The pros and cons of going back to the gold standard in the U.S.

While I do think there needs to be a return to fiscal responsibility, I’m not sure a single sovereign government can do it alone. What I see as more likely is a federation…

In the wake of the news that Utah has officially made gold and silver into currencies, Bloomberg TV hosted some heavy hitters on to ask them point blank: what’s the case for bringing back the gold standard in the U.S.?

[Check out our post It’s law: Gold and silver approved as currency in Utah for more on the gold standard.]

“It’s the ultimate currency,” Rob McEwen, CEO of McEwen Mining, says in the interview. “It can’t be replicated quickly, and it’s a store of value that’s crossed the millenium. Right now, we’re seeing the purchasing power decrease, and they’re taking away from everybody that puts money in the bank.”

“The horse is already out of the barn,” Michael Crofton, CEO of Philadelphia Trust, retorts. “I don’t think (a gold standard) could ever work given the amount of financing we have to do; both deficit financing and just operational financing.”

If there’s enough will for a new economic model, though, politicians could make it happen. It just wouldn’t come for free. There are a number of pros and cons to a gold standard. We’ve outlined several of the biggest here based on the interview with McEwen and Crofton and our own research.

Pros of bringing back the gold standard in the U.S.

  • Reducing the likelihood of another black swan event (hyperinflation, the collapse of financial institutions, etc.) that could cripple the global economy
  • Bringing back fiscal discipline in Washington – forcing politicians to clean up programs like Medicare and social security
  • It can be done. There’s precedent for it, with many nations – including the U.S. – operating with gold-backed currency for more than 100 years
  • Price stability
  • A reduction in the number of economic booms and busts
  • A system that rewards savers rather than debtors

Cons of bringing back the gold standard in the U.S.

  • Switching to a gold standard would shift the power from debtor nations (like the U.S. and Europe) to creditor nations (like China).
  • The gold standard would eliminate the need for a reserve currency – stripping yet more power away from the U.S.
  • Limits would be imposed on how much governments can borrow during crises/li>
  • Gold prices would need to be set by governments, and that could potentially give governments the power to manipulate currencies
  • Less ability for governments to stimulate growth in their economies

A different approach to the gold standard

While I do think there needs to be a return to fiscal responsibility, I’m not sure a single sovereign government could make the transition alone. A more likely solution? A federation of countries or global financial institutions that align to back a fee-based debit card system that lets buyers and sellers convert credits into physical gold or silver.

This electronic system could take deposits in any number of currencies. That cash could then be spent like cash in a normal debit account or redeemed for metal.

Individuals could use the system to protect themselves from inflation or as a shelter during tough economic times. The global binge on cheap credit has to come to an end at some point, and the solution just might be a mix of fiat and gold-backed money.


Brand new copper price forecasts for 2012, 2013 and 2014

Two factors hold the key to the future of copper prices: mine supply and growth in China. Here are where analysts see copper prices in 2012-2014.

There’s good news and bad news for copper investors in the recent study released by the International Copper Study Group (ICSG). According to their copper forecasts, global demand will exceed supply by 240,000 tonnes in 2012. That should help copper prices in 2012, but the ICSG expects a copper production surplus of 350,000 tonnes in 2013.

The ICSG is careful to point out that the surplus of 350,000 tonnes is “relatively small” and “could vary from those projected.” But their numbers align with what other organizations expect.

A report from UBS shows global copper mine production grew less than 1 percent a year between 2009 and 2011. That was temporary, though, as production numbers are poised to surge to 8.5 percent a year through 2014 (per the Wall Street Journal).

“If China cannot absorb the copper flowing into it, then the outlook for copper is negative,” UBS said in the report.

Growth in China is key as the country consumes 40 percent of the world’s copper supplies. It makes sense then that copper investors grew nervous after disappointing growth numbers out of China during Q1. Still, there were signs in April that growth’s accelerating behind the Great Wall. China’s purchasing managers’ index (PMI) rose to a 13-month high of 53.3 in April (per Reuters).

“If we start to see China coming back more strongly in the second half, which is something that we expect, then we could see, you know, stocks starting to come down to really critically low levels and we could see prices sort of bouncing up,” Peter Ghilchik, multi-commodity manager with CRU in London, said recently (per Minyanville). In his words, that could push copper prices toward $10,000 per tonne by the second quarter of 2013 – a record level that we haven’t seen since early 2011.

Other copper price forecasts:

  • Copper will trade in a range between $8,300 and $8,800 per tonne in 2012 according to the Thomson Reuters GFMS Copper Survey (per Reuters).
  • CRU believes copper prices will average $3.85/pound for the year with a peak late in 2012 around $8,650 per tonne.

Our favorite copper price prediction comes from Citi Investment Research – a daring group of analysts who are willing to project prices far off in the future. They see copper hitting $3.80 in 2013, then falling to $3.61 per pound in 2014 (per the Wall Street Journal).

In the near-term, look for copper prices to get a temporary boost off news that copper inventories monitored by the LME have fallen to their lowest levels since 2008 at 241,550 tons (per Reuters).

Altogether in 2012, copper prices have risen about 10 percent. Let’s hope the red metal can keep that trend intact – at least until miners start flooding the market with new supply in 2013.


Why Commerzbank believes gold will hit an ‘all-time high’ by end of 2012

Even though gold prices are up 6.8 percent since the start of 2012, momentum for the metals seems to have waned. Commerzbank believes that’s temporary. Here’s why.

With gold prices up 6.8 percent since the start of 2012, it’s tough to say it’s been a bad year for gold, but momentum for the metals seems to have waned.

“Right now, the disappointment of the gold bulls, you can actually feel it,” Eugen Weinberg, head of commodities research at Commerzbank AG, told Bloomberg during an interview early in April. While Weinberg believes this will present a buying opportunity “in the coming months,” it probably won’t happen soon. Even in early April, he was predicting gold would dip through June or July – perhaps below $1,600 an ounce.

The malaise in the gold market is probably due in part to seasonal trends, and in part to a need for the metal to cool after an unprecedented, two-year surge during which investors saw prices climb from $900 to $1,900 an ounce.

It’s been tough for gold bulls to stomach, though, as prices in other commodities have outperformed gold. Brent crude, for instance has nearly doubled gold’s performance year to date, with the commodity up 12.5 percent. Gasoline prices are up 12.19 percent, and soybean prices are up 12.35 percent year-to-date (per Index Mundi).

Weinberg argues that gold doesn’t behave like commodities such as oil and grains because it’s not. In his words, it’s a currency, and there are a lot of factors that are colluding to drive down gold as a currency. Specifically, Weinberg cites three things:

  • The Fed is signaling QE3 is less and less likely
  • The global economy is showing early signs of a recovery
  • The dollar is strengthening as other economies pump more cash into their systems

Still, Weinberg remains “structurally bullish” on gold.

“I’m staying bullish on the longer-term and believe that the negative real interest rates, the inflation fears, and longer-term concerns about the economy are likely to keep the prices, the long-term trend intact and the prices are likely to reach another all-time high by year-end.”

The market’s overly optimistic on the state of the economy, Weinberg argues. But we’re not out of the woods yet, and that fact should start hitting home come mid-summer. When it does, gold prices will once again power higher.


Warning: Gold and silver prices have further to fall before their summer lows

Gold’s going through a much-needed consolidation period that probably has a few more months to play out. Here’s why and how long we think it will last.

Gold and silver have officially entered the pre-summer doldrums. And that’s got some investors wondering if the decade-long bull market in precious metals is coming to a close. In fact, it looks like the metal’s going through a much-needed consolidation period that probably has a few more months to play out. Here’s why:

1) The consolidation could last 15 months. Gold’s run from $900 to $1,900 an ounce was a largely uninterrupted 25-month sprint, and that means we should expect a consolidation. In fact, this current consolidation hasn’t been long enough based on gold price corrections in the past, according to Jordan Roy-Byrne, the proprietor of Trendsman Research.

“This 25-month advance has been followed by an 8-month correction,” Roy-Byrne writes. “Using Fibonacci retracements implies a ‘time’ correction of 9.5 months, 12.5 months or 15.5 months. This indicates that Gold should correct (in terms of time) for at least few more months.”

2) Gold speculators are on holiday. “Open interest (for COMEX gold) stands at 1,284.9 tonnes – a new 12-month low,” Standard Bank wrote in its Commodities Daily report on April 23, 2012. “ETFs are still net sellers of gold, with 2.2 tonnes sold over the past week. However, the modest nature of the selling is once again a sign that ETFs do not have a particularly bearish view either.”

It’s almost as if gold investors aren’t bullish or bearish. They’re just plain apathetic right now. And that will probably continue until we get a catalyst for a big move up or down (see our post Say hello to the catalysts that could push gold prices up overnight for more).

3) Fears of recession linger. The disappointing GDP numbers released last week didn’t make investors want to run out and buy precious metals. In fact, the general consensus is that things are going to get worse before they get better. If that’s the case, commodities (including oil, precious metals and base metals) will likely suffer in the short-term, then rocket higher before the recession starts to lift or Bernanke announces a new round of quantitative easing.

“Virtually all commodities made a sharp correction in the 2008 selloff,” writes Robert Hallberg at Seeking Alpha. “Oil and silver were hit the worst and even gold made a sharp downturn. But by the time we were out of the recession gold had already made new highs and silver [was] back to where it started while oil was still down.”

4) Gold aiming for $1,500s? The current gold price correction is “shaking out every weak-handed holder possible,” Paul Schatz, president of Heritage Capital, tells Money News. “But I think it’s going to bottom some time this quarter.”

Schatz sees prices dipping into the $1,500s, before starting a fresh climb – one that could see gold prices break $2,000 an ounce. If that’s the case, look for more pain before we start seeing profits in gold.


Say hello to the catalysts that could push gold prices up overnight

From Euro woes to India taxes, here are three triggers that could push gold up in a hurry.

Gold prices have fallen slowly and steadily since the end of February, and that’s got some commentators arguing that it could be the beginning of the end for the yellow metal (see our post 3 signs investors are fleeing gold for more). That said, the price of gold is anything if not volatile.

Gold prices are so volatile, in fact, Barclays Capital’s Maneesh Deshpande is telling investors to trade volatility in gold prices rather than the metal itself (per Barron’s). In spite of that, Deshpande and several co-authors of a recent research report from Barclays have identified what they call catalysts for a rapid upswing in gold prices. Among them:

1) A Euro hangover. Should another wave of panic sweep across the Euro-zone, look for investors to pour into gold. The authors of the report do point out that the correlation between problems with the Euro and higher gold prices is tenuous at best. If a country were to be forced out of the Euro-zone or were to go into default, though, we suspect that gold prices could spike significantly.

2) A thumbs up from the Indian government. One of the less visible reasons we’ve seen languishing gold prices is India’s recent tax increase on gold imports. The government doubled import dues from 2 percent to 4 percent. That’s putting strain on the the Indian gold market, and India remains the world’s largest consumer of gold jewelry. Should the government change its mind on the new tax, gold prices could catapult higher. While Barclays feels a repeal of the tax hike is unlikely, they do point out that India’s parliament could consider modifying import rules (via its finance bill) on May 7. Whatever the outcome, gold prices could get volatile in the run-up to the decision.

3) Economic changes in the U.S. Should the economic picture in the U.S. grow cloudy, or worries over inflation crop up again, gold prices would be the biggest beneficiary. The presidential election in the fall could catalyze the Federal Reserve to take action via monetary easing if the economy shows signs of weakness. Monetary easing (or even the expectation of it) generally leads to higher gold prices as expectations of inflation grow.

Some commentators believe a new round of quantitative easing is imminent. “Bernanke will do everything in his power to make Obama look good to get re-elected,” says Chris Marchese, a contributor to The Morgan Report. Marchese is so confident this will happen, he’s predicted silver prices could spike as high as $70 an ounce this fall (nearly double where it’s at today). If silver prices do that, you can bet gold prices won’t be sitting still either.


What will silver prices be like in 2016? Haywood makes silver price forecasts

Haywood Securities has made silver price predictions for the next five years. Look for the metal to peak sometime this year, they say, then start a slow but steady sell-off.

It’s not unusual for investment companies to forecast prices for commodities in the upcoming year, but rarely do companies push their price predictions out as many as five years into the future. Haywood Securities did that with silver, though, in a recent research report (per Mineweb).

The Vancouver-based research firm told investors to look for silver prices to average $36 an ounce in 2012. After that, Haywood expects prices for the white metal to start a long, downward slog. Here are their predictions for silver prices over the next fiver years:

  • 2012 silver price forecast: $36
  • 2013 silver price forecast: $32.50
  • 2014 silver price forecast: $29.50
  • 2015 silver price forecast: $28
  • 2016 silver price forecast: $24

Beyond 2016, Haywood expect silver prices to settle around $20 an ounce. Those are glum predictions. And it’s important to note that Haywood’s not alone. Last week, Citigroup Inc. sent a research note to investors predicting silver prices would actually fall 10 percent by the end of 2013.

“We caution that continued keen investment interest in the metal is required for a silver price of approximately $30 (USD) per ounce,” Haywood analyst Chris Thompson noted in the report.

Our interpretation of that? Anytime the silver price is north of $30 an ounce, it’s up there because of high investor demand driven by economic uncertainty. To take our inferences further: if Haywood sees the price of silver continuing to drop through 2016, they feel like the global economic picture is going to keep getting better over the next five years. That means they’ve got a lot of faith that governments around the world will rally to embrace fiscal responsibility.

Further dampening silver prices, Haywood expects silver production will continue to hit record highs through 2016. The mined silver supply hit 716 ounces last year. Haywood expects the mined silver supply to exceed 1 billion ounces in 2016. That’s a whole lot of new silver in the face of decreased demand.

Of course, all of the numbers above rule out the possibility of an economic calamity in one or more countries or regions (something that is a very real possibility). Look for Haywood to quickly revise their numbers higher if we see a sovereign default, hyperinflation or a breakup of the Euro.


Undervalued Gold Mining Stocks: Petaquilla Minerals Ltd.

At least one writer pegs Petaquilla Minerals’ price target above $3 a share. Here’s why.

It’s not often that you find a promising junior gold mining stock trading at a P/E of 2.1. Petaquilla Minerals Ltd. (OTC:PTQMF, TSX:PTQ) is doing just that, though, even as it expects to rapidly ramp up gold production at it’s growing deposits in Panama.

You can blame the stock’s poor performance (shares are down 30 percent YTD) on overall weakness in gold mining shares, but if interest in the sector returns, I expect Petaquilla to outperform. Here’s why:

1) Promising production. Cash flow is the lifeblood of a small mining company, and Petaquilla’s cash flow from its Molejon gold mine in Panama is growing along with production targets.

“For the current fourth quarter of fiscal 2012, the Company is forecasting gold poured within the range of 18,000 to 21,000 ounces, and revenues within the range of $27 to $31.5 million,” Petaquilla wrote in its most recent earnings report.

All told, Petaquilla expects to mine more than 100,000 ounces of gold in 2012, up to 145,000 ounces in 2013 and perhaps as many as 250,000 ounces by 2015. Promising exploration is also ongoing at the Lomero-Poyatos project in the wake of Petaquilla’s 2011 acquisition of Iberian Resources Corp. in Spain. Exploration there should kick off within two months (per reports).

2) Big backers. One of the more promising signs Petaquilla’s committed to growth is the fact that management owns more than 12 percent of the company. Other big shareholders include Sprott Asset Management, U.S. Global Investors and Libra Advisors, according to Morgan Report contributor Chris Marchese. lists Account Management LLC as the single biggest holder in Petaquilla with 122,780 shares.

3) Fair cash costs. Petaquilla’s cash costs for fiscal 2012 are expected to fall between $550-$600 per ounce of gold sold. Compare that with a company like Alexis Minerals that recently reported cash costs north of $2,000 an ounce.

Those low costs prompted Chris Marchese to put peg Petaquilla Minerals’ price target above $3 a share.

“I’ve modeled a net asset value on a fully diluted basis of over $3/share [using $1,600/oz. gold and $2.50 copper – discounted at 15 percent], significantly higher than the current $0.42/share market price,” he said in an interview with The Gold Report. “It has been completely overlooked by the market even though it has one of the best production growth profiles out there, courtesy of its recent acquisition of Iberian Resources Corp. in August 2011.”

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3 signs investors are fleeing gold

Is it a temporary bump in the road or the beginning of the end? Either way, there are worrying signs that investor interest in gold and silver is waning.

We believe the trend is temporary, but there are worrying signs that investor interest in gold is waning. Here are three:

1) ETFs are pouring physical gold into the market. The impact of gold and silver ETFs on bullion prices cannot be understated, and last year, gold ETFs saw the lowest level of bullion intake since their inception in late 2004 (per IBTimes). That’s worrying enough, but in 2012, gold-based ETFs are actually selling off more gold than they’re taking in. That’s flooding the market with physical gold. Already in April, ETFs have sold off more than six tonnes of gold.

2) “The froth is coming off.” Pundits and authors have started venturing into the press with warnings that the gold and silver “bubble” is about to pop. One of the leaders of the bubble camp is Yoni Jacobs, author of Gold Bubble: Profiting from Gold’s Impending Collapse – a book that hit shelves yesterday. “The froth is coming off,” he says in a recent interview.

His reasoning for sounding the warning bell? Sellers have started out-numbering buyers. Last September, when the bottom fell out under gold prices, volume was extremely heavy – and that’s a bearish sign for the future. In addition, gold mining stocks are performing like gold’s glory days are long since past. The Market Vectors Gold Miners ETF (GDX) is down 20 percent over the past six months while the Gold ETF (GLD) has essentially stayed flat.

3) India’s government is trying to put the brakes on gold consumption. The government of the world’s largest gold consumer and importer is attempting to slow gold imports and consumption via taxes. The country doubled gold import duties from 2 percent to 4 percent. In addition, they’re levying a 0.3 percent tax on gold jewelry as the country’s struggling to contain a growing trade deficit.

The new taxes and the weak rupee have collided to push down gold jewelry and bullion sales by as much as 70 to 80 percent on a daily basis, per the Economic Times. “The demand is almost negative compared to previous years,” Ashish Mundhra, director of Chennai-based Mundhra Bullion, told the paper.

Still, not every agrees this is the end of the end for gold. And we definitely don’t either. In fact, we see this as one of the best time to buy shares in gold and silver mining stocks. We could be wrong, but we don’t think the U.S. economy is out of the woods yet. And with Bernanke at the helm of the Federal Reserve, we’re a lot more nervous about the future of the dollar than we are over the future of gold and silver.


The biggest silver mining stock you’ve never heard of: Revett Minerals Inc. (RVM)

If Revett can satisfy all the environmental concerns at Rock Creek, the stock will surge higher. It’s just a question of when that will happen and how high Revett will rise.

Most gold and silver mining stocks on the major exchanges are well-known among investors. Hecla Mining (HL), Agnico-Eagle (AEM) and Silver Standard (SSRI) are practically household names as are most of the gold and silver mining stocks with a market cap north of $100 million.

There is one AMEX stock that seems to be flying under the radar, though: Revett Minerals Inc. (RVM). Based on the company’s market cap of $126 million, it’s hard to believe they’re sitting on what could be the largest silver mine in the U.S., and one of the top 10 largest silver mines in the world.

The company’s Rock Creek Project in Montana contains an estimated 300 million ounces of silver and 2.5 billion pounds of copper. And, as the company works to get that world-class mine online, they’re already generating steady cashflow from their nearby Troy Mine.

“They have $28 million in the bank, and will generate roughly $30 million in cash flow (from the Troy Mine) every year (assuming silver and copper stay in the range),” writes Jay Arnold at SeekingAlpha. That influx of cash has Revett’s shares currently trading a low P/E of just 12.10.

“In my opinion, RVM’s current price reflects zero value for their giant silver/copper deposit Rock Creek,” Arnold writes. Shares are just trading on the strength of the Troy Mine (which could be operational for the next 20 years).

All this would be illogical, but there is a hurdle. Revett’s Rock Creek project has yet to be fully permitted, even after 10 years of work. If the permits finally go through, Arnold believes the stock could see a “ten-fold increase.”

“We are working to complete a Supplemental EIS (Environmental Impact Study) on the Rock Creek Project to address some NEPA-related issues as directed by the Federal District Court in May 2010,” Revett wrote when it announced its 2011 earnings results on March 27, 2012. “On November 16, 2011, we received a critical decision from the Ninth Circuit Court of Appeals affirming the prior District Court’s favorable ruling regarding challenges brought under the Endangered Species Act (ESA).”

If Revett can satisfy all the environmental concerns at Rock Creek, the stock will surge higher. It’s just a question of when that will happen and how high Revett will rise.

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Silver mania: Signs that a surge in silver prices is coming

Conventional wisdom would say that now’s the time to sell your silver. In fact, there are signs that’s silver’s setting up for another major upswing.

It’s hard to argue that the silver market isn’t weak right now. Silver stockpiles haven’t been this high on the Comex for more than a decade. On Monday, Citigroup Inc. (NYSE:C) sent a note to investors arguing that silver prices will likley fall 10 percent to $27 an ounce in 2013.

The COMEX lowered margin requirements for silver for the second time since February. Worst of all, silver prices have plunged more than 10 percent since the start of March.

And yet, there are signs out there that we’re at an inflection point for silver prices.

“Gold and silver are very close to entering the mania phase of this bull market,” writes Hubert Moolman at ResourceInvestor.

Moolman’s laid out some interesting charts showing that silver chart patterns today look eerily similar to the same patterns we saw before the white metal hit an all-time high in 1980. They also look like the chart pattern we saw in gold prices when gold hit a new all-time record in 2008 (click for the originals):

Moolman points out that in order for silver to enter a mania phase, cash (and lots of it) is going to need to flow out of a different asset class. His prediction is it’ll flow out of stocks and into metals. That’s what happened in 2007/2008, and – if you’ll recall – stocks were hitting all-time highs around that time; just as they are today.

Of course, we can’t rule out political influence on the price of gold and silver. With the upcoming presidential election in November, Chris Marchese, a contributor to The Morgan Report, believes “Bernanke will do everything in his power to make Obama look good to get re-elected.” That – along with the debt-fueled recovery we’ve been spoonfed – prompted Marchese to make calls of silver spiking as high as $70 an ounce this fall.

Buying into weakness is one of the toughest psychological hurdles in investing. It’s also a great way to make money so long as you do with discipline, a firm plan and padding in your bank and brokerage accounts to weather the inevitable setbacks. You want to buy silver when no one else is. And, if you’re worried about prices for silver that you’ve already purchased, just take the long-term view: gold and silver have been money for thousands of years. That’s not going to change anytime soon – no matter what the pundits say.