Trevor Gerszt

Trevor Gerszt has been passionate about gold since childhood. Growing up in South Africa, the world’s second largest gold producer, Gerszt spent his youth collecting gold coins. Surrounded by a family of experienced coin collectors, he gained valuable insight about the precious metal.

Paper Promises: A Review

Wednesday, 24 October 2012
Published in From The CEO
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It should be clear to even the most casual observer of international affairs that ours is a world plagued by debt.  The 2008 financial crisis was brought on by too easy access to mortgages that people couldn’t afford.  The economic crises in Spain and Greece occurred largely over debts these nations could not afford to pay back.  And guess which nation is the largest debtor nation in the world?  You guessed right:  The United States – to the tune of more than $16 Trillion.Let’s just repeat that, and, this time, express this debt as a pure number, one onerous digit after the other.  Here it is:  $16,000,000,000,000.Staggering, isn’t it?

Let’s forget for the moment about how we’re going to pay back that debt.  And let’s put it out of our minds temporarily that our two biggest creditors happen to be China and Japan.  Let’s just try to wrap our minds around the overall problem of being a debtor and what that means to an individual or a nation.  To help you do that, I’d like to recommend an eye-opening new book called Paper Promises -- Debt, Money and The New World Orderwritten by Philip Coggan and published by Public Affairs Books in New York.  The author is a current columnist for The Economist and a former columnist for The Financial Times.

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You’ll come away from the book appreciating the magnitude of world debt and its consequences.  And one thing’s for sure:  once you won’t read it, you won’t want to be caught without any gold and silver in your portfolio.  The relationship of debt to precious metals is acutely summarized by Coggan: 

“… this whole book is about debt.  But the key fact is that debt and money are two sides, not of the same coin, but of the same bank note.  That would not be true of a currency consisting entirely of precious metal.  Such metals have one defining characteristic:  they are no one else’s liability.  But as we have seen, there is not enough precious metals to go round….As soon as goldsmiths and banks started storing gold and issuing receipts (bank notes), money and debt became interchangeable.  Early bank notes were proof that the bank owed the holder money; they were thus a claim on the creditworthiness of the bank.  Modern bank notes are a claim on the creditworthiness of the government.”

While Coggan writes to clarify more than to shock, you can’t help feeling financially vulnerable once you’re just a couple of chapters into his book.  In fact, as early as page 4, the author admonishes us “On the monetary side, a government that expands the money supply at a rate in excess of economic growth will eventually erode the real value of taxpayer’s wealth via inflation.”  To our thinking, here at The Investor’s Corner, regardless of the current rate of inflation (around 2%), that statement is tantamount to an alert for each of us to buy gold, since the growing inflationary effects of QE3 lie shortly ahead.

Coggan points out in Paper Promises that Quantitative Easing is by no means a new tactic unleashed by our own Federal Reserve or by other contemporary governments in Europe or Asia.  He delves deeply into previous attempts. For instance, the economist and mathematician, John Law, after having fled his native Scotland for killing a man in a duel, became the monetary advisor to the government of France in the early Eighteenth Century.  Law became the first economist to recommend quantitative easing when he persuaded the country’s regent to create a bank to issue paper money as a way out of the immense debts facing France.

Once you learn how the scheme failed, and learn from Coggan’s book how other schemes of quantitative easing failed, you’ll come to be less forgiving of our current venture into paper money.  This venture – QE3 – offers a much greater cause for anxiety than any doubts you might have about the price of gold when you wake up tomorrow morning.

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The Fiscal Cliff

Monday, 22 October 2012
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In the first two days of next year, we will see large tax cuts expire which were passed in 2001 and 2003.  As a result, the nation will undergo cuts to both defense and nondefense programs.  Taxpayers will notice a cut in pay during the first two weeks in January.  The lowest income tax rate is slated to rise from 10 percent to 15 percent. And the highest tax rate is slated to rise from 35 percent to 39.6 percent.  Tax rates on dividend rates now at 15 percent are slated to rise to 39.6 percent.

The majority of defense programs will be cut by 9.4 percent. Most nondefense programs, except for Social Security Medicare and Medicaid will be cut by 8.2 percent; and Medicare will be cut by 2 percent.  Social Security, veterans benefits, military personnel, Medicaid and the Children’s Health Insurance Program will be spared cuts.

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No doubt about it:  this major reduction in the federal budget will apply the brakes to the U.S. economy.  Economists in the public and private sectors agree that these cuts are a natural invitation to recession.  Nobody is more aware of the consequences of the budget reduction than Federal Reserve Chairman, Ben Bernanke.  In fact, it was he who coined the term “fiscal cliff.”

Reuters reported back on October 5th that investors could be looking at gold as their “top commodities choice” for a difficult fourth quarter in anticipation that the fiscal cliff will prompt printing of more money.  Although gold has retreated in price since the news agency made this observation, it’s certainly possible that investors will grab at lower prices as we approach the year’s end.  Keep in mind we noted in a previous column that HSBC precious metals analyst Jim Steel, even in view of gold’s pullback, issued an upward revision of the yellow metal’s price for the coming year.

The reasoning behind this possibility seems clear.  Since Ben Bernanke has pledged to pump money to keep the economy afloat, the consequences of the fiscal cliff would in effect force the Fed to keep its word with respect to QE3. The printing of more money is likely to prove an additional steroid for gold.  Under the circumstances, Paul Morilla-Giner, chief investment officer at London & Capital, views gold as “flirting with $1,900 or $1,950.

Regardless of your metaphor of choice in trying to understand the market – the “slingshot effect,” the “boomerang effect” – the pullback in gold is due for its next ride up.  You should not try to chase the market or look for a bottom.  Nor should you try to wait for the election to start accumulating gold.  The results of the fiscal cliff will dog the President as well as the presidential hopeful.  While Obama is looking for legislation that extends cuts for families earning $250,000 or less, he still has to deal with a Congress that has been largely unsympathetic to this extension.  And despite Romney’s pledge that he will not allow automatic tax cuts to happen, he wouldn’t take office until January 20th of 2013. And it’s unclear what he’ll do to honor his pledge.  During the current fiscal mess, gold is your best portfolio insurance.

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A Timeout for Gold

Friday, 19 October 2012
Published in From The CEO
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In our last column, we mentioned that the market has already factored in the news about QE3.  Gold bugs need not feel discouraged though.  Quantitative easing is still the single biggest factor driving the market.  Just now though, the gold market is weighing the effects of other news -- counting all the other chips on the table, so to speak.

During this recount, the yellow metal needs additional news to push past the wait.  But as long as our Fed and other central banks choose to print paper money, it’s not a matter of if for gold.  It’s a matter of when.  Although gold needs an additional engine right now, quantitative easing continues to work its disastrous magic.  In the meantime, let’s look at the impact on gold of some of the market forces currently motivating a delay in gold.

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The U. S. housing market is beginning to reveal a bit of a pickup, with existing home sales reaching 4.73 million.  According to an article in this morning’s Wall Street Journal, residential construction is at its four-year high point and could positively influence the U.S. job market and economy at large.  Also, builders surpassed economists’ predictions with a seasonally adjusted annual rate of new starts of 872,000 units last month, up 15% from August and 34.8% from September of last year.  Since this level of housing starts “was the highest since July 2008,” the gold market was bound to react in some way.

Also, the euro has weakened about one quarter cent to the tune of 1.3033 against the dollar, according to The Bullion Desk.  The effect on gold is not surprising since, as we’ve previously pointed out, gold will often take its signal from the euro as it moves contrary to the dollar.  Also, speculative investors long on gold may have been pushed out of the market as their stops clicked in.  A “stop” is simply a sell order at a specific price specified by an investor to his broker.  For technical reasons, gold blogger Toby Connor views the current move down in gold as an expected correction, and anticipates this downward activity as turning around next week.

While much of these economic developments seem to be inhibiting gold on the way up, other less publicized developments seem to be supporting gold within a range.  We have previously mentioned disappointing news for bold emanating from India because of the weak monsoon season.  Suddenly, there’s news of a pickup in demand from India (traditionally, the world’s largest buyer of gold).  According to the Economic Times, India has experienced a surge in gold buying in response to a drop in local prices.  Month-to-date in October, Indian demand has increased by 10%.

The Indian increase in buying is tied to the very popular Diwali holiday season. The holiday symbolizes the triumph of good over evil. Celebrated traditionally between mid-October and mid-December, and otherwise known as “the festival of lights,” Diwali represents an enhanced gold-buying season for India.  Bullion demand will likely accelerate for the holiday.   The president of the Bombay Bullion Association reports that India is likely to import 250 metric tons of gold in the fourth quarter in connection for the festive season and to satisfy wedding demand.

Under the circumstances, the current price levels for gold (between $1,717 per ounce and $1,737 per ounce today) represent excellent value for buyers looking for a timeout in the gold market. 


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Gold: If Not Now … When?

Wednesday, 17 October 2012
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You can be a specialist in reading investment fundamentals and technicals, or you can be a fortune teller.   Here’s the difference. The specialist works very hard, consults a variety of sources, talks with other specialists, and makes very careful determinations about where he thinksthe market is going.  The fortune teller consults no other sources, talks with no other fortune tellers and makes a very certain prediction about the market.The specialist often gets it right – but within certain parameters. He frequently revises his judgments.  The fortune teller is always right (or always wrong) and never revises his predictions.

Here at the Investor’s Corner, we don’t know any fortune tellers, and we’re guessing you don’t either.  That said, let’s postpone our impatience with the gold market, resist the temptation to consult a fortune teller and take a look at what several specialists are saying about the gold market.

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While noting gold’s failure last week to hold on to gains over $1,790 per once, Jeffrey Nichols at Resource Investor, and senior economic advisor to Rosland Capital, believes gold will move “significantly higher by year-end or early 2013.”  We’ve noted often in this column at aggressive traders will often grab at profit opportunities, therefore putting brakes on a raging market. Accordingly, Nichols points to selling by institutional traders and speculators in the derivative markets to slap down gold to just under $1,730 per ounce.  Already Asian buyers have begun to take advantage of these low prices, and elsewhere central banks have begun to build their reserves.  Gold exchange traded funds have begun to accumulate more steadily, albeit more slowly.

We can only agree with Nichols since noticing that the $1,730 level for the yellow metal acted more like a quick bounce for gold rather than a stall.

Jim Steel of HSBC, a careful analyst, predicts a gold price of $1,900 by year end.  While the gold market still seems in search of an additional big story, Steel feels that QE3 and other central banks' policy on monetary easing will win the day for gold.  He also feels that a weaker dollar and U.S. fiscal concerns will continue to haunt markets and give gold a boost.  While he views lower jewelry demand as a possible negative for gold, it can serve only to restrain rather than defeat the current bull market.

Meanwhile, analyst Tony Daltorio has told the Financial Times that the illegal strikes of platinum workers in South Africa has begun to move to over to that country’s gold mines.  He feels these strikes could cause an “impasse” in mining activity, thus severely impacting gold demand.

You should take all of these developments into account when determining just how much gold you want to add to your portfolio at current prices.   Obviously, there are no fortune tellers out there.  No one can come up with an exact prediction for how high gold can climb.  What we do know is that all the cards are in place for a winning hand.  And the winner can be you if you choose to buy.

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Just when we thought everything was alright.  Few breaths were taken in the world financial community last September 13 until Ben Bernanke surfaced from the Fed FOMC’s annual meeting on monetary policy at Jackson Hole, Wyoming.  Then he made his fateful announcement:  The Federal Reserve would now execute its mandate to print money as it deemed necessary to boost U.S. employment figures in particular, and the economy in general.  Welcome America, to QE3!

Once Bernanke made his announcement, several things became clear:  a) the price of gold would increase, but not without some speed bumps along the way. b) monetary easing would need to catch on internationally. c) gold would require help from additional economic events to push it past the $1,790-per-ounce resistance level.

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What remains unclear is how the Fed makes its decision about how much inflation it would allow to slip into the economy and who exactly in the Fed is voting to keep the presses running, and who exactly is voting to hold them back or stop them altogether.  As it turns out, the twelve board governors are not a unanimous gaggle of geese.  There’s some dissension in the ranks; so they’re more like a fluttering bunch of doves and hawks, squawking over the nation’s tolerable rate of inflation.

According to a Reuters report Friday, all is not peachy keen at The Fed.  Since the U.S. is recovering slowly, the official position is that the Fed would continue to buy bonds until the economy improves “substantially.”  Depending whether you’re a Fed hawk or a Fed dove, you ‘ll probably come up with a different definition of “substantially.”  (Figures don’t lie, but liars figure).  Minneapolis Fed President NarayanaKocherlakota feels comfortable with a 2.25-per-cent rate of inflation.  Chicago Fed dove Charles Evans, on the other hand, can sleep nights as long as the inflation rate stays under 3 per cent.

Than we have Richmond Fed President Jeffrey Lacker who feels that what his colleagues are putting forth is all feed for the birds. According to a Bloomberg report Friday, Lacker asserts that the QE3 “will increase inflation risks and complicate the pull-back from record stimulus while not fueling economic growth.”  In a speech at the University of Virginia in Charlottesville, Lacker said that “adding to our balance sheet increases the risks we’ll have to move quickly when the time comes to normalize monetary policy and begin raising rates.”  Lacker doesn’t believe the Fed should be sainted with the authority to meddle with rates in the first place.  Moreover, he has little faith in Fed action’s ability to impact unemployment rates.

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The View from Abroad

Friday, 12 October 2012
Published in From The CEO

Here at The Investor’s Corner, we try to tap the views of experts from around the world, not simply from those here in the United States.  After all, gold represents real money to the entire world, not just to the U.S.  Still, it’s all too easy to get caught up in our own point of view, particularly since the United States is the world’s third largest consumer of gold (India is the first, and China is second); and the US Dollar is the principal currency of all international transactions.

Today, as gold hovers quietly around the $1,765-per-ounce level, let’s take a look at the Union Bank of Switzerland’s updated view of the yellow metal.Though UBS has had a long and controversial history, it remains the world’s second largest manager of private wealth assets. As such, the influential Swiss organization needs to monitor gold very closely through its investment research department. While some of today’s report repeats what we already know, other parts of the report seem refreshingly novel and direct.

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On the one hand, UBS reports what we know to be the case about our own Fed – that its role in the debasement of currencies through quantitative easing will be the principal driver of the gold price in the coming year.  In the words of the report, “a $2,000 price tag is not overly ambitious.”

On the other hand, while we have emphasized that the ultimate price of gold has little to do with political considerations, UBS investment researchers think otherwise.  They observe that the US debt ceiling is expected to be reached in early December, and that politicians will work hard to keep the country from reaching a resulting fiscal cliff in 2013.  But since the electorate will emphasize government growth over the budget, the debt ceiling will likely be extended.  If this happens, ratings agencies will downgrade the US credit status, thus weakening the dollar.  Obviously a credit downgrade will bode well for gold.

Perhaps the biggest surprise in the UBS report is its view of the current Presidential race.  Since Romney is more conservative than President Obama, UBS researchers view his proposed hawkish actions towards the Fed as being detrimental to quantitative easing, and therefore towards the price of gold. (Romney has pledged to fire Fed Chairman, Ben Bernanke, if he’s elected President.)  And in what some pollsters would no doubt consider an outlandish prediction, UBS comes out and states “we expect resident Obama to be re-elected, and so from a Fed and QE perspective the current status quo to prevail.”  This projected scenario remains particularly ironic since Vice Presidential hopeful, Paul Ryan, remains a big supporter of a gold standard.

Looking beyond what many would consider its off-the-wall perspective of U.S. politics, the UBS report sees three conditions for “a sustainable gold rally” as being firmly in place:  robust spec buying, “sizeable ETF inflows and physical demand.”  Also, due to initiatives from the Indian government, the rupee has shown considerable strength. This currency strength comes at the right time for gold -- during the heightening of the Indian wedding season in late October.  This is particularly strong news on the demand side coming from the world’s largest consumer of gold.

While some analysts would disagree with some of the UBS report, they should not ignore it entirely.  Nor should you.  The outlook on gold remains promising for those who choose to accumulate the physical metal at current prices.

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The October Price Dip

Thursday, 11 October 2012
Published in From The CEO

Taking its cue from the euro, Gold backed off its important $1,800 psychological level.  The yellow metal wasn’t helped at all by hedge fund selling.  As we’ve stressed a number of times here at The Investor’s Corner, hedge funds like to take short-term profits.  Hedge fund managers are highly opportunistic, and accumulation for the long term is ordinarily not part of their game.  Rather than be deterred by the price drop, you should view it as an opportunity.  Better to buy and wait than wait and buy.  Based on most current predictions by experts, the current price of $1,765 per ounce provides an excellent point at which to enter the market.  If you were fortunate enough to begin purchasing at $1,200 per ounce or even lower, you’d be wise to dollar-cost-average subsequent purchases as gold moves up.

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We should realize that gold is now hungry for some news in addition to quantitative easing to make another big move.   Another factor playing into the stall in gold is that the U.S. dollar made its most aggressive move up in over two months versus a basket of currencies.Although the  Fed’s reckless printing of money still remains the biggest catalyst for the gold price, investor patience can easily be distracted from the fundamentals during a short-term correction like this. 

Ultimately, the effects of quantitative easing will express themselves in terms of inflation.  What the careful gold investor needs to keep in mind during a dip in price are the sage words of Warren Buffett which we’ve quoted before:  “be fearful when others are greedy, and greedy when others are fearful.”

Much of gold’s hesitancy right now can be tied to the euro, since they both move inversely to the dollar.  And the euro is reacting to the reduced International Monetary Fund forecast of global growth from 3.5% to 3.3% for this year and 3.9% to 3.5% for next year.  The IMF also predicted a reduced growth percentage for the 17-country euro economy to 0.4% this year and 0.2% in 2013.

Through it all, the World Gold Council reports strong activity for gold on the demand side.  In August, central banks bought 15.2 metric tons of gold.  Most of this can be traced to the central banks of emerging markets.  Turkey bought 6.6 metric tons, the Philippines 4.6, the Ukraine 1.9, Kazakhstan, 2.6 and Taiwan 0.9.  These and other banks are careful to purchase on price corrections, so look for these and other central bank purchases to lend support to gold during price dips like the current one.

Meanwhile further monetary easing looms in the not-too-distant future.  Spain and Greece have still not come forth with an official request for a bailout.  But it’s just a matter of time.  Things are growing worse in both countries.  For many years, the Red Cross has appealed to Spaniards for money to help starving children in the Third World.  But, according to National Public Radio, the current European debt crisis has now brought about starvation in Spain itself.  .

The Spanish Red Cross today launched its first-ever fundraising campaign for Spaniards to donate directly to other Spaniards. The aid organization estimates that some 300,000 additional people in Spain are vulnerable to hunger because of the economic crisis.  The country reports an overall unemployment rate of 25%, and more than half of 20-somethings are unemployed.

The economy in Greece is just about as dismal.  Once the European Central Bank makes bailout funds available to both countries, expect the resulting monetary easing to ultimately reflect itself in the price of gold.

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Gold and U.S. Unemployment

Sunday, 07 October 2012
Published in From The CEO

On Friday, October 5th, gold took a step back a few notches on a surprising announcement from The U.S. Bureau of Labor Statistics.  The September rate of unemployment in the U.S., decreased to 7.8 per cent, and the country added 114,000 nonfarm jobs.  For the first 8 months of 2012, the unemployment rate held to a narrow range between 8.1 and 8.3 percent.  The actual number of unemployed persons, at 12.1 million, decreased in September by 465,000.

Gold dropped by almost $20.00 on this news because the markets reacted to what seemed like good news after more somber expectations of the employment market.  The country has been locked into its gloom from the highest unemployment rate since the Great Depression; and the fact that no modern president has been re-elected with an unemployment rate above 7.2 percent has been dogging the White House.  Under the circumstances, what constitutes good news turned out to be more like a sip of water to someone stranded in the desert when what he really needed was a full glass of water followed by some rest in an air-conditioned hotel.

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Markets have a way of correcting for impulse.  So once it became clear that the optimistic BLS figure had more to do with improvement in government employment rolls rather than with jobs in the private sector, gold rapidly regained another $10.00 per ounce.

While it seems clear that traders and investors are not yet giving gold the momentum to break the $1,800 per ounce resistance barrier, the market is maintaining a strong bottom, despite the conspicuous addition of some short positions.

Another way to read the current gold market is that traders remain unconvinced that the Fed will read the figures as sufficient reason to back off QE3 anytime soon.  Significant resistance now holds firm between the psychological $1,800 mark and the August, 2011 high of $1,817. The US job figures also motivated a sell off of the US dollar, while the euro held above 1.3000.  Meanwhile European Central Bank President Mario Draghi announced that the bank would be willing to purchase short-dated bonds once Spain makes the formal announcement that a bailout is indeed open to them.

The BLS announcement then was treated by gold as a hiccup.  Quantitative easing remains the primary engine of the market.  As long as it holds, perhaps corrects a bit, and doesn’t sink, the gold market still holds promise for a world economy wracked by debt and the prospect of inflation.  While the yellow metal continues to flirt with resistance at the $1,800-per-ounce level, you would still be advised to continue to accumulate.  Inflation is just a short distance down the road.  Haveyou noticed gas and food prices lately?

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Gold at the Crossroads

Thursday, 04 October 2012
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Although our glorious Fed has given gold a ticket to ride with quantitative easing, nobody said it would be an easy ride.  As we’ve pointed out on numerous occasions here at The Investor’s Corner, there will be encouraging starts and disheartening stops along the way.  In the parlance of market technicians, those starts and stops express themselves numerically as support and resistance points.   But make no mistake – support and resistance points invariably relate to market developments and events.

Gold’s challenge this morning weighs in at a $1,780 per ounce price for gold.  That number now asserts itself as an interim support level.  And the corresponding development for that number comes from the U.S. Department of Labor today which reports that the economy added 114,000 jobs last month and the unemployment rate fell to 7.8%.  Keep in mind that the yellow metal traded aggressively to $1,791 per ounce just before this report was issued.

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Investors and market watchers have little doubt that it’s the world imperative of the world’s major economies to print money that providesthe principal engine fueling the gold market.  But, as we’ve pointed out previously, professional investors will always look for short-term opportunities to take money off the table.  Although they know that gold is on a long-term tear, they’re going to watch intermediate developments closely as well. 

In The London Gold Market Report of October 5th,David Govett at the commodities broker Marex Spectron is quoted as saying “the 1800 level may not be the most important figure technically, but … if we can break above and hold, this should give us impetus toward the mid-1800s.”

What we’re seeing now in the gold market then is range trading.  The $1,780 -- $1,791 per ounce range is really a crossroads for gold.  If that range holds, we can feel confident of a breakout soon.  The battering-ram analogy I’ve used before in these articles, though highly informal, is still helpful in understanding gold prices in their present state.  Think of that $1,791 resistance level as a door that has to be broken down.  If five strong and determined SWAT team members run up against that door with a battering ram, they’re presented with two options if the door seems to budge but fails to collapse.  They can add another SWAT team member or two for more force, or they can drop back at a greater distance to gain more momentum for the next attempt.

In terms of gold prices, think of yet another event in the geo-political arena as one more SWAT team member holding the battering ram to help take down the door.  Now suppose Israel bombs Iran’s nuclear enrichment facilities.  Fears proliferate that the price of oil will soar, and then economiespanic.  Now we have additional muscle manning the battering ram.

But suppose the gold price keeps banging up against the $1,791price per ounce, the market tires and no geo-political events occur significant enough to drive gold past that same $1,791 resistance level.  The market corrects – drops back to say the $1,650 level of new support, just like the team holding the battering ram, to gather new momentum for the next shot at the door.

Either way, there’s no reason you have to play the role of professional trader while gold range trades.  Just hold on to your gold, and keep buying more at current prices.  When gold breaks through resistance, your portfolio will be in good shape.

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In some investor circles it’s been an article of faith that there’s some magic relationship between gold and oil.  Many have felt if one of these hot commodities starts a ride up in price, we should look to the other for an equivalent bump.  And the reverse has been held to be true also. If one of these commodities slides in price, we should look to the other for an equivalent ride down.

This relationship is most often explained as being represented by a ratio.  And the magic number most often put forth for the ratio is 14.  So when the price of gold is $1,774 per ounce and the price of crude oil is $126.71 per barrel, all is supposed to be right with the world.   Accordingly, as soon as gold reaches $2,000 per ounce, we should look for forward to the world price for crude oil price to reach $142.86 per barrel. 

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Given this argument, we’re hard put to tell the horse from the cart.  Does the gold price pull the oil price along with it?  Or does the price of oil drive the price of gold?  And does it also mean that every time it makes sense to invest in gold, we should also feel comfortable investing in oil – and vice versa?

Life isn’t that simple – at least not in the world of money.  While today’s price of gold is, in fact, $1,774, the price of crude oil today is $92.21.  You can forget about the 14 to 1 ratio.  The ratio, based on today’s prices works out to slightly more than 19 to 1.  I wouldn’t look for a correction in that ratio anytime soon.  The gold market and the oil market are being fueled by different forces.

As we’ve pointed out many times in the Investor’s Corner, gold is now being driven by wide-scale quantitative easing.  Our Fed is pumping $45 billion into the economy until some unspecified time in the future.  And Europe, China and Japan have followed suit with their own aggressive programs.    While you could argue that both gold and oil are responding to inflation, the move up in the gold price is principally dollar driven, whereas the move up in oil is a classic supply-and-demand scenario.  One that’s about to end soon.

In a recent article at thebulliondesk.com, financial historian Christopher W. Mayer argues that the bull market in oil is on its last legs.  The largest economies in the world, the U.S., China and Japan are all contracting.  Regardless of this contraction, the price of gold continues to increase because of currency debasement.  But as economies contract, the price of oil will go down as the need for oil decreases.  Mayer also points to new rich new sources of supply in Alberta oil Sands, West Africa, Brazil and Bazhevnov Shale in Russia.

One should not inflexibly invoke a gold/oil ratio to blind oneself to the differences between investing in oil and investing in gold.  Besides, here at the Investor’s Corner, we’ve always recommended investing in the physical metal.  Investing in oil doesn’t lend itself to actual physical possession.  If you keep your eye on the fundamentals driving gold and don’t worry about what oil does, you’ll be invested safely and profitably for years to come.

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