When It Comes To Gold, Follow The Money

Before I address my topic du jour, I wanted to follow-up quickly on my post about the weakening economy last week. Gallup released a report that was picked up by Zerohedge which showed that unemployment mysteriously jumped higher than previously thought after the election. You can read about it here.

Of course, Hurricane Sandy will be blamed for this, but I would suspect that Gallup knows a little more about constructing statistical studies than to make that sampling error. More likely is lackluster holiday hiring and the release of temporary Government workers hired to help out with the election. As for the likelihood that holiday employment was weaker than usual, it turns out that not only were Black Friday sales less than forecast, but post-Black Friday sales actually dropped over 3%: Here

The reader is free to draw his own conclusions, but it appears as if the data coming in now supports my thesis on the economy.

To transition this into my title topic, there is no question in my mind that the Fed is going to expand its newly-minted QE3 program. This has been well-telegraphed, but I believe what is ultimately implemented over the next 6 months will exceed expectations, as printing money is the time-honored strategy of attempting to prevent economic depression AND to finance Government spending.

The best way to take advantage of this imminent further devaluation of the dollar is to move as much of your investable funds into physical gold and silver as you can. Also, you can create rate of return leverage with this by investing in mining stocks (which are egregiously cheap right now). To implement this strategy, you would be piggy-backing an investor class with the best look at "inside" information regarding the issues of money printing and economic health: the world's Central Banks. As chronicled by this report, Central Banks globally have purchased a record amount of over 500 tonnes of gold during 2012.

To put this in perspective, the world's annual production of gold is around 2500 tonnes, give or take a few tonnes. This output, despite the rise in China's gold mining production, is in decline - some would say serious decline. So if Central Banks are buying at least 20% of annual production (it is thought that China is actually buying a lot more gold than they care to report), and likely will increase that off-take in 2013, and if every other source of demand just stays constant, there's only one way the price of gold can go. There will be plenty of other factors that will drive the price higher, but this is just the sheer supply/demand dynamic.

Given that this is the case, you have to ask yourself why the Central Banks are now hoarding gold. To me the answer is obvious: the entities that are in control of the money supply are taking advantage of this powerful position by buying the one asset, in advance, that will rise in value as the supply of printed money rises. And that would only occur if they intend to print a lot more of it.

Please note that, as always, I advise against using paper ETFs in lieu of buying real physical gold. Although beyond the scope of this commentary, ETFs are not the same thing as owning real gold for many reasons. I plan on updating my research report on GLD sometime soon and will post it here when that happens.