Gold Up-date: Have Faith in Gold and Not in Government Rhetoric

By David Levenstein   Aug 23 2010 9:18AM

A little over a week ago, U.S. Treasury Secretary Timothy Geithner wrote an article for the New York Times entitled Welcome To The Recovery in which he touted the great strides that the U.S. economy was making. But, with unemployment still dangerously high, foreclosures and personal bankruptcies continuing to set all-time records, shrinking manufacturing, burgeoning national debt, massive budget deficits, I can’t see any recovery at all. Don’t get me wrong, I am not attacking Geithner as I would not like his job for all the gold in Fort Knox, if indeed there is any really left, but, I think all the economic rescue package did was to save a few financial institutions from becoming extinct. “Panicked by the collapse in demand and financing and fearing a prolonged slump, the private sector cut payrolls and investment savagely. The rate of job loss worsened with time: by early last year, 750,000 jobs vanished every month. The economic collapse drove tax revenue down, pushing the annual deficit up to $1.3 trillion by last January. The economic rescue package that President Obama put in place was essential to turning the economy around. The combined effect of government actions taken over the past two years — the stimulus package, the stress tests and recapitalization of the banks, the restructuring of the American car industry and the many steps taken by the Federal Reserve — were extremely effective in stopping the freefall and restarting the economy,” Geithner stated in his article.

What I find fascinating is how most people have “blind faith” in what they are told by their governments. If some government official says everything is fine, they believe it to be so. However, no matter the rhetoric the facts speak for themselves and the truth is that the numbers don't lie, and statistic after statistic shows that the economic fundamentals continue to get progressively worse in the United States Even though I do not believe that we are heading for a total global monetary collapse or a major depression, I sincerely believe things are not as great as they are made out to be, and that now more so than ever before investors should take steps to preserve their wealth and the best way to do that is by investing in gold and silver.

A new analysis of the U.S. economy shows that since 2007, the private sector has lost 10.5 million jobs while the public sector has added 720,000 jobs. The study comes from The Free Enterprise Nation a nonpartisan national membership/advocacy organization for individuals and businesses that make up the private sector. The analysis was done using statistics about employment data from the U.S. Bureau of Labor Statistics.

According to data released by the US Department of the Treasury, China’s holdings of Treasuries fell 6 percent in the first half to $843.7 billion… down almost $100 billion in the past year. China more than doubled South Korean debt holdings this year, spurring the notes’ longest rally in more than three years, as policy makers shifted part of the world’s largest foreign-exchange reserves out of dollars. The amount of Korean Treasury bonds held by Chinese investors rose 111 percent to 3.99 trillion won ($3.4 billion) in the first half of the year, according to data released from the Seoul-based Financial Supervisory Service. China’s holdings of South Korean notes account for little more than 0.1 percent of its $2.45 trillion reserves.

The central banks of Hong Kong, Russia, Saudi Arabia and Russia also appear to be actively diversifying out of US Treasuries. While, none of these banks have made any public statement as to what they are diversifying into, judging by their increase in gold holdings, one can assume that gold is one asset that they have chosen. In this year alone the central banks of China, Saudi Arabia and Russia have all increased their gold holdings. During the month of July, the Central Bank of the Russian Federation added another 500,000 ounces to their gold holdings bringing their total holdings to date up to 23.3 million ounces... or 724.7 tons.  In the last seven months their holdings have increased by 2.8 million ounces which is over 10% of their entire holdings.

The U.S. debt has grown rapidly with the economic downturn and government spending for the Wall Street bailout, the wars in Afghanistan and Iraq and the economic stimulus. The total U.S. debt includes obligations to the Social Security retirement program and other government trust funds. The amount of debt held by investors, which include China and other countries as well as individuals and pension funds, will rise to an estimated $14 trillion this year and to an estimated $19.6 trillion by 2015.

A decline in foreign demand for US Treasuries would lead to higher interest rates in the United States as yields tend to rise when fewer people invest in them. This would result in the US government having to pay more interest on its $13.3 trillion national debt. And, consumers would have to pay more on their mortgages and auto loans and other borrowings from banks.

The editor of "Gloom, Boom & Doom Report"  Marc Faber recently told a CPA Association meeting in Abu Dhabi that gold is his asset class of choice for the next 10 years. Faber said that holding cash and bonds exposes investors to more dangers than holding equities, though he believes that equities are unlikely to make money given coming inflation. Faber said earlier in the year that investors should by some gold, every month, forever.

And, recently Jim Cramer had this to say about gold. “I am an unabashed believer in gold,” he says.  “Gold can go to $2,000 in the next few years, and I’m not talking about 2020.”  The “most bullish factor” for gold is that “we’re running out,” says Cramer.  “There are no more big discoveries in the world,” says Cramer, adding that the next two months are traditionally bullish for gold because of jewelry demand in India and China.

While I disagree that the most bullish factor gold is that we are running out and maintain that the real reason behind this move is the declining values of the major fiat currencies, I do agree that supplies are getting tighter. And, even if a new major deposit was discovered, it would take between 7 and 10 years to get the correct mining infrastructure in place.

At the moment given the fact that gold represents less than 1% of all global financial assets, as more people wake up and diversify into the yellow metal, prices will head much higher.  In the long run, gold has always maintained its value unlike the value of fiat currencies that historically end in total failure. In 1933 when gold was confiscated from US citizens, they were paid $20.67 for each ounce they turned over to the government. Now imagine if you were not beguiled by your government into surrendering your gold, today you would be getting over $1200 an ounce for each ounce! Instead, you are getting less than $2 for the $20.67 you had in 1933

TECHNICAL ANALYSIS

The primary trend for gold remains very much intact and upward. The recent drop in price from the historical high of $1265 to $1155 looks to have been nothing more than a small correction in the bigger picture. However, I expect to see some formidable resistance at $1250 level. But, I believe that this level will be breached and we will soon see a new historical high for the gold price.          & nbsp;

David Levenstein

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David Levenstein is a leading expert on investing in precious metals, with more than 30 years experience.

For more information go to: www.lakeshoretrading.co.za