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Meet someone who is 90% invested in gold and silver!

By Peter Degraaf, Monday Aug 2, 2010

Nations rise when, through inventions and technology they become economically prosperous. They grow as they enlarge their borders and increase in influence, through conquests or by trade. They fall, when the growing need to pay for promises made, and the cost of foreign wars, drains the treasury.

Featured is the daily gold chart. The uptrend is well defined. The month-old correction appears to have run its course. The RSI is at 8 month old support and so is the MACD (green lines). The 50DMA is in positive alignment to the 200DMA (green oval), and the latter is rising at 1.5% per month! A breakout at the blue arrow will turn the short-term trend bullish again, in harmony with the long-term trend. 

We are not ‘gold bugs’, neither are we ‘silver bugs’.  We are investors who have discovered that when governments and their bankers inflate the money supply, we can protect our assets by converting a portion of our assets into gold and silver.

Featured is a second look at the daily bar chart for gold. This time we concentrate on the Bollinger Bands. Observe that almost every time the BBs are violated, it marks a change in direction. Blue arrows mark bottoms while purple arrows mark tops. The violation from Wednesday’s action provides an important clue for future direction. The green arrow points to the anticipated initial target for this rally.

The Hulbert Gold Newsletter Sentiment Index fell to 9.2% last week (this was its low for 2010). From a contrarian point of view this is ‘gold-bullish.’

This next chart is courtesy Dimitri Speck at Seasonalcharts.com. Dimitri has recently updated this chart, using data that goes back to 1971. As can be seen by this chart, the best time to buy gold is during weakness in June and July. Don’t be left behind! Pay no attention to the deflationists!

Where the deflation crowd is making its biggest mistake is in believing Keynesian economic theory: ‘deficits don’t matter’. Actually deficits do matter, as they are almost always inflated away. The two largest drains on the US budget are Social Security and Medicare. Politicians will NOT cut these out (perhaps down – but not out). These and other unfunded liabilities exceed 50 trillion dollars! This guarantees more monetary inflation.

It is a matter of historical fact that whenever a government embarks on monetary inflation, the end result has always been the destruction of the currency. There are no exceptions! Conclusion: Deficits will continue to rise and SO WILL GOLD AND SILVER!

This chart courtesy Economist Michael Pollaro at Trueslant.com shows True Money Supply (pink line) with a year over year increase of + 8.5%.  True Money Supply 2 (green line) is rising at a 10% rate YoY.  (The word ‘Austrian’ refers to the method used, not to the country of Austria).  

True money supply represents the amount of money in the economy that is available for immediate use in exchange. The US Federal Reserve uses a different yardstick in their analysis, and they are thereby able to report a lower rate of monetary increase. Nevertheless, even when we use FED figures we notice a huge watering down of the value of money. When you add water to a glass that is half filled with milk, the color will still be white, but the quality of the liquid will have been ‘watered down’.

This chart courtesy Federal Reserve Bank of St. Louis shows the M2 money supply has risen at a very rapid rate during the past 30 years. From remarks by Fed Chairman Bernanke we draw the conclusion that the FED is ready to supply still more liquidity should the economy ‘need it’.

We are entering a period in history where massive amounts of wealth will be transferred from one segment of the population to another segment. Investments which appear to be ‘too risky’ for many people will turn out to be hugely successful for the few who dare to take that risk.

This chart is also courtesy Federal Reserve St. Louis. It shows the rate of price inflation (as admitted to by the FED) to be rising sharply (if there is no price inflation, somebody forgot to tell the people who maintain this chart). When we use data available at Shadowstats.com we see price inflation at an even higher rate than the rate admitted to by the FED. For that matter, ask any housewife! She’ll tell you that inflation is all around us.

This chart is courtesy of OMB and US Treasury. The White House admitted last week that the budget deficit is still widening. The problem is that politicians are eager to increase spending, going into the November US mid-term elections, and  millions of newly unemployed have stopped paying taxes and are drawing support instead. The Federal Reserve under Mr. Greenspan and Mr. Bernanke has been the most accomodating FED in history. Unless you think the Fed Chairman is going to do a 180, these deficits are going to be dealt with in only one manner – newly printed money.

Socialism is irrational, because it lacks a method whereby owners price the assets.  Capitalism is rational because it provides owners with a method to price the assets.

This chart courtesy Federal Reserve Bank of St. Louis shows ‘real interest rates’ to be negative. This means anyone with money in the bank, or money invested in T-bills is moving backwards. The money you get back a year hence is worth LESS than the money you put in today. What you need is something that rises faster than the rate of inflation. The solution? Gold and silver!

 “Trust God for everything. Trust governments for nothing. Trust gold and silver for the in between.”

Featured is the latest COT report for silver, courtesy Cotpricecharts.com. As expected the ‘net short’ picture improved yet again (the difference between commercial traders long and short positions – purple bars). Friday’s total at 47,000 (compared to 48,000 last week), is similar to the ‘net short’ situation that prevailed late last March. At that time silver was coming off a low at 16.50 and then rose up to 19.75. There are reports that the drop in the price of silver early last week (and the expected further decrease in the ‘net short’ position), has not been included in this COT report. That would make the picture even more bullish.

Featured is the daily bar chart for silver. The uptrend is well defined. The 50DMA is in positive alignment to the 200DMA (green oval), and the latter is rising. Price closed at the top of the daily range on Friday and a breakout at the blue arrow turns the short-term trend bullish, in harmony with the long-term trend.

Featured is the CCI commodity index. Price has just completed an upside breakout at the blue arrow, turning the short-term trend bullish. The green arrow points to the 50DMA which is turning up towards the 200DMA again. Meanwhile the 200DMA is rising strongly.  The RSI and MACD are positive. A rising commodity complex is supportive of a rise in gold and silver.

Monetary inflation is an invisible tax. It taxes money on deposit in bank accounts. As this money is ‘watered down’ through inflation, it is then distributed to recipients of government handouts, including bankers and lobbyists. These early recipients benefit from the fact that the dilution is most noticeable further down the line.

SummaryOn Friday July 29th I sent a morning update to my subscribers that indicated I was almost totally invested. 90% in gold and silver, the rest in natural gas. That is what happens when you believe in the reports you produce for your subscribers.

DisclaimerPlease do your own due diligence. Investing involves taking risks. I am NOT responsible for your investment decisions. Peter Degraaf is an online stock trader with over 50 years of investing experience. He produces a weekend report as well as a daily update for his many subscribers. 

This article is written by Peter Degraaf and with his kind permission, O B Research has been privileged to publish his work on our website. To find out more about his work, please visit: http://www.pdegraaf.com/

Weekend Podcasts

There are plenty of high quality podcast to download/listen to this weekend, something we try to do as much as possible ourselves. We have a couple of links that we recommend on our link-page, and if you as a reader think we have missed out on any, please send us an email.

Below we give you two interviews that you might find interesting, and on the websites we link to, there are more to choose from.

Team O B Research


Gold’s On The Cusp Of A Parabolic Move Up

by John Embry, Chief Investment Strategist of Sprott Asset Management

“We are on the cusp of a parabolic move in the price of gold underwritten by physical shortages. Central banks can no longer supply the amount needed to balance supply and demand while mine production continues to stagnate at best.”

For full article, please see pdf

OceanaGold – H1 Production And Exploration Result

OceanaGold released their half year production numbers, exploration results, MD&A as well as Q2 Financial Report this morning. We also provide you with a link to their conference call HERE.

The second quarter was not as strong as we anticipated, much due to weather conditions. Macreas operations (open-pit and underground) were out of action for more than a week.  A production of 67,541 oz at a cash cost of $564/oz in the second quarter compared to 65,041oz and $551/oz in the first quarter. Half year until June 30 (H1), a total of 132,388 oz were produced at cash cost of $557/oz. The company still keeps the guidance for 2010  maintained at 270,000-290,000 oz at a cash cost of $455-$495/oz. This tells the shareholders that second half of 2010 will be much better, and the key to the increased performance will be the head grade fed into Macreas mill.  According to the mine plan they were suppose to mine lower grade ore during the first and second quarter moving into higher grades second half of 2010. Macreas produced 117,500 oz in H1 2009 compared to 85,700 in H1 2010. First half of 2009 the grade was 1.59 grams/ton, for 2010 the grade was 1.23 grams/ton, so grades first half of 2009 were 29% above 2010. With the recovery rate at over 84% (81% in 2009), the higher grade will push up production and cut cash cost.
We believe that OceanaGold will reach our target of 285,000 ounce for the full year and we are particularly impressed by the improvements in recoveries to 84%, but after the first 6 months we choose to adjust our expectation upwards for depreciation and therefore total cash cost. This will mean somewhat lower expected net earnings and net earnings per share during 2010 and 2011. This will be included in our next research report.

Oceana’s exploration plans going forward
• To expand the open-pit area at Macreas, further drilling will commence
• In the north tenements of the 28 km line of strike at Macreas, sampling and trenching is ongoing to identify new drilltargets. Drilling planned to commence during Q3
• Drilling is ongoing throughout the year to increase resources and reserves at Frasers underground mine and to convert resources to reserves
• At Reefton, 1200 grab samples are planned to identify prospective targets
• New drill programs targeting potential underground targets at Reefton (recently announced increase in the Reefton exploration budget)

Q2 2010 Results Summary

Q2 2010 Financial Results

Q2 2010 Management Discussion & Analysis

Team O B Research