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July 21st, 2011
The old Cold War
USA-USSR nuclear arms race has been replaced by the East-West Central Bank battle to accumulate physical gold and physical silver reserves. While Western
Central Banks and their puppet bullion banks have distracted and goaded private citizens with the invention of fraudulent bogus paper gold and paper silver derivative products, including
ETFs more recently, and paper futures contracts for a much longer period of time, they themselves have been making sure to avoid the very fraudulent paper products they have invented and have been diving headfirst into real physical precious metals.
As Central Banks continue to significantly devalue all major global currencies through excessive creation of new supply out of thin air in a digital world where “new money” is never even printed into paper/cotton form but only is created as digital bytes that are sent across international borders, the private families that are the majority shareholders in the world’s most powerful Central Banks have engaged in heavy buying of physical gold in particular, and to a lesser degree, physical silver. In 2010, Central Banks as a group, became net buyers of physical gold after two decades as net sellers. EU Central Bankers became net buyers of physical gold for the first time during the 1st Quarter 2011 since their introduction of the heavily flawed Euro into circulation in January of 2002.
As of April 2011, China was, according to “officially reported” statistics, the sixth-largest official holder of gold, with 1,054.1 tonness, according to World Gold Council estimates. The U.S. was still reported to possess the largest gold reserves at 8,133.5 tonnes. However, all of you know by now that I believe all “officially reported” statistics, whether the statistic is GDP, unemployment, inflation, or gold reserves, to be a charade and mockery of the truth. To this day I am highly skeptical of the US reported reserves of 8,133.5 tonnes, especially since these reserves have neither been independently audited nor independently tested to ensure that they meet good-for-delivery bar status since Dwight D. Eisenhower was the US President in the 1950s. As for China’s “officially reported” holdings of only 1,054.1 tonnes, anyone that takes these reported stats at face value as the truth is a fool for any number of logical reasons. One, China reported that its “official” gold holdings were a constant 600 tonnes from 2003 to 2009 and then reported that it had increased its holdings to more than 1,000 tonnes overnight in 2009. Since China lied about its gold reserve holdings for more than 6 years, one cannot and should not assume that their “officially” announced 1,054.1 tonne level was truthful. Since China made that announcement in 2009, their “official” gold reserve level has not increased at all.
Anyone that believes that China has not accumulated more gold, and lots of it, since that time, does not understand the
Chinese government and Chinese bankers. Chinese bankers have been studying the
best ways to invest in gold and silver for many years now in preparation for this global monetary war and they realize that one of the best ways to invest in PMs is to own the real thing. Furthermore, there are multiple mechanisms by which China could be secretly increasing their gold reserves out of the scrutiny of the public eye. In 2008, China replaced South Africa as the largest gold producer in the world, but nobody really knows exactly how much gold China produces or how many proven/ probable reserves or how much measured/indicated resources they own. Thus, China could be increasing gold reserves significantly on in-house production alone. Certainly we know that China is increasing its silver reserves through a policy of decreasing its domestic silver exports and increasing its foreign silver imports.
For example, last month, China’s
General Administration of Customs reported that its net imports of silver nearly quadrupled year-over-year in 2010 to more than 3,500 metric tons. Also of important note is the fact that in 2010, China exported 1,575 metric tons of silver, 58% less than in 2009, and imported 5,159 metric tons of the metal, 15% more than in 2009. This is a huge change if one realizes that from 2005 to 2010 China transitioned from a net exporter of 2,900 metric tonnes of silver to a net importer of 3,500 metric tonnes.
From 2005 to 2010, China increased its gold holdings in its
State Administration of Foreign Exchange (SAFE) more than tenfold from a very small starting point of USD $4.2 billion to USD $48.1 billion. However, China could be increasing gold (and silver) reserves significantly through purchases in its
Sovereign Wealth Fund – purchases that are not made available for public inspection or consumption. For China to publicly announce their buildup of gold and silver reserves that would drive up the price of the very commodity they wished to accumulate more of would be akin to then-Chancellor of the Exchequer Gordon Brown’s foolish decision to pre-announce in 1999 that the UK would be selling half of its gold reserves.
Also of important note are the following facts. China only recently deregulated gold in 2003 to allow gold prices in China to mirror international prices. The Shanghai Gold Exchange only opened in October of 2002. In late 2009, the Chinese started making gold and silver bullion easily accessible to its citizens through introducing physical sales of multiple size bars at its banks and China finally legalized ownership of 99.999% pure silver bullion. The Chinese typically have a tendency to
buy PHYSICAL gold and PHYSICAL silver, not the fraudulent paper gold and paper silver derivatives invented by bankers to suppress the price of gold and silver. For the first time ever, Chinese citizens will be able to buy silver futures in Hong Kong this week and later in Shanghai; however, since the Chinese are fond of owning Physical metals, perhaps even the majority of Chinese may settle these futures contracts with physical delivery. Furthermore, even when the option to buy gold and silver ETFs in China becomes a reality, the average Chinese citizen may shy away from these products due to his or her propensity for owning real gold and real silver.
For Asians in general, gold and silver have always been money. In Thailand, the word for money “ngen” is also the word for silver. In China, the word for bank combines the characters for “silver” and “movement”. In China not only is private demand strong AND relatively young, but even in India, private ownership of gold bullion bars was not legalized until 1990. Thus, the war between East and West over gold and silver will intensify in coming months and coming years. The objective of the East will be to release the gold and silver price from the clutches of Western price suppression schemes while the objective of the West will be to hoard gold in an attempt to prevent citizens of Western nations from owning the asset that will protect them the most from their currency devaluation schemes.
The current talk in the mainstream financial media about gold being a bubble at $1,600 an ounce and of silver having already reached its top of its long-term peak at $50 an ounce is simply rubbish. A bubble is never defined by high prices, the perception of high prices or even a decade long rise in prices. What defines a bubble is a meteoric rise in price that is not supported by fundamental reasons. For example, the US NASDAQ dot.com stock market was a bubble because dot.com stocks that had zero earnings were trading at impossible valuations and sometimes double and triple digit dollar values per share. However, the fundamental reasons that have driven gold from $250 to $1,600 and silver from $4 to its current $39 – $40 range are even stronger today than they were at the beginning of this precious metals bull. Therefore, it is impossible for a bubble in gold and silver to exist at their current prices and at this current time.
And for this reason, this is precisely why the global nuclear arms race has been replaced by a global physical gold race. Welcome to the new global war in precious metals.
About the author: JS Kim is the Managing Director of SmartKnowledgeU. SmartKnowledgeU now offers monthly subscriptions to our premium investment newsletter, the
Crisis Investment Opportunities newsletter, an investment newsletter that has returned well over a cumulative 200% (on all opened and closed positions) since its launch in June 2007 to present day.
Editor:
Here are some more thoughts on gold stocks this summer from Analysts.....
Tocqueville Gold Fund Portfolio Manager John Hathaway: "I'm looking for gold stocks in general to be re-priced over the next several months. Gold stocks have tremendous catch-up potential. I don't know whether that's 30% or 25% or 40%, but it's something like that because of what kind of earnings they'll report... Mining stocks will be producing great earnings, while the rest of the economy is stalling out. Just by exception, people will have to look at them. That to me will be very positive for mining stocks I think for the next 6 to 12 months."
Raymond James/Canada: "With many of the equities trading at historically lower multiples, we would view this as an attractive buying opportunity... We recommend investors take advantage of the strengthening precious metal prices by accumulating gold and silver equities ahead of the typical fall rally."
BofA/Merrill Lynch analysts said precious metal stocks are "substantially undervalued... Based on the higher gold and silver price forecasts (offset somewhat by the lower copper prices) we have increased our price objectives on most of our stocks under coverage. Our analysis indicates that gold stocks are reflecting a gold price in the $1,200-$1,300/oz range."
Dundee Capital Markets updated a study of the historical price-to-net-asset-value multiples on a number of gold equities and described the situation as one of "bargain basement prices." Their conclusion: "Our analysis suggests that most of the gold producing companies appear undervalued and therefore offer excellent investment opportunities at this time. In fact, we recommend an overweight position in gold equities as the summer wanes and we head into the fall season, traditionally a great time to own gold companies."
RBC Capital Markets noted the relative underperformance of the gold stocks, stating the stage was set for a "potential surge in gold equities."
BlackRock's Catherine Raw of the Gold & General Fund said regarding gold miners, "I, as an investor, would say that in the end, given that belief the world isn't going to collapse, if you're prepared to be patient, then I would see now as a very good buying opportunity."
HSBC Global Asset Management, putting its money where its mouth is, reportedly sold most of its physical gold holdings and bought gold shares. "Gold equities will remain under pressure while investors remain fearful, but once investors feel that the risk of another leg down in general markets passes, or after a downswing in the markets, we feel the gold equities will do some catching up."
Blue Phoenix CEO John Licata: "Gold companies... are not factoring in $1,500 gold prices. Many of them are still building models based on $1,000 gold. So to me there's a lot of value still within the gold sector that has not been realized."
Sprott Asset Management's Chief Investment Strategist John Embry: "They [gold and silver equities] haven't moved up a lot with gold and silver... they've been sort of wallowing a bit... If money decides it has to come into this space, it's going to be like Internet stocks in the '90s, except the mining stocks are going to have real fundamentals."
CIBC's Barry Cooper said the proliferation of bullion ETFs is a "market-sentiment driven event that will pass, as fundamental financial drivers kick in to support share prices and drive them higher."
U.S. Global Investors Chief Investment Strategist Frank Holmes: "There is a substantial opportunity to buy healthy gold mining companies at historically low prices compared to gold... With gold companies currently undervalued and offering strong cash flows and attractive yields, we think gold equities will be rewarded by the market and rise with strong gold prices."
BMO financial analyst Don Coxe: "Gold and gold stocks offer protection that is going to become more valuable in the months ahead. It's possible that the long-awaited period, when gold stocks outperform bullion, is coming soon."
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