Jeff Clark, Senior Editor, Casey’s Gold & Resource Report

As a self-professed gold bug, why would I possibly want my favorite investment to fall in value? Have the long hours finally caught up with me?

Au contraire; my near-constant devotion to all things gold has only served to crystallize one of the things I really want out of this. Here’s a hint.

I had lunch with a reader at a recent conference, and while talking about one of my favorite subjects – gold stocks – I asked why he was invested so heavily in them. “Greed,” he said bluntly and with little hesitation. I appreciated the honesty.

Let’s be frank: I’m here to make money, and so are you. And that’s why I hope gold falls to $1,000 again.

Let’s say Bob has taken our advice and has been storing cash. I’ll use $1,000 as an example. If Bob buys Yamana Gold now, he’d get about 93 shares as I write (at $10.73 per share).

Now, let’s say gold drops to $1,000, about a 10% fall from here, and due to its leverage, AUY sells off by a 2-to-1 margin, meaning 20%. So with that same $1,000, Frank, who’s waited for the downturn, buys 116 shares at around $8.58. Thus, instead of owning 93 shares at $10.73, he owns 116 shares at $8.58.

When Frank sells, he doesn’t just make the difference between $8.58 and $10.73 (an extra 25%), he also makes 125% on the extra 23 shares he owns if Yamana doubles in a couple years, which I expect it to. So two years from now, Bob would have $2,000, but Frank would have $2,500 because he bought more shares and at a lower price. Frank makes 25% more than Bob on the same dollar investment simply by buying when gold and gold stocks fall in price.

Got $5,000 saved up? Multiply the profit by 5. And with larger amounts, you can see we’re talking serious money.

I don’t know if we’ll see $1,000 again or not, or if Yamana will fall that low, but I would point out that corrections in the gold price can range as high as 20% (2008 notwithstanding), so a further sell-off in price would not be out of the ordinary. A 20% correction from gold’s peak at $1,212.50 on December 2 would equal $970. That’s not necessarily a prediction, but it shows you that price is certainly possible.

Don’t like my wish? Remember, it’s called a bull market for a reason; it’s not a cow market or a puppy market. It’s going to try and buck you off. But a correction to $1,000 or even lower can give you the chance to buy more, cheaper. Don’t view sell-offs as a bad thing but rather as an opportunity.

Bring on $1,000!

By: Julian D. W. Phillips, Gold/Silver Forecaster - Global Watch - GoldForecaster.com

This is a snippet from the Gold Forecaster. The newsletter that covers all pertinent factors affecting the gold price [with a 95% accuracy rate].-

The gold market changed dramatically in 2009 and thanks to GFMS we now have evidence of these changes. The main features of these changes are: -

Mine production was up by 6% in 2009. Supply of gold scrap was up by 27%. Jewelry demand was down by 23%. World Investment jumped from 885 tonnes to 1820 tonnes, a year-on-year gain of 105%.

These are the cold facts, but what of the spirit in the market of gold and silver? It is this that counts because this gives us direction for the future of the gold price.

Mine Production

The rise in production in 2009 will now turn to a fall in production in 2010. As the major reserves of the world are depleted [can you believe that South Africa once produced 1,000 tonnes a year and now is down to 220 tonnes] and replacements ore bodies very rare, we can expect global production to fall. Even with China’s production on the rise, unless there are major discoveries, there will be no rise in the global production totals. And bear in mind that it can take 5 years before a new mine delivers gold to the market.

[As usual in this newsletter, our focuses, among the mines we favor, are on those set to benefit the most from this gold current production scene, so carefully look at these, below and the startling results some have produced already]

With this in mind any rise in demand [which is happening at institutional level with vigor] has to find new supplies from scrap sales.

Gold Scrap Supply

A rise of 27% in scrap sales of gold was due to record prices. By its very nature it is the change of ownership of gold from holders used to lower gold prices believing that gold prices cannot hold, to owners who believe that they will hold and or rise in the future. When you find that the new owners are the world’s most important money institutions, traditional investors who hold bullion itself and new entrants to the gold market in the East, then know that this shift in ownership, far from being a danger to the gold price is a very healthy change in the fundamental structure of gold investors. Even now these major investors are poised to enter the gold market, we suspect on any dips in the price.

There is no doubt that if supplies from the scrap sellers were to fall, then prices would rise to bring other scrap sellers to the market at higher prices. Otherwise, where else can gold supplies come from? Falling scrap sales therefore mean higher gold prices! We are receiving reports from India that scrap sales will fall by half this year [That’s if the gold price stays around these levels?.

Jewelry

Western style jewelry is not bought for its gold content. The artistic and design input is the key component. Even the relatively simple wedding ring, while needing the title of a ‘gold’ wedding ring is not bought for its gold content, but for its ability to retain its looks and design throughout the marriage. This implies an 18 carat ring or 75% gold with other metals hardening the ring and giving it durability. Because of these factors price is important. After all, this type of jewelry is not bought a future sale in mind. So with gold prices rising, and consequently this type of jewelry, demand was bound to drop significantly as hard times hit. Should the U.S. economy really recover you can be sure that this type of demand for gold will too. It is actually remarkable that the fall was so small. Indian jewelry demand is for 24-carat gold, so in reality doubles as investment demand. [Demand for this second type has begun to rise in 2009/2010.]

Investment Demand

Even this has changed remarkably in its nature over the last year. The cold fact is that demand overall rose 105%.

In the financial markets of the developed world there is a mindset that believes that the purpose of investment is to make a profit. Western markets in particular have that attitude to the gold market. But the gold market is far more than that and has been since gold was first considered valuable. With that in mind we now take a look at the nature of investment demand: -

Type 1: To hold gold for a future profit or as an anti-inflation/deflation scene. This is the developed world investor. He buys with a sale in view. He trusts the financial system as part of the foundation of his world. He believes that if he buys gold it must rise, in price and so justify its place in his portfolio through potential profits increasing the value of his portfolio. It will take hard times to broaden this perspective. Even the largest Pension related investor factors in; that his average contributor works from around age 20 to 60 then wants to take his savings and spend them in his remaining years, hoping his last check won’t bounce. If there is an inheritance left over, so be it, but often that is not the motive. So, after buying gold, a sale must eventually take place. Call it a cultural thing if you will.

Type 2: To hold gold as a protection against feared financial reverses ‘safe haven’ and as financial security. This investor has seen hard times and believes they will come again so steps must be taken to minimize their impact. As to profits or the rising value of the gold investment, this serves only to protect wealth, for the family [including the one following] harboring it against unforeseen events. It is not for sale unless it is sold to resolve one emergency or another. You will find this investor east of the Eurozone.

In the Eurozone you will find many large instances of this type of investor as well as the Type 1 investor too, but he is from ‘old money’. These family fortunes were made during the last turbulent century in nations that saw wars and the collapse of currencies, not infrequently. They can read the signs well and turn to gold when the skies darken. They do so unobtrusively and in large amounts. They know that gold is money when skies blacken. They are buyers right now!

Type 3: To hold gold, in quantity, as a reserve asset i.e. money. These investors are the real ‘money makers’. They are the central banks of the world. These investors hold gold as a reserve asset in back-up of paper currencies despite the fact that the printed notes offer no gold as collateral for the obligations of government that these represent. When push comes to shove, and a nation’s paper loses international confidence completely, their gold will retain international confidence and can be used to solve the worst of international financial woes, as it has in the past.

Central Banks make money and have been guilty of making too much money in the last few decades and the time has come for a real accounting. And it is their own kind doing the accounting!

Gold sales, since the seventies, by central banks of the developed world, were made in support of a zero-backed, paper currency world [discrediting gold, so paper money would be trusted completely. This tried to simply provide a currency system that relied on the need for a means of exchange internationally and the inherent confidence people have in the overall system they live under. That is all very well and good, provided the money makers keep money stable and consequently prices stable. The last 2 ½ years have given us anything but a stable money system, despite prices either stable or falling. Confidence in the system fell alongside growing instability, with the U.S. $, the pivot of the paper system, proving most unstable itself.

How have they expressed their opinion on their paper money system? In 2009 ‘Official’ gold sales ground to a near-halt. The European Central Bank Gold Agreement signatories set up another Agreement on 27^th September 2009 largely to accommodate the I.M.F. [a non-signatory] sales of 403.3 tonnes of gold and have sold almost no gold themselves since September 27^th 2009. On the other hand non-developed world central banks bought more than 300 tonnes of gold in 2009.

Herr Weber the President of Germany’s Bundesbank coined the phrase, which aptly describes this new appetite for gold, when he said in defense of Germany’s retention of their gold reserves, “Gold acts as a useful counter to the swings of the $”. [It is hard to find a sage commentator who does not point to the falling trend of the U.S. $ despite the current rally.]

So this, potentially the greatest and influential source of demand for gold, has swung vigorously from seller to buyer at a time when the supply of gold is not sufficient to satisfy their demand. You can be sure that they will buy gold as and when they can, favoring large purchases in particular, in the days to come. In so doing they are telling us something and telling us loudly.

They fully realize the need for the current monetary system to have solid support from gold. Is it any wonder then that world investment demand exceeds jewelry demand for first time in 30 years. We expect that to continue for the next few years at least.

By: Dr. Ron Paul, U.S. Congressman

Much has been made recently about the supposed economic recovery. A few blips in a few statistics and many believe our troubles are all over. Of course, they have to redefine recovery as “jobless” to account for the lack of improvement on Main Street. But the banks have money, Wall Street is chugging along, and the administration would like to get on with other agendae.

They have even set up a commission to investigate the crisis as if it were all in the past.

The truth is that Americans are still losing jobs, the Fed is still inflating, and more regulations are in the works that will prevent jobs and productivity from coming back. We are on this trajectory for the long haul. The claim has been made many times that this administration has only had a year to clean up the mess of the last administration. I wish they would at least get started! Instead of reversing course, they are maintaining Bush’s policies full speed ahead. They are even keeping the Bush-appointee in charge of the Federal Reserve! They are not even making token efforts at change in economic policy. And for all the talk of transparency, we hear that some powerful senators will do all they can to block a simple audit of the powerful and secretive Federal Reserve.

We have been on a disastrous course for a long time. The money supply has doubled in the last year, our debt is unsustainable, the value of the dollar is going to continue its drop, and those Americans who understand where we are headed feel helpless and held hostage by foolish policy makers in Washington. When the bills finally come due and the dollar stops working we are in for some real social, economic and political chaos. That is, unless we take some major steps now to allow for a peaceful transition in the future. These steps are laid out in my legislation to legalize competing currencies.

First of all, no one should be compelled by law to operate in Federal Reserve notes if they prefer an alternative. We should repeal legal tender laws and allow Americans to conduct transactions in constitutional money. Only gold and silver can constitutionally be legal tender, not paper money. Instead, it is illegal to conduct business using gold and silver instead of Federal Reserve notes. Simply legalizing the Constitution should be a no-brainer to anyone who took an oath of office. Consequently, private mints should be allowed to mint gold and silver coins. They would be subject to fraud and counterfeit laws, of course, and people would be free to use their coins or stay with Federal Reserve notes, as they see fit. Finally, we should abolish taxes on gold and silver, which puts precious metals at a competitive disadvantage to paper money.

The Federal Reserve is a government-sanctioned banking cartel that has held far too much power for far too long and is in the end stages of running the dollar into the ground, and our economy along with it. The very least Congress can do, if they are not willing to abolish the Fed, and perhaps not even conduct a serious audit of it, is to allow citizens the freedom to defend themselves from being completely wiped out by their monopoly power.

By Frank Holmes

CEO and Chief Investment Officer

U.S. Global Investors, Inc.

The biggest emerging economies have ambitious plans that require a greater share of the world’s limited commodities. This trend is spurring profound and permanent disruptions in how these resources are allocated now and in the future. For investors, these disruptions present opportunities.

Simply put, an investment in natural resources is a vote of confidence in global economic growth.

Rapid urbanization and industrialization, better infrastructure and growing consumption in emerging markets are among the key themes in the global growth story. They are also key drivers in the rising demand for oil, steel, copper, cement and other resources.

Here are just a few of the many available data points to help gauge the scale of opportunity:

• Just over half of the world’s people now live in cities – that figure is likely to rise to 70 percent over the next four decades. The urban population in emerging nations has expanded by an average of 3 million per week for the past 20 years.

• India has embarked on a $500 billion plan to expand and upgrade its highways, airports and other transportation assets by 2012.

• More than 13 million cars and light trucks were sold in China in 2009, transforming a land once dominated by bicycles into the largest auto market in the world. Forecasts for 2010 call for vehicle sales to increase by as much as 10 percent.

Commodities (as measured by the Reuters-Jefferies CRB Index) shot up 24 percent in 2009, the largest single-year increase since the early 1970s, and the International Monetary Fund projects that prices will keep rising this year due to emerging-markets demand and global economic recovery.

China’s economic growth is often mentioned in the context of commodities prices and demand – indeed, China surprised many by growing its GDP at an 8 percent rate in 2009, with commodity-heavy infrastructure investment playing a major role.

Less often discussed is China’s rapidly growing middle class (chart). Estimates are that as many as 25 percent of Chinese – more people than the entire U.S. population – fall into this category now, with a doubling possible within the next decade. While most dramatic in China, it is also under way in India, Brazil and elsewhere. This rise of the “American Dream” in emerging nations is memorably portrayed in the Oscar-winning movie “Slumdog Millionaire.”

This trend has huge implications for commodities. Wealthier people want a better lifestyle. That means more and better housing – in addition to the structure itself (cement, steel), that means more wiring for electricity (copper), more plumbing (copper, zinc) and more basic appliances (steel, copper and other metals).

They also want better transportation, as we’ve seen in China. In only 10 years, China has gone from being the world’s 20^th largest oil consumer to No. 2 behind the United States as a result of its accelerating shift from the bicycle to the car. Getting around also means more roads, more bridges, more airports, more and faster railroads – all of which add to commodities demand.

While demand is growing, the supply of many key commodities is not keeping pace.

It is increasingly difficult and costly to find and develop large new oil fields, and mining projects are often slowed down by environmental opposition and tighter regulatory requirements. Many promising new commodity sources are in countries with inadequate infrastructure and/or significant political risks.

Commodity supercycles typically last 20 to 25 years – the current supercycle began in 2000, so we are just at the halfway mark. A stress in the markets is that insufficient capital has been invested in resources in recent decades, while at the same time the world’s population has doubled and there has been spectacular growth in the middle class. Any supply disruptions quickly lead to price spikes.

There are other reasons to consider an investment in commodities or commodity-based equities, be it through an actively managed natural resources fund or a passive vehicle like an index fund or exchange-traded fund.

We’re hearing more talk about inflation – natural resources are one of the few asset classes that benefit from inflation. If prices for fuel or other commodities rise, one way to hedge against the impact of that price increase is to invest in those commodities.

Commodities are also a natural hedge against the erosive impact of a weak dollar. Given massive federal deficits for the next decade, yawning trade deficits and historically low interest rates, it is hard to see how the dollar could see a sustainable rally any time soon.

For the reasons detailed above, we believe that the secular bull market for commodities and natural resources stocks remains intact and could even intensify in 2010, depending on the extent of economic recovery in developed nations.

For more insight and commentary from Frank Holmes, visit his daily blog Frank Talk. Also visit www.usfunds.com for more research from U.S. Global Investors.

All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor. Investments in natural resources, emerging markets and infrastructure are subject to distinct risks as described in the funds’ prospectus. The Reuters/Jefferies CRB Index is an unweighted geometric average of commodity price levels relative to the base year average price.

By: Peter Cooper, Arabian Money

The first-ever gold juniors exchange traded fund is only two months old but already attracting attention among investors. Its owners will be hoping that Van Eck’s GDXJ will map the progress of gold ETFs like GLD in promoting its asset class.

GLD owns more physical gold than many countries, and has been a major force in making gold easy and cheap to own, without the problems of security and storage. Buyers can own their gold online in a brokerage account and trade it instantly at anytime.

Gold juniors

For those unfamiliar with smaller gold and silver stocks these divide into metal producers and explorers, and many mix both activities. They are a devil to analyze as data is hard to verify and the claims made by the companies always over-hyped.

However, in past gold booms the real money has been made by investing in these junior stocks, so long as you stick your pin in the right place. Thousand-fold increases are common when a junior finds gold, but then very few do.

On the other hand, the juniors are highly leveraged to a rising gold price. Exploration companies own claims to mineral rights on parcels of land, and these claims surge exponentially in value in a gold boom, whether or not there is actually any gold in them there hills.

In theory then owning the juniors is the very thing to do if you are confident that a big hike in the gold and silver price lies ahead. You have leverage to the price of precious metals without actually having any leverage in the form of debt.

2010 golden year

And for 2010 we have experts from Merrill Lynch to Goldman Sachs and gold bugs like Jim Sinclair saying that this is year is great for gold.

But if you are not confident about picking winners among the juniors then the diversification offered by the GDXJ is a neat way out. Van Eck has invested GDXJ in 56 small caps from larger firms like Hecla and New Gold to the more obscure like Hong Kong traded LingBao Gold.

That said if GDXJ performs well the real winners will still be some individual smaller gold and silver companies. For if GDXJ proves as popular this year as it probably will be then this will also be the making of fortunes in some individual junior stocks that presently lie in obscurity.

GDXJ’s success will attract investor attention back to this largely forgotten asset class. And GDXJ will pay the price of diversification by missing the biggest killings.

– Posted Thursday, 14 January 2010 | Digg This Article | Source: GoldSeek.com Previous Articles by Peter Cooper
About Peter Cooper:
Oxford University educated financial journalist Peter Cooper found himself made redundant by Emap plc in London in the mid-1990s and decided to rebuild his career in Dubai as launch editor of the pioneering magazine Gulf Business. He returned briefly to London in 1999 to complete his first book, a history of the Bovis construction group.

Then in 2000 he went back to Dubai to become an Internet entrepreneur, just as the dot-com market crashed. But he stumbled across the opportunity to become a partner in www.ameinfo.com, which later became the Middle East’s leading English language business news website.

Over the course of the next seven years he had a ringside seat as editor-in-chief writing about the remarkable transformation of Dubai into a global business and financial hub city. At the same time www.ameinfo.com prospered and was sold in 2006 to Emap plc for $27 million, completing the career circle back to where it began a decade earlier.

He remains a lively commentator and columnist as a freelance journalist based in Dubai and travels extensively each summer with his wife Svetlana. His financial blog www.arabianmoney.net is attracting increasing attention with its focus on investment in gold and silver as a means of prospering during a time of great consumer price inflation and asset price deflation.

Gold Resuming its Historical Monetary Role – as the Anti-Currency

Keynote Speech Presented by Nick Barisheff at the Empire Club’s 16th Annual Investment Outlook Luncheon
Thursday January 7, 2010

Good afternoon. As always, it is a privilege to speak at the Empire Club.

Each year for the past three years, I have returned to the Empire Club to share perceptions about the precious metals industry and specifically about gold. Generally, this forces me to step back and assess the previous year’s events and then to speculate about what they may indicate for the coming year. Choosing the seminal events this year has been more difficult than usual. Lately the pace of gold-related news has accelerated exponentially with gold’s rising price. While 2009 was an exciting year for gold, setting a new average high of $1,088, 2010 promises to be even more exciting.

In 2009 gold resumed its historical monetary role - as the anti-currency. Therefore, the influences and events that affect its price are not simple commodity supply/demand fundamentals, but the more complex global monetary issues.

To summarize some of the important key events, I thought it would help to separate them into three categories.

First, there are the obvious events—those whose implications for gold are self-evident.

Second, there are the events that require some interpretation and, finally, there are the events that we might call “incipient”. These events and stories are in their early stages of development. They may amount to nothing, or they may develop into tectonic forces that completely disrupt the gold-related financial landscape.

It is more than a year since Wall Street made some very bad bets that resulted in unprecedented losses, losses that were passed on to the American taxpayer. For their incompetence and greed, most of the company heads responsible were rewarded with generous severance packages, or with new jobs commensurate in pay and status to the ones they left behind. Even more surprising, perhaps, is that one year later many of these people continue to advise the US government’s financial policy makers. My associate, trend analyst Richard Karn, likens this particular situation to a group of chickens getting together and consulting with the foxes about a problem that is plaguing their community—the rapidly decreasing chicken population. Since the same key figures remain firmly in charge of US fiscal policy, we can assume the status quo will continue until the ship finally hits the iceberg.

So let’s start with the obvious gold events of the past year.  It was the first time in 20 years that gold purchases for investment purposes outpaced gold purchases for jewellery demand.  However, in terms of significance, central bank buying of gold this past year upstaged all other events. For the first time in over 20 years, central banks became net buyers rather than net sellers of gold. This is a watershed event.

India’s central bank purchase of over 200 tonnes of IMF gold in the fall of 2009 demonstrated that large central banks were willing to pay the market price for gold. This removed the concern that official sector sales could cut short any meaningful rally.  Although the central banks have been selling less gold each year lately, the threat of IMF sales had continued to weigh on the market.  Russia and China further dispelled this fear with the disclosure that they too have added 130 and 454 tonnes respectively.  Several smaller central banks such as those in Sri Lanka and Maritius also added to their gold reserves. Therefore, central bank buying was clearly the significant gold event of 2009 and will likely continue to be in 2010.

The next level of news events had implications that might not have been so obvious at first glance. On October 6, Robert Fisk, a veteran Middle East correspondent writing for the UK’s Independent, published an article entitled “The Demise of the Dollar.” The article described how “Arab states have launched secret moves with China, Russia and France to stop using the US currency for oil trading.” Although the central banks immediately rejected these rumours, the market treated their denials as a clear admission of guilt and gold broke through year-long resistance at $1,020 an ounce into an entirely new trading range that day.

The Iranian oil bourse, which allows oil sales in several currencies except the US dollar, is another indication that this trend will continue.  In addition, the US’s greatest supporter of the petrodollar, Saudi Arabia, announced that it would no longer trade oil futures on the NYMEX. And on October 19 a related event occurred that received almost no mainstream press coverage; in fact, the only mention I could find of this story at first was at Al Jazeera Online. This was an agreement between ten member states in Central and South America and the Caribbean to use the sucre rather than the dollar for intra-regional trade. Venezuela, one of the West’s largest oil suppliers, is also a member of this new alliance.

This trend is significant to gold because, since 1973, the US has been able to accumulate huge deficits thanks to an agreement with OPEC to price oil in dollars exclusively. This system worked until the 2008 financial crisis, which many felt weakened the dollar’s inherent worth beyond repair. The petrodollar experiment, which started in 1971 with the removal of the dollar’s peg to gold and continued in 1973 when the dollar was essentially backed with oil, is coming to an end after only 36 years. However, given the weakness of other currencies and the fact that no other paper currency currently threatens to replace the US dollar, the process may take years to complete. The end of the petrodollar’s hegemony, which is inevitable in my opinion, will have significant implications for gold.

Another event whose implications may require some extrapolation was the move by the Chinese government to encourage and facilitate gold buying by the Chinese public. China watchers know the Chinese have a long-term love for gold. In fact, on December 9, Reuters announced that China had surpassed India as the world’s largest gold buyer, for the first time in recorded history.  The Chinese have also demonstrated a strong propensity for saving. With their government making no secret of its displeasure with the US dollar, and with few other safe investment options available, the Chinese public could provide the fuel to move the gold price to new highs. One ounce purchased by each of the 80 million middle-class Chinese would equate to 2,500 tonnes of gold.  It is important to remember that during the last gold bull, the Chinese public was unable to participate. This is a story that definitely bears watching.

Finally, in the third category, is the news we might compare to the first spark of a match that either extinguishes uneventfully or ignites a raging, out-of-control forest fire. Most of us in the gold industry have discovered that we ignore these flickers at our own peril. Many of the stories that started as hints or rumours a few years ago are now accepted as fact. The first of these issues we are watching is the imbalance between gold derivatives and paper proxies and the amount of physical gold in existence. This is important because despite its best efforts, Wall Street still cannot print gold.

Since almost all the gold ever mined remains in existence and gold reserves and production estimates are monitored meticulously, such discrepancies will show up faster in the relatively small gold market than they might with other commodities. As Wall Street churns out new gold investment vehicles, people are starting to do the math. If it becomes apparent that financial institutions have sold more paper gold than actually exists in physical form, then the price of paper gold and physical gold could diverge.

This year, many analysts began to apply increased scrutiny to the gold and silver ETFs. In mid–July, hedge fund giant Greenlight Capital announced they were moving assets out of the world’s largest gold ETF – SPDR Gold Shares – and into physical gold. Greenlight is an industry leader whose movements are carefully studied and often emulated. Although Greenlight’s manager, David Einhorn, claimed it was cheaper to own and store physical gold than it was to pay the ETF fees, the fact that a major, industry-leading fund would move to physical bullion set off many alarm bells.

Since ETFs do not actually purchase their assets, there is nothing prohibiting Authorized Participants from contributing baskets of borrowed gold. The amount of borrowed gold held by ETFs is a matter of speculation.  With multiple claims on the bullion, ETF investors may suffer unexpected losses under stress conditions when they need their gold the most.

So with these events of 2009 in mind, I am often asked, “How high might the price of gold go?”

Let’s look at some figures.

We know that the US must refinance at least two trillion dollars of debt in 2010. They can raise this money in one of three ways:  through the sale of bonds, through increased taxation, or through monetization by the Federal Reserve. Foreign investors showed decreasing appetite for US treasuries in 2009. Rising unemployment along with an aging population makes increased taxation a poor option. Therefore, the US Fed will be forced to monetize the ballooning debt, further eroding  confidence in the dollar as the world’s reserve currency.

This will encourage central bankers, especially those of the developing countries, to accelerate their accumulation of gold. Stephen Jen, a managing director at hedge fund BlueGold Capital and an expert on sovereign wealth funds from his days at Morgan Stanley, estimates that the percentage of gold held by the Chinese, Indian and Russian central banks is just 2.2 percent. This compares with 38 percent held by Western central banks. According to Jen, they would have to buy $115 billion dollars worth of gold at current prices to raise their bullion to just 5 percent of total reserves, and $700 billions’ worth to reach just half of Western levels.

Along with many others in the gold industry, we have noticed that fund managers are starting to buy gold as long-term insurance, which they intend to hold for several years. By one estimate, if the world’s pension funds and hedge funds moved only five percent of their assets into gold, which these days seems quite conservative, gold would trade above $5,000.  With leading wealth managers such as David Einhorn, John Paulson and Paul Tudor Jones allocating significant amounts of their portfolios to gold, the process may have already begun.

In conclusion, the events of the past year bode well for the price of gold in 2010. At the recent highs of $1,200 many thought that gold was overbought. For those who feel this way, I would like to close with some recent words from investment legend Richard Russell who said, “If gold is going parabolic, then there’s no such thing as ‘overbought’,” Almost any of the events of 2009 I have highlighted could trigger such a parabolic rise. Right now the Chinese and Indian public, the non-Western central banks, the sovereign wealth funds, the pension funds and the hedge funds of the world are all looking for ways to increase their long-term gold holdings. The pull-back from the recent highs of $1,200 seems to be over, providing an attractive entry point for investors. In 2010 we will likely see prices rise to at least $1,300 to $1,500.

It is important to understand that this isn’t a typical bull market. Unless governments around the world stop creating massive amounts of new money, the price of gold will continue to rise.

There is a famous investment axiom that states, “Now is always the most difficult time to invest.”  To that I would add, “But now is also the best time to insure the wealth we have accumulated is protected through the ownership of gold.”

Thank you.

By David Galland, Managing Editor, The Casey Report

An interesting article by Ambrose Evans-Pritchard came my way the other day. It’s worth a read, if for no other reason than that he paints an appropriately dark picture of the current state of the U.S. economy. You can read it here.

While I very much share Mr. Evans-Pritchard’s view that the global economy is far from out of the woods, our views diverge in that he sees devastating deflation speeding our way down the tunnel. Casey Research readers of any duration know that we see devastating inflation.

While we could both be right, with deflation first and inflation later, I’m not so convinced.

For starters, there is already a massive inflation operation being run by the Fed, evidenced in a historic spike in the monetary base over the last two years.

And the Obama administration is far from done.

The Democrats’ reinvigorated focus on jobs – the single most important factor in this November’s elections – will soon translate into a flurry of new initiatives designed to put people back to work, most of it funded at taxpayer expense.

To believe in the deflationary case would seem to require believing that Obama and his minions are ready to forgo any further political aspirations by collectively putting their feet up on their desks for the balance of their sole term at the apex of global power.

Given Obama’s meteoric rise to power – evidence that he possesses a certain drive and competence in the game of politics – that seems highly unlikely. And so it seems safe to assume we’ll soon witness a redoubling of his efforts to keep interest rates down… to make it easy and cheap for strapped consumers and businesses to keep borrowing… and to otherwise flood the economy with money.

In a deflation, the value of the money increases – which is actually a pretty desirable thing, if you ask me. Inflation, by contrast, means that pretty much everything you own in the local currency steadily loses value – forcing investors into a perpetual game of catch-up. It’s hard for me to calculate how the government can dramatically increase the money supply and yet have each of the currency units become increasingly more valuable over a sustained period of time.

Arguing against that point, Evans-Pritchard makes the case that the U.S. government is making much the same mistakes that were made in the first part of the Great Depression, i.e., being overly tight with the money. And that the velocity of money is falling.

There are a couple of key differences between now and then, however. First, the Fed didn’t actually know what the money supply was back then. They literally had no monitoring tools in place, mostly because no one thought it was important enough to track. Second, they didn’t have fiat monetary powers. Today, neither of those factors apply.

Everyone knows what the money supply of the U.S. is and watches it keenly. Including our foreign creditors. And so it is not surprising to see the Fed publicly talking about tightening up a bit. But it’s just talk at this point.

With the economy continuing to struggle, the only reasonable assumption that can be made is that the Fed – in cahoots with the entirely politicized Treasury – will keep shoveling money onto the economic embers, and continue to do so until economic activity again flares up.

That will, of course, require increasing the quantity of money that actually makes it into the economy – but that should be child’s play for Team Obama – with direct hiring and spending, continuing to buy mortgages and other loans to suppress interest rates, forgiving the bad debts of banks, or changing accounting rules so that banks can postpone reckoning day. And that’s just for starters, all of it packaged nicely in the name of the public good.

And once the money starts to flow, there will be a pick-up in economic activity, which will beget yet more money moving around. At first, this money will be a palliative for the economic worries, but then comes the inflation – a small trade-off, the politicians will decide, if it buys them enough of a recovery to make it through the November elections and get the president the second term you know he so strongly desires.

There is something else that I think the deflationists are missing, and that has to do with confidence in the currency. If the U.S.’s many creditors come to agree with our point of view – that the dollar is being led to the altar as a sacrificial lamb to political expediency – then they’ll further reduce their purchases of our Treasuries and start trading their dollars for stronger currencies and tangible assets, including precious metals.

At that point, interest rates will have to begin rising to attract new buyers. As you can see in the chart of long-term Treasury bond rates, a significant move off recent lows has already occurred, and rates are looking poised for a breakout to the upside.

Of course, the higher those rates ratchet, the more it will cost the U.S. government to carry its massive debt. While rising rates will continue to drive demand to the short end, suppressing those rates, in time the sheer quantity of paper that will have to be rolled over, and the rising tide of inflation, assures that short-term rates will have to rise too.

At that point, the train begins to leave the track. Read More…