SPECIAL REPORT
January, 2012

by Peter Grant

Gold Surges 13.9% in January

Gold had a rather stellar January, posting a 13.9% monthly gain based on the LBMA PM fixings of 1531.00 on 31-Dec-11 and 1744.00 on 31-Jan-12. That's a bigger gain than the yellow metal achieved for the entirety of last year!

Last week — when gold was up less than 10% for the month — Bloomberg came out with a story noting that this was the best start to a year since 1980. Indeed gold did rally smartly in January 1980, but it also put in a nominal 27-year high that month. Should today's investors be worried that a similar fate awaits them? I think not.

The situation was completely different then versus now. We were in a severe inflationary environment throughout much of the 1970s. The Fed sought to get a handle on skyrocketing inflation with aggressive interest rate hikes. From January 1977 to April 1980 the Fed funds rate rose from 4.61% to 17.61%. That's 1300 bps in a little more than three years! Anyone remember 20% prime? The high "risk free" yields of US Treasuries pretty much sucked the life out of every other market...including the gold market.

Today, the Fed would have you believe that inflation is not a concern; in fact, inflation is exactly what the economy needs. No matter though, because given the unprecedented level of private and governmental debt that has accumulated over the ensuing three-decades, significant interest rate hikes — whether inflation rears its ugly head or not — are really no-longer an option available to us.

Imagine the implications for refunding our massive $15.3 trillion Federal debt. Imagine the implications for the still moribund housing market, which according to the Case-Shiller home price index fell back to 2003 levels in November. Imagine the impact on consumer spending for those carrying balances on their credit cards. Imagine the long-term implications as already unaffordable higher education is pushed further and further out of reach. We have painted ourselves into a corner. A corner of debt.

The Senate voted last week to allow for another $1.2 trillion hike in the debt ceiling to a mind-numbing $16.4 trillion. Having never met a debt ceiling we couldn't ultimately exceed, I have no delusions that $16.4 trillion is where this madness will end.

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The message from the Fed last week was quite clear; they are expecting the economy to continue limping along for at least another 3-years. As part of their new communications strategy, the Fed extended their zero interest rate policy (ZIRP) guidance from mid-2013 until late-2014. Even if the Fed does start raising rates at that point, they are likely to be small incremental hikes, which would likely keep real rates (factored for inflation) in negative territory for some-time after 2014.

The Fed first cut the Fed funds rate to 0-0.25% in December 2008: That would mean somewhere around 6-years of zero interest rate policy is now anticipated. We'll be more than half-way through our own lost-decade. I'm sure the Bank of Japan thought they could extract themselves from the ZIRP trap within a decade too. They're now into their third lost decade.

The CBO said in their Budget and Economic Outlook: Fiscal Years 2012 to 2022 that they expect economic activity to "remain below the economy's potential until 2018." Heck, maybe the Fed should simply concede our lost-decade now and extend their ZIRP guidance through 2018...

Going further, the Fed is now targeting inflation — core-PCE to be specific — at 2%. So, we have a moribund economy, that the Fed itself expects to persist for at least 2+ more years (the CBO is less optimistic). We have a high rate of unemployment, that the Fed also expects to remain elevated for at least a couple more years. We have households attempting to deliver, to pay down debt by scaling back consumption (Note: While personal income rose 0.5% in Dec, PCE was flat). And we have the 'sword of Damocles' that is Europe, hanging over all of that.

How exactly is the Fed going to generate 2% consumption inflation — excluding food and energy — in such an environment? They're going to expand the money supply of course. They're going to print with abandon. The not so subtle message is: Spend your dollars now, because they will buy less tomorrow. This is as much a 2% dollar devaluation target as an inflation target. It is truly an attack on savers.

One has to wonder what the other measures of inflation might look like if they do achieve 2% core-PCE. What will food and energy prices do? What will gold do?

The 13.9% rally in the yellow metal in January is probably a pretty good initial indication of what gold is likely to do. There's now a more compelling case than ever to buy gold as a means of wealth preservation; a hedge against the inflation the Fed is now obligated to manufacture. This is especially true if your disinclined to believe the Fed will be able to cap inflation at 2% once that genie is out of the bottle.

If you are a saver, your best defense against an über-dovish Fed seeking to spur consumption by eroding the value of your dollars...is to choose to save in gold.

In a recent interview, billionaire investor George Soros seemed to recognize the unprecedented nature of current events, saying, "At times like these, survival is the most important thing." The interviewer goes on to acknowledge that Soros 'doesn't just mean it's time to protect your assets. He means it's time to stave off disaster.'

In the following comment on the Soros interview, our own Michael J. Kosares concludes that; "If Soros isn't a gold owner, he certainly sounds like one."

Survivalist George Soros

by Michael J. Kosares

“. . .’At times like these, survival is the most important thing,’ he [George Soros] says, peering through his owlish glasses and brushing wisps of gray hair off his forehead. He doesn’t just mean it’s time to protect your assets. He means it’s time to stave off disaster. As he sees it, the world faces one of the most dangerous periods of modern history—a period of ‘evil.’ Europe is confronting a descent into chaos and conflict. In America he predicts riots on the streets that will lead to a brutal clampdown that will dramatically curtail civil liberties. The global economic system could even collapse altogether.”

MK comment: It is difficult to understand how an individual thinking like this would ignore owning physical gold in the form of coins and bullion — Soros’ ownership of which the author of the article linked below denies. Much ado was made of Soros past comments on gold as “the ultimate asset bubble,” and his subsequent disposal of ETF gold holdings — something which has since been quantified as having occurred in the early months of 2011. If so, the legendary Soros left a good bit still on the table, since gold traded at the time in the $1300 to $1400 range.

Since then, there has been speculation here and elsewhere that Soros may have sold his paper gold holdings to acquire something a bit more tangible. No one knows for sure and Soros, as might be expected, isn’t saying. His remarks, in this studied opinion, mask a tell-tale heart. (That from someone who has listened over the years to the reasoning of many high net worth investors who translated dollars to gold. Let me just say that Soros’ analysis has the ring of familiarity.) After all, he did at one time own gold in the form of the ETF. He did unload that position for no apparent or logical reason. And his thinking does sound like what is ordinarily expressed by individuals who have diversified their holdings into gold as the ultimate safeguard.

The article referenced above appeared at the Daily Beast website and is remarkable in its own right. Soros by this rendition is holding mainly cash, recently purchased $2 billion in Italian bonds, and likes “long-term stock picks with solid companies.” Cash? Italian bonds? George Soros? Really?? The name of his upcoming book is “Financial Turmoil in Europe and the United States.” He states that Greece is likely to default in 2012; that China is unlikely to come to Europe’s assistance; and that the entire West could descend into chaos at any moment. What’s missing here?

At any rate here is the link to the Daily Beast article. By the way, as mentioned at the top, he is predicting riots in the streets of the United States: “It will be an excuse for cracking down and using strong-arm tactics to maintain law and order,” he asserts, “which, carried to an extreme, could bring about a repressive political system, a society where individual liberty is much more constrained, which would be a break with the tradition of the United States.”

If Soros isn’t a gold owner, he certainly sounds like one. The rest of us do not have to walk on the West’s broken glass, as Soros might because of his position. We can take the most direct route to “survival” without worrying about public criticism for having done so.

George Soros, the survivalist — extraordinary. . . .

“The situation in Europe and the United States,” he says, “is about as serious and difficult as I’ve experienced in my career.”

Sometimes the constant drip of the news becomes background noise, until somebody says something that serves as a wake-up call. Though the writer of this article attempts to transpose Soros’ remarks to something akin to a call for political action, I detect something else going on — something deeply personal for Soros, and something of which we should all take note. Like so many of us, he seems to have moved away from politics as a final recourse to the crisis and begun to think about the practical business of personally surviving it.

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Peter Grant spent the majority of his career as a global markets analyst. He began trading IMM currency futures at the Chicago Mercantile Exchange in the mid-1980's. Pete spent twelve years with S&P - MMS, where he became the Senior Managing FX Strategist. The financial press frequently reported his personal market insights, risk evaluations and forecasts. Prior to joining USAGOLD, Mr. Grant served as VP of Operations and Chief Metals Trader for a Denver based investment management firm.

Michael J. Kosares is the founder of USAGOLD-Centennial Precious Metals and the author of "The ABCs of Gold Investing - How To Protect and Build Your Wealth With Gold."

This special report is distributed with the understanding that it has been prepared for informational purposes only and the Publisher or Author is not engaged in rendering legal, accounting, financial or other professional services. The information in this newsletter is not intended to create, and receipt of it does not constitute a lawyer-client relationship, accountant-client relationship, or any other type of relation-ship. If legal or financial advice or other expert assistance is required, the services of a competent professional person should be sought. The Author disclaims all warranties and any personal liability, loss, or risk incurred as a consequence of the use and application, either directly or indirectly, of any information presented herein.

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