Gold dip in short term presents "great buying opportunity" long-term - Wealth Managers

Tuesday tapering talk from Fed officials dent bullion prices as well as stocks

Gold lost its hold on the $1,300 level Tuesday, dropping into the $1,280 range for a 2-1/2-week low as tapering talk from two Federal Reserve officials also sent stocks tumbling.

A new report showing the U.S. trade deficit narrowed to a 3-1/2-year low in June also was interpreted as another sign the U.S. economy is on the mend.

Spot gold fell as much as 1.9% for its lowest level since July 18 after Chicago Fed President Charles Evans said the bank is "quite likely" to curtail its $85 billion-a-month bond-buying program at its September policy meeting, echoing statements from Dennis Lockhart, president of the Federal Reserve Bank of Atlanta, earlier in the day.

"The underlying message from various Fed officials has been that tapering is going to start sometime this fall unless the economic data takes a significant turn for the worse," saidJoseph Tanious at J.P. Morgan Funds. "Hearing those same comments from a dove (like Evans) only reinforces that."

"The downward pressure in gold is testament to the belief that tapering is likely to start sooner rather than later," saidCarlos Perez-Santalla of Marex North America.
 World Gold Council sees rebound ahead
However, gold is doing exactly what is often does in the summer: dip. The World Gold Council is predicting the metal will rebound later in the year from its traditional midyear holding pattern. "We feel that speculative money has largely come out of the gold market," WGC managing directorMarcus Grubb told CNBC. "Gold is nearer the bottom than the top right now. You'll see a stronger market towards the end of the year, and into next year." He pointed to the Far East. "A huge amount of demand coming from India and China has underpinned the market at this level," he said, adding that China's rebalancing towards a consumption-driven economy will be even more positive for gold demand.

Indeed, India's recent restrictions on the gold trade to curb its account deficit have only increased smuggling. Bloombergreported: "The steady demand for gold among Indian households means there's a ready market for smuggled gold, said Suresh Hundia, owner of Hundia Exports Ltd. and a former president of the Bombay Bullion Association. 'Gold always sells.' ... The government's curbs are fueling a 'huge gap between the supply and demand for gold.'"
 20% interest rates would cause "depression" 
Despite the tapering talk, it's important to remember that the Fed won't be raising interest rates anytime soon, and that's a huge driver for gold. Why can't it raise rates? "The economy would tank," as Fed chief Ben Bernanke told Congress last month.

The metal is showing some weakness, but that only means it's on sale for those investors with longer-term horizons. "Gold is trading on technicals right now; they don't look very pretty,"Merk Investments chief Axel Merk tells CNBC's "Futures Now" in an Aug. 6 interview. "And so the folks who buy gold long-term because of inflation risks potentially out there -- well, the glass is half-empty with regard to inflation. There is no inflation. And so those guys are on the sidelines. And the technicians are in charge right now. If you like gold, long-term it's a great buying opportunity."

Merk elaborates on why the Fed can't raise rates: "The economy cannot sustain high interest rates, especially the U.S. government cannot sustain high interest rates. The average cost of borrowing for the U.S. government is a little over 2%. Let that move up to 3% or 4%, and we cannot finance ourselves. ... Policymakers throughout the world act with the best of intentions. The problem is the road to hell is paved with the best intentions. If you talk to the folks at the Fed, they will tell you if inflation picks up, they will tighten. But you've seen what happened -- if you mention the word 'taper' -- they didn't even use the word taper -- and the market goes haywire. The long bond sells off 100 basis points. We cannot stomach these higher rates because we've depressed the yield curve artificially so much they'll snap back. And what's going to happen with the housing market? We don't have a construction boom. We have a financial boom. Look at the unemployment numbers. We don't have escape velocity. So if we did have inflation pop out, and right now it's not a concern, how are we going to fight it? We just don't have the tools. Even if we had (famed inflation hawk and ex-Fed chief Paul)Volcker success Bernanke, we cannot raise rates to 20% because it would cause a depression, a revolution. And so we just don't have the tools in the toolbox to fight inflation if and when it comes. And given the massive entitlement promises we've made, and the gridlock we have in Congress, inflation is a path of least resistance. We have a culture in the U.S. --  we prefer inflation over European austerity, and with that gold is a long-term buy, but of course it doesn't mean short-term it's going to do well."
Entrenched weaknesses haunt economy
Long-term structural weaknesses continue to dog the U.S. economy, and given those conditions, investors want to be hedged with gold. What are some of those structural kinks?:

1) U.S. debt is worse than thought: The United States has accumulated over $70 trillion in unreported debt, an amount nearly six times the declared figure, according to a new study by University of California-San Diego economics ProfessorJames Hamilton. The unique aspect of Hamilton's study is that he examines federal debt that has not been publicly released, specifically the government's support for 'housing, other loan guarantees, deposit insurance, actions taken by the Federal Reserve, and government trust funds.' Since the global economy hit rock bottom in 2008, U.S. federal debt has gone through the roof, increasing from $5 trillion to an estimated $12 trillion in 2013. Meeting the interest payments alone on that debt burden presents a formidable challenge for U.S. taxpayers: In addition to the debt, Americans must pay back around $220 billion annually just in interest."

2) Pensions are woefully underfunded: "Across the nation, cities and states are watching Detroit's largest-ever municipal bankruptcy filing with great trepidation. Years of underfunded retirement promises to public sector workers, which helped lay Detroit low, could plunge them into a similar and terrifying financial hole. A CNBC.com analysis of more than 120 of the nation's largest state and local pension plans finds they face a wide range of burdens as their aging workforces near retirement." Meanwhile, "in January, the Pew Charitable Trusts published a study showing that 61 U.S. cities have an aggregate pension funding gap of $99 billion and an additional shortfall of $118 billion for retiree health benefits. These figures were widely cited by the media in the aftermath of Detroit's bankruptcy filing. They refer to fiscal year 2009, which was the latest year with a full data set. Unfortunately, Pew's analysis is ridiculously optimistic. Or, to be fair to the authors -- who simply tabulated figures found in official reports -- the ridiculousness is in the public data they used."

3) Derivatives time bomb is ticking: "I think we are going to see a series of bankruptcies," Mexican billionaire Hugo Salinas Price recently told King World News recently. "I think the rise in interest rates is the fatal sign which is going to ignite a derivatives crisis. This is going to bring down the derivatives system (and the financial system). There are (over) one quadrillion dollars of derivatives and most of them are related to interest rates. The spiking of interest rates in the United States may set that off. What is going to happen in the world is eventually we are going to come to a moment where there is going to be massive bankruptcies around the globe. What is going to be left after the dust settles is gold, and some people are going to have it and some people are not."

4) Exploding municipal debt: "Chicago Mayor Rahm Emanuel released the city's second Annual Financial Forecast on Wednesday. Not only does the report predict a $369 million financial shortfall for the city's operating 'budget' in 2014, but it also predicts a shortfall of more than $1 billion by the year 2015."

Given these (and other) structural weaknesses, the stock market can't go up forever, and this week's tapering talk has revealed their dependency on continual Fed liquidity. When the bloom finally comes off the roses there, the flight back to quality (i.e., gold) will erupt in a stampede. The question is: Do you want to be ahead of the curve or behind it? The summer doldrums are a great time to enhance your gold position cheaply.

More information can be found online at http://www.goldbullionadvisors.com