Monday, July 26, 2010

Peter Krauth Sees Higher Gold Ahead, In Par Due To Banks

In a wide-ranging interview with William Patalon III, Peter Krauth gives several reasons why gold is going to $5,000/oz in the longer term and is also veering in on a shorter-term leap. One of the reasons he brings up isn't mentioned by many: U.S. banks are moving into commodities in a big way.
Q): You've talked about your proprietary "Gold Spike Indicator" (GSI) market-timing signal? Can you give us a basic explanation of what that is and how it works and explain the "window of opportunity" that it identifies?

Krauth: Well, since the financial crisis, some of the largest U.S. investment banks have converted into bank holding companies. That means they must file quarterly reports on their holdings, including gold and other commodities. What I've repeatedly noticed is that, for a certain amount of time before, during and after these quarterly reporting dates, gold has moved up significantly.

(Q): So exactly what is your "Gold Spike Indicator" saying right now ... or what do you expect it to say? How long will this window be open this time around?

Krauth: This window is usually open for about three to four weeks. That's not a long time. It's important to ensure you're properly positioned in time to benefit. This time around, I'm expecting the GSI to indicate that the next two to four weeks are likely the best time to get positioned in both gold and silver, as both those metals could begin to spike soon after that.

As you know, the fall tends to be the strongest period of the year for precious metals prices. What's interesting this time around - because GSI provides a signal four times a year - is that precious metals go through their weakest period in the summer months of June, July and August. That means we could be setting up for an even bigger spike this time around. And that's really exciting.

(Q): You've written extensively about the bullish, long-term prospects for commodities. As part of that, you've uncovered a promising new development in the resources area: It involves banks - especially big investment banks - taking physical control of commodities. Just what is it that we're seeing here? And isn't this an element of your "Gold Spike Indicator?"

Krauth: That's correct - this is part of the GSI. Keep in mind that a large chunk of profits that big banks report these days come from trading. But much of that trading isn't even that risky, it's just leveraged so highly it pays off very, very well. As we know, banks can borrow pretty cheaply these days with interest rates at microscopic levels. But it goes deeper than that. These banks have made strategic moves to "control" many of the commodities they trade.

What I mean by this is that they are no longer just "paper trading" commodities through futures contracts. This began a couple of years ago with the creation of exchange-traded funds (ETFs) that were physically backed with such commodities as gold, copper or silver, to name just a few.

JPMorgan Chase & Co. (NYSE: JPM) and Goldman Sachs Group Inc. (NYSE: GS) have begun taking physical delivery of gold when their futures contracts mature. Last August, Morgan Stanley got the okay to trade with Dubai Gold Securities, which will allow it to take physical possession of the gold.

Earlier this year, Goldman and JPMorgan each bought established metals-warehousing facilities. Goldman purchased Metro International of Detroit for $550 million, and JPMorgan bought Henry Bath of the United Kingdom as part of a larger $1.7 billion acquisition. According to industry insiders both deals were done at a premium. These guys aren't paying premiums unless they foresee higher prices.

As for profiting from a future rise, Krauth likes gold stocks - particularly, mid-tier producers and exploration stocks with multi-million ounce deposits.

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