Prelude to Meltdown: An interview with Bert Dohmen

 
By: Clif Droke, Gold Strategies Review

– Posted Tuesday, 31 August 2010 | Digg This Article | Share this article| Source: GoldSeek.comWhen Bert Dohmen talks, smart investors listen.In 2007 when most investment analysts and economists were downplaying the developing credit market troubles, Bert warned investors that the probability was very high that the troubles would escalate into full-blown crisis and would produce a crash of historic proportions.  He chronicled the developing credit crisis in the pages of his newsletter and also published a book in early 2008, Prelude to Meltdown, which provided his insightful views on the emerging crisis in depth.  The book will surely go down as a landmark written by a financial visionary who was several steps ahead of his peers. Dohmen writes the widely read Wellington Letter investment advisory, which has provided top-notch forecast and analysis of U.S. and global financial and economic trends since January 1977.  His newsletter has received many #1 ratings by the top ratings services and has forecasted every bear market using sophisticated technical analysis.  Bert also frequently appears as a guest on financial television, including CNN’s Moneyline, CNBC and FOX News.  Over the last 30 years he has been a favorite speaker at the largest investment conferences.  On August 27, I spoke with Bert concerning his forecast of the credit crisis, the likelihood of another financial crisis, the bond market “bubble” and the outlook for gold.  His answers were as always refreshing and full of insight.  Following is a transcript of that interview. Q: Could you tell us what first attracted you to the financial markets and how you got your start in it? Dohmen: I started trading when I was in graduate school and I was quite interested in the financial markets.  Technical analysis wasn’t widely in use at the time.  I started with $400 and using advice from a major brokerage firm that quickly imploded.  They got me into a stock with a 10 percent yield – I though the broker was a genius to find me such a stock.  But the problem was they had only one copper mine and it was later nationalized.  So that’s when I decided that if I was going to be successful in the markets I would have to do it myself.  So I spent a lot of time reading and studying and decided for myself that fundamental analysis wasn’t in accordance with my philosophy because it only shows you what happened in the past.  And I wanted to know what the big money was doing now.  And the big money means the well informed money and that you can only find out with price and volume analysis and the charts. Q: What prompted you to write the book, Prelude to Meltdown? Dohmen: I wrote in the book in 2007 and it was published in early 2008 and it predicted the global near meltdown.  I wanted to get it out because I said that people in 50 years will still be talking about it and wondering why no one forecast it.  Q: You were one of the very few analysts who correctly foresaw the approaching danger of the credit storm and you wrote extensively about it in Prelude to Meltdown.    Dohmen: It wasn’t all that difficult throughout 2007 to figure out what was coming.  At the end of the book I stated that the only question is whether the central bankers would be able to stop the meltdown altogether or if would be five minutes before twelve before they do.  And now we know even in the words of the top guys at the Federal Reserve and the Treasury that we did get up to five minutes till twelve.    Q: Do you find it amazing that so few financial experts were focusing on the problems that were building up in the early stages of the credit crisis? Dohmen: For me it was really very strange that so few people were looking at that.  It really wasn’t that difficult.  Throughout 2007 in our Wellington Letter I had been writing about all the proverbial canaries. I had a section in the newsletter describing “more canaries in the mine.”  The April 2007 issue was headlined, “The perfect financial storm,” and it listed all the reasons why.  The thing is that sub-prime mortgages were starting to go sour.  I knew that the sub-prime mortgages had been packaged up by Wall Street firms as CDOs and then sold around the world.  And through basically buying the ratings of the major bond ratings agencies they were able to take this junk and take tranches of that and get AAA ratings from the agencies, which was just amazing when you consider that there are only four U.S. corporations which are strong enough to get a AAA rating on their bond in the United States.  It was just absolutely amazing.  Then I found out that the models that these ratings agencies were using were mathematical models that justified the AAA ratings and they had no provision in that mathematical formula for a decline in housing prices.  This was an absolute shock and surprise to me as to how they could look at the huge absolute speculative frenzy in the real estate market and not think we were going to have a crisis.  And at the time I was saying that real estate prices would go back down to the 2002 levels.  In other words the entire speculative bubble created by excess credit would be wiped out and we’d be going back to basics.  For example, here in Nevada you had 32 percent gains in housing prices and the next year it was a 33 percent gain.  And people started believing that it was normal and sustainable.  Well it’s not.  Over the years you’re happy if housing goes up 5 percent a year if even that. Q:  It indeed appeared that the monetary authorities waited until the proverbial last minute before acting.  Is there anything the Fed and the Treasury could have done to mitigate the credit crisis in 2007 and 2008? Dohmen: The regulators were in collusion with Wall Street.  This wasn’t a failure of capitalism, this was a failure of regulatory agencies and in my opinion some of it was criminal.  The Wall Street firms, the big ones, were limited to 12-to-1 margin based on their capital until 2004.  Then the head of the SEC, who was a former founder of a very large Wall Street firm, and he had been able to field these Wall Street guys and after that they decided to increase the permitted leverage I believe to 34-to-1.  That was absolutely incredible.  I remember whey that happened I said, “If these firms only have a 3 percent decline in their speculative investment it wipes out all of the equity.”  I wondered how could this be allowed.  These guys were just asking for failure.  The reason it was allowed because the higher the leverage the higher the potential profits.  And I guess the theory was if something goes wrong the taxpayer would pay the losses.  They get the profits, the taxpayer gets the losses.  And that’s exactly what happened.  We had other things like that in other areas of the housing market.  Fannie Mae and Freddie Mac were basically coerced into giving mortgages who had no jobs, no income and no net worth.  Yet they got mortgages because the Congressmen said that’s what we have to do.  You know the names of these Congressmen.  So it was really excess of government, excess of speculation and there was no rationale behind it.  Even right now when you consider that the FHA is making mortgage loans with only 3 percent down – 3 percent down!  Nothing has been learned in this last episode.  And that’s why this crisis is not over.  We are just in the middle of it.  There’s another 50 percent to go.  Q: What were some of the signs you saw as being potentially ominous in the months leading up to the 2008 bear market? Dohmen: For one thing, the 5-year bull market top was in October 2007.  When it became clear that mark-to-market [accounting rules] was going to come in early November 2007, all the big boys got out in October ’07.  So the bear market started with the mark-to-market rule.  The bear market ended in March of 2009.  The mark-to-market rule was changed in April of that year but in March 2009 the U.S. Congress told the FASB, which makes the rules, “You’d better change that rule or we’re going to do it for you.”  That was known in March [2009] and that produced the bottom of the bear market at that time.  Wall Street is really a game and if you know how to play it you can make some money on it, just as they do.  Q: Do you think the abolition of the uptick rule in July 2007 played a part in the stock market crash of 2008? Dohmen: Yes, I really do.  In fact when that was done I said something is being prepared to enable some of the very big trading operations to sell short without having to wait for an uptick.  I don’t think anything happens in the financial markets by coincidence, so I really think that was part of it.  Why would they suddenly eliminate the uptick rule which had been in effect since 1933 and did a good job?  Q: The SEC never did reinstitute the uptick rule, did they? Dohmen: No, they never have reinstituted it and that is why we’re going to have another crash. Q: If worse comes to worst, can the government afford another bank bailout? Dohmen: Oh sure, the government can always create money and they don’t even have to print it now like they used to.  Back in 1980, Congressman Ron Paul gave us a tour of the Bureau of Printing and Engraving and they were so proud because they had the latest printing presses, Heidelberg presses from Germany.  Of course we all laughed because Germany had lots of experience printing money during the hyperinflation of the 1920s.  But it’s created electronically today.  Now all they have to do is add a few zeroes to make billions turn into trillions.  Q: One thing I’ve always admired about your work is your ability to predict the direction of the economy much better than most professional economists.  What are the main indicators you look at to analyze the U.S. economy? Dohmen: Credit availability is the main thing I look at to forecast the economy.  Money supply M3 was going down at an 8% annual rate.  You only see that in depressions.  Money velocity is also declining.  You don’t see such things in a good economy.  It all ends up with credit.  It’s also important to look at commercial and industrial loans, credit card credit and consumer loans.  This is extremely important.  Q: What are some other indicators investors should be watching? Dohmen: When analyzing the economy they should also look at things like credit growth.  I consider credit growth, or the lack thereof, to be the most important indicator.  Everything else merely follows.  Job growth is also an important economic factor dependent on credit growth.  If there is no credit growth then there won’t be any real job growth.  Consumer spending is the third most important thing to analyze for stock investors.  If there is no job growth then spending will depend on consumers who have jobs feeling more optimistic and spending more.  We have seen this over the past 16 months.  Consumer spending is a coincident indicator and it helped us identify the 2007 market top.  When spending starts declining, so will the stock market.  In terms of the stock market, technical analysis is also very important.  You have to look at things like price and volume and their relationship to each other to get the big picture in the stock market.  Fundamental analysis is of no value in today’s market.  If you try to use fundamental analysis to predict the stock market you will come out on the losing end. Q: Let’s talk about China for a minute.  If the U.S. enters another financial crisis, do you believe China is self-sufficient enough to withstand the lack of demand for its products from the U.S. or will China’s economy suffer? Dohmen: I think there’s a good chance the next crisis will start in China.  Everyone right now is saying, “Look at the gains made by China’s housing and financial markets over the last few years.  You have to look at what is happening in the last 2-3 months, though, not just the year-to-year trend.  An incredible $1 trillion in loans were issued to Chinese borrowers last year.  Also earlier last year, China’s regulatory officials tightened lending standards in an attempt at curbing speculation but it’s just another case of governments believing they can solve problems in the financial markets when it has never been proven that they can.  They’ve seen a tremendous decline in home sales.  Home sales are up 8% for the year so far but what the media isn’t telling you is that home sales were up an 60% percent or so before the real estate crisis hit.  The Chinese economy is coming to a screeching halt. Q: Do you still consider U.S. Treasuries to be safe long-term investments?  Is there a chance the government may someday default on its debt obligations? Dohmen: Define “someday.” Q: Say in the next 3-5 years. Dohmen: No, the government won’t default on its debt in the next 3-5 years.  I’ve always believed that when it comes to the financial markets, what everyone knows is not worth knowing.  Applying that now, everyone knows that bonds are in a bubble and that the stock market will offer a much better return than bonds, and that you should not buy bonds as a result.  I take that as a signal that bond prices may go much higher as long-term interest rates decline.  If a 4 percent yield declines to 2 percent, then the price of the bond may double.  Another reason why Treasury bonds are being purchased right now by investors all over the world is that Treasuries are a safe haven.  I believe the rally in the bond price reflects a global flight to safety.  Gold is the only real money, as it can’t be produced at will with the printing press or the computer.  Therefore, it’s a store of value.  U.S. Treasuries are also a safe haven for the big money.  Not only is there no default risk, but as the globe goes into a decade-long period of deflation, yields will drop and bond prices will rise. I think the real question is whether the bubble is in the bond market or in the fact that everyone is calling it a bubble.  The consensus that bonds are in a bubble seems to be the real bubble.  Q: You correctly predicted the top of the last major gold bull market back in 1980 as well as the bottom in 2001.  Do you still see gold as a worthwhile investment for the long term? Dohmen: In 1981 we had ridden that entire gold bull market in the ‘70s and then gave a sell signal when gold broke $694/oz. on the downside.  We sold and then we sold short and rode it all the way down to $400, which was really a nice trade.  At that time my work showed that gold would then go into a 20 year down market based on cycles.  But the after that we forecast a 30 year bull market.  Now look at what happened.  Twenty years after 1981 was 2001, which was the start of the latest gold market.  Cycles don’t always work out that accurately; as you know they can sometimes bottom a few years to the right or left.  But this cycle worked out perfectly.  If the second part of that prediction comes true gold should be in a 30 year bull market.  At that time back in 1981 we wondered what could possibly cause a 30 year bull market in gold.  Well now we know the answer.  Unprecedented deficits are the rationale behind the 30-year gold bull market.  And there really isn’t enough gold in the world, especially when you consider how much paper money there is.  To answer your question about investing in gold for the long term, if you have great trust in the government then you can buy gold coins or the gold ETFs.  You’ll ignore the fact that in 1933 the government confiscated all gold owned by U.S. citizens.  You’ll also ignore the fact that the exchanges and regulators will change the rules in midstream when there is a crisis, such as a parabolic rise in the gold price.  In other words, you’ll have to have blind faith in very corrupt people not being corrupt. Gold coins stored abroad seem to be a good alternative.  Mining stocks will eventually do well but will suffer greatly when fears of deflation soar. Q: Is economic collapse inevitable in your view or is there anything that can be done to forestall it or avoid it altogether? Dohmen: Only if there’s a regime change in Washington.  Short of this I don’t see how it can be averted.  People just have to get involved.  Unfortunately, history tells us they probably won’t. Q: What steps can an individual investor take to protect himself from financial and economic calamities in the future? Dohmen: People have to read, read, read.  I can’t emphasize this enough.  There are some excellent independent news outlets out there today that weren’t an option many years ago before the Internet.  I advise investors to read all that they can about the markets and technical analysis through books and other publications.  You can go to Amazon.com and see all the reader reviews of the books that tell you whether or not the books available might be for you.  There are just so many opportunities for investors to educate themselves and everyone should be taking advantage of them.  You have to take it upon yourself to be informed.  You can’t be informed of what’s really happening out there by just watching the mainstream news on TV.  [For ordering information on Bert Dohmen’s book, Prelude to Meltdown, visit his web site at www.DohmenCapital.com]   Clif Droke is the editor of the three times weekly Momentum Strategies Report newsletter, published since 1997, which covers U.S. equity markets and various stock sectors, natural resources, money supply and bank credit trends, the dollar and the U.S. economy.  The forecasts are made using a unique proprietary blend of analytical methods involving cycles, internal momentum and moving average systems, as well as investor sentiment.  He is also the author of numerous books, including most recently “The Stock Market Cycles.” For more information visit www.clifdroke.com – Posted Tuesday, 31 August 2010 | Digg This Article

Listening to Trader Tracks Editor Roger Wiegand talk about market conditions and precious metals is like listening to your favorite uncle tell stories at Thanksgiving. The difference is that Roger’s stories are a lot more likely to make you money. In this exclusive interview with The Gold Report, Roger offers up a few of his favorite gold and silver plays and some sage market advice.

The Gold Report: In a recent edition of Trader Tracks you quoted a former Nixon speechwriter who said, “Economics should never be treated as a science. Its claims are not falsifiable, which is why economists can disagree so violently among themselves. Economics is a branch of anthropology and psychology. . .a moral discipline.” Do you believe that’s true?

Roger Wiegand: I definitely agree with that. I think there’s more psychology in economics than many people realize. You can see that with the current economic reports coming out of Washington and New York. It’s obvious to intelligent people who follow these things that there’s a lot of manipulation going on in economics, in the stock market and in politics. It is often effective if it’s very timely. There’s no question that psychology plays a major role in economics.

TGR: Further to the point, do you believe the American public is somewhat conditioned to believe that economics is a science and thus place too much faith in it?

RW: I think that could be true. I really believe that 80%–90% of the American public is regularly sold a bill of goods by the Wall Street media from New York and Washington. It just keeps coming day after day and, after awhile, it wears them out. I think the majority of Americans still believe a lot of this information. From my point of view, a good portion of it is just nonsense.

TGR: If you could speak directly to the public and tell them what you believe they should know, what would you tell them?

RW: Well, I would say that the U.S. president is not really the man in charge. The people who are in charge of world economics, world currencies, governments and corporations are a shadow political group that has a great deal of power. Presidents in the U.S. are just puppets. They’re selected for their ability to do what they’re told. Congress is basically just a tool for these corporations and outsiders to manipulate the rules to get what they want.

I think that’s obvious when you look at what’s happened with all the offshoring of American jobs. The issue that’s got a lot of people disturbed right now is the open border between Mexico and the United States. That exists because corporations want cheap labor. And there are obviously a lot of people involved in the Mexican drug trade. There’s a sheriff in Arizona who said that even members of Congress are involved. Until the teeth are taken out of pharmaceutical economics, these things are going to continue.

Recently it’s become much worse because of what’s happened with the global banks and derivatives market. That’s what caused the Lehman Brothers collapse and took down the global economy. To make it worse, then–Treasury Secretary Henry (Hank) Paulson basically took government taxpayer money and gave it to the banks. He conjectured that, if we didn’t, the global financial system would implode. Quite frankly, I think it would’ve been better if we had taken our medicine and just moved on. But what’s happened now is that 90% of the toxic debt in those banks remains in those banks. They’ve taken it off balance sheets and put it into other corporations or partnerships (i.e., offshored it). They’re just holding the money given to them by the U.S. government earning bond interest. They’re not making loans to improve the economy.

TGR: Do you believe U.S. economic policy will ultimately lead to the demise of the USD?

RW: It’s hard to say. These things take years and they happen slowly. Our three- to five-year forecast for the U.S. dollar is 46 on the Dollar Index. One of our better analyst friends, whom you’ve interviewed before, pegs it at 40. We’re now at 82 or 82.5. Eighty is a magnetic number so to speak for the dollar. We expect it to stay there for two or three months, and then gradually drift lower. But is the dollar going to go away? I’m not so sure. It’s going to diminish in value in fits and spurts. Other currencies will replace the dollar to some extent; but, considering that the USD covers about 85% of all reserve currencies, I think it’s doubtful it will go away. They may try backing it by gold, silver or other precious metals; but it would take so much in precious metals to give it even a marginal backing that it’s difficult to imagine.

For people buying and selling shares in our business, the biggest thing to watch for is the bond markets. That’s the Achilles heel of the worldwide credit system. The stock market is big but it’s peanuts compared to bonds. Bonds are 70x larger than stocks. The bond market today is in very big trouble.

TGR: Could you explain that further?

RW: At this point, Fed Chairman Bernanke can’t find buyers for his bonds; so he’s got to print bonds and buy them back himself. Recently, the Fed had a bond auction. It was said that 30% of the offering went to indirect buyers (meaning Bernanke bought the stuff back himself). We’ve seen some other auctions where they’ve had to buy back as much as 60%. In our view, that’s the beginning of the end because the other American bond and bill buyers are backing away.

TGR: You put quite a smattering of different quotes in your newsletter and some are quite grim. You had a couple from accounts of when hyperinflation plagued Germany’s Weimar Republic in the 1920s. Why do you put quotes like that into Trader Tracks?

RW: I’ve been accused of scaring people. But I don’t really do that. I just want them to understand what kind of situation we’re facing. When I speak at conferences, I explain that, while things look pretty nasty right now—and they do look comparatively grim to Germany in the early 1920s and America in the 1930s—if you look at what’s available to us today in terms of trading and investing, I think we’ve got an opportunity that we won’t see again for many, many years. I’m speaking specifically about gold and silver and shorting these major stock markets. While some of these quotes are pretty upsetting—frightening even—it’s merely to get your attention so you’ll get off your duff and do something. A lot of people we talk to at conferences understand and agree, but they don’t do anything. That’s not going to work anymore.

TGR: What are some of those opportunities, Roger?

RW: I’ve got three favorites that I trade for myself. I trade gold spreads, silver spreads and soybean spreads. Last year, on those three kinds of trades, I made 95%. They don’t require a lot of time, which is good, because I’m very busy writing my letter and helping my readers. I’m one of the few newsletter writers who will answer emails from subscribers when they get into trouble on a trade or are looking for some ideas about an opportunity. Our newsletter subscription price is higher than others, but we like to think we give good value because many of our traders can make the subscription cost back on just one or two trades.

TGR: Probably upwards of 80% of the stocks you list in your newsletters are junior gold and silver plays. The majority are juniors. What makes you believe these are places that investors should put their money?

RW: Let’s look at history. From 1979 to 1981, the last time we had a major gold rally to $850, silver went up to $50. If you picked 20 good juniors, probably half would fail. Another 25% would make some money. But there’s probably three to five that would be tremendous homeruns, like 1,000% or 2,000%. Of course, none of us really knows when that big blowoff is coming. Also, we can’t know which ones are going to be the best. I’m constantly sifting through companies, trying to take out the ones that just sit there and don’t move. It may be a good company; but, if it’s not going to move what good is it?

TGR: Do you have a trading philosophy?

RW: We encourage people to trade on the calendar: ‘Sell in May and go away’ and on the September–October selling event, which is quite common. The precious metals stocks, the juniors in particular, have been tied to the big markets. Over the past few months, we can see a separation. We can see now that the HUI, XAU and GDX are all going on their merry ways—away from the inverse trade of the dollar and from some of the big, mainstream stock indexes. We’ve been waiting for this. To me, it indicates that there’s going to be a major divergence or breakout in gold, silver and the related stocks.

TGR: How high is that going to take gold this fall?

RW: This fall we’re looking at $1,325 as a minimum goal on the December futures, which expire after Thanksgiving. We’re in an uptrend at the moment, but I think you’ll see a little leveling off and some light selling in August. After that, you’ll see a rebound. Normally, on the calendar between the last week of August all the way to April or May, we see a big rally in gold and silver with some intermediate profit-taking corrections. The 10-year trend has been solidly up. There’s no question that we’re going to have a good fall season.

TGR: In the August 6th edition of Trader Tracks, your three second-tier choices among the seniors are silver companies. Silver Standard Resources Inc. (TSX:SSO; NASDAQ:SSRI), Silvercorp Metals Inc. (TSX:SVM; NYSE:SVM) and Pan American Silver Corp. (TSX:PAA; NASDAQ:PAAS). What are you seeing in silver that has you sending folks to these companies?

RW: First of all, we think they’re all high-quality companies. Next, silver is more volatile than gold because it’s a smaller market. However, I think silver is really coming into its own. We’ve been hanging around $18 on the futures silver price. We have touched as high as $21.50. Today, the September futures are $19.11. They’re off a bit but we think, before this fall is over, we could go to $20 (resistance). There’s harder resistance at $21.50. Once we breakthrough $21.50–$22, I think you’ll see a big push to $25, $26 and then $30. The question remains: Can we see $25–$26 this fall? I’m not sure, but there’s an excellent chance. Can we see $25–$26 by April 2011? I think we could. With silver moving quickly, these silver companies will move right along with it.

TGR: But those are majors. You may see an increase; but, on a percentage basis, it’s going to be smaller. A smaller silver producer that’s on your list is First Majestic Silver Corp. (TSX:FR; OTCQX:FRMSF). Tell us about that one.

RW: First Majestic is kind of like a senior/junior. The stock price in Canadian dollars was $4.81 yesterday, and has been steadily increasing. The bottom was $1 right after the Lehman event in 2008. The trading channel is also steadily up. We see a bullish cup and handle on the chart. We also see an inverted head and shoulders, which is bullish. Lately there’s been a falloff in volume, but that’s typical this time of year. If silver goes to that top I mentioned, we see some prices on First Majestic going to probably $4.95, $5.52, $6.00, $6.47. They’re making a lot of money. They’ve got three silver mines.

TGR: Are there prospects for growth at the three existing operations?

RW: I think there are because they’re increasing production. They’re putting out more ounces. Their total silver production in the second quarter of 2009 went up 86%. They milled 404,000 tons, which was a 20% increase over a previous quarter. It’s a new record based on tonnage from all three mines. They have good management and the property is in a location we like. We’re very fussy about geographic locations. Many fellow analysts would select mines and mining companies in some areas that, quite frankly, would frighten me.
  Continued…

Gold Rallying to $1,500 as Soros’s Bubble Inflates

Investors are accumulating enough bullion to fill Switzerland’s vaults twice over as gold’s most- accurate forecasters say the longest rally in at least nine decades has further to go no matter what the economy holds.

Analysts raised their 2011 forecasts more than for any other precious metal the past two months, predicting a 10th annual advance, data compiled by Bloomberg show. The most widely held option on gold futures traded in New York is for $1,500 an ounce by December, or 18 percent more than the record $1,266.50 reached June 21. Holdings through bullion-backed exchange-traded products are already at more than 2,075 metric tons, within 0.1 percent of the all-time high.

“Either a swift economic recovery or further dismal economic performance should bring new buyers into the market,” said Eugen Weinberg, an analyst at Commerzbank AG in Frankfurt who was the most accurate forecaster in the first quarter and expects the metal to rise as high as $1,400 next year. “A stronger economy would create more jewelry demand. If the economy stays weak or gets worse, then investors will be looking for a safe haven.”

Investors added to their gold holdings through ETPs for three consecutive weeks, reflecting demand for assets typically favored in times of financial stress. Two-year Treasury yields fell to a record low of 0.4542 percent on Aug. 24 and the yen reached a 15-year high against the dollar the same day. Pacific Investment Management Co., Deutsche Bank AG and Citigroup Inc. have announced or are offering funds or traded instruments designed to guard against sudden market declines.

Swiss Reserves

Buyers accumulated almost 278 tons of gold in 2010 across 10 ETPs tracked by Bloomberg, worth $10.4 billion at this year’s average price. Total holdings are almost twice Switzerland’s official reserves of 1,040 tons, data compiled by the World Gold Council show. ETP holdings reached a record 2,078 tons July 19, data compiled by Bloomberg show.

One of the biggest buyers has been Soros Fund Management LLC, which oversees about $25 billion. George Soros, who made $1 billion breaking the Bank of England’s defense of the pound in 1992, described gold as “the ultimate asset bubble” at the World Economic Forum’s January meeting in Davos, Switzerland. Buying at the start of a bubble is “rational,” he said.

Soros Fund Management sold 341,250 shares of the SPDR Gold Trust, the largest ETP backed by bullion, in the second quarter, according to an Aug. 16 Securities and Exchange Commission filing. That still left a holding of 5.24 million shares, equal to almost 16 tons. Soros declined to comment on the change, through a spokesman.

Accurate Forecasters

Gold may rise as high as $1,500 next year, 21 percent more than the $1,240 traded at 1:45 p.m. in London, according to the median in a Bloomberg survey of 29 analysts, traders and investors. Dan Brebner, an analyst at Deutsche Bank in London who is the most accurate forecaster so far this year, says the metal may reach $1,550.

Bullion gained 13 percent since January, beating an 8.4 percent return on Treasuries, an 8 percent decline in the MSCI World Index of shares and the 10 percent slump in the S&P GSCI Total Return Index of 24 raw materials.

Investors are concerned the recovery is weakening. Sales of new U.S. homes fell to an all-time low in July, the Commerce Department said Aug. 25. The U.S. economy grew at a 1.6 percent annual rate in the second quarter, less than previously calculated, the department said Aug. 27. U.S. growth will slow to 2.8 percent next year, compared with 3 percent in 2010, according to the median of as many as 69 economists’ forecasts compiled by Bloomberg.

‘Fear Another Crisis’

People “fear another crisis and so they will diversify into gold,” said Thorsten Proettel, an analyst at Landesbank Baden-Wurttemberg in Stuttgart, Germany, who was also the most- accurate forecaster in the first quarter. He expects gold to trade as high as $1,350 next year. Anne-Laure Tremblay, an analyst at BNP Paribas SA in London whose forecast was also the best in the period, is estimating a 2011 high of $1,370.

Bullion’s four-fold rally since the end of 2000 has attracted fund managers Eric Mindich and John Paulson. Mindich’s $13 billion Eton Park Capital Management LP bought almost 6.58 million shares of the SPDR Gold Trust in the second quarter, according to an Aug. 16 SEC filing. That’s equal to about 20 tons of gold. Paulson & Co., managing $31 billion, held 31.5 million shares in the SPDR Gold Trust, making it the largest investor, an Aug. 16 SEC filing shows.

Astor Sells

Astor Asset Management LLC, with about $570 million of assets, once had as much as 10 percent of its holdings in the SPDR Gold Trust, according to Bryan Novak, managing director of the Chicago-based company. The firm sold the stake at the end of last year for a profit and now owns silver, copper and a multicommodity ETP.

“We don’t believe we’re heading into a double-dip recession,” Novak said. “Gold carries some risk because a lot of people are piling into the trade.”

A plunge in equities may spur investors to sell their gold holdings to raise cash, he said. The Standard & Poor’s 500 Index dropped 14 percent since this year’s peak on April 26.

Investment demand of 1,901 tons last year exceeded jewelry consumption of 1,759 tons for the first time in three decades, according to London-based researcher GFMS Ltd. That trend continued into the second quarter, with total demand advancing 36 percent to 1,050.3 tons, the WGC in London said Aug. 25.

Newmont Mining

Earnings at Newmont Mining Corp., the largest U.S. gold producer, may increase 47 percent to $1.93 billion in 2010, according to the mean estimate of seven analysts’ forecasts compiled by Bloomberg. The 16-member Philadelphia Stock Exchange Gold and Silver Index advanced 8.7 percent since January.

Bets on gold may pay off even if economic recoveries strengthen. World growth will be 4.6 percent this year, the most since 2007, the International Monetary Fund said July 7. China, the second-biggest bullion buyer after India, will expand 10 percent in 2010, compared with 9.1 percent last year, according to the median of 24 economists’ forecasts compiled by Bloomberg.

Gold imports by India this year may total 600 tons to 625 tons, compared with an estimated 480 tons to 485 tons last year, according to Anjani Sinha, chief executive officer of National Spot Exchange Ltd., the country’s biggest bourse for trading physical gold.

While growth may curb investors’ appetite for gold to protect their wealth, it may also bolster purchases of jewelry, reviving demand that fell to a 21-year low in 2009, according to Jochen Hitzfeld, an analyst at UniCredit SpA in Munich and the best forecaster in the last three quarters. He’s predicting a 2011 high of $1,350.

More Bullish

Analysts are getting more bullish. Their median estimate for next year’s average gold price climbed 6.2 percent since June 16 to $1,247.50, according to 17 forecasts compiled by Bloomberg. That compares with a 2.6 percent gain in silver forecasts, 0.6 percent advance in platinum predictions and a 0.5 percent jump in their palladium outlook.

Gold averaged $1,166.43 since January, heading for a ninth consecutive year of higher average prices. That’s the longest streak since at least 1920.

Options traders are also betting on prices rallying. The biggest position is in call options expiring in November 2010, giving traders the right to buy the metal at $1,500 by then. The next biggest position is the call option for $2,000 expiring in November 2011, data from the Comex exchange in New York show.

“Investors’ interest is still growing and still hasn’t reached a reasonable part of their portfolio,” UniCredit’s Hitzfeld said. “Gold is still an under-owned asset, that’s perfectly clear.”

To contact the reporters on this story: Nicholas Larkin in London at nlarkin1@bloomberg.net.

Coronet Head Gets Second Chance

By Eric Jordan, Numismatic News August 26, 2010

This article was originally printed in Numismatic News.
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Few series in U.S. coinage history have been greeted with greater disdain by the collecting community than what is currently directed to the First Spouse series of $10 gold. Plagued by high initial cost, designs that don’t appeal to the typical collector and poor series cohesion, the First Spouse issues have seen a continuous deterioration in their sales to the point that their mintages are becoming 100-year anomalies in gold.

It might be time to take a second look at these coins.

1. Series go through what the Mint calls an inaugural sales spike when it first comes out and somewhere after the fourth issue or fourth year, sales have a tendency to bottom out. True to form this $10 gold series mintage numbers spiked the first four issues and then proceeded to crash in dramatic fashion.

2. Our friends at the Mint have to plan their planchet usage very closely these days due to limited supplier capacity and they are striking coins based on “anticipated demand.” The thing is the Mint has been seeing Mint State sales for these coins in the 3,000-4,000 range this year and proof sales in the 5,000-6,000 range. It is possible that the last of the four-coin Liberty short set has been short stuck relative to its sales potential. This set is created because four Presidents were either widowed or single while holding office, so the designs of these First Spouse coins is based on a portrait of Liberty used on coins at the time the individual served as President. These Presidents are Thomas Jefferson, Andrew Jackson, Martin Van Buren and James Buchanan.

3. Type coins with beautiful or iconic images tend to pick up an avid collector base quickly. The Hawaiian half is not $3,000 because it has a 10,000 mintage. The Hudson, Old Spanish Trail and many other mintmarked commemoratives populate a similar rarity class, but don’t command anything like the Hawaiian’s price.

A more recent example is the $10 gold Buffalo. The Indian and Buffalo designs are considered outstanding by many and its direct similarities to the Buffalo nickel have helped produce a fourfold price jump in two years.

4. The forth and final Liberty issue coming in September is struck on a half- once gold planchet, has a $10 denomination and a beautiful Coronet Head obverse current in the James Buchanan Administration. If you can’t afford the $10,000 price tag on a cameo rroof $10 gold piece struck in the late 1800s then the Buchanan Liberty may be an affordable alternative. Don’t be shocked if this coin displays completely different behavior than the other generic First Spouse issues after sales close.

5. In a recent Professional Coin Grading Service online survey, the Liberty subset featuring 1800s obverses with Presidential images on the reverse demonstrated dramatically stronger collector interest than the series in general. The good-looking Liberty short set’s potential is largely divorced from the series it inhabits.

Collector base convergence can be an important sign post of future greatness. Large denomination late 1800s Coronet Head cameo proof gold is often referred to as the “Rolls Royce” of American coinage and has a staggering price tag to go with it. Some classic collectors with a limited budget will want a proof Buchanan Liberty. Four-coin Liberty short set collectors will need one as will complete set First Spouse collectors. The potential convergence of multiple collector bases on one coin is a good sign as is the Mint’s recent tendency to strike to anticipated demand.

If you would like a cameo proof $10 Coronet Head Liberty and can afford it, then it might be a good idea to go buy it when it comes on sale and not play an extended waiting game with the Mint. There can be times in life when unnecessary procrastination proves costly.

Thinking Of Buying Gold Or Silver? Now What?

By Patrick A. Heller on August 24th, 2010
Categories: Featured Articles, Gold and Silver Commentary, Precious Metals

 

Chinese Gold Leads World & Ancient Coins section of Heritage Boston Sale

Featured News

By Dan Denning

If Goldman Sachs is publicly bullish on gold, is that a good thing or bad thing for gold bulls?

Wall Street’s notorious trading house published a report on gold earlier this week setting a price target of US$1,300 in the next six months. The report cited several factors. But before we get into them, we’ll confess it made us a bit nervous. Whenever any broker is saying one thing, you have to wonder if they’re actually doing the opposite.

That said, Goldman did make a point that is true of an asset in a bull market: it requires corrections to shake out the speculators and weak hands from time to time. Following the June high north of $1,250 the net speculative long positions declined. Traders took profits. And so did momentum players in the exchange traded funds market.

But then something happened that Michael Pascoe and Rory Robertson did not expect. The gold bubble did not pop. Because it’s not a bubble. The momentum players departed and the price found plenty of support. It’s now around US$1,220.

Goldman says the big catalyst for move higher (other than its announcement leading to a stampede of money into gold short-term) is a repricing of U.S. growth expectations for the rest of this year and all of next. Maybe it’s a fear trade, or just bearishness on U.S. corporate profits when unemployment keeps rising.

Either way, about the only dubious chart we saw in the whole report is the one showing lower U.S. real interest rates and the gold price (exhibit five). As those cool cats in statistics say, correlation is not causation. Its possible low rates give speculators fuel to play in the gold market. But it’s more likely, we reckon, that U.S. rates are low because the bond market is pricing in a deflationary scenario.

So why would gold rise in a deflationary scenario? Good question! It brings us full circle to the argument fund – manager David Einhorn made when we announced his gold position: you buy gold when you think monetary and fiscal policy are bad (we’re paraphrasing). Whether it’s inflation or deflation matters less than something unconventional and bad is going down. Gold does well in that environment, what with it being real money and all.

Our analysis shows that gold is much closer to making a new high in U.S. dollar terms than it is in Aussie dollar terms. For Aussie gold to match the greenback gain, you’d need a much stronger greenback or a much weaker Aussie. It’s worth noting that following the Fed’s announcement that it would sort of begin quantitative easing part two, the Aussie made the second-largest declines against the greenback, trailing only the dreaded Esperanto currency (the euro).

As we have banged on about gold for years now – and have a long position in the list of recommendations to Australian Wealth Gameplan readers – we won’t test your patience much longer. But yesterday’s news that the Aussie unemployment went rate up in July wouldn’t be Aussie dollar bullish, would it?

Maybe the Aussie will get a boost when this miserable Federal election nonsense is over. When thinking about the election we recall the phrase, “Don’t vote! It only encourages them.” Of course voting in Australia is compulsory. But it might be a fine worth copping if you can say you weren’t an accessory to, “the advanced auction of stolen goods,” as Mark Twain once put it.

Seriously. If anything is clear so far about the difference between the two major parties, it’s that both treat Australians as chattel. We are but tax slaves who exist to fund the government’s spending pleasures. And the Greens? More like the Reds!

But that’s all politics. Financial independence is the only real defence against this kind of relentless State encroachment from all sides. Get it. Keep it. Defend it.

Whether you like it or not, more and more governments across the world are spending out of an empty pocket. They’re spending to give people money that’ve lost jobs as a result of the structural shift in the labour markets. That shift came from globalisation. The money might keep people above water for awhile, but it’s no replacement for a real job making real things.

More and more spending is going to simply pay the interest on previously borrowed money. This is probably the most dangerous aspect of a credit bubble. You borrow and spend all that money and, and the end of the day, you have nothing to show for it…no bridges…no roads…no factories…no real increase in the capital stock. Just a lot of over-priced residential housing that suddenly isn’t in such short supply as you thought.

And now Australia finds itself at an interesting crossroads. Just a little debt didn’t seem like such a bad idea at the height of the GFC. Both parties now promise to pay it off quickly, with all the bounty from mineral and energy royalties. Both will increase spending too, but in different places, cutting other spending priorities.

But should the housing bubble pop sooner rather than later, and should Aussie banks find themselves last in the queue for global capital in another phase of the Great Correction, the temptation for more government borrowing will be nigh irresistible. Why?

Well, our stance against government debt may seem dogmatic. But if it is, it’s because the modern State always abuses the power to borrow. Always.

Whether it’s to fund politically popular but economically unproductive projects, or whether it’ just a way of putting off tough choices about actually reducing government spending and, thus, the reach of the State into private life, it’s always easier to borrow and kick the can down the road.

Debt is the health of the State in the same way that liquor is the health of the alcoholic. The relationship is inherently destructive. But we reckon that in the face of so much unproductive debt (household and sovereign) the only politically palatable policy response will be to monetise that debt: pay it off or buy it from bank with new money. The deflationists can enjoy their moment in the sun while it lasts. But it won’t last for long at this rate. (Courtesy: Daily Reckoning, Australia)

Proof bullion prices fall

8/30/2010

By Steve Roach COIN VALUES Market Analyst Proof American Eagle gold coins have provided some sparks in the marketplace this past year, but the fast fall in prices over the past several weeks serves as a reminder that what goes up usually comes down. Some major buyers have stopped buying these and prices have fallen sharply. For some smaller dealers who were stockpiling the coins in anticipation of continued demand, the change in the market means they have lost substantial money, for now, as the coins are now worth substantially less than what the dealers paid for them. During July, several large dealers were paying between $1,950 and $2,000 per ounce for Proof American Eagle gold coins in original Mint packaging – the inner and outer boxes, original capsules and original certificate of authenticity with the same year as the coins. For example, on July 14 a major wholesaler was paying $2,025 per ounce; the dealer’s price gradually declined to $1,900 July 26. Then on July 27 the dealer’s buy price went down to $1,850. On July 29 in the morning the dealer’s buy price was $1,830 and by the afternoon it went to $1,800. On Aug. 3, the price hit $1,750 and then, with orders filled, that dealer stopped buying. Incidentally, the price of gold on July 26 was $1,189 per ounce and the price on Aug. 3 was $1,184, meaning that the drop in demand was not directly related to the bullion market. On Aug. 6, when gold increased to $1,205 per ounce, one dealer offered $1,650 per ounce for coins with original packaging, and for coins without the packaging, the price dropped sharply to $1,400 per ounce. If those who are closest to the market are not buying at the high levels that have characterized these Proof issues for the last year, are they doing this because they know something that we at Coin World don’t know? On Aug. 6, the U.S. Mint told Coin World that no decision has been made as to whether Proof 2010-W American Eagle 1-ounce gold coins would be struck. If the U.S. Mint releases Proof American Eagle gold bullion coins in 2010, supplies will increase and less pressure will be placed on the current supply, likely ending the bull market for these issues.

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