“What a Bargain Gold Was at Two Grand”

Bargain Gold Was at Two GrandIn a race, there is usually a winner and a loser. It comes as no surprise that these days fiat currency issued by central banks looks to be losing the race, as the purchasing power of paper money continues to decline.

Gold bullion is the winner, having increased in value almost four-fold over the past 12 years. But that’s old news. What I’m writing about today are important, recent developments in the ongoing bull market in gold bullion that my readers can act on.

Having broken below $1,700 U.S. an ounce yesterday for the first time since November 6, 2012, I believe gold has placed a huge “for sale” sign on itself.

Yes, gold bullion demand fell in the third quarter of 2012 compared to the same period of last year, down 11% from 1,223.5 tonnes in third quarter 2011 to 1,086.6 tonnes in third quarter 2012. (Source: World Gold Council, November 15, 2012.) But what the gold bears do not realize—what they should be focused on—is the fact that central banks around the world are in a race to devalue their currencies. Money is being created out of thin air to keep the value of world currencies from rising—to stay competitive.

No, it’s not only the Federal Reserve’s money printing that’s in full swing; other central banks are increasing their money supplies well.

Japan’s central bank has been printing for some time now in an effort to achieve economic growth in that country, but the concept has been failing. As a result, the Japanese yen has fallen more than five percent since the beginning of October compared to a basket of major world currencies. Below is the chart of the Japanese Yen Index, which illustrates a precise picture of the failed policy of money printing to spur economic growth.

Japanese Yen Chart

Chart courtesy of www.StockCharts.com

How does this relate to gold bullion’s price rising? Simply stated; central banks need gold bullion to keep their foreign exchange reserves in check. If major currencies are falling at a staggering rate, central banks need something that can store value and back their declining paper currencies—only gold bullion provides a perfect solution to their problem.

While overall gold bullion demand from consumers fell in the third quarter (I believe because gold prices got too high), central banks didn’t shy away from buying more. For the first nine months of 2012, central banks around the world purchased 374 tons of gold bullion. Last year, in the first nine months of 2011, central bank purchases accounted for only 343 tons of gold bullion. (Source: International Business Times, November 15, 2012.)

I don’t believe “gold bears” are considering central banks’ purchases when looking at gold bullion prices. Gold bullion is a global currency and, as central banks around the world print more fiat currency, I believe the yellow metal will continue to rise in price.

My readers need to keep in mind that it has been 12 years since gold bullion prices ended the year higher than they started the year. Given we are going into 2013 with gold bullion around $1,700 an ounce, as 2013 develops, $1,700 an ounce for gold bullion will be looked upon as the price level about which many investors will come to say, “I should have added to my holdings when gold was that cheap.” A year from now, we will look back and say, “What a bargain gold was at two grand!”

Michael’s Personal Notes:

John, a friend of mine who is also an economist, believes the worst is behind for the eurozone crisis. He’s definitely not the only one with this opinion. John told me, “The European Central Bank has been very reactive to the sovereign debt situation and now, with Greece planning to buy back some of its debt, optimism will pour into the markets.”

Unfortunately, what John doesn’t see is the trouble still ahead for the eurozone. Think of it this way: it’s easy to go down the hill, but it takes a lot of courage and stamina to get back to the top of the hill from the bottom.

The eurozone is in a very similar situation. I think the region is experiencing a deepening economic contraction. It’s still falling down the hill and hasn’t reached the bottom yet.

Sure, it’s easy to listen to the politicians and almost believe them. But the truth of the matter is that the fundamental data are getting worse in the eurozone.

The eurozone unemployment rate reached a new record high of 11.7% in October, up from 11.6% in September. There are 18.7 million people unemployed in the region, with the Spain and Greece unemployment rates both exceeding 25%. (Source: Eurostat, November 30, 2012.)

Recent reports show that manufacturing in the eurozone nations has taken a nose dive, deteriorating now for 16 consecutive months. In November, the Purchasing Managers’ Index (PMI) was observed at 46.2—any reading below 50 represents an economic contraction. (Source: Markit, December 3, 2012.) Companies in the eurozone are struggling to find new work, and demand in the region is dismal.

Now, for those who believe it’s only Greece driving the crisis to its peak, economic contraction in the eurozone is widespread. For example, since 2010, about 450,000 businesses have closed in Italy! (Source: La Stampa, November 21, 2012.)

People like my dear friend John may hope the eurozone will recover soon and the economic contraction there will come to a halt. But, what needs to be understood is that history has proven how difficult it is for countries to recover from severe economic contractions like the one the eurozone is going through now. Just look at the Japanese economy and the U.S. economy; the latter has been struggling since the financial crisis, and it is still looking for growth.

The eurozone crisis is far from over, in my humble opinion. What you can expect to see is the region continuing to fall into and out of recession over the next two to three years unless, and until, countries start to leave the euro currency union.

Where the Market Stands; Where it’s Headed:

We’re almost there, dear reader…

The bear market rally in stocks that started in March of 2009 is losing steam. I would have thrown the towel in on the market long ago. But we had the U.S. election to deal with and now we have the “fiscal cliff” to deal with—both of which could be responsible for big market gyrations.

Come 2013, there are no extraordinary events, just deteriorating corporate earnings. Write it down: 2013—the turning point for the stock market trend.

What He Said:

“When I look around today, I see falling stock prices…I see falling house prices…and prices for retail goods stores declining. The media has it all wrong blaming (worrying about) inflation. In my opinion, the single biggest threat to the U.S. economy and to the Fed in 2008 is deflation. You can bet the Fed will expand the money supply and drop interest rates aggressively as deflation starts to rear its ugly head.” Michael Lombardi in Profit Confidential, December 17, 2007. Michael was one of the first to warn of deflation. By late 2008, world economies were embedded in their worst state of deflation since the Great Depression.

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