The World Will Listen

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I am going to keep it short this week. It is a long weekend after all and time should be spent with family.

Last week, I said gold would climb past $1500 and silver above $45 – even as analysts and the big guns at Goldman called for a strong pullback. Gold shot above $1500 and silver above $45 this week. No matter what happens in the short term, we’re going to continue to see these metals climb over a longer time span. The Dollar is in jeopardy and the gold and silver mania is really starting to begin.

If you think that it’s almost over, think again.

Many are now calling gold overpriced and in a bubble that’s about to burst.

Gold offers no income, no dividend, no interest and no earnings. It has very few industrial uses and gold production is rising (see Smaller Than You Think). It’s also at an all-time high.

There are a lot of arguments regarding gold’s true value. How can anyone justify that an ounce of gold is worth over $1500/oz? Do people even know exactly what an ounce of gold looks like?

Take a look at the picture below.

Not very big, is it?

The fact is gold really does nothing but sit around and look pretty. And believe us, because of this, there are many anti-gold bugs out there who have been shooting darts at our faces for our continued belief in gold and gold-related plays.

So let’s clear the air once again. I am not a gold bug. But I do take advantage of the obvious. And the obvious is simple: Gold is worth a lot of money

No. Wait.

Gold is money

Gold, like the pieces of paper in our wallets, has perceived value. Let’s not forget that our paper currency was derived as a receipt for the amount of gold or silver you actually owned.

But there’s one big difference: You can print as much money as you want. You can’t print gold. There’s a limited amount and if we want more, we have to work really hard to get it and exhaust a lot of resources – especially when the cost of production have continually risen year over year.

That’s why everyone wants a piece…especially the banks. In 2009, the world’s central banks became net gold buyers for the first time in two decades and this trend has continued in the last 2 years.

During the past decade, precious metals were the best-performing asset class, beating property and shares with returns of nearly 250 per cent. People who invested money in precious metals, such as gold, silver and platinum, during the ten years to December 2009 made returns of 242 per cent, the equivalent of a gain of 13.1 per cent a year.

While Contrarians argue that gold does nothing but sit there and look pretty (see Smaller Than You Think), gold is as good as cash.

Last November we published the story, “The First Time in History,” where we talked about how gold had become as good as cash:

“As of November 22, 2010, clearing house ICE Europe will begin accepting gold bullion as initial margin for crude oil and natural gas futures trading. This marks the first day in modern financial history that gold will be eligible collateral for energy futures. And this is a big deal. A really big deal.

The only form of collateral allowed by ICE before this was cash, and government securities. But with this announcement, ICE has effectively made gold equivalent to cash and government bonds.

This trend is expected to continue. Using gold to margin on oil marks a new era in making gold a usable and credit worthy currency and we can expect that other firms may soon follow suit.”

On February 2011, JP Morgan followed.

JP Morgan Chase (NYSE: JPM), one of the largest banks in the US, said it will accept physical gold as collateral for certain transactions.

For example, a hedge fund wanting to borrow money for a short period can put up gold as collateral and use the borrowings to invest elsewhere. That means gold is as good as cash.

Actually…It’s better.

Gold has appreciated in value over the last decade more than any other asset, including both currency and real estate (see The Next Big Boom). That means it’s not only a better investment, but also an inflation hedge, a safe haven against falling currencies, a hard asset, and now it’s also as good as cash.

Using gold as collateral is a trend that is happening all over the world. According to WSJ:

“Exchanges in New York, Chicago and Europe recently agreed to accept gold as collateral for certain trades. And the World Gold Council also is gaining traction in its push to have the Basel Committee on Banking Supervision accept the precious metal as a Tier-1 asset for banks, along with government bonds and currencies.

In India, many financial-services companies are offering personal loans against physical gold, a market that is expanding.”

So for all of the contrarians that still believe gold is worthless, tell that to the banks.

Is Gold Too Expensive?

Sure, gold at $1500 is expensive and maybe even a little risky. But it was also assumed expensive and risky when it was at $600.

Regardless, risk is relative. Gold as an investment is risky at these prices. But you can say the same about stocks today. You can say the same about bonds. You can say the same about real estate. Heck, you can certainly say the same about the Dollar.

Don’t bother telling me gold is risky and that it has no value. Especially when someone can print a trillion dollars for next to nothing…

Are We in a Bubble?

Eventually, I think the world and the US will get back to normal and people around the world will once again believe in currency. The question everyone should be asking is not if gold is in a bubble, but rather, at what price will the gold bubble pop? At what gold prices will our economies stabilize? And when it does, where will it settle?

Although I can sit here and make random predictions about where gold is going to pop, a lot of that depends on factors well beyond any of our control. Some say $2000. Some say $5000. Both of these numbers are attainable and aren’t farfetched predictions.

Let’s say gold goes to $3000. The downside risk with gold at $1500 now doesn’t seem so risky anymore. After gold reaches a high and the bubble pops, it will always find a higher base. I don’t think we’ll ever see $300 gold anymore.

I am sure by now you have heard me, or someone else, tell you that the US is in a heap of trouble. They have a deficit that’s growing astronomically and paying that down will be next to impossible in the near term.

It’s already estimated that over 16 percent of Americans will fail to file their 2010 federal tax returns, report their full income or pay their full 2010 tax liability. This will cost the US upwards of $490 billion in revenue for the 2010 tax year. And if they can’t collect taxes, they’ll find other means.

They’ll increase taxes, increase parking metre prices, increase licensing fees. They’ll need to do whatever they can to squeeze every dollar out of every citizen.

That won’t be a pretty sight, especially considering the state of the US economy. When people can’t put food on the table due to inflated prices, do you think they’re going to pay their taxes? If they don`t, how will the US pay their insurmountable debt?

If that happens, how high do you think gold will go then?

The Week Ahead

Bernanke will hold the Fed’s first scheduled press conference ever after Wednesday’s Open Market Committee meeting (see Beware the April Fool).

Normally, I would take the time off on a long weekend to spend more time with my son and skip a weekend issue of the Equedia Weekly Letter. But the week ahead is a jam packed calendar that I feel is my duty to make sure you know what to expect.

The week ahead includes earnings reports for key consumer, tech and energy companies, including Exxon Mobil Corp, the U.S.’s largest company by market capitalization. It also includes the release of reports later in the week at how the U.S. economy has performed in the first three months of the year.

Two-thirds of the 137 companies in the S&P 500 Index reporting first-quarter results in the previous week showed earnings above analyst expectations.

Next week, 180 S&P 500 companies are scheduled to report.

But the main focus will be on Bernanke and the concerns about inflation and the debate around what, if anything, is likely to replace the Fed’s $600 billion bond-buying program, set to end in June, and how soon interest rates could rise.

While I doubt the Fed will be changing the rates, the market will be looking for clues in Bernanke’s cryptic language about future forecasts. For example, if Quantitative easing (QE) simply ends, the markets will likely crumble.

That’s why I think Bernanke will avoid doing that. That means I predict that they will let QE2 run its course, and maybe (just maybe) implement QE3 – they’ll just call it something else. Anything short of QE3 is going to be called higher interest rates.

Regardless, next week will be volatile.

To put it into perspective, heads of other major central banks have been holding press conferences for years, and they have become key market catalysts often sparking big market swings. Just as I mentioned in a past letter Beware the April Fool, when Bernanke speaks the markets listen. It doesn’t matter what he says, the markets will react. And the world will listen.

The S&P 500 is up more than 25 percent since Bernanke’s speech at Jackson Hole last August, when QE2 was hinted.

This time around, it’s going to be a tough call. We know QE2 will likely runs its course. We know QE3 is needed. But given the recent downgrade outlook of the US by the S & P, that would be difficult to implement. It’s almost a lose-lose situation.

As an investor, I would love to see QE3. Not for the fact that it is the right or wrong thing to do, but for the short term, I would like to see the markets roar long enough to cash out my chips for what may lie ahead.

I hope you have taken the time to relax this holiday weekend. Next week will be all business…

Until next week,

Ivan Lo
Equedia Weekly

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