Although I have great sympathy for the deflation crowd, given the reckless attitude of the central bankers and their ability to create debt-based money, I do not believe deflation (contraction in the supply of money and total debt) is very likely.

For sure, in this post-bubble environment, American consumer debt continues to contract, but this is being more than offset by the expansion in federal debt. Over the past year alone, federal debt in America has surged from US$9.645 trillion to US$11.813 trillion. In other words, during the past twelve months, American federal debt has risen by a shocking 24.47% and it now stands at 83.52% of GDP! Now, given the ability of the American establishment to essentially create dollars out of thin air, I have no doubt in my mind that it be able to inflate the economy. However, this will come at a huge cost and the victim will be the American currency.

In fact, the recent weakness in the US dollar is a sign that central-bank sponsored inflation has started to dominate the private-sector debt contraction in the West. Furthermore, over the past few weeks, various governments have issued US dollar-denominated debt and this suggests that the carry-trade is back in vogue. In a startling move, Germany recently announced that it plans to borrow money in US dollars!

Now, given the ongoing federal debt inflation, debasement of paper currencies, sky-high budget deficits and competitive currency devaluations, the macro-economic environment has never been better for precious metals. Yet, both gold and silver continue to frustrate the bulls by staying below the record-highs recorded in spring 2008.

So, what is going on here? Have we already seen the end of the precious metals bull-market or are we about to witness an explosive rally? Before I attempt to answer this question, I want to make it clear that even though gold failed to better its all-time high during last autumn’s panic, it was the only asset, (apart from US Treasuries) which stayed relatively firm. And looking at the various markets today, gold is the only asset that is flirting with its all-time high. So, whether you like it or not, gold deserves some credit for fulfilling its role as a safe haven.

Now, unlike some of the die-hard gold bugs, I don’t believe that gold is the ultimate asset to own at all times. Without a doubt, there have been times in history when gold has proven to be a lousy investment. For instance, between 1980 and 2001, the nominal price of the yellow metal fell by an astonishing 70%. This horrible price action spawned an entire generation who grew up hating gold and up until a few years ago, the vast majority considered gold a barbaric relic.

However, during other periods in history, when macro-economic uncertainty was high and inflationary expectations were running out of control, gold turned out to be a fantastic asset to own.

If my take on the macro-economic situation is valid, then we are in such a period now and gold must form a part of every investment portfolio.

You may remember that over the past year, central banks have injected trillions of dollars into the banking system and it is only a matter of time before inflationary expectations start spiraling out of control. Up until now, this ‘stimulus’ money hasn’t permeated through the economy in the West but once money velocity picks up, prices will start rising and the investment community will become very concerned about inflation. When the deflation scare abates and people start protecting the purchasing power of their savings, capital will start to flow towards precious metals.

Long-term clients and subscribers will recall that about two years ago, I highlighted gold’s tendency to rocket higher every other year. Figure 1 captures this trend perfectly and you can see that since the outset, gold’s bull-market has been punctuated by lengthy consolidations and the yellow metal has surged to a new high every alternate year.

Figure 1: Is gold about to shine?

So, if gold remains in a bull-market and its trend consistency is intact, its price should surge over the following months. Conversely, if the price of gold fails to climb above its all-time high before year-end, it should start to ring alarm bells as this would open up the possibility that the bull-market may be over. Remember, certainty does not exist in the investment world and savvy investors should remain open to all outcomes.

Now, given the uncertainty in the world today and the ticking inflationary time-bomb, my view is that gold will soon embark on its north-bound journey. So, I suggest that investors hold on to gold and the related mining companies which will probably continue to perform well until next spring.

As far as silver is concerned, it has always been a high-beta play on the direction of gold. If the next up leg in gold’s bull-market materialises, the price of silver will also head towards the heavens. Accordingly, investors may also want to allocate a portion of their investment portfolio to silver bullion and silver producing companies.

Regards,

Puru Saxena

Source:Inflation is Our Future

This time around, silver has failed to match the gains that gold posted in recent months, spawning a widespread believe that silver is poised for a bull run. Such factors as a decline in supply and a weakening U.S. dollar have buttressed that bullish belief. And so has the fact that China’s government is strongly encouraging that country’s residents to buy the white metal.

With Beijing’s plan to inject $587 billion (4 trillion yuan) into China’s economy, and a growing desire to diversify away from the U.S. dollar as its key reserve currency, the Asian giant could increase its reliance on such precious metals as gold and silver – especially if global inflation takes hold.

China’s central bank “could use gold, silver or even a basket of commodities” to diversify away from the dollar, said Money Morning Contributing Editor Peter Krauth, a recognized expert in metals, mining and energy stocks. “It’s impossible to know how they’d go about it.”

This wouldn’t be the first time that silver played an important economic and transactional role in Mainland China. Nearly 2,500 years ago, the Red Dragon was the first to use silver as money. While China invented paper money in the ninth century, silver made its way back several dynasties later as legal tender until the government again prohibited its ownership in 1935.

Now, 75 years later – in the wake of the worst economic downturn since World War II – China has reversed its stance on silver.

In July, state-run China Central Television (CCTV) began a campaign that pushes the purchase of silver bullion as investment opportunity. Analysts say silver has been undervalued in the last few years, and is a good investment for individual investors, according to CCTV.

“The investment threshold [for silver] is not high, and is more suitable for the general public,” said Want Chunli, GM of Beijing’s Caibai Shopping Mall, the first to offer silver as an investment opportunity. “Silver is much cheaper than gold.”

Silver’s investment potential is best measured by the silver-gold ratio, or the price of gold divided by the price of silver. Over the past five years, the ratio has held fairly steady, requiring 55 ounces of silver to buy an ounce of gold. Earlier this year, as gold increased at a faster rate than sliver, the ratio skyrocketed to 70 to 1. It has since corrected to around 60.

Money Morning’s Krauth says that when this relative price ratio does correct, it tends to overshoot.

“I see it going to 50 at least,” Krauth said. “With gold at $1,000, that means silver could trade to $20 or even higher, which is another 20% from [the current price].”

Silver closed Friday at $16.06, while gold closed at $991.10 – implying a silver-to-gold ratio of 61.71.

Krauth sees China returning to an asset-backed currency and says ownership of silver could help the average citizen, even if its central bank is unable to diversify out of the U.S. dollar fast enough.

The more Chinese citizens who own silver, “the stronger the country will be in the eventuality that the world establishes a new world reserve currency backed by (most likely) precious metal(s).”

China’s middle class is estimated at 300 million – roughly equal to the entire U.S. population. And that consumer group in China is growing. As those incomes continue to rise, so, too, will the demand for silver.

China’s use for silver goes beyond jewelry or as a safeguard against inflation. Thanks to the antibacterial properties of silver ions, the white metal is used for everything from socks to wash machines, to name a few.

Silver Supply is Falling

The world once had 2.2 billion ounces of silver above ground, but that figure has plummeted 86% to the current 300 million ounces, according to Addison Wiggin, a best-selling author and an executive publisher at Agora Financial LLC, which, like Money Morning, is part of the Agora Inc. group of companies.

However, above-ground silver accounts for only 25% of the silver produced today, says Money Morning’s Krauth. The other three-quarters is actually a byproduct of such mined base metals as iron, nickel or lead.

When the financial markets nearly collapsed last fall, base-metals producers weren’t spared. As demand forecasts were cut, they quickly throttled back on production, expansion and exploration.

“More has to come from mine production, which can only grow so fast,” Krauth said. “The fact that base-metals producers have cut back a lot hurts silver production because it’s a byproduct of base-metal mining.”

Once the recovery begins – and it’s already under way in China – supplies will be hard to come by as demand for base metals returns, resulting in higher prices for silver.

Gold’s “Lap Dog”

The price of gold doesn’t necessarily affect the price of silver, but when other economic factors such as the U.S. dollar falter, prices traditionally rise at the same pace. But when the global financial crisis took hold last year, the silver-to-gold ratio shot up to 84.

Much like a “nervous little lapdog,” the price of silver follows gold closely, Krauth says.

Since its mid-July low of $12.46 an ounce, silver has rebounded roughly 30% to current levels. But if gold supplies run short, silver may have even more room to run.

When gold hit its all-time high of $1,033.90 per ounce in March 2008, silver prices soared as high as $20.92. But when gold hit its 18-month high earlier this month, silver stayed in check.

“Silver has lagged the rise in gold prices since 2000,” said Money Morning Contributing Editor Martin Hutchinson, a former investment banker with more than 25 years’ experience in the global financial markets. “If gold really takes off and the big money finds there isn’t enough of it, there should be spillover into silver.”

Famed commodities investor Jim Rogers also noted the lag in silver and gold’s prices.

“I’m looking at all commodities, but some commodity prices are very depressed,” Rogers told China International Business. “Silver is 70% or so below its historical highs, coffee is 70% or so, as is sugar, while gold is only 10% off its all time high.”

Making the Investment

While buying physical silver is an option for investors, the simplest way to get in, Krauth says, is via the iShares Silver Trust (NYSE: SLV) exchange-traded fund (ETF). In the three years since its inception, SLV has accumulated $3.91 billion in assets, and the share price – which is the equivalent to one ounce of silver – is up more than 50% this year.

During last fall’s market crash, SLV’s holdings remained nearly flat, around 220 million silver ounces. Since then, it has grown a further 22% to about 280 million ounces.

“That’s a testament to investor commitment,” Krauth said.

Hutchinson calls SLV “quite a good vehicle” over the big silver miners – such as Coeur d’Alene Mines Corp. (NYSE: CDE).

Coeur d’Alene has a large silver deposit in Bolivia. But Hutchinson characterizes Bolivia as a country that he “wouldn’t touch,” thanks chiefly to the Venezuela-like nationalization of the country’s other commodities, including oil and natural gas.

Source: The No. 1 Way to Profit When Silver Upstages Gold

Spot gold hit a high of $961.00 an ounce, its firmest level since Aug. 7, and was bid at $955.10 an ounce at 1434 GMT, against $946.75 an ounce late in New York on Thursday.

Prices rose after heavy selling of the dollar late on Thursday, particularly against the Swiss franc, knocking the U.S. currency to multi-week lows versus the euro.

“In the near term is it still predominantly the currency that is in the driving seat,” said Saxo Bank senior manager Ole Hansen.

“That has managed to tip (gold) through a technical level where new buying and short covering has been triggered this morning, and that has given us a bit of momentum on the upside.”

Gold typically moves in a close inverse relationship with the dollar, as it becomes cheaper for holders of other currencies as the U.S. unit softens. Gold was also being bought as an alternative asset to the falling dollar.

“We touched these highs yesterday in the euro-dollar, and we haven’t really come back from that,” said Hansen. “The euro has elevated to slightly higher levels now, and that has given (gold) the support that’s needed now to test higher.”

The U.S. unit was little changed on Friday versus a currency basket, but lifted from lows against the euro after data showed consumer confidence fell to its lowest in four months in August, denting interest in currencies seen as higher risk.

Oil climbed after Thursday’s better-than-expected U.S. GDP and jobs data boosted interest in nominally higher-risk assets like equities and commodities.

U.S. gold futures for December delivery on the COMEX division of the New York Mercantile Exchange rose $9.70 to $957.00 an ounce, off a high of $964.60.

SILVER RISES

Silver was also helped by gains in base metals, with copper up more than 4 percent. Silver, also used as an industrial metal, rose to $14.70 an ounce from $14.24.

On the wider markets, European shares rose more than 1 percent on Friday, while U.S. stocks were higher, though they also pared gains after the consumer sentiment data.

Platinum was supported by a strike at South Africa’s Impala Platinum and news that a union had rejected the latest wage offer from Anglo Platinum , the world’s largest producer of the metal.

Platinum was at $1,242 an ounce against $1,240.50, and palladium was at $286 against $284. South Africa is the source of four-fifths of the world’s platinum.

The National Union of Mineworkers said Implats, the world’s number two platinum producer, had failed to secure a court order to stop the strike. Some workers at its Rustenburg mine have been on strike since Wednesday.

But a rise in platinum stocks after demand fell for the autocatalyst material, news of capacity cuts from Toyota earlier this week, and hopes industrial action will be resolved quickly are limiting gains, analysts said.

“The market reaction to these supply interruptions help confirm our view that this is not an attractive tactical entry point into new long platinum positions,” said UBS analyst John Reade in a note.

Aug 28 (Reuters)

Nevgold Resource announced that the drill rig will be turning on its Cordero gold project in Nevada. The junior is targeting high-grade feeders at around 450 meters depth. Nevgold ended the day unchanged at C$0.15.

The Evolving Gold story continued to evolve. The junior mobilized a fourth core drill rig to its Rattlesnake Hills property in Wyoming. Evolving Gold closed at C$1.29, for a C$0.18 gain.

The markets appear to be at a pivotal turning point with signs that an economic recovery is at hand driving buyers back into equities. We shall see what Monday trading has in store.

Source: Resource Stock Roundup:Monday, July 27, 2009

Silver developed the gentlest of upward trends early in London and rode that trend through the Globex, ending just off its intraday high at $13.87/oz., up 17 cents. For the week, silver is up 3.4%. (Click here for charts)

Although profit-taking kept gold from staging a big rally this week, the yellow metal should be well supported at current levels because of dollar weakness and inflation fears, analysts said.

“We are still up here in quite a high range. We don’t see any physical buying coming in at these levels, but what is supporting it is the dollar,” said Andrey Kryuchenkov, an analyst at VTB Capital.

“The dollar’s weakness and the idea that inflation expectations are on the rise are holding gold here,” Kryuchenkov added.

In company specific news, Mineweb reported that Kinross Gold (NYSE:KGC) has recently assumed stock price leadership of the loosely-defined Tier 1 global gold stocks sector, which includes 12 companies with an aggregate market value of just under $200 billion. Kinross’s stock price fluctuated between a 52-week low of $6.85 and high of $20.98 a share, with current trades around the $20.28 mark.

Barrick, the world’s biggest gold miner by value and production, is trading nearly 25% off its 52-week high. Kinross was one gold stock chosen for investment this year by US hedge fund Paulson & Co Inc., which famously scored gains of nearly $4 billion betting against banks in 2007 and 2008.

In the past several years, Kinross has transformed itself from a stodgy, higher cost gold producer to one that increasingly reports lower costs, along with a highly convincing longer-term growth profile.

Source: Gold Pushes Through $950

Potash Corp. of Saskatchewan (NYSE:POT), the world’s largest fertilizer producer by market value, saw second quarter profits fall by 79% to $187.1 million or $0.62 per share. Stripping out a one-time gain of $115.3 million from previously impaired securities and the profit tallied $0.32 per share. The company also announced that 2009 earnings will be less than previously forecast as demand from farmers declined. This did not dismay investors as Potash ended the session up C$7.09 at C$104.59.

Brett Resources tabled an updated inferred resource of 155 million metric tons grading 1.04 gram gold per metric ton for its Hammond Reef deposit in Ontario. Brett ended the day up C$0.03 at C$0.89.

The appetite for resource related equities appears to be insatiable right now with the bigger producers receiving most of the interest. We shall see what Friday trading has in store.

Source: Resource Stock Roundup:Friday, July 24th, 2009

Silver traded flat most of the day, as a gentle rise and fall in London and the same in New York canceled each other out perfectly. The metal finished exactly where it started at $13.70/oz., up/down 0 cents. Overnight, silver is trending higher. (Click here for charts)

Despite big gains in oil yesterday, which is usually gold supportive, the yellow metal fell as it took its cue from rising equities and a slightly stronger dollar.

“We have a tug of war here between those who dare to buy at these levels and people who got in at previous levels. If it breaches $960 [an ounce] it might make a quick run to $975, or it might swing back to the lower end,” said Jon Nadler, senior analyst at Kitco Metals Inc.

If Treasury auctions or GDP data coming next week prove dollar supportive, “it would bring gold down to the $930s at a minimum,” Nadler continued.

While Peter Grant, a senior metals analyst at USAGOLD – Centennial Precious Metals, Inc., believes inflation to be a “legitimate risk,” Nadler calls the jury very much out. “Right now we’re still grappling with deflation if anything.”

In reality, we’ve already had massive inflation (meaning expansion of the monetary base), but it hasn’t manifested in prices yet because the banks are holding the funds in reserve rather than lending them out. Once that money hits the market, however, (and there’s no telling when that will be exactly) you can and should expect huge price inflation to follow. This will be extremely positive for gold.

Source: Gold Takes a Step Back

High-flying Ventana Gold appointed Stephen Orr to the position of president and chief executive officer effective September 1. Mr. Orr was chief executive officer of OceanaGold and prior to that he was vice-president of North American operations, then managing director of Australia and Africa for Barrick Gold (NYSE:ABX). Ventana ended the day up C$0.01 at C$5.20.

Following the Colombian gold theme, Ventana’s neighbor Greystar Resources ended the day up C$0.35 at C$4.30.

Shares of Keegan Resources (AMEX:KGN) added C$0.24 to close at C$3.03 after the company reported drill results that included 10.31 grams gold per metric ton over 22 meters at its Esaase property in southwest Ghana.

Investors in junior resource stocks are eagerly anticipating the next batch of drill results with favorable ones driving the share price higher and disappointing ones causing a run for the exits. In other words, all appears to be right with the world. We shall see what Thursday trading has in store.

Source: Resource Stock Roundup:Thursday, July 23rd, 2009

Silver started to fall midway through trading in the Far East and moved sideways through London but trended much higher the rest of the day through the Globex to close at $13.70/oz., up 17 cents. Overnight, silver is trending higher. (Click here for charts)

Gold closed at its highest price on the Globex since June 11 as the dollar weakened in response to an up-tick in risk appetite.

“Almost all the recent momentum is coming on the back of recent dollar weakness,” said Pradeep Unni, a Richcomm Global Services analyst. “Earlier this month economic worries encouraged investors to buy the dollar and U.S. Treasuries. Appetite for other assets including gold and equities seems to be returning.”

“Prices remain well supported above the $950 an ounce mark, largely on the back of the weaker dollar,” said Calyon metals analyst Robin Bhar.

“It may be that outflows from things like the ETFs or the retail base are being offset by more buying of OTC- or futures-based [products],” Bhar added.

Meanwhile, reported holdings of SPDR Gold Shares (NYSE:GLD) dropped another 5.8 metric tons yesterday from 1,092.41 tons to 1,086.61 tons. In the last 30 days, holdings have fallen 44.63 metric tons, or 3.9%.

Some analysts view the decline in holdings at GLD as a sign of waning investor demand.

“We fear that there will be very few buyers above $955 an ounce,” said Andrey Kryuchenkov, a VTB Capital analyst. “Investor demand is waning and it is too early for a seasonal pick-up in jewelry demand.”

Source: Gold Closes Above $950

Silver hit its intraday high of $13.70 about midway through Hong Kong then developed a volatile but generally downward sloping trend and fell to its intraday low of $13.45 around 1 p.m. in New York. From there silver was able to regain some ground through the Globex to close at $13.53/oz., down 10 cents. Overnight, silver is down sharply. (Click here for charts)

Gold was propped up by higher oil prices yesterday but that upward force was slightly overpowered by investors’ naïve belief that the Federal Reserve will be able to combat future dollar devaluation and price inflation.
Still, analysts like Shuji Sugata, a manager at Japan’s Mitsubishi Corp Futures & Securities, said crude oil is currently a key factor in providing gold with direction.

“We’ve seen crude oil climb almost daily and before we knew it it had topped $60, which has been a positive factor for gold,” Shuji said.

“Now whether crude oil challenges $70… will also be key to whether gold will rise towards its recent high near $990,” he continued.

Meanwhile, reported holdings of SPDR Gold Shares (NYSE:GLD) dropped 2.13 metric tons yesterday from 1,094.54 tons to 1,092.41 tons. In the last 30 days, holdings have fallen 38.83 metric tons, or 3.4%.

In company specific news, Australia’s largest gold producer, Newcrest Mining’s annual gold production fell more than 8% over the past fiscal year, only just meeting company guidance.

Newcrest’s latest production report showed total gold production across its operations fell to about 1.63 million ounces, compared to about 1.78 million ounces last year, a fall of 8.4%.

Newcrest shares fell 57 cents, or 1.84%, to $30.39 on the news.

Source: Gold Holds Firm