Best of the Week
Most Popular
1. The Trump Stock Market Trap May Be Triggered - Barry_M_Ferguson
2.Why are Central Banks Buying Gold and Dumping Dollars? - Richard_Mills
3.US China War - Thucydides Trap and gold - Richard_Mills
4.Gold Price Trend Forcast to End September 2019 - Nadeem_Walayat
5.Money Saving Kids Gardening Growing Giant Sunflowers Summer Fun - Anika_Walayat
6.US Dollar Breakdown Begins, Gold Price to Bolt Higher - Jim_Willie_CB
7.INTEL (INTC) Stock Investing to Profit From AI Machine Learning Boom - Nadeem_Walayat
8.Will Google AI Kill Us? Man vs Machine Intelligence - N_Walayat
9.US Prepares for Currency War with China - Richard_Mills
10.Gold Price Epochal Breakout Will Not Be Negated by a Correction - Clive Maund
Last 7 days
The State of the Financial Union - 18th Aug 19
The Nuts and Bolts: Yield Inversion Says Recession is Coming But it May take 24 months - 18th Aug 19
Markets August 19 Turn Date is Tomorrow – Are You Ready? - 18th Aug 19
JOHNSON AND JOHNSON - JNJ for Life Extension Pharma Stocks Investing - 17th Aug 19
Negative Bond Market Yields Tell A Story Of Shifting Economic Stock Market Leadership - 17th Aug 19
Is Stock Market About to Crash? Three Charts That Suggest It’s Possible - 17th Aug 19
It’s Time For Colombia To Dump The Peso - 17th Aug 19
Gold & Silver Stand Strong amid Stock Volatility & Falling Rates - 16th Aug 19
Gold Mining Stocks Q2’19 Fundamentals - 16th Aug 19
Silver, Transports, and Dow Jones Index At Targets – What Direct Next? - 16th Aug 19
When the US Bond Market Bubble Blows Up! - 16th Aug 19
Dark days are closing in on Apple - 16th Aug 19
Precious Metals Gone Wild! Reaching Initial Targets – Now What’s Next - 16th Aug 19
US Government Is Beholden To The Fed; And Vice-Versa - 15th Aug 19
GBP vs USD Forex Pair Swings Into Focus Amid Brexit Chaos - 15th Aug 19
US Negative Interest Rates Go Mainstream - With Some Glaring Omissions - 15th Aug 19
GOLD BULL RUN TREND ANALYSIS - 15th Aug 19
US Stock Market Could Fall 12% to 25% - 15th Aug 19
A Level Exam Results School Live Reaction Shock 2019! - 15th Aug 19
It's Time to Get Serious about Silver - 15th Aug 19
The EagleFX Beginners Guide – Financial Markets - 15th Aug 19
Central Banks Move To Keep The Global Markets Party Rolling – Part III - 14th Aug 19
You Have to Buy Bonds Even When Interest Rates Are Low - 14th Aug 19
Gold Near Term Risk is Increasing - 14th Aug 19
Installment Loans vs Personal Bank Loans - 14th Aug 19
ROCHE - RHHBY Life Extension Pharma Stocks Investing - 14th Aug 19
Gold Bulls Must Love the Hong Kong Protests - 14th Aug 19
Gold, Markets and Invasive Species - 14th Aug 19
Cannabis Stocks With Millennial Appeal - 14th Aug 19
August 19 (Crazy Ivan) Stock Market Event Only A Few Days Away - 13th Aug 19
This is the real move in gold and silver… it’s going to be multiyear - 13th Aug 19
Global Central Banks Kick Can Down The Road Again - 13th Aug 19
US Dollar Finally the Achillles Heel - 13th Aug 19
Financial Success Formula Failure - 13th Aug 19
How to Test Your Car Alternator with a Multimeter - 13th Aug 19
London Under Attack! Victoria Embankment Gardens Statues and Monuments - 13th Aug 19
More Stock Market Weakness Ahead - 12th Aug 19
Global Central Banks Move To Keep The Party Rolling Onward - 12th Aug 19
All Eyes On Copper - 12th Aug 19
History of Yield Curve Inversions and Gold - 12th Aug 19
Precious Metals Soar on Falling Yields, Currency Turmoil - 12th Aug 19
Why GraphQL? The Benefits Explained - 12th Aug 19
Is the Stock Market Making a V-shaped Recovery? - 11th Aug 19
Precious Metals and Stocks VIX Are About To Pull A “Crazy Ivan” - 11th Aug 19
Social Media Civil War - 11th Aug 19
Gold and the Bond Yield Continuum - 11th Aug 19
Traders: Which Markets Should You Trade? - 11th Aug 19
US Corporate Debt Is at Risk of a Flash Crash - 10th Aug 19
EURODOLLAR futures above 2016 highs: FED to cut over 100 bps quickly - 10th Aug 19
Market’s flight-to-safety: Should You Buy Stocks Now? - 10th Aug 19
The Cold, Hard Math Tells Netflix Stock Could Crash 70% - 10th Aug 19
Our Custom Index Charts Suggest Stock Markets Are In For A Wild Ride - 9th Aug 19
Bitcoin Price Triggers Ahead - 9th Aug 19
Walmart Is Coming for Amazon - 9th Aug 19

Market Oracle FREE Newsletter

Top AI Stocks Investing to Profit from the Machine Intelligence Mega-trend

How Helicopter Ben Helps Jobs and, Inadvertently, Gold

Commodities / Gold and Silver 2012 Oct 09, 2012 - 02:50 AM GMT

By: Frank_Holmes

Commodities

Best Financial Markets Analysis ArticleThe world’s central bank leaders continue to spike the monetary punch bowl, with investors imbibing on gold once again. This flurry of gold buying prompts many curious investors and doubting media to ask me two questions: 1) How can demand for gold and gold stocks continue; and 2) How high can the precious metal go?

To answer these questions, we need to look at the intentions behind the economic and political decision-making across several developed countries, analyze the causes, the effects, and the possible ramifications.


For example, one of the most debated topics today is America’s ongoing unemployment situation. Job loss has affected the lives and pocketbooks of millions of Americans and our friends and families, culminating to a center-stage position in the election this year. All eyes turn to President Barack Obama and Mitt Romney to explain how each intends to create jobs.

During the two years following the Great Recession, Americans lost jobs at a similar rate to the employment losses during the Great Depression and in Finland after 1991. But two years after the crisis, U.S. employment losses stopped and reversed direction.

Compare this to the situations in Norway, Spain, Finland and Sweden, each of which had prolonged unemployment. After Norway’s financial crisis in 1987, it took 8.5 years to return to the country’s employment peak. It took 13 years for Spain’s employment to return to its 1997 peak. For Finland and Sweden, it took more than 17 years following their 1991 peaks.

Employment Loss

Although the job losses in the U.S. don’t seem as dismal, “Helicopter” Ben Bernanke wants to avoid Europe’s and Japan’s catastrophic situations. To him, the economy “has not been growing fast enough recently to make significant progress in bringing down unemployment.”

In a speech to the Economic Club of Indiana on October 1, Bernanke explained that the Fed is “charged with promoting a healthy economy,” which includes “an economy with low unemployment, low and stable inflation, and a financial system that meets the economy’s needs for credit and other services.” With regards to the decisions relating to monetary policy, the Fed’s goals are dictated by Congress and are to seek “maximum employment and price stability.” He explains, “We would like to see as many Americans as possible who want jobs to have jobs and that we aim to keep the rate of increase in consumer prices low and stable.”

Ten years earlier, Ben hinted at the way he might accomplish such goals as a Fed chairman. In a speech regarding deflation, he shared his position on a government’s means to print money, referring to Milton Friedman’s comment about dropping money out of a helicopter into the economy. He stated, "The U.S. government has a technology, called a printing press (or today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at no cost." Since then, he’s been known as "Helicopter Ben."

With unemployment continuing, the Fed’s helicopter drops another $40 billion per month to buy mortgage-backed securities, as well as an additional $45 billion of longer-term securities per month through the end of the year.

And, as Bank of America-Merrill Lynch says, “monetary policy is contagious.” The Fed’s money printing practice to help create jobs is only one part of the picture. Along with the growing U.S. monetary base, global liquidity has been growing every year for the past 12 years. As you can see, both of these factors have a close correlation to the rise of gold.

Global Liquidity

While well-intentioned, I believe these “quantitative infinity” programs may have a devastating devaluing effect on currencies, which has helped to spur gold prices over this entire time period.

Gold investors have recognized this correlation by returning to gold en masse. In August, investors rushed into gold, with the massive inflows of money going into the gold exchange traded products in August more than each of the prior five months.

Buying continued in September, with gold lovers loading up on coins. According to Bloomberg, people purchased the most American Eagles from the U.S. Mint in eight months. Almost 70,000 ounces were sold last month—the most sold since January when the U.S. Mint sold 127,000 ounces.

Miners also attracted interest, with the FTSE Gold Mines Index experiencing a rise of 13.25 percent and the NYSE Arca Gold Miners Index rising 12 percent during the month of September alone. See how U.S. Global gold funds performed.

So how high can gold go? If you factor in only the Fed’s program to purchase mortgages and Treasuries, Bank of America-Merrill Lynch says that over the next nine months gold could go to $2,000, and by the end of 2014, gold could be at $2,400.

FED Balance Sheet

This target doesn’t take the Love Trade into consideration. Over the past several months, we’ve heard only chirping crickets from India, the country that has historically been the world’s largest consumer of gold. Demand suffered under a very weak rupee, as the price of gold in the local currency climbed to an all-time high.

The rupee’s recent strength has helped to increase Indian gold demand with flows climbing to a five-month high, according to UBS. What’s helped bring shoppers back to the market is the fact that the exchange rate is back to where the rupee was in April.

This improvement in the currency comes just in time, as the wedding season is in full bloom. Every year, about 10,000 weddings are held in India from late September through January, in between the monsoons and the summer heat. Gold has historically been closely linked with the celebration of weddings, as the bride wears the precious metal and gifts of gold coins are given to the newlyweds.

In addition, Diwali will be celebrated in November. The Festival of Lights is India’s biggest and most important holiday of the year and is celebrated by almost 1 billion Hindus around the world. Traditionally, on the first day of Diwali, it is considered auspicious to clean the home and shop for gold.

Why is India so significant to gold? As you can see below, from 2000 through 2011, the rising incomes in both China and India have been strongly correlated to the price of gold.

Strong Correlation China India Incomes Gold Price

Investors now have two strong reasons to invest in gold: the Fear Trade, driven by an expanding monetary base, and the Love Trade, driven by rising gold demand in Chindia. If you’re already sold on gold, make sure to maintain a modest 5 to 10 percent weighting in gold and gold stocks. For those investors who don’t hold gold, what’s stopping you?

U.S. Global Investors, Inc. is an investment management firm specializing in gold, natural resources, emerging markets and global infrastructure opportunities around the world. The company, headquartered in San Antonio, Texas, manages 13 no-load mutual funds in the U.S. Global Investors fund family, as well as funds for international clients.

For more updates on global investing from Frank and the rest of the U.S. Global Investors team, follow us on Twitter at www.twitter.com/USFunds or like us on Facebook at www.facebook.com/USFunds. You can also watch exclusive videos on what our research overseas has turned up on our YouTube channel at www.youtube.com/USFunds.

By Frank Holmes

CEO and Chief Investment Officer
U.S. Global Investors

U.S. Global Investors, Inc. is an investment management firm specializing in gold, natural resources, emerging markets and global infrastructure opportunities around the world. The company, headquartered in San Antonio, Texas, manages 13 no-load mutual funds in the U.S. Global Investors fund family, as well as funds for international clients.

All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor.

Standard deviation is a measure of the dispersion of a set of data from its mean. The more spread apart the data, the higher the deviation. Standard deviation is also known as historical volatility. All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor. The S&P 500 Stock Index is a widely recognized capitalization-weighted index of 500 common stock prices in U.S. companies. The NYSE Arca Gold BUGS (Basket of Unhedged Gold Stocks) Index (HUI) is a modified equal dollar weighted index of companies involved in gold mining. The HUI Index was designed to provide significant exposure to near term movements in gold prices by including companies that do not hedge their gold production beyond 1.5 years. The MSCI Emerging Markets Index is a free float-adjusted market capitalization index that is designed to measure equity market performance in the global emerging markets. The U.S. Trade Weighted Dollar Index provides a general indication of the international value of the U.S. dollar.

Frank Holmes Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules