Published April 14, 2011

The 2011 Gold Quiz

Dear Reader,

Even as the dust was settling from the 2008 crash, innumerable commentators were already proclaiming the death of capitalism. Well, nearly three years later, capitalism is still around in one form, and socialism’s resurgence failed to produce the growth it promised. The trillion-dollar bailouts and stimulus plans have still not resurrected the economy. Yet, far fewer articles proclaim the death of government intervention. Such is life…

But that doesn’t mean some lines of thought haven’t completely changed. So, I made a list of three ideas killed or severely wounded in the crash. 

1.  Macroeconomics – The crash has given birth to numerous conspiracy theories that explain market crashes. And this doesn’t come from just the political pundits but educated professionals as well. In listening to some of these opinions, one would think that the 2008 crash was the first in history. The analysis rarely looks beyond the immediate events. For example, theories based on the 1999 Glass-Steagall repeal fall into this category. Supposedly, with Glass Steagall intact, the crash would have been prevented. Has everyone forgotten the many recessions between 1933-1999? Yes, there were quite a few of them. Other analysis often blames derivatives or this or that event while typically ignoring the historical record of other crashes where these factors weren’t present. 

2.  The European Monetary Union’s expansion – It seemed for a moment that the EMU would spread to every corner of the continent. But with Greece and Portugal in dire need of a bailout, those dreams are now all gone. After this experience, other weaker countries with hopes of joining can just forget about it. Furthermore, the jury is still out on the future of the EMU. It may still fall apart through a series of unfortunate events. In some ways, the euro reached its high-water mark prior to the crisis. Its expansion will be limited from here, and its experience with bailout after bailout will likely hinder its role as a possible alternative reserve currency.

3.  The anti-war movement – With the economic crisis center-stage, the American anti-war movement is dead as a door nail. Obama was the last glimmer of hope with regards to ending the wars. Honestly, I didn’t expect much from him, but the results were even worse. At least with Bush, the wars continued while facing some opposition. Now, even the majority of the left supports the strike on Libya. Bush started the wars, and Obama – along with the economy – silenced the opposition. What a tag team.

Perhaps some of these things can be resuscitated. Certainly, the anti-war movement will come back with a Republican presidency, but a weak economy may still stifle it. And after the crisis dies down, perhaps economists will begin to evaluate it in comparison to other historical crashes. The expansion of the euro… well, that one might be dead for good. If you have any more thoughts on what should be on the list, please write in.

The 2011 Gold Quiz

By Jeff Clark, BIG GOLD

CPM Group recently released their 2011 Gold Yearbook, an invaluable resource for us gold analysts. Mostly a reference book, even a gold enthusiast might find it dry reading. But I loved it, and as I studied it on a plane, I kept finding data that made me perk up.

To have a little fun with it, I thought I’d summarize what I read in the form of a quiz. See how many you can get correct. Regardless of your score, I’m sure you’ll agree with the ramifications each point makes for the gold market.

I’ll start off easy…

1)      The main driver behind rising gold prices over the past decade is:

a)      Increased jewelry demand in India
b)      Greater industrial uses of the metal
c)       Investment demand

Worldwide investment demand for gold totaled 44 million ounces in 2010. Because of the growing demand by investors, prices have been forced upward.

→Five exchanges began trading gold contracts for the first time in 2010, and three more introduced mini contracts, collectively the largest number launched since the early ‘80s. There are now 24 gold vending machines in seven countries, with three more countries adding machines this year. Households in developing countries are now moving away from gold jewelry and buying coins and bars for their savings. I could go on, but suffice it to say that investment demand will continue to be very strong.

2)      True or false: recovery from gold scrap was lower in 2010 than 2009.

Scrap rose three consecutive years in a row – until last year. Gold supply from scrap fell 2.1%, to 42.2 million ounces.

→This is significant because gold prices were higher, which would normally increase the amount of scrap coming to market. One of the primary reasons scrap dropped is because investors are holding on to their metal, reportedly because they believe prices are headed higher. Isn’t that one reason you’re holding on to your bullion?

3)      There are many reasons investors have been buying gold over the past 10 years, but what is the #1 reason?

a)      Safe-haven asset
b)      Gold coins and bars have become more intricate, widespread, and beautiful
c)       Supply and demand imbalance

Global fears increasingly led investors to purchase large volumes of gold in 2010 for safe-haven purposes, despite record price levels.

→High levels of investment buying are expected to continue in 2011 because virtually none of the economic, political, and monetary concerns have been resolved.

If you got all three answers correct, you’re an investor who understands the basic reasons for owning gold and that those reasons are still in play.

Now let’s step it up a little…

4)      Gold represented what percent of global financial assets at the end of 2010?

a)      3.1%
b)      0.7%
c)       1.6%
d)      2.4%

The estimated value of investor gold holdings stood at $1.5 trillion at the end of last year, about 0.7% of global financial assets.

→While up nine years in a row and triple what it represented in 2001, gold is still a miniscule portion of the world’s private wealth. It represented 2.8% of global assets in 1980, four times what it does today.

5)      How many central banks increased their gold holdings in 2010?

a)        9
b)      12
c)      15
d)      19

Russia, Thailand, Belarus, Bangladesh, Venezuela, Tajikistan, Ukraine, Jordan, Philippines, South Africa, Sri Lanka, Germany, Kazakhstan, Mexico, Greece, Pakistan, Belgium, Czech Republic, and Malta = 19. Central banks as a group are expected to continue to be net buyers of the metal for the foreseeable future.

→It’s interesting that most purchases were from developing countries, unsurprising when you consider they’ve accumulated over $5 trillion in foreign exchange reserves just since 2002.

6)       Compared to 2009,U.S. Mint gold coin sales in 2010 were:

a)      Down 12%
b)      Up 8%
c)       Up 5%
d)      Up 3%

The U.S. Mint sold 1.43 million ounces last year, down 12% from the 1.62 million ounces sold in 2009. You might think this is negative until you realize that global coin sales rose 21% last year, reaching 6.3 million ounces. Makes you wonder what other countries know that many North Americans don’t.

→Supply problems continue to plague the U.S. Mint, evidenced by the fact that Buffalo sales were suspended for half the year.What happens when the greater population begins to clamor to buy gold? Bottleneck, meet desperation.

7)      CPM estimates that the fiscal and monetary imbalances, especially in developed countries, could take how long to resolve? 

a)      1 year
b)      Decades
c)       5 years
d)      2 years

Rigid social contracts are so deeply ingrained, especially in the developed world, that it will take decades to resolve the monetary imbalances.

→This sobering fact means gold will likely be in a bull market for many years to come. There are very few options to deal with the overwhelming debt burden in most of these countries: raise taxes, cut spending, increase growth, or print money. Guess which one is most likely? Inflation from currency dilution is baked in the cake and will spur further gold demand and light a fire under the price.

If you got these four questions correct, I think it means you’re an astute investor who doesn’t worry about day-to-day price fluctuations and instead focuses on owning enough ounces to protect your assets from the huge and intractable fiscal problems that still have to be faced.

Now here are some questions for those of you who love gold stocks…

8)      What was the industry-average cash cost to produce an ounce of gold last year?

a)      $509
b)      $498
c)       $544
d)      $474

Cash costs have tripled since 2002 and rang in at $544 last year. They will certainly be higher again this year.

→In spite of higher costs for the producers, margins actually rose due to higher gold prices. Margins in 2010 averaged $680, and were only $114 as recently as 2002.

We’ve got some of the most profitable companies in BIG GOLD, along with a number of producers that have big growth coming online over the next one and two years. Buy these stocks before that growth happens; if you shell out the bargain basement price of $79 now, I think your portfolio will be very happy when it comes time to renew.

9)      The average grade of gold mined on a worldwide basis last year was how much?

a)      5.11 grams/tonne
b)      3.54 grams/tonne
c)       2.96 grams/tonne
d)      1.83 grams/tonne

The second lowest level on record – 1.83 grams per tonne – occurred in 2010. While not entirely negative since higher gold prices allow producers to go after lower-grade deposits, this leads to higher costs for both discovery and production. It is undoubtedly true, though, that one of the main reasons grades are lower is because the easy fruit has been picked in many regions around the world.

→This is bullish for those explorers that can find and develop higher-grade deposits and is where much of our speculative dollars should be focused. Our mining exploration advisory International Speculator tells you which companies are the best of the best, outperforming the S&P by 8.4 times last year. So if you’re not reading the International Speculator yet, you’re missing out on some spectacular profits.

10)   The most popular region for exploration spending is where?

a)      Latin America
b)      Canada
c)       Nevada
d)      China

Roughly 25% of all global exploration money is devoted to Latin America. The biggest beneficiaries are Peru, Mexico, Brazil, Chile, and Argentina.

→If you’re investing in gold and silver explorers, make sure you have exposure to this region, as odds are high there will be a number of major discoveries made here.

If you got these three questions correct, you’re well in touch with the gold stock market, and I hope you’re taking advantage of the picks we offer in BIG GOLD and International Speculator.  

This data clarifies and confirms why many investors own gold and continue buying it. It paints a decidedly bullish picture for the metal, in spite of record price levels. Monetary issues are far from over, won’t be easily resolved, and will take years to play out. Banks continue buying, and investors aren’t selling. The U.S. Mint can’t keep up with demand, and yet gold is underowned when compared to other major asset classes. Costs are rising for the producers, but margins are rising faster for the better-run companies.

When looking at the big picture for gold, I for one draw comfort from knowing I’ve got some ounces tucked away. I hope you, too, see gold for what it is – protection against unsustainable fiscal imbalances and massive currency debasement, and a profit center for years to come.

[CPM isn’t just for hedge funds and international organizations – they provide consulting, asset management, and investment banking services to individual investors as well. And their research products are the best in the world. You can get the Yearbook yourself, as well as any of their top-line products, here.]*

World Gold Council: Gold – the Performing Commodity

By Alena Mikhan and Andrey Dashkov

A report published by the World Gold Council this week reveals that investors willing to diversify into gold should look beyond commodity indices and gain direct exposure to the metal, both for risk reduction and higher returns.

The report titled “Gold: a Commodity Like no Other,” released this week, investigates the benefits of increased exposure to gold and looks at whether various commodity indices serve that purpose.

The results are quite striking: investors who use such indices as the S&P Goldman Sachs Commodity Index (S&P GSCI) or the Dow Jones-UBS Commodity Index (DJ-UBSCI) as “benchmarks for their commodity allocations” do not get exposed to the yellow metal to a significant degree.

The reason is quite obvious: gold weighting in most commodity indices is too small, somewhere between three and seven percent of the total basket. In this case, if an investor has a 10% overall allocation to commodities, his or her effective exposure to gold is less than 1%, which is obviously less than enough to make gold have a meaningful impact on portfolio performance.

To clarify, consider this example:

“An investor with an asset allocation similar to a simple benchmark portfolio (50% equities, 40% fixed income, 10% commodities) during 2008 would have reduced portfolio losses by between US$200,000 to US$400,000 on a US$10mn investment by allocating 5% to 10% of the overall portfolio directly to gold. Furthermore, over the past 20 years, the same investor would have increased average annual portfolio gains by between US$100,000 to US$200,000 by directing a similar allocation to gold. These findings suggest that portfolio managers and investors who already have exposure to commodities in their portfolio stand to benefit from including gold as a separate strategic asset class, without compromising long-term returns.”

WGC insists, “Gold should be viewed as a separate, distinct asset class, and a foundation to a well-diversified investment portfolio.” And goes on to suggest that “the optimal strategic allocation to gold can be as high as 9.5% to the overall portfolio for more risk-averse investors (leaving a 0.5% to other commodities) or a moderate 4.5% (5.5% to other commodities) for those willing to take on more risk.”

We take this portfolio model and suggestions on allocation between different assets with a grain of salt – we have a much higher allocation to precious metals – but the recommendation to increase gold exposure is quite interesting, given how much the metal has appreciated recently. It implies an assumption that gold still has potential to appreciate and the market for it is not in a bubble.

The report goes on to contrast the gold market to those of other commodities (including energy, agriculture, livestock and other metals, including non-gold precious metals). In short, the gold market is quite unique. There are a number of features and market conditions that make the difference.

First, the demand-supply structure: dominated by jewelry and investment, gold demand allocated to industrial uses comprises only one-tenth of the total (see table below). This makes gold exposure to business cycle fluctuations much less than for other metals. Indeed, for the rest of the metals listed below, technology represents at least a half of the total demand.

Gold supply comes in large part from recycling, as most of the gold ever mined still remains on the face of the earth. This makes total gold supply quite stable, and demand depending to a large degree on the current investment sentiment, or “fear factor,” not industrial demand.


Another significant characteristic of the global gold market is its liquidity. The World Gold Council estimates the “investable” portion of the total gold market at 60,400 tonnes (2.1 billion ounces) or US$2.4 trillion (based on 2010 average gold price). This amount is comparable to “the size of US government-guaranteed debt (US$2.7 trillion),” the report says. Various estimates suggest that daily gold turnover worldwide is somewhere between US$63 and US$211 billion.

And although gold is priced in dollars, it is, unlike USD, not subject to default. Gold does not represent debt. This makes it a monetary asset, something other commodities (besides, silver) lack.

The WGC report supports our core belief that gold should be a part of any prudent investor’s portfolio, reducing risk of loss and enhancing overall performance. Unfortunately, gold is largely underrepresented in the most popular commodity indices, so relying on them does not provide an investor a significant chance to profit from gold’s price action.

Vedran here. Let me point you again to our BIG GOLD newsletter, one of the best advisories I know of – maybe the best – when it comes to gold and silver. Where to get it, where to store it, when to buy it, when to sell… plus the best conservative precious metals stock and fund recommendations. Despite the rather low risk exposure, some of Jeff Clark’s stock picks have more than doubled in price since he recommended them.

You’ve got nothing to lose trying it. First of all, it’s only $79 a year, and second, you have 3 full months to figure out if you like it. If not, cancel for a 100% refund. Learn more about Jeff’s portfolio-boosting strategies here or sign up right away here.

Additional Links and Reads

How Silver is Mined, Part I (YouTube)

How Silver is Mined, Part II (YouTube)

Goldman Traders Tried to Manipulate Derivatives Market in '07, Report Says (Bloomberg)

That’s it for today. Thanks for reading and subscribing.

Vedran Vuk
Casey's Daily Dispatch Editor

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