corrections. The current move targets $1,360 in my view as the rallies are about US$200 from the low points.

There may be temporary resistance at $1,300, being the measured target from the large 08-09 trading range. If the rally-pullback-rally pattern repeats itself my next target will be $1,500 after a pullback to $1,300.

These targets may prove to be conservative if the bull market starts to accelerate (as we would expect in the later stages of a major bull cycle) and the size of any upward moves gets bigger/longer each time.

DARYL GUPPY, CHIEF EXECUTIVE OFFICER, GUPPYTRADERS.COM

"The uptrend line starting July 28 is used to define the continuation of the uptrend as the price moves towards the next target level at $1,355. The September 13 reaction away from resistance and dip below the trend line was temporary.

"The price target level is calculated by measuring the width of the trading band between $1,160 and $1,260. This value is projected upwards and gives an upside target near $1,355."

"The trendline break is an alert signal. Trend reversal is confirmed with a move below the 15-day Exponential Moving Average."

For a technical outlook, click: here

Dr. Marc Faber on the Federal Reserve and Hyperinflation

By Ron Hera:

Hera Research Newsletter (HRN): Thank you for joining us today. You've commented that the Federal Reserve's policies have been linked to past boom and bust cycles in the US economy. Why do you believe that?

Dr. Marc Faber: Booms and busts happen also under the gold standard like we had in the 19th century various railroad and canal booms, and we also had real estate booms, first on the east coast in Chicago, then, at end of the century, in California. What the Federal Reserve has really done is create a lot of economic volatility. If you look back at the various crisis starting with the S&L crisis in 1990, then the Tequila crisis [the Mexican Peso crisis] in 1994, then Long Term Capital Management (LTCM), the NASDAQ bubble and at the current crisis, each crisis actually became worse and worse and the bubbles became bigger and bigger. The Federal Reserve did not pay any attention to excessive credit growth. The reason I am so negative about the Federal Reserve's policies is that they only target core inflation and argue that they can't identify bubbles, but when each bubble bursts they flood the system with liquidity that bring about unintended consequences.

HRN: What would be an example of that?

Dr. Marc Faber: Commodity prices peaked in May 2006 and after May 2006, especially in 2007, where there was actually a slowdown in the global economy and so there was no reason for commodity prices to go ballistic, but the Federal Reserve slashed interest rates after September 2007. In a global economy that was going into recession, the price of oil went from $78 to $147 and that burdened the US consumer with additional "tax" of five hundred billion dollars. I am not saying that is the only reason but it helped push the US consumer into recession. The fact is that without the Federal Reserve's expansionary monetary policy after 2001, we wouldn't have had a housing bubble to the same extent. The Federal Reserve's policies basically encouraged sub prime lending; it's not the case that they discouraged it......read on