How China Could Push Gold to $1,000 An Ounce This Year

By Chris Weber
In the most recent issue of the Weber Global Opportunity Report, I sized up the current situation in the gold market.

To me the news is contained in the chart :
Look at the top line, marked "Gold, adjusted for inflation." You can see that gold's "real" price, taking inflation into account, has only just begun to rise.

Even though in purely nominal terms, gold is around the same $850 "record" level we saw in 1980, in real terms gold is very far below that level. Gold would have to be more than $2,000 per ounce to approximate that 1980 level in today's prices. Further, very few people own any gold at all. Ask yourself about the people you know.

Chances are they don't own any. In fact, I know many of you reading this essay don't own any gold or silver.

Though gold is now trading at a record high, it is still roughly around January 1980 prices. How many other assets can you say this about? The average home is maybe five to six times what it was 28 years ago. The Dow is about 14 times what it was then.

Looked at in this way, gold is still a bargain.

Now look at the way the central banks are throwing newly created paper money and credit at every problem that comes up. Put this together, and gold's rise has far, far more to go. I am very impressed by the way gold has stayed above $800.

The month of December 2007 was the first month in history where gold closed the month over $800. I think we will see it touch $1,000 in 2008. This would be less than 20% from where it ended last year, at $833.80. After all, gold rose over 31% during 2007 (from $636 to $833.80). If it only had two-thirds of that juice this coming year, we'll see $1,000 gold.

Gold's percentage gains since its bull market began in 2001 are laid out below:

2007 31.1%
2006 20.6%
2005 40.0%
2004 8.36%
2003 54.5%
2002 20.2%
2001 33.1%

The average annual rise since 2001 has been 27.27%. If gold rises by just this average in 2008, it'll close the year at $1,061 per ounce. There's one other new development for gold that may help it get there...

This year, China is beginning the country's first-ever trading in gold futures contracts. These are of fairly small size: 1,000 grams, or 32.15 troy ounces per contract. Buyers can put down as little as 7% of the contract, or less than $1,900 per contract at today's prices.

Gold production in China has been soaring in recent years. And according to the China Gold Association, 2008 may be the year that China becomes the world's biggest producer, leapfrogging over Australia, South Africa, and current-No. 1 producer the U.S. And last year, China overtook the U.S. to become the second-largest consumer of gold, after India.

With gold futures contracts being traded on the Shanghai Futures Exchange in sizes that don't shut out the smaller investors, there could be huge demand on the part of the average Chinese for gold this year. If the stock market falters, or enough smart investors start to diversify out of stocks and into gold, this could have a huge impact on the price.

Good investing,

Chris Weber

The Enigma of Martin Armstrong

Some memories fade, but are not forgotten. The same holds true for certain personalities, particularly the bizarrre and eccentric. One such notorious individual is Martin Armstrong a.k.a. Princeton Economics a.k.a. self-professed expert in the history of money and things gold, and of course, true to my theme of things Japanese. He was accused of Ponzi fraud and the purveyor of the notoriously unvaluable "Cresvale Bonds" that besotted Japanese corporate investors and populated their portfolios, much to their eventual chagrin. Coincidentally, in a bout of synchronicity, I was wondering only a few weeks ago what's become of him and was preparing a post, so it is timely indeed that after languishing for six and a half years in a Manhattan jail cell, he finally pleaded guilty to charges fo Fraud on Thursday, August 17th 2006.

In a nutshell, Martin Armstrong was a confidence trickster, if not a fraudster for which he was accused. Martin Armstrong was also a bad trader. A very very bad and inept trader. And Martin Armstrong committed fraud to cover up his bad trades. And then he committed more trades to cover up his fraud. Most in Nikkei and Gold. Despite the laughable ineptitude with which he implemented his "strategies", by most accounts he was smooth, suave and authoritative, in a way that encouraged people to entrust to him their money. Which he duly lost. Many many hundred of millions of US doillars. Perhaps billions. The official court dockets (available on-line) from his 1999 indictment in the Manhattan district of US Federal Court read like a Shakespearean comedy. The more he traded, the more he lost. So much and so bad were his trades that his colleagues, and brokers mercilessly joked about it behind his back. He was so consistently wrong-footed in his bets that he would have done far better flipping a coin to decide whether or not to be long or short. Or use the infamous "8-Ball" method. Or consult Nancy Reagan's financial astrologer, or ask the advice of Paul Wolfowitz. Anything but use his own judgement.

Though his company, Princeton Economics, had head offices in the US, he traded from Tokyo in an office overlooking the gardens of the Imperial Palace. For Japan has a special place in his scheme. You see, the Japanese too, in undertaking their own form of speculation known as Zaitech, had lost billions in late 80's and early 90's on dubiously-thought-out wrong-footed speculation and investment. Like Martin Armstrong, and other agent-trader victims shell-shocked by large lossess, they were too ashamed and emabrassed to tell their shareholders that they had punted wrongly, or in UK football vernacular, scored an "own-goal". Not willing to "come clean, they found themselves with a serious problem and yearned for a clever and tidy solution that would absolve them of the thing they feared most, which was NOT the losing of the money itself, but accepting responsibility, a dilemma not unlike that faced by I. Lewis "Scooter" Libby.

Enter Martin Armstrong and the almost forgotten Cresvale Securities. He too had a problem since his golden-tongued investment plans, proved rather less robust than hoped [and promised] and resulted in large trading losses for his clients. It seems that he was able to continue his scheme and make payments to the clients who redeemed by using the proceeds from new investors. This, however was proving more difficult as losses mounted, and so he need new clients. Big clients. Well-heeled clients who wouldn't be asking for their money back any time soon. Like money from a dead persons trust. A better yet, a dead-pet trust. Or even better: a Japanese corporate client that themselves had a dirty big secret to hide.

And so they found each other: the companies, like an inveterate gambler, desperate for an investment saviour who would, over time, regain their previous losses, rescuing them from humiliation and shame they most dreaded (not to mention a demotion to the Corporate Travel Office, or Janitorial Services Dept.) and Armstrong, now with a fresh load of clients, and more importantly, their cash. In between them stood Cresvale Japan, the securities firm who brought them together, gave legitamacy to both their pursuits, and took nice fees out of the middle in the process, and in so doing torpedoed themselves out of existence.

The scheme worked something like this: Japanese Corporate 'Y' perhaps lost $100,000,000 speculating through a subsidiary, selling Nikkei Put Options or buying boatloads of overvalued shares after consulting with Madame Inoue's Buddhist toad. They were able to hide this for a while by playing "pass the parcel". perhaps between offshore subsidiaries with different year-ends. Thus their consolidated accounts still showed these losses as assets at their full value on their balance sheets. So Armstrong/Cresvale prposed they swap $50,000,000 of new money for a "repair bond" with a maturity value equal to the full $150,000,000 ($100mm of losses + $50mm of new money) and then let Magic Martin do his thing. If things went right, they would make their money back and everyone wins. If something goes wrong, well they can blame the investment losses on Armstrong, call it fraud, and take write-offs, without having to take responsibility in the first instance. (note: this is sketch of the essence, not the actual details).

This is all interesting, but what really fascinated about this story is that in the mid-90s, certain un-named American value investors had eyed a number of Japanese companies that they believed "cheap" because they seemed to have large amounts of cash & marketable securities on their balance sheets, relative to their now-diminished market capitalizations. In some cases it was in excess of their entire market capitalization. Many reasons were put forth explaining the phenomena such as: "empire building"; "saving for a rainy day"; "deflation"; "management conservativeness"; "investor pessimism"; "adverse taxes upon large distributions"; "legal inability to conduct share buy-backs" etc. All seemed somewhat plausible. Conspicuous by its absence, except as speculated by the most hardened, battle weary cynical gaijin observers was: "because it doesn't exist".

But clearly some people HAD to know about their losses. For other foreign banks were in the repair bond business. And many of the companies themselves were household names. Maybe their businesses were not as fraudulent as Armstrong's, but nonetheless their audited accounts and actions were meant to deceive shareholders by masking losses and allowing them be amortized over many years.

Annd since we are writing it, we all now know that things didn't go according to planned. When the Armstrong fraud broke, many of the guilty Japanese Corporates had to come clean. Sort of. They said they were victims of fraud (and some truly were unsuspecting purchasers of Cresvale Bonds), but the "repair Bond" concept and angle was often lost on most observers. Yakult Honsha (TSE#2267) was said to have $1bn of losses, as well as engineering firm Chudenko (#1941); specialty chemcial maker Gun-Ei Co. (#4229) pharma co's. Kissei (#4547), and Towa Pharm (#4553), machine-tool giant Amada Corp (#6113), pneumatic specialist SMC (#6273), eletronic parts mfgr Alps Electric (#6770) advertising agency Asatsu (#9747), office furniture maker Itoki Crebio (#7972) and more than 50 other firms were deemed to be "stung". Yakult's losses were so big that they couldn't blame Armstrong, but many other co.s did, and were "absolved" of culpability for their original sins.

The epilogue was that Armstrong, accused of Fraud, sat in jail for contempt of court, not brought forth to trial for failure to turnover evidence and in particular, tell authorities the whereabouts of $15mm of gold and silver coins and bronze statues he'd squirreled away. It was the longest such languishment for contempt in United States history. All the while, he's claimed that he was innocent of the fraud. I make no judgement here, but it seems likely from the court documents and testimony that he did commit fraud in the form of the ponzi that used new proceeds to pay old losses. His brokers, Republic Bank, (now the behemoth HSBC) coughed up nearly USD$600mm for their part of not alerting autorities to the potential wrong-doing, whichh court documents alledge, they were well aware. But most of the losses were not "embezzlement" or "theft", per se, as the newspapers and Japanese Corporates would have readers believe, but out-and-out ineptitude and shitty trading, for which is no crime, excepting one's sensibilities of the good, the bad, the random and the ugly.

His guilty plea may reflect that Armostrong the man met Armstrong the fraudster. Or it may reflect Armstrong's understanding that having spent six years in jail, an admission of guilt might allow him to squeeze a few years of freedom in his (no pun intended) "Golden Years".

For investors, the only the protection they can afford themselves is doing appropriate due diligence and being highly skeptical of anything that purports to be "too good to be true", or turn base metals or paper into errrrr gold.

Gold, S&P 500, XAU, HUI & BGMI - annual change rates

Smaller Things Grow Faster

by Jason Hommel, June 19, 2006.

One of the most important investment principles that I've ever discovered is this:

Smaller investors have the greatest advantage of all, because they can grow their money the quickest; but big money grows the slowest.

In other words, acorns can grow into big oak trees, but big trees cannot grow to the moon.

For example, you can buy a soda for 50 cents, and sell it later that same day for $1.00 on a hot day, and make 100% in a single day! But the next day, you’d have to sell 2 sodas, then 4, 8, 16, 32, 64, 128, etc. But that kind of work might not be enough to pay the rent, and that kind of growth is unsustainable. Within a week, you have a job that’s too much for you, and you have to give up some of your gains to hire workers or buy vending machines to keep selling soda. Or, the season will change, and you can’t sell any soda if it’s not a hot day. Or, you’ll have to get a permit to sell that much soda. Or, you’d fill the needs of the market, and not be able to increase sales day after day. Or, competitors will show up, and you’ll sell less.

The former generation of investment advisors will typically tell you what I consider to be half-truths when it comes to compounding your money. They will say that if you save $10,000 by age 18, and never again add to your savings, and if you are able to compound it at 10% per year, than you can retire as a millionaire by age 65. This is true, factually true. You can grow 100 fold in a lifetime, at 10% per year.

But what good is a million dollars if there is hyperinflation, and a loaf of bread costs $10,000 in 40 years? The real truth is that you not only have to earn 10% per year, but you have to earn 10% more than inflation each year! If inflation is roaring along at 7% in consumer goods, you need to earn 17% per year! And if they are creating new money at a rate of about 15% per year (which is close), then you need to grow 25% per year! Or, if years of prior inflation show up all at once, you may have to do better than 50% to 100% per year!

Furthermore, it is terribly misleading if you end up thinking that you should grow at no more than 10% per year, if 100% to 1000% is more realistic for you!

Fortunately, if you are a small investor, you can grow your wealth by 100% per year, or better! (After all that’s merely a doubling, or a 2 fold return.)

Issac grew his wealth 100 fold in one single year; from simple farming!

Genesis 26:12 Isaac planted crops in that land and the same year reaped a hundredfold, because the LORD blessed him.

Large investors, on the other hand, have great difficulty growing so fast, or outperforming the market. You can prove this to yourself on an excel spreadsheet: If you invested 1 oz. of gold 6000 years ago, and compounded it at ¼ of 1% per year, then you’d own more gold than has been mined in the history of the world, over 6 billion ounces, which is obviously impossible. If you grew your ounce of gold at 2% per year, over 6000 years, you’d own all the atoms in the universe, all of it would be gold, and all of it would belong to you. Clearly, that kind of growth rate, 2%, is impossible—for the largest money to achieve over long periods of time.

In fact, the largest money cannot even grow more than ¼ of 1% per year. And if it does, then it must have corresponding years of losses to make up for it, just like a mature oak tree cannot compound its way to grow to the moon.

This math proves, beyond a shadow of a doubt, that it is impossible for “the rich to grow richer, and the poor to grow poorer”. In actual fact (and even a casual look at history shows this to be true) the poor grow rich fastest, and the rich have to always struggle, just to maintain their wealth. And more often it seems, people who inherit wealth squander it. As it is, the USA seems to be squandering its wealth, too, neglecting to invest in gold and silver (and possibly even secretly dumping the Treasury's gold), whereas India and China, the poorest nations on earth, are making the best investment decisions; to buy gold and silver!

Why Silver is better than Oil as an Investment

by Jason Hommel, March 15, 2008

1. There is a 40-year supply of oil in the ground. There is a 14-year supply of silver in the ground. Therefore, silver is the better investment.

If "peak oil" is true, then every peak oil nutcase out there ought to be several times more worried about "peak silver", since silver reserves will run out sooner.

If oil is used in more kinds of products than any other commodity on earth, then silver is the second most used commodity, used in electronics of all kinds. And if silver is used up first, then we won't have all the electronic machines needed to go and get the oil!

But the "peak oilers" are not so worried about silver. Why not? I can only guess, but it is an educated guess based on extensive reading of their works over the years. I suspect it is because they are ignorant of silver, ignorant of economics, irrationally fearful, and worship government and "mother earth" instead of God.

2. In 1970, there was a 10-year supply of oil in the ground. We did not run out in 1980. We explored, and found oil. Mankind has explored for oil and produced oil only for 150 years or so, which creates extra fear of uncertainty (unlike silver and gold's 5000 year history). Since we did not run out in 1980, then we will not run out in 2050, over 40 years from now.

3. If it's not about "running out" but rather, running out of the "cheap stuff", fine, I agree! If we run out of "cheap oil", we will run out of "cheap silver" far, far sooner, so silver is the better investment, and will outperform oil.

4. The silver to oil ratio: In 1980, at the former peak prices for oil and silver, oil cost $43/barrel and silver was $50/oz. An oz. of silver was worth more than a barrel! At the bottom of the market around 2000, oil was $10/barrel and silver was around $5/oz. This implies a price for silver of somewhere between $55-110/oz., with oil prices remaining stable. If oil doubles from here, then silver will go up ten times, to $220. Therefore, silver is the better investment.

5. The public will never buy 100 barrels of oil to store on their front lawn, at $110 each, to save $10,900 worth of wealth. The public will buy a $15,000 bag of silver to store in the closet, or home safe.

6. The silver market is orders of magnitude smaller than the oil market, and will move far higher with a smaller amount of money moving into silver.

World oil supply is 85 million barrels of oil per day x $109 = $9.2 billion/day, or 31 billion barrels/year, which is $3.4 trillion per year.

World silver mine supply is 650 million ounces per year x $21 = $13.6 billion/year.

In the long run, if paper money fails, the world might have to pay for oil with silver. (Gold would be used for everything else). In that case, that implies that an ounce of silver would buy 47 barrels of oil (31,000 / 650 = 47), which implies a price for silver of $109 x 47 = $5200/oz.

Interestingly, even gold is a much, much better investment than oil, because all the gold ever mined in all of human history is about 5 billion ounces, which, at $1000/oz., is $5 trillion, which would barely pay for the world's annual oil consumption of $3.4 trillion. But as you all know by now, silver is much better than gold.

7. About 70% of the world's oil is supplied by national governments that have confiscated private oil discoveries. Therefore, oil is a risky investment. National governments generally do not spend money on exploration or development; they spend nationalized oil profits on wasteful social programs to maintain the power of the government thieves.

Of the other 30% of the world's oil, the "free world's" oil, about 9 cents per gallon of gas goes to the oil companies as profit, and about 51 cents per gallon goes to governments in taxes. Thus, 51 out of 60 cents, or 85% of the "free world's" oil has been nationalized, too. Therefore, oil is an extremely risky investment. Not only is the price of oil too high, but governments steal most profits that exist in the industry, world-wide. Investors ought to worry far more about governments stealing an oil discovery, than a silver discovery.

While oil prices moved up over ten times from $10/barrel to $110/barrel since 2000, Exxon Mobile stock barely doubled from $40 to $85. This shows that the "big oil" companies are not "getting rich" off of high oil prices, due to excessive government taxation. (Chevron has also gone from $40 to $85 since 2000, and BP has done much worse, going from $60 to $64 since 2000!)

If only 1% of gross world oil profits were spent on silver, instead of being stolen by governments, that would be: 31,000 million barrels x $110 x .01 = $34 billion. Since total annual investment demand for silver is about $1 billion, then I estimate that much money would move the silver price up to well over $200/oz.

Yes, 1% of gross world oil costs would probably drive up silver prices over ten times!

8. I believe "Peak Oil" is a fraud. If the world does hit a "Peak Oil" temporary mini trend sometime in the next 50 years, it will be due to worsening government theft, nationalizations, confiscations, taxes, and wars, not lack of oil in the ground in the world, and all of those things would be very bad for investors in oil.

9. I have never seen a peak oil proponent advocate free market solutions; nor do they invest their own money into alternatives (some of them are broke!); they always call for more government power, and more government controls, and more government "solutions". Therefore, their entire argument is as fraudulent as government itself.

10. I believe "Manmade Global Warming" is a fraud, designed to increase government control, or even "justify" the "global solution" of world government. We may be in a mini warming cycle, but 30 years ago the world was in a cooling cycle and the fear of the day was of an impending Ice Age. If "manmade global warming" is true (and it is not), there should be more of it; we would save on heating bills; and be able to plant more crops, and enjoy a wider variety of good wines from all the vineyards that could be planted farther north, like several hundred years ago.

11. Silver is not a fraud, and is the antidote to the fraud of the dollar, and the antidote to excess government power, and government theft, which is the real problem in the world, not "peak oil" or "global warming".

12. Silver is not confiscable. This is why silver is money; it is private ownership of wealth, it is true wealth, it is owned annonnymously, and is the antidote to theft through inflation or confiscation. There is not enough silver to confiscate, because the silver market is too small. All the silver in the world is worth perhaps $20 billion, which is infinitesimally small compared to the budget of the U.S. government. If the government confiscated silver, because it was "worth it" for them, it would imply that silver was worth about $10,000 per ounce.

13. There is no "oil problem". It is an energy problem. If oil prices get too high, the free market will provide energy through other means; wind, or solar, or nuclear, or coal liquefaction, or geothermal, or further oil exploration. I suspect the U.S. hit peak oil in 1970 because we abandoned silver coinage in 1964, and abandoned gold in 1971, driving up all domestic prices and severely distoring world econimcs. And with paper money, it became cheaper to buy foreign oil with fraudulent paper, rather than explore and produce it at home.

14. There is a 300+ year supply of coal. Coal liquefaction technology can make liquid fuel from coal. This is old, reliable technology, and dates from before World War II, both in Japan and Germany.

15. Most solar energy that comes to the earth is wasted. Look at the amount of solar space available in the deserts of the world. The Sahara is a very big place. All of the world's energy needs could probably be satisfied with a solar panel that covered 1/4 of the Sahara.

16. Yes, I know about the Hunt brothers. Do you know the full story? They tried to protect their oil profits in silver. Their oil was stolen by Libya. I believe that the mistake of Nelson Bunker Hunt, who is alive today, is that he tried to borrow money to buy more silver than they could afford, so they lost money when it went down from $50/oz. Don't make the same mistake. Don't buy silver on leverage, and don't let other people hold your silver for you.

'Buy-and-Hold' -- A Bull Market Trait?

by Nico Isaac

Do financial investors act "rationally"? It's the question of all questions, the ultimate topic of economic debate. And, for the better part of Wall Street, the answer is unequivocally yes -- stocks turn down on negative news, rally on positive news, and market participants predictably follow suit.

Not on this planet. More times than we can count, when the "stuff" hits the fan, market participants move in even closer, standing firmly to the ground in direct line of fire.

Take, for example, the news events of February 29. On that day, the Dow Jones Industrial Average honored the "Leap" Year by taking a giant, 300-point leap off a cliff, marking the index's fourth straight month of decline. From its October 2007 peak, in fact, the Dow has lost nearly 20% in value.

Rather than dampen the bullish flame, however, the slide in stocks fanned the blaze even higher. Instead of weakness, the usual suspects see a way in to one of the biggest buying opportunities in quite some time. To wit: "Wall Street Sees Signs Of A Bottom" (CNN Money) -- AND – "Now is an ideal time to at least begin watching for bargain stocks" (Canadian Business.com)

Translation: The harder stocks fall, and the worse the economic data, the stronger becomes the public's faith in the future of the overall market. "Rational"? We think not. Regular -- however -- it is very much so.

Buy and Hold : Wrong Strategy for a Bear Market

"Buy and hold, buy and hold, buy and hold" has been the mantra for decades. But as often as investors have heard it, they don't always practice what the preachers on Wall Street preach. Turns out they hold on longer during a bear market than a bull market – obviously, not a good strategy. Our analysts have just written a special section for the latest monthly issue of The Elliott Wave Financial Forecast, called "The Long Un-Winding Road," which explains why it's important to anticipate long-term trends to know when to hold and when to try a new mantra.