The amount of bearish sentiment towards gold prices these days on the part of investors is not surprising to me. Investors often work in herds, moving to “hot” sectors from “weak” sectors very quickly. But, as I have said all along, the “gold play” is a long-term one, not a speculative one.
Economics 101: if demand for an asset or item increases, prices rise. If supply of an asset or item increases above demand, prices fall.
Gold prices follow the same historical economic principle. If we see demand for gold increasing, we can assume prices will also rise, because the supply of gold is limited.
At present, and as I have said in these pages many times before, there is fundamental demand for gold. Central banks and investors alike are hunting for and buying physical gold.
To give you some idea on the strength of gold buying, according to the Census and Statistics Department of the Hong Kong government, gold imports by China from Hong Kong doubled in the month of November 2012 from the prior month. China bought 90.764 metric tons of gold in November compared to only 47.478 metric tons in October of 2012. (Source: Bloomberg, January 8, 2013). Compared to the first 11 months of 2011, for the first 11 months in 2012, Chinese imports for gold also doubled.
Now let’s look at gold demand by the central banks. To say the least, they are running towards gold like never before. Why? Because their printing presses are in overdrive mode. Central banks need to have some physical gold to back their ever-increasing supply of paper currency.
Which central banks are printing the most fiat money?
Take a look at a world map and point at any major country; chances are, they are involved in money printing: the central bank of Japan, the Federal Reserve in the U.S., and the central bank of Brazil, just to name a few. Others central banks, like the European Central Bank (ECB), have also promised to join the fiat money printing club.
Who else? The central bank of Switzerland has been preventing its currency from rising against the euro. The Swiss central bank has printed almost 500 billion francs or $541 billion—nearly the same as the gross domestic product (GDP) the country generates. It is buying currencies, bonds, stocks, and gold with the freshly created money. (Source: Wall Street Journal, January 8, 2012.)
The demand for gold is there, and it is very visible in the price.
Last year was one of the worst years in recent memory for the stock prices of senior and junior gold mining companies. And given what I have just told you above, I see these stocks offering the best “against the herd” opportunity for 2013.
While quantitative easing (the creation of money out of thin air) may have been needed back when the U.S. economy was on the verge of collapse, at this point, more of it simply equates to asking for more trouble ahead.
As regular readers of Profit Confidential know, I have been very critical about quantitative easing. If the Federal Reserve continues to print more money as it buys $85.0 billion worth of bonds each month, inflation in upcoming years will be a bigger problem.
We have already established that the Consumer Price Index (CPI) reported by the Bureau of Labor Statistics (BLS) doesn’t show the entire picture of inflation. In November of 2012, the BLS reported that the CPI decreased by 0.3%. For the first 11 months of 2012, the inflation rate was 1.6%. (Source: Bureau of Labor Statistics, last accessed January 10, 2013.) But the reality is that the way CPI is calculated is obsolete. We all know inflation is running much higher than 1.6%.
Sadly, as inflation continues to take a toll on the pockets of Americans, the Federal Reserve plans to continue quantitative easing until the unemployment rate in the U.S. economy reaches 6.5%.
My question: how long will it take to reach the Fed’s target unemployment rate?
In December, total non-farm U.S. payroll rose by 155,000. (Source: Bureau of Labor Statistics, January 4, 2013.) If we assume 155,000 to be the average monthly job creation in the U.S. economy, keeping everything the same, it will take about 38 months to reach the unemployment rate of 6.5%. (Source: Federal Reserve Bank of Atlanta, last accessed January 10, 2013.) In other words, 38 months of more quantitative easing—or another $3.2 trillion of more money printing!
What does this means for inflation? You guessed it: prices will rise even further. Remember; more printing means higher inflation.
Thanks to quantitative easing, like many others, I believe the real inflation rate is actually multiple times of that officially reported by the BLS. Quantitative easing has been disastrous to savers and those who live off a fixed income. Slowly, by the inflation it creates, it is taking a toll on the pockets of more and more Americans.
While the question in the mainstream financial media remains—“When will quantitative easing stop?”—I think the damage has been done. If not today, then in the very near future, higher inflation caused by too much money in the system will be very damaging to the U.S. economy.
Where the Market Stands:
We’re close to the end of the line, my dear reader. The bear market rally that started in March of 2009 is close to putting a top in.
What He Said:
“Recipe for Catastrophe: To me, the accelerated rate at which American consumers are spending coupled with the drastic decline in the amount of their savings is a recipe for a financial catastrophe.” Michael Lombardi, Profit Confidential, September 7, 2005. Michael started talking about and predicting the financial catastrophe we began experiencing in 2008 long before anyone else.