Recent data shows the US economy is slowing down, while stocks continue to rise...

Is there something wrong with this picture?

You bet there is.  

It's obvious the market is clearly anticipating another round of QE after Bernanke said last week that the central bank remains "prepared to do more as needed," and reiterated their pledge to keep borrowing rates at record lows through 2014.

The market has been so accustomed to QE that fundamentals in the real world and the market is clearly out of sync.  

What I worry about now is a repeat of both 2010 and 2011 where we start the year strong, only to fall back. As with many stocks in this environment, we need momentum to really sustain an acceptable recovery. Right now the numbers are telling us things are slowing down. The labour market is sluggish meaning US unemployment will remain at unacceptable levels for the time being.  

Mass manufacturing isn't going to come back to the US. It's that simple. There will need to be a new sector of job creation, or a massive influx of consumer spending, to truly bring unemployment to acceptable levels. I don't see that happening anytime soon.  

Corporate Earnings  

Corporate earnings are hitting big marks only because profits are being held and not spent. Corporate spending on equipment and software climbed at a 1.7 percent pace, the weakest in almost three years - despite record profits. Although corporate profits recently have hit historic highs, the economy's sluggish 2.2 percent GDP growth doesn't reflect this. That's because profits are being spent overseas.

A recent Wall Street Journal analysis of 35 companies based in the United States that employ more than 50,000 people found that they collectively added 446,000 jobs between 2009 and 2011. But the shocker is that around 75% of them went overseas. During that period, 60 percent of their revenue growth came from overseas. While this means that 334,000 jobs created overseas aren't coming at the expense of the domestic labor market, it clearly shows the real growth and profits aren't coming from the US.  

Apple's recent blockbuster earnings? You can thank China's iPhone sales for that.  

Still in Charge

So how is the US - especially during an election year - going to show that it will still indeed be the number one driver of the world for years to come? It needs to flex its muscles. The only way it can is to infuse the markets with money.

It's no wonder why Bernanke's comments, combined with the realities of the economy, suggest another round of QE.  

Without question, that bodes well for gold and silver - despite manipulation in both markets.

A Dramatic Change in Gold Fundamentals

While the price of gold (dictated by the paper market) has not done much over the past months, the actual physical market is undergoing some extreme demand shift fundamentals.  

Recent data shows that Chinese gold demand continues to remains strong, with China importing 40 metric tonnes or nearly 40,000 kilos of gold bullion from Hong Kong alone in February. That's nearly 13 times higher than the 3,115 kilograms in the same month last year. 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 already levels seen last year.

CHINA'S GOLD IMPORTS FROM HONG KONG 

Source: Hong Kong Census and Statistic Dept, Reuters Reuters graphic/Catherine Trevethan, Rujun Shen 11/04/1

There's no doubt that the market has missed the importance of the massive increase in the demand for physical gold - the true long term dictator of price.  

I have already discussed previously that many countries have begun to increase their physical gold reserves. (see The Hoarding Has Begun) 

Last year, central banks purchased 439.7 tonnes of gold. According to the latest IMF statistics, at least 12 countries are known to have increased their gold reserves in March. The stats show that central banks appear to have purchased no less than 58 tonnes in the month. If this continues, that is equal to 696 tonnes per year. I see no reason why they will stop.  

In a recent survey of reserve managers at 54 central banks responsible for portfolios worth $6 trillion, almost half the world's total, 71% of them said gold was a more attractive investment than it had been at the start of last year.  

If you remember from my past writings, you will know that central banks made their largest purchases of gold in more than four decades last year and have continued to buy the precious metal in the early months of 2012. (see A Record Breaking Event)  

Yet gold prices are lower than they were last year. How is this possible? How is it possible that the demand for gold continues to surge, yet prices have dropped?

While it is true that the price of gold can be easily manipulated in the paper markets, the same does not hold true when such a dramatic increase in demand floods the markets. When this happens, who is going to supply that demand? What country is going to give up their gold?  

When demand cannot be met, prices will be forced to go much higher. When it does, it will bring a major surge into the overall gold sector. It will make the non-believers, believers.   

Gold's True Worth

The question of gold's worth is simple and I challenge anti-gold bugs to deny it. If you have an ounce of gold and you know there are millions of people willing to buy it from you for $2000, would you sell it for $10 because you thought it had no use?   

Right now, there are not only people buying physical gold at those prices (i.e. rare gold coins), there are countries.  

So gold may not do much but, like art (which is soaring in prices), it's worth what people are willing to pay. And in the not too distance future, those buying gold and silver will be thankful they bought it at a cheaper price.

It know I am arguing my point over and over again in practically every letter I have written in the past few years. But when you have a point of view that opposes the mainstream media and the reckless actions of government policies, you have to do it over and over again until people understand why you think the way you do.

I have chosen to follow in the footsteps of some very brilliant minds who have been right on many of the issues before 2008. They may not have been exact in their timing, but their wisdom and contrarian views have made them a lot of money and preserved a lot of wealth. While we all have our own opinions, our overall sentiment remains the same.  

Outstanding investments are only fully recognised after the event.

The End Game

Governments need to monetize their debt. They need people to buy treasuries and bonds. But when the returns on treasuries and bonds fall, so does the money flowing into those investments.     

Furthermore, consider that the government must now print and monetize their debt to ensure a stable rise in economic growth and prevent another disaster. As that happens the value of treasuries and bonds is lowered substantially as they become overshadowed by a devaluation of their respective currency through inflation.

That's why the Fed purchased an astounding 61% of the total net Treasury issuance in 2011. The net issuance of Treasury securities is now a whopping 8.6% of gross domestic product (GDP) on average per annum. That's insane. (see A Shocking 2011 Cover-Up)  

The mainstream media and the powers behind the suppression of gold and silver prices have effectively driven away your average investor out of the market by the volatile price action. While this may continue, eventually it will be overtaken by the fundamental demand of the physical.  

Just imagine if this purchasing power and demand shift in gold were applied to the oil market? What would happen to oil prices if countries around the world decided they wanted an additional 10, 20, or even 30% of the world's production supply?

As I always say, you can't predict politics nor manipulation. But you can't argue with real demand fundamentals.  

The demand for gold continues to break records...the price will soon follow. 

Ivan Lo

Equedia Weekly  

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Why I am Excited About This Gold Market      

After a reasonably long period of sustained and occasionally dramatic escalations, commodity markets in general, and precious metals markets in particular, have declined. This is normal and healthy behavior, even if it is uncomfortable for some market participants. Readers with a long memory will remember the 1970s gold bull market, where the gold price advanced from $35 to $850 per ounce - though in 1975, in the middle of that epic bull market, the gold price declined by 50%. While a 50% decline is a near-religious event for many market participants, particularly those on margin, it is instructive to note that at the bottom of the retrenchment the gold price was up threefold from its $35 low, and that gold went on to increase eightfold in price after the bull market resumed. It is thus important to recognize that cyclical retrenchments are a normal and healthy feature of a secular gold bull market.

Readers should consider whether the reasons for the gold market are intact. Has gold's decline made it more likely that sovereign debts can be serviced or that unfunded obligations can be met? Does it mean that insolvent banks are now healthy? Does it mean that creating trillions of unbacked dollars and euros and renminbi will have no consequences? Of course not. We are simply uncomfortable with volatility.

Gold's Current Weakness

Let's examine some factors that may have contributed to gold's current weakness and think about the probabilities of those factors contributing to further weakening in the gold price.

For the past ten or twelve years, the gold price has been in a steady state of advance. In the near term, some participants probably took some profits, and high prices also probably contributed to demand destruction in industrial fabrication and jewelry demand. A softening of the gold price is likely to reverse the effects of price-induced conservation and substitution, even while investment demand, measured by gold funds and the ETF industry, continues to be strong.

Equity and debt markets appear to be stabilizing as a consequence of quantitative easing in Europe, the US, and China, and the apparent easing of concerns in Greece. This flood of liquidity has forced interest rates down as well as bond and deposit yields, pushing savers into longer durations and riskier instruments - including equities - and lowering servicing costs for debtors, which in turn has lowered perceptions of default risk. The markets appear more confident, and hence gold's attractiveness as insurance is fading. Some of us believe that the root word of confidence is "con," just as I believe the correct phrase for quantitative easing is "counterfeiting." It would appear that in excess of $4 trillion of new currency units have been introduced into the system, with no concurrent increase in underlying wealth in the form of goods or services. This does not make me find gold less attractive relative to fiat currencies or sovereign debt. How about you?

Physical demand in India and Vietnam has been constrained by excise and import taxes on gold in the case of India, and increased regulation in Vietnam. The constraints on physical demand in India has had an important impact on overall gold demand, and has become a hot political issue in India. Gold merchants were on strike concerning the excise tax, further constraining demand. It is worthy to note that South Asian societies have a deep-seated, cultural attraction to gold, and that the fairly recent removal of the taxes they just reinstated was a consequence of widespread smuggling and informal trading in gold. I suspect that central government interference in the Indian gold market will be ineffective and ultimately inconsequential.

Small, commodity-oriented institutions such as hedge funds have experienced strong outflows of equity capital and constrained access to debt financing, which has caused them to engage in forced liquidation of precious metals holdings. This is true, and in my opinion will continue. I believe, however, that if black swan style events destabilize other markets, the gold ETF industry and gold trusts like Sprott Physical Gold will easily absorb the remaining institutional bullion hoards. Further, Sprott has firsthand knowledge of the strong interest among sovereign wealth funds in increasing their bullion holdings.

Gold Equities

Since late 2010, gold equities have underperformed the commodity, and this underperformance has continued, and perhaps increased, as the gold price has declined. These twin trends are uncomfortable to participants in the gold equities markets. Let's examine some of the factors that may have contributed to the underperformance of gold equities relative to gold, and the probable consequence of current market conditions.

It is important to remember that for much of the last decade gold equities outpaced gains in the metals. In fact, the escalations in gold equities pricing became so acute that Canadian analysts were describing companies selling at premiums to their net asset value as "undervalued," because their premium to net asset value (i.e., what they are worth) was less than the industry standard. Always remember, markets work! This prior overvaluation was an important cause of the sector's subsequent undervaluation. The expectations built into gold equities valuations, even relative to gold, were simply unsustainable. In particular, the valuations accorded the junior gold sector were best described as "a bubble in search of a pin." The pin was found. History has shown that markets cure periods of overvaluation; and I suspect that they will also solve this period of undervaluation, relative to bullion, as well.

The emergence of bullion-linked equity instruments like the Sprott Physical Gold Trust and the various Gold ETFs allowed securities investors a new, low-cost, convenient way to participate in the gold markets. These developments at once spurred demand for bullion to back these equity-like instruments and constrained demand for gold equities as investors switched from traditional gold equities to bullion-like equities. I believe this phenomenon was particularly evident as a consequence of the relative overvaluation of gold equities described in the preceding paragraph. Given that the relative attractiveness of bullion-like equities to traditional gold equities was greatest when the gold equities were overpriced relative to bullion, I suspect this attractiveness will lessen now that gold equities are more attractive relative to bullion.

Gold equities were punished, both absolutely and relative to bullion, by their relative corporate underperformance. Many analysts, myself prominently among them, were dismayed at the gold mining industry's abysmal corporate performance during the last decade. The industry's operating cash generation in the face of a gold price escalation from $260 per ounce to over $1,200 per ounce was inexplicably poor. The companies' continued equity issuances in the face of these increases in the gold price meant that existing holders were continually diluted, even as their earnings expectations were always disappointed. Investor fatigue - in fact, investor disgust - was the natural and healthy response to this performance.

Now, even though equities prices continue to decline, corporate performance is increasing, and increasing dramatically. A cursory look at producers' income statements tells a dramatic story: earnings and cash generation, on a per share basis, are rising in dramatic fashion. Capital expenditures are increasingly funded with internally generated cash rather than equity issuances or debt. In fact, even in the face of the gold equities decline, many gold producers are generating cash so fast that even after funding hefty capital budgets, they are able to return cash to shareholders in the form of stock buybacks and increased dividends.

The Juniors

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