Posts Tagged ‘Gold’

Do you really believe that the gold bull market is over?

Saturday, May 25th, 2013

Recently, there are a lot of chatter in the financial market about the end of the gold bull market. Those who believe that will use the examples of smart money to bolster their argument- George Soros selling his gold, Goldman Sach warning that gold prices  can fall further, etc. Indeed, there are no shortage of experts offering their opinion on why the gold bull market is over. It is easy to believe it because gold prices has been going nowhere since 2011. If you look at the 10-year chart for gold prices, you can be forgiven for thinking that the uptrend seems to be over. Is the gold bull market really over?

Before we answer this question, let?s look at the current popular narrative that tries to explain why gold prices is falling. The prevailing story is that the US economy is finally on track to a real recovery and hence, the money printing measure enacted since the GFC can finally stop. When money printing stops, at least the debasement of money can end. With luck, if the US economy continue to recover and become gangbusters, Bernanke may even start to clean up and unwind the money litter. In either case, gold will not be needed anymore since confidence in fiat money (ie US dollars) will return.

Indeed, the financial markets are reading Bernanke?s lips to divine when he will start to stop printing money. Bernanke did a good job of confusing the market. But in our opinion, it is very hard for him to end the monetary rain. Why? Because once it becomes clear that Bernanke will eventually stop printing money, guess what will happen to the US dollar? It will continue to rise and rise and rise and rise. That will kill the export competitiveness of the US economy and pull the US back into the economic hole that it just got out. Do you think the US will be stupid enough to score its own goal and give countries like China and Japan a chance to high-five each other? Anyway, let?s go back to the popular narrative?

Unfortunately, this popular narrative (that the US will start to stop printing money) miss one important big picture fact. Missing this fact is so mind-bogglingly stupid!! It is as stupid as missing a gigantic elephant in the room. Those who fail to see this elephant will sell their gold to those who could see it. In due time, when this elephant gets noticed, there will be a rush back into gold.

What is this gigantic elephant in the room?

The answer is found in the last section of chapter 5 of our book, How to buy and invest in gold and silver bullion.

What will happen if Uncle Sam does not raise the debt ceiling?

Wednesday, July 27th, 2011

Today, the financial markets are abuzz with chatter about the possible default of the US government due to Congress not raising the debt ceiling. A lot of investors are also interested in this topic and hence, this article.

First, what do we think will happen? We do not know what will happen in future. But our bet is that the debt ceiling will eventually be raised. If not by August 2, then it will be soon after. Maybe that will involve Obama invoking the 14th amendment clause in the Constitution to bypass Congress to raise the debt ceiling. Or maybe some other measures that we have not thought off. Or maybe there will be a surprise hugs and kisses in Congress as both Democrats and Republicans agree to raise the ceiling. Maybe… Anyway, this is not the first time this is happening. Every time, the debt ceiling is eventually raised. But because it was always raised eventually, it becomes like a game of crying wolf. So, each time it happens, the brinkmanship has to bring the country nearer to the edge in order to be taken more seriously.

But what if the unthinkable happens? What if the Uncle Sam fails to raise the debt ceiling and defaults on its debt?

US government debt is supposed to be the safest forms of cash in the world. It is supposed to be the debt that can never ever be defaulted. As a result, the yields on long-term US government debt become the benchmark to appraise every other investment, including stocks and bonds. The heart of value investing depends on the sacred safety of US government debt (see our series, Value investing for dummies). Now, there is talk that the US government may default on its debt. The fact that such a talk exists shows that it can happen. It hasn?t happen yet. But you can be sure that if it happens, it will throw chaos into the world of investing because if the world?s safest form of cash becomes unsafe, how do you value all the other investments?

So, what will happen?

Obviously, the US dollar will go down. But go down relative to which currency? Euros? Nay, Europe has its own sovereign debt problems. Yen? Maybe yes, but Japan?s government debt as a percentage of GDP dwarfs even the Greeks. Chinese Yuan? Perhaps, but it is still not a fully convertible currency. Australian dollar? That sounds better, and that can explains why the AUD is surging. Gold and silver? Yes, if the sacred safety of Uncle Sam?s debt is no longer safe, then there?s no recourse but to return to what is historically money for thousands of years.

Next, what will happen to interest rates in the US? Imagine all the US government bond holders heading for the exits together. US government bond prices will tank, which means its yields will surge. That will then lead to surging borrowing rates in the US.

But wait! Will Ben Bernanke sit there and do nothing while interest rates sky-rocket? Of course not! We think the Federal Reserve will step in by conjuring up money from thin air to buy the bonds from the panicking herd in order to support US government bond prices. And Bernanke will surely be praying that this will turn the tide of the massive wave of selling. What if the herd saw Bernanke?s money printing and believes that he is going to unleash a tidal wave of money into economy. That?ll be hyperinflationary! But if Bernanke does not do what it takes to support the US government bond prices, it will be hyperdeflationary as the already weak US economy get crunched by oppressively high interest rates.

Remember two years ago when National Party Barnaby Joyce suggested that Australia must have a contingency plan for an US government debt default. The then Prime Minister Rudd denounced him as an irresponsible loony. Today, that loony looks to be saner than Rudd.

Interesting times lies ahead. Those who had read our book, How to buy and invest in physical gold and silver bullion and had already taken action have much less to fear. And by the way, our book is now also available in iTunes, for those who owns Apple’s iPod Touch, iPhone and iPad.

Something fishy happening in the physical gold and silver market

Thursday, December 9th, 2010

Have you noticed something fishy going on in the silver market? Take a look at this chart:


This chart shows the ratio of gold to silver prices over a period of a year. As you can see from the trend, silver is getting more and more expensive relative to gold since before September. If you extend the period to 36 years, you will see this:


The latest move is pretty major, even when you see it from a time-frame of 36 years.

So, what is the story behind this major move? Remember what we wrote in page 59 of our book, How to buy and invest in physical gold and silver bullion? There, we wrote about the possible fuses that can ignite silver prices. In that section of our book, we mentioned the colossal short silver positions of JP Morgan.

Well, according to J.P. Morgan and the Great Silver Caper,

?A viral campaign (Crash JP Morgue Video [below]) to buy a physical silver and ?crash? the bank is now spreading like wildfire on the Internet,? SFGate reports

Even more fishy is that the futures market for gold and silver are in backwardation (see Investors to Silver: ?Let?s Get Physical?). In case you do not know what "backwardation" means, you may want to take a read at How futures price affect market price. What does this mean?

Well, in theory, backwardation is not supposed to happen. But if it happens in reality (as it is happening right now, which is rare), it is a sign of distrust in the paper gold/silver markets as traders/investors are queuing up to take physical delivery of the precious metals.

Another interesting observation: as you know, we are an affiliate partner of We noticed that all the customers that we referred to them are buying silver. We have yet to see a gold purchase.

Note: This article is not financial advice. Take it as a piece of juicy ‘gossip’ from the financial markets that we are passing to you.

Is there any benefit for Aussies to invest in gold?

Tuesday, November 16th, 2010

Recently, one of our readers who bought How to buy and invest in physical gold and silver bullion wrote to us,

I live in Perth so am looking to buy bullion from the mint, just down the road, literally, however I?m concerned about how the fluctuating US dollar affects my investment. Surely during hyperinflation of the US dollar gold will obviously go up, but also the Aussie dollar will strengthen significantly at the same time. If the Aussie dollar goes up more than the gold price, I actually loose money in Aussie dollars for which i use to pay my gold (If I use us money trading account…i will loose money when i finally exchange us to aus $$ if the exchange rate is super high)…is this a realistic situation or in a case of hyperinflation, is gold likely to spiral upwards whereas the Aussie dollar marginally increase in relation to the US$…….i.e will the spiralling gold price and hyperinflation in the states cause equivalent hyperinflation worldwide and therefore maintain the “approx” AU/US $$ exchange rate.? I can see gold skyrocketing but if the Aussie dollar also sky rockets also…this is of no benefit is it>>> or is it???

our dollar is very strong at the moment and predicted to get stronger, hence, i will loose money by investing in gold or silver, but i have no trust in the US financial system. Is there a way i can hedge myself against a strengthening Aussie dollar??

I realise u don’t have a crystal ball…I’m not holding you to anything i just want your opinion.

As we can all see, currently there?s a correlation between Australian dollars (AUD) and gold price. Hence, from the point of view of Australian investors of gold, a rising gold price (in USD) does not benefit them. We see that correlation working out in 2007 and today. Today, even though gold prices had hit a record high in USD terms, it is still below the record high in AUD terms- gold hit a record high of around AU$1500 in 2009 when the AUD was very ?weak?.

To answer our reader?s question, we have two points to make:

Back to the basics?

First, let?s revisit the basics. As we wrote in How to buy and invest in physical gold and silver bullion, when we invest in gold, we are not so much into ?making? money. We are doing so to hedge and protect our existing wealth. In other words, gold is not so much of an investment. Instead, it is more of an insurance policy. Therefore, we wouldn?t be so concerned if our ?investment? in gold is not turning out well in terms of AUD. However, what we are more concerned is the possibility of an AUD currency crisis. We have written about that in Will there be an AUD currency crisis?. We are not saying it will happen. Instead, we are suggesting that there?s a possibility that it may happen and by ?investing? in gold, we are hedging ourselves against that.

USD the reserve currency

Regarding the mess in the US financial system, it would be quite an entertaining spectacle if the US is just an inconsequential banana republic like Zimbabwe (which incidentally fell into hyperinflation- a object lesson for the US to learn). In that case, the case for ?investing? in gold will be much weaker.

Unfortunately, the US is not an inconsequential banana republic. It is a superpower whose currency is the world reserve currency. As we wrote in How to buy and invest in physical gold and silver bullion,

The United States, with ?helicopter? Ben Bernanke at the helm of the Federal Reserve, is committed to money printing to solve America?s economic woes. To the extent that the US dollar is the world reserve currency, it will affect the rest of the world.

Because it is the world?s reserve currency, China ?saved? most of the fruits of its hard work in the form of that reserve currency (a cool US$2 trillion worth). Same thing for Japan. Ditto for many other countries.

By printing money, the US is devaluing the world?s reserve currency. But the world cannot afford to have its reserve currency devalued towards the value of confetti. As we wrote in Why did the foreigners bail out cash-starved financial institutions?,

China?s trillions of US dollars reserve is a form of savings that will be used to acquire their future needs for resources to power their economy in the long term. Therefore, any threat to the long-term value of their savings will be a long-term threat to their economy.

So, what is the solution to the devaluation of the reserve currency? As we wrote in What if the US fall into hyperinflation?,

Now, in this age of freely fluctuating currencies, the currency?s value is a relative concept. For example, a falling US dollar implies a rising Australian dollar. Therefore, one way to ?maintain? the value of the US dollar relative to the Australian dollar is to devalue the Australian dollar. Perhaps this is the route that central bankers will concertedly take to instil ?confidence? in the US dollar in order to create the illusion that the US dollar is still a reliable store of value? Well, they can try, but growing global inflation and skyrocketing gold price relative to all currencies will be tell-tale signs of such a dirty trick.

That?s why there?s a threat of a currency war between the US and China right now. The US is accusing the Chinese of manipulating their currency while the Chinese are pissed off with the US for exporting their inflation to China. As the US prints and devalue its reserve currency, China will be hard pressed to devalue theirs too (in the form of a currency peg). If China let their yuan soar in value, their exports will collapse, which will severely affect their economy and social stability. Japan is in the same situation too. A strong yen (relative to the USD) is very bad for their economy too. That’s why Japan recently cut their already super-low interest rates and there’s talk of more money printing on the Japanese’s part.

Now, look at Australia. Let?s imagine that the AUD reaches US$1.20 and is threatening to march forward to $1.40 and beyond. If the AUD gets too strong, it will hurt the Australian economy. In such a situation, Australia will be hard pressed to devalue its currency too (e.g. by cutting interest rates, direct intervention). Or maybe impose capital controls.

In other words, the world is in a situation where there?s a competitive devaluation of currencies. In the recent G-20 summit, countries are pledging not to engage in that. Well, if you doubt their words, then you will sleep better to have your own reserve currency in the form of gold.

In any case, it?s going to be very rough ride in the forex markets. If you are forex speculator, this is heaven. If not, then it is going to suck.

The #1 reason why gold prices collapsed this week

Thursday, October 21st, 2010

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Has gold reached its zenith?

Wednesday, September 22nd, 2010

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Should you leverage to the max in a long-run bull market?

Sunday, July 18th, 2010

Between 1970 and 1980, gold was in a bull market. In 1971, the average price of gold was around US$40. By January 1980, it hit US$850. So, the question is: Surely, it was a good idea to leverage as much as you can in the 1970s (assuming you knew that gold would be in a bull market)? Since gold prices multiplied by 21 times from 1971 to 1980, and if you leverage to the maximum at any time in the 1970s, you will become filthy rich by 1980 right?


If you leveraged say, 10:1 in December 1974, you will be likely to be financially wiped out by August 1976. Between that time, gold prices fell from US$195 to US$103- a correction of 47%. Then from August 1976, gold resumed its up-trend to the high of US$850.

The lesson here is clear. Even in the midst of a long-term bull-market, you can become bankrupt if you are highly leveraged and unlucky.

Next question to ask: What if a lot of people are highly leveraged at the same time, in the same asset class, believing that it is in a long-term bull market? We will turn the answer to this question to our readers.

Notice the change of narratives in the financial markets?

Tuesday, July 6th, 2010

At around January-February this year, when the global financial market first suffered a correction, the narrative was about the sovereign debt of Greece. That had the implication on the Euro. Back then, the US dollar rose and gold fell. The fact that gold fell was not something that can be rationally explained. That?s because if there?s a lack of confidence in a major fiat currency (the Euro in this case), then the alternative should be gold. But as we wrote in How To Foolproof Yourself Against Salesmen & Media Bias, there?s a difference between what should happen and what will happen. This is example of a divergence between the two.

In May this year, the narrative was again on Greece, the other PIIGS countries and by implication, the Euro. Gold and US dollar rose. This time round, gold?s move was rational.

Fast forward to today.

There?re a lot of indication that the narrative is back in the bears? favour (see Mr Market is in the bear camp). But this time round, there?s a difference between May?s bearish narrative and today?s bearish narrative- European sovereign debt (and by extension, the Euro) story is no longer part of the narrative. The more prominent story is the growing expectation of a double-dip recession. As we wrote in Keep up spending- Who?s right? Europe or America?,

The expected (assumed is the more accurate word) recovery in the United States seems to be stalling. China is enacting policies to slow growth. Europe is mired in sovereign debt problems.

This narrative carries the implication of a return to deflation. The signs of deflation include rising US dollar and falling asset prices. Our guess is that in the context of this new narrative, gold in US dollar terms may be under pressure. A rising USD implies a falling AUD, which will mitigate some of the falls in gold price in AUD terms.

In the near term, stocks may be oversold and may rebound slightly. But according to the narrative of the bigger picture, the bears are still in charge.

When will silver prices explode?

Friday, June 25th, 2010

David Morgan of Silver Investor Report is a well-known expert on silver. Naturally, he is bullish on silver prices. But for many investors, after having seen silver prices languishing for so long, they feel like giving up.

As we wrote in our book, How to buy and invest in physical gold and silver bullion, there are many reasons why silver is a better choice than gold in terms of price speculation. This is because it is a hybrid between monetary and industrial metal. In terms of supply and demand fundamentals (in the context of industrial use), silver is much stronger than gold (because it has hardly any industrial use).

However, for whatever reason, silver prices are languishing for a very long time. But for David Morgan he has a theory of when silver prices will see its day of vindication. The theory goes like this:

  1. Assuming that one day, people will lose faith in fiat money, gold will be hoarded by more and more of the masses.
  2. Unfortunately, gold is relatively expensive and rare and that means the majority of the masses will miss out on getting some gold for themselves.
  3. When that happens, they will notice that silver is dirt cheap relative to gold (since silver prices have been languishing for a very long time).
  4. Therefore, they will surge towards getting silver.

Given that silver prices are at a far lower base than gold, it doesn?t take much for silver prices to rise in absolute terms in order for it to rise a lot in percentage terms.

That?s when David Morgan believes that we will see silver prices soar. Will that day come? We don?t know, but this is a very good Black Swan trade to get into. If you want to speculate in silver prices, just make sure that the ?silver? that you hold are not empty promises.

News report of Chinese crowd buying gold

Thursday, May 20th, 2010

A few years, we advised one of our Chinese friends to buy gold. Back then, there was a craze among Chinese investors to invest in stocks (and mutual funds). Our friend queued up at the bank and asked to buy gold. The lady behind the bank counter then laughed at our friend.

?You want to invest in gold?? she asked, being amused. ?Nobody invest in gold!?

Fast forward to 2009.

The property bubble in China was powering ahead, after a brief disruption in 2008. Then in 2010, the Chinese government began to crack down hard on property speculation (see What if China crashes?). Hence, as we wrote before in Will a crashed Chinese property market lead to an embrace of gold? Part 2- Store-of-value function, it becomes very logical for the Chinese to move their speculation from property into gold.

Today, we see this news report (notice what one of the lady said about one property of gold that is not present in property):

As Paul, one of our readers said,

Any hint of softness in price will cause the Chinese to stop buying. Conversely, any hint that the price is set to rise, and they will rush in.

Once gold enters the mainstream imagination of the Chinese people, you can imagine what will happen to gold prices. This could be the beginning of the trend.

How to buy and invest in physical gold and silver bullion