10 Reasons to Buy Gold at $1,300.00 an Ounce

1. Technical Breakout

From a technical analysis perspective, there has never been a better time to own or purchase gold. Every tradable asset has what is known as support and resistance. Support is the value by which any asset is assumed safe for buying. This is determined by previous price levels.

When prices reach this level more buyers than sellers step into the market. In the latest leg of the gold bull market, $1,000 has been established as the new floor.

Resistance is the price by which assets cannot move beyond because of an overhang of existing supply in the market. After gold reached $850 an oz. in 1980, those unfortunate buyers at that price level waited 30 years, watching the price of gold fall below $300 an oz. before $850 eventually was taken out.

The price of gold traded briefly in 2008 and 2009 in a range between $725 and $1,025 before rising short-term and long-term trend lines confirmed that the path of least resistance of the price of gold was upward.

2. Undervalued on an Inflation-adjusted Basis

If you calculate the cost of gold from it 1980 high of $850 an oz., on an inflation-adjusted basis, the price of gold today would be $2,250 an oz. At today’s price around $1,318 an oz., gold can increase $900 before it would equal its 1980 high. From there, its price can expand from increase demand.

All assets trade in cycles. Before the end of a cycle an asset becomes overvalued. Likewise, at the beginning of a cycle, an asset has been neglected by its market and is undervalued. Gold, having cleared overhead resistance, is now free to seek its 21st century value; including overshooting that fair value before the cycle ends.

3. A Store of Value

The major stock averages 10-year average annual return is virtually zero. Over the last three years, residential real estate has lost 25% to 50% of its value, depending on the market you’re referencing, yet gold has been up nine of the last ten years. This should continue.

The market meltdown of 2008 nearly destroyed the credit market. Real estate is the most credit dependent asset there is. The Mortgage-Backed Securities market, which provided the liquidity for the mortgage industry has not been repaired. Therefore, a structural cap has been placed on the future value of real estate.

U.S. stocks rose in value in the 1980s and 1990s because of deregulation, loose credit, and undervaluation. The inflationary 1970s made stocks poor investments relative to hard assets. By the beginning of the 1982 secular bull market in stocks, the average market multiple for stocks, the number of times over earnings stocks are bought for was between five and ten. Currently, the P/E (price x earnings) ratio for the S & P 500 Index is 17.08.

4. A Rising Asset in a Rising Asset Class

The soft and hard commodity complexes are on a roll. There are various recessionary and depression levels for many assets here in the U.S. towards home ownership, unemployment, commercial real estate vacancy rates, etc. But demand in Asia (the 21st century center of the universe) and South America is strong and getting stronger, monthly.

Foxconn in China, Apple (AAPL) Computer’s primary supplier recently gave its employees a 66% wage increase following 10 work-related suicides. Average U.S. wages have been flat for 10 years. Russia’s heat wave this summer severely reduced its wheat crop. Palladium, silver, coffee, cotton, wheat, pork bellies, and lean hogs are all up significantly for the year. The emerging market countries were not as leveraged as the west; therefore, their economies rebounded faster from the global recession. Their demands for commodities are driving up prices.

5. Upcoming Currency Devaluation

Last week, the Financial Times reported that Brazilian finance minister Guido Mantega said central banks are locked in an “international currency war”. The U.S. Treasury Secretary Tim Geithner is currently pressuring the Chinese to adjust the Yuan against the dollar. Japan is manipulating the Yen to increase exports. Other exporting countries are deliberately attempting to drive their currency lower to expand their respective domestic exports. Unfortunately, this race to the bottom cannot be won by all.

Europeans fled the Euro this spring after Greece debt problems appeared to be growing. Now, the Euro is surging because Ben Bernanke has all but signaled the availability of QE II or QE Lite after the November elections. The U.S. dollar became the least bad currency in the world and a safe haven. That is changing.

The U.S. economic recovery, which is now forecasted to struggle until 2015, will compel currency debasement by the Feds and compel countries and investors to reexamine their dollar holdings. This will add significant downward pressure on the dollar and upward pressure on the price of Gold.

6. Gold as an Upcoming World Reserve Currency Component

This story ran in Reuters at the end of September:

Dollar to remain world's reserve currency—Lockhart

(Reuters) - The U.S. dollar will remain the world's reserve currency, though some diversification over time is inevitable, Atlanta Federal Reserve Bank President Dennis Lockhart said on Tuesday.

"It's very far-fetched ... that the dollar will lose much of its position in the near term as a reserve currency," he said in response to an audience question after a speech at the University of the South.

"I do, however, expect a gradual reduction in the dollar's role as the rest of the world diversifies and some new currencies become qualified to be held as a reserve currency," he said.

It’s rumored that discussions are underway by various countries to prepare for when the U.S. dollar is no longer the world's reserve currency. China, Brazil, Russia, and France are in talks, with the aid of the International Monetary Fund (IMF), when the world loses faith in the dollar.

Central banks from around the world have stopped selling their gold. This is a reversal from your normal practice for much of this decade which implies that the value of gold is on the ascent.

Since no single currency has the ability to replace the dollar, a basket of currencies and gold will be created. Until such time, the informal reserve currency has defaulted to gold.

7. A Shift in Supply/Demand

The World Gold Council reported on second-quarter demand rising 36% compared with the second quarter of 2009, to 1,050 metric tons. Investment demand rose 118%, to 534.4 tons, and of that segment, ETF demand represented 291.3 tons, which was a 414% rise over 2009's second quarter.

Worldwide demand for gold is rising. From gold bar dispensing ATM machines at the Frankfort, Germany airport and the Abu Dhabi Emirates Palace Hotel, to Exchange Traded Funds (ETFs) such as GLD, IAU, PHYS, and SGOL. The U.S. Mint 2009 Ultra High Relief Double Eagle Gold Coin has sold out. However, Thursday evening, the U.S. Mint opened the 2010 American Gold Eagle Proof Coins, Rust was discovered forming on the Bank of Russia’s 2009 "St. George the Conqueror" .999 fine coins.

Domestically, baby boomers will live longer and will need more principal in order to sustain their lifestyle. This will necessitate the need to diversify away from paper assets and into hard assets such as silver and gold as inflation returns.

8. A Momentum Play

The return on gold this year is forcing money managers to throw in the towel and adjust their allocation for the yellow metal. Managers will have the remaining 90 days of 2010 to salvage their portfolio’s return for the year.

The year-to-date return for the S&P 500 Index is 3.8%, the DJIA is 4.9%, the NASDAQ 100 is 8.2%, and the Russell 2000 is 9.6%; while gold is up 22.7%, silver is up 37%, and palladium is up 43.8%. True alpha, and the path of least resistance is precious metals.

9. Betting With the House

For the price of gold to collapse from current levels, congress would need to enact legislation to correct the problems of wasteful spending, high unemployment, an expanding federal debt liability, and sensible tax increases.

The November elections of 2010 are completely irrelevant. Whether it is the Republicans or the Democrats who control Washington DC, the government's inability to correct the problems that persist in today's economy will continue. The price of gold will move higher whether it's gridlock or austerity by the GOP or of fiscal stimulus by the Democrats.

Thomas G. Dolnan’s Barron’s editorial dated October 2 observes:

Even a step in the right direction would face huge opposition. A permanent 10% cut in retirement benefits of all kinds, and the same cut applied to health-care spending, including doctors' and hospital fees, would be worth maybe $150 billion a year. A 10% cut in military spending was worth about $60 billion last year. It could occur automatically if the wars wind down. A 10% cut for everything else the government does except pay interest would be worth about $120 billion.

These would be real cuts from last year's spending, not a reduction from the rate of growth, with allowances for inflation and population growth. But they would take us only a quarter of the way to a balanced budget.

The expiration of the Bush income-tax cuts and restoration of the estate tax would raise about $400 billion a year. The tax hike and the 10% cut together would leave another $700 billion a year to be cut or taxed. Fortunately, that happens to be the advertised cost of the anti-recession programs.

Such spending cuts and tax increases are a reasonable program for national renewal—and for political suicide. So don't ask why candidates aren't proposing spending cuts to balance the budget. Borrowing is so much easier—until no one will lend.

10. The US stock and bond markets are predicting no growth in the future.

The yields on bonds and corporate earnings through cost-cutting informs sober investors that between now and 2015, the U.S. economy will struggle and will be unkind to equities.

Stock rallies are no longer a proxy for economic growth. Stocks can just as easily rise because of a drop in the dollar allows foreign buyers to purchase U.S. stocks at a discount.

Corporate culture, the ego to the stock market’s id, no longer cares about long-term goals and results, when the future is always 90 days away. Therefore, long-term, as we now know it is a contemporaneous creature that is shallow but dangerous. This environment debases paper assets and benefit hard assets. 

The Market Is Just Not Into Main Street Anymore

August Commentary: The Market is Just Not into Us, Anymore

I’m reminded of the story about the recently deceased arriving at the gates of Heaven and being told that he has freedom of choice he may visit both Heaven and Hell before making his eternal decision. After visiting Heaven for the day he journeys down to Hell.

The most incredible party witnessed in history is going on. The most beautiful people he had ever seen were there. The finest food and drink from the four corners of the planet was being served. The greatest band he had ever heard played every one of his favorite songs and sounding never better, from each stage of his life.

The next morning he returned to Heaven, rendered his decision and apologized for choosing Hell, along with conveying his thanks for the heavenly hospitality.

Upon returning below, the music was gone; so too were the beautiful people and the fabulous food and drink. All that remained in the dark cave was coal, fire, shovels, and heat. When he demanded to know where everyone and everything went; Lucifer winked and replied:

“Yesterday, you were a prospect. Today, sir, you are my client.”

Throughout 2010, and for the last decade, equity returns have produced practically nothing for all its troubles. Then, why do investors continue tolerating an insane amount volatility and risk of principal, for punk rewards - we are holding on to a once profitable relationship that no longer exists.

There; it had to be said.

This 30-year affair between the American middle class and financial markets has been counterproductive over the previous decade. Analysts and money managers are like your mate’s best friend who looks straight into your eyes and lie to your face. “The relationship is fine.” “You are imagining things.” “Every relationship has its highs and lows; you two are experiencing a temporary low period, that’s all.” “You think you could do better without her?”

These examples mirrors a few mindless talking points investors hear bantered about each day on business channels, describing investors’ net worth reduction and why any concern, on your part, is totally unnecessary. Let’s recall how this relationship started by returning to the beginning of this latest chapter.

Wall Street was a rich man’s playground - until the inflationary 1970‘s. At that point, the rich stop buying stocks. P/Es on stocks fell to hat size levels. Prior to the stagflation and inflationary 1970’s, it mattered little that commissions were fixed and burley. The last secular bill market ran from 1950 to 1965. Potential brokers were invited and groomed, by white shoe firms, to introduce themselves to and to form relationships, with the affluent.

In 1962, self-employed individuals or unincorporated businesses became eligible to self-direct retirement accounts through Congressional legislation with the establishment of (Eugene) Keogh or HR (10) plans. Twenty years later, employers asked the same question, differently: Why shouldn’t employees have the same freedom to self-direct their retirement account (thereby, removing corporate responsibility for employees’ retirement).

The private sector, as late as the early 1980’s, offered new workers employer-sponsored defined benefit (DB) retirement plans. Investment risk and portfolio management are entirely controlled by the company. Payouts are calculated on factors such as salary and duration of employment. If there is a short-fall on investment returns, companies are obligated to dip into earnings to cover the difference.

Luckily, for corporations, bottom line margins and much of today’s $1.6 trillion in cash, sitting on the balance sheets of corporations, is safe from being encumbered by DB plans and their retirees.

DB plans are still owned by many public sector workers. Currently, these plans are routinely vilified in the press as parasitic in nature. Defined Contribution (DC) retirement plans, enthusiastically launched in the 1980’s as DB plan’s chief competitive product, and were sold primarily by ridiculing DB plans as being inferior to self-directed accounts. DC plans’ major weakness, an unknown future payout to retirees, became its major marketing strength.

Men with ambition, real men, theoretically, could make untold millions playing the stock market. Accepting a DB plan’s corset over unlimited retirement income potential was the providence of the dull-witted or the lazy, lacking in motivation, vision and imagination.

The tiny requirements for raking in bushels of filthy lucre, for your golden years, as the pitch went, were reading Peter Lynch books and by faithfully watching Louis Rukeyser’s Wall Street Week; “as you know, over time, all stocks increase in value.”

Because of the internal logic of DC plans’ supposition from 1980’s Wall Street, it was antithetical for Human Resource departments and mutual fund companies to argue, at the beginning of a secular bull market, in favor of capping pedestrian, formulaic, DB plan payouts. Unrestricted, free market-based, DC plans were vastly superior on every count.

Beside, where did DB plans’ returns really come from? They came from the stock market! Eliminate the middle man; keep for yourself all the returns your hard earned dollars generate in the stock market. Mr. Hare, meet Mr. Tortoise.

The accelerants fomenting this new mindset, when stocks such as Boeing, Walt Disney, Mattel, and many others, sold for $5 dollars a share or less, were de-regulated commissions, Merrill Lynch’s new Money Market Account, and Sears acquisition of Dean, Witter, Reynolds (now Morgan Stanley). Additionally, declining inflation and interest rates, tax cuts, and deficit spending, helped deliver to Wall Street the middle class aspiration of champagne wishes and caviar dreams.

Over the next 20 years it was a world wind affair with unbridled infatuation. Mutual fund sales loads were cut from 8.5% to 4.5%. Exchange privileges inside mutual fund complexes were established. Letters of Intent, reducing sales fees further, became standard. Investors began choosing stock investment over precious metals, over real estate, over all other asset classes.

Stock market DC plans, became the preferred method of saving for retirement. Dividend Reinvestment Plans (DRIP) and stock purchase plans, compounding returns, also became more popular, adding fuel to the roaring stock market fire. Owning equities were touted by every financial services company. Consequently, more workers chose DB plans, year after year, playing at the big boys table.

Fictional character Gordon Gecko became the Pontiff of American financial idolatry and fictional prosperity. In the late 1980’s, banks begin selling mutual funds and insurance; and vice versa. Charles Schwab introduce the no load mutual funds Fund companies created A, B, C, and D shares, offering various sales load configurations.

In the 1990’s, everyone made money playing the stock market. The beginning of online trading even made it easy to do. The WSJ ran a recurring article featuring a chimp throwing darts, selecting stocks, and comparing his returns with professional money managers. That’s when you know when you are in a secular bull market.

The 14-member investment club from Beardstown, IL, the Beardstown Ladies became national celebrities for reporting earning compound annual average returns of 23.4%, over 10 years, thru 1993 - until they were audited.

Their actual return was 9.1%. By 1997, the Ladies had upped their stock picking skills and annual average returns over 10-years increased to 15.3%, yet, they still lagged the S&P 500’s 10-year return, during this period, of 17.2%.

Yes, we were so in love with each other. Then, dark clouds appeared and forever changed the future – Glass-Steagall was repealed.

Early in the next decade, Wall Street’s wandering eyes caught a glimpse of augmented proprietary trading and underwriting fees. Enhanced leverage, donning smaller and more provocative capital reserves, heretofore, disapproved of among prudent men, became desirable and lusted after by all. Scandalous risk was in vogue.

Investors’ trading commissions and management fees were a competent and faithful, if somewhat, plain way for firms to earn revenue. It was like home cooking five nights a week and backyard grilling on the weekends – safe, predictable, fulfilling, and bland.

Conversely, trading the firm’s capital and collecting securitization fees was the long-legged, redheaded, man-eating, gorgeous knockout, swinging from your arm each night, walking into your favorite hangouts.

Are you still dollar-cost averaging into your funds? Maximizing 401k and IRA contributions? Sporadically purchasing round lots of a few hundred or a few thousand shares of stocks, at discounted prices? This was no longer enough for descendants of the Buttonwood Agreement.

Once Wall Street felt the rush from mainlining mortgage-backed securities, the relationship with John and Jane Q. Public was doomed.

Any hope of salvaging this fraying union ended in 2008. We were unsuccessful in getting American finance off the narcotic of toxic assets; kicking this addiction to fast money, infinite fees and profits, and nympholeptic bonuses. A clean and sober banking system, facing tough new regulations, would function properly, yet again.

Regrettably, the wrong crowd appeared to offer help – Buffett, Paulson, Geithner, Blankfein, Bernanke, and Geithner – peddling TARP, Quantitative Easing, credit facilities, and government guarantees.

Immediately, overnight loan orgies were being held at the Feds’ discount window. The decency of mark-to-market accounting was scoffed at and ignored. Banking hedonism ran amuck on the streets of Manhattan and through the halls of Congress. Someone had shot the sheriff and the deputy, too.

It’s over. In a world of globalization, high frequency trading, melt-ups, flash-crashes, and algorithms, Wall Street doesn’t need the American middle class anymore; Need proof? Here is a snapshot from the internet of an Investment Company Institute chart displaying flows into LT Mutual Funds thru 07/21/2010:

The stock market was up 7% in July despite the fact that equity mutual funds experienced outflows in each of the last 12 weeks.

Wall Street borrows pure, uncut, scratch – at 0% - directly from Mr. Big; Washington DC. Treasury auctions are co-dependent enablers of this bankrupt practice. There is no turning back. Investors will make the wrong choice during a flash crash or flash bounce and will lose.

Somehow, that someone is always John and Jane Q. Public.

It’s the Soil, Not the Green Shoots, that’s Bad

At the risk of being repetitive, if you look at the macro economic data and the upcoming political showdowns over taxing and spending, the markets are justified in listing with a negative bias, as we sail into the future.  Regrettably, this includes a shocking but probable casualty suffered by the U.S. debt obligation’s AAA credit rating, by 2012. 

The massive selloff seen in Wednesday’s Treasury bond market rested on disclosed information communicated throughout the trading day, as well as what was unspoken; that deep down inside, short-term investors and long-term money managers alike do not believe in green shoots sprouting across America. 

Let us review a few macro-economic facts that can poison US green shoots faster than eating the wrong part of a Blowfish in a Sushi bar: 

·         The IRs reported that tax revenues fell by $138 Billion or 34% in April versus a year ago.

·         Some municipalities are contemplating disincorporation in the face of budget shortfalls.

·         Forty-two states are facing at mid-year a $60 billion shortfall for FY 2009.

·         In April 21 states saw unemployment fall, 11 unchanged, 18 states are still experiencing rising unemployment.

·         TransUnion Credit reported individual credit scores, on average 6 points to 11 points, between the 3^rd qtr. of 2008 and the 1^st qtr. of 2009.

·         Consumer debt fell six out of eight months ending in March, which is up .1 per cent, the slowest growth in 17 years.

·         Germany, the world’s largest exporter, economy is growing worse.

·         The Federal Reserve Z1 statistical release shows household wealth fell $.5 trillion in 2007 and $11.8 trillion in 2008.

·         The US will not be able to sell 2 trillion dollars in obligation, for FY 2009, without significantly higher interest rates.

·         Higher interest rates will choke off any recovery and retard growth.

·         The rebound in real estate is an aberrational illusion, which will peter out later this year, when move-up buyers fail to show up this fall. 

I hate being the skunk at the summer picnic; however, to ignore these facts and promote the meme of “less bad is good” is a bit too Orwellian for my sensibilities.  Losses are not equal to profits.  Once you accept the premise that de-leveraging will continue for the next several years, it becomes easier to discern between green shoots and weeds, and what awaits future business trends.  Now is the time to exit most fixed rate debt in exchange for variable rate debt like TIPS. 

What’s more ominous, though, is the unhealthy political climate to correct problems that do require sagacious political solutions and strong political leadership.  The pervasive irrational mindset that the largest industrialize nation’s infrastructure can be had with niggardly taxation defies logic.  Maintenance of our transportation system, our communication system, as well as our public/private healthcare and pension schemes, for too many years was paid for by dubious credit, OPM (other people’s money), or ignored altogether. 

California is an exquisite example of bad politics.  In the name of fiscal discipline and conservatism, California may allow the eighth largest economy in the world to fail, aided perhaps by the Obama administration’s refusal to be involved.  California’s Legislative budget analyst projects a 2009-2010 budget deficit of $28 billion dollars.  Short-term, California is looking for a $15 Billion dollar backstop in guarantees by the feds.  That will help 38.2 million people, or 12.4% of the US population.  California generates 13% of the nation’s GDP.  How many green shoots will that strangle in its infancy? 

If you think that this assessment is too gloomy, 2010 holds its own surprise for doubters of stagflation and global political drama.