Central banks shifting to gold

There has been much talk about central banks becoming net buyers of gold since the start of the economic crisis in 2008. I want to elaborate on that.

The world gold council (WGC) yearly reports on the amount of central bank gold sales. As of 2010, central banks have shifted from net sellers to net buyers of gold (Figure 1). And this has only happened recently! As we look at history, during the inflationary years of 1980, central banks were buying gold. Then a period of gold selling occured from 1989 till 2009 where gold went into a bear market. Central banks only shifted to buying gold since 2010. Which means we are going straight back into a bull market of gold.

Figure 1

The WGC expected growth in gold buying from central banks to continue throughout 2012. The projected growth of central bank gold buying was projected to be 336 tonnes of gold per year in 2011 (Figure 2). Their predictions were right as central banks added 450 tonnes during 2011.

Figure 2

By far, the increase in interest in gold is the highest within the sector of central banks as opposed to investment, bars, coins and ETF’s (Figure 3).

Figure 3

The top among those countries that increased their gold holdings in 2011 are: Mexico, Russia, Thailand, Bolivia, Korea (Figure 4). More recently, we see activity from Mongolia and Kazachstan.

Figure 4

Conclusion: Central banks know there is something going wrong with our fiat currency system. Otherwise they wouldn’t shift to buying gold, which started coincidentally after 2008: the year of the global financial crisis where money supply exploded. I suggest that we investors follow the big guys into buying gold, you don’t want to be left behind.

Agriculture turning around?

At the beginning of 2012 agriculture prices are starting to turn around after the big correction that occured in 2011. Speculators have started to add net long positions in agriculture due to drought concerns in South America. Global demand is still going up.

Soy Bean prices are going up on dry weather in Brazil and Argentina.

Palm Oil prices benefit from the problems in the Soy Bean crops.

Cotton prices are improving but are still weak. Cotton prices are bottoming out though.

The rubber market is likely to continue the uptrend due to bad weather conditions. Demand for rubber is strengthened by the buying up to the Lunar New Year.

Wheat prices are still weak due to large wheat production.

Coffee prices had a surge in 2010 and were correcting in 2011. Prices will remain firm though due to supply shortages.

Sugar is in an uptrend, but speculators are turning bearish.

Corn prices are weak due to a surplus in inventory, but seem to be bottoming out.
Rice prices are turning in a downtrend as India starts exporting more rice to the world.

Overall, we can say that agriculture prices are in the process of bottoming out, but I wouldn’t count on making money here because wheat, corn and cotton (the three biggest agricultural commodities) are still in oversupply.

RJA Rogers Agriculture ETN

Chinese buying copper

At the London Metal Exchange (LME) the copper stock levels keep declining as can be seen on following graph:

LME Copper warehouse level

The Chinese were importing copper at record levels during December 2011 to restock their inventory. There has been a concern that in 2012, there will be a copper deficit, which resulted into this buying frenzy.

As a result we can see that since September 2011 the copper price was going up, just at the same time that LME stock levels were going down.

Copper price

I can’t blame the Chinese to buy copper, they want real assets and not some US government paper, which they are dumping by the way as can be seen on following graph:

China US treasury holdings

I think the buying frenzy is not over yet, as China is positioning itself to create competition against the London Metals Exchange in June 2012. On that date China will open the Pan Asia Gold Exchange, also known as PAGE, challenging the LME and COMEX.

I predict that gold and silver will explode on that event. Interesting times will emerge later in 2012, so prepare accordingly by buying precious metals!

Belgium Downgraded by Fitch

Today Belgium was downgraded by Fitch from AA+ to AA with negative outlook. All of this due to the Dexia fiasco. I’m from Belgium and I can say that the bailout of Dexia was the most immoral thing the government has ever done. Dexia has an enormous amount of Greek debt (US$5 billion write down)  and everyone knows Greece is going to default sooner than later. Supporting Dexia was the dumbest act ever. The only reason why Belgium government bonds are doing well is because Belgians have an enormous amount of savings and the unemployment rate is improving.

But we see the consequences already from Dexia. Several cantons lost several millions of money. Of course, we tax payers will need to pay for this.

Amount of shares in Dexia per capita

4 other countries were downgraded as well:

Italy: A => A-
Spain: AA- => A
Cyprus: BBB => BBB-
Slovenia: AA- => A

Surprisingly, the euro went up…

Gold Spike?

Today there was this large gold spike to 2263.65 EUR/oz during New York Globex time. I have no idea what this phenomenon is. If somebody could point out what this is, it would be really helpful.

Maybe it’s an omen of what is yet to come!

Spot gold in EUR/oz

Baltic Dry VS Copper

The last few weeks we see that the Baltic Dry Index has been dropping while copper prices surge. How can this be?

Is the economy slowing down as evidenced by the falling BDI, or is the economy growing as evidenced by the rising copper prices. Nobody really knows. My take on this is that the economy actually is growing, on phony money that is (or you can equally say the money supply is increasing).

What is happening to the BDI though, is a consequence of the massive creation of ships during the period of 2005-2008.

BDI VS Copper

While the BDI may keep falling, the copper price is steadily going up, together with the S&P. The chart below shows the high correlation between copper prices and the S&P.

S&P VS Copper

Another evidence of the improving economy can be seen in the BullandBearwise index, which measures the performance of key macro-economic metrics (capacity utilization, unemployment, CPI, PPI, yields, etc…). This index is still in an uptrend:

BullandBearWise Index

So frankly, I don’t see a crash coming soon, even if the BDI keeps dropping. Because this is a disparity created by an oversupply of ships.

The Fed will never increase interest rates again

Today Ben Bernanke said he would keep the benchmark rate essentially at zero percent till 2014. Earlier he said he would keep it at zero percent till 2013.

My take on this is that they will never increase interest rates again, until the whole system collapses. Marc Faber already pointed this out in 2010.

Look at what effect it has on the silver and gold price…

To see the whole interview, see below:

USD is losing reserve currency status

It is apparent in the timeline below that the whole world is trying to back away from the “reserve currency” of today: the US Dollar. More and more political games are going to be played and this will eventually result in the Great War of our century (as Gerald Celente calls it). It all started in end 2010 but the games are accelerating. If you pay attention to the countries involved, you will see that Asia itself is trying to create an Asian reserve currency.

Here’s what is happening:

• 24 November 2010: Russia and China want to back away from the USD to lessen their dependencies on the US dollar. They will try using their own currencies for settlement.

• 24 July 2011: China wants to export their goods to Iran in exchange for oil. Thereby bypassing the USD and US financial sanctions. (that is also why USA is trying to go to war with Iran, just to make it more difficult for the Chinese)

• 25 December 2011: China and Japan promote direct trading in yuan and yen to reduce costs of USD currency interchange. Japan buys Chinese government bonds (instead of US government bonds).

• 29 December 2011: India comes to play and wants to strenghthen bilateral trade with Japan. Thereby boosting the rupee. Japan will invest in Indian infrastructure projects.

• 07 January 2012: Dmitri Medvedev proposes Iran and Russia to drop the USD and buy the rial and ruble in bilateral trade. Thereby ignoring U.N. sanctions imposed on trade with Iran.

• 20 January 2012: India starts paying Iran for oil in rupees, ignoring U.N. sanctions imposed on trade with Iran. India is relying heavily on Iran’s oil.

USD is losing reserve currency status

Capacity Utilization update

The Capacity Utilization rate in the US for total industry (Dec 2011) was released today at 78.1%. This means that we’re still in an uptrend, which is bullish on gold and silver.

Speaking about silver: PSLV (Sprott’s silver trust) today dropped almost 10% today, I’d say this is a very good price to start accumulating physical silver.

Capacity Utilization (BullandBearwise)

Historically when capacity utilization rates go to 80%, a year later we get a spike in inflation. So there is a high correlation between capacity utilization and inflation.

If you don’t know what capacity utilization is, you can follow these two videos from Salman Khan on the capacity utilization – inflation correlation here:

Buying vs Renting

Recently I had a heated discussion about which one is better: buying a house or renting a house.

I kept saying that renting a house was cheaper than buying a house and here’s why:

– The government will not keep subsidizing your loan

– Housing prices will not forever keep going up faster than the rise of wages

– Gold will increase much faster than real estate due to inflation

– Taxes on property are high and will keep increasing

– Maintenance on property needs to be paid by the owner of the house 

– Mortgages will rise in interest rate and will collapse the price of houses

I found a nice site that calculates the expenses: Renting VS Buying

If we make following assumptions:

– The average rent of an appartment in Belgium: 715 euro/month (2010) (house rent)

– The average price of an appartment in Belgium: 215000 euro (2010) (house price)

– Inflation rate: 3.5%
– Mortgage interest rate 5.5%

– 30% down payment

– Rent inflation 3.5%

– Interest on investment in gold: 5%/year (gold will at least triple in price in 30 years)

– 30 year mortgage

– Maintenance 1000 euro/year

– 6450 euro closing costs 

– 2300 euro tax/year

– Depreciation of house: 1% a year (your appartment will lose value year over year due to style that gets old and due to the fact that people will pay less for a house that has been lived in for 30 years)

Conclusion:
Buying does not become better than renting during the first 30 years.

Here’s how much you’re out under each scenario:
 $480,804 to buy the house.
 $189,411 from renting if you invest the difference.
 $575,490 from renting if you don’t invest.
If you rent and religiously invest the difference between what you would have paid for a house and what you’re paying in rent, you can earn a return of $386,078 (after taxes). This helps make renting a better deal.

Buying	Renting
$674,112	$575,490	Cash spent
–$206,746		Home value
$13,439		Closing costs on resale
$480,804	$575,490	Net spent (if not investing) (lower number wins)
	–$386,078	<a class="helpy" href="http://michaelbluejay.com/house/rentvsbuy.html#&quot; style="text-decoration: none;" title="Buying a home costs more at first than renting, but buying is an investment. But there's a way to make renting an investment: Take the money you save each year by renting instead of buying, and invest it in something (e.g., mutual funds). Usually this isn't enough to make renting a better deal, but sometimes it will, and the calculator will tell you if it does. Some people prefer to go this route even if it's a worse deal because they don't want to be tied down to a house for several years. // Note that getting the return listed in the calculator requires that you religiously invest allthe money you save by renting. I don’t think most people are disciplined enough to do this. If that’s you then you won’t see the kind of returns reported in the calculator. // In any event, the Renting side of the results is shown both with and without the ‘investing the difference’ bit, so you can easily see what the results look like in each case. Note that the investment amount is the net amount *after* paying taxes on it. // The return is just that, the return only. (Principal isn’t included.)”>Less return on investment
$480,804	$189,411	Net spent (lower number wins)