Category Archives: Gold Articles

Gold is Still Money

By Robert Prechter, CMT

The following article is excerpted from a brand-new eBook on gold and silver published by Robert Prechter, founder and CEO of the technical analysis and research firm Elliott Wave International. For the rest of this fascinating 40-page eBook, download it for free here.

Have you ever traveled abroad and taken a look at the local currency and wondered how the citizens of that country could take seriously what looks like “Monopoly money?” I’ve got news for you: You’re using the same stuff. Monopoly money is the money over which some government has a monopoly. It is the currency of the realm only because the state makes it illegal to use any other type.

Promissory notes issued by a state and declared the only legal tender are always doomed to depreciate to worthlessness because of the natural incentives and forces associated with governments. A state cannot resist a method of confiscating assets, particularly one that is hidden from the view of most voters and subjects. By extension, it is unreasonable to advocate a standard for such notes, which is simply a state’s promise that its currency will always be redeemable in a specific amount of something valuable, such as gold. A gold standard of this type is only as good as the political promises behind it, reducing its value to no more than that of paper. It could be argued, in fact, that a state-sponsored gold standard is far more dangerous than none at all, as it imbues citizens with a false sense of security. Their long range plans are thus built upon an unreliable promise that the monetary measuring unit will remain stable. Later, when the government’s “IOU-something specific” becomes, as Colonel E.C. Harwood put it, “IOU nothing in particular,” reliability disappears and the arbitrary reigns. Although the populace tends to retain its confidence in the currency for awhile thereafter, the ultimate result is chaos.

The only sound monetary system is a voluntary one. The free market always chooses the best possible form, or forms, of money. To date, the market’s choice throughout the centuries, wherever a free market for money has existed, has been and remains precious metal and currency redeemable in precious metal. This preference will undoubtedly remain until a better form of money is discovered and chosen. Until then, prices for goods and services should be denominated not in state fictions such as dollars or yen or francs, but in specific weights of today’s preferred monetary metal, i.e., in grams of gold. Anyone might issue promissory notes as currency, but the acceptance of such paper certificates would then be an individual decision, and risks of loss through imprudence or dishonesty would be borne by only a few individuals by their own conscious choice after considering the risks. Critical to the understanding of the wisdom of such a system is the knowledge that private issuers of paper against gold have every long run incentive to provide a sound product, just as do producers of any product. As a result, risks would be minimal, as the market would provide its own policing. Thievery and imprudence will not disappear among men, but at least such tendencies in a free market for money would not have the potential to be institutionalized, as they are when a state controls the currency. From a macroeconomic viewpoint, occasional losses resulting from dishonesty or imprudence would be extremely limited in scope, as opposed to the nationwide disasters that state controlled paper money has facilitated throughout history, which have in turn had global repercussions. As Elliott Wave Principle put it, “That paper is no substitute for gold as a store of value is probably another of nature’s laws.”

That being said, it is also true, and crucial to wise investing, that markets come in both “bull” and “bear” types. Being a “gold bug” at the wrong time can be very costly in currency terms. For nearly three decades, gold and silver’s dollar price trends have confounded the precious metals enthusiasts, who for the entire period have argued that soaring gold and silver prices were “just around the corner” because the Fed’s policies “guarantee runaway inflation.” Yet today, 29 years after the January 1980 peaks in these metals and despite consistent inflation throughout this time, their combined dollar value (weighting each metal equally) is still 40 percent less than it was then.

It is all well and good to despise fiat money, but it is hardly useful to sit in gold and silver as if no other opportunities exist. In contrast to the one-note approach, which has had an immense opportunity cost since 1980, competent market analysis can help you make many timely and profitable financial decisions in all markets, including gold and silver.

For more in-depth, historical analysis and long-term forecasts for precious metals, download Prechter’s FREE 40-page eBook on Gold and Silver.


Robert Prechter, Chartered Market Technician, is the world’s foremost expert on and proponent of the deflationary scenario. Prechter is the founder and CEO of Elliott Wave International, author of Wall Street best-sellers Conquer the Crash and Elliott Wave Principle and editor of The Elliott Wave Theorist monthly market letter since 1977

The first steps to hyper-inflation

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Not for the first time the Financial Times says we are “nuts” – a
word which all too often follows on from “gold” in the financial
media.

I should rise above this sort of thing. What does it matter if the
FT thinks me nuts? But I find I’m irritated, both for myself and
on the collective behalf of successful gold investors. I don’t
think we deserve to be called “nuts” after our gold has for 6
years so consistently outperformed all those other serious
investment classes so diligently analysed on Wall Street and in
the City.

Gold continues to strengthen against the Dollar. Faint hopes of a
swift “V-shaped” recession are dwindling, which is hardly
surprising. Global economic activity up to 2007 was driven by rich
world consumers buying things even they couldn’t afford. In the US
alone they have since lost about $12 trillion of private wealth –
$120,000 per family. Judging by estimates published in The
Economist this should induce a demand slump of about $500 billion
per year, for 10 more years.

That means a typical family will be cutting back spending at the
rate of $5,000 per year for a decade. So our economies will stay
shrunk, threatening deflation.

To combat this governments are trying to engineer some inflation.
Deficit spending here, quantitative easing there, and zero
interest rates everywhere; with all of it geared to stimulating
more production in a world already suffering over-capacity. This
is where they step into dangerous territory.

Retail prices inflate in an overheating economy when there is a
supply shortage of consumer goods. Because demand outstrips supply
the producer has the whip hand, and he exploits it by asking more
money for his goods. But look around you today and you will see
there is no supply side shortage in the world economy. So if we do
get inflation it’s not going to be because of overheating.

Hyper-inflation, on the other hand, has little to do with supply
side shortages and overheated economies. It happens when a
currency dies. Once the realization grips savers (not consumers)
that their money is losing its purchasing power then they exit
money and look for better stores of value.

So while ‘normal’ inflation is driven by consumer-pull for goods,
hyper-inflation is driven by saver-push of money, and this
explains a big qualitative difference between inflation and hyper-
inflation.

Modest inflation through undersupplied goods has a negative
feedback because new supply pulls prices back, bringing the
economy back to equilibrium. Hyper-inflation does the opposite.
Once it starts it suffers a positive feedback by encouraging more
and more savers to dump cash. What starts as a trickle accelerates
into an unstoppable torrent of savings pouring into circulation.

The unusual problem we now have is that after using cash rescues
to protect the overcapacity in our economies we are not going to
be able to create normal, controllable, supply-shortage inflation.
It’s increasingly likely that the only style of modest price rises
which the central banks can engineer will be the trickle which
precedes a hyper-inflation.

Indeed, what caused the Financial Times to wheel out the old “gold
nuts” phraseology was the strange case of last week’s bond
markets. Bond prices – the best proxy for the future value of cash
– were falling when they should have been rising. The markets are
telling us that cash 10 years forward is becoming less valuable.
This is a hint of savers losing faith in their currency.

And why wouldn’t they? Their deposits will pay them no interest
for the foreseeable future. Inflation and tax will eat into their
savings. The economy looks mired in recession. Governments, which
are now welcoming devaluations as a trade benefit, are deep in
debt and are toying with hyper-inflationary policies like
quantitative easing. It all points to the inflationary transfer of
the government’s enormous debt into plummeting values for
depositors’ cash and investors’ bonds.

An insight – courtesy of Bill Bonner – suggests what could soon
happen. There is an $11 trillion bond mountain, which is $96,000
of issued US Dollar bonds per US family. With total federal
obligations now reaching above $63 trillion, this is the polar
icecap of contemporary finance, and it holds the bulk of the
savings of two generations, all denominated in dollars which are
frozen solid until their redemption date. If the Fed gets what it
wants, then a modest dose of inflation now will forestall a
depression. But inflation will heat that icecap and make the bond
market more jittery, and at exactly this point the Fed says it
will reverse its QE policy and sell bonds back into the market,
because this is how it plans to get cash back out of circulation
to control the inflation it has created.

Choose your poison: The trickle of excess QE cash or the trickle
of excess bond redemptions, both in a world of over-supply. It
seems all roads lead to inflation. Don’t assume it will be the
manageable kind.

Kind regards,
Paul Tustain
Director, BullionVault

Prechter’s New Gold & Silver eBook Now Online

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Greetings,

Beware: Gold is setting itself up for “the buy of a lifetime.” Only the resource we’re about to share with you will help you prepare for it.

Do you invest in precious metals? Should you?

Only you can answer the first question; we’ve written this letter to help you with the second.

Gold bugs have long touted the yellow metal’s time-tested store of value. But, contrary to popular opinion, gold isn’t always the best investment when times get tough – and we have the analysis to prove it.

Our friends at Elliott Wave International have just released a brand-new eBook that will help you decide just how – and when – gold and silver should be put to work in your portfolio.

Among the unique insights in this free eBook are 6 eye-opening tables that reveal how gold and silver performed vs. stocks and T-notes during each of the 11 recession-expansion cycles of the past 100 years. These tables alone are worthy of a high price tag, but you can download them for free.

You’ll also get valuable analysis for gold stocks, precious coins and more – all at no cost.

If you have even the slightest interest in gold and silver, you must consult this free 40-page eBook now. It will show you how to invest in precious metals safely and successfully like no other resource can.

Learn more about the free 40-page Gold and Silver eBook here.

Warmest regards


About the Publisher, Elliott Wave International
Founded in 1979 by Robert R. Prechter Jr., Elliott Wave International (EWI) is the world’s largest market forecasting firm. Its staff of full-time analysts provides 24-hour-a-day market analysis to institutional and private investors around the world.

Now is the Time to Buy Gold

buy gold

By Darryl Kelley
MidasLetter.com
Tuesday, April 7th, 2009

Given the false hope inspired by the conclusion of the G20 summit in London last week, and its associated residual ‘positive sentiment’ effect on global equity markets, now is a good time to accumulate gold and related asset classes. That’s because the price has suffered exactly the kind of steep correction that over the last 8 years have typically preceded a fresh assault on new highs.

And there are other telltale signs that gold is about to take a Great Leap Forward.

Foremost amongst them is the fact that the AMEX HUI Goldbugs Index is foreshadowing a jump with its habit presaging enhanced interest in gold with a sharp drop followed by a sharp rise. (The rise part of the equation has yet to form).

Secondly, the engineered ‘positive sentiment’ by U.S. media and financial elements has now served its purpose, which is to lend a mantle of credibility to the G20 process by allowing participants and leaders to point to robust markets as proof that their collective actions embodied in 15 pages of summary were in fact successful.

Third, there is the deluge of corporate earnings to be unleashed pre and post Easter weekend, which are almost uniformly awful. S&P 500 companies are expected on average to decline 37 percent, the eighth straight quarter of double digit losses in quarterly earnings.

And finally, analysts (to use the term loosely) have seemed to arrive at the unanimous conclusion that the IMF’s planned sales of gold to raise $50 billion will have no meaningful impact on the gold market. Maybe that’s because, as GATA will tell you, they don’t have it.

SOURCE: http://www.midasletter.com/news/09040703_Now-is-the-Time-to-But-Gold.php

Gold to Hit Record Levels on Inflation Fears

gold bar

By Chris Flood
Financial Times
Tuesday, April 7th, 2009

Gold prices could “easily” re-attain the $1,000 an ounce level this year and could even push through the $1,100 barrier, setting a new record high, according to GFMS, the precious metals research consultancy which released its Gold Survey 2009 today.

GFMS said that it was “only a question of time” before investment demand proved sufficiently powerful to overcome weak fabrication demand, particularly in the gold jewellery market, and surging scrap supplies, the the twin obstacles which have managed to halt the advance in gold prices short of the $1,000 an ounce level.

Although the spur for safe haven buying of gold from concerns over the stability of the banking sector might wane as the credit crisis eases, GFMS said investors would increasingly focus on a new worry: the probable inflationary consequences of the fiscal and monetary policies being adopted by governments in response to the global financial crisis.

“Investors who are currently sitting on record amounts of cash will be looking for a secure inflation hedge for which purpose gold fits the bill perfectly,” said Philip Klapwijk, chairman of GFMS.

Inflows into the gold market reached $26bn last year, a relatively small amount compared to the flows into mainstream asset classes but enough to drive gold prices to record levels.

Mr Klapwijk said last year’s inflows could be “dwarfed” if gold’s appeal to investors widened substantially on the back of government’s willingness to attempt an inflationary solution to the current global economic crisis.

Warning that central banks would be slow to raise interest rates, especially while struggling to combat recession and rising unemployment, GFMS said the solidity of the US dollar was also likely to be questioned by investors concerned about the ability of the US authorities to finance the explosion in government debt

Following the collapse of Lehman Brothers in September of 2008, GFMS said there had been a ground swell in investment in physical gold, reflecting distrust in financial institutions, and general desire for wealth preservation, with this buying centred on western Europe and North America.

This desire for gold in physical form was illustrated by the 40 per cent rise in minting of official coins last year while gold bar hoarding rose 62 per cent.

GFMS said there had been an explosion of buying interest in gold last year but this had been offset by the general sell-off across commodity markets that was prompted by fears global growth would slow dramatically and the need to raise cash to cover margin calls or losses elsewhere.

“Without these outflow from the OTC and futures markets, chiefly from hedge funds, gold prices might well have achieved fresh highs in the final months of 2008,” said Mr Klapwijk.

SOURCE: http://www.ft.com/cms/s/0/c7dc2572-2370-11de-996a-00144feabdc0.html

Bob Prechter on Silver & Gold

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By Nico Issac

In case you hadn’t noticed: Over the past year of financial turmoil, the “safe haven” premium of precious metals has offered about as much support as a rubber ducky in a tsunami. Despite a string of powerful rallies, silver and gold remain well below their March 2008 peaks.

It goes without saying that the greatest opportunities in precious metals were not had by those who played the “disaster hedge” card; but rather by those who timed the trends as they developed, regardless of the fundamental backdrop.

Bob Prechter is in the latter group. Amidst the buzz and whirl of the most bullish backdrop in precious metals’ recent history, gold and silver prices soared to new, all-time highs and calls for a “New Gold Rush” and “$30 Silver” flooded the mainstream airwaves. Yet Bob alerted subscribers to an approaching top in the March 14, 2008 Elliott Wave Theorist.

“The wave count [in silver] is nearly satisfied, though ideally it should end after one more new high. If this analysis is accurate, and silver does peak and begin a bear market, gold is likely to go down with it.”

In the days that followed, prices in both metals fell off a cliff. In turn, Bob was asked to address his exceptional call for a turn down in a March 19, 2008 Bloomberg interview. Here are of excerpts from that conversation:

Bloomberg: “Why did you put out that call on Friday (March 14) about a peak in precious metals?”

Editor’s Note: You can download Bob Prechter’s 5-page report, Gold & Recessions, free from Elliott Wave International. It features 63 years of historical analysis that reveals how gold, T-notes, and the DJIA have performed in recessions and expansions.

Bob Prechter: “One of the reasons is that it seemed like an absolutely sure thing. We track several indicators of sentiment. One of them is the Daily Sentiment Index (DSI). That reached 98% bulls on a one-day basis going into this last high. We were tracking silver as well… as it is clearest in our minds. Now, at the time, we needed one more slightly new high. That happened Monday morning and silver dropped 15% in 48 hours. That’s a heck of a reversal and I think it’s real.”

“Real” indeed: From their March peaks, gold prices plummeted 34%, alongside a 60% sell-off in silver before hitting the breaks in October. Here, the October 2008 Elliott Wave Financial Forecast prepared for a corrective rebound and wrote:

“Silver traced out a five-wave decline from its March peak…Gold should also rally as silver pushes higher. Once silver’s rise is exhausted (initial target: $15.15), the larger downtrend should resume for both metals.”

A powerful, four-month bounce ensued in both metals: Gold prices came within kissing distance of its March peak before turning down on February 20; silver followed suit — a fulfillment of this bearish, near-term insight presented in the February 23 Elliott Wave Theorist:

“Silver has been clear as a bell. Silver is due to turn back down, and gold, which is back at $1000/oz, is likely to follow.”

Since then, it’s been a steady march lower for both metals. Obviously, EWI’s forecasts do not always prove this accurate. Yet in this case the analysis speaks for itself.


For more metals analysis from Bob Prechter, download Gold & Recessions a free 5-page report from Elliott Wave International. It features 63 years of historical analysis that reveals how gold, T-notes, and the DJIA have performed in recessions and expansions.


Robert Prechter, Certified Market Technician, is the founder and CEO of Elliott Wave International author of Wall Street best-sellers Conquer the Crash and Elliott Wave Principle and editor of The Elliott Wave Theorist monthly market letter since 1979.