It's been a quiet week, so I don't have much to add to Jeff Clark's look at whether or not our favorite investment class has topped. We've said many times and in many ways that we don't think it's so, but Jeff's new take is driven by hard data. This is not just reassuring, it's exciting.
Senior Metals Investment Strategist
|Rock & Stock Stats|
One Month Ago
One Year Ago
|Gold Producers (GDX)||44.43||47.62||56.13|
|Gold Junior Stocks (GDXJ)||19.30||21.62||36.11|
|Silver Stocks (SIL)||18.52||19.54||24.85|
|TSX (Toronto Stock Exchange)||11,659.96||11,633.40||13.403.10|
By Jeff Clark, Senior Precious Metals Analyst
Doug Casey told me in January, "The only thing that scares me is that central banks are buying a lot of gold; they're historically contrary indicators." When it comes to buying gold, central banks have such a poor timing record that they're frequently joked about as a contrary indicator.
We dislike referring to tonnes of gold instead of ounces. Gold is priced by the ounce. But certain market players, especially central banks, report gold transactions in tonnes. One metric ton (tonne) equals 32,150.7 troy ounces.
Recently, they have been buying, quite literally, tonnes of it. Consider the following:
Here's the picture of what has transpired since the financial crisis hit in late 2008.
(Click on image to enlarge)
Central banks have added a net of 1,290 tonnes since the fourth quarter of 2008. This total excludes China and other nations that don't regularly report their activity, as well as countries that have been surreptitiously buying their own production.
That's a lot of gold buying. One has to wonder whether so much buying may in fact signal a top for gold. After all, a number of prominent analysts have claimed for some time that gold is in a bubble and that it's all downhill from here.
Not so fast. Like many mainstream reports, looking at the short-term picture usually leads to erroneous conclusions. Let's put central-bank purchases into historical perspective.
(Click on image to enlarge)
In spite of the recent activity, world central-bank holdings are far below what they were in 1980. Clearly, a few years of net buying does not a bubble make.
The difference is greater than you might realize. Consider that since 1980…
It seems rather obvious that a lot more "catch-up" buying is needed before we start talking about a top for gold on this basis.
Meanwhile, we think the trend of central-bank gold buying will continue. It's not hard to see why: central bankers around the world know what it must ultimately mean to run the printing presses the way the US has since 2008, even if price inflation is not immediately obvious. It's no surprise that they want to hedge their bets, moving more reserves into something with actual value... something that can't be debased with a few keystrokes. The US dollar has been the world's reserve currency since WWII, and that's beginning to change – the movement into gold is just one facet of that change.
The entire world may indeed be beginning to understand that it's operating on a fiat currency system backed by nothing. At the same time, the sovereign debt crisis in the Eurozone is intensifying, and some countries have succeeded in inflating their currencies faster than the Fed has inflated the USD. It doesn't take Nostradamus to read this writing on the wall… and while the world's central bankers can lie to the public, they themselves know how bad things are.
In fact, the WGC is so confident that central banks will continue to buy gold that it's changed its reporting structure: it's added "official sector purchases" as a new element of gold demand, while eliminating "official sector sales" as a negative supply factor.
Of course, gold will someday top, and Doug Casey believes a bubble in gold and related equities is highly likely at some point, courtesy of the trillions more currency units governments will create in a desperate (and ultimately unsuccessful) attempt to stave off the Greater Depression.
But we're nowhere near that point. There's a long way to go before we start legitimately using the "B word" (bubble) or "S word" (sell).
In the meantime, I suggest using the "B word" (buy) or "A word" (accumulate) to make your decisions about gold.
While we're convinced that buying gold and silver right now will provide handsome rewards, much more money will be made by investing in companies that mine these precious metals. For investors with an appetite for risk, the really big paydays will come from speculating in the best of the best junior miners.
You can get the latest scoop on the most promising juniors at the upcoming Casey Research/Sprott, Inc. Navigating the Politicized Economy Summit in Carlsbad, California.
Our own Louis James will be on hand to update attendees on his latest fact-finding mission, which includes upcoming visits to under-the-radar mining operations in China that he believes could yield life-changing gains. Joining him will be a host of financial luminaries and former government officials who will highlight the risks and opportunities that today's troubled economy presents. Reserve your seat before July 31 to receive $300 off of Summit registration.
Gold is a big deal in Turkey. By World Gold Council (WGC) estimates, Turks have accumulated about 5,000 tonnes (160.8 million troy ounces) of gold in their homes, worth around $255 billion at the current spot price. The WGC ranks Turkey fifth globally by jewelry demand and eighth by retail-investment demand.
Recently, local banks started promoting new services for gold holders, including gold deposits. The country's central bank played a major role in helping to spread the popularity of the new ways to save. From September 2011 to June 2012, the Turkish central bank increased the ratio of lira reserves that could be held in the form of gold from zero to 25%, which drastically increased private banks' appetites for gold. Total gold deposits in Turkish banks soared to 15.6 billion lira ($8.6 billion) in April 2012 from 3.7 billion lira ($2.4 billion based on an historical exchange rate) a year earlier.
The ascent of gold deposits has been a benefit to the country's monetary system, as the more people put their gold holdings into the banks, the less gold Turkey needs to import, which helps decrease its current account deficit. Also, the country's gold market develops and becomes more liquid – all moves in the right direction.
The news about Guatemala's proposed constitutional amendment calling for up to 40% state ownership in mining projects generated a lot of uncertainty among resource investors and speculators and negatively impacted companies operating in the country.
This made the president clarify himself by making another public statement: "In the mining sector [there] is a misinterpretation. It is not an expropriation in any form, but is that the State would participate in the new concessions if they become subject to mining and oil, with a share of the State [ownership] of up to 40%."
This seems good – at least the government realized how dangerous nationalization threats are to companies trying to do business. Still, we suspect that the government's participation in future concessions will be a carried interest, and we'll just have to see how permitting goes for projects currently under development.