Profiting from Gold Prices
Profiting from Gold Prices: SWAT-Team Bankers Suggest Gold Could Soar in Next 24 Months
A Taipan Publishing Group Strategy Report
by Irwin Greenstein, Senior Research Analyst, Taipan Publishing Group
The heartbeat of American commerce, your local bank, could find itself on life support. The backbone of American commerce is collapsing so smart investors are finding ways of profiting from gold prices.
Plans by the FDIC to prepare for a rash of bank failures harkens back to the worst days of the Great Depression -- while at the same time telegraphing powerful signals that gold is the best way to protect yourself in the darker days ahead.
The lid was pried off a hush-hush plan by the FDIC to rehire 25 retired bank examiners. This group of SWAT-team bankers reportedly worked for the FDIC during the late 1980s and early 1990s, when more than 1,000 financial institutions failed amid the savings-and-loan crisis.
The return of the SWAT-team bankers would staff up the FDIC’s division of resolutions and receiverships by nearly 10%. The division now employs 223 people, mostly in Dallas.
The Wall Street Journal broke the story on February 25. When pressed for a response, FDIC spokesman Andrew Gray said the agency was looking to bulk up "for preparedness purposes."
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Profiting from Gold Prices: The Next Safe Harbor
As the FDIC knows intimately, the backbone of American commerce is buckling under the load of inflation, deflation, mortgage woes, foreclosures and toxic credit card debt. This nasty bundle of bad news means that investors must find the next safe harbor for their money.
Wall Street’s hottest traders have already taken the lead. Hedge funds, institutional investors and ETFs are flocking to commodities such as grains, oil and precious metals as they flee the dollar.
From our perspective, gold is the very best commodity to be in right now.
Profiting from Gold Prices: Gold Is Real Money
The yellow metal is really the only global currency that does not require government backing. While paper money is called a fiat currency (money backed by an authority rather than specie), gold is universally accepted as cash when it comes to commerce.
Gold also possesses a cultural mystique that enhances its value. Ancient cultures, such as China and India, prize gold for its durability and malleability -- virtues that characterize successive generations of prosperous families.
And of course, gold jewelry is an outward symbol of accomplishment for people who want to broadcast to the world that they’ve made it.
Banks, meanwhile, are wearing the dollar as an albatross around their neck.
Profiting from Gold Prices: Gold Liberates You From the Dollar
The big problem for U.S. banks is that they are stuck with the dollar. Dislodging the dollar is impossible for banks -- even as the currency dips to record lows against the euro. The dollar is at its weakest in 12 years compared with a basket of international currencies.
The great American institution of the local bank is under siege -- as you can see in this one-year chart of the Kbw Bank Index traded on the Philadelphia Stock Exchange…
The tale of the chart is that the 24 institutions on the index are suffering their worst performance in years.
Profiting from Gold Prices: SWAT-Team Bankers Parachute In
Wall Street analysts have been telling anyone who will listen to dump their shares in American Express, Wells Fargo and Wachovia. Downgrades also hit SunTrust, US Bancorp and New York Community Bancorp.
By parachuting in the SWAT-team bankers, the FDIC’s is tipping its hand to show that it does, in fact, expect 100-200 banks failures within the next 12-24 months.
The core number of banking institutions identified as "problem" by the FDIC has surged from 50 at the end of 2006 to 76 at the end of 2007. While that number may not seem enormous, it’s still a 52% increase. Imagine if there were a 52% increase in the number or auto dealerships closing down… Wall Street would go nuts.
The FDIC never identifies which institutions. But 76 of them have combined assets of $22.2 billion, according to published reports, putting a huge sum of money at risk.
Profiting from Gold Prices: Bank Profits Nose-Dive
Moreover, profits at the 8,533 FDIC-insured institutions between October and December dropped by 83.5% to $5.8 billion, hampered by soaring loan defaults and provisions for loan losses, the FDIC said. A year earlier, these banks recorded $35.2 billion in profits.
The profit plunge further erodes the value of the dollar, both in real terms and as an expression of investor sentiment.
At the same time, gold continues its historic march upwards, as evident in this one-year chart of the AMEX Gold Bugs Index…
March 3 saw gold rise to a record $992 an ounce as the dollar fell to the lowest ever against the euro, putting gold at a year-to-date gain of 17%. This is more good news for investors who bought gold last year, when it bolted 31% -- the most since 1990.
Profiting from Gold Prices: Gold Skyrockets in Emerging Economies
Demand for gold remains very strong as producers struggle to bridge the supply gap. But a chronic shortage of electricity
in South Africa forced AngloGold Ashanti Ltd. and Gold Fields Ltd. to close their South African mines because of power problems. The nation is the second-largest producer of gold, after China -- accounting for approximately 11% of worldwide gold from mines.
Despite the shortfall in supply, the gold market sees to relief. Ironically, emerging economies are the ones driving the gold market today.
China's appetite for gold reached 302.2 metric tons in 2007, making it the country the world's second-largest retail jewelry market after India.
And in India, jewelry consumption rose to 558 metric tons in 2007 from 526 metric tons in 2006.
Coming from behind, Russia became the fastest-growing gold consumer, with jewelry demand in Q4 nearly 25% higher than a year earlier.
Profiting from Gold Prices: Gold Could Hit $1,500
In all of these countries, strong economic growth indicates that jewelry sales will remain strong in 2008.
With the U.S. dollar falling and inflation rising, gold shatters one record high after another -- to the extent that gold analysts believe it might surpass the psychologically key $1,000 level before the end of March. Once gold crosses the $1,000 barrier, $1,500 gold is definitely possible -- perhaps by the end of 2008.
Skeptics of $1,500 gold should keep in the mind the naysayers who laughed at $100 oil. Those investors who snubbed the idea are probably now kicking themselves as oil nears $104 in the early months of 2008.
The relationship between rising gold and rising oil prices is not a coincidence. In fact, it points to gold hitting $1,500 per ounce.
Profiting from Gold Prices: The Gold-to-Oil Ratio
A Wall Street tool called the gold-to-oil ratio says that you should be able to buy 15.2 barrels of crude with 1 ounce of gold. Track that ratio and you can accurately predict the prices of both oil and gold.
The relationship between gold and oil prices took hold in 1971, when President Nixon decoupled gold from the dollar. To fill that vacuum, a gold-to-oil ratio seemed like a logical way to help value gold.
What does that mean in today’s market? As oil passes $100 per barrel, gold should be selling for about $1,500 per ounce.
It all makes sense…
While oil bolted nearly 80% in the past 12 months, gold appreciated less than half as much. The potential upside in gold is enormous, simply based on the recognition that the age of cheap oil is over.
We believe that gold will power to record highs this year -- perhaps to $1,500.
So get out of the banks, get out of the dollar, and get into gold, because the commodities boom is raging.
When this opportunity hits the news, it could be too late to reap the earliest and biggest gains that come with a first-move advantage. Our analysts here at Taipan Daily have reported from Russia, Thailand, Albania, Peru, and many other investment hot spots overlooked by Wall Street. They can show you how to turn “crisis” situations like these into lasting wealth. Get in on these opportunities now. Sign up for your FREE Taipan Daily e-letter and receive the bonus Chart of the Day alerts. |
Originally published March 7, 2008.
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