Gold traders are the most bullish in two months after mainland China imported the most metal ever from Hong Kong and investors bought U.S. bullion coins at the fastest pace in more than two years.
Eighteen of 23 surveyed by Bloomberg expect the metal to gain next week, the highest proportion since Nov. 11. Mainland China imported almost 102.8 metric tons in November, valued at about $5.4 billion, trade data on Jan. 11 showed. The U.S. Mint said it sold 85,500 ounces of American Eagle gold coins in the first 12 days of January. Full-month sales would reach 213,750 ounces at that pace, the most since December 2009.
Bullion rallied 6.2 percent since plunging to within 1 percentage point of a bear market on Dec. 29, on mounting concern that economic growth is slowing and European leaders are failing to contain the region's debt crisis. Holdings (.GLDTONS) in exchange-traded products backed by the metal are heading for the biggest weekly expansion since mid-November and are within 2 percent of an all-time high, data compiled by Bloomberg show.
"The thing that's caught people's minds is the massive increase in Chinese buying," said Ross Norman, chief executive officer of Sharps Pixley Ltd., a brokerage handling physical bullion in London. "Gold has demonstrated time and time again its ability to hold purchasing power. It looks expensive and people talk about bubbles, but it's not."
World Index
Bullion rose 10 percent last year on the Comex in New York, beating the 1.2 percent drop in the Standard & Poor's GSCI Total Return Index of 24 commodities and the 9.4 percent decline in the MSCI All-Country World Index of equities. Treasuries returned 9.8 percent, a Bank of America Corp. index shows.
The metal fell almost 19 percent from its record closing price of $1,891.90 an ounce on Aug. 22 through Dec. 29, taking it below its 200-day moving average for the first time since January 2009. Prices closed above the moving average on Jan. 10 and settled at $1,630.80 in New York today.
Holdings in bullion-backed ETPs reached 2,357.3 tons yesterday, valued at $124.1 billion and exceeding the reserves of all but four central banks.
China overtook India in the third quarter as the largest gold-jewelry market, according to the World Gold Council. The gain in imports from Hong Kong may be a sign the central bank is adding to reserves, according to Sharps Pixley's Norman. The People's Bank of China last made known its gold reserves of 1,054 tons more than two years ago.
Call Options There were 8,002 call options traded on Jan. 11 giving holders the right to buy the metal at $2,200 by July, and the six most widely held holdings are for calls at 22 percent above prices today, Comex data show. Options traders are making fewer bearish bets against the SPDR Gold Trust, the biggest gold- backed ETP, than at any time in the past 20 months.
Gold is also benefiting from concern the euro zone will tumble back into recession. Germany, the region's biggest economy, shrank "roughly" 0.25 percent in the fourth quarter from the third, the Federal Statistics Office said Jan. 11. The euro region will contract 0.2 percent this year, compared with growth of 1.6 percent in 2011, the median of 21 economist estimates compiled by Bloomberg show.
The rebound in gold is being threatened by a strengthening dollar, which rose to a 15-month high against six major currencies this week. The 30-week correlation coefficient between the greenback and bullion is now at -0.43, data compiled by Bloomberg show, with a figure of -1 meaning the two always move in opposite directions.
Housing Stagnant
Global equities climbed today to the highest level since mid-November, and the U.S. Federal Reserve said Jan. 11 that the economy improved last month across most of the country even as hiring was limited and housing remained stagnant.
"Gold was held back toward the end of last year because of dollar strength and people having more confidence in the U.S. economy," said Carole Ferguson, an analyst at Fairfax IS in London. "If people feel the U.S. economy will pull the whole world up a little bit, then you could see gold being very flat to trading down." Hedge funds and other money managers have become less bullish, cutting bets on higher prices by 56 percent since the beginning of August. They reduced their net-long position to 110,594 futures and options in the week ended Jan. 3, the lowest since January 2009, U.S. Commodity Futures Trading Commission data show. The last time the position was that low, prices climbed about 17 percent in the next four weeks.
Benchmark Contract
Ten of 22 traders and analysts surveyed by Bloomberg expect copper to fall next week and three were neutral. The metal for delivery in three months, the London Metal Exchange's benchmark contract, declined 21 percent last year and gained 5.3 percent this month to $8,000 a ton.
Raw sugar retreated 27 percent last year and settled at 23.84 cents a pound today on ICE Futures U.S. in New York, and a 2.3 percent gain this month. Six of 11 people surveyed expect prices to gain next week.
Fourteen of 22 anticipate higher corn prices, while 15 of 24 said soybeans will advance. Corn fell 7.3 percent this month to $5.995 a bushel after increasing 2.8 percent in 2011. Soybeans are down 4.1 percent this month at $11.5825 a bushel after sliding 14 percent last year.
"You have a potential disturbance factor which is the euro crisis," said Bayram Dincer, an analyst at LGT Capital Management in Pfaeffikon, Switzerland. "Investors are optimistic that the global growth rates are still high enough to support demand and commodity prices."
There is no doubt that Chipotle (CMG) is a Mexican fast food chain on a serious roll. It seems like it can do no wrong as it has attained pious status on Wall Street. But how long can this momentum last until the shares collapse like a house of cards? As long as there are greater fools to snap up the shares, the bloated valuation will continue to grow even more insane. Shorts in a panic mode are not hurting matters either, as they are forced to cover at even higher prices.
Two upgrades (William Blair and Goldman) in the past week have sent the shares into new uncharted highs, but are these broker upgrades more of a "pump and dump" scenario than an actual change in fundamentals? I mean, why weren't these guys upgrading $100 ago? They appear way late to the game. What is this sudden infatuation all
Lambert here: This post is an important contribution to the debate, because the history of the WPA gives the lie to the oft-heard claim that "the government can't create jobs." It can and it has.
* * *
In the current debates surrounding various job guarantee programs (in association with the Chartalist or Modern Money perspectives), it might prove helpful to review some aspects of the Works Progress Administration (renamed in 1939 as Work Projects Administration). While the WPA was not a "job guarantee" program, it nevertheless points to a number of issues that are under current discussion, including those of the nature of the projects undertaken, impact on the larger economy, concerns surrounding bureaucratic impediments, etc. Let's begin with an introductory statement pertaining to the political and economic orientation of Franklin Delano Roosevelt (and his Administration).
Roosevelt was not a progressive. He ran on a balanced budget platform, and initially attempted to fulfill his campaign promise of reducing the federal budget by slashing military spending from $752 million in 1932 to $531 million in 1934, including a 40% reduction in spending for veteran's benefits which eliminated the pensions of half-a-million veterans and widows and reduced the benefits for those remaining on the rolls. As well, federal spending on research and education was slashed and salaries of federal employees were reduced. Such programs were reversed after 1935. And one might recall that Roosevelt attempted to return to a balanced budget program in 1937, just as the economy appeared to be slowly recovering. The result was a renewed depression that began in the fall of that year and ran through 1938.
Thus, the Roosevelt Administration was forced into progressive activism because of massive—and organized—popular discontent based mainly in working class and small farmer organizations. The union movement was rejuvenated through the formation of the CIO, farmers organized to prevent the forced sales of their properties (and this often included the threat of armed action), rent strikes were rampant, etc. Chicago, New York, other cities saw massive demonstrations. "Riots" shook the Kentucky coal fields. One must remember that the communist party was large (as these parties go), active, and popular. The specter of revolution was in the air and some politicians responded. Hamilton Fish Jr. instructed his fellow Congressmen, "(i)f we don't give (security) under the existing system, the people will change the system. Make no mistake about that."
The WPA was one of several programs developed to respond to this supposed threat. Initially, the Roosevelt Administration authorized the Federal Emergency Administration of Public Works in 1933 (renamed in 1939 as the Public Works Administration). The PWA allocated over $6 billion to private firms that actually undertook the large scale projects ordered by government. Dams, including Grand Coulee, hospitals, bridges (the Triborough Bridge and Lincoln Tunnel in New York City), etc.
In the same year, the Civilian Conservation Corps (ostensibly Roosevelt's favorite such program) was organized. Exceptionally active in erosion control, reforestation, the creation of public parks, etc., the CCC hired 2 million young men over the course of its history. The fundamental difference between the CCC and the PWA was that workers on CCC projects were hired directly by the government. And this funding relationship served as the model for the WPA.
The WPA was under the direction of Harry Hopkins, a notable figure in his day. While the program was officially terminated in 1943, U.S. entry into WWII effectively ended its existence. On average through 1941, the WPA employed about 3 million people each month. If we include employees in the CCC and the National Youth Administration (a separate program under the WPA), total employment in government contracted work came to roughly 4.3 million per month. This represented 8-9% of the U.S. labor force. Originally, the WPA was an extension of the Federal Emergency Relief Administration—the first federally-funded welfare program in the U.S. One rationale for the WPA was that it was better to put people to work performing useful tasks rather than merely receiving assistance: off the dole and on the job.
A maximum work week was set at 30 hours, and pay was set at "the prevailing wage." This latter standard raised some unintended humorous criticism. Senator Richard Russell of Georgia complained that: "In the State of Tennessee the man who is working with a pick and shovel at 18 cents an hour is limited to $26 a month, and he must work 144 hours to earn $26. Whereas the man who is working in Pennsylvania has to work only 30 hours to earn $94, out of funds which are being paid out of the common Treasury of the United States" (In Couch, 2008).
The WPA was not intended as a "full employment" program. Only one household member could be employed under the program (it was usually males), though one does find female heads of households so employed. It should also be noted that state and local governments were required to contribute 10-30% of the costs of the various projects undertaken. Over its life, total spending on WPA projects amounted to about $13.4 billion, roughly 2% of GDP over those years.
And what were those projects? Was this simply a "make work" program that made little difference in the long run? Or, was the WPA integral to the larger economy and its contributions socially useful? A truncated tally follows. (See below for a slideshow of projects under the WPA)
560,000 miles of roads built or improved
20,000 miles of water mains, sewers constructed
417 dams built
325 firehouses built; 2384 renovated
5,000 schools constructed or renovated
143 new hospitals, 1,700 improved
2,000 stadiums, grandstands built
500 landing fields; 1,800 runways (including participation in the construction of LaGuardia Airport, NYC)
State and municipal parks, including the foundation of the extensive California state park system.
100 million trees planted
6,000 miles of fire and forest trails created
Education: Through 1941, 1 million enrolled in adult education courses, 37,000 children in classes and nursery schools; 280,000 received music instruction, 67,000 art instruction.
Libraries were built. These were especially directed toward poor and rural communities.
Zoo buildings constructed
In addition to the above, one should note the WPA's contribution to the cultural life of the country. Under the direction of Hallie Flanagan, the Federal Theatre Project mounted 1,200 productions including 300 new plays. Audiences were estimated at 25 million in forty states, many of whom had never before seen a play. As well, WPA programs included Federal Music, Federal Arts, and Federal Writers' Projects. This latter program produced the most notable "Slave Narrative Collection," consisting of 10,000 pages of interviews with former slaves, a continuing treasure-trove for researchers. Last, let us not forget the famous murals that were produced by artists hired by the WPA. These dot the country from post offices (though these were mainly funded by the Treasury Department through a grant from the government) to college buildings, to government buildings. Included in this array were those painted by Diego Rivera for the City College of San Francisco, Anton Refregier in the Rincon Annex Post Office, San Francisco, and Thomas Hart Benton in the Missouri State Capitol rotunda.
Let us now turn to some numbers and tell something of a story about some of the macro effects of the jobs programs.
As I commented in 'The Wrap' in Friday's column, the gold price got sold off as soon as trading began in the Far East on their Friday morning. It hit its low price tick around 11:30 a.m. Hong Kong time, but rallied back to virtually unchanged just moments before London opened at 8:00 a.m. local time...which was 3:00 a.m. Eastern.
As you know, it was all down hill from there right up until the London p.m. gold fix at 10:00 a.m. Eastern. Once the 'fix' was in, there was a willing seller that sold it down a percent to its New York low of the day, which was $1,624.20 spot.
Gold then regained all that loss by noon Eastern time, only to give most it up by the Comex close ninety minutes later...and then regained it again by the close of electronic trading at 5:15 p.m. in New York.
It was a roller coaster ride within a one percent price range. A tempest in a teapot, perhaps?
Gold closed at $1,639.70 spot...down $8.90 on the day. Despite all the shenanigans, Friday's net volume [126,000 contracts] was only slightly higher than Thursday's net volume, which was 112,000 contracts.
Silver's price action on Friday was a virtual carbon copy of gold's...with the timing of the price changes being identical as well. Silver's low price tick at 10:25 a.m. Eastern was $29.36 spot...and by the close had recovered 41 cents from the low.
Silver closed at $29.77 spot...down 48 cents from Thursday. Net volume was 33,000 contracts..the same as it was on Thursday.
The dollar index opened about 80.80...and then fell to 80.60 by 2:00 p.m. Hong Kong time. It sat at that price until about 8:30 a.m. in London, before rising just under 30 basis points by 8:40 a.m. in New York about five hours later.
Then the dollar really took off to the upside...and by 10:20 a.m. it had tacked on another 75 basis points. This was its high of the day...and from there it gave up about 25 basis points going into the close of trading at 5:15 p.m. Eastern time. The dollar index closed up 69 points.
Except for the New York high in the dollar...which corresponded exactly with the low in gold and silver...it's a bit of a stretch to say that there was much real co-relation between the dollar and the precious metal prices yesterday.
The gold stocks were pretty much slaved to the gold price yesterday...and the HUI finished down 1.40% on the day, but up 4.1% year-to-date.
The silver stocks were down across the board yesterday...and Nick Laird's Silver Sentiment's Index closed lower by 2.19%.
(Click on image to enlarge)
The CME's Daily Delivery Report showed that 38 gold and 23 silver contracts were posted for delivery on Tuesday. And, once again in silver, it was Jefferies delivering on the short side...and the Bank of Nova Scotia and JPMorgan receiving on the long side. The link to yesterday's Issuers and Stoppers Report is here.
There were no reported changes in either GLD or SLV...and the U.S. Mint had no sales report, either.
The silver action over at the Comex-approved depositories just doesn't stop. On Thursday they reported receiving 1,488,261 troy ounces of the stuff...and only shipped 250,774 ounces out the door. The link to that action is here.
The Commitment of Traders Report yesterday was pretty much what I was expecting. The Commercial net short position in silver increased by 3,146 contracts, or 15.73 million ounces...and I'm guessing that a huge chunk of that was the small Commercial traders, Ted Butler's raptors, selling out their long positions to the tech fund shorts as the price rose.
It was almost the same thing in gold, but there wasn't as much of a deterioration as I was expecting...which is certainly OK by me. The Commercial traders only increased their net short position by 4,731 contracts, or 473,100 ounces of gold. It was the raptors once again selling their long positions to the tech fund shorts as the price rose.
Here's another chart from Washington state reader S.A. and, as is usually the case, it requires no further embellishment from me. I have a couple of stories on this further down.
(Click on image to enlarge)
Reader Scott Pluschau has done more T.A. work on the U.S. dollar now that the new COT report was released yesterday. He had this to say in his covering e-mail to me..."COT report showed that the lights are still flashing a warning on the dollar. There is a good chart showing weakness intraday, and a multipoint trend line that has formed on the daily. Bulls don't want to see this trend line break. Commercials have got to know something. Front-running QE3, perhaps?" The link to Scott's blog is here.
With ruthless editing, I've cut the number of stories down to as few as I could.
The big decline in gold and silver prices in late September...plus the decline in the last week of December had absolutely zero to do with the dollar.
China Hoarding of Gold Turns More Traders Bullish. Miners see gold price hitting $2,000 this year. Russian Move Against US Called 'First Shot' Of World War III.
President Obama formally notified Congress on Thursday of his intent to raise the nation's debt ceiling by $1.2 trillion, two weeks after he had postponed the request to give lawmakers more time to consider the action.
Congress will have had 15 days to say no before the nation's debt ceiling automatically is raised from $15.2 trillion to $16.4 trillion.
In a letter to House Speaker John A. Boehner (R-Ohio), Obama wrote that "further borrowing is required to meet existing commitments."
I borrowed this story from Friday's King Report...and it's posted in Thursday's edition of The Washington Post. It's worth skimming...so take the red pill...and then click here.
Private antitrust litigation pitting some five million retailers against Visa, MasterCard, and 13 large banks, has slipped under the radar of many analysts and investors who follow those companies, but the case may deliver a multi-billion dollar shock to bank bulls in the coming months.
Estimates of the potential cost of a settlement of the antitrust case vary dramatically–from a few billion dollars into the hundreds of billions. At least as worrisome to the financial companies, according to Deutsche Bank research, is the risk that a settlement or judge's ruling could take the 2% "interchange" fees banks and card companies charge retailers on credit card transactions to as low as .5%, That would equal the rate in Australia, but still be higher than the .3% charged in the European Union, according to a report by Sanford Bernstein analyst Rod Bourgeois.
The impact of such a change would be several times as costly as the Durbin Amendment, which caps fees banks can charge on debit cards and is one of the new rules most hated by the big banks.
This story appeared in Forbes on Thursday...and I thank reader 'David in California' for sending it along. The link is here.
Seven months after Hurricane Katrina ripped holes in the Superdome's roof in 2005, Louisiana State Bond Commission members made what they were told would be "the best of a bad situation" in financing the stadium's renovation.
Acting against the recommendation of their staff, the commissioners voted for a Merrill Lynch & Co. plan to use debt and interest-rate swaps to pay for the job. While the deal helped keep the National Football League's New Orleans Saints from leaving town -- and the arena got new scoreboards while 12,000 seats were converted to luxury class -- taxpayers became the losers for supporting a winning team.
The cost of financing the work has reached $42 million, almost a quarter of the $187 million spent on Katrina-related repairs and enhancements and three times as much as expected. The deal became so expensive that the state repurchased the debt sold by the New York investment bank to stop the bleeding.
This sounds very similar to what happened to Jefferson County in Alabama. I thank Washington state reader S.A. for this sending this Bloomberg story my way yesterday. Take another red pill and then click here.
There are two stories coming out of New Hampshire. The big story is Mitt Romney. The bigger one is Ron Paul.
Romney won a major victory with nearly 40 percent of the vote, 16 points ahead of No. 2. The split among his challengers made the outcome even more decisive. Rick Santorum and Newt Gingrich were diminished by distant, lower-tier finishes. Rick Perry got less than 1 percent. And Jon Huntsman, who staked everything on New Hampshire, came in a weak third with less than half of Romney's vote. He practically moved to the state — and then received exactly one-sixth of the vote in a six-man contest. Where does he go from here?
But the bigger winner was Ron Paul. He got 21 percent in Iowa, 23 in New Hampshire, the only candidate other than Romney to do well with two very different electorates, one more evangelical and socially conservative, the other more moderate and fiscally conservative.
This op-ed piece was in The Washington Post on Thursday...and I borrowed it from a GATA release yesterday. The link is here.
This was the headline to yesterday's edition of Casey's Daily Dispatch. It's actually the title to the featured article in David Galland's missive yesterday...and it's also your first must read of the day. In fact, it's an absolute must read. I've been around a while...and I never thought I'd read an article such as this, written about the United States...ever!!! This is scary stuff...and the two red pills you took should last you through this essay as well...plus the next one. The link is here.
Everyone knows that the US government is bankrupt and has been for many years. But I thought it might be instructive to see what its current cash-flow situation actually is. At least insofar as it's possible to get a clear picture.
So what can you do about it? Well, actually, there is nothing you can do about it. At least as far as changing the course of history is concerned. The best you can do is to speculate intelligently on further, new distortions that will be cranked into the system, as well as others that are inevitably going to be liquidated.
It seems to me that this is a trend that can no longer be turned around. The US government's budget is, in fact, the biggest thing in the world; it won't be turned around, because it's like a gigantic snowball rolling down a hill. It will only stop when it smashes into the village at the bottom of the valley. The best thing you can do is capitalize on it as well as you can...and get out of its way while you do.
Doug has been preaching this message ever since I heard him speak for the first time about ten years ago. It was excellent advice then...and even more critical today, especially if you live in the United States. This is another absolute must read...and do it before the effects of the pills wear off.
Washington Mutual junior debt holders (WAHUQ.PK) exhaled a little after federal bankruptcy judge Mary Walrath denied a long standing claim raised by Dime Savings Bank (DIMEQ.PK) warrant holders which would have resulted in a $337 million dollar general unsecured claim were it approved. The possibility of such a massive claim against the estate drove junior debt shares down to just a 3 percent recovery in the days prior to the ruling. Shares then surged upwards some 90 percent after the claim was denied and relegated to common equity. A settlement between WMI and DIMEQ later followed, paying DIMEQ $9 million and granting them a subordinated claim of $10 million as well as 2.631% of the reorganized company's shares.
Not every ruling went Washington Mutual's way, however. The judge also upheld a $49.6 million general unsecured claim by Tranquility Master Fund which holds WaMu and WMALT Trust Certificates. WaMu had attempted
It's the middle of January and the New Year euphoria is long in the tooth. The bubbly has settled, the hoopla of big shows such as the Consumer Electronics Show (CES) is done and over with, as are some of the early January analyst conferences (e.g. the Needham Growth Conference) that tend to focus on vision and hope. You're feeling a bit nervous with the gains you've had this month, and are nervous about recent pronouncements such as the spectre of a Greek Catastrophe. What's one to do to play defense without hiding in a bunker? In the past there was a set playbook for defense - sectors like drugs, staples and tobacco. Now drugs have pipeline issues, staples such as P&G (PG) have the uncertainty of consumers 'downshifting' to white label brands, and tobacco and litigation seem to be eternally friendly.
HOUSTON -- Just below is this week's closing table followed by the CFTC disaggregated commitments of traders (DCOT) recap table for the week ending January 13, 2012.
If the images are too small click on them for a larger version.
Vultures, (Got Gold Report Subscribers) please note that updates to our linked technical charts, including our comments about the COT reports and the week's technical changes, should be completed by sometime Monday evening. We are planning a full Got Gold Report for this weekend, which should also be delivered to members by Monday evening.
As a reminder, the linked charts for gold, silver, mining shares indexes and important ratios are located in the subscriber pages. In addition Vultures have access anytime to all 35 of our Vulture Bargain (VB) and Vulture Bargain Candidates of Interest (VBCI) tracking charts – the small resource-related companies that we attempt to game here at Got Gold Report. Look for new commentary often as we are making frequent notations in the tracking charts during this fantastic negative liquidity aftermath and post tax loss selling superb bargain hunting environment.
Remember that the linked charts on the subscriber pages are always the first place to look for new commentary at GGR. In the future we intend to rely more on the charts to communicate, especially when it comes to our own trades.
Continued…
Gold and Silver Disaggregated COT Report (DCOT)
In the DCOT table below a net short position shows as a negative figure in red. A net long position shows in black. In the Change column, a negative number indicates either an increase to an existing net short position or a reduction of a net long position. A black figure in the Change column indicates an increase to an existing long position or a reduction of an existing net short position. The way to think of it is that black figures in the Change column are traders getting "longer" and red figures are traders getting less long or shorter.
All of the trader's positions are calculated net of spreading contracts as of the Tuesday disaggregated COT report.
(DCOT Table for Friday, January 13, 2012, for data as of the close on Tuesday, January 10. Source CFTC for COT data, Cash Market for gold and silver.)
*** We will have more in the linked technical charts for Vultures by Monday evening.***
You'd think Australian stock market would be doing rather well with:
A narrow escape from the Great Recession of 2008
The resources boom
Low unemployment
Government debt to GDP at one third the OECD average
Four big banks amongst the 25 world safest according to Rabobank
The world's best treasurer in Wayne Swann, according to Euromoney
But how is the Aussie index ASX200 really holding up?
The charts below compare the performance (by percentage gain) of the ASX200 (in blue) to four of its peers. The American S&P500 (in red), Hong Kong's Hang Seng (green) and the British FTSE (gold). The three charts compare them over 1, 2 and 5 years. The further back you go, the worse the ASX200 appears to do.
Over the last year, only the Chinese have outdone us on the downside. That stands to reason if you see Australia as a safe way for foreigners to invest in China. If China falls, so should we.
Over two years, the story is similar. Except we look just as bad as the Chinese instead of almost as bad. And we almost never managed to post a gain during the whole two years!
All of a sudden, the Chinese are on top of the pile (but still down over the period). And the ASX200 is the worst performer out of the four indices. Now, admittedly, some of the European exchanges we didn't include in the chart have fared considerably worse. But they have sovereign-debt crises to deal with.
This brings us to today's Daily Reckoning title, brought to you by the movie 'The Sting'. The gist of the movie is that a group of people put together a fake but seemingly credible Tote. That's a place to gamble on horses. Anyway, they convince people it's real by creating fake races. 'This is a class joint' the manager tells his customers. Of course, it helps that staff happen to give gullible gamblers incredibly accurate tips on which horse will win. For a short time, the few real punters at the Tote make money from the tips. They are drawn in, thinking they've discovered a free lunch. Next thing they know, they lose several times more money than they won as every single tip proves wrong.
At least that's how we remember the movie. And after reviewing the charts above, it should sound familiar. You've been told the stock market - and house prices - always go up. But it only takes a market crash to bring reality storming back. Meanwhile, you've been tricked into tying up your capital in someone else's business, at someone else's brokerage, or someone else's fund. All at a cost to you.
Sure, just like at a casino, there are some winners. But are the odds of relying on the capital gains of the broader market in your favour? And even if they are, is it worth the risk?
That's the big problem with relying on capital gains in the stock market. They can disappear when you need them. Which is why Slipstream Trader Murray Dawes reckons his risk-management techniques are the key to his success, not just his ability to spot trades.
'The three things I want to achieve with my trading are lowering the risk on a trade as quickly as possible, continually taking money off the table to ensure my P+L is heading in the right direction and also exposing myself to large upside if a stock continues to trend. My risk management system is the cornerstone to achieving these three things.'
Murray has been suspiciously quiet these last few days. To find out why, you can watch his free video here. But, as his subscribers know, this is the quiet before the storm. Murray has a habit of sending out no new trades for weeks before pouncing on the market with a flurry of carefully considered positions. The whole office tenses up when he goes on a new rampage.
But need it be so? Aren't there investment opportunities that give you a peace of mind instead of something to worry about? We hope to answer that question with a resounding 'yes' in coming months. We'll keep you posted on how.
But why is the ASX200 performing poorly?
So who is to blame for Australia's poor stock market performance?
It's probably the Aussie dollar's fault. It's up significantly across each of the time periods we mentioned above. In other words, gains in the currency have cancelled out moves in stock prices.
This takes a moment to understand. Usually stock markets move in similar ways. So when they diverge, people go looking for a reason. In this case, the strengthening Aussie dollar could explain much of the divergence. Foreign investors in Australia made their gains in the Australian currency instead of the Australian stock market, but the gains were similar to their domestic stock market.
This shows the importance of factoring economics into your investment decisions. In two senses. Firstly, your returns measured in foreign currencies haven't been all that bad. If you've been holidaying overseas or buying Christmas presents online, you'll know that means things are cheaper. But that's small comfort when you look at the returns from your super account.
That brings us to the second sense economics should factor into your investment decisions: you should be prepared for things like currency movements, domestic and foreign recessions, and asset price bubbles. They can make or break your investment returns.
To be mentally prepared, you might want to read something like the Daily Reckoning Australia. But we'll leave a discussion of why to another day.
Instead, how might you be able to make your portfolio benefit from economic trends, events and ideas?
This is where the world of ETFs comes into its own. Exchange Traded Funds are tradeable on a stock exchange, just like stocks. But they represent a holding of assets. Maybe a commodity like gold. Or a currency like the US dollar. Most of the time the price of the ETF simply represents the value of the assets it holds divided by the amount of shares on issue. If a gold ETF holds a billion dollars of gold and has a million shares, the ETF share price will be around $1000.
But some ETFs are a little more sophisticated. For example, this ETF 'aims to track the performance of the price of gold bullion, with a currency hedge against movements in the AUD/USD exchange rate'. In other words, if we understand it correctly, an Aussie gold investor worried about a gain in the Aussie dollar's exchange rate outweighing any gains in gold could have bought this ETF. If the gold price rises in USD terms, the price of the ETF on the ASX will go up about as much, regardless of the Aussie dollar's performance.
That's the theory anyway. BetaShares, which set up the ETF we just described, has a couple of other currency hedged commodity ETFs, including oil and agriculture.
Now we're not sure about these ETFs just yet. In a world of extreme uncertainty, depending on slightly odd and unproven investment mechanisms might not be such a good idea. But ETFs do open up the world of macro investing to the average Joe. Meaning anyone with a brokerage account can easily place bets on economic trends like currencies and commodities.
But back to the underperformance of the ASX200 relative to foreign indices. We suspect the financial world has played a cruel joke on us Australians. You see, a rise in the Aussie dollar has depressed our stock market. (At least, let's assume for a moment that's the case.) Does this mean if the Aussie dollar collapses our market will soar?
Our bet is Aussie investors will be disappointed again in that scenario. You see, the conditions under which the Aussie dollar would collapse aren't exactly bullish for the stock market. Falling resource demand, a China property bubble collapse, an Aussie property bubble collapse... None of these are good for the stock market. But they would send the Aussie dollar falling. Perhaps Aussie stocks might fall less than they would without a currency adjustment. Our exports would do well with a lower dollar, for example. But the damage from falling asset prices would still be frightening.
Perhaps this lose-lose scenario has been keeping foreign investors out of the Aussie market, depressing demand and price. The currency risk and the price risk are both peering over a cliff as far as foreign investors are concerned. And without them, the Aussie market can't be expected to do very well.
The United States government has decided it can no longer afford to fight two land wars at the same time. You may have missed that little news item from last week. And if you didn't miss it, you'd probably agree that for a nation over $15 trillion in debt, it's going to be pretty hard to pay for two big land wars, much less fight them.
Like trying to patch a nuclear reactor with scotch tape and chewing gum, the central banks of the world's leading economies are trying to Spackle over cracks in the global monetary system with a variety of desperate tactics and measures.
It's all happening, Fellow Reckoner. Gold, stocks, oil...all have rallied to important highs. That's what the papers say anyway, so it must be true. Gold has "reclaimed the rally," reported one outfit. The Midas Metal was trading for around $1,634 an ounce last we checked, up $24 in as many hours.
All too often in the world of money we think of things in the abstract. Money is after all an abstract concept. But at its core, economics is about human beings going about their daily business. We make choices. And these choices filter through into the financial world.
You can find a coin shop in nearly every town in the United States. The proprietor is unlike any you will find in any other store. He is unusually steeped in history, intensely aware of the larger context of the passing economic and political scene. This is because if it is a good shop, you will find the whole history of modern life on exhibit, and learn more from looking than you find in a multivolume history.
There they are on display: coins from all lands. Why are they worth more than the coins in your pocket? Because they are old? That's part of it. There are some new coins here that are also just as valuable as the old ones.
What is critical is that they are made of gold and silver. You can pick them up and tell the difference. They are heavy. Stack them and let them fall on each other and they make a different sound from the coins that usually rattle around in your pocket.
It strikes everyone and anyone immediately. Somehow these coins are "real"; the coins we use today are not. But what does this really mean? And what does it imply?
The value of the coins amounts to far more than their marked value. Even dimes before a certain date sell for 10 and 15 times face value. The larger coins can be quite expensive.
What is real here is their substance, not the printing on the outside. This is the opposite of modern coins, the substance of which is completely irrelevant: All that matters is what is printed on the outside.
So the use of the term "real" here parallels how we use this term in any other context. Reality TV is said to provide the unvarnished truth about what people really do. We say someone should "get real" if we suspect that his thought or behaviour is a mask or a blindfold obscuring a more-obvious truth.
So it is with coins. The new coins we use in transactions are not real. They are wearing a mask, a disguise, one put on by the state. More absurdly, the state tells us not to look at the reality, but rather to trust God that all is right with the money in the realm.
The old coins, in contrast, are precisely what they say they are and, therefore, have nothing to hide. There are no invocations that require a leap of faith. The truth is found on the scale and is told in ounces.
The gold ones are, of course, the ones you really want to hold. Their value reflects the metal content. Melt them, restamp them, make them into jewellery and they are still worth no less than the market value of the metal.
And who decides what the values of these old coins are? The coins might bear the likeness of a politician. They might bear the name of the nation-state. But these pictures and slogans are merely interlopers on the real point. What you hold is valuable not because some legislature, Treasury Department or central bank says it is valuable. Its worth was and is dictated by the market, which is to say, the choices and values of human beings. No government can add to or take away this value except by physically manipulating the coin itself.
Not only that. If you dig deep enough in the coin shop, you might run across coins that were not minted by governments at all, but by private manufacturers. In the early years of the Industrial Revolution, this was the way coins were made in Britain. Not by the Royal Mint, but by entrepreneurs no different from any other. George Selgin tells the whole story in his aptly named book, Good Money.
It turns out that making money is a business like any other, not something that only governments do. In a free world, it would be done entirely by private enterprise. The same is true of exchanging money. Some of the world's first great fortunes were made this way, profiting from the buy/sell spreads in coinage markets. Today, the business is the same in some respects, and one can see the appeal of it all. Bless those who sustain it and believe in it.
So long as this good money is in your hands, it is your independent store of wealth. There are no taxes due, no withdrawals required, no forms to fill out. It is the physical embodiment of independence. It gives you freedom. It secures your rights. And because this coin is valued not by the nation-state, it rises above it and extends beyond it. Its value is recognised the world over, and not because the U.N. has proclaimed it, but rather because it is something everyone on the planet agrees on.
Geographic mobility is only part of it. Look at the dates on the older coins: 1910, 1872, 1830, 1810 and earlier and earlier. They are still beautiful because they are durable. Their value is not diminished over time, as with just about everything else we know about; rather, it increases over time. And by its very nature, gold protects your investment from the depredations of modern life.
How they inspire the imagination! What was the world like when such coins served as money? The economy wasn't managed by some central authority. It managed itself from within, by the buying and selling decisions of economic agents themselves. The coins were selected by the market to serve as the facilitator of exchange, the things by which we were permitted to rise above the limits of barter.
They made possible calculation between goods and services that were as widely diverse as the whole of the human project, and reveal what was profitable and what was not. So these coins made it possible to organise the world's resources into lines of production that served society in the most-efficient way.
And how did the politicians figure into this mix? When they got their hands on these coins, they could do terrible things. But it was rather difficult for them to get them. They had to demand that the citizens fork over the coins or else, which is to say, they had to tax people. You have to have a pretty good reason to do this. Or the lie you tell has to be pretty darn compelling. You can only tell fibs so many times before people catch on.
If this is the only money that circulates, the aspiring leviathan state faces a serious limit on its capacity to expand - a limit imposed by physical reality and the unwillingness of most people to give up something for nothing.
This is why every state is so anxious to see money substitutes circulate widely, preferably in the form of paper that can be made at will. If that same state can get banks to cooperate in creating more paper than can be redeemed by gold and silver coins, it can begin to habituate the population to the idea of a "fiat" currency, that is, money invented out of whole cloth.
Even better for the state is a system that completely separates "paper money" from its historical roots in good money. Then there are no limits at all to how much money it can make to fund itself and pay its friends, even if that means that money in general becomes ever less valuable.
And here we have the short history of how money came to be destroyed and how the modern world came to host the ghastly leviathans that dominate it. Here is the basis of destructive and unnecessary wars that last and last, the character-shredding welfare state and the swarms of bureaucrats who run our lives in every respect. It all comes down to the way money was destroyed.
You can tell from looking at the dates on coins that all of this happened surprisingly recently. The process began in the early 20th century with the cartelization of the banking system so that banks could loan money out of deposits they promised to pay on demand. The government's own debts would be paid no matter what. This helped with the war - taxes don't cut it when it comes to funding global war - so the financial system was encouraged to set aside its usual concerns over stability, since it was now guaranteed not to fail.
The process continued with the attack on gold during the New Deal under the influence of people like John Maynard Keynes, who believed that paper money would usher in a new utopia of a government-managed economy. So desperate was FDR to have people stop trading good money that he demanded it all be turned in; he said this was necessary to stop the Depression. Then the paper money revolution was furthered by people like Milton Friedman, who believed that a pure paper money would somehow bring about a stable price level - through a formula that may have looked good on paper but failed to account for the realities of politics.
In the end, we ended up on the other side of the great divide between freedom and tyranny, all symbolized by the contrast between the coins of the past and the coins of the present. It is reality versus fiat, independence versus dependence, value that lasts versus value that is the whim of the transitory political class.
You discover all of this when you walk into the coin shop.
Have a conversation with the proprietor, who tends to be of a type: perhaps a bit crusty, but highly knowledgeable and independent-minded. At his office, he lives amidst this history. He is surrounded by the truth about money that most people never discover. He is daily faced with the beauty of what once was, and perhaps, too, he imagines the possibility that it could be again. He is not usually the despairing type, either. He sees the difference between what is permanent and what is transitory. If you take the time, you can learn from him.
If you trade with him, you can enter into his world of knowledge and partake in the ancient truth about money, politics and civilization. Owning these coins helps grant some sense of independence to you, too. You will possess a store of wealth not subject to wild bubbles, state-manufactured inflations and political whims. It is a kind of privatized secession.
Is it any wonder that people who enter this world think differently from others? Their blinders are off. They see what is real and true. They no longer believe in the great modern lie that the state is our wise master, in whom we should trust our very lives. The owner of gold and silver coins is just a bit less attached to the state than others. And should a time of great crisis come and you look among the survivors, you can be pretty sure that pre-eminent among them will be those who love the coin shop as much as I do.
Publisher's Note: Jeffrey Tucker is the publisher and executive editor of Laissez-Faire Books.
The European debt crisis has just gone to an entirely new level. Just when it seemed like things may be stabilizing somewhat, we get news of huge financial bombs being dropped all over Europe. Very shortly after U.S. financial markets closed on Friday, S&P announced credit downgrades for nine European nations. This included both France and Austria losing their cherished AAA credit ratings. When the credit rating of a country gets slashed, that is a signal to investors that they should start demanding higher interest rates when they invest in the debt of that nation. Over the past year it has become significantly more expensive for many European nations to borrow money, and these new credit downgrades certainly are certainly not going to help matters. Quite a few financially troubled nations in Europe are very dependent on the ability to borrow huge piles of cheap money, and as debt becomes more expensive that is going to push many of them over the edge. Yesterday I wrote about 22 signs that we are on the verge of a devastating global recession, and unfortunately that list just got a whole lot longer.
Over the past several months we have seen quite a few credit downgrades all over Europe, but we have never seen anything quite like what S&P just did. Standard & Poor's unleashed a barrage of credit downgrades on Friday....
-France was downgraded from AAA to AA+
-Austria was downgraded from AAA to AA+
-Italy was downgraded two more levels from A to BBB+
-Spain was downgraded two more levels
-Portugal was downgraded two more levels
-Cyprus was downgraded two more levels
-Malta was downgraded one level
-Slovakia was downgraded one level
-Slovenia was downgraded one level
This is really bad news for anyone that was hoping that things in Europe would start to get better. Borrowing costs for many of these financially troubled nations are going to go even higher.
In addition, there was another really, really troubling piece of news that came out of Europe on Friday.
It was announced that negotiations between the Greek government and private holders of Greek debt have broken down.
The Institute of International Finance has been representing private bondholders in negotiations with the Greek government about the terms of a "voluntary haircut" that is supposed to be a key component of the "rescue plan" for Greece.
Greece desperately needs private bondholders to agree to accept a "voluntary haircut" of 50% or more. Without some sort of an agreement, the finances of the Greek government will collapse very quickly.
For now, negotiations have failed. There is hope that negotiations will resume soon, but Greece is rapidly running out of time.
The Institute of International Finance issued a statement on Friday which said the following....
"Unfortunately, despite the efforts of Greece's leadership, the proposal put forward … which involves an unprecedented 50% nominal reduction of Greece's sovereign bonds in private investors' hands and up to €100 billion of debt forgiveness — has not produced a constructive consolidated response by all parties, consistent with a voluntary exchange of Greek sovereign debt"
The IIF says that negotiations are "paused for reflection" right now, but they are hoping that they will be able to resume before too long....
"Under the circumstances, discussions with Greece and the official sector are paused for reflection on the benefits of a voluntary approach"
Something needs to be done, because Greece is experiencing a complete and total financial meltdown.
Back at the end of July, the yield on one year Greek bonds was sitting at about 40 percent. Today, the yield on one year Greek bonds is up to an astounding 396 percent.
That is how fast these things can move when confidence disappears.
Those living in the United States should keep that in mind.
Unfortunately, Greece is not the only European nation that is completely falling apart financially.
We aren't hearing much about it in the U.S. media, but Hungary is a total basket case right now. The credit rating of Hungary was reduced to junk status some time ago, and now the IMF and the EU are threatening to withhold financial aid from Hungary if the Hungarians do not run their country exactly as they are being told to do.
In particular, the IMF and the EU are absolutely furious that Hungary is trying to take more political control over the central bank in Hungary. The following is from an article in the Daily Mail....
The European Union has stepped up pressure on Hungary over the country's refusal to implement austerity policies and threatened legal action over its new constitution.
The warnings escalated the standoff between Budapest and the EU, as Hungary negotiates fresh financial aid from Europe and the International Monetary Fund.
Over the past months, the country's credit rating has been cut to junk by all three major rating agencies, unemployment is 10.6 percent and the country may be facing a recession.
But bailout negotiations broke down after Budapest refused to cut public spending and implemented a new constitution reasserting political control over its central bank.
Slovenia is a total mess right now as well. The following comes from a recent article posted on EUObserver.com....
Slovenia's borrowing costs have reached 'bail-out territory' after lawmakers rejected the premier-designate, putting the euro-country on the line for further downgrades by ratings agencies.
Zoran Jankovic, the mayor of Slovenia's capital Ljubljana, fell four votes short of the 46 needed to be approved as prime minister by the parliament, with the country's president set to re-cast his name or propose someone new within two weeks.
Some time ago, I warned that 2012 was going to be a more difficult year for the global economy than 2011 was.
Well, things are certainly starting to shape up that way.
Europe is heading for some really hard times. What is about to happen in Europe is going to shake the entire global financial system.
Those that live in the United States should take notice, because the U.S. financial system is far more fragile than most people believe.
Our banking system is a gigantic mountain of debt, leverage and risk and it could fall again at any time.
In addition, the U.S. debt problem is bigger than it has ever been before.
For example, did you know that the federal government is on a pace to borrow 6.2 trillion dollars by the end of Obama's first term in office?
That is more debt than the U.S. government accumulated from the time that George Washington became president to the time that George W. Bush became president.
For now the U.S. government is still able to borrow giant piles of super cheap money, but such a situation does not last forever.
Just ask Greece.
Already there are indications that foreigners are starting to dump large amounts of U.S. debt. If this trickle becomes a flood things could become very bad for the United States very quickly.
We are on the verge of some very bad things. The kinds of "financial bombs" that we saw dropped today are going to become much more frequent. As governments, banks and investors scramble to survive, we are going to see extreme amounts of volatility in the financial marketplace.
Things are not going to be "normal" again for a really, really long time.
Hold on tight, because 2012 is going to be a very interesting year.
If you missed last week's episode of Porter's new radio show, Stansberry Radio, be sure to take some time this weekend to listen to it.
The episode features candid interviews with two fantastic guests -- former presidential candidate and media magnate Steve Forbes, and S&A master trader Jeff Clark -- along with Porter's outrageous predictions for 2012, and a new feature suggested by listeners that you don't want to miss.
France was stripped of its top credit rating by Standard & Poor's and banks suspended talks with Greece over debt restructuring, the first blows this year to efforts aimed at stemming Europe's fiscal turmoil.
France's AAA rating will fall by one level at S&P, Finance Minister Francois Baroin told France 2 television today. Slovakia, Italy, and Austria are among other countries to be downgraded, European officials said. Germany will keep its top rating, a person familiar with the matter said. S&P may release its report later today.
The decisions came at the end of a week in which signs grew that Europe's woes may be cresting as borrowing costs fell, evidence of economic resilience emerged and the European Central Bank said it had quelled a credit crunch at banks. The immediate impact on French and Italian borrowing costs was limited, with the yield on 10-year government bonds rising three basis points and one basis point, respectively.
"It's a reduction of one level, it's the same level as the U.S.," Baroin said. "It's not a catastrophe."
The euro today fell to its weakest in 16 months against the dollar, declining to $1.2665. The yield on Germany's benchmark 10-year bund slipped seven basis points to 1.759% and earlier touched a record low.
"We've had a few calmer weeks with sentiment improving, but the situation was vulnerable to re-escalation," said Nick Kounis, head of macro research at ABN Amro Bank NV in Amsterdam. "There are enough challenges ahead which could be fresh triggers for the crisis."
Third Year
European leaders are struggling to tame a crisis now in its third year and convince investors they can restore budget order. Greece's creditors today announced they had failed to agree with its authorities about how much money investors will lose by swapping the nation's bonds, increasing the risk of the euro-area's first sovereign default.
While confirmation that Germany, Europe's biggest economy, retains its top rating could lessen fallout, the French and Austrian downgrades threaten the potency of the region's main bailout fund, which currently has 440 billion euros ($558 billion) to spend.
The European Financial Stability Facility, which is funding rescue packages for Greece, Ireland, and Portugal partially with bond sales, owes its AAA rating to guarantees from the region's top-rated nations.
The French downgrade and refusal by governments to provide more credit enhancements would reduce the fund's lending capacity by around a third to 293 billion euros, Trevor Cullinan, S&P's director of sovereign ratings, said last month.
EFSF Power
"It will be interesting to see what the strategy will be regarding the EFSF," said David Schnautz, a fixed-income strategist at Commerzbank AG in London. Downgrades could "limit the volume of AAA rated EFSF paper that could be issued, or the EFSF could begin to issue non-AAA."
Downgrades sometimes lack bite. The yield on the benchmark U.S. government bond fell to a record 1.6714 percent on September 23, seven weeks after S&P withdrew its AAA rating for the first time, citing the nation's political process and a failure to tackle a record budget deficit.
Today's impasse in Greece comes three months since officials and creditors agreed to implement a 50% cut in the face value of the country's debt, with a goal of paring Greek's borrowings to 120% of gross domestic product by 2020. Unresolved is the coupon and maturity of the new bonds to determine the total losses for investors.
Greek Impasse
Proposals put forward by a committee representing financial firms have "not produced a constructive consolidated response by all parties," the Washington-based Institute of International Finance said in a statement today. "Discussions with Greece and the official sector are paused for reflection on the benefits of a voluntary approach."
The government said the two sides will reconvene discussions in five days. European governments have been pushing for the Greek debt to carry a coupon of 4%, a person with direct knowledge of the negotiations said this week. Private bondholders said they would accept those terms for a period of time if they were able to get a bigger payout later as Greece's economy recovered, the person said.
The Greek bond due October 2022 rose, pushing the yield six basis points lower to 34.36% at 5:20 p.m. London time. The price climbed to about 20.5% of face value.
If you're a frequent reader of the blog, you may have noticed that it has slowed down a bit over the last couple of months. This isn't because of lack of interest or topics to discuss. It's rather quite the contrary. The reason is, I've finally made it out of Argentina, and have been living in Northern Ireland for the last month.
Timing was actually pretty good. We have been meaning to leave Argentina for a long time, thinking mostly of USA. Because of troubles getting a visa to reside in USA, we've been postponing the move for many years, trying to find a sponsor or finding some way to get to USA...
Finally in 2011, we had enough and decided to leave one way or another...
Googling on the best country to raise a family, I came across Northern Ireland. While not perfect (like any place on Earth), the more I read about it the more I liked it... so by mid 2011, we were already making up our minds about it.
At first, we were going to leave in January 2012, but the situation in Buenos Aires getting worse made us jump out a bit sooner than planned. Hernan's murder was another thing that scared us a lot, especially since we had heard so many stories of people getting robbed or hurt right before they managed to leave the country...
There was also [Argentine President] Cristina [Fern&cute;ndez de Kirchner]'s reelection coming, and we knew things were going to get worse after she got reelected. It was scary to see her take the draconian measures she took not a week after getting reelected.
I can say without a shadow of a doubt that our preparedness and survival mindset made all the difference in the world for us during those weeks before leaving...
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