Golden Bubble?

Golden bubble?  We are not in a golden bubble, and there are mounting signs that are signaling that this gold bull is for real.  If anything we are at the beginning of a “perfect storm” for gold!

Gold ended a news filled week up $6.40 at $1,095.70 on the COMEX, after having once again reached a new all time high of $1,100.90.  Gold is clearly on the move and a close above $1,100 appears to be a  certainty in next weeks trading.  The devil is in the details, and gold was handed a set of details this week that are sure to keep the rally going forward.

Wednesday’s news that India bought 200 tons of recently offered IMF gold set the ball rolling.  All the rumors that the sale of IMF gold would hurt the spot price of gold on the markets were blown away when it was announced that India’s government had scooped up half of the IMF’s offering before the Chinese even had a chance to bid on it.

By JOHN MORRISSY, Canwest News ServiceNovember 4, 2009

India’s purchase of 200 tonnes of gold from the International Monetary Fund sent the precious metal’s price to a record high yesterday, but fears that the move indicates lurking inflation or is a sign of further weakness in the United States dollar are misplaced, analysts say.

Gold soared $30.90 U.S. an ounce to $1,084.90 U.S. on news of the $6.7-billion purchase by India’s central bank from the IMF, which had announced its intention to sell 403 tonnes of gold to help fund loans to developing nations.

As the financial crisis has unfolded, central banks have slowed gold sales and in some cases increased their holdings as countries like China, with large holdings of U.S. dollar assets, have fretted about the declining value of the greenback.

Investors have driven up the price of gold, which broke above $1,000 U.S. an ounce in early September, seeking a hedge against inflation they fear will be unleashed by the massive amounts of stimulus spending circulating through the system.

But India’s move – the largest central-bank purchase in at least 30 years, according to Bloomberg news reports – should be seen as nothing more than a central bank deciding to diversify its asset base, said Bart Melek, global commodity strategist with BMO Capital Markets.

“They certainly have worries about the U.S. dollar longer-term and, as a matter of policy, want to diversify.”

He added, however: “I’m not sure the average person can assume anything about a central bank’s action to forecast what’s going to happen with inflation or the U.S. dollar.”

John Nadler, senior analyst for Kitco Metals, a precious metals retailer, said: “The perma bulls would interpret this to mean central banks are confirming gold is the ultimate money. But India’s purchase is just a normal part of currency management practices.”

Nadler said gold’s run above $1,000 U.S. and the U.S. dollar’s 14-per-cent slide since early March are nothing more than a bubble driven by hedge funds.

Much as they did using the so-called yen carry trade before the financial crisis began, funds have been borrowing U.S. dollars at near-zero interest costs to purchase higher-risk assets like stocks and commodities.

“As soon as the U.S. Federal Reserve reverses or even show signs of reversing interest rates, this carry trade party is over,” Nadler said.

Once rate hikes begin, they will come quickly, knocking the value out of commodities like oil and gold that have been driven far beyond fundamentals by hedge funds, Nadler warns.

To buy gold now is likely to buy at the peak, he cautioned investors.

But Jamie Horvat, senior portfolio manager for Sprott Gold and Precious Minerals Fund, says gold’s price action yesterday is a sign of rising concern about the impact of mushrooming money supply.

Governments continue to pump money into the system to try to avert recessionary outcomes. The process drives down the purchasing power of money and “destroys the wealth of savers in the process,” Horvat said.

“That’s what we’re seeing today. That’s why oil is at $80 a barrel and copper is at $3 a pound. They continue to go up because the value of currencies continues to go down.”

Using what he described as conservative estimates, Horvat said gold is likely to hit $2,000 an ounce within three years. Melek’s target is for $1,100 U.S. an ounce by 2011.

Jon Nadler’s comments, with all due respect,  are narrow minded and myopic.  Gold is not over priced in relation to the dollar, if anything it is under priced. Jon has spent his career as a naysayer on the value of the product from which he earns his living.

When the automobile first came on the scene, the buggy whip manufacturers proclaimed the auto as a passing fancy.  Where are they now?  With the Russians and the Chinese calling for a basket of currencies to replace the dollar as the world’s reserve currency, it is time to realize that we are witnessing a sea change in the order of things that is of a major magnitude.

Yesterday the price of gold hit a record high above 1,100 dollars an ounce after Sri Lanka  joined India in purchasing gold over the US dollar.  “The Central Bank of Sri Lanka has announced that it is buying gold to diversify its reserves,” the World Gold Council (WGC) said in a statement issued before gold struck its new record high.  “Over the past year central banks, which have been net sellers of gold are now a new and increasingly important source of demand,” said WGC chief executive Aram Shishmanian.

U.S. Unemployment Numbers Disappoint

U.S. Employers cut 190,000 jobs in October, not the 175,000 that was expected.  This brought about more talk of additional stimulus from a U.S. Administration that has done nothing to improve the private sector.  The Obama administration is caught between a rock and a hard place.  In order to continue their “progressive” (read Marxist) policies, they have got to produce some private sector job growth, but that is unlikely, because that requires freedom in the markets which they are hell bent on destroying!

What a dilemma!!!  You either give the free enterprise system a dose of de-regulation by removing government control and put the American people to work, or you continue on the bloated big government path and head right into a depression which will guarantee your party losing the power that is the only reason for its existence.  Catch 22!!!

Sunday November, 1 brought about another stunning success for the Stimulus Package and the TARP program.  Sarcasm intended! How many more negative stories will have to come out before the public realizes that government  has  not fixed anything, but rather just delayed the inevitable while digging us  into the Grand Canyon of debt.

CIT failure to leave small businesses floundering

Sun Nov 1, 2009 4:36pm

* CIT’s $42 bln factoring business in doubt

* Small businesses still facing credit crunch

By Elinor Comlay

NEW YORK, Nov 1 (Reuters) – CIT Group Inc’s (CIT.N) bankruptcy filing, while long expected, could still trigger a financing crunch for many of the hundreds of thousands of small businesses it finances.

CIT filed for bankruptcy protection on Sunday, and said its creditors have already approved the century-old commercial lender’s reorganization plan.

The bankruptcy followed a failed struggle to refinance its debt amid the credit crunch and recession, and paves the way for it to restructure.

Under the plan announced on Sunday, the lender expects to reduce total debt by about $10 billion.

But the company’s long-term prospects are uncertain and the bankruptcy could leave more than one million small and medium-sized businesses looking for another source of funding, lawyers said.

“This could have a devastating effect,” said Jerry Reisman, a partner at law firm Reisman Peirez & Reisman in Garden City, New York, who has been working with many of CIT’s factoring clients.

These clients — about 2,000 small companies — are in a particular bind when it comes to finding alternative financing since CIT is by far the biggest provider of factoring services.

In the factoring business, CIT buys accounts receivables from vendors that range from $5 million to $1 billion in size and then works with their customers to ensure payment.

What’s more, many of the factoring clients are in the garment industry, where they already face a bleak holiday season.

“In the best of times you would have seen a situation where other lenders would certainly have been willing to consider getting into this business,” said Mark Jacobs, a partner in law firm Pryor Cashman’s bankruptcy group. “In the current environment, given the constraints on credit generally, there’s not enough capacity out there,” he added.

In the first six months of the year, CIT lent just $65 million in Small Business Administration loans, one percent of the total lent in this category over that time period. In 2008, CIT was the top SBA lender in dollar terms, providing 6 percent of all SBA lending, according to the National Small Business Association.

At the same time, banks are also broadly cutting back on lending to small and medium-sized businesses. Banks’ lending to small companies fell by about 2 percent, or $14.8 billion, for the year through June, according to data from the Federal Deposit Insurance Corp.

The NSBA had expressed its concern about a potential CIT bankruptcy and in July wrote to U.S. Treasury Secretary Timothy Geithner to ask the government to consider assisting CIT. It may discuss a similar lobbying effort again, spokeswoman Molly Brogan said in an interview before the bankruptcy filing.

The CIT Group  received $2.33 billion of taxpayer money last year, because they were” too big to fail”.  Don’t you think it would have been better to just let them fail back then?  At least we would have saved the  $2.33 billion that was printed out of thin air and thrown down the rat hole after them.

Are These The Signs of a Golden Bubble, Or The Harbingers of a Fight to Safety In Gold?

There are just too many negatives associated with the U.S. economy and the Obama Administration’s handling of it to be passed away as non related to the ending of this recession/ depression.  Gold is becoming the flavor of choice for central banks around the globe.  With central banks buying gold, there will be no dumping of gold into the markets in order to control the price.  The global central banks are telling you that this is not a gold bubble, but rather a major flight to the safety of gold.

There is one other simple test that you can perform yourself to in sure that you are not unwittingly buying into a bubble.  How many friends and acquaintances do you know that have been, or are currently buying gold?  I would venture to say that you do not know many, if any at all.  This gold bull has simply not reached the radar of the masses yet.  Bubbles are the defined by the amount of people that succumb to them.  When gold hits and stays above $1,250 per ounce, the public’s interest may begin to rise.

Buying gold on the dips is the way to go.  The central banks have too much invested in the fiat currency system to just let it slip away.  They will mount attacks on gold in order to slow its rise so that they can accumulate more.  A test of the $1025 level will occur at some point and it will provide a major buying opportunity.

These next two stories prove the point that you should do your research before you invest in gold producers.

Two Stocks That Get Burned By Hedge Books An Derivatives!

Barrick Reduces Gold Hedges

Earlier this week, Barrick Gold Corp. (ABX) announced that it has reduced its hedge book by 1 million ounces of gold in October.  Barrick plans to eliminate its remaining 1.9 million ounces in gold hedges by September 2010 in order to take full advantage of the rising gold price.  Apparently Barrick’s  management has spent too much time reading Jon Nadler over at Kitco.

Their shares have paid the price for this failure to see the forest for the trees, and will continue to do so for the next year or two.  By hedging forward the price of gold Barrick has not benefited from the recent run up in the price of gold.  What a stupid move by the world’s largest gold producer!

The following story about Yaman’s adventures in the derivatives markets comes to us courtesy of MineWeb.

Yamana Gold 3Q09 revenues hit by derivatives loss

Derivatives loss sends Yamana net profit spiraling downward by 59% during the third quarter.

Author:  Dorothy Kosich
Posted:  Wednesday , 04 Nov 2009

RENO, NV -

Yamana Gold revenues fell 59% during the third quarter of this year from $150 million and 21 cents per share for the third-quarter 2008 to $60.8 million and 8-cents/ sh.

The Toronto-based company reported a $21 million loss of derivatives for the third-quarter 2009, compared to a gain of $138.9 million for derivatives for the same quarter a year ago.

During the third-quarter 2009 the company realized a foreign exchange gain of $15.1 million.

For the first nine months of this year, Yamana reported a net income of $156.45 million or 21-cents per share, a substantial decline from the $255.4 million or 37-cents per share in net earnings reported during the same period of 2008. The company also realized a forex gain of $87.8 million for the first nine months of this year.

During the third quarter of this year total production increased 34% to 314,707 gold equivalent ounces.

For the first nine months of this year, Yamana reported total production of 875,763 GEO, a 20% increase over the total production of 728,124 GEO reported for the same period a year ago.

Yamana’s production plan is aimed for a range of 1.05 million to 1.1 million GEO this year, a 40% increase over 2008 output. Yamana officials say they are committed to sustainable production of at least 1.1 million GEO yearly and plan to increase this from 2010 onwards.

During this year Yamana also completed the 20-million tonnes per year expansion at its Chapada operation with the new mine fleet expected to begin operation during the fourth quarter.

Hedging the price of gold by gold producers is insane in a rising price environment.  Barrick had plenty of time to unwind their hedges when they said they were going to do it two years ago.

Yamana, on the other hand, played with the very same derivatives market that caused the financial crisis in the first place!  Both of these companies should be avoided until they get some leadership in their management teams.

Bubble Talk is Just That… Talk!

The gold bull is alive and well and all the sound and fury that surround it will not stop it.  Gold is going to $1,250, then Jim Sinclair’s $1,650 and beyond, possibly to $2,250 if the wheels come off the dollar’s orderly decline.  Prepare yourself, because gold is going to become the real store of wealth for the world.

Golden bubble?  We ain’t got no “stink’in” golden bubble!

Till next time, good luck and good trading!

More Gold Market Analysis:

• Soros Warns Gold Is The Ultimate Bubble
• A Golden Oportunity
• Golden Reality Check
• India’s Announcement Pops Gold Up!
• Barrick Unhedges: Stock Soars