The Hoarding Has Begun: Venezuela Nationalizes Gold Sector

There is a major disconnect from reality. While the long term outlook for the US and the world remains dismal, the near term outlook really isn't as bad as the media has been making it out to be. Here's our latest thoughts.
There is a major disconnect from reality. While the long term outlook for the US and the world remains dismal, the near term outlook really isn't as bad as the media has been making it out to be. Here's our latest thoughts.

 

There is a major disconnect from reality. While the long term outlook for the US and the world remains dismal, the near term outlook really isn’t as bad as the media has been making it out to be.

We can’t ignore numbers and forecasts – even if they are being changed week after week. Just when we thought we were in the clear for a short term rally, we get slammed with more negative forecasts and numbers.

Take a look:

The S&P 500 is down 15% for the quarter, losing 2.5 trillion in market value – the largest loss of wealth since the height of the financial crisis in 2008. On a global scale, more than 6 trillion of equity has been erased in August.

10 year yields in the US dipped below 2% for the first time ever as investors snapped up the government bonds on fears of a global economic slowdown.

Existing home sales in the U.S. are down and is on pace this year to be the worst in 14 years for home sales. Foreclosures and short sales – when a lender agrees to sell for less than what is owed on a mortgage – made up about 29 per cent of all home sales last month. That’s not including the wave of foreclosures by backlogged courts or lenders awaiting state and federal probes into troubled foreclosure practices.

Jobless claims remain high as the number of people applying for unemployment benefits rose back above 400,000 last week. While the report suggests that the economy is creating jobs, it’s not nearly enough to lower the high unemployment rate. We’ll need to see something below 375,000 to signal any sort of healthy job growth.

Consumer prices rose 0.5 per cent from June, the largest monthly increase since March. That leaves consumer prices 3.6 per cent higher than they were a year earlier, which is far above the U.S. central bank’s informal target of 2 per cent.

Of all the disappointing U.S. economic news released last week, it was a drop in factory activity in the mid-Atlantic region that most unnerved investors. Data from the Philadelphia Federal Reserve Bank, (viewed as a forward-looking gauge of U.S. manufacturing) dropped to minus 30.7 – the lowest level since March 2009. According to Bloomberg data, each time the Philadelphia Fed’s gauge has stood at minus 30 or lower, the economy has been in a recession or was about to tip into one.

So does that mean a recession is coming and should you run for the hills?

I don’t think so. Not yet, anyway.

First of all, the Philly Fed Poll was conducted from Aug. 8 to 16, when we experienced one of the wildest periods of stock market volatility…ever (see The Big Signal). Unemployment numbers are bad, but they’re not getting worse. Inflation, measured through the CPI, should be lower as the price of oil, gas, and other commodities have dropped significantly over the last month.

I wouldn’t run for the hills just yet. I still feel that the true trend of our short term markets will be revealed after U.S.’ Labour Day (see Before It’s Too Late). At which point, I expect the markets to truly rally absent of any cataclysmic event.

Even with the market tanking, that doesn’t mean everything has been going down. If you have been reading the Equedia Letters over the past years, you would know that I continue to remain bullish on the precious metals sector despite the uncertainties.

Last week, the Market Vectors Gold Miners ETF (GDX) surged 4 out of 5 days, ending up nearly 6% while its little brother, the Market Vectors Junior Gold Miners ETF (GDXJ), soared over 7%.

This week, they did the same. The GDX is up another 4% while the GDXJ managed to stay in the green. Despite the volatility and the impact of the recently released forecasts, the miners still found a way to make gains as gold and silver prices continued to climb. Silver closed up to nearly $43.

The Glory of Precious Metals

Gold prices soared to new highs Friday, hitting as high as $1,881.40 US an ounce before closing at $1,852.20. That’s the seventh consecutive week of gains and the longest string of advances in almost four and half years.

In October 2007, gold sold for about $740 an ounce. A little over a year later, it rose above $1,000 for the first time. It’s up more than 25 per cent since July, and has risen by seven per cent this week alone.

The price of gold has steadily risen for 11 straight years.

Everyone who owns gold asks me if they should sell. Everyone who doesn’t, asks me if they should buy. For those who continue to teeter-totter and worry about buying gold, it’s still not too late. Not even close.

Gold is undoubtedly in an extremely strong decade-long bull market and while it seems very much like a bubble, it’s nowhere close to popping. Bull market bubbles usually end with extreme speculation characterized by three to five distribution days occurring within a relatively short period of time (distribution is a decline in price with higher volume than the preceding session) and a mass entrance by the retail public. So far, we have seen neither of these events.

While gold is trading significantly over its 150-day moving average, the factors contributing to gold’s rise remain strong and consistent. I have written too many letters to count on why gold will continue its climb, |yet every week there are even more reasons as to why.

As Real as it Gets

For the first time in more than a decade, South Korea’s central bank purchased gold for the first time since the Asian financial crisis in 1997.

The gold portion of South Korea’s official foreign reserves surged to $1.32 billion at the end of July from a measly $80 million at the end of June.

While South Korea’s central bank seems a little late to the party, gold investors should continue to expect price support as central bankers around the world are underinvested in the yellow stuff and are looking to increase their holdings:

  • Mexico just ramped up its gold reserves by almost 100 tons — boosting what were previously minimal holdings to around 106 tons.
  • Russia purchased 26 tons during the second quarter, taking its total gold holdings to around 837 tons, equivalent to almost 8% of the country’s reserve assets.
  • Thailand’s gold reserves rose by 15.5% in the two months and rose to about 4.07 million ounces in June, from about 3.523 million ounces in May.

Central banks around the world are topping up their gold reserves and have quadrupled their total purchases from the market in the last quarter buying 69.4 metric tons of gold, up from 14.1 tons reported a year earlier.

During the first half of the year, central bank gold purchases totalled 192.3 tons, more than 2 1/2 times the 72.9 tons bought in the first six months of 2010.

Since 2009, central banks have been net buyers of gold. Before that, they have been net sellers of gold for nearly two decades.

Hoard Your Gold: Venezuela Nationalizes Gold Sector

Earlier in the week, Venezuelan President Hugo Chavez said that he plans to nationalize the gold sector, including extraction and processing, and use the production to boost the country’s international reserves:

“I have here the laws allowing the state to exploit gold and all related activities. That is to say, we’re going to nationalize the gold and we’re going to convert it, among other things, into international reserves because gold continues to increase in value” – Hugo Chavez

He’s also ordered the repatriation of 90 percent of Venezuela’s gold reserves held abroad, returning the country’s gold reserves back to Caracas:

“We’ve managed to increase the international reserves. We have close to 12 or 13 billion of dollars in gold reserves. We can’t allow it to continue to be taken away” – Hugo Chavez

Hedge Fund Participation

Despite the ramblings months ago that some of the world’s most powerful hedge fund managers were exiting their gold positions (who have since missed out on some serious gains), other hedge funds are now loading up.

SAC Capital Advisors L.P., the powerhouse hedge fund run by Steven Cohen, disclosed a new position in options on the gold exchange-traded fund, SPDR Gold Trust. The investment, which are options that allow SAC Capital to buy shares of the gold ETF at a defined point in time, is valued at $628 million. It is the single largest value of equity positions disclosed by SAC Capital, As of March 31, 2011, the fund had no positions of the gold ETF.

As Real as it Gets

The shift to gold is real. This is not your tech bubble. This is not your real estate bubble. This is real. Central banks are buying. Hedge funds are buying. And the world is watching. Don’t remain on the sidelines of one of the greatest bull markets of our time.

The Week Ahead

Next week, we’re going to be standing on our toes as Ben Bernanke makes his famous Jackson Hole speech on Friday.

It was at the Fed’s Jackson Hole meeting last year where Bernanke first suggested “QE2” (see Beware the April Fool) which sparked a 25% rally in the S&P 500 in the following months.

This time around the world will be watching even closer. Will he say anything about QE3 or will he just tell everyone that he’s got some tricks up his sleeves if the economy moves further into recession territory?

A lot will be riding on his speech next week, so be prepared. I would most certainly not swan dive into any particular stocks next week but adding to the precious metals sector on dips could prove smart.

It’s all up to you, Ben.

Disclosure: I added to my gold and silver long positions earlier in the week and I am long on both gold majors and juniors.

Until next week,

Ivan Lo

Equedia Weekly

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