A Formula for $12,000 Gold

Posted On Oct 12, 2012 By Addison Wiggin

October 12, 2012

  • A short-term gold opportunity: Watch for one event between now and Election Day
  • An array of gold price forecasts: 12 months, 24 months and a staggering chart that points to the possibility of $12,000
  • Ignoring the noise: Guenthner and Elmerraji on the media hand-wringing surrounding the start of earnings season
  • The War on You, continued: Mom jailed for… letting her kids play in their cul-de-sac (gasp!)
  • Why readers believe we’re shortchanging them of their rightful 5 Mins…. tales from the front lines of real estate lending… choice ripostes to Wednesday’s “annoyed” reader… and more!


  Gold has steadily advanced over the last 60 days from $1,600 to this morning’s $1,767. Which is making some people a little nervous.

For instance: “Can you comment,” a reader asks, “on what you think might happen to the price of gold if Romney gets elected?”

We’ll answer that question today in the course of examining some longer-term trends that will prove immune to whatever happens [checking the calendar] 25 days from now [thank God].

  One of the most respected gold fund managers sees gold reaching for a new high inside the next 12 months.

In his latest shareholder letter, Tocqueville Gold Fund chieftain John Hathaway bases that forecast on continued negative real interest rates: That is, as long as central banks push interest rates below the rate of inflation, gold performs well.

“Some suggest,” Hathaway writes by way of answering the reader’s question, “that a Republican victory in November would be a game changer for gold. It could bring about the dismissal of Bernanke, the taming of fiscal deficits, the painless elimination of excess liquidity from bloated central bank balance sheets and the restoration of robust economic growth.”

[Pausing while your editor guffaws…]

“All of this,” Mr. Hathaway goes on, “would need to occur within the four years allotted to a new administration while voters patiently awaited the magic to take effect. While this rosy scenario is possible, we believe it would be a long shot.

“Therefore, we regard any possible pre-election weakness in gold and mining stocks based on such a possibility as a buying opportunity.”

  A few mainstream analysts, believe it or not, are one-upping Mr. Hathaway.

Bank of America Merrill Lynch has assembled an intriguing chart tracking the expansion of the Federal Reserve’s balance sheet going back to the first round of “quantitative easing” in early 2009… and the price of gold. The chart yields a target both for next summer and the end of 2014.

100  Those numbers might prove conservative. “This target doesn’t take the love trade into consideration,” writes Vancouver favorite and U.S. Global Investors head Frank Holmes, who brought the chart to our attention.

The “love trade” is his term for the centuries-long affinity that Chinese and Indians have had for gold, in contrast to the Western-minded “fear trade.”

In recent months, Indian demand has slumped as the local currency weakened, driving the rupee price of gold to all-time highs. Now that trend is starting to reverse: The exchange rate is now back where it was six months ago, and UBS reports Indian gold demand at a five-month high.

“In addition,” says Mr. Holmes, “Diwali will be celebrated in November. The Festival of Lights is India’s biggest and most important holiday of the year and is celebrated by almost 1 billion Hindus around the world. Traditionally, on the first day of Diwali, it is considered auspicious to clean the home and shop for gold.”

  And what of China, the other emerging-market driver of gold demand?

China’s gold imports via Hong Kong — an imperfect measure, but it’s as transparent as the Chinese get about these things — fell 29% between July and August. But it’s the year-over-year trend that matters… and at 53.5 metric tons, it’s up 22%.

Another way to look at it: In the first eight months of this year, China has imported 512 metric tons of gold — more than the total for all of last year, 428.

  “What’s happening in precious metals,” says Gary Dugan, “is that they are becoming more mainstream.”

Mr. Dugan is the chief investment officer for Asia and the Middle East at Coutts — the private banking arm of the Royal Bank of Scotland.

Ten years ago, investors rarely held any gold in their portfolios. Now, he tells Reuters, “We are going back to normality, and the normality is that precious metals are the core part of your portfolio.

“Some of the clients ask where gold prices are going, and I say don’t even think about prices. It’s a store of value.” Music to our ears…

  Here’s another way to look at how Fed action is driving gold: It’s called the gold coverage ratio.

It measures the amount of gold on deposit at the Fed against the total money supply. “This ratio,” writes Guggenheim Partners chief investment officer Scott Minerd, “tends to move dramatically and falls during periods of disinflation or relative price stability.”

You might not think we’re living in a period of “relative price stability”, but we’ll take Mr. Minerd at face value: The gold coverage ratio is currently at an all-time low of 17%… yielding two tantalizing possibilities.

“The historical average for the gold coverage ratio,” Minerd writes, “is roughly 40%, meaning that the current price of gold would have to more than double to reach the average.”

It gets better: “The gold coverage ratio has risen above 100% twice during 20th century,” most recently at gold’s 1980 peak. “Were this to happen today, the value of an ounce of gold would exceed $12,000.”

At $1,767, it only makes sense to add to your current position. And our friends at the Hard Assets Alliance make it incredibly easy to do so. You can take delivery, or you can store it at one of six sites, including four overseas. Setting up an account takes only a few minutes, and they’re waiving the account-setup fee for Agora Financial readers indefinitely.

You can get started at this link. Note we may be compensated once you fund your account, but we wouldn’t alert you to this opportunity if we didn’t stand behind it all the way.

  Major stock indexes opened the day up. Of course they’ve done that nearly every day this week only to lose ground by the close… heh.

The Dow is pushing toward 13,400, while the S&P’s at 1,436. Among the numbers on traders’ radar this morning…

  • Producer prices: Up 1.1% last month. But not to worry, the wonks at the Labor Department assure us: The “core rate” for people who don’t consume food or energy was pancake-flat
  • Consumer sentiment: Up big, according to a preliminary reading from Reuters and the University of Michigan. At 83.1, the number is the highest since September 2007, before the onset of the “official” 2007-09 recession.

The first banks to report third-quarter earnings both delivered “beats”… but for once the Street is seeing through the accounting games. J.P. Morgan is off slightly and Wells Fargo down more than 3%.

  “Much like we saw earlier this year, analysts are already jumping all over stocks,” write our technician team of Jonas Elmerraji and Greg Guenthner, assessing the start of earnings season.

Alcoa turned in a decent report but “guided lower” for future quarters and traders took its shares out to the proverbial woodshed.

“We talk a lot about ‘herd thinking’ when it comes to the investing public,” Jonas and Greg write. “But the same is true of Wall Street analysts. Even the pros can get caught up in the overwhelmingly negative sentiment. So as stocks approach their highs, analysts are again tempering expectations.”

The reality is a bit different, they say: “It’s still very early this earnings season — but three times as many companies in the S&P 500 have beaten earnings as missed them. On top of this, the investor confidence index is lower than it has been since January 2009 (which, you will recall, was right before the market bottomed).”

 Please, please don’t take my mom to jail. Please, she didn’t do anything wrong,'” implored a 9-year-old girl from Texas, clenching on to the police officer’s leg.

Tammy Cooper, a stay-at-home mom, and latest addition to our “War on You” file, was arrested recently on felony charges of child endangerment and child abandonment.

Aside from the failed logic of forcibly abandoning children by arresting their mother while their father is away on military duty… for allegedly abandoning them… it seems Mrs. Cooper was arrested not because she actually deserted her children… but due to neighborly grapevine gossip.

Her arrest was carried out because Shelley Fuller, a disgruntled neighbor, reported to the police that Cooper had abandoned her children. Upon further questioning, Ms. Fuller later told the police she hit Cooper’s children with her car in the block’s cul-de-sac because they were “abandoned” while they played outside.

BS, says Ms. Cooper, who’s taking her neighbor to court:

“Never at any point were any of Cooper’s children hit by a car as they played in the street. Moreover, Cooper was observing her children the entire time they were outside on the date of her arrest and thus could not plausibly have abandoned them.

“Despite the fact that Fuller alleged she had hit one of the children with her vehicle, no medical response was called for or needed as it was obvious that neither child had been hit by a car or was hurt in any way.

“Interestingly, Fuller was never confronted about her lie regarding striking the child with the car. Instead, Cooper, the victim of an angry neighbor, was arrested and charged with a crime in a public and embarrassing manner.”

Before all of this ended, Cooper’s children, ages 6 and 9 were questioned, she spent 18 hours in jail, spent over $7,000 in legal fees and an investigation by Child Protective Services required her to take her children to a CPS office for further harassm… er.. I mean “questioning.”

What about the neighbor? Well… at long last, she slithered out with “No comment.”

  In a War on You twofer this Friday, a follow-up to on the case of busybody dietitians trying to shut up a blogger.

Last February, we told you the story of Steve Cooksey — a Type 2 diabetic who got off insulin and medication by following a low-carbohydrate “paleo” diet. He blogged frequently about his experience, complete with meal plans and recipes, at his Diabetes Warrior website — invoking the wrath of the North Carolina Board of Dietetics/Nutrition.

The board notified Mr. Cooksey that he was providing dietary and nutritional advice without a license. The bureaucrats even helpfully sent print-outs of his blog entries with the offending portions redlined.

In May, we’d mentioned Cooksey went to court, backed by the fine folks at the Institute for Justice — declaring the self-evident truth that his blog is protected speech under the First Amendment.

One week ago today, a federal court threw out Cooksey’s suit on the grounds that he doesn’t have “standing.” That is, he’ll be entitled to a day in court only after he’s been arrested or fined… seriously.

Whether he plans to put this ruling to the test, he’s not saying. His blog hasn’t been updated for more than two months now.

  “You were 1:40 short of your 5 Mins. yesterday,” a reader writes. “Do we get a refund?

“I’m not sure,” adds an Equity Reserve member, “whether it qualifies as time inflation or deflation (is time the baseline, or The 5?), but I have noticed that a number of the recent 5 Min. Forecasts have been running somewhat less than five minutes.

“Today, at 3:20, was, I think, the shortest, despite the inclusion of a relatively long rant by someone who thinks our current politicians are of much higher quality than others with which you lumped them. In any case, it appears that five minutes just isn’t what it used to be. Is there just nothing more worth writing about? I would not have guessed it, but perhaps, as editor, your perspective is different.

“In any case, thanks for the daily 5. I always read it from one end to the other, even as the ends get closer together.”

The 5: We’re the unwitting victims of a broken clock.

Fact is our word count is no lower than it’s ever been, so rest assured you’ve not been shortchanged. In the meantime, we’ve banged on the clock a couple of times to remedy the problem…

  A friend of mine recently went to his bank that he has done business with for years to refinance a set of apartment buildings he owns.

“Even though he had always made his payments on time and the value of the apartments was above what was being refinanced, the bank wanted 40% owner equity. Ouch! When he told me this, I thought about the Dodd-Frank regulations that penalize a bank for a nonqualifying loan but never define what a nonqualifying loan is. Banks will estimate what used to be reasonable, double it and then require that until a qualifying loan is defined.”

The 5: Hmmm… Does this ring a bell with anyone else out there? Let us know…

  You have to love it when a dissenting commentary proves the validity of the original polemic,” writes one of several readers after Wednesday’s episode.

“When your ‘annoyed’ reader railed against the reader not willing to give up his ‘barbarous relics,’ he/she expressed quite succinctly how such commentary and thinking should be dealt with… that such a person ‘is unworthy of drawing breath.’ Did ‘annoyed’ not see the irony, really? My fear is that ‘annoyed’ may be more than willing to confiscate my ‘barbarous relics’ at the point of a different kind of ‘barbarous relic’ in the hand of someone truly barbarous, a federal agent.”

  “By their blind allegiance to the ‘party line,'” adds another, “the annoyed reader clearly demonstrates how the Third Reich ‘achieved’ what it did during that nightmare decade during the first half of the 20th century. They bring new meaning to ‘We get the government we deserve.’

“Keep up the good work!”

  “I find it really amusing,” writes a reader, wrapping up the week on a strictly nonpartisan note, “when I hear responses from readers defending either Obama or Romney.

“They are quite passionate about defending one or the other. I enjoy playing a game with these people when I hear their oaths of fealty toward one of them. I ask, ‘Please explain to me how there is a shred of difference between them?’ When the subsequent awkward silence appears (and it always does), I just laugh and thank them for their time.”

The 5: As long as you do it for your own amusement and you don’t expect them to actually re-examine their values…


Addison Wiggin

The 5 Min. Forecast

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