Dollar Continues to Control Gold, Oil & Equities

November 15th, 2010

Over the past few months it seems as though everything has been tied to the dollar. Simple inter-market analysis makes it obvious that almost everything in the financial market eventually has an affect on stocks and commodities in some way. But recently trading has really been all about the dollar. If you watch the SP500 and gold prices you will notice at times virtually every tick the dollar makes directly affects the price and direction of gold and the SP500 index.

Let’s take a look at some charts to see the underlying trends and what they are telling us…

Dollar Index – Daily Chart

As you can see the trend is clearly down. Currently the dollar is trying to find a bottom as it bounces and pierces the previous high. The question everyone wants to know is if the dollar is about to rally and reverse trends or was Friday’s pierce of the October high just a shake out before the next leg down?

Back in late August the dollar pierced the July high on an intraday basis (shake out) just before prices dropped sharply. I think this could very easily happen again but when you see what gold volume is doing, it’s a different story.

Those who follow me closely know I focus on trading with the underlying trend, but manage my risk by trading smaller position sizes when the market has more uncertainty than normal with is what we are currently experiencing.

GLD – Gold Fund – Daily Chart

Gold and the dollar are almost inverse charts when comparing the two. Gold happens to be testing a key support level and its going to be interesting to see how the price holds up going forward. The one thing that has me concerned is the amount of selling taking place. The chart shows heavy volume selling and could be warning us of a possible trend change in the dollar, gold, oil and equities in the coming weeks.

Again the trend for gold is still up, so I would not be trying to short it at this time, rather look to buy into dips until the market trend proves us wrong. That being said, with the selling volume giving off a negative vibe and the fact that gold has rallied for such a long time, any new positions should be very small…

Crude Oil – Daily Chart

Oil looks to be forming a possible cup and handle pattern. If the Dollar continues to consolidate for another 1-3 weeks and breaks down, then we should see the price of oil trade in the range shown on the chart and eventually breakout to the upside. I have a $95-100 price target on oil if the dollar continues to trend down. Until we see some type of handle form here I am not trading oil.

SPY – SP500 Fund – Daily Chart

The equities market looks to have had one of those days which spooked the herd. Friday the price dropped triggering protective stops with rising volume. I was watching the intraday chart as the SP500 broke below the weeks low, and this triggered protective stops which can be seen on the 1 minute charts. In an uptrend I prefer watching stops get triggered because it means traders are getting taking out of long positions and most likely looking to play the short side. When the masses become bearish on the market, that’s when I start looking to play the upside in a bull market (buy the dip).

The chart below clearly shows the days when the shake outs/running of the stops took place. Most traders were exiting their positions and/or going short because the chart looked bearish. One thing I find that helps my trading is that if the chart looks rally scary (bearish) then I start looking at a shorter term time frame for a possible entry point to go long using price and volume analysis.

Weekend Market Trend Trading Conclusion:

In short, I feel the market is at a critical point which will trigger a very strong movement in the coming days or weeks. Because the dollar, gold, oil and the equities market have had such big moves I think trading VERY DEFENSIVE is the only way to play right now. That means trading small position sizes. Right now I am trading 1/8 – 1/4 the amount of capital I generally use on a trade. Meaning if I typically put $40,000 to work, right now I am only taking positions valued at $10,000.

Remember not to anticipate trend reversals by taking a position early. Continue to trade with the underlying trend with small positions or skip a couple setups if you feel strongly of a possible reversal. Once the trend reverses and the volume confirms, only then should you be playing the new trend. Picking tops can be expensive and stressful.

Get My Daily Pre-Market Trading Analysis Videos, Intraday Updates & Trade Alerts Here: www.GoldAndOilGuy.com

Chris Vermeulen

Read more here:
Dollar Continues to Control Gold, Oil & Equities




Chris Vermeulen is a full time daytrader and swing trader specializing in trading (NYSE:GLD), (NYSE:GDX), XGD.TO, (NYSE:SLV) and (NYSE:USO). I provide my trading charts, market insight and trading signals to members of my newsletter service. If you have any questions feel free to send me an email: Chris@TheGoldAndOilGuy.com This article is intended solely for information purposes. The opinions are those of the author only. Please conduct further research and consult your financial advisor before making any investment/trading decision. No responsibility can be accepted for losses that may result as a consequence of trading on the basis of this analysis.

Commodities, ETF

Top ETF Gainers of the Week to Watch

November 15th, 2010

In a down week for indices world-wide, the top ETF gainers for the period were primarily short ETFs, with some strength in the energy sector evident.  Oddly enough, following the widely anticipated QE2 announcement, Treasuries have been selling off, presumably because markets had widely anticipated the announcement and were perhaps hoping for something more substantial on the order of another full Trillion dollars in purchases.

Those who foresaw the government debt reversal and shorted Treasury ETFs had a good week.  Meantime, gold and silver had wild swings, with silver’s move initially precipitated by margin requirement surprise announcements, but further bolstered by US Dollar strength in what appears to be the next Euro crisis – Ireland.

Elsewhere, Obama’s trip abroad failed to yield a free trade agreement with South Korea, there was much criticism from abroad on the US QE2 initiative, there were some really shocking cuts recommended from the US deficit panel, and the tech bellwether Cisco (CSCO) saw its shares hammered in an earnings call in which its outlook was less than hopeful.  With these events, we saw the following top performing ETFs in both the non-leveraged and leveraged segments:

Non-Leveraged ETFs

GAZ – Barclays iPath Natural Gas ETN – Up 11% – Energy has been a hot story of late, even with other commodities taking a breather this week.  This natural gas ETN (exchange traded note) has been moving quickly, but note that ETNs can trade at a premium to the net asset value of their underlying assets, and GAZ is showing a premium of over 20%.  A reversion to the mean alone would surprise investors.  GAZ is actually down 38% YTD.

VXX – iPath S&P 500 VIX Short Term Futures ETN -Up 7% – This ETN trades on the VIX, otherwise known as the fear index.  In any down week, one could anticipate VXX will show a positive return.  This often makes for a good long trade when markets are collapsing and volatility is spiking, but as a long-term investment, VXX isn’t really suitable for most portfolios.  Volatility is not an asset class and can’t reasonably be assumed to appreciate indefinitely.  YTD, VXX is down over 65%.

XOP – S&P Oil and Gas Exploration – Up 3% - This ETF was up on both stronger oil prices (aside from Friday) and M&A activity in the sector, including Chevron (CVX) and Atlas (ATLS). With multinationals flush with cash, investors are certainly speculating on more such activity.  XOP is up 16% on the year.

Leveraged ETFs:

DRV - Direxion Real Estate Bear 3X – Up 15% – Real estate outfits took it on the chin last week in the face of more downward home price data in many metro markets and no signs of life in the economy at large.  With more on leveraged ETF performance below, note that DRV has lost 2/3 its value just YTD.

EDZ - Direxion Emerging Markets Bear 3X – Up 13% – With emerging markets tending to be more volatile than western markets, many countries in the emerging markets sectors showed huge losses on the week on the heels of China trying to cool things down with further rate increases and global jitters over the latest Greece in the EU – Ireland.  Given the strength we’ve seen overall for emerging markets on the year, the 3X inverse EDZ is down over 50% YTD.

ERX – Direxion Energy Daily 3X – Up 4% – One of the sole long ETF sectors on the week, ERX gained on the heels of oil and natural gas continuing to rise, driving exploration and refiners higher.  As mentioned above, with some M&A activity in the sector, speculation on other deals drove shares of many firms higher as well, in spite of a drop in oil prices on Friday.

* I always highlight that leveraged ETFs are undesirable as  long-term investment due to the decay in value that occurs over time from daily resets.  This is a mathematical certainty that investors often don’t research or understand up front, check out real-life example leverage ETF decay examples showing why they continuously reverse split for more.

Disclosure: No positions in any ETFs for equities referenced in article.

Commodities, ETF, Real Estate

Top ETF Gainers of the Week to Watch

November 15th, 2010

In a down week for indices world-wide, the top ETF gainers for the period were primarily short ETFs, with some strength in the energy sector evident.  Oddly enough, following the widely anticipated QE2 announcement, Treasuries have been selling off, presumably because markets had widely anticipated the announcement and were perhaps hoping for something more substantial on the order of another full Trillion dollars in purchases.

Those who foresaw the government debt reversal and shorted Treasury ETFs had a good week.  Meantime, gold and silver had wild swings, with silver’s move initially precipitated by margin requirement surprise announcements, but further bolstered by US Dollar strength in what appears to be the next Euro crisis – Ireland.

Elsewhere, Obama’s trip abroad failed to yield a free trade agreement with South Korea, there was much criticism from abroad on the US QE2 initiative, there were some really shocking cuts recommended from the US deficit panel, and the tech bellwether Cisco (CSCO) saw its shares hammered in an earnings call in which its outlook was less than hopeful.  With these events, we saw the following top performing ETFs in both the non-leveraged and leveraged segments:

Non-Leveraged ETFs

GAZ – Barclays iPath Natural Gas ETN – Up 11% – Energy has been a hot story of late, even with other commodities taking a breather this week.  This natural gas ETN (exchange traded note) has been moving quickly, but note that ETNs can trade at a premium to the net asset value of their underlying assets, and GAZ is showing a premium of over 20%.  A reversion to the mean alone would surprise investors.  GAZ is actually down 38% YTD.

VXX – iPath S&P 500 VIX Short Term Futures ETN -Up 7% – This ETN trades on the VIX, otherwise known as the fear index.  In any down week, one could anticipate VXX will show a positive return.  This often makes for a good long trade when markets are collapsing and volatility is spiking, but as a long-term investment, VXX isn’t really suitable for most portfolios.  Volatility is not an asset class and can’t reasonably be assumed to appreciate indefinitely.  YTD, VXX is down over 65%.

XOP – S&P Oil and Gas Exploration – Up 3% - This ETF was up on both stronger oil prices (aside from Friday) and M&A activity in the sector, including Chevron (CVX) and Atlas (ATLS). With multinationals flush with cash, investors are certainly speculating on more such activity.  XOP is up 16% on the year.

Leveraged ETFs:

DRV - Direxion Real Estate Bear 3X – Up 15% – Real estate outfits took it on the chin last week in the face of more downward home price data in many metro markets and no signs of life in the economy at large.  With more on leveraged ETF performance below, note that DRV has lost 2/3 its value just YTD.

EDZ - Direxion Emerging Markets Bear 3X – Up 13% – With emerging markets tending to be more volatile than western markets, many countries in the emerging markets sectors showed huge losses on the week on the heels of China trying to cool things down with further rate increases and global jitters over the latest Greece in the EU – Ireland.  Given the strength we’ve seen overall for emerging markets on the year, the 3X inverse EDZ is down over 50% YTD.

ERX – Direxion Energy Daily 3X – Up 4% – One of the sole long ETF sectors on the week, ERX gained on the heels of oil and natural gas continuing to rise, driving exploration and refiners higher.  As mentioned above, with some M&A activity in the sector, speculation on other deals drove shares of many firms higher as well, in spite of a drop in oil prices on Friday.

* I always highlight that leveraged ETFs are undesirable as  long-term investment due to the decay in value that occurs over time from daily resets.  This is a mathematical certainty that investors often don’t research or understand up front, check out real-life example leverage ETF decay examples showing why they continuously reverse split for more.

Disclosure: No positions in any ETFs for equities referenced in article.

Commodities, ETF, Real Estate

Quick Sector Rotation Insights from the September Low

November 14th, 2010

The S&P 500 bottomed (recent swing low) at the 1,040 level at the end of August/start of September and has rallied almost non-stop to the 1,230 area.

Two quick questions come to mind – how have the individual sectors performed, and what does this say about the broader market?

Let’s take a look:

When doing any sort of Sector Comparison, it’s best to start with a grouping of sectors into two categories – the OFFENSIVE (or aggressive) sectors and the DEFENSIVE sectors.

I always make that distinction when I do Sector Rotation updates.

Offensive Sectors – as shown through AMEX Sector SPDRs – include Financials, Consumer Discretionary, Technology, Industrials, and Materials.

As you can see from the grid above (via StockCharts), the Offensive Sectors have in some case almost doubled the percentage gains of the Defensive Sectors (Consumer Staples, Health Care, and Utilities).

That’s what you’d expect, and it suggests bullish strength for the broader market – as in, according to the model, this is what you would expect to see from a broad Bullish Expansion phase.

Of course, there is one little outlier and it’s the Energy (XLE) sector, which is up 23% from the late September lows (to present).

According to the Sector Rotation Model, when energy is the best performer, it’s usually a danger or caution sign, as energy prices start to ‘overheat’ in the midst of a broad expansion which serves almost as a tax on consumers and businesses.

It’s something to keep an eye on, but for the moment – or at least looking at the early September to mid-November rally – the Model is showing bullish confirming strength.

It suggests that – as long as the rally continues – investors would look to be positioned in the Offensive Sectors, though what happens at the key resistance at 1,230 is key.

A firm break above 1,230 is a call for repositioning bullishly (according to the model), given that price could stall at the key 1,230 level.  It’s an example of how to combine index expectations and key levels with the Sector Rotation Model (which gives a broader look at the S&P 500 Index).

Keep a watch on Energy and the Offensive Sectors – and leading stocks in those sectors – until proven otherwise.

Corey Rosenbloom, CMT
Afraid to Trade.com

Follow Corey on Twitter:  http://twitter.com/afraidtotrade

Read more here:
Quick Sector Rotation Insights from the September Low

Uncategorized

Quick Sector Rotation Insights from the September Low

November 14th, 2010

The S&P 500 bottomed (recent swing low) at the 1,040 level at the end of August/start of September and has rallied almost non-stop to the 1,230 area.

Two quick questions come to mind – how have the individual sectors performed, and what does this say about the broader market?

Let’s take a look:

When doing any sort of Sector Comparison, it’s best to start with a grouping of sectors into two categories – the OFFENSIVE (or aggressive) sectors and the DEFENSIVE sectors.

I always make that distinction when I do Sector Rotation updates.

Offensive Sectors – as shown through AMEX Sector SPDRs – include Financials, Consumer Discretionary, Technology, Industrials, and Materials.

As you can see from the grid above (via StockCharts), the Offensive Sectors have in some case almost doubled the percentage gains of the Defensive Sectors (Consumer Staples, Health Care, and Utilities).

That’s what you’d expect, and it suggests bullish strength for the broader market – as in, according to the model, this is what you would expect to see from a broad Bullish Expansion phase.

Of course, there is one little outlier and it’s the Energy (XLE) sector, which is up 23% from the late September lows (to present).

According to the Sector Rotation Model, when energy is the best performer, it’s usually a danger or caution sign, as energy prices start to ‘overheat’ in the midst of a broad expansion which serves almost as a tax on consumers and businesses.

It’s something to keep an eye on, but for the moment – or at least looking at the early September to mid-November rally – the Model is showing bullish confirming strength.

It suggests that – as long as the rally continues – investors would look to be positioned in the Offensive Sectors, though what happens at the key resistance at 1,230 is key.

A firm break above 1,230 is a call for repositioning bullishly (according to the model), given that price could stall at the key 1,230 level.  It’s an example of how to combine index expectations and key levels with the Sector Rotation Model (which gives a broader look at the S&P 500 Index).

Keep a watch on Energy and the Offensive Sectors – and leading stocks in those sectors – until proven otherwise.

Corey Rosenbloom, CMT
Afraid to Trade.com

Follow Corey on Twitter:  http://twitter.com/afraidtotrade

Read more here:
Quick Sector Rotation Insights from the September Low

Uncategorized

Dazzling Bargains in Commodities

November 14th, 2010

Sean Brodrick

Tomorrow is your last day for Weiss Research’s extremely timely online presentation by Martin Weiss and Monty Agarwal and ALSO the day they’re closing enrollment in the service that tracks Martin’s $1 million portfolio. (Click here to view now.)

Missing it would be unfortunate because one of the three major asset classes where they’re investing Martin’s money is the same area where I see the most dazzling bargains — in commodities.

Let me ask you this: Is gold a bargain at $1,400 an ounce? Is crude oil a screaming deal at $85 a barrel?

Absolutely!

In fact, I think the prices of many commodities such as gold, crude oil, wheat, soybeans, copper and silver will continue to climb over the next year … and will be much higher just 18 months from now.

Today, I’ll tell you why that is. And why, even if you’re only starting to invest in commodities right now, you could make a heck of a lot of money going forward.

After All, A New Commodities Supercycle Is Here!

There are distinct cycles in the commodity markets, and the last big bull market started a decade ago with gold.

But don’t worry, you haven’t missed the boat. Commodity bull markets typically last 18 to 21 years!

Moreover, I don’t think this is an average commodity bull market. I think it’s a “commodity supercycle” — a much longer period in which commodity prices absolutely soar.

This is a rare and powerful event, indeed. In fact, there have been only two supercycles in the last 150 years:

  • Commodities Supercycle #1 saw the Industrial Revolution create powerful and sustainable demand for raw materials for 33 years between 1885 and 1918.
  • Commodities Supercycle #2 started after World War II and ran for 29 years between 1946 and 1975 as the reconstruction of Europe and Japan helped set off a global commodity price explosion.

So what’s fueling Commodities Supercycle #3?

Ravenous demand from emerging markets around the world for copper, aluminum, steel, coal and more is ramping up. China, Russia, the Middle East, India, Brazil and others are devouring raw materials as they build up their economies.

In fact, Merrill Lynch forecasts that more than $6 trillion will be spent on infrastructure improvements over the next three years — with 80 percent being invested in the BRIC countries (Brazil, Russia, India, China).

South Africa will spend $115 billion; Mexico, $140 billion; Brazil, $517 billion. In Russia and the Middle East, expect $500 billion and $586 billion, respectively. China, meanwhile, will spend more than all of the others combined — $3.8 trillion — mostly on water, environment, transportation and energy.

Plus, there are two more forces at work here:

Force #1: A flood of money from central banks desperate to keep their tottering economies afloat is lifting the boats of all hard assets.

Why?

Because while printing presses can manufacture money, they can’t create more hard assets. That’s why we call gold, silver, oil and other commodities “real wealth.”

Force #2: The easy-to-access deposits of many basic commodities have already been discovered and used up.

Yes, we can find more oil, for example. But to get it out of the ground, we have to come up with new, cutting-edge technologies — such as in the Bakken oil shale or such as drilling offshore wells as deep as Mt. Everest is high.

So we can find more resources, but it’s not cheap. And the further and further we have to stretch to get new deposits, the higher and higher the costs — and prices we’ll pay.

You can see why a new commodities supercycle is here.

And while prices have already doubled, there’s no reason they can’t triple or quadruple!

Keep in mind that the last two supercycles pushed commodity prices higher for an average of 31 years.

Increasing Demand from Overseas Consumers
Will Only Stoke the Supercycle Fires Further …

Only a generation ago, most people in China were riding bicycles. Now, China is the biggest auto market in the world. And the Chinese are hopping into their cars to go buy air conditioners, refrigerators and Western food.

They want to eat, drive and live like Americans. In fact, everybody does!

Asia boasts fully HALF of the world’s population. And they are all traveling on a similar path — from austerity and rice bowls to prosperity and all-you-can eat buffets.

The restaurants are air-conditioned, and the consumer electronics are state-of-the-art. To me, that means their road to the future is paved with steel and aluminum, oil and coal, silver and copper.

Not long ago, some scientists figured out that if everyone in the world wanted to live like Americans, we’d need to find three more Earths to supply all the raw materials. That means commodity prices are headed higher, higher and HIGHER!

Just take a look at what’s happening in individual commodities markets right now …

Silver: As of Thursday, November 4, the U.S. Mint had sold more American Silver Eagle bullion coins in 2010 than in any other year of the coin’s history. October sales combined with the 255,000 already sold in November lifted 2010 Silver Eagle bullion coin sales to 28,885,500.

What’s more, every pullback in silver brings in new buying. On Wednesday, when silver dropped $2 an ounce, sales of Eagles soared to 675,000 on a single day.

My new target for silver: $50 an ounce!

Gold: Gold eagle sales are soaring as well, and worries over European sovereign debt are keeping the fires lit under the yellow metal. Demand for gold is rising among investors large and small, as well as central banks.

I now expect gold to go to $2,500 an ounce.

Copper: The red metal just hit a new record high because copper exports from Chile are under pressure, even as demand for copper in China ramps up enormously.

Result: The industrial metal, which is used in plumbing, heating, electrical and telecommunications wiring, has rocketed by around 50 percent since June to a new peak.

Oil: Global demand is rising, U.S. supplies are falling as our economy improves, and Chinese demand is insatiable. Is that bullish for oil prices? Heck, yeah!

In fact, I think crude oil is going to $105 a barrel in the next six months!

And agricultural commodities like soybeans and cotton are exploding higher, too!

Look, the math of the commodity bull market is simple:

You add the massive new demand in Asia with rapidly dwindling supplies, then multiply it by the rapidly growing amount of paper money in the world.

What you’re left with is the potential for this supercycle to drive prices to all-time highs … then, to all-time inflation-adjusted highs … and ultimately, beyond.

What’s important here is that big bull markets like this one usually don’t provide “perfect” entry points. Those who are waiting for the “ideal” place to enter the commodity supercycle may have a long and frustrating wait..

You can sit on your hands and watch the parade of profits pass you by. Or you can join in. The choice is yours.

Reminder: If you want to learn how veteran hedge fund manager Monty Agarwal is investing $1,000,000 of Martin’s money, tomorrow is your last day to view their special presentation. After tomorrow (Monday 11/15), not only will you miss this extremely valuable information, it will be impossible for you to join them. Click on this link.

Yours for trading profits,

Sean

Related posts:

  1. Nine Beaten-Down ETF Bargains
  2. Give Thanks for Dividend Bargains
  3. Gold up $41! Commodities, currencies exploding higher!

Read more here:
Dazzling Bargains in Commodities

Commodities, ETF, Mutual Fund, Uncategorized

Dazzling Bargains in Commodities

November 14th, 2010

Sean Brodrick

Tomorrow is your last day for Weiss Research’s extremely timely online presentation by Martin Weiss and Monty Agarwal and ALSO the day they’re closing enrollment in the service that tracks Martin’s $1 million portfolio. (Click here to view now.)

Missing it would be unfortunate because one of the three major asset classes where they’re investing Martin’s money is the same area where I see the most dazzling bargains — in commodities.

Let me ask you this: Is gold a bargain at $1,400 an ounce? Is crude oil a screaming deal at $85 a barrel?

Absolutely!

In fact, I think the prices of many commodities such as gold, crude oil, wheat, soybeans, copper and silver will continue to climb over the next year … and will be much higher just 18 months from now.

Today, I’ll tell you why that is. And why, even if you’re only starting to invest in commodities right now, you could make a heck of a lot of money going forward.

After All, A New Commodities Supercycle Is Here!

There are distinct cycles in the commodity markets, and the last big bull market started a decade ago with gold.

But don’t worry, you haven’t missed the boat. Commodity bull markets typically last 18 to 21 years!

Moreover, I don’t think this is an average commodity bull market. I think it’s a “commodity supercycle” — a much longer period in which commodity prices absolutely soar.

This is a rare and powerful event, indeed. In fact, there have been only two supercycles in the last 150 years:

  • Commodities Supercycle #1 saw the Industrial Revolution create powerful and sustainable demand for raw materials for 33 years between 1885 and 1918.
  • Commodities Supercycle #2 started after World War II and ran for 29 years between 1946 and 1975 as the reconstruction of Europe and Japan helped set off a global commodity price explosion.

So what’s fueling Commodities Supercycle #3?

Ravenous demand from emerging markets around the world for copper, aluminum, steel, coal and more is ramping up. China, Russia, the Middle East, India, Brazil and others are devouring raw materials as they build up their economies.

In fact, Merrill Lynch forecasts that more than $6 trillion will be spent on infrastructure improvements over the next three years — with 80 percent being invested in the BRIC countries (Brazil, Russia, India, China).

South Africa will spend $115 billion; Mexico, $140 billion; Brazil, $517 billion. In Russia and the Middle East, expect $500 billion and $586 billion, respectively. China, meanwhile, will spend more than all of the others combined — $3.8 trillion — mostly on water, environment, transportation and energy.

Plus, there are two more forces at work here:

Force #1: A flood of money from central banks desperate to keep their tottering economies afloat is lifting the boats of all hard assets.

Why?

Because while printing presses can manufacture money, they can’t create more hard assets. That’s why we call gold, silver, oil and other commodities “real wealth.”

Force #2: The easy-to-access deposits of many basic commodities have already been discovered and used up.

Yes, we can find more oil, for example. But to get it out of the ground, we have to come up with new, cutting-edge technologies — such as in the Bakken oil shale or such as drilling offshore wells as deep as Mt. Everest is high.

So we can find more resources, but it’s not cheap. And the further and further we have to stretch to get new deposits, the higher and higher the costs — and prices we’ll pay.

You can see why a new commodities supercycle is here.

And while prices have already doubled, there’s no reason they can’t triple or quadruple!

Keep in mind that the last two supercycles pushed commodity prices higher for an average of 31 years.

Increasing Demand from Overseas Consumers
Will Only Stoke the Supercycle Fires Further …

Only a generation ago, most people in China were riding bicycles. Now, China is the biggest auto market in the world. And the Chinese are hopping into their cars to go buy air conditioners, refrigerators and Western food.

They want to eat, drive and live like Americans. In fact, everybody does!

Asia boasts fully HALF of the world’s population. And they are all traveling on a similar path — from austerity and rice bowls to prosperity and all-you-can eat buffets.

The restaurants are air-conditioned, and the consumer electronics are state-of-the-art. To me, that means their road to the future is paved with steel and aluminum, oil and coal, silver and copper.

Not long ago, some scientists figured out that if everyone in the world wanted to live like Americans, we’d need to find three more Earths to supply all the raw materials. That means commodity prices are headed higher, higher and HIGHER!

Just take a look at what’s happening in individual commodities markets right now …

Silver: As of Thursday, November 4, the U.S. Mint had sold more American Silver Eagle bullion coins in 2010 than in any other year of the coin’s history. October sales combined with the 255,000 already sold in November lifted 2010 Silver Eagle bullion coin sales to 28,885,500.

What’s more, every pullback in silver brings in new buying. On Wednesday, when silver dropped $2 an ounce, sales of Eagles soared to 675,000 on a single day.

My new target for silver: $50 an ounce!

Gold: Gold eagle sales are soaring as well, and worries over European sovereign debt are keeping the fires lit under the yellow metal. Demand for gold is rising among investors large and small, as well as central banks.

I now expect gold to go to $2,500 an ounce.

Copper: The red metal just hit a new record high because copper exports from Chile are under pressure, even as demand for copper in China ramps up enormously.

Result: The industrial metal, which is used in plumbing, heating, electrical and telecommunications wiring, has rocketed by around 50 percent since June to a new peak.

Oil: Global demand is rising, U.S. supplies are falling as our economy improves, and Chinese demand is insatiable. Is that bullish for oil prices? Heck, yeah!

In fact, I think crude oil is going to $105 a barrel in the next six months!

And agricultural commodities like soybeans and cotton are exploding higher, too!

Look, the math of the commodity bull market is simple:

You add the massive new demand in Asia with rapidly dwindling supplies, then multiply it by the rapidly growing amount of paper money in the world.

What you’re left with is the potential for this supercycle to drive prices to all-time highs … then, to all-time inflation-adjusted highs … and ultimately, beyond.

What’s important here is that big bull markets like this one usually don’t provide “perfect” entry points. Those who are waiting for the “ideal” place to enter the commodity supercycle may have a long and frustrating wait..

You can sit on your hands and watch the parade of profits pass you by. Or you can join in. The choice is yours.

Reminder: If you want to learn how veteran hedge fund manager Monty Agarwal is investing $1,000,000 of Martin’s money, tomorrow is your last day to view their special presentation. After tomorrow (Monday 11/15), not only will you miss this extremely valuable information, it will be impossible for you to join them. Click on this link.

Yours for trading profits,

Sean

Related posts:

  1. Nine Beaten-Down ETF Bargains
  2. Give Thanks for Dividend Bargains
  3. Gold up $41! Commodities, currencies exploding higher!

Read more here:
Dazzling Bargains in Commodities

Commodities, ETF, Mutual Fund, Uncategorized

The Tale of André Prenner, a Parable for our Times (Part Two of Two)

November 14th, 2010

Today, we take a brief pause from our normal economic and financial market commentary with this tale of common sense economic calculation and action. And no, we do not believe that the world is any more complex than we present it here. If you want to understand economics, you need first understand two things: That the human condition is one of scarcity and uncertainty; and that absent rational economic calculation and a certain degree of passionate risk-taking, nothing good can ever come of it.

Continued from here…

At least there was still plenty of demand for basic bread, which provided for a reliable if less profitable business. This period lasted nearly two years. Yeoville Bakers was never at serious risk of bankruptcy, in large part due to Andrés swift reaction to the downturn. But it had been a hard time nonetheless and taught André some important lessons. When he felt the time was right and sensed rising demand once again, he returned to his passion of baking gourmet European breads and re-hired most of his former employees, several of whom had made do with odd jobs in the interim. Business began to grow again, but André was a bit more of a businessman now and a bit less of a passionate visionary. Yes, he had now managed to save a good deal of money, but he told himself he would always be cautious, never expand too quickly and always make certain he had the flexibility to change and/or reduce operations as required to face challenging circumstances.

It was three decades later when things got really bad. Not only was the nation in recession; tax and regulatory policies had made André’s business considerably more costly to run. Although he had not expanded the business by much in recent years, he now had to employ three accountants to handle Yeoville Bakers’ more complicated affairs. The US Department of Agriculture (USDA) was now quite active in screening foreign grain and flour imports for bad quality or what they sometimes referred to as “irregularities”, as if André or his more experienced staff would be unable to determine quality for themselves. The Commerce Department occasionally imposed foreign duties because of what they called “dumping” which to André seemed rather arbitrary. And the regular or, on rare occasion, surprise inspections of his own facilities, imposed a cost unseen by anyone but André and his core team, who always needed to be prepared just in case, with any and all requested documents, tours of facilities, product samples, etc.

As such, running the business had become more complex, with supplies harder to secure, prices more volatile and higher overhead costs. Adding to the challenges, it was now difficult to hire new employees, not because of a shortage of those able or willing to do quality work; rather, because payroll taxes and required healthcare and other benefits were much higher than before. Also, he had had some difficulty reducing staff during the most recent downturn, with one employee accusing Yeoville Bakers of unfair dismissal, including claims of workplace discrimination. The ensuing legal tangle was resolved in favor of Yeoville Bakers but cost André much valuable management time and taught him an important lesson about how careful he needed to be when hiring new staff. Unless he was absolutely certain that they were qualified, reliable and unlikely to complain if let go, he wouldn’t hire anyone, no matter how rosy future business prospects.

So now, André found himself facing the familiar situation of slack demand he had faced several times before in his long career, but he lacked the flexibility to respond as effectively. It was one morning when he was contemplating what, exactly, he should do in the current instance, when he received an email from the Small Business Administration (SBA) offering him a loan.

Now this had never happened before. André knew of many businesses that had received government subsidized loans through the years. Most of those businesses had grown and thrived, at least for a time.
But he could not recall the SBA offering loans pro-actively in this way. It was the businesses that normally did the asking. So why was this happening? Could it have something to do with what he had heard about many banks turning small businesses down for new loans? Or cutting existing lines of credit? Everyone knew that banks had lost a huge pile on residential and commercial lending. Although André had no use for a loan at present, he was intrigued by the very existence of the program and inquired anyway, picking up the phone.

“Small Business Administration, new loans division, may I help you?”

“Yes, I’m calling to inquire about an email I received offering me a low-interest loan. Please could you let me know some of the terms and conditions, as well as the purpose of the program?”

“Of course. We are offering subsidized loans to small businesses that can demonstrate that their access to credit has been reduced, or that have viable expansion plans yet cannot get access to new credit. Specific terms and conditions vary with the size and proposed use of the loan. Those uses pertaining to environmental or green technologies receive the most favorable terms. The overall purpose of the program, other than supporting small businesses generally, is to ensure that credit is available, in particular for investment related to environmental or green technologies.”

“Thank you.”
“Have you recently been denied credit?”
“No.”
“Do you have plans to expand your business?”
“No.”
“What then is the reason for your inquiry?”
“Just curious, thank you.”
“Well if your circumstances change, please don’t hesitate to give us a call.”
“Thank you. I will do so. Goodbye.”
“Goodbye.”

André hung up the phone and thought to himself. “So this is the way the government goes about trying to restore economic growth: First, they cut interest rates to near zero, following the residential and subsequent commercial real estate bust. But apparently that isn’t enough to stabilize the big banks, several of which are at risk of failure, so the central bank bails them out, assuming some illiquid, toxic debt that André knows will never be sold back into the market. Then the government enacts a massive stimulus plan, which seems primarily to funnel money to a bunch of big businesses with strong connections to government, most of which probably have little difficulty accessing credit. But none of this seems to help smaller businesses, which is where most hiring in the economy normally takes place and where worker productivity tends to be highest. So now it appears they’ve got some fancy new program to extend credit to small businesses, but the favored terms are reserved for those that are keen to invest in the sorts of projects that the government wants, for whatever reason, and which are already being done in some shape or form by the large, government-connected businesses that received most of the stimulus money in the first place.”

“In the meantime, they have raised payroll taxes, in part to pay for increasing healthcare costs. The state has also raised sales taxes to cover an unprecedented revenue shortfall. They are threatening now to raise income and corporate taxes. The regulatory regime was already uncertain and is likely to become more so as Congress seems unable to resist the temptation to respond to each new lobbying effort by this industry group or that. Workplace discrimination suits are now so commonplace that I need to do full background checks on potential employees to make certain that, in the case I need to let one of them go, they are unlikely to take legal action. Customer demand remains weak as unemployment remains high.  Now my input costs are soaring because of the weak dollar–which I understand is the result of so-called “quantitative easing”–which pushes up global grains prices. These costs I can only partially, if at all, pass on to my customers, implying lower margins and profitability ahead.”

“And these guys think that I, a small-town baker, might be interested in a loan? In expanding my business? In hiring new workers? Business is risky enough in good times. It is riskier in bad times. But even in the bad times–and I’ve had a few–there have been occasional opportunities to hire a good employee; acquire some good equipment at a low price from another bakery closing its doors; adjust the product line to better suit changing consumer attitudes. Yet now, not only are times bad; the uncertainty is higher than ever and the priority of the government is really not about getting the economy going again with sensible, sustainable, predictable tax and regulatory policy but rather about subsiding their pet programs and government-connected firms, which in the end is only going to raise the overall economic debt burden, implying even higher tax rates in future. No thanks.”

He went for a long walk and thought. The next day he went for another long walk and thought some more. He spoke to a few other small businessmen he knew who were getting by but not doing particularly well. He shared a few thoughts with his wife and with the two oldest of his three children.  And he made a decision, perhaps the most difficult of his life.

The next day, after he arrived at work, he assembled all of his senior employees in his office. He let them know that he was going to put the business up for sale. If they wanted, they could buy him out over time, financing the purchase with a loan that he would provide at a low interest rate. He was retiring, he said.

“This seems rather sudden,” said one of his assistant managers.

“No, actually, it’s not. It is the result of trends that have been in place for a long time. It’s just that I think about things differently than I used to. I’m getting older. And as you get older you begin to realize that some things may change for the better, some for the worse, but some things don’t change at all. I’m tired of waiting for some things to change. I’ve had enough. It’s your turn now. Good luck.”

His employees were stunned. They respected the man, who had a fine reputation. He had kept his business profitable and, more often than not, growing, for over 40 years. And now it was their turn. They were going to need good luck all right. Lots of it.

Regards,

John Butler,
for The Daily Reckoning

[Editor's Note: The above essay is excerpted from The Amphora Report, which is dedicated to providing the defensive investor with practical ideas for protecting wealth and maintaining liquidity in a world in which currencies are no longer reliable stores of value.]

The Tale of André Prenner, a Parable for our Times (Part Two of Two) originally appeared in the Daily Reckoning. The Daily Reckoning, offers a uniquely refreshing, perspective on the global economy, investing, gold, stocks and today’s markets. Its been called “the most entertaining read of the day.”

Read more here:
The Tale of André Prenner, a Parable for our Times (Part Two of Two)




The Daily Reckoning is a contrarian e-letter, brought to you by New York Times best-selling authors Bill Bonner and Addison Wiggin since 1999. The DR looks at the economic world-at-large and offers its major players – investors, politicians, economists and the average consumer – some much-needed constructive criticism.

Commodities, Real Estate, Uncategorized

The Tale of André Prenner, a Parable for our Times (Part Two of Two)

November 14th, 2010

Today, we take a brief pause from our normal economic and financial market commentary with this tale of common sense economic calculation and action. And no, we do not believe that the world is any more complex than we present it here. If you want to understand economics, you need first understand two things: That the human condition is one of scarcity and uncertainty; and that absent rational economic calculation and a certain degree of passionate risk-taking, nothing good can ever come of it.

Continued from here…

At least there was still plenty of demand for basic bread, which provided for a reliable if less profitable business. This period lasted nearly two years. Yeoville Bakers was never at serious risk of bankruptcy, in large part due to Andrés swift reaction to the downturn. But it had been a hard time nonetheless and taught André some important lessons. When he felt the time was right and sensed rising demand once again, he returned to his passion of baking gourmet European breads and re-hired most of his former employees, several of whom had made do with odd jobs in the interim. Business began to grow again, but André was a bit more of a businessman now and a bit less of a passionate visionary. Yes, he had now managed to save a good deal of money, but he told himself he would always be cautious, never expand too quickly and always make certain he had the flexibility to change and/or reduce operations as required to face challenging circumstances.

It was three decades later when things got really bad. Not only was the nation in recession; tax and regulatory policies had made André’s business considerably more costly to run. Although he had not expanded the business by much in recent years, he now had to employ three accountants to handle Yeoville Bakers’ more complicated affairs. The US Department of Agriculture (USDA) was now quite active in screening foreign grain and flour imports for bad quality or what they sometimes referred to as “irregularities”, as if André or his more experienced staff would be unable to determine quality for themselves. The Commerce Department occasionally imposed foreign duties because of what they called “dumping” which to André seemed rather arbitrary. And the regular or, on rare occasion, surprise inspections of his own facilities, imposed a cost unseen by anyone but André and his core team, who always needed to be prepared just in case, with any and all requested documents, tours of facilities, product samples, etc.

As such, running the business had become more complex, with supplies harder to secure, prices more volatile and higher overhead costs. Adding to the challenges, it was now difficult to hire new employees, not because of a shortage of those able or willing to do quality work; rather, because payroll taxes and required healthcare and other benefits were much higher than before. Also, he had had some difficulty reducing staff during the most recent downturn, with one employee accusing Yeoville Bakers of unfair dismissal, including claims of workplace discrimination. The ensuing legal tangle was resolved in favor of Yeoville Bakers but cost André much valuable management time and taught him an important lesson about how careful he needed to be when hiring new staff. Unless he was absolutely certain that they were qualified, reliable and unlikely to complain if let go, he wouldn’t hire anyone, no matter how rosy future business prospects.

So now, André found himself facing the familiar situation of slack demand he had faced several times before in his long career, but he lacked the flexibility to respond as effectively. It was one morning when he was contemplating what, exactly, he should do in the current instance, when he received an email from the Small Business Administration (SBA) offering him a loan.

Now this had never happened before. André knew of many businesses that had received government subsidized loans through the years. Most of those businesses had grown and thrived, at least for a time.
But he could not recall the SBA offering loans pro-actively in this way. It was the businesses that normally did the asking. So why was this happening? Could it have something to do with what he had heard about many banks turning small businesses down for new loans? Or cutting existing lines of credit? Everyone knew that banks had lost a huge pile on residential and commercial lending. Although André had no use for a loan at present, he was intrigued by the very existence of the program and inquired anyway, picking up the phone.

“Small Business Administration, new loans division, may I help you?”

“Yes, I’m calling to inquire about an email I received offering me a low-interest loan. Please could you let me know some of the terms and conditions, as well as the purpose of the program?”

“Of course. We are offering subsidized loans to small businesses that can demonstrate that their access to credit has been reduced, or that have viable expansion plans yet cannot get access to new credit. Specific terms and conditions vary with the size and proposed use of the loan. Those uses pertaining to environmental or green technologies receive the most favorable terms. The overall purpose of the program, other than supporting small businesses generally, is to ensure that credit is available, in particular for investment related to environmental or green technologies.”

“Thank you.”
“Have you recently been denied credit?”
“No.”
“Do you have plans to expand your business?”
“No.”
“What then is the reason for your inquiry?”
“Just curious, thank you.”
“Well if your circumstances change, please don’t hesitate to give us a call.”
“Thank you. I will do so. Goodbye.”
“Goodbye.”

André hung up the phone and thought to himself. “So this is the way the government goes about trying to restore economic growth: First, they cut interest rates to near zero, following the residential and subsequent commercial real estate bust. But apparently that isn’t enough to stabilize the big banks, several of which are at risk of failure, so the central bank bails them out, assuming some illiquid, toxic debt that André knows will never be sold back into the market. Then the government enacts a massive stimulus plan, which seems primarily to funnel money to a bunch of big businesses with strong connections to government, most of which probably have little difficulty accessing credit. But none of this seems to help smaller businesses, which is where most hiring in the economy normally takes place and where worker productivity tends to be highest. So now it appears they’ve got some fancy new program to extend credit to small businesses, but the favored terms are reserved for those that are keen to invest in the sorts of projects that the government wants, for whatever reason, and which are already being done in some shape or form by the large, government-connected businesses that received most of the stimulus money in the first place.”

“In the meantime, they have raised payroll taxes, in part to pay for increasing healthcare costs. The state has also raised sales taxes to cover an unprecedented revenue shortfall. They are threatening now to raise income and corporate taxes. The regulatory regime was already uncertain and is likely to become more so as Congress seems unable to resist the temptation to respond to each new lobbying effort by this industry group or that. Workplace discrimination suits are now so commonplace that I need to do full background checks on potential employees to make certain that, in the case I need to let one of them go, they are unlikely to take legal action. Customer demand remains weak as unemployment remains high.  Now my input costs are soaring because of the weak dollar–which I understand is the result of so-called “quantitative easing”–which pushes up global grains prices. These costs I can only partially, if at all, pass on to my customers, implying lower margins and profitability ahead.”

“And these guys think that I, a small-town baker, might be interested in a loan? In expanding my business? In hiring new workers? Business is risky enough in good times. It is riskier in bad times. But even in the bad times–and I’ve had a few–there have been occasional opportunities to hire a good employee; acquire some good equipment at a low price from another bakery closing its doors; adjust the product line to better suit changing consumer attitudes. Yet now, not only are times bad; the uncertainty is higher than ever and the priority of the government is really not about getting the economy going again with sensible, sustainable, predictable tax and regulatory policy but rather about subsiding their pet programs and government-connected firms, which in the end is only going to raise the overall economic debt burden, implying even higher tax rates in future. No thanks.”

He went for a long walk and thought. The next day he went for another long walk and thought some more. He spoke to a few other small businessmen he knew who were getting by but not doing particularly well. He shared a few thoughts with his wife and with the two oldest of his three children.  And he made a decision, perhaps the most difficult of his life.

The next day, after he arrived at work, he assembled all of his senior employees in his office. He let them know that he was going to put the business up for sale. If they wanted, they could buy him out over time, financing the purchase with a loan that he would provide at a low interest rate. He was retiring, he said.

“This seems rather sudden,” said one of his assistant managers.

“No, actually, it’s not. It is the result of trends that have been in place for a long time. It’s just that I think about things differently than I used to. I’m getting older. And as you get older you begin to realize that some things may change for the better, some for the worse, but some things don’t change at all. I’m tired of waiting for some things to change. I’ve had enough. It’s your turn now. Good luck.”

His employees were stunned. They respected the man, who had a fine reputation. He had kept his business profitable and, more often than not, growing, for over 40 years. And now it was their turn. They were going to need good luck all right. Lots of it.

Regards,

John Butler,
for The Daily Reckoning

[Editor's Note: The above essay is excerpted from The Amphora Report, which is dedicated to providing the defensive investor with practical ideas for protecting wealth and maintaining liquidity in a world in which currencies are no longer reliable stores of value.]

The Tale of André Prenner, a Parable for our Times (Part Two of Two) originally appeared in the Daily Reckoning. The Daily Reckoning, offers a uniquely refreshing, perspective on the global economy, investing, gold, stocks and today’s markets. Its been called “the most entertaining read of the day.”

Read more here:
The Tale of André Prenner, a Parable for our Times (Part Two of Two)




The Daily Reckoning is a contrarian e-letter, brought to you by New York Times best-selling authors Bill Bonner and Addison Wiggin since 1999. The DR looks at the economic world-at-large and offers its major players – investors, politicians, economists and the average consumer – some much-needed constructive criticism.

Commodities, Real Estate, Uncategorized

The Best Gold Stock to Own Today

November 13th, 2010

The Best Gold Stock to Own Today

Gold and gold stocks have been the rage lately, as the price of gold reaches new highs. However, not all gold stocks are the same. Some have vast reserves of proven gold in the ground. Others have lower productions costs that give them an edge. Using three of the best major gold mining companies as a guide, let's explore how these factors can guide your selection of the best gold stock to own.

Proven and probable reserves
Like treasure hunters, gold miners know there is gold somewhere. The proven and probable number of ounces of gold in the ground is the company's treasure — only they know where it is.

“Proven” means they know how many ounces of gold are in the ground for sure. “Probable” indicates there is a statistical probability there are so many ounces in the ground. Geologists use standard procedures to derive the probable number of ounces.

The more ounces of gold that a company has in its proven and probable column, the more it should be worth. Updated annually, in 2009, Barrick Gold Corporation (NYSE: ABX) had 139,751,000 ounces of proven and probable gold in the ground, substantially more than Newmont Mining Corporation (NYSE: NEM), with 91,800,000 ounces and Goldcorp (NYSE: GG), with 48,470,000. With so much more gold in the ground, Barrick should be more valuable to investors.

If we take the enterprise value of the company, which represent's the company's value if it were to be acquired, divided by the number of proven and probable ounces in reserve, we can identify how the market values an ounce of the company's gold in the ground, known as Enterprise Value / Reserve Ounce (EVO). At the end of 2009, Goldcorp's reserves were valued at $63.18 per ounce, while Barrick's were less than half that number at $31.58, with Newmont achieving the lowest valuation at $27.39.

From this, you could imply that Newmont is the best opportunity, since the market places the lowest value on the gold it has in the ground.

But what about the cost to mine that gold?

Low cost producer
Remember, the market sets the price for gold — not the mining companies. The companies that produce their gold at the lowest cost per ounce make more money.

Mining for gold is a capital, labor and energy-intensive business. According to the GFMS, a precious metals consultancy based in London, the average cost to produce an ounce of gold has risen above $500.

Most gold mines extract other metals and minerals found when they mine for gold. Copper and silver are the most common. According to the Gold Institute Production Cost Standard, the best way to measure what it costs for a company to produce an ounce of gold is to subtract out the price received from the sale of other metals, known in the industry as the Cash Cost (by-product).

For the trailing 12 months ending in September 2010, Goldcorp leads the way, with by-product costs of $317 an ounce, well below the average cost and that of its large competitors. This price is up from $295 for the 12 months ending in December 2009.

Barrick has a slightly higher cost per ounce of $346, down from $363 for all of 2009, on the strength of its copper production. Subtracting the sale of copper from the gold helps to lower production costs.

Newmont realized a cost of $478 an ounce, down from $526 an ounce for 2009. Newmont is benefiting from a rather large amount of copper by-product in its reserves. As copper prices expand with the economy, it will have a greater influence on a number of gold miners.

In this case, Goldcorp is the clear winner, with Barrick coming in second. Newmont will see its by-product cost for gold fall as it reaps the rewards of higher copper prices.

Valuing gold companies
As we have seen, the market value of a gold company's reserve varies significantly. Without going into detail, this depends largely on the cost to extract the gold from the ground. It also varies with the value investors place on other metals the company might have in reserve and produce. Putting these together gives us a simple way to compare gold mining companies.

The plot below shows the Enterprise Value / Reserve Ounce (EVO) vs. the Cash Cost to Produce (by-product) gold.

Investors want to see a gold company move from the upper left part of this graph down and to the lower right. When this happens, it means the value of the enterprise goes up along with the miner's stock price.

Goldcorp wins on both dimensions, though it might not have much more room to improve. [Nathan Slaughter, Chief Strategist of our Market Advisor newsletter, turned his readers on to Goldcorp just in time. Now, they're sitting on a +58% gain.]

Uncategorized

5 New Industries That Could Topple Today’s Giants

November 13th, 2010

5 New Industries That Could Topple Today's Giants

Austrian economist Joseph Schumpeter first introduced the world to the concept of “creative destruction” by which, in his own words, sets forth a “fundamental impulse that sets and keeps the capitalist engine in motion [and] comes from the new consumers, goods, the new methods of production or transportation, the new markets, the new forms of industrial organization that capitalist enterprise creates.”

In other words, just like in nature, business models and companies evolve over time. And if they don't, they eventually give way to new technologies or rivals or die out all together. Andy Obermueller, editor of the Game-Changing Stocks newsletter, is always on the hunt for firms that are already making shareholders significant profits for their successful, disrupting technologies. So I thought I would look into some areas I thought would be game-changers in the coming years myself and see if there was a potential way for investors to profit.

With that, here are five industries that I think could see significant disruption in the years ahead — and the players that could end up toppling the incumbent giants.

1. Cloud Computing
Incumbents: Microsoft (Nasdaq: MSFT), Adobe (Nasdaq: ADBE), Oracle (Nasdaq: ORCL)
Potential Winners: Amazon (Nasdaq: AMZN), Google (Nasdaq: GOOG), Intuit (Nasdaq: INTU), Microsoft

The current software business model consists of buying a copy of a software program and copying it to your computer. This leaves the maintenance tasks and updates to the computer user or corporate IT department. But software as a service, or SaaS for short, consists of using the Internet to access a program for a fee and leaves the maintenance and updating to the provider of the software.

This has major potential implications for those that currently benefit from the current business model. For the leaders, it is highly lucrative, as it has scale advantages — design the software once and sell it to a basically unlimited number of users. The new model could shift the advantage to those who fully embrace SaaS instead of fighting it to try and keep the current model intact. Amazon is a potential winner for providing servers to run all the software.

The music industry is a perfect example of fighting the migration of music to online servers and digital subscription services. Pure software providers, such as those listed above could benefit. Traditional providers could topple, but could also survive if they embrace the way the industry is shifting. [StreetAuthority contributor Tom Taulli recently gave his three favorite cloud computing clicks. Go here to read his article.]

2. Voice Over Internet Protocol
Incumbents: AT&T (NYSE: T), Verizon (NYSE: VZ), Sprint (NYSE: S)
Potential Winners: Google, Vonage (NYSE: VG), Skype.

Voice Over Internet Protocol, or VoIP for short, is simply the use of the Internet to transmit traditional voice telephone calls. It is in pretty wide use already, but if firms like Google have their way, they will use it to put traditional phone companies out of business.

If VoIP really takes off, it would make the existing fixed line networks that AT&T and Verizon have spent billions building and maintaining for more than a hundred years obsolete. Google recently acquired Swedish firm Global IP Solutions to beef up its VoIP capabilities and has supposedly acquired a firm with cutting-edge technologies in the space.

Vonage is a pure play in the space and has struggled to prove that customers are willing to pay for VoIP, but it is quite clear that the incumbents would be toppled if a low-cost or free option were made available. This threatens every incumbent telecom provider out there and could benefit firms including Skype, which recently announced plans to go public and could benefit investors if it can create an economically-viable VoIP business model.

3. eReaders
Incumbents: Barnes & Noble (NYSE: BKS), Borders Group (NYSE: BGP)
Potential Winners: Amazon, Apple (Nasdaq: AAPL), Barnes & Noble

eReaders, including Apple's iPad, Amazon's Kindle, and even Barnes & Noble's Nook, are rapidly stealing market share from printed books. The iPad is an early leader, whose success is largely already priced into Apple's share price. Amazon's offering is a small part of its strategy to dominate online sales, but could represent another key growth avenue to its operations.

The main potential play for investors is if the advent of digital books completely destroys the traditional book retailers. Barnes & Noble is somewhat hedging its bets with the Nook, but still relies heavily on its bricks-and-mortar book stores. Borders is at a clear disadvantage to B&N and could easily meet its demise with the onslaught of eReader competition. [My colleague David Sterman thinks Barnes & Noble is in trouble, too (and could be a compelling short play). Click here to read his analysis.]

4. Mobile Transaction Services
Incumbents: MasterCard (NYSE: MA), Visa (NYE: V), Global Payments (NYSE: GPN)
Potential Winners: eBay (Nasdaq: EBAY), LM Ericsson (Nasdaq: ERIC)

At some point in the future it will be possible to make payments and transfer money simply from your mobile phone. Of course, this is already possible on the web thanks to eBay's PayPal service. Certain features do exist on cell phones, but are limited and almost non-existent when transacting between two individuals.

Japan is a leading region for this type of technology and is offered by global telecom firm LM Ericsson. eBay is another clear leader that could benefit as it provides the technology over mobile phone networks. Leading payment processors including MasterCard and Visa are obvious beneficiaries, though as incumbent leaders, they could be toppled by more nimble competitors.

5. Waste-to-Entergy (WtE)
Incumbents: Waste Management (NYSE: WM), Republic Services (NYSE: RSG)
Potential Winners: Covanta (NYSE: CVA), Waste Management

I won't spend too much time covering the waste-to-energy industry, as I did more thoroughly in a previous article. [Read that article here] But WtE has the potential to permanently alter the business models of traditional waste management firms such as Waste Management and Republic Services. The ability to literally turn garbage into energy is fascinating, and Covanta is a pure play in the space and a global provider of WtE facilities.

As I detailed in the previous article, Waste Management already has ambitions in the space. If it embraces this industry transformation, the company could grow into a global player in WtE, given its clear advantage of having a huge supply of waste to transform into energy.

Action to Take —> As you may have noticed, many incumbents are also potential beneficiaries as long as they don't let creative destruction completely destroy their business models. In my mind, cloud computing and mobile transaction services have the greatest likelihood to be the most destructive to the status quo.

In terms of individual firms, Google, Amazon, and Apple are among the biggest disrupters, have already toppled larger rivals, and have healthy appetites for additional creative destruction going forward. But you may also want to look into some of the lesser-known disruptors on this list, such as Vonage or Covanta, and also be on the lookout for a Skype IPO in the near future.

– Ryan Fuhrmann

P.S. –

Uncategorized

36% Gains From a Takeover — and Two More Stocks That Could Follow

November 13th, 2010

36% Gains From a Takeover -- and Two More Stocks That Could Follow

Back on October 26th I suggested e-commerce software provider Art Technology Group (Nasdaq: ARTG) was an attractive buy at the then-current price of $4.39. [Click here to read the article] A few days later, the company was acquired by Oracle (Nasdaq: ORCL) at a price just under $6.00 — a nice +36% move in the span of about a week.

So how'd I do it? Well, it was actually quite simple. I was 100% confident the company was going to continue growing its bottom line, as it had been for a few quarters. I was about 70% sure those results would translate into a rising stock, as had been the case — mostly — since early last year. And, I had absolutely no idea the company was going to be snagged by Oracle.

I don't say that to create any self-deprecating humility that I'll turn around later; I really had no idea that Art Technology Group was a target. I just knew it was a great company I’d want to own, and as it turns out, Oracle agreed.

I have two more acquisition candidates like Art Technology in mind, but before I share them, it may be worth explaining my thought process.

The whole experience got me thinking about some of the other M&A chatter we’ve been dancing with during the course of this year, much of which never panned out.

Take Microsoft's (Nasdaq: MSFT) rumored buyout of Adobe (Nasdaq: ADBE) for instance. A mere meeting between Microsoft's head Steve Ballmer and Adobe's CEO Shantunu Narayen sent Adobe shares soaring as much as +16% when the buyout buzz was circulated on October 7th. The stock tumbled by about half that amount the next day when the rumors were snuffed.

Fortunately, Adobe shares have since reclaimed almost all of that lost ground, but surely more than a few investors bought at the high and then defensively sold at the low of that span.

California Pizza Kitchen (Nasdaq: CPKI) is another example of a fizzled acquisition-based rally. The company effectively put itself up for sale on April 9th, and pushed shares from $18.18 to $20.74 as traders jockeyed for a piece of the company before it was bought. By July, the stock had reached a low under $13.00, having never moved above that peak of $20.74, and still no suitor in sight.

The same story unfolded again when renewed whispers of a sale shot the stock to a peak price of $20.00 on July 28th. Since then, not only have we still not seen a buyout, but investors who bought it at $20.00 on acquisition hopes have yet to see the stock hit $20.00 again.

If you're keeping score, that's two buyouts that were well-publicized, then highly-speculated on, that ultimately fizzled — and cost investors money in the process.

Now contrast that with the acquisition of Art Technology Group, which nobody saw coming, yet managed to materialize and pay off on a big way.

Get the point? If your only goal is to step into a target company before a possible acquisition, you're likely to be disappointed more often than not — not to mention stuck with a stock you may not want. If you focus on owning great companies, though — as we all should — at the very least you'll own a great company and you may just win big from an acquisition anyway.

With that as a backdrop, I can unveil my next two potential acquisition targets. The first is A-Power Energy Generation Systems (Nasdaq: APWR), and the other is Xyratex (Nasdaq: XRTX).

No, neither of these company names has been spinning in the M&A rumor mill. That's the point. They are both great companies, however, that would be as attractive to another company as they are to individual investors.

Xyratex is a data-storage player, which is an arena that's seen more than its fair share of buyout interest lately. Most of the focus seems to be on Compellent Technologies (NYSE: CML) or STEC Inc. (Nasdaq: STEC) — I don't recall hearing Xyratex in any of the data storage consolidation discussions. Oddly though, Xyratex has been producing about 10 times the revenue that Compellent has been generating (with a similar income disparity), while Xyratex's market cap is about two-thirds of Compellent's. Better still, the stock boast's a strangely low trailing 12-month price-to-earnings (P/E) ratio of about 4.7.

A-Power Energy Generation Systems is primarily a Chinese energy management holding. It's not priced as low as Xyratex is right now, but the forward-looking P/E of about 6.1 is plenty attractive — and plausible. The kickers for A-Power here are growing institutional ownership and a growing wave of utility and energy acquisitions this year; a sector's merger-mania often develops its own inertia.

Action to Take –> If you're only jumping on a stock because the rumor mill is suggesting it is an acquisition target, you may find yourself stuck with a lousy stock — if you don't even want to own it for the long haul, why would another company want to? Besides, by the time you hear about an acquisition, it's probably too late to do anything about it.

On the other hand, winning the buyout lotto isn't a lost cause. Companies acquire other companies for the same reasons investors do: reliable income, leading technology, market share, etc. Find a good, undervalued company like A-Power Energy or Xyratex, and you'll do one of two things — you'll either (1) own a great stock, or (2) you'll benefit from a buyout. Either way, it's a win.


– James Brumley

James brings a wide degree of experience in the investment industry, including being the Director of Research of a trading newsletter. James' work has appeared in major investing sites such as Motley Fool and Investopedia. Read more…

Disclosure: Neither James Brumley nor StreetAuthority, LLC hold positions in any securities mentioned in this article.

This article originally appeared on StreetAuthority
Author: James Brumley
36% Gains From a Takeover — and Two More Stocks That Could Follow

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36% Gains From a Takeover — and Two More Stocks That Could Follow

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5 Reasons Why This Chip Stock is Undervalued

November 13th, 2010

5 Reasons Why This Chip Stock is Undervalued

Despite a fairly bleak quarterly report from Cisco Systems (Nasdaq: CSCO) on Thursday, investors should realize that troubles for Cisco don't mean trouble for the whole sector. In fact, the tech sector has shaken off the gloom and doom of this summer, with the Nasdaq surging +20% since late August.

The rebound in the Nasdaq comes from an increasing sense that tech spending will rise steadily higher in 2011 — which means more profits for tech firms. And when tech firms are feeling flush, they go out and invest in new equipment. The prime beneficiary: Applied Materials (Nasdaq: AMAT), the world's largest producer of chip-making equipment. That's reason enough to be bullish on shares.

Here are five more reasons:

1. Rich and getting richer. Applied Materials has $2.3 billion in cash, and there's more to come. Citigroup figures the company will generate nearly $2 billion more in operating cash flow in the fiscal year that began this month. Applied Materials continues to buy back stock at a prodigious clip, yet cash could still approach $3.5 billion ($2.50 a share) by the end of the current fiscal year.

2. Cheap and getting cheaper. If you back out that cash balance, Applied Materials trades for around 10 times trailing profits, and around seven times projected fiscal (October) 2011 earnings. Looked at another way, shares trade for just 5.5 times projected 2011 EBITDA.

3. An imminent resolution to the Samsung ordeal. Applied Materials appears close to settling an embarrassing lawsuit with Samsung. Some of the company's employees in Korea apparently sold Samsung's secrets to a rival, leading Samsung to cut off its business and sue. Analysts think Applied Materials is about to cut Samsung a $200 million check to resolve the mess, at which time analyst think it will place some new orders with Applied Materials that had been on hold. Shares have been under pressure on fears that the issue would linger on and perhaps prove even more costly. A settlement could help fuel a relief rally.

4. Trends are rising, not sinking. Applied Materials operates in a highly cyclical industry. Company sales plunged -38% in fiscal 2009 and likely shot up more than +80% in fiscal 2010. (Full-year results will be out next week). Many analysts think semiconductor capital equipment sales will slump anew next year, although Applied Materials' market positioning should yield a +10% gain in revenue.

But a growing minority of analysts think the industry is actually set to fare quite well next year, and that Applied Materials can grow closer to +20%. (Consensus estimates range from 0% growth to +35% growth). The rising bullishness stems from an arms race among chip foundries. These are the folks that make chips on behalf of other tech companies that design and sell semiconductors without actually making them. GlobalFoundries, a new player in the foundry industry has been aggressively ordering new equipment, leading rivals to make sure they also own state-of-the-art gear. Goldman Sachs believes that GlobalFoundries “could invest $15-20 billion of capex cumulatively from 2010 to 2015.” And it thinks other foundries such as Taiwan Semiconductor (NYSE: TSM) will follow suit. Applied Materials is likely to focus on this topic on next week's conference call.

5. Solar goes from headwind to tailwind. The solar market held great appeal to Applied Materials, as many manufacturing processes for solar wafers are quite similar to the processes needed to make semiconductors. But the company got too greedy, also entering the commercial market by selling solar panels. That move dampened profit margins and soured investors. Applied Materials got wise this summer and tightened its solar focus to proven, profitable segments. As a result, year-over-year financial comparisons are likely to start looking better and better, and the whole solar operation should morph from a money loser in fiscal 2010 to a money maker in 2011.

Action to Take –> This is not a call for you to buy shares ahead of next week's conference call. Seasonal gyrations mean that October quarterly results may come in above or below forecasts. Instead, this is a call on 2011, when a series of real and imagined headwinds become tailwinds. This industry leader, with oodles of cash, still ensconced in a favorable phase of the cycle, and an ultra-low price-to-earnings (P/E) ratio, should move back into favor in coming quarters.


– David Sterman

David Sterman started his career in equity research at Smith Barney, culminating in a position as Senior Analyst covering European banks. David has also served as Director of Research at Individual Investor and a Managing Editor at TheStreet.com. Read More…

Disclosure: Neither David Sterman nor StreetAuthority, LLC hold positions in any securities mentioned in this article.

This article originally appeared on StreetAuthority
Author: David Sterman
5 Reasons Why This Chip Stock is Undervalued

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5 Reasons Why This Chip Stock is Undervalued

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Gold: The Market’s Global Currency

November 13th, 2010

World Bank president Robert Zoellick has stirred up a hornet’s nest with his recent call for a return to a gold anchor in the global financial system.

The usual suspects immediately denounced him, with Keynesian Brad DeLong anointing Zoellick the “Stupidest Man Alive.”

In the present article I’ll explain the resurging interest in the yellow metal.

I’ll also explain the dangers of Zoellick’s proposal, and why fans of the classical gold standard should be wary.

The Limitations of the Printing Press

In order to make sense of our current situation – and why Zoellick would timidly call for a return to a pseudo-gold standard – we need to first think through the logic of fiat money. Fiat money is not “backed up” by anything; it is intrinsically useless paper (or nowadays, mere electronic bookkeeping entries) that is valuable only because of its anticipated purchasing power. In contrast, a market-based commodity money, such as gold or silver, is a useful good in its own right, serving industrial and consumer purposes.

The critical difference between fiat and commodity money is that fiat money can be produced in virtually unlimited quantities at very low cost. In this respect, the person who controls the printing press of a fiat currency is in a much stronger position than the person who owns a gold mine. With just some ink and paper, the printing press can create a million new dollars quite easily, whereas the owner of the gold mine would need to hire workers to operate expensive equipment in order to bring forth new amounts of gold having the same market value.

Yet we shouldn’t conclude that the owner of a printing press has unlimited power. For one thing, prices would eventually rise in response to large amounts of new money creation. So printing off, say, $1 million in fresh new currency would buy fewer and fewer goods and services with each successive round of inflation.

Even more problematic, the people in the community would abandon the currency if the inflation became too excessive. For example, if a brilliant counterfeiter developed a machine to produce perfect $100 bills in his basement, he wouldn’t be able to literally buy the whole world. Long before that point – even if the authorities didn’t track him down – people would have ditched the dollar and switched to the use of other currencies.

Although our scenario sounds farfetched, it’s actually very close to the real world, right now. The only difference is that instead of our hypothetical, brilliant counterfeiter in the basement, we have our actual, less-than-brilliant economist in the Federal Reserve. His name, of course, is Ben Bernanke.

The Bretton Woods System

The original Bretton Woods system – so named because of the location of the meetings that established it in 1944 – governed international monetary arrangements in the postwar era until Richard Nixon’s fateful decision to close the gold window in 1971.

Under the Bretton Woods agreement, other nations would use US dollars as their “reserves.” The Bank of England, Bank of France, etc., would issue their own domestic currencies, but would maintain stockpiles of US dollars with which they could regulate the value of their own currencies. If the British pound sterling began to depreciate against the US dollar, for example, then the Bank of England could enter the foreign-exchange market and use some of its dollar holdings to “buy pounds,” thus bringing the value of the pound back within target. In this way, investors across the globe could feel comfortable with their British financial holdings, because the pound was tied to the dollar.

Note the tremendously advantageous position that the Bretton Woods system assigned to the United States. As issuer of the world’s reserve currency, the United States had a very captive market. If the Bank of England wanted to increase its dollar reserves by another $1 million, then ultimately Great Britain had to sell $1 million worth of goods and services to Americans in order to earn the dollars. The Bretton Woods system effectively expanded the scope for US inflation to the entire world, thus magnifying the benefits to those who controlled the American printing press.

Of course, the other members of Bretton Woods understood these details. The US achieved its privileged outcome in the negotiations because of its economic and military might at that point in world history. But in order to restrain the natural temptation for runaway inflation by US officials, the Bretton Woods system linked the dollar itself to gold. Specifically, any central bank could redeem its dollars for gold at the fixed rate of $35 per ounce.

The Bretton Woods system has been described as a “gold-exchange standard,” in contrast to the classical gold standard. In the original framework – which was smashed, like so many other aspects of Western civilization, in World War I – each nation tied its own currency to gold. Then, the currencies in turn traded at fixed exchange rates against each other, because of their mutual ties to gold. Individual citizens could present the currencies for redemption in gold, keeping a very tight check on inflation. If any central bank began to issue too much currency in relation to its gold reserves, speculators would begin depleting the reserves, causing the central bank to quickly reverse course.

Under the diluted Bretton Woods system, individual citizens had no right of redemption. Most currencies were only indirectly linked to gold (via their link to the dollar). And, of course, even this tenuous link was destroyed when Richard Nixon abandoned the dollar’s convertibility to gold in 1971. At this point, the entire global financial system was based utterly on fiat money.

No longer shackled by the peg to gold, the Federal Reserve began printing money with reckless abandon. The obvious results were an acceleration in US consumer prices, and an explosion in the US trade deficit, trends that noticeably worsen after 1971:

CPI for Urban Consumers

Consumer Price Index (Blue Line, Right Scale) and Balance of Payments as a Share of GDP (Red Line, Left Scale)

The Reluctant Return to Gold

Say what you will about the powerful people running the global monetary system, but they aren’t stupid. They can see as well as the rest of us that there is no “exit strategy” for Bernanke’s bouts of massive inflation, or “quantitative easing” as they now call it. At some point, the trillion(s) in excess reserves will begin leaking back into the broader monetary aggregates. At that point, Bernanke or a successor will need to choose between saving the dollar or saving major Wall Street institutions. I predict that he will sacrifice the dollar, and it seems many elites around the world have come to the same conclusion.

It is in this context that World Bank president Zoellick writes:

The G20 should complement [a] growth recovery programme with a plan to build a co-operative monetary system that reflects emerging economic conditions. This new system is likely to need to involve the dollar, the euro, the yen, the pound and a renminbi that moves towards internationalisation and then an open capital account.

The system should also consider employing gold as an international reference point of market expectations about inflation, deflation and future currency values. Although textbooks may view gold as the old money, markets are using gold as an alternative monetary asset today. (emphasis added)

To repeat, gold is the bane of central bankers; it ties their hands and limits their discretion when conducting monetary policy. However, the game collapses if people lose faith in the fiat currency underpinning the whole system. As the recklessness of Bernanke’s moves becomes apparent to more and more people, the central planners around the world will need to throw a bone to the fearful public. A “basket of currencies,” each of which is still fiat-paper money, will not suffice.

As Zoellick is a member of the Council on Foreign Relations, and a participant in the notorious Bilderberg meetings, some analysts are understandably suspicious of his motives. After all, if powerful people were trying to introduce a regional currency to replace the dollar – in the same way that the euro has supplanted the traditional European currencies – then it would be necessary to first wreck the dollar. In its place, it would be very tempting to offer a new currency with a tie to gold.

In this light, what appear to be “inexplicable” and contradictory actions by the Federal Reserve and other powerful figures would make perfect sense.

Conclusion

Regardless of the machinations of the political insiders, the laws of economics cannot be denied. Central bankers cannot be trusted with the printing press, especially when there is no formal check on their inflationary policies. It is no coincidence that gold is hitting such heights as investors the world over hunker down for what may very well be a collapse of the dollar system.

Robert Murphy
for The Daily Reckoning

Gold: The Market’s Global Currency originally appeared in the Daily Reckoning. The Daily Reckoning, offers a uniquely refreshing, perspective on the global economy, investing, gold, stocks and today’s markets. Its been called “the most entertaining read of the day.”

Read more here:
Gold: The Market’s Global Currency




The Daily Reckoning is a contrarian e-letter, brought to you by New York Times best-selling authors Bill Bonner and Addison Wiggin since 1999. The DR looks at the economic world-at-large and offers its major players – investors, politicians, economists and the average consumer – some much-needed constructive criticism.

Uncategorized

Gold: The Market’s Global Currency

November 13th, 2010

World Bank president Robert Zoellick has stirred up a hornet’s nest with his recent call for a return to a gold anchor in the global financial system.

The usual suspects immediately denounced him, with Keynesian Brad DeLong anointing Zoellick the “Stupidest Man Alive.”

In the present article I’ll explain the resurging interest in the yellow metal.

I’ll also explain the dangers of Zoellick’s proposal, and why fans of the classical gold standard should be wary.

The Limitations of the Printing Press

In order to make sense of our current situation – and why Zoellick would timidly call for a return to a pseudo-gold standard – we need to first think through the logic of fiat money. Fiat money is not “backed up” by anything; it is intrinsically useless paper (or nowadays, mere electronic bookkeeping entries) that is valuable only because of its anticipated purchasing power. In contrast, a market-based commodity money, such as gold or silver, is a useful good in its own right, serving industrial and consumer purposes.

The critical difference between fiat and commodity money is that fiat money can be produced in virtually unlimited quantities at very low cost. In this respect, the person who controls the printing press of a fiat currency is in a much stronger position than the person who owns a gold mine. With just some ink and paper, the printing press can create a million new dollars quite easily, whereas the owner of the gold mine would need to hire workers to operate expensive equipment in order to bring forth new amounts of gold having the same market value.

Yet we shouldn’t conclude that the owner of a printing press has unlimited power. For one thing, prices would eventually rise in response to large amounts of new money creation. So printing off, say, $1 million in fresh new currency would buy fewer and fewer goods and services with each successive round of inflation.

Even more problematic, the people in the community would abandon the currency if the inflation became too excessive. For example, if a brilliant counterfeiter developed a machine to produce perfect $100 bills in his basement, he wouldn’t be able to literally buy the whole world. Long before that point – even if the authorities didn’t track him down – people would have ditched the dollar and switched to the use of other currencies.

Although our scenario sounds farfetched, it’s actually very close to the real world, right now. The only difference is that instead of our hypothetical, brilliant counterfeiter in the basement, we have our actual, less-than-brilliant economist in the Federal Reserve. His name, of course, is Ben Bernanke.

The Bretton Woods System

The original Bretton Woods system – so named because of the location of the meetings that established it in 1944 – governed international monetary arrangements in the postwar era until Richard Nixon’s fateful decision to close the gold window in 1971.

Under the Bretton Woods agreement, other nations would use US dollars as their “reserves.” The Bank of England, Bank of France, etc., would issue their own domestic currencies, but would maintain stockpiles of US dollars with which they could regulate the value of their own currencies. If the British pound sterling began to depreciate against the US dollar, for example, then the Bank of England could enter the foreign-exchange market and use some of its dollar holdings to “buy pounds,” thus bringing the value of the pound back within target. In this way, investors across the globe could feel comfortable with their British financial holdings, because the pound was tied to the dollar.

Note the tremendously advantageous position that the Bretton Woods system assigned to the United States. As issuer of the world’s reserve currency, the United States had a very captive market. If the Bank of England wanted to increase its dollar reserves by another $1 million, then ultimately Great Britain had to sell $1 million worth of goods and services to Americans in order to earn the dollars. The Bretton Woods system effectively expanded the scope for US inflation to the entire world, thus magnifying the benefits to those who controlled the American printing press.

Of course, the other members of Bretton Woods understood these details. The US achieved its privileged outcome in the negotiations because of its economic and military might at that point in world history. But in order to restrain the natural temptation for runaway inflation by US officials, the Bretton Woods system linked the dollar itself to gold. Specifically, any central bank could redeem its dollars for gold at the fixed rate of $35 per ounce.

The Bretton Woods system has been described as a “gold-exchange standard,” in contrast to the classical gold standard. In the original framework – which was smashed, like so many other aspects of Western civilization, in World War I – each nation tied its own currency to gold. Then, the currencies in turn traded at fixed exchange rates against each other, because of their mutual ties to gold. Individual citizens could present the currencies for redemption in gold, keeping a very tight check on inflation. If any central bank began to issue too much currency in relation to its gold reserves, speculators would begin depleting the reserves, causing the central bank to quickly reverse course.

Under the diluted Bretton Woods system, individual citizens had no right of redemption. Most currencies were only indirectly linked to gold (via their link to the dollar). And, of course, even this tenuous link was destroyed when Richard Nixon abandoned the dollar’s convertibility to gold in 1971. At this point, the entire global financial system was based utterly on fiat money.

No longer shackled by the peg to gold, the Federal Reserve began printing money with reckless abandon. The obvious results were an acceleration in US consumer prices, and an explosion in the US trade deficit, trends that noticeably worsen after 1971:

CPI for Urban Consumers

Consumer Price Index (Blue Line, Right Scale) and Balance of Payments as a Share of GDP (Red Line, Left Scale)

The Reluctant Return to Gold

Say what you will about the powerful people running the global monetary system, but they aren’t stupid. They can see as well as the rest of us that there is no “exit strategy” for Bernanke’s bouts of massive inflation, or “quantitative easing” as they now call it. At some point, the trillion(s) in excess reserves will begin leaking back into the broader monetary aggregates. At that point, Bernanke or a successor will need to choose between saving the dollar or saving major Wall Street institutions. I predict that he will sacrifice the dollar, and it seems many elites around the world have come to the same conclusion.

It is in this context that World Bank president Zoellick writes:

The G20 should complement [a] growth recovery programme with a plan to build a co-operative monetary system that reflects emerging economic conditions. This new system is likely to need to involve the dollar, the euro, the yen, the pound and a renminbi that moves towards internationalisation and then an open capital account.

The system should also consider employing gold as an international reference point of market expectations about inflation, deflation and future currency values. Although textbooks may view gold as the old money, markets are using gold as an alternative monetary asset today. (emphasis added)

To repeat, gold is the bane of central bankers; it ties their hands and limits their discretion when conducting monetary policy. However, the game collapses if people lose faith in the fiat currency underpinning the whole system. As the recklessness of Bernanke’s moves becomes apparent to more and more people, the central planners around the world will need to throw a bone to the fearful public. A “basket of currencies,” each of which is still fiat-paper money, will not suffice.

As Zoellick is a member of the Council on Foreign Relations, and a participant in the notorious Bilderberg meetings, some analysts are understandably suspicious of his motives. After all, if powerful people were trying to introduce a regional currency to replace the dollar – in the same way that the euro has supplanted the traditional European currencies – then it would be necessary to first wreck the dollar. In its place, it would be very tempting to offer a new currency with a tie to gold.

In this light, what appear to be “inexplicable” and contradictory actions by the Federal Reserve and other powerful figures would make perfect sense.

Conclusion

Regardless of the machinations of the political insiders, the laws of economics cannot be denied. Central bankers cannot be trusted with the printing press, especially when there is no formal check on their inflationary policies. It is no coincidence that gold is hitting such heights as investors the world over hunker down for what may very well be a collapse of the dollar system.

Robert Murphy
for The Daily Reckoning

Gold: The Market’s Global Currency originally appeared in the Daily Reckoning. The Daily Reckoning, offers a uniquely refreshing, perspective on the global economy, investing, gold, stocks and today’s markets. Its been called “the most entertaining read of the day.”

Read more here:
Gold: The Market’s Global Currency




The Daily Reckoning is a contrarian e-letter, brought to you by New York Times best-selling authors Bill Bonner and Addison Wiggin since 1999. The DR looks at the economic world-at-large and offers its major players – investors, politicians, economists and the average consumer – some much-needed constructive criticism.

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