The Michael Fuljenz Metals Market Report: March 2013, Week 1 Edition
Gold recovered to $1608 last Wednesday but then it closed the week slightly down, on expectations that the U.S. economy might recover enough this year to convince the Fed to end Quantitative Easing (QE) early. However, the U.S. GDP rose only 0.1% last quarter, so there's no real danger of an over-heated economy any time soon. With the first two months of the year now in the books, stocks are leading gold year-to-date, but it is too early to say that gold's 12-year winning streak is in danger of ending. In other years since 2001, stocks led gold through the first few months of the year, but gold won in the end.
Bernanke's Testimony Indicates Three More Years of "Quantitative Easing"
Last Tuesday, Federal Reserve Chairman Bernanke told Congress that he would probably continue the asset purchases called "Quantitative Easing" ($85 billion per month of new money) for as long as the unemployment rate stays above 6%, which is likely to last well into 2016. When Tennessee Senator Bob Corker called the Fed Chairman a "dove," Bernanke responded by bragging that "Well, maybe I am, but on the other hand, my inflation record is the best of any Federal Reserve chairman in the postwar period." Bernanke left the impression that the Fed would likely continue Quantitative Easing until 2016, and that helped to lift the gold market above $1600 last Wednesday.
In the last five years, the Fed has more than tripled its balance sheet (its volume of Treasury holdings). Historically, gold enjoyed its strongest surges when the Fed was in quantitative easing mode. According to Macquairie Research, there is a 0.93 correlation (with 1.0 being perfect correlation) between the Fed's balance sheet and the price of gold. Macquirie found that for every $300 billion expansion in the Fed's balance sheet, gold rose $100. Considering the fact that the Fed is committed to growing its balance sheet by $85 billion per month ($1.02 trillion per year), gold "should be" rising by about $340 each year!
Sell Out
In the last month we sold out of our current inventory of more advertised products (Indian, Bison and certified Silver Eagle coins) than at any time in the history of our company. A rare 1794 silver dollar sold for a record $10 million dollars. The coin and physical precious metal market is strengthening. Pay attention!
More Reasons to be Bullish on Gold
The weekend Wall Street Journal featured an article purporting to explain why investors are still "hanging on" to gold. Apparently, it is a great tribute to the stubborn personal commitment of these "gold bugs" that they maintain loyalty to an investment that fell for a few months in a row. On Wall Street, the article says, the short-investors (those betting on a decline) now outnumber the longs, but that trend may be ending. The gold "shorts" (bears) may be cashing in their chips, now that gold has fallen to the $1570s.
Last Friday, March 1, the Commitments of Traders report "showed a 4,662 contract decrease in managed money (large speculator) shorts, the first significant reduction in spec shorts in a month and since gold traded in the $1,660s," said Gene Arensberg, editor of "Got Gold." He added: "Managed money traders have an enormous gross short position on at the moment ... which they will have to cover at some point."
Longer term, the world's formerly-poor nations – those that have always loved gold but couldn't afford to buy much of it – are becoming richer and can now afford to buy more gold. These "emerging markets" used to be poor, but China is rich enough these days to become the #1 gold market for years to come.
Back in 2001, when the current gold bull market began, the emerging markets were responsible for only 15% of global gold demand. Now, according to the World Gold Council (WGC), there's an "increasing relevance of emerging markets in the gold market, particularly over the past 12 years." Emerging nations, primarily in Asia, "have a cultural affinity for gold," according to the WGC. By 2011, the WGC says, the emerging markets accounted for 74% of total gold demand, including gold ETFs, first launched in 2002.
The next time someone talks about George Soros selling some gold, let them know how insignificant Mr. Soros is in the global gold demand distribution. With emerging markets controlling almost three-fourths of gold demand, the rich nations only divide up the remaining 26%, with Europe leading the way. North America only accounts for 7% of total gold demand. Within the hedge fund portion of that 7% slice, a dedicated gold investor like John Paulson controls about 36 times as much gold as George Soros currently does.
As mentioned here two weeks ago, John Paulson is sitting on 21.8 million shares of the SPDR Gold Trust, the leading gold ETF, while Soros made headlines by selling 55% of his 1.32 million SPDR shares, leaving him 600,000 shares, less than 3% of the amount of SPDR gold shares controlled by John Paulson.
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