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The Most Compelling Reason to Own Gold

By Jeff Clark
Thursday, December 22, 2011

Investors woke up yesterday morning to the news that the European Central Bank (ECB) had performed a "Bernanke." The ECB announced it was giving away free money to European banks through something it called Long Term Refinancing Operations (LTRO). Everyone else should call it Let The Ripoff Occur.
 
The operation is based on the principle that nobody wants to hear the ear-piercing screams of heroin addicts suffering through withdrawal, drowning out the soothing sound of Christmas carolers. So the ECB is providing more drugs to the European banks just ahead of the Christmas holiday.
 
Here's how it works...
 
The ECB is lending long-term money to European banks at 1% interest. Those banks can then pay down their existing short-term debt to the ECB. Or they can invest the money in longer-term European sovereign debt and collect 5%-plus. Or they can simply hang on to the funds and make their balance sheets look more attractive.
 
Under these conditions, it's no surprise the banks jumped at the chance to borrow money and did so to the tune of nearly $500 billion. After all, if you were offered a chance to refinance your mortgage at 1%, wouldn't you do it?
 
But the real question is... Where did the ECB get the money for these cheap, long-term loans?
 
The answer, dear reader, is from the same place our own Federal Reserve got its money for quantitative easing parts one and two. It printed it out of thin air.
 
I cannot imagine a more compelling reason to own gold right now.
 
Yes, the shiny yellow metal got clubbed last week. And yes, there may be a bit more downside. But with the ECB now borrowing the heroin-filled syringe of the Federal Open Market Committee, any dips in the price of gold are like early Christmas presents – unexpected and tremendously appreciated.
 
Banks pay 0.10% interest on savings deposits. The broad stock market is marking time, and will likely do so for a few more years. Long-term U.S. Treasury bonds pay 3% interest.
 
I can't imagine a more opportune time to buy gold. You should look at last week's weakness as a Christmas gift. Be thankful for it.
 
Merry Christmas,
 
Jeff Clark




Further Reading:

The recent dip pushed gold to its lowest level since July, and that has latecomers worried. But as Editor in Chief Brian Hunt says, folks are looking at gold's bull market through the wrong lens. Read Brian's take here: The Right Way to View Gold's Bull Market.

In The Daily Crux
Market Notes
Big, "boring" businesses are doing great... fresh 52-week highs for Wal-Mart, Kraft, McDonald's, and Philip Morris.
 
Pipeline uptrend continues... Enbridge, Kinder Morgan, and Plains All American surge to fresh all-time highs.
 
Software companies are entering a new downtrend... Oracle, Salesforce, and VMWare are all at three-month lows.
 
"Hated" tech giant Hewlett-Packard is still sitting around a two-month low.
Market Watch
Symbol Price
Change
52-Wk
S&P 500 1243.72 +0.2% -0.9%
Oil (USO) 38.11 +1.5% -0.5%
Gold (GLD) 157.16 +0.1% +16.1%
Silver (SLV) 28.60 -0.6% -0.1%
U.S. Dollar 80.00 +0.2% -0.7%
Euro 1.30 -0.3% -0.4%
Volatility (^VIX) 21.43 -7.7% +30.0%
Gold Stocks (^HUI) 513.92 +3.7% -8.7%
10-Year Yield 1.92 +6.1% -42.7%

World ETFs
Symbol Price
Change
52-Wk
USA (SPY) 124.17 +0.2% +1.1%
S. Korea (EWY) 52.14 +1.1% -9.9%
Canada (EWC) 25.86 +0.9% -12.6%
Singapore (EWS) 10.94 +0.7% -14.2%
S. Africa (EZA) 59.77 -0.8% -14.3%
Japan (EWJ) 8.95 -1.0% -14.8%
Lat.America (ILF) 42.25 +0.2% -16.9%
China (FXI) 34.76 -0.8% -18.1%
Taiwan (EWT) 11.61 +3.5% -19.3%
Israel (ISL) 13.40 -0.9% -21.5%
Russia (TRF) 14.06 +0.1% -37.3%
India (IFN) 19.67 -1.4% -41.2%

Sector ETFs
Symbol Price
Change
52-Wk
Utilities (XLU) 35.53 +1.5% +18.7%
Big Pharma (PPH) 72.12 +1.3% +15.5%
Retail (PMR) 21.98 +0.4% +14.5%
Health Care (IYH) 71.03 +0.7% +9.4%
Real Estate (IYR) 56.65 +0.1% +6.3%
Consumer Svcs (IYC) 71.04 +0.1% +5.6%
Big Tech (QQQQ) 55.13 -1.4% +1.3%
Defense (PPA) 18.22 +0.5% -1.4%
Transportation (IYT) 89.29 +0.6% -1.7%
Industrials (IYJ) 63.20 +0.1% -2.2%
Internet (HHH) 68.90 -1.8% -5.8%
Media (PBS) 13.06 +0.4% -5.9%
Construction (PKB) 11.96 +0.7% -7.4%
Insurance (PIC) 14.81 +1.4% -7.5%
Telecom (IYZ) 20.95 +0.1% -8.0%
Software (PSJ) 22.94 -3.0% -9.7%
Biotech (PBE) 19.74 +0.2% -10.6%
Water (PHO) 16.76 +0.5% -12.7%
Financials (IYF) 48.66 +0.6% -13.5%
Basic Mat (IYM) 64.56 +0.3% -14.6%
Oil Service (OIH) 114.33 +1.0% -16.1%
Semis (PSI) 13.70 -0.9% -16.4%
Nanotech (PXN) 6.06 -1.3% -39.4%
Alt. Energy (PBW) 5.06 +0.2% -50.3%

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