Are Chinese Women Smarter Than Warren Buffett?

Warren Buffett is one of the world’s most successful investors. He is also a well-known critic of gold as an investment. He believes buying gold is “stupid.”

Middle-aged Chinese women did not get university economics or finance degrees. They do not understand the difference between economic schools of thought. But they have lived under brutal Communism. They have suffered extreme poverty. They understand what it takes to preserve wealth under tyranny.

These Chinese women are buying gold. More than Indian fathers. From a recent report:

On Sunday afternoon, a microblogger in Beijing logged into Sina Weibo, China’s leading social media platform, to gossip about the “auntie” next door. It’s a broad term of respect for an older woman, and his followers understood precisely what he meant when he tweeted, “The auntie next door used all of her retirement savings to buy gold. When asked what she’d do if prices keep dropping, she replied that if everyone kept buying gold, the price wouldn’t drop…”

This might strike a conservative investor as reckless. But in China, where gold has long been a national obsession, a mid-April record crash in global gold prices has been seen as an unprecedented buying opportunity. According to reports in China, Chinese have purchased 300 tons of gold worth more than $16 billion since the crash.

These people are not trading gold futures on margin. They are allocating their savings to precious metals.

Photos of crowds packing jewelry shops and emptying their shelves are now regular features in the news media. On Monday, a police officer in Shanxi province tweeted, in regard to his actual aunt: “My aunt’s family has a gold store, and my colleague who’s in the market for some gold for his mother asked if I could get him a cheap price. I asked, and my aunt said first come and take a look to see if anything catches your eye. But at the moment the display cases are empty, and they are unable to get new inventory. All I can say is that the power of the Chinese is frightening.”

China’s voracious appetite for gold is long-standing. At Chinese jewelry stores, the spot price for gold is always prominently displayed. Calculators and scales are never out of a customer’s reach. Gold jewelry is desirable, but so are gold bars, and any jewelry store that considers itself full-service will stock ingots of various weights. (In April, an investor in Guangzhou bought 44 pounds of the bars, according to a local newspaper.) Special commemorative bars in various weights and designs were issued for the 2008 Beijing Olympics and the 2010 World Expo in Shanghai.

The current rush is unusual in two ways. The first is its epic scale. The second is that, according to both traditional and social media, aunties are doing most of the buying.

This activity is widespread in China. When something is widespread in a country with 1.35 billion people, it’s a real phenomenon.

Social media tends to take a less critical, and more personal, view of the aunties. Depictions involving mother-daughter interactions, in particular, are very common. On Saturday, Zhongxiao Fang Fang Fang, the handle for a microblogger in Shenzhen, tweeted: “Yesterday my mother called me to say the price of gold has fallen, and to ask me to go to Hong Kong to buy gold. I said I didn’t want any. She very calmly said it would be good to prepare a dowry so I can get married!”

Reported elsewhere:

Perhaps the majority of Americans cannot comprehend the unusual feelings Chinese people have toward gold and silver. They’ve never considered that rather than being afraid to invest in gold, the Chinese are more afraid that they won’t possess gold. Maybe what Chinese aunties care about is not the price of gold tomorrow, their desire is perhaps nothing more than to buy gold, to delight in gold, to hold it. Chinese aunties’ gold investment strategies are simple and unsophisticated, they just “buy what they want.”

What do the Chinese aunties know that Warren Buffett doesn’t?

Read more at Bloomberg

Gold Delivery Denied! Paper Gold Is a House of Cards

A rich American man had gold in a segregated account in a Swiss bank. Or so he thought.

When he tried to get delivery of his gold, the bank refused. It said the central bank wouldn’t let them do it, because it was more than 200,000 euros worth of gold. So instead, the bank would settle with cash.

What’s going on here?

I don’t think it’s anti-terrorism and anti-money laundering regulations, as the bank says.

Over the years, banks have borrowed non-interest-bearing gold from gold owners, including central banks, at 1% or so, then sold it to buy higher-yielding bonds. It was a reliable trade for a long time. But as the banks have refinanced those loans, gold prices have climbed and many of those debt instruments have fallen in value. They cannot buy back the gold on the market at today’s prices, and the bonds in which they invested have suffered and cannot be sold without a loss.

The day of reckoning comes when these gold shorts cannot pay back the gold owners. This means many investors, including central banks that lent out their gold, will not get their gold back. Like our American friend who tried to take delivery from the Swiss bank.

Imagine the fallout when this spreads. The paper gold market is like a stick of dynamite. When it blows up, you don’t want to be holding it. Yet when this happens, the holders of actual physical gold will be very happy.

— Read more about this story at King World News — 

Mini-Review: CBC Documentary “The Secret World of Gold”

On April 18, CBC aired a documentary called “The Secret World of Gold.” Though flawed, the program was interesting and covered many issues.

Here are some things talked about in the documentary:

  • The Bank of Canada has sold almost all our country’s gold over the last 30 years.
  • Underwater treasure hunts for gold.
  • Secret government deals to control gold.
  • Futures market manipulation (this was by far the weakest part of the show — the futures market is not explained and the case made for manipulation is very thin).
  • Buildings with gold windows.
  • Wars for gold.
  • How Chavez got all Venezuela’s gold back from the US and Europe
  • Gold shifting to the East from the West
  • Death gold from Nazi extermination camps (some of which was used to fill Hitler’s teeth — WTF).
  • Allocation of central bank gold holdings — who owns the gold? Is the gold even there?

Think about taking 45 minutes out of your weekend to check it out. You can watch it here for free, the only drawback is there are a few dumb CBC ads.

UPDATE: You no longer need to watch it at CBC. The copyright police got to “The Secret World of Gold” on YouTube, so it looks like you have to watch on CBC…

Gold Is Better Protection than Silver

On March 6, I wrote about how gold holds up far better than silver when a panic hits.

Recent events seem to provide confirmation of this.

Silver at its peak was $48.70 in 2011. It is now at $23.29. This is a 52% loss — ouch. That is very painful for someone who bought near the top.

Gold has weathered the panic with much more success. In 2011, gold hit $1913 and it now is trading at $1391. This is only a 27% loss. Harsh, but not so harsh that you would want to throw yourself off a cliff.

As a speculative play, you could see big profits if you buy silver near the bottom. That’s because, relative to gold, silver is tremendously volatile. But you need to be careful: you may recall that during October 2008, silver traded below $9. Panics hits silver hard. Unless we enter Great Depression 2, I doubt silver will fall that low again — but I think it could certainly drop below $20 before this shake-up is resolved.

Is Now the Time to Get Out of the Stock Market?

Last week gold and silver got killed, especially after the rumor hit that Cyprus would sell gold to get a big fat bailout (honestly I doubt that will happen).

The slaughter continued today. I am writing this with gold at $1365. Margin calls are probably dropping left and right.

Other commodities have fallen, including oil. Bonds have rallied recently. The 30-year Treasury offers less than 3%, which is pretty much completely crazy. Meanwhile, Canada lost 54,000 jobs in March — the worst employment update in four years.

To me, these are pieces of data which imply an economic correction trying to work itself out, rather than a rippin’ recovery. If these developments justify concerns about a slowing economy, then you want to be careful about the mainstream coverage about this gold panic, and their general frenzy about  buying stocks.

US stocks, which are the hot ticket these days, seem to me dangerously high. Corporate earnings in the US are 70% above their historical average due to massive fiscal profligacy by government and citizenry, and aggressive cost-cutting post-2008. Periods of strong corporate profits are never permanent and eventually regress towards the mean. Therefore it should be expected that future earnings and dividends will disappoint.

The Fed is struggling to perpetuate the error cycle and keep the ‘recovery’ going.

Meanwhile, the TSX is not performing well this year, after being one of the world’s worst stock markets in 2012. And the TSX-V — which is where all the most exciting action is — is going to get smaller. The average level of cash held by TSX-V-listed stocks has fallen from $4.3 million in mid-2011 to about $2.8 million now. This might not sound too bad because it is still several times higher than pre-2008 levels, but on a per-share basis, it is terrible. TSX-V companies have only about 2.8 cents per share as of last quarter, a drop of more than 50% in two years. Remember, these companies don’t usually generate their own cash flows from any operations, and cash is frequently their only good asset. All the while, TSX-V companies have doubled their liabilities per share — so when the nearly 2.6 cents per share is paid off, they are basically broke. So while this says nothing about any individual companies, it suggests the junior resource sector is going to come up on some hard times.

I absolutely expect Canada and the US to join the other developed nations suffering from recession.

If you hold stocks at this time, you should seriously think about just selling most or all of them. Be ruthless about keeping only the absolute best ones. Keep the balance in cash and patiently await buying opportunities as prices fall.

If you are a long-term believer in gold, this is clearly a huge buying opportunity. Gold could still fall another 10-15% before hitting a bottom, and it could take a 6-12 months to recover. I would like to point out that during the previous gold market, there was a 20% price drop in late 1978.  We know how that turned out. Yet, if the fundamental argument for gold is still sound, then today’s prices are a godsend.

TSX Loses All Gains for 2013

The Canadian stock market was hit pretty hard as oil fell and gold got hammered. At the close, gold was down nearly $75 USD. The TSX lost all of its 2013 gains over the last few days.

I have predicted that North America will face recession this year, so a falling TSX is consistent with that. An economic correction is especially hard on capital goods industries and raw materials.

I also believe it is a reasonable expectation for gold to fall to $1200-$1300/oz as the economic error cycle matures. Then, when a panic hits, and Fed and other central banks will respond with further inflation, and the gold price will rise in response to that.

A commodity broker says: “the argument for gold as a safe haven or protection against inflation just isn’t there . . . It doesn’t look too good for gold.” This assumes there another crisis will not occur, and central banks will not inflate in response. At some point central banks will have to stop inflating to prevent currency collapse and preserve their nations’ banks, yes. Yet, I do not think that time is nigh because we have not yet seen massive consumer price inflation result from the monetary expansion since the ’08 financial crisis.

Read more at Financial Post.

Is the gold price being manipulated?

When oil prices rise, many economically illiterate people will say something like this:

“Speculators and oil companies are manipulating the market to drive up the price of oil.”

When there is a price change that people don’t like, it’s often blamed on “manipulation.” Did the price of gas rise in the summer? It’s those monopolistic oil companies.

Of course, no one ever blames the manipulators when the price of oil falls.

When it comes to gold and silver, people behave in a similar way. The difference is that people decry the “manipulators” and “conspiracies” when the price goes down.

I read Ed’s Gold and Silver Daily in the morning because I like the charts. I find it hard to read his commentary, because he is always blaming “da boys” for any price decline. Price declines which, he claims, are “impossible” in the free market. (For example, it’s claimed to be utterly incomprehensible that gold would fall in the post-Cyprus crisis, unless the cause of the decline is manipulation.)

Yet you will never hear Ed, or anyone like him, use manipulation to account for a price increase.

Gold and oil often move together. If gold is down, see if oil is down as well. If you think manipulators are driving down oil prices, then at least you are being consistent if you claim manipulators are driving down gold also. Yet no one ever blames manipulators for driving down oil prices.

In my opinion, people should not worry themselves over gold manipulation. So short-term futures traders might cause the market to move around a bit. But every short has a long. Futures traders do not want to manipulate the price downward if prices “should” be going up with massive shorts, because if so the market will rape them when price rises. Secondly, the banks that are supposedly manipulating gold prices lend huge amounts of money to gold producers. None of the board members of mining companies that I know believe there is manipulation.

And really: if the price of gold is being manipulated to a lower-than-otherwise level, why not just buy more? If someone drives the price of a commodity below what its market price “should be”, it would be… below the price at which it should be. Good deal. If some idiot like Gordon Brown (who sold half of Britain’s gold at hilariously low prices) wants to drive the price down, good luck. They obviously can’t keep it the price down forever.

Forget the manipulators. Here is why I think the gold price is falling: the economy is slowing down. Europe, Japan, and China are in recession. I believe North America is fighting hard to avoid one, but by the end of the year there will be nowhere left to run.

A panic will cause central bankers to inflate even more, and gold will move up in response to new monetary expansion. Otherwise, slowing economies are rough on investments. People want to avoid losses and gather cash, so they sell stuff like gold and stocks. When  demand deteriorates, prices drop. This is totally normal and not at all related to “manipulation.”

Investing: Silver vs. Gold

Many people want to know about silver. They want to know how it compares to gold as an investment.

Some call silver a “poor man’s gold.” In other words, the average man on the street is more able to go to a dealer and buy a few ounces of silver than he is a few ounces of gold. Yet “poor man’s gold” is not a fair characterization, because it assumes silver and gold belong in the same category simply because they are both precious metals. The reality is that silver and gold are different in important ways.

I recommend that one’s precious metal holdings be MAXIMUM 25% silver. 15% is probably better. Gold should make up the rest.

First, I invite you to check out the Kitco charts and look at recent price behavior.

In April 2011, silver reached a high of $49. But by June 2012, it hit $27. As I write this, it is $29. Measured from the 2011 highs, this is a massive loss. Nearly 50%.

Now look at gold. In September 2011, gold hit a high of $1895. In May 2012, it bottomed at $1540. As of right now, it is $1580. Measured from the 2011 highs, this is a moderate loss. Nearly 20%.

The idea reflected here is that silver is much more volatile.

Look back to 1980. Silver fell from $50 to $3.60 in 1991. Gold, at its worst, fell from $850 in 1980 to $255 in 2001. It’s like losing your house and all your money, instead of just all your money.

So when gold sells off, silver will sell off  harder and faster. Silver bulls will argue that the potential gains are much, much higher with silver than with gold. This is plausible, if only because silver is 40% down from its all time high and gold is 17% down from its all time high, and there are strong reasons to believe that both will move upwards.

Why the volatility? The primary reason is industrial demand, which for gold is very small. It is significant for silver, however. During a panic, the price for raw materials plummets.

Gold is different. You could say it commands a premium. This is essentially because gold is regarded as a monetary metal even though it is not money. Central banks buy and sell gold. They have it in their vaults. Central banks don’t stock silver. Wealthy people want gold in a crisis, and silver is much less interesting. Indian families buy it when their daughters get hitched. Asians use it to protect against inflation.  Silver really doesn’t serve that purpose, and I do not believe it will in the near future.

Silver will probably have a bigger bull market than gold by the time Great Depression 2 hits. But if you want to buy precious metals because you are afraid of people like Bernanke and Carney, then you want gold. Silver is a higher risk trade. Gold will perform better in a panic, which is when silver will perform horribly.

In either case, your objective is to hold until the error cycle reaches its final moments before we enter a deflationary depression. Because at that point, you want to unload all your gold and silver and get currency and bonds from institutions that won’t go broke. It’s a trade that would be harder to time correctly with silver than with gold.

All this being said, there is one other important advantage gold has over silver: your wife or girlfriend will like gold jewelry more than silver jewelry.

What is up with the gold price?

The first two months of 2013 have erased gold’s price gains from 2012.

So what? The gold market is a bumpy ride. Are you sure you are man enough to own gold until Great Depression 2?

If you’ve been buying gold coins throughout the last decade, you probably don’t even care much about the current situation. You might even welcome a bit of weakness in the market as a chance to get more value.

I’ve been telling people to buy and hold gold coins for ten years. I still recommend doing so. The latest developments in the gold price don’t upset me much. I barely think about it.

Late-comers to the gold scene are the ones who are stressed out. You might be upset if you purchased your first gold coin last year, or bought into some gold ETF at the mid-2012 lows. You’ve heard bullish predictions for $2000 gold, $2500 gold, $3000 gold, but you’ve seen the price action over the last 12 months. You hear all the news stories reporting bearish sentiment on gold, and you worry. Your “Get Rich Quick” scheme has failed.

People get frightened when their holdings fall 5%, 10%, and 20%. I consider price changes, even big price changes, to be normal. But then again, most of my trades are in highly speculative stocks that frequently rise or fall 20% in one day. So price volatility upsets me less than most.

I would not be surprised if gold fell another 20% from its current point. Actually, I predict this will occur within a year. Recession will drive down asset prices. Asia is in recession. Europe is in recession. The US is going into recession. As the US goes, so goes Canada.

Also critical is Federal Reserve policy. Much has been made of the Federal Reserve minutes from February 21, where it was suggested the economy was improving and the size of their bond purchases may need to be “adjusted” — which was interpreted to mean “lowered.” I don’t think this holds much meaning. It’s just talk. The Federal Reserve has no “exit plan” prepared.

Instead, it is highly significant that the Federal Reserve did not inflate last year. In terms of gross open market operations, the Fed was busy. But on net, the balance sheet did not increase. This puts downward pressure on gold’s price. QE3 is now underway, but gold’s price already jumped last year in anticipation of the inflation that would create.

Other central banks are inflating and buying gold — mainly Asian central banks, and Russia. The trend indicates these purchases will continue — but in the grand scheme of the gold market, these deals are small. Japan’s central bank has gone into “suicide mode” and seems eager to ruin the yen.

Bernanke recently testified in Congress that interest rates had risen and that indicated improvement in the economy. Let us assume that is true — what interest rates have risen? Two-year to 30-year rates have been falling. Only the shortest-term rates have risen, and not significantly. 90-Day went up five-hundredths of a percent in February, and nobody cares.

The economy is getting worse, not better. Central banks’ money printing will become more frenzied.

Don’t worry about short-term fluctuations in the gold price. If you believe that there will be long-term worldwide mass inflation, then you should continue to accumulate  gold coins until it comprises a significant (25% to 40%) of your net worth.

Guest Piece: Is gold mining coming back to the Yukon?

Notes from the Field: Yukon
By Louis James

I’ve just returned from another trip to the Yukon. Details on the companies I saw I’ll have to keep for Casey International Speculator subscribers, but there is a broader observation I can share that I think is of value.

The Yukon has a long and famous history of exploration and mining – especially for gold – but currently there’s been little actual mining going on in recent years. Capstone Mining’s (T.CS) Minto mine was the first new hardrock mine built in the Yukon this millennium, with first concentrates shipped in 2007. Until Minto proved it could be done, the prevailing wisdom seemed to be that the Yukon was geologically interesting, but a remote and expensive place to work, as well as a difficult political environment that made the effort questionable. The success at Minto attracted a lot of exploration dollars, with Underworld Resources making a new discovery that was quickly snapped up by major gold miner Kinross Gold (KGC, T.K) in March of 2010. This really put the place high up on t he radar screen, and exploration dollars flooded in.

However, a couple of months later, Western Copper (WRN, T.WRN) was delivered a surprise setback when the final permit it needed for its Carmacks copper project was rejected by the Yukon Water Board. This decision is being appealed, but the company is also seeking to address the regulators’ concerns, hoping to finally get the project permitted one way or the other. This has not slowed exploration in the territory, but it does have people wondering if the Yukon is really such a great jurisdiction for mining after all.

One answer to this is that Alexco Mining (AXU, T.AXR) was able – post-Camracks – to permit its Bellekeno mine in the Keno Hills district of the Yukon; it just went into commercial production. Now, Bellekeno has a much smaller footprint, being a high-grade underground mine with ore milled in a plant, rather than Carmacks’ heap-leach operation that would be the size of a mountain (sprinkled with scary-sounding chemicals), so it was much easier to permit, but it still shows that the government is not opposed to mining.

Well, not opposed so far; there is an election coming up, and it seems too close to call.

However, while my plane was grounded in Whitehorse due to weather, I bumped into a consultant who has worked with both the regulators and the mining industry. We had, I believe, a very sincere conversation (on that day, I was there to see another company, not hers) and she explained to me that the permitting process actually changed during the efforts to permit Carmacks. She also told me that, unlike British Columbia, most of the First Nations land claims have been settled in the Yukon, so dealing with native populations is much simpler. That’s a great advantage that removes a lot of uncertainty. Also, the Yukon being a relatively small territory with the government concentrated in Whitehorse, the actual logistics of dealing with regulators are simpler, and there’s less turf conflict between regulators. There was and always is a lot of politics involved in such things, but her take is that the Yukon is definitely a place where miners can work.

This perception fits with information I’ve gathered over the years from other sources. Permitting is always a challenge everywhere, but I think the average Yukoner wants to see the territory benefit economically from responsible mining. And the rocks sure look good. I think we’ll see more discoveries coming from the Yukon soon and more mines being built. I’ll be looking for more opportunities to profit if I’m right… and I’m looking now, while prices are down.

[Louis circles the world, applying Doug Casey’s 8 Ps to promising companies so that only the best speculative plays are recommended in Casey International Speculator. You can put his expertise to work for you: a trial subscription is completely risk-free for ninety days.]

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