Gold price signals China credit bubble bursting as investors seek safety

Uncertainty is growing over China’s ability to sustain the rapid rates of economic growth it has seen over the past decade

Uncertainty is growing over China’s ability to sustain the rapid rates of economic growth it has seen over the past decade Photo: Getty Images

By Andrew Critchlow

8:00PM GMT 16 Feb 2014

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China’s “unfolding credit crunch” is having an unforeseen and dramatic impact on gold prices as investors urgently stock up on the precious metal as a form of financial protection against a sharp correction in the world’s second largest economy.

This is the main reason why gold prices have unexpectedly shot up more than 10pc to breach $1,300 (£776) an ounce for the first time since November against the prevailing forecasts for weaker demand made by many industry experts at the beginning of the year, according to Adrian Ash, head of research at gold trading platform BullionVault.com.

Gold traded on the Shanghai Gold Exchange has also reached a three-month high.

Rebounding is part of the reason for the rise, said Ash, adding: “Gold lost 30pc and silver nearly 40pc last year. The world economy will struggle to deliver all the good news priced in by that crash. But China’s unfolding credit-crunch looks central right now.”

Uncertainty is growing over China’s ability to sustain the rapid rates of economic growth it has seen over the past decade amid concern over high-levels of debt among its provincial governments. These concerns have helped to drive sharp falls across emerging markets since the beginning of the year.

Ash argues that capital flight is happening at a rapid rate in China because of the $1.8 trillion of funds that have flooded into unregulated, non-bank “wealth management products” which offered very high yields, up to 17 times as much as cash deposits. It is feared that many of these funds are now trading at a loss, setting up a crunch moment for China’s economy.

“Bullion traders never knew before what would happen to prices if China hit trouble,” said Ash, “because we’ve never before seen Chinese demand plumbed into the world market so deeply. Its jewellery buyers, together with rising mining costs worldwide, helped finally put a floor under gold in 2013. But while that kind of consumer demand will never drive prices higher, capital flight by wealthier households and Chinese money managers certainly can.”

According to Ash, the first default which could be a sign of China’s credit bubble bursting was reported two weeks ago when a $50m coal-mining bond failed to repay investors on maturity. He says that about $875bn of other such products are due to mature in 2014 and that Beijing has few answers available to tackle the problem.

“Gold’s 2014 rally had been steady before, far quieter than the rebound from last spring’s record crash,” he said. “But rising for seven of the past eight weeks, something it hasn’t managed in two years, gold has now risen for six trading days running. That’s a very rare move, last seen when gold neared its peak above $1900 during the euro crisis, US debt downgrade and UK riots of August 2011.”

Meanwhile, uncertainty continues to surround a 500-tonne discrepancy in China’s gold import figures and its domestic supply. The unaccounted-for Chinese gold has helped to fuel market speculation that the People’s Bank of China may be stockpiling, or that bigger volumes are changing hands on the grey market as a hedge against financial turmoil.

However, other brokers have said that the rise in gold prices last week above the commodity’s 200-day moving average was mainly because of the fall in the dollar against a basket of other currencies. Commerzbank said that SPDR Gold Trust, the world’s largest gold exchange-traded fund, raised its holdings above 800 tonnes of the precious metal for the first time.

According to Gold Money, bulls also returned to the market after Janet Yellen signalled that the US Federal Reserve will continue to prune back its stimulus measures. “Western buyers and vaults are now back in the frame amid the more bullish market sentiment,” said Roland Khounlivong, head of dealing for the broker.

http://www.telegraph.co.uk/finance/commodities/10642184/Gold-price-signals-China-credit-bubble-bursting-as-investors-seek-safety.html

The insatiable rush for the barbarous relic

When there’s much wrong with the world, it must be the fault of either greedy speculators or that ‘barbarous relic’ called gold

The attempts of profligate governments to escape the strict discipline imposed by gold have often led to crises, which in turn have been used as excuses for further government intervention.

With the price of an ounce of gold rising from a low of about $250 to break past $1,900 in August 2011, the year 2001 marked the beginning of an exciting 10-year bull run for the metal. The massive jump in price led to tectonic changes in the international gold market. China’s huge, but until then dormant, gold mining industry was reinvigorated as both large mining corporations and amateur gold diggers stepped up efforts to mine gold to satisfy increasing demand. Huge demand from the Chinese central bank added further to the rush for gold. Mines in other parts of the world, which were gradually shut during the course of a previous 20-year secular bear market, were reopened for production.

Such clamour for gold was hardly a new tale though. Similar events played out in the 1970s when the price of gold shot up with the end of price manipulation under the Bretton Woods monetary system, giving a push to explorers and miners to pursue untapped gold mines.

Gold: The Race for the World’s Most Seductive Metal by Matthew Hart provides an engaging account of the dynamics of gold price through history, and its stimulatory effect on gold production—not to miss interesting tales of individual explorers and businessmen. But the more intriguing part of gold’s history, that has spanned over more than just a few centuries, has been the metal’s brush with the political class; which forms the other half of Hart’s narrative on gold.

For a metal that has been the market’s preferred medium of exchange, gold has never quite caught the favour of politicians. This should not be perplexing. For one, in the economic era prior to the 20th century a monetary system based on gold tied the hands of profligate governments trying to live beyond their means. Second, adjusting for the vagaries of short-term price fluctuations, the rising value of gold has constantly exposed the depreciating value of paper currencies; then, it is not without a reason that gold remains a major hedge against risk even today.

The attempts of profligate governments to escape the strict discipline imposed by gold have often led to crises, which in turn have been used as excuses for further government intervention.

Evidence of the same is documented by Hart through his account of important events in financial history, such as US banker John Pierpont Morgan bailing out the US government in 1895, US president Franklin D. Roosevelt confiscating Americans’ gold in 1933, and Richard Nixon reneging on his commitment to the rest of the world to redeem dollars for gold in 1971.

What is often ignored is, each of these crises followed attempts by the US government to live beyond its means by inflating the country’s monetary base well beyond the available stock of gold. Naturally, this led to a series of panic attacks that exposed the government’s insolvency. But for Hart, who acknowledges economist Barry Eichengreen for his “valuable observations” on the book’s manuscript, these do not count for fraud on part of governments, but for gold’s incompatibility with the demands of a modern economy.

To be fair to Hart, the view is shared by many economists who consider economic discipline a hindrance to macroeconomic policymaking.

Hart’s problems with gold extend further. To him, the huge demand for a metal like gold, that has little use value, should probably be irrational. The craze for gold that has led to troubles of nepotism in China, and price manipulation by London’s bankers is a major headache for the world. Not to forget, encouraging retail investment in gold has only added to price instability and risk. And finally, since there’s much wrong with the world, it must be the fault of either greedy speculators or that “barbarous relic” called gold.

Prashanth Perumal is Assistant Editor (Views) at Mint.

http://www.livemint.com/Opinion/junoj6E3srVuLJk67HTgNO/The-insatiable-rush-for-the-barbarous-relic.html

Gold Buying Opportunity Now, Could Go $1500 By Summer

We have been writing about the bottoming process of the Gold Bear Cycle (Elliott Wave Theory) since December 4^th 2013, and our most recent article on December 26^th reiterated that the best time to accumulate the Gold/Silver stocks was in the December and January window. Specifically this is what we wrote:

“These types of indicators are coming to a pivot point where Gold is testing the summer 1181 lows…at the same time, we see bottoming 5th wave patterns combining with public sentiment, bullish percent indexes, and 5 year lows in Gold stocks. This is how bottom in Bear cycles form and you are witnessing the makings of a huge bottom between now and early February 2014 if we are right.

The time to buy Gold and Gold stocks is now during the next 4-5 weeks just as we were recommending stocks in late February 2009 with public articles that nobody paid attention to. This is the time to start accumulating quality gold miner and also the precious metals themselves as the bear cycle winds down and the spring comes back to Gold and Silver in 2014.”

Since that article a few of our favorite stocks rallied 40-50% in just 3 weeks or so from the December timeframe of our article. A recent pullback is pretty normal as we set up for Gold to take out the 1271 spot pricing area and run to the mid 1300’s over the next several weeks. By that time, you will be kicking yourself for not being long either the metals themselves or the higher beta stock plays.

A few suggestions that we have already written about we will reiterate here again. Aggressive investors can look at UGLD ETF, which is a 3x long Gold product that will give you upside leverage as Gold moves into elliott wave3 up. Other more aggressive plays we already recommend a lot lower include GLDX, JNUG, NUGT and others. Picking individual stocks can be even better and we have recommended a few to our subscribers that are already doing very well.

What will trigger this next rally up is sentiment shifts to favor Gold and Silver over currency alternatives. The precious metals move on sentiment, much more so than interest rates or GDP reports or anything else in our opinion. Sentiment remains neutral to bearish as evidenced by the larger brokerage houses running around in January telling everyone to sell Gold, so we see that as a buy signal on top of our other indicators.

 

We expect the mid 1500’s by sometime this summer, but by then your opportunity will be long in the rear view mirror.

http://www.investing.com/analysis/gold-buying-opportunity-now,-could-go-$1500-by-summer-200771

Gold Bugs Have Reasons to Cheer

Bloomberg

Gold has a new lease on life. For now, anyway.

Gold, one of the biggest losers of 2013 with its whopping 28% decline, is on the upswing as tremors in emerging markets rekindle the investor appetite for safe havens that was lacking for much of the last year.

As central banks in emerging markets try to slow an investor retreat and global equities markets swoon, some investors think gold is a decent spot to wait out the chaos. Futures are up 1.3% at $1,266.40 an ounce, on track for a two-month high.

“Gold becomes the ultimate currency” in environments like this, gaining along with safe-haven stalwarts like the Japanese yen and Treasurys, says Bill O’Neill, a principal with commodities trading firm Logic Advisors,

Still, gold has a long way to go to regain investors’ trust. Gold exchange-traded funds, a popular vehicle in recent years for investors to gain exposure to gold, haven’t seen big inflows despite the rebound in prices so far this year.

“You have problems in Argentina, Turkey, Brazil, India,” Mr. O’Neill said. “There’s been myriad financial and currency related problems around the world, and gold really hasn’t been able to break out.”

Futures are up 5.2% this month, which would be the third-best monthly performance since gold slipped into its current bear market. But that’s well short of the 10% surges gold posted in recent years when the Federal Reserve was ramping up bond purchases and Europe’s debt crisis flared.

With the Fed expected to further throttle back its purchases, gold’s rebound may be short-lived.

• http://blogs.wsj.com/moneybeat/2014/01/29/gold-bugs-have-reasons-to-cheer/

China corners the gold market like the Hunt Brothers goosed silver in 1980

By Peter Cooper

China has effectively cornered the gold market over the past couple of years by draining the vaults of the world and will now create a shortage of the yellow metal that will hike its price just as the US billionaire Hunt Brothers goosed silver in 1980 and sent the price to levels it has never achieved again in 34 years.

Only this time around something is different. The Comex won’t be able to change the rulebook as it did to bring the Hunt Brothers’ empire crashing down with the silver price. China has actually taken possession of the physical gold. It is not a paper derivatives contract at stake this time.

Gold watchers

Gold watchers are waiting for two announcements at the moment: the hour of reckoning when the Comex no longer has sufficient gold in its warehouses to cover deliveries; and a report from China that its official reserves are up from 1,054 as last reported five years ago to more than 5,000 tonnes.

How anybody can be fooled by Goldman Sachs and Morgan Stanley into thinking that the next big move for gold will be back to $1,000 we don’t know. Did somebody not once say that if you are going to tell a lie make it a big one and people will believe you?

What these US investment banks have done is to capitalize on investors’ myopia: they only see what is in front of them in US financial markets and don’t see the wood for the trees. Think US domestic short-term and you have a recovery on your hands and a runaway stock market.

Still cashing out of gold after its big tumble last year and investing in the stock market that has just stalled after a stellar run looks like a suicide ticket to us. Perhaps the rise in the price of gold and silver since the beginning of the year is a sign that we are not alone in seeing this.

Maximizing ROI

Readers of the ArabianMoney investment newsletter will know our view on 2014 and how best to leverage up on rising precious metal prices (click here). Sadly we can’t give this information away on this website and it remains proprietary to the newsletter only.

What we can tell you is that China’s cornering of the gold market is the biggest thing to hit precious metals since the Hunt Brothers cornered silver in 1980, but the Comex won’t be able to break China’s stranglehold so prices will head very much higher from here.

Of course silver will have the last laugh, and outperform gold as it always does to the upside. Given the 60 per cent discount to 1980 prices silver’s price increase will be epic.

http://news.goldseek.com/GoldSeek/1390752240.php

Gold as a Deflation Hedge

Commodities / Gold and Silver 2014

Jan 16, 2014 - 09:44 PM GMT

By: Michael_J_Kosares

(The following is the first of a five part series on how gold performs during periods of deflation, chronic disinflation, runaway stagflation and hyperinflation. The first installment examines gold’s safe-haven role during a deflationary event like the global 1930s economic depression.)

“The inability to predict outliers implies the inability to predict the course of history. . .But we act as though we are able to predict historical events, or, even worse, as if we are able to change the course of history. We produce thirty-year projections of social security deficits and oil prices without realizing that we cannot even predict these for next summer — our cumulative prediction errors for political and economic events are so monstrous that every time I look at the empirical record I have to pinch myself to verify that I am not dreaming. What is surprising is not the magnitude of our forecast errors, but our absence of awareness of it.”

- Nicholas Taleb, The Black Swan — The Impact of the Highly Improbable, 2010

“Having been mugged too often by reality, forecasters now express less confidence about our abilities to look beyond the immediate horizon. We will forever need to reach beyond our equations to apply economic judgment. Forecasters may never approach the fantasy success of the Oracle of Delphi or Nostradamus, but we can surely improve on the discouraging performance of the past.”

- Alan Greenspan, The Map and the Territory, 2013

Introduction

This short study examines gold’s performance under the four most commonly predicted worst-case economic scenarios — a 1930s-style deflation, chronic Japanese-style disinflation, a 1970s-style runaway stagflation, and a Weimar-style hyperinflation. “That men do not learn very much from the lessons of history,” Aldous Huxley once wrote, “is the most important of all the lessons of history.” Though I agree with Huxley’s assessment when applied to contemporary policymakers and central bankers, I do not agree with it when applied to their counterparts in the private sector, i.e., the individual investors. As justification, I offer the ongoing (and long-term) success of the USAGOLD website as well as the soaring statistics of late on private gold ownership both here and abroad, most of which has been accumulated for safe-haven purposes. Individually, we can and do learn the lessons of history even if we do not always do so collectively.

Black Swans, Yellow Gold is dedicated to those who believe, like Nicholas Taleb, that it is just as important to prepare for what we cannot foresee as what we can. Some might put their money on the latest Oracle of Delphi or the contemporary reincarnation of Nostradamus — or even an all-seeing eye plug-in that can be downloaded from the internet — but in the end, such notions are the dreams of government planners and retired central bankers. For the rest of us, a solid hedge in gold coins, as your are about to read, is the more sensible and reliable alternative — a wealth haven for all seasons.

We invite you to return to these pages periodically for the second installment in this series which we plan to publish next week.

Gold as a deflation hedge (United States, 1929)

WEBSTER DEFINES DEFLATION A “CONTRACTION IN THE VOLUME of available money and credit that results in a general decline in prices.” Typically deflations occur in gold standard economies when the state is deprived of its ability to conduct bailouts, run deficits and print money. Characterized by high unemployment, bankruptcies, government austerity measures and bank runs, a deflationary economic environment is usually accompanied by a stock and bond market collapse and general financial panic — an altogether unpleasant set of circumstances.

The Great Depression of the 1930s serves as a workable example of the degree to which gold protects its owners under deflationary circumstances. First, because the price of gold was fixed at $20.67 per ounce, it gained purchasing power as the general price level fell. In 1933, when the U.S. government raised the price of gold to $35 per ounce in an effort to reflate the economy through a formal devaluation of the dollar, gold gained even more purchasing power. President Franklin D. Roosevelt also confiscated gold bullion by executive order in concert with the devaluation, but exempted “rare and unusual” gold coins which later were defined by regulation simply as items minted before 1933. As a result, only those citizens who owned gold coins dated before 1933 were able to reap the benefit of the higher fixed prices. The accompanying graph illustrates those gains, and the gap between consumer prices and the gold price.

Gold as a deflation hedge

Second, since gold acts as a stand-alone asset that is not another’s liability, it played an effective store of value function prior to 1933 for those who either converted a portion of their capital to gold bullion or withdrew their savings from the banking system in the form of gold coins before the crisis struck. Those who did not have gold as part of their savings plan found themselves at the mercy of events when the stock market crashed and the banks closed their doors (many of which had already been bankrupted).

How gold might react in a deflation under today’s fiat money system is a more complicated scenario. Even one under a fiat money system, the general price level would be falling by definition. Economists who make the deflationary argument within the context of a fiat money economy usually use the analogy of the central bank “pushing on a string.” It wants to inflate, but no matter how hard it tries the public refuses to borrow and spend. (If this all sounds familiar, it should. This is precisely the situation in which the Federal Reserve finds itself today.) In the end, so goes the deflationist argument, the central bank fails in its efforts and the economy rolls over from recession to a full-blown deflationary depression.

How the government treats gold under a deflationary scenario will play heavily into its performance:

- If gold is subjected to price controls and restricted ownership, as it was in the 1930s deflation, it would likely perform as it did then, i.e., its purchasing power would increase as the price level fell. Under such circumstances, the ownership of “rare and unusual” gold coins might once again come into play.

- If ownership is not restricted, it would turn out to be the best of all possible worlds for gold owners. Its purchasing power would increase as the price level fell, and the price itself could rise as a result of increased demand from investors hedging systemic risks and financial market instability.

Note: That, by the way, is the primary reason governments tend to restrict gold ownership when confronted with widespread bank runs and failing financial markets. Governments seize gold not because they need the money; they seize it to cut off the escape route and force capital flows back into banks and financial markets. As an aside, that is precisely the reason why governments have an interest in controlling the price of gold. Former Fed chairman Paul Volcker, it has been copiously reported, once said, “Gold is my enemy. I’m always watching what it is doing.” Though there is no direct evidence I know of that the Fed or Treasury Department intervened directly in the gold market during Mr. Volcker’s tenure, his statement does reflect the acute interest in gold on the part of monetary policy-makers. Alan Greenspan voiced a similar interest in gold throughout his Fed chairmanship and still does today, though unlike Volcker he has always defended gold and expressed an appreciation for its use as a form of money or final payment or reconciliation. Gold, in the end, is not just competition for the dollar; it is competition for the bank deposits, stocks and bonds most particularly during times of economic stress, and that is the source of enduring interest among policy-makers.

The disinflationary period leading up to and following the financial market meltdown of 2008 serves as a good example of how the second scenario might unfold. The disinflationary economy is a close cousin to deflation, and is covered in the next installment in this series. It provides some solid clues as to what we might expect from gold under a full deflationary breakdown.

If you are looking for a gold-based analysis of the financial markets and economy, we invite you to subscribe to our FREE newsletter – USAGOLD’s Review & Outlook, edited by Michael J. Kosares, the author of the preceding post, the founder of USAGOLD and the author of “The ABCs of Gold Investing: How To Protect And Build Your Wealth With Gold.” You can opt out any time and we won’t deluge you with junk e-mails.

By Michael J. Kosares 
Michael J. Kosares , founder and president 
USAGOLD - Centennial Precious Metals, Denver

Michael J. Kosares is the founder of USAGOLD and the author of "The ABCs of Gold Investing - How To Protect and Build Your Wealth With Gold." He has over forty years experience in the physical gold business.  He is also the editor of Review & Outlook, the firm's newsletter which is offered free of charge and specializes in issues and opinion of importance to owners of gold coins and bullion.  If you would like to register for an e-mail alert when the next issue is published, please visit this link. 

Disclaimer: Opinions expressed in commentary e do not constitute an offer to buy or sell, or the solicitation of an offer to buy or sell any precious metals product, nor should they be viewed in any way as investment advice or advice to buy, sell or hold. Centennial Precious Metals, Inc. recommends the purchase of physical precious metals for asset preservation purposes, not speculation. Utilization of these opinions for speculative purposes is neither suggested nor advised. Commentary is strictly for educational purposes, and as such USAGOLD - Centennial Precious Metals does not warrant or guarantee the accuracy, timeliness or completeness of the information found here.

http://www.marketoracle.co.uk/Article43997.html

Gold's Decline Eats Into Swiss Reserves

Central Bank to Cancel Dividends for First Time

Updated Jan. 6, 2014 5:48 p.m. ET

ZURICH—It didn't take a heist for the Swiss National Bank SNBN.EB -4.39% to lose $16.6 billion on bullion.

That is how much the central bank said its gold holdings fell in value last year, as the price of the precious metal skidded 28%, the most since 1981. The loss was only partially offset by the central bank's profit on foreign currencies, saddling it with a $10 billion paper loss for 2013 and forcing the bank to cancel dividends to shareholders for the first time since it was founded 107 years ago.

The central bank also said Monday that it wouldn't be able to make additional payments to Switzerland's 26 cantons, which are similar to U.S. states, and the federal government for the first time since 1991.

Investors ranging from coin collectors to billionaire hedge-fund manager John Paulson have been hammered by gold's decline, which ended a 12-year bull run in 2013. Central banks are among the biggest losers, with $350 billion shaved off the value of their holdings in the year through October, according to Wall Street Journal calculations based on the most recent data from the International Monetary Fund. Unless the banks sell, their losses are unrealized and could reverse if gold rallies.

Enlarge Image

Most central banks own gold to boost confidence in their paper currency or protect against financial shocks, and are less concerned with the metal's performance.

For many investors, the shrinking role of central banks in the market is another reason to sell. The magnitude of last year's selloff already is making central bankers reluctant to buy more of the metal, weighing on prices and making a rebound less likely in 2014, analysts said.

"It's been a very tough period for [central bank] reserve asset managers," said Tom Kendall, a precious-metals analyst with Credit Suisse Group AG in London, pointing to volatility in currencies and the retreat in gold. "In theory these guys should be managing for the very long term, but the fact that they're recording [paper] losses makes it harder to say you should be adding more."

More

• MoneyBeat: Swiss National Bank Takes Hit

Gold fell throughout 2013, diving $200 a troy ounce, or 13%, over two days in April amid speculation the U.S. Federal Reserve would scale back its economic-stimulus efforts. The Fed is set to reduce bond purchases this month, marking the beginning of the end for a program that had supported demand for gold among investors worried that it would spark inflation.

Gold prices hit a more-than three-year low of $1,195 an ounce on Dec. 19. On Monday, gold ended down 60 cents, or 0.05%, at $1,237.80 an ounce.

The Fed doesn't own gold. The U.S. gold hoard—8,133.5 metric tons as of November, according to the IMF—is held in vaults by the Fed and U.S. Mint but is owned by the Treasury. The government agency has valued its gold at $42.22 an ounce by law since 1973.

Amid the price volatility last year, two of the most prominent investors in gold, Mr. Paulson and George Soros, cut their holdings in SPDR Gold Trust, GLD -0.57% the world's largest gold exchange-traded fund. Overall, ETFs liquidated 874 metric tons of the metal as investors sold shares, according to Barclays PLC. Many developed economies have gradually reduced their gold holdings for much of the past decade. However, central banks in emerging markets were major buyers over the same period, turning to the metal in an effort to diversify away from the U.S. dollar and other paper currencies. Some, including Russia and Indonesia, increased their gold holdings in 2013, according to the IMF.

Recently, gold's drop has heightened concerns about dwindling foreign-exchange reserves in some of these countries as slowing economic growth causes trade and budget deficits to widen. Investors pay close attention to the size of a country's reserves, including both currencies and gold, as a way to gauge how much firepower it has to pay its debts and to ride out economic shocks.

"With gold prices falling, obviously those countries that have built up gold reserves and have inflated reserve estimates…are the ones that get hurt with gold on the way down," said Robert Abad, an emerging-markets portfolio manager at Western Asset Management Co. in Pasadena, Calif. The decline in gold prices is particularly bad news for Venezuela, which holds about 70% of its foreign-exchange reserves in gold.

Enlarge Image

The SNB's gold holdings are kept in bars and coins.Bloomberg News

Still, most central banks aren't nearly so reliant on gold to shore up reserves. Even factoring in last year's drop, central banks' gold hoard was valued at $1.35 trillion in October, up 60% since 2008.

"Anyone who bought gold after 2010 is currently in the loss zone," said Andreas Nigg, head of equity and commodity strategy at Bank VontobelVONN.EB +0.82% in Zurich.

Central banks in the euro zone own about 350 million ounces of gold. Through the first nine months of 2013, the value dropped by about €100 billion ($136 billion). However, euro-zone central banks built up sizable valuation buffers, accounts used to address unrealized gains and losses, when gold prices were rising and can probably absorb these paper losses without affecting their annual profits, which are distributed to national governments.

The Swiss National Bank's loss on its gold holdings, which amounted to 1,040.1 metric tons as of September, according to the IMF, will likely stoke a political controversy in Switzerland. Members of the right-wing Swiss People's Party are pushing for a national vote on requiring the central bank to keep at least 20% of its assets in gold. The central bank has said its flexibility would be limited by such a requirement, which could force it to buy more gold or reduce its holdings of other assets, such as currencies.

—Erin McCarthy contributed to this article.

Write to John Revill at john.revill@wsj.com and Laura Clarke at laura.clarke@wsj.com

Corrections & Amplifications
In 2012, the Swiss National Bank allocated 1.5 million Swiss francs in dividends. An earlier version of this article incorrectly said the SNB allocated 1.5 billion Swiss francs in dividends. An earlier version of this story also misidentified Andreas Nigg, head of equity and commodity strategy at Bank Vontobel in Zurich.

http://online.wsj.com/news/articles/SB10001424052702303933104579304153253798112

Gold has its S.O.S. moment, and it’s bullish

By Michael A. Gayed

I see tons of articles arguing that gold is only heading lower after its worst year in three decades. Make no mistake about it — the precious metal had its Lehman moment in 2013.

Yet, with hindsight, it is clear that "Lehman moments" can result in some significant trading gains following extreme declines. Could gold be in a secular bear market? Maybe, but from a trading perspective, I think it’s worth considering some money positions back into gold minersGDX -0.91%  and gold itself GLD +1.09% .

Last year was almost a perfect storm. Between U.S. stocks rallying hard, India taking actions to make gold less attainable by her citizens, and the spike in bond yields combined with falling inflation expectations, there was no shortage of reasons to not divest the metal.

"Lord save us all from a hope tree that has lost the faculty of putting out blossoms."

— Mark Twain

This year may be very different. One of the biggest headwinds against gold was positive real rates, which back in January of last year I called the main dilemma against momentum. Historically, gold tends to do well when inflation is higher than nominal rates, also called a negative real-rate environment. When real rates are positive (inflation lower than nominal rates), the metal becomes less attractive due to holding and opportunity costs. There is no doubt that we aggressively entered a real-rate environment as bonds slumped and the deflation pulse took hold simultaneously.

But what if that ends? I suspect there will come a meaningful period of time in 2014 where negative real rates return, especially under a Yellen-led Fed. This implies that either inflation expectations really pick up, or bond yields fall to counter deflationary pressure.

Take a look below at the price ratio of the SPDR Gold Trust Shares ETF relative to the S&P 500 SPY -0.02% . As a reminder, a rising price ratio means the numerator/GLD is outperforming (up more/down less) the denominator/SPY. For a larger chart, please click here .

Gold has been an awful performer since the Summer Crash of 2011, vastly underperforming U.S. markets, with extreme weakness in 2013. Yes, the trend is still down, but it’s worth considering that a tradeable opportunity is coming and soon.

Everyone loved gold up until 2011, and everyone hates it now. The contrarian in me says that's why its worth watching carefully. The catalyst likely needs to be negative real rates, and with inflation expectations ticking up a bit, the "Great Convergence of 2014" between reflation and U.S. markets may be precisely why gold's S.O.S. moment gets heard.

This writing is for informational purposes only and does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction, or as an offer to provide advisory or other services by Pension Partners, LLC in any jurisdiction in which such offer, solicitation, purchase or sale would be unlawful under the securities laws of such jurisdiction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. Pension Partners, LLC expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing. 

http://www.marketwatch.com/story/gold-has-its-sos-moment-and-its-bullish-2014-01-03