Political Metals (PMs)

Much has happened in the Political Metals world during my 3-week family vacation to escape the cold of Dunedin winter. When we left, gold and silver was around $1,500 and $34 respectively. When we returned, gold was at its all time high in USD, GBP, EUR & MYR while silver answered the question “Silver: Will it be Up or Down?” decisively.

Now that silver has punched through its 50-DMA and $38 resistance level, it should be revisiting its April high pretty soon, or be back to the mid 40s “in a heartbeat” as James Turk puts it. This optimism is based on several developments and forecasts by some big names in the PMs space.

Key developments that are positive for gold & silver   

1. Reinvestment in the Exchange Stabilization Fund is suspended. 

The US treasuries department has announced that it will suspend reinvestment of the Exchange Stabilization Fund (ESF), the last of the measures available to keep the nation under the statutory debt limit.

The ESF was established at the Treasury Department by a provision in the Gold Reserve Act of January 31, 1934. The fund began operations in April 1934, financed by $2 billion of the $2.8 billion paper profit the government realized from raising the price of gold to $35 an ounce from $20.67. The act authorized the ESF to use its capital to deal in gold and foreign exchange to stabilize the exchange value of the dollar. The ESF as originally designed was part of the executive branch not subject to legislative oversight. Wikipedia

This is very significant because it is partly through this fund that the US government and the Federal Reserve intervene in the gold market. While we still have to contend with the likes of JP Morgan, one major player in the Gold Cartel is down, at least temporarily.

2. Threat of Euro Zone default

Ambrose Evans-Pritchard, International Business Editor of The Daily Telegraph puts it this way.

“As the twin pillars of international monetary system threaten to come tumbling down in unison, gold has reclaimed its ancient status as the anchor of stability.”

According to Ben Davies, CEO of Hinde Capital, Euro Zone default is no longer a question of “if” or “when”. It’s a question of how. “What remains to be seen is, is it going to be disorderly?  This is all highly conducive for gold.”

“People are really beginning to realize that (gold) is the currency of first resort…. Various liquidity is going to be coming from all corners of the world.  At no time has gold pulled back throughout any of this credit tightening process, the market is going higher.  We are in my opinion going to see a $2,000 handle this year.”

3. China’s launch of the Pan Asia Gold Exchange

Up until now, the COMEX gold & silver paper traders have dominated the market to the extent that price discovery for physical gold & silver is akin to the tail wagging the dog. All this is set to change with the launch of the Pan Asia Gold Exchange in China. Andrew Maguire, independent bullion trader and a whistle-blower told KWN

“By creating the first ever rolling spot contract, Chinese bank customers will for the first time have ease of access to 10 ounce gold contracts in Renminbi directly from their bank accounts and with the click of a mouse. To give a further idea of scale, if just 1% of their customers bought a single 10 ounce contract, that would equate to 1,000 tons of physical gold being drawn down…. I firmly believe we are marking a pivotal point that will in very short order affect current precious metals price discovery dynamics.  We now have an additional factor to be vended into the supply demand equation.  This factor will ultimately destroy the remaining short positions in both gold and silver.”

4. Saving the best for last - Ben Bernanke’s testimony

Gold prices catapulted to record highs after Ben Bernanke’s testimony to the House Financial Services Committee reaffirmed the possibility of more monetary easing. To give you an idea of the potential extent of the impact, here’s a quote from Peter Hambro, Chairman of Britain’s biggest pure gold listing Petropavlovsk.

“It is very scary - the flight to gold is accelerating at a faster and faster speed.. One of the big US banks texted me today to say that if QE3 actually happens, we could see gold at $5,000 and silver at $1,000. I feel terribly sorry for anybody on fixed incomes tied to a fiat currency because they are not going to be able to buy things with that paper money.”

QE3 aside, what’s more interesting is Bernanke’s comment that “Gold is not money” (Watch the video). Indeed! How can gold be money when it cannot be created out of nothing, the manner he’s been creating Money out of thin air all along? At least he is consistent and honest on this point.

When asked why people own gold, he replied ”As protection against of what we call tail risks: really, really bad outcomes.”

Again, he’s spot on! Really, really bad outcomes. Would you consider hyperinflation, currency debasement, sovereign debt default, collapse of the fiat money system on a global scale as “really, really bad outcomes”? If you do, and if you have not already done so, consider starting your fight against every central bank in the world by owning gold (& silver).

And..

if you think that gold at it’s current all time high of $1590.10 is “expensive”, take a look at the inflation-adjusted price of gold using the Shadowstats model.

-