Eric Sprott, chief executive officer of Sprott Asset Management, recently sat down with CNBC at the SALT conference in Las Vegas to discuss gold and silver. When asked about gold’s recent price struggles, Sprott pointed to the fundamentals remaining intact. He explained, “We have some wonderful statistics on physical gold purchases which argue very strongly for the price of gold to go up. He further added, “There was a data point that came out yesterday where the exports of gold from Hong Kong into Mainland China went up 600 percent year-over-year in the month of March.” Sprott’s investment firm has $9 billion in assets under management and has returned 17.1 percent on an annualized basis since 2002 by identifying the gold bull market early.

The data Sprott refers to comes from the Census and Statistics Department of the Hong Kong government. It showed that gold shipments from Hong Kong to Mainland China surged to 135,529 kilograms (135.5 tonnes) in the first-quarter, compared to only 19,729 kilograms (19.7 tonnes) in the same period last year. Shipments in March alone increased 59 percent from February. “We’re looking at another solid year for Chinese demand based on these early numbers,” said Nick Trevethan, senior commodities strategist at Australia & New Zealand Banking Group, according to Bloomberg. “While it’s largely related to price, negative real interest rates should keep demand strong.” The strong start to the year also places China in a likely position to overtake India as the world’s largest gold purchaser. The World Gold Council’s most recent annual report showed that Chinese demand for gold jewelry and investment was almost 770 tonnes in 2011, not too far behind India’s 933 tonnes.

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With the global financial system over leveraged and struggling to maintain the status quo, it is not surprising that countries like China are buying massive amounts of gold to protect themselves from fiat currency turmoil. Earlier this week, Gao Xiqing, president of China Investment Corp., said the nation’s sovereign wealth fund has stopped buying European government debt because of the financial conditions in the region. Xiqing explained, “What is happening in Europe right now is of course of concern. We still have our people looking at opportunities in Europe, even though we don’t want to buy any government bonds. Two or three years ago we started moving gradually from Europe and North America to Asia and Latin America,” according to Bloomberg.

Sprott also addressed the critical comments which came from Bill Gates, Warren Buffett and Charlie Munger this week regarding gold. He said, “Gold was the investment of the last decade. It blew away any investment you could make, including Microsoft and Berkshire Hathaway, probably by a factor of 500 percent. In other words, they missed the trade big time. I don’t know that I should respect their opinion at this point in time.”

Although gold and silver have been in a “funk” lately, as Sprott points out, the year is not over and the reasons for holding precious metals have not changed. He also predicts that silver will be the investment of the next decade. By the end of the year, he expects gold and silver to trade over $2,000 and $50 per ounce, respectively. Those are some lofty price targets and both metals will need to find support before climbing higher. If you would like to receive professional analysis on support and resistance levels in precious metal investments, we invite you to try our premium service free for 14 days.

Investor Insight: Einhorn and Ron Paul on Bernanke’s Wealth Effect Fed Policy

Disclosure: Long EXK, AG, HL, PHYS

According to a recent Gallup poll, gold leads four other types of investments when Americans were asked to pick the best long-term investment. The poll found that 28 percent of Americans view gold as the best investment vehicle for the long-term, compared to 20 percent selecting real estate. Paper assets such as stocks and savings accounts were tied for third place with 19 percent, as bonds finished last with only 8 percent. The new findings were part of Gallup’s April update of its annual Economy and Personal Finance poll.

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Although gold prices have declined from their nominal highs made last year, the safe-haven metal still remains the top pick. Gallup explains, “Investing in gold has gained in popularity in recent years as low interest rates have made traditional savings instruments less attractive, and instability in the stock and real estate markets has undermined the mass appeal of those options. Meanwhile, the rising trajectory of the price of gold over the past several years apparently offers more of the returns and stability investors seek. Although gold prices dipped in the last quarter of 2011 after hitting an all-time high of $1,924 per ounce in September, and have yet to fully recover, more Americans continue to consider gold the best long-term investment among the major options available to consumers.”

While the Gallup poll findings may raise red flags for contrarian investors, the percentage of Americans that viewed gold as the best investment actually declined 6 percent from last year. Furthermore, what Americans say and do are completely two different things. Gold ownership still remains low by historical standards and according to sales by the United States Mint, there is no rush to buy American Gold Eagles, the most popular bullion coin in the country. In April, the U.S. Mint sold 19,000 American Gold Eagles, the lowest monthly amount since 2008. For the first four months of 2012, the U.S. Mint sold 181,000 Gold Eagles, compared to 358,000 sold in 2011. Furthermore, gold held in the SPDR Gold Trust, the world’s largest gold backed ETF, recently fell to a three month low of 1,274.09 tonnes.

Even though short-term volatility and a lack of understanding may scare many Americans away from investing in gold and silver, the fundamental reasons for owning either precious metal have not changed. In a world of uncertainty, gold and silver can still be used to diversify and preserve wealth.

Investor Insight: Do Central Banks Still Love Gold?

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Members of the Federal Reserve’s policy-making committee once again held its key interest rate near zero percent, citing lingering concerns about significant downside risks and deflation. The FOMC statement explained, “To support a stronger economic recovery and to help ensure that inflation, over time, is at the rate most consistent with its dual mandate, the Committee expects to maintain a highly accommodative stance for monetary policy. In particular, the Committee decided today to keep the target range for the federal funds rate at 0 to .25 percent and currently anticipates that economic conditions-including low rates of resource utilization and a subdued outlook for inflation over the medium run-are likely to warrant exceptionally low levels for the federal funds rate at least through late 2014.” Nine out of 10 Fed officials voted to keep the current easing measures in place, but with no indication of further easing programs.

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The FOMC also held relatively steady on its inflation outlook. The March statement said, “inflation has been subdued in recent months, although prices of crude oil and gasoline have increased lately.” Compared to the April statement that said, “Inflation has picked up somewhat, mainly reflecting higher prices of crude oil and gasoline.” Both statements expect longer-term inflation to remain stable.

While keeping interest rates at record low levels sounds bullish for precious metals to most rational investors, as it prolongs a negative real interest rate environment, gold and silver immediately spiked lower after the FOMC statement. As the charts above show, gold futures fell to as low as $1,625 per ounce, while silver futures dropped to $29.93 per ounce. Some may attribute the stable inflation outlook as a bearish signal for precious metals, but this could actually provide the Federal Reserve with more room to provide further easing, despite the option being labeled as “off the table” by some observers.

Although the FOMC minutes did not announce any QE3, Ben Bernanke has clearly not taken the option off the table. In a press conference after the FOMC statement, the Fed Chairman explained, “If appropriate and depending also on assessment of the costs and risks of additional policy actions, we remain entirely prepared to take additional balance sheet actions if necessary to achieve our objectives. So those tools remain very much on the table and we will not hesitate to use them, should the economy require that additional support.” The knee-jerk reaction seen in precious metals to the downside after the FOMC statement was overshadowed by Bernanke’s comments, as gold and silver both rebounded from intra-day lows.

In today’s headline and stimulus driven market, it is becoming increasingly important for investors to recognize certain events that can cause short-term volatility in precious metals. On Monday, we warned our premium subscribers that the FOMC meeting could cause a sell-off in gold and push silver down to $30 or even lower. Subscribers who heeded our warning received a lower entry-point into both precious metals and are in a better position to protect their portfolios from ongoing currency devaluations.

By Eric McWhinnie

Investor Insight: What are the Key Themes in Gold?

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Disclosure: Long EXK, AG, HL, PHYS

Outside of the United States, countries take their gold business very seriously. Earlier this week, a 30 year old Chinese woman was given the death sentence by a court in Wenzhou. According to Xinhua news agency, Wang Caiping cheated investors out of 100.11 million yuan, losing 94 million yuan in futures and gold trading. Xinhua explained that she borrowed the money in 2010 promising to invest in equipment and property, but used the money instead to speculate in futures and gold trading with her brother. Caiping’s defense lawyers claimed the investment activities were legal, but the court ruled that she had committed fraud and sentenced her to death for the large amount of money involved. Unlike the MF Global fiasco in the U.S., financial crimes in China carry heavy punishments.

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The Chinese demand for gold still remains strong. According to GoldCore, China imported 40,000 kilos of gold bullion from Hong Kong in February, compared to only 3,115 kilos in the same month a year earlier. GoldCore explains, “Shipments were 72,617 kilograms in the first two months, compared with 10,564 kilograms a year ago or nearly a seven fold increase from the record levels seen last year. China’s appetite for gold remains strong and Chinese demand alone is likely to put a floor under the gold market.” The firm goes on to say that Chinese consumer demand for gold beat India for the first time in nearly three years in the fourth quarter and may surpass India as the largest gold buyer on an annual basis this year.

While well-known American investors such as Warren Buffett view gold as a “lifeless” asset, countries such as India view the precious metal as a way of life. Indian retailers went on a 20 day strike due to the government declaring in March that it would double import taxes on gold and place excise taxes on most gold jewelry. The new excise tax would also cause more regulation and red tape on jewelers. The new taxes caused an up roar and gold imports declined more than 50 percent. However, India’s gold-jewelry trade associations recently agreed to end the strike after Finance Minister Pranab Mukherjee promised to reconsider the new taxes. Prithviraj Kothari, president of the Bombay Bullion Association said, “All shops have reopened. Gold demand should pick up. In April and May total, imports will be around 100 tons,” according to WSJ. Gold is India’s second largest import item by value after crude oil.

Although it can be easy to be caught up in risk on risk off trading mentalities in gold, investors should bare in mind that gold is the unofficial world reserve currency and represents deep cultural beliefs in countries such as China and India. In addition to deteriorating financial conditions, these cultural beliefs and strong demand will continue to support gold prices in the years ahead.

By Eric McWhinnie

Investor Insight: The Federal Reserve Did It Again to Gold Prices

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The current financial system serves as a global high-speed economic highway that is filled with many obstacles, including debt, bubbles and politics. Being the world’s reserve currency, the U.S. dollar is the truck that is one good bump away from losing control and crashing, causing a chaotic financial wreck. The U.S. official national debt now stands at over $15.6 trillion, representing about $140,000 per taxpayer. The record debt amount continues to increase as Washington gridlock is stronger than ever. The debt ceiling, which was raised last August to $16.394 trillion and initially expected to last well into 2013, is now estimated by Zero Hedge to be reached in September of this year. When Treasury Secretary, Timothy Geithner, was recently asked how much he would raise the debt ceiling if given only one more request, he responded, “No idea.” After $20 trillion and $50 trillion were floated as ideas, he finally conceded, “It would be a lot. It would make you uncomfortable.” The dire situation in Washington and the dollar is causing states to prepare for a bumpy road ahead.

In a bill that advanced on Tuesday, South Carolina residents would be able to use gold and silver coins as currency. The measure was approved by the House Judiciary Committee and would allow people to use both precious metals as money, as long as businesses agree to accept them. Under the bill, gold and silver coins in the state would also be exempt from any sales tax, an action that presidential candidate Ron Paul has long advocated. Eliminating sales and capital gains taxes on gold and silver are key steps to returning precious metals back to a normal currency role. Last year, Utah became the first state in the country to legalize gold and silver coins as currency. The Utah law also exempts the sale of the coins from state capital gains taxes.

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As more states and individuals prepare for future turmoil, Washington continues to look for more ways to abuse the nation’s currency. Geithner is currently trying to receive congressional permission to strip copper and other valuable metals from pennies and nickels. He told a House Appropriations Committee this week, “Currently, the costs of making the penny and the nickel are more than twice the face value of each of those coins,” according to Philly.com. Since 1982, pennies are mostly made from zinc and only contain about 2.5 percent copper. Meanwhile, the nickel is composed of 75 percent copper and 25 percent nickel. Geithner hopes that minting changes “will save more than $75 million” per year, starting next year. The U.S. nickel has not contained any silver since 1945 and silver was completely removed from quarters and dimes in 1965.

Although met with criticism, some governments are willing to eliminate certain circulated coins altogether. The Canadian government announced in its budget on Thursday it will withdraw its penny from circulation this year, hoping to save around $11 million annually. Finance Minister Jim Flaherty said, “Pennies take up too much space on our dressers at home. They take up far too much time for small businesses trying to grow and create jobs,” according to Bloomberg. That may be true, but the move also helps to hide the debasement of currencies from the public.

While elevated gold and silver prices flash a warning light to governments and fiat currencies worldwide, the signal is ignored by many. Investors looking to protect and diversify themselves against the current global financial system should strongly consider deploying gold and silver airbags. Individuals not willing to purchase gold and silver may want to consider picking up some U.S. nickels, while they still contain copper.

Kyle Bass, the Hayman Capital fund manager who correctly predicted the credit bubble, is a big believer in gold, platinum and nickels. In Michael Lewis’ latest book, Boomerang, Bass explained that he purchased a million dollars’ worth of nickels, totaling twenty million nickels. Bass explained, “I’m telling you, in the next two years they’ll change the content of the nickel. You really out to call your bank and buy some now.”

Investor Insight: Endeavour Silver Produces Blueprint to Sprott’s Call to Action

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To contact the reporter on this story: Eric McWhinnie at staff.writers@wallstcheatsheet.com

To contact the editor responsible for this story: Damien Hoffman at editors@wallstcheatsheet.com

Founded in 1995, Randgold Resources is an African focused gold mining and exploration company.  Yesterday, shares closed 12 percent lower after reports of renegade soldiers overthrowing a democratically elected government of Mali, where the miner has operations.  Chief executive Mark Bristow, said the military coup did not affect operations of the company, which relies on mines in Mali for the majority of its production.  “Malians respect laws and I don’t believe this will come with a high-handed change in political direction.  We don’t expect any subsequent governments to disregard proper and due process,” Bristow said in a press release.  He also went on to explain, “Operations are running normally, people are at work.”

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The plunge in Randgold shares is a perfect example of the political risks in gold and silver miners.  Even though Randgold’s CEO dismissed the conflicts taking place, shares still sold-off on the news with heavy volume.  More than 3.8 million shares were traded yesterday, compared to a three month average of about 600,000 shares.  Today, shares fell another 3 percent on more than 2 million shares of volume.  The two-day plunge has taken shares back to July 2011 levels.  The recent price action has also caused Citigroup and J.P. Morgan to downgrade their stock ratings on Randgold.

For many investors, physical bullion holdings are still the best way to invest in precious metals.  Physical gold and silver does not carry counter-party risk or receive downgrades.  Furthermore, investors can take comfort in the fact that precious metals are an asset outside of the problematic banking system.  However, some governments are trying to change these benefits as an act of financial desperation.  Government officials in Turkey will soon launch an incentive plan for consumers to store their bullion inside the country’s banking system.  The WSJ reports, “The push to tap into the individual gold reserve-the traditional form of savings here- is part of Ankara’s efforts to reduce a finance gap that is currently about 10 percent of gross domestic product.”  The Istanbul Gold Refinery estimates that 5,000 tons of gold may be stored outside of the banking system in Turkey.

One of the new incentives being considered is interest-yielding gold-deposit bank accounts that would allow customers to earn interest and withdraw their gold bars from automated teller machines.  This appears to be a challenging feat for the Turkish government, because most people do not hold gold for interest payments, but rather its intrinsic qualities.  For example, people not having to rely on a bank’s automated teller machines to return their own gold is very comforting in a time of crisis.  “Turkey has historically been hit by crises and inflation, so the tradition of holding gold outside the system could be hard to shift,” said Murat Ucer, an economist at Global Source Partners, an Istanbul-based research consultancy.  According to the World Gold Council, Turkish consumer demand for gold bar and coin investments hit 80.4 tons ($4.1 billion) last year, compared to 40.5 tons ($1.6 billion) in 2010.

Investor Insight: Endeavour Silver Provides Blueprint to Sprott’s Call to Action

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By Eric McWhinnie

Disclosure: Long EXK, AG, HL, PHYS

To contact the reporter on this story: Eric McWhinnie at staff.writers@wallstcheatsheet.c

Even though the unemployment rate remained unchanged at 8.3 percent, the U.S. dollar index, which weighs the dollar against six other fiat currencies, jumped from 79.16 to almost 80.  “This is a very strong report for a host of reasons,” said Eric Green, chief market economist at TD Securities.  With the unemployment report giving strength to the dollar, some investors may be dialing down expectations of more quantitative easing from the Federal Reserve too soon.  New reports indicate that the Fed is already discussing a new bond-buying program.

Earlier this week, the WSJ reported that “Federal Reserve officials are considering a new type of bond-buying program designed to subdue worries about future inflation if they decide to take new steps to boost the economy in the months ahead.  Under the new approach, the Fed would print new money to buy long-term mortgage or Treasury bonds but effectively tie up that money by borrowing it back for short periods at low rates…This is known as ‘sterilized‘ QE.”  Just the mere mention of more bond-buying was enough to send gold and silver higher, subdued inflation or not.

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Although the positive unemployment report may have added doubts to more quantitative easing from the Fed, investors are not forgetting about the current easing in the form of record low interest rates and the Fed’s pledge to keep them low until 2014.  When asked about another QE program, Presidential Candidate Dr. Ron Paul said, “When you keep interest rates at zero percent essentially, isn’t that a bit of quantitative easing?  It’s the policy that has not changed and its not likely to change.  The whole concept is wrong, there’s a lot of credit out there being allocated by Congress and the Federal Reserve and it completely distorts the market.”  Paul is pleased with the improved unemployment report, but goes on to explain the he believes the improvement will be temporary and the U.S. will continue with its course of structural unemployment.

To put the job market into perspective, Heidi Shierholz, economist at the Economic Policy Institute explains, “We have 5.3 million fewer jobs now than we did before the recession started, and we should also have added around 4.6 million jobs over this period just to keep up with normal growth in the working-age population.  Even at the quite strong average growth rate of the last three months, it would take roughly five years to get back to full employment in the labor market.”

Since the report about another bond-buying program on Wednesday, gold and silver have increased about 2 percent and 4 percent, respectively.  The market is signaling little faith in the Fed’s ability to provide sterilized QE or a reduction of current QE because of an improved unemployment report.  While it is not politically safe for the Fed to announce new quantitative easing programs, it will need to keep interest rates low to fund government debt.

By Eric McWhinnie

Investor Insight: Does Gold Still Sparkle for Morgan Stanley and Germany?

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To contact the reporter on this story: Eric McWhinnie at staff.writers@wallstcheatsheet.com

Morgan Stanley still believes there are four main pillars that gold’s bull market will rely on to climb higher.  The first pillar involves the decline of producer hedging.  A miner seeking to protect itself from a falling gold price may choose to sell anticipated production for delivery at a future date, adding more gold supply into the market.  Although producer hedging increased for the first time in a decade last year, it is not expected to have a material impact.  The World Gold Council explains, “Hedging as a source of supply is expected to stay muted as the practice of wholesale industry-wide hedging activity has proved damaging to the industry in the long run.”

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The inability of gold mining companies to increase gold supplies materially is also a pillar of strength for the gold bull market.  With gold prices reaching a new all-time nominal high last year, gold production also reached an all-time high of 2,810 tonnes.  However, this only represents a 4 percent increase from 2010.  Furthermore, mine production only grew 2 percent in the fourth quarter of 2011, signaling that miners will dial back as gold prices dip.  Labor, energy and infrastructure issues in regions such as South Africa also dampened mine production.

The last two pillars of strength involve gold demand by emerging central banks and investors.  Not only have central banks dramatically scaled back gold sales, but they have turned into net buyers.  In the past two years, central banks have purchased more than 500 tonnes of gold.  “The net buying trend which started in Q2 2009 has proliferated, as emerging market central banks have continued to add gold on increasing concerns about the creditworthiness and low yields of their existing reserve assets.  Both the euro area sovereign crisis and the sovereign debt downgrade in the U.S. during the summer of 2011 have compounded these worries,” states WGC.  Meanwhile, investment demand for gold reached a record of 1,640.7 tonnes in 2011, representing a 5 percent increase from the previous record of 1,567.5 tonnes set in 2010.

As the financial markets remain in turmoil, central banks and investors will turn to gold as a hedge against the wall of worry facing the world.  Earlier this year, Venezuela’s central bank received its last shipment of gold bars in a move that repatriated 160 tonnes of the precious metal held abroad.  Apparently, with Greece and other countries teetering on the edge of the financial cliff, Germany is becoming increasingly concerned with its own gold reserves.  According to German newspaper Bild, German lawmakers are planning to review Bundesbank controls of and management of Germany’s gold reserves.  GoldCore reports, “There is increasing nervousness amongst the German public, German politicians and indeed the Bundesbank itself regarding the gigantic risk on the balance sheet of Germany’s central bank and this is leading some in Germany to voice concerns about the location and exact amount of Germany’s gold reserves.”  According to the latest data from the WGC, Germany holds nearly 3,400 tonnes of gold, representing 71.4 percent of its reserves.  It is believed that more than half of Germany’s gold is held in storage facilities outside of the country, in places such as the Federal Reserve Bank of New York.

By Eric McWhinnie

Investor Insight: Will Doomsday Bill Help Gold and Silver Shine?

If you would like to receive professional analysis on equity miners and other precious metalinvestments, we invite you to try our premium service free for 14 days.

To contact the reporter on this story: Eric McWhinnie at staff.writers@wallstcheatsheet.com

The annual value for gold demand in 2011 equaled $205.5 billion, an all-time high and a 29 percent gain above the 2010 value. Jewellery accounted for $99 billion in gold demand, while investment demand was close behind with nearly $83 billion. Interestingly, the majority of investment demand value was due to physical bar and coin demand, which represented $75 billion. As more investors remain skeptical and lose confidence in the global financial system, they turn to physical gold for protection. The annual report explains, “The bar and coin story is one which has traversed borders led by China, India and Europe, but other markets have also participated in terms of relative growth rates. Store of wealth demand, diversification, negative real deposit rates, the threat of inflation in developing markets, deflation in developed markets and currency debasement have all contributed to driving up demand over the last few years.”

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In 2011, the average price of gold averaged $1,571 per ounce, which was more than 28 percent higher than its 2010 equivalent. While this contributed to the record annual value for gold demand, it also proved an argument against gold to be incorrect. Many gold critics claim that as gold prices increase, the supply of gold will also increase from people selling any form of gold they might hold. However, this is simply not true. Despite a nominal record high of $1,900 per ounce, recycled gold declined by 2 percent. In fact, recycled gold supply has been declining since 2009, when it hit a peak of 1,694.7 tonnes. The WGC explains, “Despite the rise in prices, recycling activity was constrained by a combination of expectations for higher prices, acclimatisation to a higher current price level, economic growth and exhaustion of near-market supply.”

Record high gold prices also failed to significantly curtail the appetite for industrial demand. The technology sector demanded 463.5 tonnes of gold in 2011, down from 466.4 tonnes in 2010, but still above the 456.3 tonne average of the preceding five year period. Within the sector, electronic demand increased from 326.9 tonnes in 2010 to 330 tonnes in 2011. The dental segment is the one area that appears to be affected by rising gold prices. Dentistry gold demand fell 10 percent year-over-year to 43.8 tonnes. The WGC reports, “This result was driven by the elevated gold price and weak economic conditions which continued to encourage substitution both in favour of palladium and non-precious options, mainly cobalt-chrome and ceramic materials.” However, dentistry represents a small portion of global gold demand, and will not have a material impact on prices.

Investor Insight: Will Gold Cleanse The World From Fiat Currencies?

Even though 2011 was filled with volatility and higher gold prices, the world still craves the only world reserve currency that can not be printed. The current trends that have fueled the 11-year gold bull market remain in place. Furthermore, gold prices continue to receive additional support as central banks not only devalue fiat currencies, but also purchase gold themselves. “The net buying trend which started in Q2 2009 has proliferated, as emerging market central banks have continued to add gold on increasing concerns about the creditworthiness and low yields of their existing reserve assets. Both the euro area sovereign crisis and the sovereign debt downgrade in the US during the summer of 2011 have compounded these worries,” states WGC. In the past two years, central banks have purchased more than 500 tonnes of gold.

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Greece’s bailout package totals 130 billion euros, but not all of the finance ministers are satisfied Greece is completely committed to the deal.  Euro Chairman Jean-Claude Juncker said, “I did not yet receive the required political assurances from the leaders of the Greek coalition parties on the implementation of the program.”  Greece needs the bailout to avoid a default on March 20, when 14.5 billion euros in debt repayments are due.  The ongoing insolvency issues in Greece and other European nations have caused precious metals to be viewed more as a safe-haven.

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Pau Morilla-Giner, head of equities, commodities and alternative investments at London and Capital Asset Management explained, “Below the surface … gold continues to trade about 60 to 70 percent of the time as an alternative currency, which clearly has to do with being a better store of value than nominal currencies that are being abused by excessive quantitative easing across the board.

Although the dollar has held up well in February, it benefits from being the cleanest shirt in the dirty basket of fiat currencies.  In addition to a weakening euro, the dollar has risen against the Japanese yen.  Earlier this week, the Bank of Japan surprised markets by adding 10 trillion yen to its quantitative easing program, bringing the total to 65 trillion yen.  For the first time in history, the central bank also set a consumer inflation target of 1 percent for the time being.  This came shortly after the Federal Reserve set its own inflation target.  “The Federal Reserve’s decision to adopt an inflation target is clearly affecting the BOJ’s thinking. The Fed’s move has also given ruling and opposition lawmakers reason to pressure the BOJ into adopting an inflation target and easing policy further,” said Seiji Adachi, senior economist at Deutsche Securities in Tokyo.

The Bank of England also announced last week that it will extend its quantitative easing program by 50 billion pounds, bringing the total to 325 billion pounds.  Furthermore, any negative news could easily prompt additional easing efforts from the central bank.  Sam Hill, an analyst at RBC explained, “If there is significant downside news over the next three months then the monetary policy committee could announce further asset purchases.”

Investor Insight: Exclusive James Rickards Interview: Gold is the Answer to Currency Wars

As central banks around the world continue to engage in currency devaluation policies, gold will be relied upon to cleanse the mess left behind by central banks and fiat currencies.  It will also become increasingly important for investors to research and protect themselves from misconstrued perceptions about gold and silver.  In 2010, George Soros called gold the “ultimate bubble.”  However, gold completed its 11th year of consecutive gains in 2011.  Furthermore, newly released data shows Soros increased his stake in the SPDR Gold Trust ETF to 85,450 shares in the fourth quarter of 2011.  This represents an increase of 77 percent from the prior period, and suggests that Soros is not as bearish on gold as previously thought.

By Eric McWhinnie

Last year, Apple made headlines when its cash and marketable securities position of $73.8 billion surpassed the operating cash balance at the U.S. Treasury.  The news magnified calls for Apple to deploy some of its idling cash hoard.  At the time, analyst Katy Huberty from Morgan Stanley explained that Apple’s current and future cash flows “greatly exceed” its cash needs.  After Apple’s most recent earnings report, the calls for deploying cash are increasing in volume.

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Late Tuesday, Apple reported its financial results for its fiscal 2012 first quarter, which ended December 31, 2011.  In addition to a blow-out earnings number, Apple’s cash position has grown to new earth-shattering records.  Apple generated a cash flow of $17.5 billion in the quarter, and finished 2011 with a whopping $97.6 billion in cash and equivalents.  According to Zero Hedge, “Looked at otherwise, if Apple were a country, and its cash was equivalent to GDP, it would rank as the world’s 58th largest economy, above such countries as Slovakia, Iraq, Luxembourg and Syria.”  In terms of market capitalization, Apple has now surpassed Exxon Mobil as the world’s most valuable company.  In fact, Apple’s current cash position of nearly $100 billion is greater than the market cap of 474 of the S&P 500 companies.

The question then becomes, what should Apple do with its massive cash hoard?  Conventional recommendations range from paying a dividend or buying back stock, to acquiring suppliers.  While these are certainly worthy recommendations, it is hardly the unconventional thinking that has propelled Apple to the top of the podium.  In addition to these recommendations, Apple should also consider purchasing gold.  A relatively small gold position in Apple’s portfolio could help the company further offset currency and monetary policy risks to its $97.6 billion stockpile.  In November, Apple started accepting Chinese yuan for App Store downloads, but could benefit even more by diversifying into gold.  A report by Oxford Economics last year recommends holding at least 5 percent of assets in gold.  The report concludes that gold is a good hedge against inflation, as well as deflation.

Companies investing in precious metals such as gold is not completely unthinkable.  In 2009, life insurer Northwestern Mutual announced it purchased $400 million in gold.  It was the first time in the company’s 152-year history.  Chief Executive Officer Edward Zore explained, “Gold just seems to make sense; it’s a store of value.  The downside risk is limited, but the upside is large.”  Since his comments in June 2009, gold prices have increased from $950 per ounce to nearly $1,700.

Investor Insight: Currency Wars Are Driving Gold and Silver Higher

Aside from gold’s monetary value to investors, gold also has a minor industrial value.  According to the most recent data from the World Gold Council, technology gold demand in the third quarter of 2011 was 120.2 tonnes.  The WGC explains, “According to the Semiconductor Industry Association, worldwide sales of semi-conductors (the major consumer of gold in tech) were $25.8 billion for the month of September, an increase of 2.7 percent from sales of $25 billion the prior month.  Over the year to end-August, sales grew 2.2 percent year-on-year, partly as a result of rising demand in netbook and tablet segments.  Industry analysts iSuppli estimates that worldwide tablet shipments will exceed 60 million units in 2011, with Apple accounting for 73.6 percent of those.”  Keep in mind, this estimate was before Apple’s record breaking sale of 15.43 million iPads in the December quarter.

While some may think it would be out-of-the-question for Apple to purchase gold, the precious metal would provide a hedge for the company and its shareholders.  At the very least, Apple could use the gold in its technology products.  If Apple deploys just 5 percent of its $97.6 billion cash hoard to purchase gold, it would only have to part with $5 billion.  This amount of cash flow was earned in just one month in the previous quarter.  Although Apple has not announced new plans for its cash supply, it may be nearing a decision.  The company’s Chief Financial Officer Peter Oppenheimer said, “We’re actively discussing uses of our cash balance, and have no specifics to share.  In the meantime, we continue to be disciplined with cash, and are not letting it burn a hole in our pockets.”

By Eric McWhinnie

The last time China experienced a significant slowdown was towards the end of 2008.  Over the next two years, China provided four trillion yuan ($586 billion) in stimulus money to boost growth.  While investors may be expecting another replay of stimulus, China is indicating that the current slowdown is not significant enough, and inflation is still a concern.  On Wednesday, the China Securities Journal said the nation has no reason to slash interest rates in the first quarter of 2012, because real interest rates remain negative.  The journal explains, “Any change in China’s interest rates will come at a more appropriate time window, when inflation eases further and when economic growth slows down further.”

Investor Insight: Global Factors Boost Gold and Silver Demand.

The inflation rate in China was last reported at 4.1 percent in December 2011.  Inflation hit a three-year peak of 6.5 percent last July, and averaged 5.4 percent over the course of 2011.  The official inflation target in China for 2011 was 4 percent.  XE, a leader in foreign currency research and tools, explains, “One year deposit rates, meanwhile, are set at 3.5 percent, leaving a negative real interest rate of 0.6 percent. Many economists believe China will not move to cut lending rates while inflation remains above deposit rates.”  The China Securities Journal also notes that monetary policy in China would be conducted in the open-market operations and required reserve ratio adjustments instead of further interest rate cuts.

Despite predictions of a Chinese hard landing, the most recent GDP data eases these concerns, at least in the short-term.  Although China may not provide more monetary easing through rate cuts, the nation avoiding a hard landing is bullish for precious metals and commodities.  The latest GDP numbers not only sent gold and silver higher, but also oil and copper.  On Tuesday, crude oil prices climbed back above $100 per barrel, as copper prices hit their highest level since September.

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Instead of speculating on Chinese stimulus programs, investors should take notice that other trends in the precious metal bull market are gaining strength.  According to the latest GFMS annual survey, central banks increased net purchases by fivefold to 430 tons in 2011, and may purchase another 190 tons in the first half of 2012.  Last year’s net purchases of gold by central banks was the highest level recorded since 1964.  In 2010, net purchases only equaled 77 tons.  “Attitudes among central banks haven’t really changed,” Thomson Reuters GFMS annual survey said. “There’s still that desire to come into the gold market to diversify some of the assets away from foreign exchange and to boost gold holdings.”  As demand increases for physical gold and silver, precious metal prices will receive support and climb higher.  The GFMS annual gold survey also predicts that gold prices will make a push towards $2,000 per ounce in the second half of 2012.

Sprott’s letter goes on to say, “Instead of selling all their silver for cash and depositing that cash in a levered bank, silver miners should seriously consider storing a portion of their reserves in physical silver outside of the banking system. Why take on all the risks of the bank when you can hold hard cash through the very metal that you mine? Given the current environment, we see much greater risk holding cash in a bank than we do in holding precious metals.”  After the letter, Sprott said he received a groundswell of interest-more than he had ever seen before-but more still needs to be done.  The issue of silver producers protecting themselves and shareholders through physical silver reserves seemed to fade, until Endeavour Silver issued a press release yesterday.

Investor Insight: Can Precious Metals Overcome U.S. Dollar Strength?

Endeavour Silver Corp. is a mid-cap silver mining company with a focus on production, reserves and resources in Mexico.  On Tuesday, the company released a press release providing an update for the fourth quarter.  In the fourth quarter, gold production increased 45 percent, while silver production increased 25 percent, compared to 2010’s fourth quarter.  However, the most interesting section of the press release comes from the company’s inventory update.  Endeavour says, “Due to the correction in metal prices in the fourth quarter 2011, Endeavour management elected to hold a significant portion of the fourth quarter silver and gold production in inventory rather than sell at the lower prices. Management plans to monitor the metal prices closely and sell some or all of the silver and gold in inventory at appropriately higher metal prices, or if the need arises for more cash.”

This is a fine example of what Sprott discussed in his call to action letter.  Endeavour is electing to hold its precious metal inventory until prices correct to its liking.  With silver falling to as low as $26 in the fourth quarter, Endeavour sold only 400,000 ounces of silver and 4,000 ounces of gold in the quarter.  As a result, Endeavour’s inventory increased to 812,000 silver ounces and 3,000 gold ounces in bullion.  The company also holds another 168,000 ounces of silver and 2,400 ounces of gold that are recoverable from concentrate.  For comparison, Endeavour’s inventory at the end of the third quarter included only 270,536 ounces of silver, and 2,420 ounces of gold.

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Although Sprott’s open letter brought attention to the matter, Endeavour has been parking excess cash in silver and gold on a short-term basis since 2008.  More recently, in the third quarter, Endeavour announced, “Management elected to not to sell all the silver and gold produced during the third quarter due to the falling precious metal prices.”  The company made this decision as its realized gold and silver price came in at  $1,679 and $40.72, respectively.  Based on this, it appears that Endeavour expects precious metals to climb higher than these levels in the near future.

Judging by the market, it also appears that investors believe Endeavour is making the correct move.  Shares of the company have gained more than 8 percent this year.  Due to Endeavour’s decision to hold a significant portion of its fourth quarter precious metal production, revenues decreased 39 percent when compared to the fourth quarter of 2010.  However, shares still managed to close 2.12 percent higher on Tuesday.  If more miners follow Endeavour’s example, precious metal investors could see a silver market dictated by actual physical supply and demand issues, rather than paper traders who abuse the market.

To contact the reporter on this story: Eric McWhinnie at staff.writers@wallstcheatsheet.com

The Federal Reserve has not officially announced another major monetary easing policy since ZIRP, QE1, QE2, Operation Twist and favorable swap lines, but it continues to show its concern and frustration.  Earlier this week, the Fed announced it will make public its forecast for short-term interest rates.  Furthermore, the Fed called for more aggressive action from Congress and other policy makers to aid the housing sector.  If the Fed is not satisfied with Congress, will they step in with QE3?  Morgan Stanley believes the economy will slow down further this year, and prompt another round of easing from the Fed.  Morgan Stanley explains, “Eventually though, we believe that a package of Treasury and MBS purchases of US$500-$750 billion will arrive some time between March and June.”

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Robert Prince, co-chief investment officer at Bridgewater, the world’s largest hedge fund firm, is preparing for many years of slow growth and high unemployment for developed economies.  Due to their mountain of debt, Mr. Prince calls the U.S. and Europe “zombies.”  He goes on to explain, “What you have is a picture of broken economic systems that are operating on life support.  We’re in a secular deleveraging that will probably take 15 to 20 years to work through and we’re just four years in.”  In the meantime, gold prices should continue their bull market as central banks around the world continue to print money.

Investors are becoming more interested in physical silver.  According to data from the U.S. Mint, American Silver Eagle sales reached a new record of 39.8 million last year.  The dramatic shift in physical silver demand is magnified when compared to U.S. silver production data.  SilverDoctors explains, “U.S. silver production has declined 50 percent since its high of 70 million ounces in 1997.  In 1997 American Silver Eagle sales were 3.6 million, which accounted for only 5 percent of domestic silver production.  Contrasted to today, Silver Eagle sales are estimated to reach 40 million while domestic mine supply will decline to 35 million ounces in 2011.  Thus, American Silver Eagle sales will be 114 percent of the total U.S. silver supply in 2011, what a difference in 14 years.”

Investor Insight: China Cracks Down on Gold Exchanges.

The demand for physical gold and silver is also appearing in certain stocks.  Over the past two days, shares of the SPDR Gold Trust have closed 1.19 percent higher, while shares of the Sprott Physical Gold Trust have jumped 1.90 percent.  The difference in silver is even greater.  In the same time period, shares of the iShares Silver Trust have declined 1.11 percent, but shares of the Sprott Physical Silver Trust have surged 2.71 percent.  The Sprott funds are managed by billionaire precious metal investor Eric Sprott, a strong advocate of physical bullion investments.

Rising mountain debt loads and central bank balance sheets will continue to weigh on the confidence levels of investors.  Zero Hedge recently reported that the “top three central banks (ECB, Fed and BOJ) account for up to 25 percent of developed world GDP.”  As central banks continue to provide monetary easing, investors will continue to demand physical gold and silver as a protection plan, and a storage of wealth.

If you would like to receive more professional analysis on equity miners and other precious metal investments, we invite you to try our premium service free for 14 days.

To contact the reporter on this story: Eric McWhinnie at staff.writers@wallstcheatsheet.com

To contact the editor responsible for this story: Damien Hoffman at editors@wallstcheatsheet.com

By Eric McWhinnie

A joint statement issued by People’s Bank of China, the Ministry of Public Security and other regulators recently announced, “No local authority, institution or individual is allowed to set up gold exchanges.”  In essence, gold exchanges in China, except for two in Shanghai are to be banned.  The joint statement also explained that the Shanghai Gold Exchange and the Shanghai Futures Exchange are sufficient enough to meet domestic investor demand for spot gold and futures trading.

Reuters explains, “The PBOC cited lax management, irregular activities and evidence of illegality which were causing risks to emerge, as the reasons for taking the decision.  The central bank said it would lead a team to clear up the mess — gold exchanges will be altered or closed, banks will stop providing clearing services to them; and some people will be put under police investigation.”

The move serves as a reminder to precious metal investors that gold and silver remain to be a focus in a world of fiat currencies.  In addition to tighter gold exchange oversight, China is making agreements to distance itself from the U.S. dollar.  Earlier this week, Bloomberg reported, “Japan and China will promote direct trading of yen and yuan without using dollars and will encourage the development of a market for the exchange, to cut costs for companies, the Japanese government said. Japan will also apply to buy Chinese bonds next year, the Japanese government said in a statement.”

If you would like to receive more professional analysis on equity miners and other precious metal investments, we invite you to try our premium service free for 14 days.

To contact the reporter on this story: Eric McWhinnie at staff.writers@wallstcheatsheet.com

To contact the editor responsible for this story: Damien Hoffman at editors@wallstcheatsheet.com