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Physical Demand Soars as The Financial Crisis Worsens, but Gold Goes Down!

By Warren Bevan      Printer Friendly Version
Oct 6 2008 11:59AM

It was the most important week in many ways since the 1930’s for the US economy. Either outcome would not have been good, but perhaps the worst was chosen. Physical demand is soaring and reflecting where the paper metals markets should be. In gold the premium can be 10% while silver can be up to 100% higher than the spot price. But demand is still through the roof. This cannot last long. Let’s move right into things.

Metals review

Another Friday, another broken uptrend for gold. The price did move back above the final Fibonacci retracement support line which is a very good sign.  The 25 day moving average gave some support as well.

As demand for physical is soaring to unprecedented levels the paper price continues to trade in a range. This is not how markets should behave. Mints around the world are struggling to keep up with demand while the paper price of gold declines. The decline fuels further physical demand. At this pace it won’t take too long until the physical market sets the price instead of the easily moved paper market. GLD the largest gold ETF, also increased holdings this week showing strong investor demand despite the price decline.

As strange as it seems gold should move lower on a technical basis. $800 is the next line of support followed by $775, then around $750.

RSI closed the week below 50 and is bearish. The moving averages are neutral to bearish. The 25 day moving average is at the Fibonacci level which if broken on a closing basis will almost surely bring gold back to $800. What another great buying opportunity that would be for the insatiable appetite of the public. It’s very counterintuitive that gold can move down when the world is facing the largest financial crisis of our time.

MACD and Slow STO have broken down to a bearish posture. None of this means much in this market that seems to move opposite to where it should. This is a pivotal week for gold, silver and the world financial system as we know it.

Silver was trashed this week too. There is no real support in the six month chart other than the recent low at $10.19. Pray we go that low again and you may be able to buy physical again for $15. What? Yes, to own physical silver the premiums are 50% to 100% higher than the quoted paper price...if you can source it.

Silver could not hold above the 50 line on the RSI and is now flattened out. Friday shows a small uptick in this indicator.  All three moving averages are moving steadily lower and showing no sign of a reversal yet. MACD is about to cross into bearish territory. Slow STO has been bearish all week and closed below the 50 mark.

Technically paper silver does not look good unless you are short. But as with gold the paper and physical markets are two different beasts. 

As suggested last week the bearish flag pattern was shattered. Platinum and gold will very likely be trading in the same range again very shortly. Platinum is not in demand as a safe haven like gold so it saw more weakness.  Also the horrible auto sales numbers this week hurt. But as usual the story of developing nations demand for catalytic converters in automobiles is nowhere to be found.

It doesn’t get much uglier than platinum right now. Well, palladium is close! RSI could not beat the recent peak and turned down strongly remaining below 50 signifying at least a short term bear trend.

All three moving averages are pointing south with the 25 day tracking the strong downtrend line. MACD could not best the recent peak and is telling us to run away, not walk. Slow STO is very low and oversold, but what else is new? 

I can say much the same for palladium as I stated above with platinum.  The bearish flag was broken. The downtrend line is solidly holding and pushing palladium lower. All three moving averages are still going south. The three indicators however are showing a sign that a consolidation point has been reached. Will it be a bottom or just another bearish formation before another downturn? I would say fundamentally it is nearing a bottom around $200. But technically and with markets in panic mode these are far from normal times.

Fundametals Review

The International Monetary Fund (IMF) now says that the global financial quagmire has been upgraded to a “full blown crisis?. There is no doubt the world financial system is crumbling. 

According to Jim Willie, a big American bank has received signs in advance of a weeklong bank holiday which could come at any moment.  Mr. Jim Sinclair is urging readers to hoard up to two months cash in your home or on your person. If a bank holiday is declared, credit cards, and debit cards will in all likelihood not work.  It is time now to keep your tanks topped up, and wallet full of cash in case of such a dire measure.

Personally I am stocked up on food, wood, cash, gas and wine. Of course some physical gold and silver also compliment my hoard in case an emergency progresses to that degree. It may very well not happen. But what if it does? In my small mountain town it is always prudent to have a store off food and gas at a minimum as we discovered in 2007.

In that spring a large landslide crossed the only road in or out while the mighty river flooded at the same time. We were without gas, food, and many other supplies which arrived by road or train which runs along the river.  We were cut off for five days and all stores ran low or completely out of food, gas, generators, batteries and so many other essentials. Earth is fragile, and tragedy can happen suddenly. Think of the more than 30 people who died in the ice storms of eastern Canada and the US in 1998 by freezing to death.

I was unfortunate enough to be on Sumatra, in Indonesia, thankfully on high ground in the jungle, when the Tsunami of 2004 hit and killed more than a quarter million people so quickly and tragically. I understand intimately how fragile life and tranquility is in our lives. There is nothing wrong with preparation. It simply means you have foresight and are smart enough to realize how fragile this planets infrastructure is, from transportation, to energy, foodstuffs, communication on down the line amounting to 99% of everything you deal with in your daily life. I don’t want to alarm or sound like a doomsayer but please protect your fragile state of being. It is quite simple, and truly the only responsible action to take, especially if you have a family under your wing.

The Federal Reserve reports that $1.839 trillion was injected into the financial system in just the last week. That’s not even getting into what many other central banks have injected over the same time period.  The inflation being created daily is staggering.

Now that the $700 billion dollar bailout is passed the end is in sight. This number pales in comparison to the money injected worldwide without permission or democratic process in the last week alone which exceeds $2 trillion. The bailout is going to be used to buy the bad assets that have caused so many institutions to fail, and put so many on the brink. These bad assets hurt these cornerstone companies so badly, now they will be on the US taxpayers books and they are now the benefactor of these troubles. Lord help us.

So what? You may ask. Now the government will effectively own a large portion of the mortgages in the US. So you may initially think it may in the end be a good investment. But one factor rarely mentioned is that so many of today’s homes are build to last for 20 to 25 years. They are not built like they used to be with copper pipes, good solid locally refined wood and many other strong, long lasting features.  By the time this crisis unravels these houses may be worth more demolished than standing. If these were good investments the banks and other institutions would not need them off their books ASAP.

While I don’t expect the hyperinflation happening now will be as pronounced as that in Zimbabwe you just never know.  What I do know is that anyone in that country who own physical gold and silver is doing fine and can continue day to day life as normal. The public cues up daily to withdraw the daily limit of worthless currency. Many are now measuring amount of days to wait in line for currency against the amount of goods they can buy.  From the article; “like countless Zimbabweans, Mrs. Moyo has calculated the price of goods by the number of days she had to spend in line at the bank to withdraw cash to buy them: a day for a bar of soap; another for a bag of salt; and four for a sack of cornmeal.?

Inflation is so bad there that in August the government removed 10 zeros from the currency.  Had that measure not been taken the exchange rate you now be $10 trillion Zimbabwean dollar to $1 USD! It’s a sad and worsening story in Zimbabwe and my thoughts are certainly with them.

A recent report shows a nice chart of gold adjusted for inflation. I like to look at these charts once in a while to give me an idea of how truly early we are in this secular bull market. We are just starting the move up in inflation adjusted terms.  The money printing happening today is unprecedented in western history and the problems facing our economies are much worse than when gold hit its high in 1980.  I expect gold to go much higher than the inflation adjusted all time high over $2,500.

A fantastic article which is hard to believe, a better script could not be written. Please read it here. Here’s a teaser to get you warmed up; “IMAGINE, if you will, that a man who had much to do with creating the present credit crisis now says he is the man to fix this giant problem, and that his work is so important that he will need a trillion dollars or so of your money. Then add that this man thinks he is so indispensable that he wants Congress to forbid any judicial or administrative questioning of anything he does with your dollars.?  Might I add, he will be resigning after the election to a sunny private beach somewhere full of bird I am sure. Paulson is an avid birdwatcher.

My French Canadian friend sent me a good one this week.  Merci Jacque!

How the credit crunch will affect Britain

And perhaps most importantly and candidly Mr. Jim Sinclair points out that “Unless the LIBOR rate drops sharply we are facing a planetary financial crisis next week.? LIBOR is the London Interbank Overnight Rate which is the interest rate banks charge each other for overnight lending.  It soared this week signifying the banks inability and reluctance to lend.

Dividend payouts dropped to the lowest level in 50 years in the 3rd quarter. I just added a small producing company to my portfolio that actually pays a dividend. They recently increased it and as output grows they will increase it again.  The drop in payouts resulted in $22.5 billion not going to investors.

Let’s move onto some positive thoughts in terms of where to continue to invest for the long term in the only secure and independent investment.

Demand for gold in coin form is surging. Investors are paying large premiums for physical gold and have to wait up to several months for delivery. Some mints have demand exceeding production and halted production as a result while they try and rebuild reserves. 

The chart above clearly demonstrates the huge increase in investor demand for all types of coins. Interesting how the sales picked up so strongly as the price was hit so hard in August and September. It seems like some in the west are taking after the Indian buyers who increase demand as price softens and lowers demand as prices strengthen.

Record demand for gold bars is also soaring according to the world gold council. Here are some good quotes encapsulating the story:

  • “If you can’t have confidence in banks you can at least have confidence in gold?
  • “The distrust of banks has intensified recently?
  • “People are taking money out of their savings account to invest in gold. Typically they’re withdrawing amounts over £35,000, which is the level of the government deposit guarantee?
  • “We have seen higher interest in gold over the last two weeks but from Monday onwards it’s been really, really busy?
  • “There are people coming into the market who have never bought gold before. They know it’s a gamble but they’re not so worried about making a profit – it’s all about security?
  • “People are buying both bars and coins. We have not sold out, but we are selling faster than we can source new supplies.?
  • “Krugerrands used to be 6 per cent above the gold price, now they’ve moved up to 10 per cent?
  • “There are people who seem to think that they’re going to have to use a krugerrand to buy a loaf of bread one day?

And finally my favourite quote from the story, a man who plans to use a gold bar as a doorstop, not a bad idea! “I asked if that would be a security risk and he said ‘Oh, no one would notice it, and if they did they’d never believe it was real’.?

There are plenty more stories of soaring demand.  Here is one and this is another for your reading pleasure.  It’s real folks, and it’s NOW!

Nick Holland acknowledges the supply of gold will likely decrease as the financial crisis stumps producers’ ability to fund growth and new projects. The smaller guys will hurt even more. He also says that companies will be looking to unconventional countries with solid currencies to fund projects.

We should take heed from the German’s. They went through a hyperinflationary period during the Weimar Republic and that lesson is still fresh in many still living today. They know how bad things can get, while much of Europe and the rest of the world are oblivious, having no real experience with the terror caused by hyperinflation. Germany understands the current posture of world financials systems is leading to hyperinflation and wants no part of it. Germany says they will not sell any more of their gold reserves. Although pressure to sell is strong, they are holding fast and opting to keep a solid gold holding in their reserves.

The fourth year of the Washington Agreement ended on September 27th and ended up being far short of the allotted 500 tons allowed to be sold.  Roughly 320 tonnes were sold leaving a 180 tonne shortfall. With Germany refusing to sell in this the last year of the agreement other central banks will be called upon to make up for the shortfall. Rumours are that the final year will be far shorter than this past year in terms of total gold sales. Times are changing where central banks are now becoming net buyer rather than sellers of gold since it is truly money. Unfortunately the silver market is so small it may not see any benefits from this demand for money. But since the silver market is so small investor demand alone should aid in its outperformance of gold during this bull market.

The Swiss National Bank also said they are done with gold sales. They have finished the sale of 250 tonnes. Looks like the final year sales of the Washington Agreement will be much, much lower than this year, perhaps even as low as 200 tones. If the banks wise up a bit, the total in the final year will be zero. According to some analysts central banks may begin accumulating gold again, especially in Asia and the Middle East.

Demand is soaring for gold in Canada as well as the Royal Canadian Mint is delaying deliveries and under strain from the surge in demand.  But the mint states that at least they are still producing unlike the US mints recent halting of coin manufacture.

A hedge fund manager is warning of a potential gold seizure if financial conditions worsen. A quote from the story; “The worst thing for any kind of central banking crisis is everyone buying the oldest currency in the world. Buying gold is a clear sign that investors don’t have confidence in the financial system." Imagine how easy it would be today. They would confiscate GLD and that would take a good portion of the gold in one foul smelling swoop.

Just in September $4 billion was added to the GLD ETF. 

Some leading Russian miners said many smaller miners or explorers are being forced to sell some assets in order to survive the global crisis.  We will be hearing much more of this as many explorers who may have had a shot at production are losing that chance now as credit dries up. There will be a lot of good properties for sale for literally pennies on the dollar. The large cap, cash rich miners are in an envious position and can sit back and wait until a good offer crosses their desk by a desperate small miner. Picking winners is becoming increasingly difficult.

As most of you know the USA is not the center of the universe and becoming less so by the hour these days. Gold has broken out into all time highs in the Australian dollar and is close in several other major currencies. I am not posting all of the near all time high charts but here are a few to illustrate the point. The big picture is what matters and must be considered.

All time highs in the Australian dollar.  Reports are that physical gold is close to sold out in Australia and silver even harder to find.

Investment demand is soaring in this region of the world.

Getting close to another all time highs in the British Pound.

As I wrap this week up I leave you with a shocking video and a funny one. If you watched the vice presidential debate his past week this video will be even funnier. I don’t watch much TV but made an exception last night.  I haven’t laughed that hard...possibly ever!

The second video is...well kind of shocking. Not that I am a fan of Kate Moss or anything but I couldn’t help notice this provocative 50 kg solid gold statue recently finished. The statue can be seen here and her short part begins at the 1 minute slot.  Did she pose for that? What next?

As always have a great week, but be extra careful this week.


Warren Bevan



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