Gold to be a lousy investment in the next decade

The Indian price of gold has risen six folds in the last decade, fueling a record speculative import spree. Soaring gold imports have hit $42 billion in the first ten months of 2012-13 , pushing the current account deficit to near-disaster levels. The finance minister is wringing his hands in distress, while housewives say that buying gold was the best thing they ever did.

Sorry, but the party is over. The notion that gold is the finest investment, whose value can only go up, is dead wrong. History shows that gold fluctuates crazily, so it can look a fabulous investment for some time and then become a total disaster. There's nothing safe about it.

The Indian price reached a peak of Rs 33,000 per 10gm in late 2011. It has since fallen steadily to just Rs 29,000. Global trends suggest we have entered an era of falling or stagnant gold prices. Housewives and all other buyers beware: gold will probably be a lousy investment in the next decade.

After the US went off the gold standard in 1971, gold shot up from $35/ounce to $835 in 1980. It looked the best investment in sight. But then its price crashed and stayed down till 2001, at around just $250/ounce. Gold investors lost their shirts (and sometimes underpants) for two decades.

However, after 2003 gold zoomed again. It reached a new peak of $1,890 in late 2011. But it has fallen steeply to just $1,501 last Friday. It may bounce back temporarily , but will then fall again.

The fall in price has been less dramatic in India because the rupee has depreciated against the dollar. Even so, gold in rupee terms is down 10% from its peak. Goldman Sachs estimates that the world price will fall sharply to $1,270 by the end of 2014, and other analysts are almost as gloomy.

--> Gold is a safe haven to which people rush in troubled times, so speculators hoped its price would rise in today's troubled conditions. North Korea is threatening nuclear war and Japan seeks to double its money supply. Cyprus has set a dangerous precedent by confiscating uninsured large deposits in its top banks, and this could have prompted a rush into gold. Why, then, has gold fallen instead of rising?

First, fears of a Eurozone breakdown took gold to a peak in 2011, but those fears are mostly gone, so gold is less needed as a safe haven. Second, the US is finally set, after five years, to end its quantitative easing of money supply, reducing the monetary fuel of speculators.

Third, as part of its bail-out package, Cyprus may have to sell its gold reserves to raise 400 million euros. Not only will this glut the market, it stokes fears that similar gold sales may be forced on other troubled Eurozone countries that may also go bust. Troubled Italy has the fourth largest gold holdings in the world of 2,452 tonnes, worth a whopping $95 billion.

Speculators had poured $26 billion into gold-linked securities in 2010 and 2011. But after mid-2012 , when fears of the Eurozone's survival ended, many speculators (including George Soros, the most famous of all) decided that the gold boom was over and got out of the market. Money fled from gold-linked securities. SPDR Gold Shares, the biggest exchange traded fund linked to gold, has seen net redemptions of $7.7 billion in 2013 so far.

Indian speculators and housewives, please read the writing on the wall. The special reasons driving the gold boom of the last decade have gone. It's time to sell gold, not buy.

To discourage gold imports, the finance ministry has increased the import duty on gold. Unfortunately this has raised the domestic price correspondingly, rewarding instead of penalizing speculators. It has also led to increased smuggling.

In decrying and trying to suppress gold imports, the finance ministry has unwittingly given the impression that gold is a great bet. Moreover, government banks today are aggressively pushing sales of gold coins to customers as a must-have investment. They should be obliged to warn customers of the risks too.

The finance minister should warn people, in speech after speech, that gold has already fallen a lot and is likely to fall much further. Every time the gold price falls, he should come out with advertisements saying "I told you so".

Last but not least, he should announce that the import duty on gold will be abolished by the end of the financial year. This will induce people to stop importing now, and wait for next year, by which time speculation may be ebbing anyway. The balance of payments will improve magically.

Gold Price Heads for 2nd Monthly Drop, "Uptrend Needs New Investment" as Saudi Arabia Tries to Talk Down Oil Price

The Gold Price retreated below last week's finish Thursday morning in London, heading for its second monthly fall in succession against all major currencies bar the Japanese Yen.

Italian and Spanish debt prices fell amid fresh bond sales and a national strike respectively, while Frankfurt's stock market fell for the 7th session in nine.

Crude oil slipped to a 1-week low after French prime minister Francois Fillon followed yesterday's news of a sharp rise in US stockpiles by saying the prospects "are good" for a joint Euro-US release of strategic reserves.

Down 2.0% in February, the Gold Price in US Dollars was trading at $1657 per ounce by lunchtime today – some 7.0% below the start of March.

Gold hasn't fallen for more than two months in succession since spring 2001 vs. the Dollar, autumn 2006 vs. Sterling, and mid-2007 vs. the Euro.

"The view that the US economic recovery is looking more sustainable is becoming increasingly accepted," wrote UBS analysts Edel Tully and Julien Garran in a new report on Wednesday, slashing the Swiss banks's 2012 average Gold Price target by 18% to $1680.

"Gold is at risk, for it needs persistent inflows of investor money to keep it on its upward trajectory."

"Investors need to put in well over $100 billion to the gold market in 2012 to keep prices high," said GFMS chairman Philip Klapwijk at a CME conference in Singapore today, quoted by Reuters.

Globally, Gold Investment demand rose 33% by Dollar value to $83bn in 2011, according to GFMS data.

Klapwijk forecasts a "short-term" drop in the Gold Price below $1600 per ounce.

New data today showed Russia selling down its Gold Bullion reserves for the first time in 5 years last month.

Slipping by 3.8 tonnes, Russia's gold reserves have doubled by weight since 2007 to 883 tonnes, and quadrupled as a proportion of its total foreign exchange reserves by value to 9.8%.

Figures from Data Explorers, quoted by CityWire, say that hedge funds and other investors have sharply increased their short sales of Gold Mining stocks, with 10% of Chinese miner Zijin Mining Group currently out on loan.

"Indian [gold] demand has been dead for 3 months," said a senior Swiss logistics executive to BullionVault on Thursday, as the strike by India's jewelry retailers protesting a hike in import duties to 4% by value entered its 14th day .

"Nothing's moving, everyone's waiting."

Jewelry demand in India – the world's #1 consumer market – "was reasonably positive" in the first two months of 2012, according to GFMS's Klapwijk, but the hike in India's gold import duties is denting sales.

"If the excise duty is corrected, the trade will be happy," MarketWatch quotes Bhargav Vaidya of the Bombay Bullion Association.

"The strike will not be indefinite, and customers will not go high and dry during [the key Gold Buying] wedding season."

Meantime in the UK – which the OECD today said has fallen back into recession – daily petrol sales jumped 81% and diesel sales by 43% on Wednesday, according to the Petrol Retailers Association, blaming Government minister Francis Maude for the "panic buying" by advising motorists to fill jerry cans ahead of a possible strike by tanker drivers next week.

More broadly, and with crude oil prices near all-time records in Sterling and Euros today, "It is the perceived potential shortage of oil keeping prices high – not the reality on the ground," says Saudi oil minister Ali al-Naimi writing in the FT today.

"There is no lack of supply. There is no demand which cannot be met."

"Used to be that Saudi Arabia produced more oil when it wanted lower oil prices," notes Olivier Jakob at Petromatrix. "Today, when Saudi Arabia wants lower prices it produces an op-ed in the Financial Times.

"It shows that you either do not want or can't produce more."

Also in the UK today, Bank of China Ltd applied for membership of the London Metal Exchange, the world's #1 base metals exchange.

BoC's UK commodities arm is the first Chinese-owned business to apply for membership. Barclays Capital reckons that China now buys some 40% of annual global demand for copper, aluminum and nickel.

In the last 3 months of 2011, Chinese households overtook Indian consumers as the world's top buyers of physical gold according to GFMS data, despite the Gold Price recording its second-ever highest quarterly average against the Yuan.

Natural Gas Investor Opportunity

Marin Katusa, Chief Energy Investment Strategist, Casey Research : The energy market is a complex beast, its many parts interconnected through a multitude of linkages. When one part fails, the entire system reacts: certain linkages are burdened with extra stress, while other components sit idle. Only by studying the entire machine can one understand the rippling effects that stem from one change.

With the energy market, the system is made up of various sectors - oil, natural gas, uranium, coal, and alternative energies - and the countries that have each of those energy resources. The components are then linked through a long line of forces, including the geographic distributions of supply and demand, international allegiances and trade deals, global markets and commodity prices, and the ever-evolving field of international relations. A change in any country, sector, or linkage resonates through the entire system.

From this perspective, North America's shale gas revolution truly earns its accolade as a "game changer." As many people now understand, the boom in natural gas reserves and production in the United States and Canada is changing the way North America will power itself in the future.

What a lot of people do not understand is how to profit from this shift.

Natural gas prices are depressed and expected to remain so for the short to medium term, so investing in natural gas options or a natural gas exchange-traded fund is not likely to bring home the big bucks anytime soon. Domestic natural gas equities are an even riskier idea - most producers are scaling back production and selling assets as they hunker down in preparation for a tough few years.

In this case, the way to profit is by understanding how natural gas' changing role is impacting North America's energy machine as a whole. Cheap natural gas is prompting utilities to switch from coal to gas where possible. The confluence of cheap natural gas and a risky global economy has droves of investors turning their backs on green energy, the sector that was such a market darling only a few years ago. Farther down the road, North Americans are debating - and in places implementing - a range of strategies to take advantage of the continent's newfound abundance of natural gas, from natural-gas-powered transport trucks to exportation of liquefied natural gas (LNG).

Isaac Newton showed us that for every action there is an equal and opposite reaction. That is why every downside force in the energy sector creates upside opportunities elsewhere. The challenge is finding them. It takes an understanding of the entire global energy machine to figure out what areas are benefitting from the changing landscape.

For Every Down, There's an Up

Natural gas seems to know that it is heading for several years in the doldrums and, in fighting spirit, it is trying to take a couple of other energy sectors down with it.

With coal, it is succeeding, but there are still lots of coal opportunities outside of the United States. With uranium, the global supply-demand scenario and America's position within it is in such flux right now that cheap natural gas is doing little to reduce America's need for U₃O₈. Then there's the well-field services sector, where the successes born from horizontal drilling and fracturing created the gas supply glut that is forcing production cuts. Far from slowing down, however, well-field service companies are busier than ever as the oil industry adopts fracking to access shale oil, and the deepwater Gulf of Mexico continues to test the limits of drilling technology.

Coal

The sector feeling the worst impacts from gas' downturn is thermal coal. Demand for the coal burned to generate power in the US is plummeting as utilities take advantage of the cheapest natural gas in ten years. Consumption of coal to produce electricity is expected to fall 2% this year to its lowest level since 1992, while gas-fired consumption rises 5.6%. Making matters worse, winter heating demand is falling in the face of mild weather: through January, this has been the warmest winter since 2006 and the fourth-warmest on record. With natural gas and warm weather conspiring against it, coal demand is decidedly down - in the second week of February, coal consumption was 4.3% lower than it was a year ago.

Exports are not going to provide any help. Last year, Europe bought 50% of America's thermal coal exports, but demand from the EU is shrinking as the region struggles to stave off a recession. The economies of the EU shrank 0.3% in the fourth quarter of 2011 compared to the previous quarter, the first contraction since mid-2009.

In response, US thermal coal prices are deteriorating. Appalachian coal, the US thermal-coal benchmark, fell 15% in January alone to sit near US$60 per tonne and has moved little since (by comparison, Australian thermal coal is currently fetching almost US$120 per tonne). Mining costs to dig thermal coal out of the ground range from $60 to $75 per tonne for Central Appalachian producers, which means margins are already razor thin or nonexistent. Several major US thermal coal producers are reducing output and in some cases closing mines, including Arch Coal (NYSE.ACI), Patriot Coal (NYSE.PCX), and Alpha Natural Resources (NYSE.ANR).

Now for some good news. Thermal coal prices in the United States may be faltering, but that doesn't mean that coal is in the doldrums across the globe. In fact, quite the contrary: global thermal-coal demand is expected to increase by 50% from 2008 to 2035, with the vast majority of increased demand coming from the developing world. That equates to a demand increase of 1.5% each year, and production is not quite expected to keep up to that pace. Rising demand plus not-quite-enough supply equals investment opportunities - maybe not in the US, but elsewhere.

That's just thermal coal. There's another component to the coal world: metallurgical coal, the higher-carbon coal used to make steel. Supplies are even tighter with metallurgical coal, which is why our subscribers have exposure to "met coal" through either equities or a fund. More recommendations are on the horizon: the upcoming edition of the Casey Energy Report will be all about coal. We will provide the background, supply and demand projections, and the best ways to profit from the global coal sector.

Uranium

The abundance of cheap gas has utilities looking to build more gas-fired power plants. Some observers have suggested that this will be to the detriment of the nuclear sector in the US. But that perspective is pretty shortsighted.

It is true that some utilities have delayed plans for new nuclear plants by a few years, primarily in response to the Fukushima nuclear disaster in Japan and the ensuing public backlash against uranium. But that backlash is already fading; and those delays will have only a minimal impact on the nuclear sector in the US. Five new generators are on track for completion this decade, including two reactors approved just a few weeks ago (the first new reactor approvals in the US in over 30 years). Those will add to the 104 reactors that are already in operation around the country and already produce 20% of the nation's power.

Those reactors will eat up 19,724 tonnes of U₃O₈ this year, which represents 29% of global uranium demand. If that seems like a large amount, it is! The US produces more nuclear power than any other country on earth, which means it consumes more uranium that any other nation. However, decades of declining domestic production have left the US producing only 4% of the world's uranium.

With so little homegrown uranium, the United States has to import more than 80% of the uranium it needs to fuel its reactors. Thankfully, for 18 years a deal with Russia has filled that gap. The "Megatons to Megawatts" agreement, whereby Russia downblends highly enriched uranium from nuclear warheads to create reactor fuel, has provided the US with a steady, inexpensive source of uranium since 1993. The problem is that the program is coming to an end next year.

At present the world is producing just enough uranium to meet global demand, but this precarious balance is already tipping. There are dozens of new reactors under construction in China, India, South Korea, and Russia that will need fuel. Production increases from new mines and mine expansions are not expected to keep pace. The race to secure uranium resources is on, and for the first time the US has to compete.

The answer is domestic production. The rocks underneath the United States hold lots of uranium, enough to make a significant contribution to the country's uranium needs. The biggest impediment to mining this resource is public opposition to the nebulous dangers of uranium mining, but as the Megatons program ends Americans will start to see that the alternatives to domestic production are decidedly worse: competing against China, India, and the like for uranium is an expensive and unstable way to acquire a desperately needed energy resource. In fact, we have been vocal in predicting a demand-driven boom in US uranium production. We even expect to see "Made in America" uranium garnering a premium over imported yellowcake, in the same way that in-demand Brent crude oil earns a premium above oversupplied West Texas Intermediate crude.

We have already recommended a range of investments to our subscribers to gain exposure to the coming uranium resurgence and, as with coal, there is more to come: the next edition of the Casey Energy Opportunities newsletter will focus on uranium, with recommendations to boot.

Well-Field Services

The techniques used to unlock natural gas from shale reservoirs - horizontal drilling and well fracturing - worked so well that they created a supply glut that is altering the global energy scene. That supply glut is now prompting natural gas producers to cut back on output, which you might think would be bad news for the well-field service companies that complete those tasks.

Not to worry: North America is also in the midst of a crude-oil production boom, and the common theme linking most of the continent's new wells is highly technical drilling and production methods. The purveyors of those techniques are the continent's well-field service companies, and their services are very much in demand.

Well-field service companies have been able to compensate for lost gas fracking business by shifting to oil, as the oil industry has adopted fracking to unlock its shale deposits. If you've read about the oil production boom that is keeping North Dakota's economy hopping, you read about the Bakken shale formation. In the Bakken, wells are drilled horizontally to follow along the oil-bearing layer, and then high-pressure fluids are forced down the well to fracture the shale and release the oil.

Meanwhile, the challenges of producing oil in the deepwater Gulf of Mexico continue to test the limits of drilling technology. Pushing through kilometers of water before drilling through just as much rock and then extracting and transporting oil from a platform rocked by waves and threatened by hurricanes demands a wealth of specialized equipment and operators.

Most oil and gas companies do not own drill rigs, nor do they actually drill or fracture their own wells. They contract those jobs out to companies that drill and frac for a living, known as well-field service companies. And with wells in America's booming oil and gas fields requiring more complicated and more technical services with each passing year, the services these companies provide are essential to North America's oil and gas producers.

The Casey energy team is all over the well-field services sector. Subscribers to the Casey Energy Report newsletter and the Casey Energy Confidentialalert service were alerted to our latest recommendation in the sector in mid-November. Three months later, our investment is already up roughly 50% and we suggested that subscribers take a "Casey Free Ride," which means selling enough shares to recoup one's initial investment and retaining the remaining "free" shares for continued, risk-free upside exposure.

The Take-Home

When a machine is as interconnected as the global energy trade, no part can change without impacting the rest. The dramatic debut of shale gas in North America has done far more than just depress domestic natural-gas prices - a shift of this magnitude has impacts that reach far beyond one commodity or one country. Some of those impacts are negative, but hidden in the doom and gloom lie opportunities to profit. The key is to open your horizons and embrace the complexity and interconnectedness of the global energy machine... either that, or find a good mechanic who can do the job for you.

 This is WebStory!

Why you must buy gold and silver in turbulent times

The current scenario in the global investment landscape can at best be summed up as ‘precarious’. Investors have a tough task laid out in front of them that calls for capital preservation as their primary goal, with capital appreciation as a secondary objective.

The modern portfolio theory has clearly proved through countless research papers that investors who manage to walk out of relentless bear markets with their capital (investment float) largely intact, have a sizable advantage over those whose portfolios suffer erosion and need to come back to ground zero (breakeven) before yielding alpha (profits) in following bull markets.

While equities, as an asset class, can undoubtedly be relied upon to beat inflation over the long term, they provide little protection during the actual bear market. My personal experience in equity markets since 1986-87 tells me that equity prices witness large-scale attrition in high inflation periods, like we are currently experiencing, and provide almost no place to hide.

In a punishing bear phase, you only have the option of deploying funds in stocks that will at best fall less than the benchmark indices. While this “relative out-performance” is fine for high net worth individuals (HNI) and “buy only” institutions, the retail investor undergoes the horror of absolute returns that are negative. Try paying your electricity and telephone bills with relative returns alone and you know what I am getting at!

Are gold and silver a ‘safe’ haven?
The answer is a confusing yes and no! Yes, because high inflationary periods imply that commodities are a lot more “honest” to an investor and actually appreciate in such turbulent times, and no because in the market place, the price rules supreme and your returns are dependent on the sole factor of buying at the right price. Many technical studies help us gauge the appropriate time to invest in bullion, equities, ETFs and currencies.

The primary yardstick is the age old system of “range expansion”. The technician relies on price charts to track periods when the prices of the underlying asset are moving in a quiet, measured and lower beta (volatility) calibration.

Any “breakout” of such a measure of routine acceleration (rate of change) should alert the trader / investor that the outlook for the underlying asset or the market as a whole is changing gears. It is then a matter of being nimble footed to latch on to the moving bandwagon of prices and riding the “waves” or bull / bear phases. 
In the current scenario, avid bullion investors will break apart the price volatility of gold and silver into two phases - pre -August 2010 and post -August 2010. While silver was trading at close to Rs30,000 / Kg, gold was trading steadily at Rs 18,000 / 10 gms before August 2010. The price acceleration in both these precious metals has been swift and parabolic at times. The sum and substance of the argument is that an investor should deploy money when sanity prevails in price patterns rather than chase uptrend for the fear of feeling “left out”. Case in point - any investor who bought silver in the latter half of April 2011 saw a price erosion of up to 30 % within a matter of three weeks.

Where are we now?Both silver and gold are consolidating after a period of high volatility and parabolic price rise. The probability of short -term weakness should not be ruled out. While the larger scheme of things indicate that the uptrend is by no means fractured, market mechanisms are attempting to “shakeout” the weaker hands by extreme price moves that result in decisions that are more emotional (fear / greed driven) than logical.

Typically, the leveraged players who participate in the action via futures will see maximum stress as mark-to-market payments and span margin commitments will require deep pockets to just fuel existing long positions with little / no scope for enhancing long positions on price declines. The age old adage that “money makes money” rules the roost here and nothing beats taking delivery of the precious metals in physical format or ETF and e-silver / e-gold. While the exposure levels maybe smaller as compared to futures markets, you manage to skirt emotional pitfalls arising out of funding an existing position when your broker demands fresh funds to keep your positions “alive”. Less is indeed more and small is of course beautiful, at least in the case of the bullion investment game.

Should you buy, and why?I think you can ignore bullion and depend on equities and / or fixed income investments alone, at your own financial peril. While equity prices are likely to remain under pressure and provide negative absolute returns for some more time, fixed income investments will mean negative real effective returns as your Bank FD interest rates are lower than your food inflation at the street level. Bullion will offer a store of value and also capital appreciation opportunities provided you think of timelines in multiples of 12 months and incremental in similar multiple periods thereafter.

Remember, barring ETF’s where long term capital gain protection is available after 12 months (only Gold ETF’s are on offer in India), all other modes of investment (physical bars, coins, e-silver etc) are required to be held for 36 months before gains are protected from taxes. If you attempt to speculate in bullion so you can throw a grand New Year party, chances are you may erode your capital base.

The “why” of investing in bullion is all too apparent to a seasoned investor - fiat currencies are likely to lose purchasing power in the coming few quarters / years.

Asian countries may prove to be a power house of economic revival in the coming years, but their population is rising much faster than their resources supply side economics. That spells high inflation - a highly conducive scenario for bullion investors willing to dig their heels in these assets, with a long term outlook.

The Tao of bullion investing Deploying all your money in one go is a loser’s game. Battle hardened investors seldom empty their bank balance in a single cheque. Periodic investments, especially at prices lower / equal to your last purchase is the way to go. Typically, buying progressively slightly larger quantities when the prices are on the way down south makes sense. That way, your average acquisition costs are relatively closer to the current ruling market prices, reducing your anxiety levels. Since currencies are likely to play a dominant part in domestic bullion prices, you need to monitor interest rates and fix markets to time your bullion buys.

As a contrarian player, I would buy gold / silver whenever banks raise interest rates and drive bullion prices lower in the short term, knowing that the prices would rally all over again, whenever economic pressure points re-emerge at a later date. Over the next 36 months, this strategy should navigate you towards above normal profits. Start nibbling at silver at sub Rs50,000 levels and gold below Rs25,500 levels. Remember, systematic investing at lower values (averaging) will be required, so plan your finances accordingly. Do not get rattled to see a 15 - 20 % dip in prices, especially if some highly leveraged hedge fund in the western markets decides to unwind positions due to financial/ regulatory constraints. History provides ample evidence that such events have occurred with unfailing regularity. LTCM, Amaranth Advisors, Bear Sterns are some examples. These are times when bullion baiters (and haters) have screamed “I told you so”, but bullion has prevailed, and will continue to prevail.