Yes, It's Gold's Day!!

2007-09-13
By James West

You’ve been hearing it for years.

“Gold’s going to a thousand dollars an ounce!”

“Gold will outperform every other commodity this decade!”

“Gold could go to $5,000 an ounce!”

Well, it’s starting to happen. Gold hasn’t set any new records yet, but for the first time since the 1980s, gold is solidifying above $700 an ounce.

And everybody knows why. The house of cards that was easy credit, a massive trade deficit, and declining growth has all come crashing down. And as everybody keeps saying, it ain’t gonna end any time soon.

This index is made up of mortgage finance stocks, with some pretty big names in the industry heavily weighted. Fannie Mae is 11%, Freddie Mac is 9%, Washington Mutual is 8% and Countrywide Financial is 5%.

It is a bottom-line performance snapshot of home mortgages. Recently we saw mortgage default rates climb to a level in the third quarter that was 14% higher than the second quarter of 2007.

According to a report last week from the Mortgage Bankers Association:

“Delinquency and default rates on loans and personal bankruptcy rates are still at comparatively low levels--only 4.7% of all loans in the third quarter--but they have been rising rapidly over the course of this year. Other measures of financial distress are also pointing one way for American families--up. With all pieces of the trifecta staying in place, rising delinquency rates on mortgages may be the beginning of a trend toward more middle-class financial insecurity . . .

“The data on bankruptcy rates also show a worrisome trend over the course of 2006. Bankruptcy rates dropped precipitously in 2006 in the wake of large filings in 2005 just before the new bankruptcy law went into effect. However, from the first quarter of 2006 to the second quarter, the annualized personal bankruptcy rate, measured as bankruptcy cases relative to the U.S. population, grew from 1.2 in 1,000 to 2.0 in 1,000--an increase of 33.7%. The bankruptcy rate in the third quarter stood at 2.2 in 1,000, an additional increase of 9.6% in that quarter alone.

“Middle-class families are caught between low income growth, a high debt burden, and rising interest rates--and for the moment, these ingredients are here to stay. The most recent third-quarter delinquency, default, and bankruptcy figures show that the dangers to middle-class economic security are not theoretical concepts. They are a harsh reality for a growing share of middle-class families.”

Countrywide announced Thursday that it had obtained another $12 billion in financing after borrowing $11.5 billion the week before and selling a stake to Bank of America for $2 billion.

You’ve got to ask yourself why an institution as blue chip as Bank of America would invest in the country’s largest home mortgage lender just when everybody else in the sector is running for the hills.

It seems quite apparent to me that the only way Bank of America is going to ensure a lower default rate on its inventory of ABCP is to make sure that the so called triple-A assets behind the deteriorating paper continue to be financed. So it logically the bank has decided it’s better to spend $2 billion than on an “investment” than to have an exponentially greater amount of debt go delinquent on its books.

Desperate times call for desperate measures, apparently.

Gold thus becomes more attractive. Crumbling credit availability means the oversupply of new housing and commercial real estate will curb demand, which will see prices drop. Larger institutional investors begin to see gold as a hedge against further US dollar drops and risk associated with credit.

Even Goldman Sachs has finally jumped on the gold bug bandwagon, publicly proclaiming that gold will reach $725 this year.

Meanwhile, central banks in the Middle East and Russia continue to add to their gold reserves, even while European and North American central banks keep selling. Many industry watchers think China is about to become a buyer of gold, as its massive reserves of U.S. dollars are looking like they could see pretty substantial devaluation in the months and years ahead.

Gold has doubled since 2002, even in the face of concerted central bank selling. When these banks start to run out of gold to sell, what will happen to the price-limiting effect of their selling? It’s not unimaginable that gold could then start on an even steeper upward trajectory with no ceiling visible.

And then there’s the gold “carry” trade. Gold is “borrowed” at a rate that is typically very low. The borrower sells the gold and invests the money in an asset that performs better than gold over time, then sells that asset and buys the gold back, supposedly at a profit.

This formula depends on a relatively stable gold price, because if the price of gold were to increase at a higher rate than the asset performance rate, a loss would be realized by the time the gold had to be returned.

So in this environment, nobody is going to want to lend or borrow gold, as its enhanced volatility represents elevated risk. Gold broke out of the year’s trading range to resume a bull market, moving quickly from $670 to $721 in just eight trading days. A 7.6% gain in such a short time certainly got the attention of anyone in the carry trade business. So that business, and its net downward effect on the price of gold, is over.

Some analysts from otherwise conservative institutions think gold will see $850 by the end of 2007 as a result of desperate covers on short positions as the rate of gold price increase intensifies.

Meanwhile, Gold Fields Mineral Services, a global metals consultancy based in London, forecasts that total world gold-mining production will slip in the second half of this year. Gold sales by central banks, it says, rose by a modest 4% between January and July compared with the same period last year. Sales of so-called “scrap” gold--mostly recycled jewelry--fell by more than one quarter, despite spot gold prices trading at their highest six-monthly average in history.

Gold jewelry owners worldwide, in other words, want to hold on to the metal as its price continues to rise.

I, for one, am making regular trips to my local bullion bank to empty my wallet of paper currency for gold coins and bars. Somehow, it just seems to make sense.

Buy Gold or Else!!

Buying Gold is no Longer Advisable, it's a Must-2007-09-19
Courtsey:Goldworld

As the fundamentals driving gold straight north continue to gain intensity, the bottom line for those of us with capital tied up in other investments is that some gold in the portfolio is not merely advisable--it’s a must.

If you are a student of economic history, you will understand that in spite of the world’s abandonment of gold as the peg by which all currencies are measured, all currencies can still be measured in gold. That fact alone should amplify gold’s unassailable position as history’s value vault of last resort.

Alan Greenspan’s new book, which comes out tomorrow, points the blame directly at the Bush administration for abandoning “rigorous fiscal policy” in favor of misguided “easy money.”

Many commentators, however, blame Alan Greenspan for the current morass.

Their arguments suggest that if Greenspan hadn’t lowered rates so drastically in response to the dot-com meltdown, the current real-estate bubble bust and accompanying credit crunch would never have materialized.

That makes no difference now, though.

Countries who participated in the U.S. style of mortgages front-loaded with low interest rates are now having to devalue their currencies by pumping in paper to replace the even more nebulous ABCP which represented imaginary credit dollars. Those dollars are frozen in time as creditors wait with teeth clenched to see what rate of default falls out of raised rates of interest.

Admittedly, the assets backing even the sub-prime caliber of debt are not utterly worthless. But they’re surely not worth the value of the loans they’ve backed.

The yet-to-unfold problem here is that in the past, properties that were foreclosed upon found a ready market for the assets. Now, in the new tighter credit environment, that market is largely dried up, while supply is going up and will go through the roof in the months to come.

So government is having to inject more money into the system, which ultimately increases supply while lowering demand for those currencies.

Which means, in a roundabout way, the price of gold relative to those currencies is going to go up. The more money central banks have to pump back into their economies to alleviate liquidity crises, the more upward pressure will develop under the price of gold.

Presently gold is trading around its 16-month high, and looks strong at these levels.

If the Fed cuts interest rates by 25 basis points tomorrow, that will almost certainly send gold higher, as it will send a strong signal to foreign holders of U.S. currency that their rate of return on U.S. dollar holdings will fall victim to the Fed’s monetary policy.

That could see those U.S. dollars move increasingly into gold as huge government investors run from the greenback.

Northern Rock PLC, the U.K. mortgage lender that was the recipient of an emergency bailout package by the Bank of England, is now effectively in play as a takeover target because of is huge drop in share price. Northern Rock has shed over 35% of its market capitalization since the announcement last week.

Customers who were lined up outside the Newcastle branch burst into laughter when an employee came out to inquire if anyone was there to deposit funds as opposed to withdrawing them.

That grass roots panic could grip some U.S. banks, and if it does, the price of gold will go through the roof in short order.

The price of gold is already going through the roof, albeit as fast as cold molasses. But this credit problem is much like the onset of a bad case of flesh-eating bacteria. One minute the patient seems healthy, and then within months there’s no patient left.

A little drastic, perhaps, but it would be foolish to underestimate the scale of what is happening right now.

Gold is increasingly being snapped up by Asian and Middle Eastern customers.

Gold sales in Dubai could increase 40 per cent in September compared to last year’s figures, said the managing director of the Dubai Gold and Jewellery Group in a Qatar newspaper.

The Peninsula reported that Tawhid Abdullah, who is also the chairman of international jewelry retailer Damas, said that he expects that gold sales will increase in the fourth quarter of 2007 as customers make more purchases during the Dubai Shopping Festival and the Islamic month of Ramadan.

“The market is not affected by the current prices of gold and we have a better economy in Dubai and strong consumer confidence,” he said.

Gold sales in August were up 26 per cent compared to the same month in 2006.

All Signs Point to Buy Gold!!

Source:Goldworld

Mortgage Meltdown and Falling US Dollar Add Strong Bullish Sentiment to Buy Gold

DENVER, CO--Continued turmoil in the mortgage finance system led to an 8.3% drop in the sales of new single-family homes for the month of August. Meanwhile, builders in the US began work on the fewest homes in twelve years and new building permits dropped 5.9% to their lowest levels since 1995.

Yuck!

Robert Toll, chairman and CEO of Toll Brothers Inc., summed up the current housing market and credit crunch nicely two weeks ago while speaking at the Credit Suisse Homebuilder Conference ......

Deep doodoo indeed

Home builders are now launching new promotional price reductions as well as other incentives to attract homebuyers and move standing inventory off their books.

It's an act of desperation that I doubt will have much positive effect for them.

Potential buyers are being constantly inundated with negative media commentary on the housing market, which is further exacerbating residential housing woes.

There are about twice the numbers of homes on the market for sale compared to a year ago. Buyers have more choices, leading to higher competition among sellers and lower prices.

Furthermore, lending standards across the country are tightening. Folks who want to put no money down on a home are being subjected to more scrutiny when they apply for a mortgage loan. As a result, they are being turned down more often than they were last year.

The consequence is that houses are sitting longer on the market, and once again no one benefits. Homeowners get anxious when waiting to sell their houses and often react by lowering prices and accepting lower offers.

In an effort to help the housing market the Fed stepped in two weeks ago and cut interest rates by a half-percentage point, the first rate cut in the past four years.

It was the old band-aid on the broken leg.

And that's because for the sub-prime mortgage borrowers who are already on the brink of foreclosure, the Fed cut is of little consequence. At this point in the game, the Fed simply cannot help them. The Fed cannot help them!

Moreover, the Fed cannot fix the overall broken house market. It can only work to delay the inevitable.

The world's financial policy technicians will be hard pressed to solve the housing issue. And for now we can't get around the problem. We have to just go through it.

The piper must be paid.

Meanwhile the USD continues to erode in value.

The dollar extended its recorded-setting lows against the euro this morning. The once mighty greenback fell to $1.43 per euro, its lowest level since the 13-nation currency's debut in 1999.

The USD Index, a basket of six weighted world currencies, has also been steadily trending lower. At last look, the USD Index was at 77.86.

Further dollar weakness is probably still in the cards. And an unpleasant thought lingers in the back of everyone's minds: Recession.

Let's face it . . . Americans are spending junkies. We've borrowed trillions of dollars to remodel our homes, take vacations to Tahiti, and buy 60" plasma HDTVs and giant gas-guzzling SUVs.

There are consequences to this lifestyle. And we'll reap what we've sown.

We're living financial history here, ladies and gentlemen. And the best way to hedge yourself against personal fiscal catastrophe is by doing what I've been urging--practically begging--people to do for the past ten years: BUYING GOLD!

With the USD on the back foot and the economy on the verge of recession, precious metals will see continued support.

Gold has recently breached the $750/oz. level as the reality of economic disaster is finally beginning to sink in.

The yellow metal is now at a 28-year high after rising some 10% last month. And the fundamentals for gold have never looked stronger.

Besides the weakness in the USD and the credit crisis, September and October are typically a period when jewelers increase their holdings. Gold ETFs have also been buying aggressively in recent months and central bank selling has cooled off.

Please, do yourself and your family a favor: Hedge the coming financial economic crisis with gold.