Posts Tagged ‘Gold’

The Economy: Is It Really Getting Better?

03/03/2010

What We See

People are optimistic, The Dow remains above 10,000, inflation fears seem over-estimated, and the financial crisis seems isolated in places like Greece, California, and random long-expected lay-offs.

I just met with a manufacturer of fashion apparel and she was telling us how many designers who were previously afraid to launch their collections are now coming out of the woodwork with some very risky and ultra-modern designs. So we have throngs of risk-taking designers in the already cut-throat industry of fashion design. IS the economy picking up?

What We Get

Sometimes in science, and in economic models we can often assume what something is by what it’s missing. In this case: Fear. Is there caution? Absolutely. But the open-eyed cold-faced pessimism we saw in March of last year seems to have gone into a long winter hibernation. This is the problem. Fashion designers, manufacturers and central bankers are all sharing the same sense of false security.

Here are some reasons why:

  • The VIX (which tracks market volatility, otherwise known as the “Fear Index”) is touching all-time lows. This means people are discounting any chance of risk in the market.
  • Gold and Silver are slowly and quietly creeping up towards their all-time highs, a sign that financial security is again coming under question.
  • Commercial Real Estate, Rising Unemployment, Too Low Interest Rates, Government Irresponsibility, and High Stock Valuations are all playing a major role in the potential for another crisis.

Here are some insights from top banking insider and billionaire, Andy Beal: http://bit.ly/ahi5s4.

When was the last time you prepared for any worst case scenario?

What We Do

One of the best and easiest lessons I ever learned in finance was as follows, bear with me:

Income (money that comes into your pocket) – Expenses (money that leaves your pocket) = Cash Flow (“my money”)

With this in mind there are 3 things you have to do:

1) Stop Spending! Buy used, buy less, buy what you need. This is a timeless and necessary action if you ever want to be happy financially. A used book on Amazon is rarely any different than a new one… but its far cheaper.

2) Get out of debt! There’s no good reason to spend 101% of your income(s). Start paying cash, pay off far more than your minimums, and stop paying someone else 15-30% for everything you buy.

Everyone knows the first two suggestions but few focus on this next one...

3) Make More! Don’t just mope and cry about how you now have money in the bank, but feel broke. Get out there and challenge yourself! Make some more sales calls, do things to get promoted, start your own business (YES in a recession). If you want to have anything significant in life, you’ve got to go get it. Be proactive and MAKE it happen!

No matter what happens, you will always be you, and there will be good times, and not so good times. Your job is to ensure that you and your family are protected and comfortable, both financially and emotionally, no matter what life brings!

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Why Invest in Gold?

02/25/2010

By Levik Dubov

Simple Answer:

The reason why investors own precious metals, is to insure themselves from a debasement of currency at a greater rate than available market returns. Few people actually own precious metals physically, and those who do often do for the wrong reasons.

Gold is not a reliable vehicle for appreciation, yet it is an outstanding store of value. The sensible capitalist does not “invest” in gold. He merely safeguards his wealth in the form of non-financed physical-assets in times when currency competency comes into question, and waits until either the inflation subsides or an opportunity of adequate returns to be restored.

As one hedge fund manager recently put it: “All investments have their day, and right now gold is having its day”.

In-Depth Analysis:

For all those who aren’t familiar with Talmudic-style dissection, Get ready!

Some people are natural cynics and approach everything with a good dose of skepticism. (These people often spend years owning nothing but AAA-bonds and Market Funds). Others are opportunists and approach everything with a gullible zeal. (These people are often looking for the next Microsoft). We see ourselves as mere realists, in an attempt to approach everything with a logical and objective frame of mind.

To understand results we must first find reason…

Questions Scott Adams poses:

I am referring to a recent article by famed Dilbert cartoonist, Scott Adams. I enjoy his posts very much and I hope this article will clarify his perplexities regarding precious metals investment.

1. “People aren’t good at predicting the future, no matter how obvious the future path seems”.

It is for precisely this reason, that when things do change, (such as the turn of the English Empire), so few expect it and are prepared. Ask people interested in precious metals, exactly how many ounces of physical metal they own. You’ll notice how few people truly stand behind the words they’ve spoken. As a matter of fact, just glancing through the comments on Adams’ blog, it seems that most of the forum comes across as hypothetical folks who either own too little of a position, or are influenced by invalid reasoning.

2. “Warren Buffett isn’t putting all of his money in gold”.

I will get to the reason behind this in a moment, but it must be understood that Mr. Buffett is a “Common Stock Man”. That’s what fascinates him, that’s what engages him, that’s what he does best. So why should he invest in gold when he has found far greater returns in an under-valued marketplace?

3. “My failure to imagine how the debt can be contained might be just that: a failure of my imagination”.

When it comes to debt there is far too many variables to consider (i.e. Chinese Bond-ownership, Dollar Replacement, Federal Bankruptcy, Currency Revaluation, The Gold Standard). In other words, the ownership of gold stands not as an investment with the intention of appreciation, but as an clever insurance policy against a catastrophic hyper-inflation or currency debasement.

Explanation:

In “The Intelligent Investor” written by Benjamin Graham (Buffett’s famed mentor), which was revised as of 1971, Graham says in Chapter 2, “The Investor and Inflation”, in the article “Alternatives to Common Stock as Inflation Hedges”:

“The standard policy of people all over the world who mistrust their currency is to buy and hold gold… the holder of gold has received no income return on his capital”.

He adds in summation:

“There is no certainty that a stock component will insure adequately against such inflation” [emphasis ours].

A few points need to be highlighted:

1) Graham informs us that the hoarding of gold was an age old practice. This made total sense as in fore-times bank panics, currency debasement and depressions occurred just about once a decade.

2) He cites the years between 1935-71 as “proof” that gold has been a lousy and inadequate investment class. However, between the years of 1969 and 1981, gold appreciated phenomenally, outperforming each and every other asset class by a wide margin. Had Graham witnessed this spectacle there is strong reason to believe that he would have reconsidered his position, and may have made room for precious metals in a conservative portfolio.

3) In that paragraph he also frowns upon investing in real estate claiming that it is subject to “wide fluctuations” and “serious errors”. His only advice to such business is:

“Be sure it’s yours before you go into it”.

What Graham is telling us here, is that any asset is a bad investment if done for speculative reason, or with improper judgement.

4) In his closing remark, Graham even warns that even while common stocks offer great opportunity, they may nevertheless fail to overcome the challenges of inflation, or currency debasement.

What’s Changed?

Much! Too much actually. As a matter of fact, from an economic standpoint America is no longer similar to the America Graham was familiar with. For one, America has lost its status as the world’s largest manufacturer of goods, and has gained a frightening lead in terms of consumptions and spending. (For those familiar with European history, this is how 16th Century Spain lost its position as the world leader in trade and commerce).

The world of currencies have also changed drastically. While I will not delve into the fascinating history of barter, trade and the properties of monetary exchange here, one enormous variable differentiates the Pre-1974 and the Common Eras. In ancient times, every single transaction took place with an element of exchange in mind. Whether it was sea shells, or cattle, or wooden sticks, the value of any transaction or credit was accurately measured in terms of a monetary exchange unit. With the agreement to terminate convertability from gold to Dollars in 1974, this all changed. No longer would the U.S. Dollar, the “ineffable” reserve currency of the world, be exchangeable for the gold metal.

Thus began, the current era of a universally-accpeted fiat (non-commodity based) currency. No longer would each transaction be measurable in accurate terms. And no longer would any Government, foreign or domestic, be compelled and obligated to abide to the regulations of supply and demand. So long as We The People would accept and stand loyal behind the mere faith and credit of the United States Government, so long would our ever-glorified Dollar endure.

4.
“What happens to the price of gold if people simply change their minds about its value?”

Adams’ question seems pertinently logical. However, there is one crucial question that he fails to address…

What is a currency?

The following I adapt from the works of Doug Casey:

In the 4th century BC, Aristotle defined 5 reasons why gold is money, and they are just as valid today as they were then. A good form of money must be: consistent, convenient, durable, divisible, and have value in and of itself.

Consistent. The lack of consistency is why we don’t use real estate as money. One piece is always different from another piece.
Convenient. That’s why we don’t use, for instance, other metals like lead, or even copper. The coins would have to be too huge to handle easily to be of sufficient value.
Durable. That’s pretty obvious – you can’t have your money disintegrating in your pockets or bank vaults. That’s why we don’t use wheat for money; it can rot, be eaten by insects, and so on. It doesn’t last.
Divisible. Again, obvious. It’s why we don’t use diamonds for money, nor artwork. You can’t split them into pieces without destroying the value of the whole.
Value of itself. The lack here is why you shouldn’t use paper as money.

A 6th reason that Aristotle may have overlooked since it wasn’t relevant in his age, and nobody would have thought of it: It can’t be created out of thin air!

This is not a gold bug religion, nor a barbaric superstition. It’s simply common sense. Gold is particularly good for use as money, just as aluminum is particularly good for making aircraft, steel is good for the structures of buildings, uranium is good for fueling nuclear power plants, and paper is good for making books. Not money. If you try to make airplanes out of lead, or money out of paper, you’re in for a crash.

That gold is money is simply the result of the market process, seeking optimum means of storing value and making exchanges.

Buffett’s Investment in Silver, Style and The Finale of an Era:

Buffett It should be noted, that Buffett did make a significant investment into Silver (not gold) in the late 90s, one that has come under sharp scrutiny in recent years, as few are knowledgeable of exactly what led Buffett to purchase over 100 million ounces of physical silver on the open market, and moreover what ever happened to the holding. Those who know him, have even mentioned his fascination with silver over the decades. All in all, we cannot say that Buffett “only” invested in common securities.

We may also add, that the majority of Buffett’s tenure as the “world’s greatest investor” coincided with an era that was quintessential for the class of Common Stocks. The 50s, 60s, 80, and 90s, were all part of a two-part secular bull-market that captivated the attention of Wall Street and Main Street, concluding in the most absurd valuations for up-and-coming Tech start-ups that had neither money nor model. However, one may realize that Buffett’s years of 50-100% returns are far behind him. With over $100 Billion under his management, investment opportunities are slim as: a) Stocks have become a staple of investment and speculation, thus raising valuations to their highest in modern history, and b) The potential for significant returns diminish greatly as the ability for a multi-national corporation to grow is minimal, if not non-existent. This is known in economic circles as The Law of Diminishing Returns.

All in all, it can be assumed that the heyday in common stock are over, as long as current valuations remain at their elevated levels, and investor exuberance and hopeful optimism remain.

Depleting Commodities:

In summation, I’d like to point out why investors and speculators have begun a gradual influx into commodities and precious metals in particular. In brief: They’re disappearing. This doesn’t mean that there will be none left soon, the same way that Peak Oil doesn’t mean that there’ll be no more oil. It simply means that these goods will no longer be available at these prices. This may sound reminiscent to anyone who experienced oil sky-rocket from $1.50/ barrel to over $40 in the late 70s. When the government capped the price level, supply and demand kicked in: Boom! No more gas! Extended lines of anxious cars waiting to be fueled but to no avail. There is no more gasoline left at the price it sells for.

This is why investors flood commodities when inflationary scenarios take hold. Because with all the over-investment into service companies, manufacturing facilities, tech stocks, real estate developments and paper currencies, people have completely forgotten the elements all that possible: physical goods. Oil, Lumber, Cotton,

So take Adams’ post as you wish. But bear in mind that markets aren’t very intuitive. They tend to evaluate the here-and-now and the probable, and don’t have much patience for abstract and the possible.

I only restate the famed Ben Graham’s empirical warning: “Be sure it’s yours before you go into it”.

Good investing!
Levik

Why 2010 May Be Quite Similar to 2009

01/08/2010

If you did well this past year, I guess that’s a good thing!

Friday is my market day and it seems that with the new year some realignment of the big picture is in order. Note of optimism: When you know what’s going on you can properly position yourself to benefit from its leverage. No condition is ever entirely good or entirely bad. So here’s what’s going on…

“Sentiment Oscillation” or “Paradigm Shift”.
That’s the reason for all this mayhem. As general conditions continue to change (as they have since 2007), so will the general mindset. From growing to sustaining. From net profit to net loss. From Investment to saving. From short-term gains to long-term advantage.

Let’s focus solely on economic facts:

The How:

  1. Internationally Governments have already allocated rescue money that will be spent over the next few years
  2. They have also lowered Interest Rates which spurs a higher inflation of credit
  3. When Rates rise savings gains precedence and production falls decreasing the supply of goods and labor
  4. Less supply causes over-demand and higher prices for real goods and commodities
  5. When commodities prices rise, they tend to cut into expenses thus lowering profits
  6. Lower profits and demand for cash decrease momentum of corporate investment and the stock markets decline
  7. Lower Markets lower the sentiment of the consumer and spending decreases
  8. Less sales means less revenue and retail venues under pressure go under causing a Commercial Real Estate bust
  9. With Investing and Equity down and out people turn to Savings and Cash
  10. With Bond markets already pressured by higher Interest Rates and a debt laden currency people begin to turn to Precious Metals and Tangible Goods

Why:

  1. Someone say Bailout? Trillions have been spent and Trillions more will
  2. With the lowest Interest Rates in decades credit is merely being deferred
  3. Businesses decide to save rather than reinvest profits
  4. This one’s tricky but the former ALWAYS leads to latter
  5. Even if businesses raise prices, profits will fall
  6. Bond yields begin to resemble stock dividends only with less apparent risk
  7. Higher stock prices are always met with consumer exuberance
  8. This has already begun but has been prevented by soon ending rescue funds
  9. With higher Interest rates CD’s and Money Market funds begin to make sense again
  10. This is what happened during the 70’s as Real Interest Rates remained negative

Investing Advice: If you are going to “invest”, you must understand that the next 10 years will be similar to the last. Much higher prices for real goods, much lower valuations for equity and paper. This is because we’re doing the same things over (lower rates, more issuance of credit, more debt to pay off). These are times to seek under-valued out-of-favor securities.

Business Advice: If you are going to do business, I believe you will be better off than many people trying to make ends meet on unemployment checks and the reason for that is the ability to be proactive. Your success is what you make of it, and if you’re determination is deep then no recession or even depression could abstain it. Focus on providing customers with durable and consistent value.

Fundraising Advice: If you are in the legions of the eager financiers trying to keep the lights on in your non-profit, raising for a local charity or even seeking capital for your small business, remember that people are always searching for the best place to put their money. Your job is to provide them with the sense of value that its going to the right place for the right reasons.

Have an awesome weekend!

Gold and Silver Update

09/16/2009

When Fundamentals clash with Technical Charts who to follow? What role does the Gold-Silver ratio play? What happens if Gold breaks above $1000? What does that mean for Silver? And what should the prudent investor do?

How Intelligent Investors Think

We are approaching another critical point for the Precious Metals Trader. Notice how I say “trader” not “investor”. An investor doesn’t follow a position. He buys low – when demand is virtually non-existent, and sells high – when demand is irrationally justified. A trader on the other hand, may profit from medium term trends. What’s interesting is that more often than not, the investor wins. The reason for this is that generally markets follow trends. “Generally” implies most of the time, however when they do buck the trend they do so with “shock and awe”. Thus, we must approach this current scenario like an investor/long-term trader, and not like a little kid out to make a few dollars.

Many recall the March 2008 highs. Note that Silver is still 20% below its 2008 high and 65% below its all-time. At the time, we did not sell and our reasoning was very clear and even in hindsight “justified”. “If the downside is significant we can always wait it out. Yet if prices pivot to the upside – and they have strong reason to do so – then there will be no way for the investor to re-enter the market”. Basically, you can’t jump onto a moving train. (Well, you could, but its not advised).

One note on the matter: We don’t really “invest” in gold or silver. Gold is the ultimate currency and should be the default holding of any investor. Only an investment of significant upside and strictly limited downside should be wagered for its value.

Outlook

What we see now is similar to March 2008 in the sense that the Technicals look bleak, while the Fundamentals look increasingly resilient. Gold has just broken-out above $1000. This has stood as a significant resistance level and its abolition holds the keys necessary to bring thousands of traders and funds into the market again. These are mostly people who are waiting on the sidelines to see if the rally is sustainable.

Another factor, that will definitely play a key role in the longer-term is the fact that Central Banks are now buying gold, not just selling it. This create a fascinating equilibrium in a once Dollar-dominated monetary system. The game may be up, this time for good. In addition, mining companies, such as Barrick, intend to de-hedge their positions in gold shorts – which were profitable when Gold was falling in the 80s and 90s but with rising prices has now turned against them. These two development are decade changing events and will alter the precious metals market for years to come.

Finally, there is not a lot that the U.S. and the Dollar have to gain from expensive gold. It destroys their credibility and instills fear in the hearts of fiat-borrowers. This being the case, it would be of no surprise if governments make one last-standing effort to contain the gold price. Problem is, that while this was once going with the flow, its now battling an uphill trend – a strong one to say the least.

When Fundamental and Technical indicators clash one must look at Sentiment. This is the one differentiating fact between 2008 and today. While March 2008 was met with great fear and anxiety regarding the future of the economy causing extreme bullishness in precious metals, September 2009 is met with confidence and calm, to the point of skepticism that Gold can old above $1000.

The fact remains, that the precious metals are over-bought and reaching stress levels on the upside, but these factors are merely short term. The overall trend remains up and amidst the strongest buying month of the year, the top may not yet be upon us.

The Gold-Silver Ratio

Many market followers don’t reallize that silver is due to outperform simply due to its recent under-performance and under-valuation relative to gold. Geologists estimate that the in-ground Gold-Silver ratio stands at something between 8-20. This means that there is approximately 8-20 times more silver than gold. Yet above ground reserves have dwindled significantly in recent years as much of the metal has been used industrially or has gone into private hoards and won’t come out until prices increase over-and-above current estimates.

The ratio, now at about 60 as of this writing, is still high relative to its suggested variant. This means that if one could expect a mean ratio of say 45, then with Gold hovering at $1000, Silver can still rally straight up to $22. If Gold rallied to $1650, as many expect within the next 12 months, we can expect to see Silver as high as $36. Again this is all if we revert to a mean ratio. But markets tend to over-extend their pre-defined impacts. Only time will tell.

Summary

There is no question that the bull market is intact. As for corrections, “they’re as predictable as snow storms in winter”. Yet, when it comes to making sound financial decisions, the ones that don’t require much thinking are those that warrant action. The best action is often no action. I saw many people who call themselves “investors” pile out of Gold in 2008. Yet, they did so for the wrong reasons. No one saw the collapse of Lehman Brothers sweeping the market causing a massive full-scale sell-off affecting each and every asset class – precious metals included.

On the flip side, had the market rallied on the COT short-squeeze, or had a major buyer stepped into the market, they’d probably still be locked out of the market forever. This time is no different. Maybe prices will decline, maybe they’ll rally… but its a bull market you know!

A Story

In Reminisces of a Stock Operator, the famed trader Jesse Livermore teaches many valuable lessons about markets and trends. In one event, he was told the following

“When you are as old as I am and you’ve been through as many booms and panics as I have, you’ll know that to lose your position is something nobody can afford; not even John D. Rockefeller. I hope the stock reacts and that you will be able to repurchase your line at a substantial concession, sir. But I myself can only trade in accordance with the experience of many years. I paid a high price for it and I don’t feel like throwing away a second tuition fee. But I am as much obliged to you as if I had the money in the bank. It’s a bull market, you know.”

Want to Be Successful? Own Gold!

08/26/2009

People get scared when they hear me talk about gold. “Why Gold?” They ask. “Isn’t gold only for the depression-ready end-of-the-world-as-we-know it pessimists?”

Not if you value it as the most valuable and un-destroyable currency in the world.

Once upon a time, gold was the currency of the wealthy and powerful. Only kings and rich noblemen (and woman) traded in its coinage. The middle-class used primarily silver, and the poor used copper and other base metals.

But as time passed, society began treating gold-equivilents as gold. But when every government around the world “de-linked” their paper currencies from the precious metal, people none the wiser. They continued to treat Dollars – once gold-equivalents – as, well, gold.

I always say that the default holding of any investor should be gold, as it always has been. The investor has to be thoroughly convinced of a business’s potential upside and limited downside to part with it.

I just finished a great article from Gold Basis Trader, Antal Fekete. He wrote a rather lengthy article on te subject here are my take-away notes. Emphasis in bold.

~~~

“The Last Contango in Washington”

The complete article and its follow up can be found here and here.

Contango: In technical jargon of futures markets, the basis is the spread between the nearest futures price and the cash price in the same location. The gold market has always been a carrying-charge market – a contango market – due to the monetary metal status of gold. This means that the gold spread has always reflected the carrying charge, the opportunity cost, of carrying gold, most of which is foregone interest.

Here is the deal they offer you: Give us your cash gold in exchange for gold futures that we’ll let you have at a deep discount so that you can pocket risk-free profits. The offer is increasingly declined. There was a time when a drop in the basis would pull in gold from the moon, figuratively speaking. No more. Arbitrageurs no longer believe that gold futures are fully exchangeable for cash gold.

But a strange phenomenon has been manifesting itself for 35 years, since the inception of gold futures trading. Rather than remaining constant, the trend has been that the basis as a percentage of the rate of interest has been vanishing and now has dropped from 100% to zero. At the same time gold holdings registered at the Comex-approved warehouses have been dwindling. Both indicators point toward a shortage of monetary gold that appears irreversible.

The last contango has first occurred in Zimbabwe, where gold is not available at any price quoted in Zimbabwe dollars. [Editor: Zimbabwe has recently suffered from hyper-inflation by printing many quadrillions (comes after trillions) of notes].

Gold backwardation is virtually inevitable, and when it comes, it will be irreversible. Why? Because it signifies a crisis of the first magnitude: the general disappearance of gold from trade for reasons of lack of confidence. No one will give up gold, because one is no longer confident that he can get it back on the same terms.

Implications

The only thing that might turn this runaway train around is a steep rise in US interest rates. However, that would ruin what is left of the U.S. economy. It would cause the bond market to collapse, sending the dollar down the drain.

I do not see the collapse of the bond market happening any time soon. The US Treasury and the Federal Reserve can muddle through this crisis, and possibly beyond, by making bond speculation risk-free in order to maintain demand for Treasury paper.

Bonds, notes, bills, and other obligations of any government are irredeemable. They are redeemable in nothing but more of the same. Treasury Bonds are redeemable in Federal Reserve credit, which is irredeemable and “backed by” the self-same bonds of the U.S. Treasury. Why is it, then, that these Treasury obligations are in demand where one might think that redeemability is a sine-qua-non of issuing them? What makes people participate in this shell game? How can such a crude check-kiting scheme mesmerize the entire population?

The debt of the U.S. government is still redeemable in a sense, however limited or restrictive it may be. The debt of the U.S. government has a liquid market in which it can be exchanged for Federal Reserve credit. In turn, Federal Reserve credit can still be exchanged in liquid markets for physical gold, the ultimate extinguisher of debt, albeit at a variable price.

Scenario

As the gold markets enter their phase of permanent backwardation, all rational basis for holding U.S. Treasury debt – or any debt, for that matter – will disappear. There will be a mad rush to the exits, and holders of debt will trample one another to death in trying to cash in on their winnings.

Once the $1,000 level is breached, there may be some “profit taking,” to be sure. But because of the zero basis, those who take profits will look rather foolish. Last contango = last profit taking.

Be prepared for a great wave of defaults on paper gold obligations. Certainly, the lessees of central bank gold will default. Comex will close its gold pit for good, and outstanding contracts will be settled on a cash basis.

I’d be surprised if any gold ETF shareholders get a fraction of their gold back from the warehouses – after a lengthy wrangle. Too many claims have been issued on the same lump of gold.

Look at it this way. There is a casino where the lucky gamblers can gamble risk-free. Their bets are “on the house.” This casino is the U.S. bond market. There is only one catch. The pile of the winning chips in front of each gambler may become irredeemable at the exit when the hairy godfather waves his magic wand.

Apart from wartime, the gold standard has been the most crisis-free monetary system in history. Of course, all monetary system have a habit of breaking down during wars.

The international monetary system as now constituted has been built on quicksand. It is a mere makeshift that took its origin in the last gold crisis of 1971.

The Last Contango in Washington will be different from all previous crises. It will destroy virtually all paper wealth and render virtually all physical capital idle. It will destroy our freedoms, unless we take protective action.

~~~

At Sentiment of Success feel that there is still a faint element of pessimism that surrounds gold. That’s why we go with silver. Whatever happens to gold, silver will rise much further and at the same time always maintain its value as a monetary currency.

Thoughts on the Economy

08/16/2009
I don’t like to post on markets that often, as I reserve this blog for more optimistic success-related material that focus more on proactive personal-development than on reacting to news and sentiment.

Nevertheless, in the dog-eat-dog world we live in, I believe its highly important to have a sound knowledge of what the external forces that govern our lives entail.

The one theme I keep noticing time after time in the selective articles I read (no major media, only hand-picked analysts who have proven themselves over time) is: Deflation or Inflation?

Unfortunately, many many people are misinformed when it comes to money. It’s not that they lack an MBA or didn’t understand what they’ve been reading, rather that they misinterpret what seems to be a paradox, but goes hand in hand in reality.

Deflation in Austrian terms is defined as an contraction in the loans of credit provided by a Government (pulling down assets). Inflation is its cousin-scenario where credit is expanded wildly (pushing up assets).

The mistake many make is in confusing the value of the Dollar and the credit/money supply. One is demand, while the other is supply. They may work either together or against each other.

I believe that what we are about to witness, on a grand scale, is a whiplash effect of contracting credit and strengthening currency on one hand, and a failing economy on the other. This will crush the average debt laden consumer as they battle with BOTH rising costs of interests and debt AND the rising costs of living due to monetary inflation.

This is due to a currency who’s printing presses are under no control and MUST outrun any effects of deflation – from real estate, stocks and Dollar buying. The irony here is that the Fed will soon have to choose between letting the Dollar appreciate on its own or pushing it down further. Chances are that they will always choose a falling currency over a rising one due to: a) its bi-centennial policy of monetary easing, and b) the fact that while the US has experienced an intense deflationary scenario (1930-38), we have yet to experience a “hyper-inflationary” one – induced by over-supplying credit and money – at least since Continental scrip was flushed away following the Civil War.

The savvy individual who will deflect such a predicament will be the low-debt high-asset frugal-consumer. This will eliminate high interest payments, appreciating assets and low expenses.

Note that the above applies to both the lower and upper class, since interest on debt and assets effect both the same.

Advice: Own Things! Real estate, commodities, physical gold and silver and strategic undervalued assets all comply. Areas of extreme caution: Stocks of companies that are either overvalued or financially unstable, toxic derivatives and high-interest debt.

~~~

It should also be noted that the generational-trends (10-17 year) remain intact: a) generally rising interest rates b) falling P/E ratios in stocks, and c) a falling Dow/Gold ratio.

This implies that Gold acts a safe haven regardless of whether the Dollar/Economy/Market does well since what we are expecting is not a monetary or nominal increase in price but an aggregate reversion to mean and true value.

Over the long run (next 7-10 years) bonds/fixed-income will mostly outperform capital appreciation for stocks, and hard assets will continue to outperform fiscal contracts.

The mindset will shift from growth to value and from wealth creation to wealth preservation. There will be those who do well, but only those who shy away from the general sentiment of things and focus on their own growth and productivity.

Friday Markets

07/24/2009
Here are the top headlines of the week

Sorry I couldn’t provide the links. Will do so next time.

GE next big one to go?

Porter Stansberry: Who says that anyone who doesn’t own Verizon shouldn’t be able to call himself an investor and has called the demise of the original AT&T, GM, Fannie Mae and Freddie Mac, now says that Continental and GE are net to go. GE has relied on its A+ rating to manipulate its financial program. But now it seems to be following CIT by-the-click.

Doug Casey: Every investor should own at least some physical gold in their personal possession.

FDIC chairman Sheila Bair told a Congressman there would be at least 500 more bank failures 10 times as many as have already occurred this year.

Richard Russel on Gold: In order for the US to justify the recent surge in spending and bailout money, rather than renege on its death, they will instead rid it through inflation and taxation. The only way for the average citizen to defend themselves? Gold. “Gold will be the last man standing. Gold is the secret, unstated world standard of money. It can’t be devalued, multiplied out of thin air, cheapened or devalued or bankrupted. It has no debt against it and isn’t the product of some nation’s central bank. Gold is pure intrinsic wealth. It needs no nation to guarantee it. Gold is outside the paper system.” On Stocks: “It’s clear to me that we are in a rally within a secular bear market within the confines of a long-term or secular bear market”.

William O’Neil: Stocks are in the midst of a bull market that began in March. We say cut every single loss when a stock goes down 8 percent below the price you paid for it. It’s like taking a little insurance policy.

Joe Biden: ‘We Have to Go Spend Money to Keep From Going Bankrupt’

Gary Shilling: Stock Market Will Crash As US Consumers Retrench. The economy won’t start to recover until 2010 as the US consumer is cutting back fast. Spending will drop from 70% of GDP to 60% as consumers pay down debt and go on a saving spree. Most recessions have a positive quarter or two of GDP, so if we get one, it won’t mean anything. The S&P will plunge 35% to 600 by the end of the year. Buy Treasuries.

Gold Bullion or ETFs? Hedge fund manager David Einhorn of Greenlight Capital had roughly $390 million invested in the GLD (SPDR Gold ETF) and then sold all his shares in favor of physical bullion. If you hold for a long time, bullion is likely cheaper. If you trade short-term (or in smaller sizes), GLD is likely better.

Jim Rohn: “It’s about your philosophy, not the economy”.

10 Things you should know before buying a car

Buffett’s 3 Rules for investing. 1) “If it seems too good to be true, it probably is.” 2) “Always look at how much the other guy is making when he is trying to sell you something”. 3) “Stay away from leverage”.

Lobster is now cheaper than hot dogs! LOB (not a real ticker) down from $10 to 2.25.

Buffett Dumps Moody’s (and it’s about time). “Moody’s and its rivals did such an awful job on the debt and mortgage ratings game”.

Goldman Sachs: S&P 500 to Rally Most Since 1982. Improving earnings will spur the steepest second-half rally since 1982. Expects S&P at 1000.

Stocks Both Buffett and Soros Hold: ConocoPhillips, Wal-Mart, Lowe’s, Home Depot, NRG Energy.

08/11/2008

The Real Silver Lining

“To invest successfully over a lifetime does not require a stratospheric IQ, unusual business insights, or inside information. What’s needed is a sound intellectual framework for making decisions and the ability to keep emotions from corroding that framework. – Ben Graham, 1949

The following is a slightly more in depth analysis of the silver market for those who are edgy as to where we stand and why I remain as bullish than I ever have been. First let us backtrack exactly one year. It was August 2007. Gold and Silver had been in a serious consolidation since May 2006. Few investors were coming to market and analysts were getting tired of plugging the silver bull. Nevertheless, there was much speculation for months already that the next leg up in the long-term trend would begin around September/October. Just then, silver plummeted overnight from $13.50 to just under $12.


Ignorant Support

Support then was at $10 hence many critics were calling for a retracement to that level. Then as now silver crashed through its 200 Day Moving Average, a well known support line. To belie
ve that silver must fall to the lower support level ($14) simply because the higher one ($16) has not held is foolish and investors who wait for such an event can prove costly. $21 will be the new support fairly soon and anything below $18 will be considered cheap.

Relative Strength Then as now, Silver is heavily oversold. (Silver’s RSI – Relative Strength Index – has not been this low over the past 12 months).

Gold Silver Ratio It is interesting that during that August 2007 sell-off the Gold/Silver ratio jumped to 56 and held above 55 before for a few months before declining back to below 50. Remember that the Gold/Silver ratio is in a multi-year down-trend and these upward fluctuations are mere noise.


Seasonal Strength
July and early August are historically weak months while late August and September exceptionally strong months.

Other Factors

The U.S. Dollar – The Dollar is now overbought and has not been so in ages. This may be the final blow-off of the Dollar rally and may now lead to its (ultimate?) downfall. Recent strength may surely be the intervention of the government trying to save the last currency since the Civil War. (For those who think the idea is tin-foil-hat-like read the next sentence).

COMEX Short PositionI’m no conspiracy theorist but I do sympathise with “survivalism”, and that is what we may be witnessing. Anyone who knows how to read a COT report can see that there is serious trouble on the short-side of the silver market. With barely 70 million ounces of investment silver a year its hard to imagine where these short will get a hold of over 300 million ounces of silver. Pretty much anything you answer will prove bullish.

Inflation – The PPI, Price Producers Index (that usually leads Consumer Prices) , has just come out with multi-decade high increases. The fact is that while retailers of all sorts and industries have attempted to hold off increasing prices, that range of revenue vs. profit has just about vanished and the choice is no longer theirs. Expect surging costs and with it surging precious metals prices.

Sale! Many, including India and China, were fretting over the fact that Gold was too high and pushing jewelry, a Eastern culture staple, to incredibly exuberant prices. As luck would have it they got what they had asked for (or manipulated?).

Sentiment Positive interest in Gold and Silver is just downright awful. Analysts (who I have noticed have simply become Chartists) are at a loss as to what to do. But with the fundamentals more bullish than they ever have been (think U.S. Budget, economy, inflation) I see nothing but a G-d given opportunity. (Nevertheless, I still find it incredibly ironic that the little bullish sentiment can be found on none other than… Marketwatch!)

Recession
Gold and Silver’s day in the sun will probably be when the recession begins and consumers begin to really feel the brunt of the economy and whiplash of falling wages, employment and earnings/share prices versus rising costs, prices and defaults.

Dow/Gold Ratio – I put this one last since it should be so readily presumed and stands at the center of the long term downtrend in debt-laden share prices and uptrend in unfinanced asset prices. The trend remains intact at 13.59. Any surprises will likely be to the downside heading to a ratio of 7, or even 3, before this recession is over (has it started?).

Conclusion
If you own anything that is long-term bullish in the face of credit crunches, paper deflation, asset inflation and fear (namely Gold, Silver, Yen, Franc, Short ETFs) you are probably destined to see some nice returns in your portfolio over the next few months.

The key words are: Negative Financing.

07/22/2008

Fair Value of Gold

And Why Investors Buy

We have commented on what the future has in store for stocks, whether you are buying for dividends sake, or for earnings valuations. Now we care to top it all off with an explanation as to why any conservative investor would and should buy gold.

Why So Unconventional?
In the early chapters of The Intelligent Investor, after explaining the balance between bonds and common stocks, Ben Graham goes into a lengthy analysis regarding earnings-price ratio relative to dividend yields. It does not pay, he explains, for the investor to remain invested in bonds during times when inflation of general goods are rising, and is better off holding stocks, albeit the lesser of two evils.

Mind you, the above is written by a man who experienced markets between the 1920s and early 1970s. Unfortunately, when Graham wrote the above in 1971, gold was still unavailable to the average investor and was still linked to the U.S. Dollar. This means that inflation, although an issue had no weight whatsoever with gold, as nominal loss and Dollar devaluation were synonymous.

If his book were written just a few years later I believe he’d be all the more wiser (and wealthier!) and would have urged investors to buy gold as an adequate hedge against inflation relative to interest rates. Real Interest Rates (IRs minus CPI).

Real Interest Rates and Gold
When real rates turn negative due to rising inflation greater than the return on cash, it makes little or no sense to hold anything currency denominated. This is where gold plays a crucial role that it has not played in over 120 years – the ultimate sound currency.

When investors squabble over gold being a hedge against inflation (flight to assets) or deflation (flight to currencies), what they really refer to are real rates of interest. Gold now has the ability to act as both a currency that retains its value amidst a flight from fiscal assets and debt, and a commodity that rises with the tide of the rush to hard goods.

Dow/Gold Ratio
This trend can be seen on a wide scale from the Dow-Gold ratio. Seemingly, the business cycle runs through years of investment and expansion, with money flowing out of cash into businesses, to times of savings and contraction, with liquidity flowing out of enterprise and into the highest yielding accounts.

Not much explanation should be necessary to understand what this ratio represents. Why would I buy shares trading at 20-40 gold ounces when I can just hold my gold and expect to buy a business at a later date at practically parity?

Hold and Buy!
The ratio reminds us that just as the “buy-and-hold” strategy worked so well for so many throughout the 40s, 50s, 80, and 90s… a “hold-and-buy” strategy would have done just as well during the 30s, 70s and 10s.

What would Buffett Say?
Quite frankly, I believe that the wealthiest investor of our time may have missed out on one of the greatest profit opportunity of the decade (excluding Uranium). Buffett himself expressed his thoughts when he said regarding his silver investment “We bought too early and sold too early”. He knows better than to buy into a rally. He missed out and that’s something he’s gotten used to over the years. If you asked me, I think that the $40 billion pile of cash in his portfolio is filling gold’s role as his savings. And don’t be surprised to see him splurge it all at once in the coming months!

Real Valuations
Many investors look for opportunities that stand square in their favor. With the Dow crossing over the 15 ounce line stocks will soon be trading in the lower buying range. The last chance to buy gold is now!

Unless you know of a stock that has fundamentals set to rally over 300% in the coming years, you may want to look into gold!

07/21/2008
Buy Stocks?

I am going to make a very bold statement. The source of my “madness” is 50% educated hypothesis and 50% gut instinct. You’ll understand why I call it madness in a moment.

We all know that while stocks like to trend together, they don’t copy each other exactly. Each follows its own business plans, sales, customers and respective wacky technical charts. On the day of the Great Crash in 1929 there were a number of issues, however few, that actually went up in price. The general trend does not concern each stock. One of the prime reasons that the indexes have been falling is because in each financials weigh heavily.

Nevertheless, it is important to realize that while some stocks set in a major bottom in 1982, others did so in 1978, many in 1975 and a few in 1971. Some swam against the tide altogether.

I believe we are experiencing a major bottom in financial and homebuilding shares. This does not mean that they have bottomed yet but the formation is in the making and we are merely a sharp decline away. Nor does this mean that they have sound books or have written off all their losses – far from it. It does mean that the coming panic (double-bottom) will place banking and home-developing shares at prices and valuations that are simply the lowest they can possibly be discounted. I suspect this may happen in as soon as they next few weeks.

Next, a bottom may set in for one sector that has dominated trading desks for years. Can you guess? Technology. Shares of Retailers, Financials, Homebuilders, Manufacturing, you-name-it have fallen over recent months. But some have held up reasonably well – until now. I think that during the major bottom that I expect sometime in late 2009 will offer bargains in some of the names that investors crazed over 10 years ago – Microsoft, Cisco, Apple, IBM. I think even Google will be selling itself unfavorably.

The key is: Safety and Earnings. I am extremely cautious on the banks not only with concern to their own solvency but more so the solvency of the system and the Central Banks to prevent it. If the financial crisis over blows heavily to the point where balance sheets are no longer legible, I would retroactively suspend my case for the Financials.

As for the Homebuilders, I think that very soon a great opportunity will be upon us and investors who look just a few months passed the carnage and bad earnings reports will see a solid balance sheet with a sound business model.

As for everything else, make sure when the market swoon comes, not only have you read the financial reports, but you are ready with trucks rented.

As for now, you want to be in Cash. But there’s a catch to cash – You don’t want to own currencies as they are just as subject to getting slammed as the banks that trade them. The best currency to hold is gold and silver. Sure the Franc, Aussie and Yen may rally too, but nothing will compare to the rush that will influence the greatest price increase (relative to time) in this Precious Metals Bull Market.

There are few currencies that will be safe from inflation – and not the CPI – but rather real family-oriented price-increases. SaraLee has just reported that they will have to hike the price of meats up 20% by year end. Many companies will follow suit.

The commodity that will most probably emulate that increase is Gold. Retail investors are well aware of its characteristics and it seems that, as predicted, small speculators are beginning to catch on as well. Gold seems to correlate very well with fear, to which inflation (read: falling dollar) will greatly contribute.

At that time, whenever it is upon us I’d say: Sell Half your Gold, and Buy Some Bargains! And Buy with Care! This is going to be the best buying opportunity in 35 years!

07/15/2008
This is it!

The last time we issued such an alert, was back in Auguest of 2007, when we wrote “The Moment of Truth“. In it we said

I deem the next 30 days as integral to my credence as an investment analyst… The fundamentals remain in check, and reasons for the rally only continue to build. It should also be considered that stocks by contrast have historically had some tough sailing through the fall months. Gold may also emerge triumphant if the cycle turns “deflationary” and gold holds its value while stocks take a hit, on what’s inversely often the weakest months for equities.

Over the following months Gold rallied from $675 to over $1000, while Silver went parabola from it dip of $11.75 to $21.50 – 83%! The only resistance was both meager and short lived, around the $850 and $16 level, respectively.

I am issuing a similar alert now. The second stage of the largest “Migration” stage of Gold has already begun.

I believe there are 3 stages: a) Denial: The longest and most durable rally [2001-2006], b) Migration: the current stage, which I believe will take gold well over $2000 [2007-2009] and c) Euphoria: When gold will probably double in a matter of months sometime in the next few years [2014?].

We said of Migration

As a breakout occurs, institutions and growth investors will run with it, extending the sector to its largest gains, probably well past $1000.

This will be followed by Euphoria. This is an interim-Euphoric stage when Gold may reach as high as $5,000. This will not be the ultimate Panic buying that could take Gold into 5 digits.

This may all seem abstract and far fetched now but a) we know how quickly things change in today’s economy (think Freddie Mac) and b) how historically such a scenario has plenty of room for materializing (think stocks in 1982).

If you do not yet own any gold or silver I suggest you go out and buy some. I will not cheerlead the precious metals ever again. This is it! I consider myself a value investor and I see value in the PMs, but only underneath a certain level. You must buy in before the rally in order to remain solvent.

Watch as all the Wall Street prior-deniers-and skeptics run into the precious metals along with the institutions and momentum funds.

[Note: I do see one more correction in the cards, (possibly around the $1,500 level). If for whatever reason you do miss this one, wait for the next, and don’t get emotionally lulled in by the rally.]

As we said a few months ago: Buy until your hands bleed!

For a Technical Outlook I suggest these articles on Silver and Gold

The Real Bubbles

05/04/2008

 

“It is the measure of wealth itself [the Dollar] that is overvalued, not the goods that it represents”

 

 

I’m beginning to understand what is going on. I hope this article will shed some light on a variety of issues, some of which have been fairly complicated for the common investor to digest.

I will begin with a paragraph of adages and mantras being proclaimed on Wall Street, followed by a thorough analysis of why they are either baseless or misconceived. For the sake of simplicity I won’t use references but they are all available.

Mr. Market says

“The Commodities Bubble has begin to blow over, with everything from gold to oil to potash collapsing from their artificially inflated prices to mediate norms. Much of these gains have been driven by speculator demand, from hedge funds and the like, as well as consumer demand, including China, India and Russia.

“Investors have bought in every premium into these contracts and optimism is high. Furthermore, commodities have been a very poor investment relative to stocks and bonds. Even gold has underperformed inflation. As equities recoup its gains and inflows of capital return, pushing inflation down with it, commodities will be a relic of the past.

“Recessions are times of diminishing consumer demand and this will further help in reducing prices. With much of the investing community already discounting shares due to recession we can expect a bottom in the stock market with a rally beginning just as the economy is officially in recession. Financials and Homebuilders are set to gain the most as they have been beaten down severely, looking awefully cheap from a value prospective.

“The Dollar is set to rally as stark pessimism has oversold it. Recession will strengthen the currency. This will bring in investment flow previously allocated to Euro, Yen and Gold.”

The Problems With Mr. Market and the rest of the Wall Street gang (CNBC)

1. Wrong Biases
Wall Street as we know it is not a the Mutual Fund Industry, a group Hedge Funds or even large network of multi-national corporations. It is simply the media’s opinion of the former. There are few companies that end up becoming large corporations and even fewer speculators-wanna-be-billionaire-investors who actually live up to their own aspirations.

This is due to its ill-conceived sentiment, nothing more. It has all the facts (most do at least) yet the small investor constantly fails to make the integral judgments necessary to fulfill his lifelong ambition of success, or even of financial independence. They run after Enrons, Devalued Russian Rubles and dot coms believing beyond any doubt that they have it made for themselves and they have indeed “beat the street“.

However, the only way to real gains is to bet against the crowd, to look where no one else is looking, or even better, to see past the unsound biases that have plagued investors since the Mississippi Scheme in the early 18th century.

2. Confusing Short and Long Term
This is probably the most extreme variable, one which offers the most profits to he who can see past its vile inadequacies. Many (not all) of the arguements presented in favor of the Dow 36,000 were in one way or another grounded fundamentally. The problem with the gushes of cash inflow was they were based on an economic phenomenon that was years into the future, results that we are only beginning to see today – and interestingly enough by quite a different group of influences. While investors were placing bets on Yahoo and Juno, Google wasn’t yet a public company.

3. Forgetting Premium and Discount
In addition, shares were discounted many times over yet speculators failed to realize it. Any price was a great price because in the mind of these irrational gamblers the gains were infinite it seemed. It was hard for investors themselves to understand that they were betting that the company of purchase was one of sound safety that would last, and therewith deliver on its earnings 100-1000 times over, without any interruption whatsoever.

4. Wall Street too has Seasons
There are financial equinoxes, waxing and waning over decades. Warren Buffett himself cautioned Saturday not to expect big gains from the stock market in future years. Indeed, there are periods when year after year people move from the New York Stock Exchange to the commodity pits of the Midwest in search of better returns.

5. In The Dollar We Trust
A currency is present only to act as a constant method of exchange between goods. Yet the U.S. currency is nothing of the sort. It has become a staple of growth and a signal of everlasting creditability. Unfortunately for many this will not last. Contrary to many pundits the present rally in the Dollar, however great it may seem, is a mere decoy and will be short-lived.

Even Treasury Secretary Paulson has advocated that a weak dollar is in America’s best interest. While this may or may not be a positive development, one thing may be guaranteed by any student of financial history dating back to Cicero in ancient Rome: every fiat currency has failed, frequently bringing its empire down with it.

6. Action and Consequence
Finally it pays dearly for the prudent investor, who has the sole initiative to first protect and only then appreciate his capital, to understand the elements of check and balance. Every action that does not act as a stimulus for long term growth but merely for short term gain will inevitably be met by an equal and opposite loss. Failing to understand this will, for the ignorant, deplete capital faster than you can say “Bear Sterns”.

Commodities will not blow over.
Long term investors understand the need for correction and rest. Things that go straight up are indeed called bubbles and we are not there yet. Like fire feeding off oxygen and fuel, so too do bubbles feed off of extreme optimism and public involvement, both of which can’t disappear over a few weeks. The perceptive analyst will look around and tell with utmost certainty there is no sign of a any euphoria. If anything the investor relies on solid fundamentals, all of which are intact, and buys when the crowds are telling him to be cautious. If he didn’t sell he is sorry but it is insignificant because a bottom is close at hand.

Has all the oil inventories been replenished with years of supply? Have investors the fear that would send each preferring a Krugerrand over a wad of hundreds? Are the cheerleaders over at CNBC telling you to buy Krugerrands and load up on more shares of Nemont Mining?

Market Norms
I have read through many books on markets, investment and financial history yet I have never seen evidence of such a thing. Everything has an intrinsic value and it either sells at a premium to that value or a discount. Professional Traders look for market “norms” in the sense that they seek a short term variable and attempt to trade within that range yet they abandon all affiliation when this trend is broken, that which all may be confident that it will.

The Real Bubble
With pundits of financially-based markets they seem to make two awfully wrong assumptions. Firstly, that the a Commodity Bubble exists in Dollar denominated form and secondly that it has been inflated by artificial and speculative demand.

The first misconception is one that one would almost fail to consider to begin with. After all, the U.S. Dollar has been on the center stage of international trade since the Bretton Woods Agreement shortly after the Great Depression in 1941. Yet since 1913 its intrinsic value relative to goods and services has fallen by over 93%. The fact that there is still any goodwill left to the Dollar at all resembles a Bubble of sorts. It is the measure of wealth itself that is overvalued, not the goods that it represents.

Thus, it is not the goods and services that rise but the Dollars that fall; their inability to maintain their value. Nevertheless instead of markets taking their natural course and correcting itself, the Government is artificially inflating the money supply whilst protecting the very economy that its currency stands for. This devaluing of the Dollar to be able to finance its debts is in no way different than if Enron was given the very ability to print its own currency to continue its business operations or pay out to its shareholders.

This explains the underlying developements we have seen in physical goods, not too different from what we experienced in the 1970s, with a dangerous undersupply of commodities, runaway deficits and financial derivatives of enormous proportions.

I ask of the conscious minded economist, “With over $500 trillion in financial promises, which now seems to be Dollar-backed and secured by the Federal Government, what meager value may be given to the price for real goods, that which feeds and sustains mankind? Furthermore, if demand for goods the world over is rising is it not reasonable to assume that prices rise with it, if not to curb demand, then to act as an incentive for the farmer to increase production? Finally, what would have offset the interest for the speculator to profit from these gains if the fundamental demand continues unabated?”

To quote Charlie Munger “We have convulsions now that make Enron look like a tea party.”

Critical Optimism
Does the financial community really believe that there is excess optimism in commodities? That gold bullion are selling off shelves? That people left and right are participating in buying goods that will benefit from real demand? On the contrary, I see that many have found an opportunity to sell the only gold that they may have in their possessions to take advantage of higher market. This denotes good business sense of buying low and selling high, but certainly not in the realm of exuberance that we have seen in previous meltdowns.

Physical vs. Fiscal
Commodities and Equities. Gold and The Dow. It is a subject that many seem to overlook from a generation-term prospective (considering that Buffett’s long term is 10 years). It is the flaw you will see in every commodity-bearish argument: “Commodities just don’t cut it relative to equities”.

But let us look at the origins for monetary protocol: Traders bartered goods in the marketplace. With many various items coming from numerous townships it was necessary to create a measure of value, a pivot whereby difference between supply and demand may mediate; a method by which payment may be expandable without the physical presence of currency.

Thus began the credit cycle. Producer sold to seller, who bartered with traders, who retailed to the marketplace, who took home their foods from their labor and fed their families.

This “Credit”, unlike the commodity-based currencies of old, had but one restriction: the tolerance of the lender. As long as the lender would risk would the industry borrow. It is of no coincidence that this cycle of credit take years to build and then years to crumble.

The “historical trend”, if we may call it, offers fairly simple advice to the novice merchant who wishes to conserve and grow his capital:

When in times of expansion… lend, invest and do business. In times of contraction and uncertainty… Pay debts, take inventory and accumulate capital.

Recessions of Supply and Demand
It is interesting how mainstream economists will focus on something specific in great detail and fanfare and at the same time fail to see its direct opposite exposure. For instance, it is assumed that a recession diminishes demand for goods and therefore lowers prices overall, not only in the U.S. but also in China. Consequently however, a loss of demand will hurt producers who may decrease production. This will have the opposite effect and raise prices.

Furthermore, it is assumed that as we move into recession, investors have already discounted all the possible losses and write downs. At first glance this possibility seems preposterous. How can a market, however “efficient” it may be, properly and throroughly account for the very speculations that everyone from the companies to the Federal Reserve can only guess at? Besides, it’s quite humorous that Wall Street can call the middle of a recession when they can’t even call the beginning, let alone its happenstance altogether.

It goes without saying that the same case may be made for commodities, in the sense that recessionary results have already been discounted and accounted for, or that they even sell at a discount relative to post-recessionary time-tables.

Capitalism that would make Marx smile?
Capitalism works. And for he who says it doesn’t should look no further than every innovation and technological advancement since the Middle Ages. Nevertheless, it is a process and it may not be looked at point blank. There are times when the advantages of Capitalism may overextend its true worth, while there may be times that it will seem to underestimate it (much like your average share price).

For the last 28 years we have lived in a credit expansion. Yes, there have been pitfalls – the Crash of 87, LTCM, the DotCom collapse – yet we have rolled on. The world has undergone quite a change in that time and has made people sentimentally and physically wealthier than ever before. Liquidity was fluid, credit was available for anyone who needed it, lending was commercialized and industrialized allowing the investor in China to buy equity in a startup in Australia. What the lender would risk would the industry borrow.

Yet now the payments are due, and the funds we have borrowed to finance this wonderful world we have built for ourselves must be paid in full. We are not veering off a path of success, not failing at our ambitions, we are merely paying for what we have taken.

Our past actions have now brought about the future results. For years we benefited when investors fled from commodities to purchase equities and financial paper, suppressing prices through shorting, or “selling forward”, neglecting the farmers and producers. Now we must compensate those to increase supply in order to feed a larger, hungrier, wealthier, more innovated world.

04/30/2008
It’s Time to Revisit The Markets

It’s time to reflect on the predicament of the markets. We ran two editorials in late December entitled “Are You Ready for The “Blue” Year?” and “Some Thoughts on the Markets“. We defined a general outlook for the economy for the year of 2008.

We are constantly reminded that “The more things change, the more they stay the same”, it is far easier to predict what we may see in the future. With that I would like to offer clarity to the confused investor.

Dow/Gold Ratio
The ratio currently stands at 15, with a low of 12.5. Our immediate term goal is 7 with an eventual decline to 3 before the economy pulls itself out of recession.

During the brutal 1973 downturn the Dow Jones Industrial Average fell from 1050 to 570, a decline of 45%! Yet this wrecking fall was cushioned by a counter-rally from 800 to 1000, within 5% of its all-time high. Interestingly gold, during this same period, rose throughout the downturn, from 70 to 195 over the 2 years period. Over 178%!

If I were to rewrite that paragraph but multiplying all 1973-75 dates respectively, it would read as follows:


During the brutal 2007 downturn the Dow Jones Industrial Average fell from 14,000 to 7600, a decline of 45%! Yet this wrecking fall was cushioned by a counter-rally from 10,650 to 13,300, within 5% of its all-time high. Interestingly gold, during this same period, rose throughout the downturn, from 700 to 1950 over the 2 years period. Over 178%!

Obviously, history will not repeat itself, but it sure as hell does rhyme. I believe that the DJIA will push above 13,000 temporarily and then resume its decline to 7600 vicinity. While gold will trend ultimately to the $2000 level by late 2009.

[One may ask based on these calculations, that Dow 7600 / Gold 2000 = 3.8, well above our factor of 3. Nevertheless, it is most probable that gold won’t peak at the exact time that the Dow bottoms].

Thus the prudent investor will seek refuge in some words from our December article.

“The truth is, however inverted it may seem, bad is good, bear is better than bull, bust beats boom”.

This simply means the investor can do phenomenally well by simply paying little attention to the media and markets and instead focus on the short yet profitable buying opportunities that present themselves.

With that we move on to some predictions we made back in December of 2007, results since then and what we can expect going into 2009.

The Economy

“When demand is high and supply is low prices must rise, and if by any means they are manipulated or capped they will rise further in no different a logic than the what lead to most of the current problems in housing

This sums up what we’ve been seeing over the last few months, and it can be expected to continue into 2009. The media will keep calling bottoms while credit and leveraged conditions deteriorate.

“There isn’t much we can be sure of in the next year other than the fact that more volatility and election jargon will be stuffed down our throats

This in my eyes was a no-brainer. Tension was all too high and much of the markets movements were based on speculation rather than solid fundamentals.

“Corporate profits will fall causing either p/e’s to rise or prices to fall as well. Don’t be surprise to see us approaching single-digit ratios for the Dow”

This may have been too short an outlook, however it is expected before markets bottom. It’s not if, but when.

“Expect to see more and more consumers turn to their retirement accounts and credit cards to keep them afloat”

This has been seen slightly and is significantly increasing. Foreclosures have doubled year-to-date and increasing amounts of home-owners are just walking away.

Inflation

Whether or not [we have a Recession]… expect some sort of ‘flation.

So far GDP has been positive so there is no “official” recession. But ‘flation indeed! Stocks have fallen and since found some relief, while commodities have boomed and since corrected. Yet the investor should not be fooled by this.

Interest Rates

“He [Bernanke] really has no choice… right now he sees fear of recession and it’s his job to cater to it”

With rates lowered from 6.25% to 2%, all Fed Discount Windows were opened and inflows have been supplied to the market, not to mention the bailing out of Bear Sterns.

Currencies

“The Yen and Yuan seem to be holding up fairly well… As for Switzerland? Yeah, I think the Franc should hold up just fine… for the Loony, Real, Ruble and Aussie Dollar the future never looked so bright”

This was mostly due to a declining Dollar. The Dollar may have now found a bottom and this will be sustained when the Fed turns to raising short term rates. Yet if markets follow any similarity to the 1970s, this rally will be short-lived, with the Dollar testing new lows come 2010.

Housing

Interest rates are a major part of the equation. The lower rates go the higher the floor for housing prices”

Any economist would agree that the potential damage has been avoided. Yet we are faced with the worst housing recession since the Great Depression and the results will be felt. Low interest rates cannot makeup for decades of careless credit policy.

“Prices fell a record amount for this year. Buffett says it will continue into late 2008. Others say into 2009. Jeff Saut says prices have to either fall 25% tomorrow or streamline for 5 years in order to reevaluate on an price/income basis.

According to the Schiller Index prices are down 12% in many U.S. cities.

Oil and Gas

“Oil at $150? …I think oil has more to run… many others say $150 or even $200 before the year is out… Expect higher prices at the pump”.

Right on the money! Oil has risen as high as $120 recently. (with gas prices expected to possibly reach $8 a gallon before the year is out). This may be due to the fact that many airline fuel storages, were running low. Acting as a catalyst this replenishing pushed up prices.

“Recessions do decrease demand, but with a decrease in demand comes a decrease in productivity… Wall Street’s assumption of $50 oil… may be way off target”

This can be seen with regard to possible production decreases in Nigeria, and with regard to metals production from South Africa.

The Stock Market

“It’s all in the earnings… there will be surprises… there will be opportunities but I doubt there will be any significant bottoms at least until the recession officially begins”.

Earnings have yet to plummet as stocks are currently down a mere 8% from their highs. Yet while we find ourselves amidst a speculative, yet predictive, short-term rally, we remain within a well defined long-term downtrend. (Is the Dow really selling for 64x earnings?)

Small Banks and Homebuilders

“I say not yet. Will I be wrong? Possibly, but at least I’ll be empty handed on the downside risk, and there is some. I still don’t believe Wall Street has revisited pure unadulterated pessimism. A P/E of 8 doesn’t seem that bad until you recognize its all in the denominator.”

This call is still up in the air. Average bottoms have been presented with indexes selling below book value. They currently sell for 1.3x book.

Commodities and Precious Metals

“When people want food, prices rise”

If I say “Rice, Wheat, Soybeans”, need I say more?

“This will benefit all commodities, as well as gold (The Street gives a $1000 projection). Of course Silver has much further to rise as it regains some historical ratio.”

Talk about psychological resistance! Commodities benefited greatly and Gold went straight to $1000 before correcting strongly. In the case of the Gold/Silver ratio now major advancement was seen. The ratio hovered around 48 before heading as high as 53.5

“In the event that commodities… decline in the short-term this should be seen as a buying opportunity”

We have since been offered this buying opportunity.

China

“China’s bubble will blow over, but not before the Olympics… After that I suggest you get out, especially if USA Today is announcing record high stock prices.”

China has corrected together with the world markets, but has since regained much losses.

Another great quote from the last article

“The perma-bulls tell you to remain 100% invested in the ‘long run’ as stocks are the highest returning asset class over very long periods, like 100 years… But I have yet to meet an investor that either has a 100 year time horizon or can actually sit through all of the bear markets that occur during 100 years.”
Bennet Sedacca

04/25/2008
Sentimentally Challenged

How funny is it when you see this headline on the most prominent media center Marketwatch.com

Contrarian analysis no longer as bullish on gold

Draw your own conclusions.

04/25/2008
So Who’s The Fittest?

“What a fool does in the end, the wise do in the beginning” (Spanish Proverb)

Whether or not we conform to the Evolutionary theories of Charles Darwin, there is most certainly an element of truth behind the prospect that there is indeed a “survival of the fittest”. He who flaunts his wealth, is released from it. He who mistreats his body, withers. He who disrespects other men, is himself reputed.

We see this in our world from every perspective possible. China remains to its thousands year old traditions, as it is, by a philosophy inherently averse to war. Presidents, world leaders, CEOs and Activists usually maintain the stamina throughout even the most challenging times since it was that inbred zeal that got them there in the first place. Many of the happenstances of our history are due not to mere chance but to the wiring of our very fiber.

Hitler failed not because the West defeated him in military strategy or intelligence, but because all hope was forfeited from the beginning; he couldn’t control his own faculties, how would he a nation, how would he the world?

In the makeup of Capitalism as we know it, the earliest laissez-faire economists realized that monies are safest in the private hands, and handiest in the possession of those who understand its value most. Wal-Mart together with its proprietors, the Waltons, is one of the wealthiest economies on the planet, yet at the same time it ranks as the second largest charitable institution on the planet.

Small Money and Smart Money
What has all this to do with practice investment application? Yesterday I was chatting with a friend of mine. She mentioned how she had recently pawned in her gold. “Why?” I asked. She said she wasn’t exactly sure, only that gold had run up quite some bit over the last few years and she decided to profit from it. “Do you reckon it could go any higher?” I asked with a smirk. “It’s already fallen!” she replied.

We may call the above example the Small Money. These are the people, most of society actually, who just go about their daily business and they act, well, pretty much because they are not quite sure.

Then there is what we may call the Smart Money (this does not necessarily Big Money). For examples of such we must look to large institutions that carry a sound sense of financial responsibility; Governments that provide the world with resources and labor, Funds that manage the wealth of many of the affluent with full regard to risk and reward (major ETFs and Mutual Funds may be included in this group), as well as value-conscious long-term investors.

While the Small Money (and so they shall remain) are selling – Real Estate and hard assets – the Smart Money is buying. We see this day after day as the mortgage predicament continues to unravel, but nowhere in economics does it have any mention of leaving bargains on the table.

Where I live there was a “W 55” building that was set to be completed. Unfortunately, the building went under as property values and lending fell. At auction each penthouse sold for $150,000 down from the 300s. 50 cents on the dollar!

Long Term Investors
So what are the long-term investors doing now? They are Buying. Many now see the perfect opportunity to get in on an ongoing commodity boom – read ‘Boom’ not ‘Bubble’. Gold and silver are down 12% and 20% off their highs, respectively. Where many see ‘correction’ others see ‘opportunity’.

Go out to any coin dealer and try to buy more than 50 ounces of silver. Firstly, you moat probably won’t find it. If you do it will probably be in small denominations with pictures of Brett Farve or the Twin Towers on them. The piles of metal from the mints seems rather depleted.

Secondly, you’ll face a hefty premium. It’s almost as if the real over-the-counter market has become completely estranged towards the paper market and fails to believe it. Go on eBay and try to buy silver. You’ll face premiums (outright or in the form of shipping) of $2-$10 per ounce! In a sense, the actual silver market hasn’t fallen much at all.

Many pundits of the industry stated that as prices rise, supply of scrap silver will flood the market. One thing for sure, it ain’t floodin’ it. If it is coming online, it’s coming too slow relative to demand. Regardless, it seems that higher prices are secured sooner than later.

Did someone say Rice? Let’s not even go there.

Funds and Institutions
What about the big funds? Buying. The iShares Silver Trust (SLV) has actually been accumulating physical silver as prices have fallen. This is probably in line with relative demand by the funds investors (I’m one myself).

Governments
Big Governments? Also Buying. It is said that the Central Bank of Russia has been adding to its capital gold reserves and for all we know China and others may be following suit.

“After all is said and done, more is said than done” as Aesop said and the markets seem to reflect that. Those who have bought are destined to be wealthy and those who have sold are destined to buy again.

Oh, and the essential difference between a ‘Boom’ and a ‘Bubble’ is that a boom is when everyone is trying to buy something which no one else owns but everyone else wants, while a bubble is when everyone wants to eventually sell that which everyone has and practically nobody needs.