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More on the Case of Silver

By David Galland, Managing Director, Casey Research

Last month gold broke into new record territory – reaching an all-time high of $1,387 on October 14.

A new record in nominal terms, that is. To top the previous high in inflation-adjusted dollars, gold will have to approximately double from there.

Silver, however, has barely made it halfway back to its prior nominal high of $49.45 an ounce, achieved on January 21, 1980. In order to break into new territory in inflation-adjusted dollars (using the same CPI calculation methodology used in 1980), silver would have to rise to over $250 an ounce – more than ten times where it is today.

Here are some other useful facts about silver:

Due to the fact that silver’s industrial applications result in destroying the stuff, there is currently a total of only 1,234,590,000 “investable” ounces of silver in aboveground supplies. At $21 per ounce, the total value of aboveground silver comes to only about $26 billion.

By contrast, because pretty much every ounce of gold ever mined still exists, there are a total of 4,585,620,000 “investable” ounces of gold in aboveground stocks. At $1,330 per ounce, that comes to $6 trillion worth.

Thus, the silver/gold ratio is currently about 63:1, yet the total value of all the investable gold on the planet is about 235 times that of silver.

For the record, the ratio of silver to gold in the earth’s crust is 17:1. That’s in the ballpark of the 15:1 average silver/gold price ratio that has held sway over the centuries.

Kicking off his presentation at our recent Gold & Resource Summit, Bob Quartermain, the powerhouse behind Silver Standard (SSO), stated that if the audience took nothing else away from his talk, it should be that the demand for silver well exceeds new mine supply, and has for some time.

For instance, in 2009 total silver demand topped 889 million ounces, outstripping new mine supplies of 710 million ounces. The difference was made up by scrap recycling.

Of course, the real pressure going forward is from investment demand, which has been a fraction of that for gold. If history is any guide, however, as gold becomes viewed as being too expensive for the “common man,” silver sales will soar.

The following chart from Quartermain’s presentation helps put things into perspective.

Furthermore, if you agree with our contention that the economic crisis will continue, and that China’s propped-up manufacturing sector will come under serious pressure, it’s also logical to assume that demand for industrial metals such as lead, zinc, and copper will fall. That’s important in the discussion of silver, because only 30% of silver’s production comes from primary producers (i.e., silver mines), with the balance produced only as a byproduct of other minerals.

Of the total new mine supply, fully 57% is associated with base metals production.

As it, too, has industrial applications, demand for silver from manufacturers will also falter, but given the existing deficit in supplies, the surge in investor demand, and silver’s growing use as a “green” metal (50 to 60 million ounces used up in solar energy applications in 2010 alone) and as an antibacterial agent, the overall supply/demand picture remains favorable.

The truly miniscule amount of silver available above ground and its relatively modest price gains over the course of the precious metals bull market so far are what set the stage for it to play a quick game of catch-up to gold in the months just ahead.

And when silver does a runner, the handful of pure play silver companies – producers and juniors that have identified large deposits – will do the equivalent of a moon shot.

Just a heads up on something to pay attention to, especially on days when the precious metals take a breather from their steady ascent.


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Fed to Buy $600 Billion of Treasuries to Boost Growth

By Scott Lanman, November 4

The Federal Reserve will buy an additional $600 billion of Treasuries through June, expanding record stimulus and risking its credibility in a bid to reduce unemployment and avert deflation.

Policy makers, setting a pace of about $75 billion of purchases a month, “will adjust the program as needed,” the Fed’s Open Market Committee said today in a statement in Washington. The central bank left unchanged its pledge to keep interest rates low for an “extended period” after Chairman Ben S. Bernanke said it could be modified in some way.

While Bernanke’s near-zero rates and $1.7 trillion in asset purchases helped end the recession, the Fed said progress has been “disappointingly slow” in bringing down joblessness close to a 26-year high. The risk is that the move doesn’t work or fuels inflation and asset bubbles, said Paul Ballew, a former Fed economist and a senior vice president at Nationwide Mutual Insurance Co. in Columbus, Ohio.

“The Fed has been dissatisfied with the pace of recovery,” former Richmond Fed President J. Alfred Broaddus said. “The long-term mandate is to conduct monetary policy consistent with full employment and stable prices. We are a long way from that.”

The FOMC kept its benchmark interest rate target for overnight interbank loans at zero to 0.25 percent, where it has been since December 2008. New York Fed President William Dudley, who serves as FOMC vice chairman, said Oct. 1 that purchases of $500 billion would be about equivalent to reducing the rate by 0.5 to 0.75 percentage point.

Boost Growth

Bernanke, in an opinion article for the Washington Post released late today, said the purchases should boost economic growth through lower borrowing costs and higher stock prices and that concerns about the strategy are “overstated.”

“This approach eased financial conditions in the past and, so far, looks to be effective again,” he said.

The Standard & Poor’s 500 index rose 0.4 percent to 1,197.96 at the 4 p.m. close of trading in New York. The dollar weakened 0.7 percent against the euro to $1.4139 after touching a nine-month low of $1.4179.

Central bankers acted a day after Americans voted in midterm elections to hand control of the House to Republicans and slim down Democrats’ Senate majority, intensifying political gridlock on fiscal issues and putting more of the burden for sustaining growth on the Fed. The FOMC’s schedule of eight meetings in 2010 was announced in June 2009.

Asset Purchases

Fifty-three of 56 economists surveyed by Bloomberg News last week predicted the central bank would announce asset purchases today, with 29 forecasting a pledge to buy $500 billion or more.

“They did a little bit more — that suggests they want to add an exclamation point to what they’re doing,” Broaddus said in a Bloomberg Television interview.

Including Treasury purchases from reinvesting proceeds of mortgage payments, the Fed will buy a total of $850 billion to $900 billion of securities through June, or about $110 billion per month, the New York Fed said in an accompanying statement.

The Treasury 30-year bond fell the most in almost two months after the New York Fed said in a separate statement that 86 percent of its purchases will target bonds coming due in 2 ½ to 10 years.

“Only a small fraction of the buying will be beyond the 10-year note,” said Paul Zemsky, the New York-based head of asset allocation for ING Investment Management, which oversees $550 billion.

Temporarily Relaxed

Assets will have an average duration of five to six years, and the central bank temporarily relaxed a 35 percent per-issue limit on its securities holdings “to provide operational flexibility” and buy the “most attractive securities on a relative-value basis,” the New York Fed said.

Central bankers in the world’s largest economy are struggling to bring down a jobless rate that has persisted at 9.5 percent or higher for 14 months. U.S. payrolls have declined for four straight months as employees hired for the census were fired and state and local governments eliminated positions to balance budgets.

The Fed’s preferred gauge for consumer prices, which excludes food and energy, rose 1.2 percent in September from a year earlier, the slowest pace since 2001. Fed policy makers have a long-run goal of 1.7 percent to 2 percent inflation they see as consistent with achieving legislative mandates for maximum employment and stable prices.

Employment Growth Slow

“The pace of recovery in output and employment continues to be slow,” the FOMC said. “Currently, the unemployment rate is elevated, and measures of underlying inflation are somewhat low, relative to levels that the committee judges to be consistent, over the longer run, with its dual mandate.”

Bernanke, 56, a former Princeton University economist who studied the Great Depression, pressed forward with the move even after five of 18 policy makers went public with objections or doubts.

The one of the five who has a vote this year, Kansas City Fed President Thomas Hoenig, today cast his seventh straight dissent, the most at consecutive regular policy sessions since 1955. Hoenig was concerned that the “continued high level of monetary accommodation” may “destabilize the economy” by increasing long-term inflation expectations over time, the FOMC statement said.

U.S. real gross domestic product, which is adjusted for inflation, grew at a 2 percent annual pace in the third quarter, faster than the 1.7 percent rate between April and June yet still below what central bank officials believe is needed to reduce unemployment.

Economic Projections

Economists in a Bloomberg News survey last month forecast the unemployment rate will average 9.3 percent next year. Fed governors and regional presidents presented updated economic projections at this week’s meeting and will publish them in minutes to be released Nov. 24.

Xerox Corp., the Norwalk, Connecticut-based printer and business-services provider, said Oct. 21 it would cut 2,500 jobs in the next 12 months. “I’m still cautious on the economy, particularly in the large enterprise portion of the economy,” Xerox Chief Executive Officer Ursula Burns said on a conference call.

At Bentonville, Arkansas-based Wal-Mart Stores Inc., sales at U.S. locations open at least a year have declined for five consecutive quarters. Target Corp., based in Minneapolis, said last month that it would lower prices on more than 1,000 toys to attract shoppers.

‘Bottom Line’

“The bottom line is that fundamental problems remain in the economy that monetary policy isn’t going to fix,” Ballew said. “Risks remain out there that overly aggressive monetary policy can cause unintended consequences.”

Still, the economy has shown some signs of a pickup. Retail sales increased more than forecast in September, and manufacturing expanded in October at the fastest pace in five months.

Stocks have climbed and the dollar weakened in anticipation of further Fed easing. Since Bernanke said Aug. 27 the Fed “will do all that it can” to keep the recovery going, the Standard & Poor’s 500 Index has gained 14 percent, and the dollar declined 8 percent against a basket of six currencies.

Bond traders’ inflation expectations for the next five years, measured by the breakeven rate between nominal and inflation-indexed bonds, rose to 1.47 percent today from 1.44 percent yesterday and are up from 1.19 percent on Aug. 26.

Some Prices Gaining

Some measures of prices are gaining. Global food costs rose 26 percent in October from a year earlier, the fastest pace since 2008, according to the United Nations Food and Agriculture Organization. Gold futures traded in New York reached a record $1,388.10 an ounce on Oct. 14 and are up 23 percent this year.

The Fed’s decision is the biggest in a marathon week of worldwide central bank meetings. Australia and India yesterday raised interest rates to cool inflation. Tomorrow, the Bank of England may leave the door open to more aid to the U.K. economy while the European Central Bank holds the line against price increases. The Bank of Japan on Nov. 5 may accelerate stimulus for its economy.

Bernanke’s renewal of asset purchases completes a full U- turn this year. In February, the Fed raised the discount rate, charged on direct loans to commercial banks, to 0.75 percent from 0.50 percent. In March, it ended purchases of mortgage- backed debt begun during the financial crisis. Bernanke testified before Congress in March and July on how the Fed would pare back record stimulus.

Recovery Slowing

Then, with the recovery slowing, the Fed in August decided to halt the shrinking of its balance sheet by reinvesting maturing mortgages into new Treasuries, setting a $2 trillion floor on asset holdings. The next month, the Fed said it was prepared to ease policy if needed and said for the first time that too-low inflation, in addition to sluggish growth, would warrant taking action.

Bernanke and other Fed policy makers have since signaled the likelihood of printing money to start a new round of securities buying. “There would appear — all else being equal — to be a case for further action,” Bernanke said Oct. 15 at a Boston Fed conference. “The risk of deflation is higher than desirable.”

At the same time, “nonconventional policies have costs and limitations that must be taken into account in judging whether and how aggressively they should be used,” he said. One risk is that the public becomes less confident in the Fed’s ability to pare back stimulus and expects inflation above the central bank’s desired level, a concern Bernanke said would be “unjustified.”

Not Sure of Impact

Not all Fed officials are so sure of the impact. Philadelphia Fed President Charles Plosser said Sept. 29 that he doesn’t see how additional asset purchases will help employment in the near term, and Narayana Kocherlakota of Minneapolis has said a new round would probably have a “more muted effect” than prior purchases.

St. Louis Fed President James Bullard in July warned of a rising risk of Japanese-style deflation in the U.S. and called for purchases of Treasuries as a response to any negative shock. Japan’s economy has stagnated since the bursting of a stock- market and real-estate bubble in the early 1990s.

Consumer prices in Japan have fallen for seven of the past 10 years, and gross domestic product, unadjusted for changes in prices, was the smallest since 1991 last year. The country was overtaken by China as the world’s No. 2 economy in the second quarter.

Quantitative Easing

The Bank of Japan started quantitative easing in 2001, pumping trillions of yen into the economy over five years through injecting funds into bank reserves. The funds sat static at commercial lenders’ accounts at the central bank and failed to spark business investment and consumption.

The Fed purchases announced today will add to the $981 billion of excess deposits that banks held at the central bank as of Oct. 20. Plosser said Oct. 22 that the funds are failing to spur growth now and are “kindling” for money creation and inflation in the future.

Full article

Big Gold Miners Making Huge Profits

By Matt Badiali, editor, S&A Resource Report, November 3

“Big Gold” is finally benefiting from big gains in the price of its product.

Back in May, I noted how the world’s largest gold mining companies have struggled to increase their profits and share prices… even though gold was in a big bull market.
Vital input costs like fuel, labor, and infrastructure rose just as fast as gold… so shares of most gold producers stagnated from 2006 to 2010.
But as giant gold producer Goldcorp (GG) just showed us, gold’s recent climb from $950 an ounce to $1,350 has finally turned on the money machine for miners…
Goldcorp is one of the five largest gold miners in the world and one of its most efficient. Last week, the company reported it made $979 on every ounce of gold produced in the quarter. The profit per ounce is 38% higher than the actual price of gold two years ago. The higher profit translated into a 65% increase in earnings… and allowed the company to increase its small dividend payment.
Over the last two years, the price of gold rose 90%. Input costs for the major gold producers increased a small amount, but their profits soared. Take a look:
Changes Since October 2007
Newmont Mining
Barrick Gold
Cost per Ounce
Profit per Ounce
Profits may have soared, but the share prices of these companies haven’t kept up. Goldcorp’s stock is only up 31%. Newmont’s up 24%. Barrick climbed a measly 13%.
The table below shows price-to-earnings (P/E) ratios for the big three miners. Back in 2007, investors were willing to pay an enormous amount for these companies. That’s not the case today…
Newmont Mining
Barrick Gold
P/E October 2007
P/E Today
Investors don’t seem to be on the gold bandwagon yet. It’s clear from these numbers they are still wary of Big Gold’s profits… as if the price of gold will evaporate back to $700 per ounce overnight.
After the last two years of stagnant shares, the reality of the mining companies’ newfound profits hasn’t sunk into the general market yet. We’re in the throes of one of the greatest gold bull markets in history… Yet shares of these companies haven’t grown in step.
The profits are piling up at the major gold miners. That’s great for shareholders. At some point, investors will buy them in droves. (At the same time, it’s great for junior mining companies. Cash-rich majors will continue to acquire new projects.)
If you haven’t taken a position in big gold miners, you’re not too late.
Good investing,
Matt Badiali

Gold Market in China May Double in a Decade on Investment

China’s gold market may double in the next decade as retail investment and jewelry demand gain, an official from the World Gold Council said today.

Consumption may gain to 800 metric tons to 900 tons in the next ten years, Wang Lixin, the World Gold Council’s Greater China general manager, said at a Shanghai conference today. “It probably will be achieved earlier than that.” China’s jewelry and investment gold demand was 428 tons in 2009, according to the council.

Gold climbed to a record $1,387.35 an ounce on Oct. 14 as investors sought to protect their wealth amid concerns about the global economic recovery, and is headed for a 10th consecutive annual increase. China and India will continue to drive demand for gold jewelry going into the fourth quarter, Bank of China International Holdings Ltd. said in a report on Sept. 27.

“In the past few years, China’s demand for retail gold investment has been increasing at about 50 percent each year,” Wang said. Gold demand from jewelry in China may gain by 8 percent to 10 percent annually, Wang said.

Gold demand in China, the world’s largest producer, already gained in the first half of this year as government measures to cool the property market and falling equities spurred investment, the Shanghai Gold Exchange said July 7.

Sales of gold bars by China’s Zhongjin Gold Co. have jumped this year as investment demand gains.

“Our sales of investment-level gold bars have reached 10 billion yuan in the first nine months, compared with less than 6 billion yuan for the full year 2009,” Wang Jinding, company president, said today at the conference. “The surge in gold prices is largely attributable to investment demand.”

China’s gold output may rise to 340 tons this year, from 314 tons last year, solidifying the nation’s position as the world’s largest producer, Zhang Fengkui, section chief of the raw materials department at the Ministry of Industry and Information Technology, said on Oct. 16.

Full article

QE2 Risks Currency Wars and the End of Dollar Hegemony

By Ambrose Evans-Pritchard, 1 November

As the US Federal Reserve meets today to decide whether its next blast of quantitative easing should be $1 trillion or a more cautious $500bn, it does so knowing that China and the emerging world view the policy as an attempt to drive down the dollar.

QE2 risks currency wars and the end of dollar hegemony

The Fed’s “QE2” risks accelerating the demise of the dollar-based currency system, perhaps leading to an unstable tripod with the euro and yuan, or a hybrid gold standard, or a multi-metal “bancor” along lines proposed by John Maynard Keynes in the 1940s.

China’s commerce ministry fired an irate broadside against Washington on Monday. “The continued and drastic US dollar depreciation recently has led countries including Japan, South Korea, and Thailand to intervene in the currency market, intensifying a ‘currency war’. In the mid-term, the US dollar will continue to weaken and gaming between major currencies will escalate,” it said.

David Bloom, currency chief at HSBC, said the root problem is lack of underlying demand in the global economy, leaving Western economies trapped near stalling speed. “There are no policy levers left. Countries are having to tighten fiscal policy, and interest rates are already near zero. The last resort is a weaker currency, so everybody is trying to do it,” he said.

Pious words from G20 summit of finance ministers last month calling for the world to “refrain” from pursuing trade advantage through devaluation seem most honoured in the breach.

Taiwan intervened on Monday to cap the rise of its currency, while Korea’s central bank chief said his country is eyeing capital controls as part of its “toolkit” to stem the flood of Fed-created money leaking out of the US and sloshing into Asia. Brazil has just imposed a 2pc tax on inflows into both bonds and equities – understandably, since the real has risen by 35pc against the dollar this year and the country has a current account deficit.

“It is becoming harder to mop up the liquidity flowing into these countries,” said Neil Mellor, of the Bank of New York Mellon. “We fully expect more central banks to impose capital controls over the next couple of months. That is the world we live in,” he said. Globalisation is unravelling before our eyes.

Each case is different. For the 40-odd countries pegged to the dollar or closely linked by a “dirty float”, the Fed’s lax policy is causing havoc. They are importing a monetary policy that is far too loose for the needs of fast-growing economies. What was intended to be an anchor of stability has become a danger.

Hong Kong’s dollar peg, dating back to the 1960s, makes it almost impossible to check a wild credit boom. House prices have risen 50pc since January 2009, despite draconian curbs on mortgages. Barclays Capital said Hong Kong may switch to a yuan peg within two years.

Mr Bloom said these countries are under mounting pressure to break free from the dollar. “They are all asking themselves whether these pegs are a relic of the past,” he said.

China faces a variant of the problem with its mixed currency basket, a sort of “crawling peg”. Commerce minister Chen Deming said last week that US dollar issuance is “out of control”. It is causing a surge of imported inflation in China.

Critics in the US Congress say China could solve that particular problem very quickly by letting the yuan rise enough to bring the country’s $180bn trade surplus into balance.

They say the strategy of holding down the yuan to underpin China’s export-led model is the real source of galloping wage and price inflation on China’s eastern seaboard. The central bank has accumulated $2.5 trillion of foreign bonds but lacks the sophisticated instruments to “sterilise” these purchases and stem inflationary “blow-back”.

But whatever the rights and wrongs of the argument, the reality is that a chorus of Chinese officials and advisers is demanding that China switch reserves into gold or forms of oil. As this anti-dollar revolt gathers momentum worldwide, the US risks losing its “exorbitant privilege” of currency hegemony – to use the term of Charles de Gaulle.

The innocent bystanders caught in the crossfire of Fed policy are poor countries such as India, where primary goods make up 60pc of the price index and food inflation is now running at 14pc. It is hard to gauge the impact of a falling dollar on commodities, but the pattern in mid-2008 was that it led to oil, metal, and grain price rises with multiple leverage. The core victims were the poorest food-importing countries in Africa and South Asia. Tell them that QE2 brings good news.

So the question that Ben Bernanke and his colleagues should ask themselves is whether they have thought through the global ramifications of their actions, and how the strategic consequences might rebound against America itself.