Equities Don’t Follow the Dollar Index So Hold On!

April 18th, 2011

So far in 2011 the equities market has made some sizable whip saw type moves that even veteran traders have had difficulty being on the right side of the price action. The year started out with equities being very overbought and extended making is virtually impossible for a low risk trader to buy on pullbacks. This was primarily due to the fact that there were no real pullbacks other than for a day or two which was immediately followed by prices continuing to grind higher.

In March, we finally had the pullback everyone was waiting for which we caught 4% of the sell off using an inverse ETF. Then we saw the bottom a few days later and caught a 3% gain from near the lows during a rally higher. So as you can see there have been three trends in the SP500 so far this year and we are about to see another sizable move unfold in the coming week.

In the past 8 sessions we have seen the market pullback slightly and the big question everyone is asking is do we get long or do we short here? Below are my thoughts and analysis….

US Dollar Index – Daily Chart
The dollar is still in a very strong down trend. As long as it continues to fall we should see higher stock and commodity prices. I do feel as though there is more downside for the dollar but its nearing an end. Stepping back and looking at the longer term chart of the dollar is very clear that it is getting oversold and sizable bounce should take place. If we see the dollar breakout of this falling wedge and start to rally you will want to be short stocks and commodities.

SPY ETF (SP500 Index Fund) Daily Chart
When comparing the Dow Jones Industrial Average and the Russell 2K indexes it is rather obvious that both have performed well this year and have broken above the February highs. The DOW was strong because it has it is exposed to energy stocks and with oil rocketing higher, it has helped those energy based stocks lift the index higher. The Russell 2K consists of small cap stocks and with the general public still being so bullish on the equity markets and investors are buying volatile, high risk small cap stocks to help boost their gains.

Commodities, ETF

Equities Don’t Follow the Dollar Index So Hold On!

April 18th, 2011

So far in 2011 the equities market has made some sizable whip saw type moves that even veteran traders have had difficulty being on the right side of the price action. The year started out with equities being very overbought and extended making is virtually impossible for a low risk trader to buy on pullbacks. This was primarily due to the fact that there were no real pullbacks other than for a day or two which was immediately followed by prices continuing to grind higher.

In March, we finally had the pullback everyone was waiting for which we caught 4% of the sell off using an inverse ETF. Then we saw the bottom a few days later and caught a 3% gain from near the lows during a rally higher. So as you can see there have been three trends in the SP500 so far this year and we are about to see another sizable move unfold in the coming week.

In the past 8 sessions we have seen the market pullback slightly and the big question everyone is asking is do we get long or do we short here? Below are my thoughts and analysis….

US Dollar Index – Daily Chart
The dollar is still in a very strong down trend. As long as it continues to fall we should see higher stock and commodity prices. I do feel as though there is more downside for the dollar but its nearing an end. Stepping back and looking at the longer term chart of the dollar is very clear that it is getting oversold and sizable bounce should take place. If we see the dollar breakout of this falling wedge and start to rally you will want to be short stocks and commodities.

SPY ETF (SP500 Index Fund) Daily Chart
When comparing the Dow Jones Industrial Average and the Russell 2K indexes it is rather obvious that both have performed well this year and have broken above the February highs. The DOW was strong because it has it is exposed to energy stocks and with oil rocketing higher, it has helped those energy based stocks lift the index higher. The Russell 2K consists of small cap stocks and with the general public still being so bullish on the equity markets and investors are buying volatile, high risk small cap stocks to help boost their gains.

Commodities, ETF

Instead of Modeling Risk, Why Not Control It?

April 18th, 2011

Risk comes from not knowing what you’re doing.” Warren Buffett

To be more successful in helping investors the professionals that provide guidance to wealthy investors need to step up and take control of risk rather than sitting around figuring how to estimate risk using complex models and simulations. All models are necessarily based on a multitude of critical assumptions and if any of those assumptions are wrong, and a few of them always are, then the model is worthless and actually does more harm than good. It’s better to acknowledge that you don’t know the risk rather than to proceed under a false assumption.

The volatility investors faced within the equity markets in 2008 and 2009 led me to think about the changes I’ve seen as an equity trader and manager over many years.  As an investment professional for more than 45 years, believe me when I say that I have seen plenty of changes.

The basic principles of investing have remained constant throughout history. Successful investing is all about risk and reward; it always has been and always will be. If there were no reward no one would bother to invest and if we assumed there was no risk we would either be ignorant of the facts or most likely looking at some sort of Ponzi scheme.

Investing relates risk with reward and that is something you already know.  In this article I intend to deal primarily with the risk side of investing because no one has control of the reward side. However it surprises me that so little is actually known and understood about the risk side of investing.  Let’s briefly summarize a few things that we do know about the risks of investing.

Most investment professionals are aware that risk exists and spend a great deal of time and effort trying to prudently define the risk of each investment and then attempt to limit the risk to some acceptable amount that is proportional to the expected rewards. As simple as this approach might seem it quickly gets very complicated. Professionals have found that accurately quantifying and forecasting risk is surprisingly difficult. Look at all the failed models the academic community has come up with to quantify and anticipate the risks of a particular investment or a portfolio of investments.

Whenever I am thinking of examples of attempts to model and quantify risk, Long Term Capital Management comes to mind. As you may recall, some of the brightest minds in the academic community got together and came up with a plan to provide attractive returns with hardly any risk. On paper the idea looked foolproof but in reality they had no idea what was eventually going to happen. Their complex models did not correctly anticipate the eventual risk and the project blew up costing the investment community hundreds of millions of dollars in losses and requiring the federal government to take some extreme (at the time) measures to prevent a broad financial meltdown. The point here is that even the brightest Nobel laureates failed dismally at predicting and limiting risk. What they failed to understood was that the only way to predict risk is to take control of it. Why go to such great lengths to build complex models to estimate risk when we have the ability to simply set the risk at the level we want? In this article I intend to explain the advantages of simply taking control of risk rather than simply trying to estimate what it might be. I will also explain how risk can easily be limited.

To be more successful in helping investors the professionals that provide guidance to wealthy investors need to step up and take control of risk rather than sitting around figuring how to estimate risk using complex models and simulations.  All models are necessarily based on a multitude of critical assumptions and if any of those assumptions are wrong, and a few of them always are, then the model is worthless and actually does more harm than good. It’s better to acknowledge that you don’t know the risk rather than to proceed under a false assumption. Even generally reliable methods such as Monte Carlo simulations are now under attack for failing to accurately predict the probability of the 2008 decline. According to these simulations the probabilities of a decline like the one we just experienced were so remote that it wasn’t supposed to have happened.

Now let’s move forward and get right to the heart of the problem. I believe that the common investment philosophy of buy and hold is entirely to blame for the drastic losses that investors have suffered and for the current lack of confidence in equity investments. You should note that I refer to buy and hold as a philosophy and not a strategy.  That is because buy and hold is in fact the absence of an exit strategy which leaves the eventual outcome of the investment entirely to chance with no control of the risk.  If you start out with the idea that you are going to buy a stock and hold it forever regardless of what happens then it is impossible to know what the risk might be unless you assume the actual risk is the total amount invested. Unfortunately that dire assumption would be the only correct one. Any more optimistic assumption of the risk when using a buy and hold approach is flawed and likely to fail.

Now that we have accurately quantified the risk of investing in any particular stock there are many obvious problems associated with the assumption that the risk is 100% of the amount invested. In order to invest successfully we want our potential reward to exceed our risk. That principle is the foundation of modern portfolio theory. If the risk is 100% then our reward should be more than that. However, in many cases a return greater than 100% may not be possible or realistic. How many investors would enter the equity market if they were aware that their risk was 100% of their investment?

Now we can appreciate the reasoning behind the need for portfolio diversification.

I think it is safe to say that a policy of prudent diversification should prevent us from losing 100% of our total investment (as long as we are not using any form of leverage). However, as we clearly saw in 2008, diversifying a portfolio of stocks will not prevent losses of 40% or 50% or unacceptable losses that could be much higher. The clear threat of systemic risk makes portfolio diversification and periodic rebalancing ineffective in limiting risk to acceptable levels. In fact the former manager of the Harvard endowment, Mohamed El-Erian, recently stated, “Diversification alone is no longer sufficient to temper risk. In the past year, we saw virtually every asset class hammered. You need something more to manage risk well.”

The realization that risk is not being effectively controlled by traditional portfolio management techniques is disturbing to investors and has not only caused them to lose confidence in equity investing but in their wealth advisers as well. That current state of affairs is unfortunate because the solution is to simply abandon buy and hold and implement a strategy that protects equity investments with trailing stops.

Unfortunately however the mutual fund industry has deliberately misled the public and advisers into believing that any form of market timing will cause investors to miss important rising periods in the market and drastically reduce long term results. The dissemination of this false, misleading and inaccurate information should be a criminal offense.

The mutual fund industry and their stooges in the investment community have been very fond of publishing various studies that show the negative consequences of missing a handful of important up days in the market. They want investors to believe that they must be willing to hold on to their investments through thick and thin in order to make a decent return. They publicize misleading excerpts from academic studies to frighten investors into believing that they should never sell and reassure them that in the long run they will benefit from doing nothing to mitigate the drastic losses that they are exposed to. It would seem that because mutual funds are unable to use market timing they don’t want their investors to use it either.

Let’s talk a little about these typical studies and why they are so misleading. The studies always show the consequences of missing a few important up days in the market but fail to point out the benefits of skipping a few of the worst down days in the market. The truth is that the benefits of skipping those down days far outweigh the penalties of missing the equivalent number of up days. Let’s take a close look at what might be the most comprehensive study of this subject.

The study I will be referencing is entitled Black Swans and Market Timing and was conducted by Javier Estrada at the IESE Business School in Barcelona, Spain. This important study encompasses more than 100 years of data on the Dow Jones Industrials.

Here is a summary of the highlights of this study:

A $100 investment at the beginning of 1900 turned into $25,746 by the end 2006, and delivered a mean annual compound return of 5.3%.

Missing the best 10 days reduced the terminal wealth by 65% to $9,008, and the mean annual compound return one percentage point to 4.3%.

Avoiding the worst 10 days increased the terminal wealth (with respect to a passive investment) by 206% to $78,781, and the mean annual compound return by more than one percentage point to 6.4%.

Missing the best 20 days reduced the terminal wealth by 83.2% to $4,313, and the mean annual compound return to 3.6%. But avoiding the worst 20 days increased the terminal wealth by 531.5% to $162,588, and the mean annual compound return to 7.2%.

And missing the best 100 days (0.34% of the days considered) reduced the terminal wealth by 99.7% to just $83 ($17 less than the initial capital invested), and the mean annual compound return was reduced to −0.2%.

And finally the most important part of the study show that avoiding the worst 100 days (0.34% of the days considered) increased the terminal wealth by a staggering 43,396.8% to $11,198,734, and more than doubles the mean annual compound return to 11.5%.

There have been many studies over shorter time periods that show very similar results. In all of these studies avoiding the down periods always has much more positive benefit than the negative consequences of skipping the biggest up days. However that critical part of the studies is seldom publicized because the fund industry broadly disseminates only the part of the studies that show the negative consequences of missing a few important up days in order to discourage their investors from ever selling their shares.

I have never seen any evidence that supports the assumption that prudent efforts to skip the biggest down days must necessarily result in missing any critical up days. The critics of market timing are quick to point out that it would be impossible to identify and avoid these particular down days. I would agree that it is impossible to know exactly when these down days may occur. But to achieve our goal of avoiding these down days we can take a shotgun approach rather than the rifle approach that targets only specific days. We can easily identify broad down-trending periods when these down days are most likely to occur. With some effort we can skip the entire period of weakness and achieve the same or even better results than targeting only a few specific days.

Was the 2008 debacle avoidable with simple market timing? Indeed it was and a surprising number of market technicians using very simple methods saw the warning signs in the fall of 2007. I think it might be appropriate at this point to make some general comments in support of market timing. Many critics think of market timing as some sort of crystal ball forecasting, which it is not. Effective market timing is based on careful observations of what is actually happening and not on predicting the future. Let me give you an analogy that might help.

Picture yourself walking down the middle of a narrow road at night and in the distance you see headlights approaching. You are confident that the headlights are real and not an optical illusion. Should you move to the side of the road and wait until the car passes just to be safe even though it might delay your journey by a few minutes? Would that prudent action be based on some dubious prediction of the future or is it merely a disciplined reaction to potential trouble you can easily see coming? If the car happens to stop unexpectedly and turn around would you second guess your decision and think your caution was ill advised? What would you do if you saw another car coming? I would argue that avoiding risk that you can see coming is always a good decision and that is really what using market timing for exits is all about.

We all know that reliably predicting specific future events is impossible. Effective market timing should never be based on illogical predictions.  However most market timing is based on factual observations of reality and no crystal balls or astrological tables are needed.

Now let’s get a bit more specific about timing the exits of equity positions to avoid risk. In more than forty years of research and much trial and error I have concluded that periods of extraordinary price weakness almost always result in further price weakness. The obvious problem with this logic is that stocks go up and down all the time so and accurately defining and recognizing extraordinary price weakness promptly can be very difficult. As you might imagine the magnitude of these normal up and down price movements varies quite a bit from stock to stock and also changes according to the trend direction of the stock. Attempts to apply a fixed percentage decline (8% or 10% are popular) have failed because those percentages are not the best settings for most stocks most of the time. Using the same percentage trailing stops on 5,000 or more stocks is like lining up 5,000 people and trying to fit them all into a size ten shoe.

Setting trailing exits by attempting to identify levels of support are also popular but what qualifies as a valid support level can vary depending on the skills and experience of the person reading the chart. Identifying support levels is a highly subjective approach which appears to work better in hindsight than it does in real time. Also a serious problem occasionally arises if the stock is in a severe downtrend and the previous support levels have all been broken. If you are entering stocks on the weakness, as many value investors prefer, then there may be no support in sight. On the other hand if the stock is in an uptrend and moving at a rapid rate it can quickly climb so far above a previous support level that the exit point is too far away to limit risk to a reasonable amount.

I could go on and explain the shortcomings of many more conventional stop setting techniques but they all suffer from the same basic problem. They fail to accurately identify what is truly abnormal price weakness.  If investors take action prematurely and sell a stock based on less than abnormal price action they often experience a dreaded “whipsaw” where the stock resumes its upward price action and they have sold unnecessarily and miss a valuable opportunity for profits. When this happens investors tend to blame the trailing exit rather than their failure to recognize that the stock was going up and simply buy it back. After a painful “whipsaw” or two the investors vow to never use trailing stops again and they eventually get themselves into serious trouble. Some investors try to avoid costly and frustrating “whipsaws” by setting their exits much further away. But this tactic generally leads to taking much bigger losses than necessary. One popular exit strategy is to risk 25% on every stock.  That approach makes more sense than buy and hold but in most cases a setting a trailing stop that far away results in taking much more risk than necessary.

As the developer of the algorithms used at SmartStops.net I can briefly explain the logic that makes the SmartStops trailing exits so much more accurate and effective than other methods of setting trailing stops. First in order to recognize “abnormal” price weakness we must accurately define “normal” price action. One primary element of that task is to constantly track volatility so that we know how far a stock will normally travel up or down over a particular time period. The direction the stock is headed also has an effect on what is normal price action. Direction needs to be defined as up, down or sideways because there is specific price action that is normal for each of those directions. Also it is important to be able to set the exits further away when a stock is moving up so that we can let the profits run. If we believe, as I do, in the old adage of letting profits run and cutting losses short then it logically follows that in a downtrend our exits should be closer.

Volatility and trend direction vary widely from stock to stock so it easy to see why conventional methods of setting stops can be so futile.  Using the same trailing exit for every stock is not the best way to limit losses and protect capital. The exits need to be very adaptive as the precise definitions of “normal” and “abnormal” change daily.

In conclusion I suggest that modern investors need step up and take control of risk. There is nothing we can do to control the size of profits so let’s take control and limit the size of our losses. As the “Black Swan” and other studies have demonstrated, avoiding losses will accelerate profits dramatically.

Read more here:
Instead of Modeling Risk, Why Not Control It?




HERE IS YOUR FOOTER

Mutual Fund, Uncategorized

Smoke, Mirrors and Hurricane Warnings

April 17th, 2011
Martin Weiss

We’ve been had! Again.

First, our leaders in Washington have subjected us to the insult that, after nearly a year of wrangling over the 2011 budget — and even after the American people installed an army of self-avowed budget-balancers in Congress — the best they could do was reduce government spending by a meager $38 billion.

Sure, $38 billion sounds like a lot when you say it fast. But do a little arithmetic and the truth suddenly becomes clear. $38 billion in cuts is no more than 2% of this year’s budget deficit — a microscopic drop in Washington’s vast ocean of debt.

Adding insult to injury, according to the Congressional Budget Office (CBO), even that paltry number was a fantasy. The new budget does not really cut $38 billion in spending — only $352 million.

We had barely swallowed that bitter pill, when we were subjected to the much-ballyhooed budget-cutting plan President Obama presented in his speech to the nation on Wednesday. But even his supporters admit it was no plan at all — merely a loose collection of good intentions and bad ideas that neither the CBO nor his own Office of Management and Budget (OMB) could possibly attach a number to.

After witnessing this budgetary train wreck over the past few weeks, only one conclusion is clear: Washington is still talking a good game — but nobody on either side of the aisle in Congress or in the White House is actually DOING anything about it.

To any investor who’s paying attention, Washington’s latest follies are not merely an embarrassment.

They are proof of the incompetence and cowardice of our leaders …

They are strong indications that our government is unlikely to find the intestinal fortitude to end its spending, borrowing and money-printing addiction.

And they are, above all, a hurricane alarm — a warning that today’s dollar disaster and soaring tangible asset prices are likely to accelerate in the weeks and months ahead.

Good luck and God bless!

Martin

Read more here:
Smoke, Mirrors and Hurricane Warnings

Commodities, ETF, Mutual Fund, Uncategorized

Brand New Video Online Now!

April 17th, 2011
Martin Weiss

But tomorrow, two things will happen: The video will come offline permanently. And all enrollment for our strategy — investing $1,000,000 of my own money in these kinds of windfall opportunities — will close.

We have no choice. The markets cannot wait. Nor can WE wait for Congress or the White House to move forward to solve the immediate threats we face as investors.

In fact, the sad reality is that, we’ve been had! Again.

First, our leaders in Washington have subjected us to the insult that, after nearly a year of wrangling over the 2011 budget — and even after the American people installed an army of self-avowed budget-balancers in Congress — the best they could do was reduce government spending by a meager $38 billion.

Sure, $38 billion sounds like a lot when you say it fast. But do a little arithmetic and the truth suddenly becomes clear. $38 billion in cuts is no more than 2% of this year’s budget deficit — a microscopic drop in Washington’s vast ocean of debt.

Adding insult to injury, according to the Congressional Budget Office (CBO), even that paltry number was a fantasy. The new budget does not really cut $38 billion in spending — only $352 million.

We had barely swallowed that bitter pill, when we were subjected to the much-ballyhooed budget-cutting plan President Obama presented in his speech to the nation on Wednesday. But even his supporters admit it was no plan at all — merely a loose collection of good intentions and bad ideas that neither the CBO nor his own Office of Management and Budget (OMB) could possibly attach a number to.

After witnessing this budgetary train wreck over the past few weeks, only one conclusion is clear: Washington is still talking a good game — but nobody on either side of the aisle in Congress or in the White House is actually DOING anything about it.

To any investor who’s paying attention, Washington’s latest follies are not merely an embarrassment.

They are proof of the incompetence and cowardice of our leaders …

They are strong indications that our government is unlikely to find the intestinal fortitude to end its spending, borrowing and money-printing addiction.

And they are, above all, a hurricane alarm — a warning that today’s dollar disaster and soaring tangible asset prices are likely to accelerate in the weeks and months ahead.

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But you’ll have to hurry:
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Good luck and God bless!

Martin

Read more here:
Brand New Video Online Now!

Commodities, ETF, Mutual Fund, Uncategorized

What Is Silver Screaming About?

April 16th, 2011

The current surge in bids to buy silver might seem dramatic, but it’s more measured by far – to date, at least – than the true silver bubble of September 1979 to January 1980.

Even so, you may as well call this a record price. In real terms, as Matt Turner at Mitsubishi told me this week, one ounce of silver briefly rose above 40 of today’s US dollars per ounce in 1864, when the American Civil War neared its climax. In nominal dollars, the Hunt brothers’ multi-billion-dollar corner only saw it more highly priced on 5 trading days in January 1980. And while US investors waiting to buy silver are also still waiting for it to record a new intra-day high, it’s already broken new ground against the British pound and for most of the Eurozone, too.

The cause? Gold investors have long tried to explain how the metal is “telling us” something. “First warning” of the looming financial crisis, said Marc Faber in his Gloom, Boom & Doom Report of September ’07, was when “the price of gold more than doubled in nominal terms and against the Dow Jones Industrial Average [because of] ultra-expansionary US monetary policies with artificially low interest rates.”

In which case, and with global interest rates further below zero today after inflation than at any time since 1980, what in the hell is silver telling us now?

Gold vs. Silver vs. TIPS

“TIPS pay a lower rate of interest than regular Treasuries,” explained Bloomberg News when the yield offered by 5-year Treasury Inflation Protected Securities briefly dipped below zero (and $20 silver broke a 28-year high) back in March 2008.

“[That’s] because their principal rises in tandem with a version of the consumer price index which includes food and energy prices. Rising demand for TIPS [which pushes up prices and so pushes down the nominal yield] indicates investors expect the inflation adjustment to make up the difference.”

What great expectations TIPS buyers must have of Uncle Sam’s “inflation adjustment” today! They’re buying 5-year index-linked bonds with a nominal yield of minus 0.6%, anticipating a full 2.8% per year fillip from Washington when compared with the annual yield now offered by conventional 5-year bonds. And what greater hopes still must the new rush of silver investment hold…rejecting TIPS in favor of metal, and breaking silver’s tight connection with both gold prices and TIPS yields as our chart above shows.

Note the point at which silver breaks higher – right when Fed chairman Bernanke vowed to begin QE2 in summer last year. That a fast-growing nugget of the world’s private wealth is fearful of the result is clear. That silver looks a turbo-charged play is clearer still. Because as an industrial as well as monetary metal, silver is exposed to strong economic growth – as well as loose central-bank policy – in a way that its cousin, gold bullion, isn’t. You could point to 2010’s record levels of Indian and Chinese gold demand coming off their continued economic booms, but Asia’s silver investment demand is surging faster still. And the aim of all this easy money, remember, is to keep GDP stoked, whether in Beijing, Washington, Frankfurt or London.

Little wonder then that Chinese, US, Eurozone and UK inflation is rising sharply. And so no wonder either then that…

  • By value, London’s wholesale bullion market last month saw silver volumes jump to one-sixth the daily turnover of gold plus silver, according to the LBMA’s new stats, released to members today. That’s a 13-year high. In raw dollars, silver turnover set new all-time records for the second month running.
  • By number, New York’s Comex saw the volume of silver futures contracts overtake the volume of gold futures on Monday and Tuesday this week. By value, silver trading rose to one-seventh of total gold and silver volumes, up from a seventeenth just a month ago.
  • ETF Securities say their silver exchange-traded products saw “more flows than any other individual commodity ETP” in the first quarter
  • Here at BullionVault – the world’s largest gold ownership service online – our customers have pushed silver trading up from 22% of daily volumes by value in January to 27% in both March and so far in April.

There’s no bull market like a silver bull market, in short – just ask the Hunt brothers ahead of their bankruptcy, eight years after their corner blew up with the big inflation-fueled 1970s’ bull market. Double-digit Fed interest rates popped the bubble back then (plus a good dose of anti-speculative action by regulators and the exchanges, otherwise known as “saving the system” of course. It was sparked in turn by the Hunt brothers’ own naked greed, otherwise known to them as “inflation protection”). The most recent time silver got hot, however, it took oil at $150 and then the Lehman Brothers’ collapse to do to GDP growth and commodity prices what central bankers wouldn’t dare. Because raising interest rates to double digits to kill a “speculative frenzy” wasn’t politically possible.

Silver’s bull run, unlike gold’s, is all about inflation. Which is worth bearing in mind whether you’re quitting, holding, ignoring or looking to buy silver today.

Regards,

Adrian Ash
for The Daily Reckoning

What Is Silver Screaming About? originally appeared in the Daily Reckoning. The Daily Reckoning recently featured articles on stagflation, best libertarian books, and QE2

.

Read more here:
What Is Silver Screaming About?




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, ETF, Uncategorized

What Is Silver Screaming About?

April 16th, 2011

The current surge in bids to buy silver might seem dramatic, but it’s more measured by far – to date, at least – than the true silver bubble of September 1979 to January 1980.

Even so, you may as well call this a record price. In real terms, as Matt Turner at Mitsubishi told me this week, one ounce of silver briefly rose above 40 of today’s US dollars per ounce in 1864, when the American Civil War neared its climax. In nominal dollars, the Hunt brothers’ multi-billion-dollar corner only saw it more highly priced on 5 trading days in January 1980. And while US investors waiting to buy silver are also still waiting for it to record a new intra-day high, it’s already broken new ground against the British pound and for most of the Eurozone, too.

The cause? Gold investors have long tried to explain how the metal is “telling us” something. “First warning” of the looming financial crisis, said Marc Faber in his Gloom, Boom & Doom Report of September ’07, was when “the price of gold more than doubled in nominal terms and against the Dow Jones Industrial Average [because of] ultra-expansionary US monetary policies with artificially low interest rates.”

In which case, and with global interest rates further below zero today after inflation than at any time since 1980, what in the hell is silver telling us now?

Gold vs. Silver vs. TIPS

“TIPS pay a lower rate of interest than regular Treasuries,” explained Bloomberg News when the yield offered by 5-year Treasury Inflation Protected Securities briefly dipped below zero (and $20 silver broke a 28-year high) back in March 2008.

“[That’s] because their principal rises in tandem with a version of the consumer price index which includes food and energy prices. Rising demand for TIPS [which pushes up prices and so pushes down the nominal yield] indicates investors expect the inflation adjustment to make up the difference.”

What great expectations TIPS buyers must have of Uncle Sam’s “inflation adjustment” today! They’re buying 5-year index-linked bonds with a nominal yield of minus 0.6%, anticipating a full 2.8% per year fillip from Washington when compared with the annual yield now offered by conventional 5-year bonds. And what greater hopes still must the new rush of silver investment hold…rejecting TIPS in favor of metal, and breaking silver’s tight connection with both gold prices and TIPS yields as our chart above shows.

Note the point at which silver breaks higher – right when Fed chairman Bernanke vowed to begin QE2 in summer last year. That a fast-growing nugget of the world’s private wealth is fearful of the result is clear. That silver looks a turbo-charged play is clearer still. Because as an industrial as well as monetary metal, silver is exposed to strong economic growth – as well as loose central-bank policy – in a way that its cousin, gold bullion, isn’t. You could point to 2010’s record levels of Indian and Chinese gold demand coming off their continued economic booms, but Asia’s silver investment demand is surging faster still. And the aim of all this easy money, remember, is to keep GDP stoked, whether in Beijing, Washington, Frankfurt or London.

Little wonder then that Chinese, US, Eurozone and UK inflation is rising sharply. And so no wonder either then that…

  • By value, London’s wholesale bullion market last month saw silver volumes jump to one-sixth the daily turnover of gold plus silver, according to the LBMA’s new stats, released to members today. That’s a 13-year high. In raw dollars, silver turnover set new all-time records for the second month running.
  • By number, New York’s Comex saw the volume of silver futures contracts overtake the volume of gold futures on Monday and Tuesday this week. By value, silver trading rose to one-seventh of total gold and silver volumes, up from a seventeenth just a month ago.
  • ETF Securities say their silver exchange-traded products saw “more flows than any other individual commodity ETP” in the first quarter
  • Here at BullionVault – the world’s largest gold ownership service online – our customers have pushed silver trading up from 22% of daily volumes by value in January to 27% in both March and so far in April.

There’s no bull market like a silver bull market, in short – just ask the Hunt brothers ahead of their bankruptcy, eight years after their corner blew up with the big inflation-fueled 1970s’ bull market. Double-digit Fed interest rates popped the bubble back then (plus a good dose of anti-speculative action by regulators and the exchanges, otherwise known as “saving the system” of course. It was sparked in turn by the Hunt brothers’ own naked greed, otherwise known to them as “inflation protection”). The most recent time silver got hot, however, it took oil at $150 and then the Lehman Brothers’ collapse to do to GDP growth and commodity prices what central bankers wouldn’t dare. Because raising interest rates to double digits to kill a “speculative frenzy” wasn’t politically possible.

Silver’s bull run, unlike gold’s, is all about inflation. Which is worth bearing in mind whether you’re quitting, holding, ignoring or looking to buy silver today.

Regards,

Adrian Ash
for The Daily Reckoning

What Is Silver Screaming About? originally appeared in the Daily Reckoning. The Daily Reckoning recently featured articles on stagflation, best libertarian books, and QE2

.

Read more here:
What Is Silver Screaming About?




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, ETF, Uncategorized

Why the Euro Is in the Path of a Slow-Moving Train

April 16th, 2011

Bryan RichMark Twain once said, “If you don’t read the newspaper you are uninformed, if you do read the newspaper you are misinformed.” That couldn’t be truer in this crisis era. And for self-preservation, you’re probably better off doing the former rather than the latter.

If you read the daily newspapers, you likely think the Fed and the U.S. government are behind the curve on this recovery. That is, they’re making critical mistakes that will leave the U.S. economy behind.

Moreover, you likely believe they’re destroying the dollar in the process through their ignorance.

Here’s how I see it …

On one hand, policymakers have gotten what they’ve wished for: They’ve restored confidence.

On the other hand, they’ve done such a good job at restoring confidence that people actually think there’s a real recovery underway. As such, global pressures on governments and central banks keep rising for them to move away from the unprecedented emergency policies that were put in place to prevent an all out global economic disaster.

But there’s a disconnect between facts and perception when it comes to the state of the world economy. And that’s put policymakers in a place where they could make mistakes that could exacerbate the depth and duration of this ongoing crisis.

Advertisement

The structural underpinnings of economic activity are a disaster. The global financial system is still mired in bad debt … the systemic disease that triggered a global economic collapse. And without an unprecedented scale of coordinated, official intervention to stabilize global confidence, the world would be deep in technical depression right now.

Instead, it’s in a manufactured recovery — represented only by numbers on government spreadsheets. Meanwhile, most major economies in the real world feel and look like depression.

But because the depression is masked over by intervention, the global fallout is playing out in slow motion.

No Place Is That More
Evident Than in Europe …

While most of the world’s attention is constantly focused on Fed monetary policy, the U.S. debt situation and the dollar, Europe is where the next leg of the global economic crisis is playing out.

Looking back at historical financial crises, it’s clear we should expect sovereign debt defaults to follow — and for those defaults to be contagious.

Which is preciously what is happening in Europe!

But in desperation, European officials continue to adhere to the playbook of 2008: Delay, delay, delay.

In this case, it means delaying sovereign defaults and an unknown future for the euro and the European Monetary Union.

They keep the patient breathing in hopes of bridging the gap between economic downturn and sharp sustainable global recovery. For this strategy to have a chance of working, they would need a recovery so sharp that even bankrupt countries could quickly grow out of the problems that took decades, if not centuries, to develop.

But neither sharp nor sustainable recovery is coming. Even the optimistic official outlooks now agree.

Moreover, the patient count in Europe continues to grow. And the resources to keep them breathing are dwindling.

First it was Greece. Both European and Greek officials swore off all speculation that Greece was a problem. Finally, they admitted they were bankrupt.

Then it was Ireland. Again, Irish and European officials said “nothing to see here.” And then, they asked for aid.

Last week it was Portugal. As late as Wednesday afternoon, Portugal’s finance ministry spokesperson said it could meet ALL its financing needs. Later that evening, they made a formal request for aid.

Now, Spain is on the clock. And again, the adamant message from Europe and Spain is that the buck stops with Spain. There is no risk. The sovereign debt crisis is over, they say. Spain can handle its problems itself.

I think we’ve seen this movie before.

Dominoes Still Falling!
What about the Euro?

What hasn’t played out yet is a total collapse of the euro. After all, the euro is at the core of the sovereign debt problems in Europe. It’s the monetary union of the euro-zone countries that keeps these bankrupt countries from righting their own ships.

They can’t cure their insolvency by currency devaluation. And they aren’t free to restructure their debt.

Consequently a no-win situation continues to play out in Europe, but the can continues to roll down the road!

Why?

Because the euro is the reason these bailout schemes are being undertaken in Europe. It’s the second most widely held currency in the world. And global partners, like China, have more than enough interest in helping Europe buy time by persistently keeping the euro stable and reasonably strong. But when does that time run out?

When do China and a consortium of other global central banks (through the Bank for International Settlements) back away from buying the euro, and let nature take its course?

Based on recent history, there are two good reasons to think that time could be now.

Take a look at this chart below of the euro.

EUR/USD weekly chart

Reason #1:

Before last week, the last time the ECB hiked rates was in 2008, in the face of an unraveling financial crisis. That triggered a sharp 22 percent decline in the euro as you can see in the far left of the chart.

So it wasn’t a surprise when the ECB hiked rates last week, even in the face of a confluence of global economic threats, not the least of which resides in Europe.

Could that move get the euro ball rolling down hill again?

Reason #2:

When Greece formally asked for aid, it triggered a 13 percent decline in the euro — until China came in to turn the tide of the euro and stabilize sentiment in Europe. After Ireland’s formal request for aid, the euro quickly dropped by more than 6 percent. Again the bottom was marked by China buying euros.

Then last week, Portugal made a formal request for aid AND the ECB raised rates. Could these two events mark another sharp downturn for the euro? And this time, will the global community be there to support it?

Either way, the situation in Europe and with the euro looks very much like a game of musical chairs …

When the music stops, and the fallout in Europe confirms the next major wave of global economic crisis, expect the world’s focus to turn back to concerns about growth and away from concerns about inflation.

So the time to look for a chair is now — before the music stops.

Regards,

Bryan

Read more here:
Why the Euro Is in the Path of a Slow-Moving Train

Commodities, ETF, Mutual Fund, Uncategorized

Why the Euro Is in the Path of a Slow-Moving Train

April 16th, 2011

Bryan RichMark Twain once said, “If you don’t read the newspaper you are uninformed, if you do read the newspaper you are misinformed.” That couldn’t be truer in this crisis era. And for self-preservation, you’re probably better off doing the former rather than the latter.

If you read the daily newspapers, you likely think the Fed and the U.S. government are behind the curve on this recovery. That is, they’re making critical mistakes that will leave the U.S. economy behind.

Moreover, you likely believe they’re destroying the dollar in the process through their ignorance.

Here’s how I see it …

On one hand, policymakers have gotten what they’ve wished for: They’ve restored confidence.

On the other hand, they’ve done such a good job at restoring confidence that people actually think there’s a real recovery underway. As such, global pressures on governments and central banks keep rising for them to move away from the unprecedented emergency policies that were put in place to prevent an all out global economic disaster.

But there’s a disconnect between facts and perception when it comes to the state of the world economy. And that’s put policymakers in a place where they could make mistakes that could exacerbate the depth and duration of this ongoing crisis.

Advertisement

The structural underpinnings of economic activity are a disaster. The global financial system is still mired in bad debt … the systemic disease that triggered a global economic collapse. And without an unprecedented scale of coordinated, official intervention to stabilize global confidence, the world would be deep in technical depression right now.

Instead, it’s in a manufactured recovery — represented only by numbers on government spreadsheets. Meanwhile, most major economies in the real world feel and look like depression.

But because the depression is masked over by intervention, the global fallout is playing out in slow motion.

No Place Is That More
Evident Than in Europe …

While most of the world’s attention is constantly focused on Fed monetary policy, the U.S. debt situation and the dollar, Europe is where the next leg of the global economic crisis is playing out.

Looking back at historical financial crises, it’s clear we should expect sovereign debt defaults to follow — and for those defaults to be contagious.

Which is preciously what is happening in Europe!

But in desperation, European officials continue to adhere to the playbook of 2008: Delay, delay, delay.

In this case, it means delaying sovereign defaults and an unknown future for the euro and the European Monetary Union.

They keep the patient breathing in hopes of bridging the gap between economic downturn and sharp sustainable global recovery. For this strategy to have a chance of working, they would need a recovery so sharp that even bankrupt countries could quickly grow out of the problems that took decades, if not centuries, to develop.

But neither sharp nor sustainable recovery is coming. Even the optimistic official outlooks now agree.

Moreover, the patient count in Europe continues to grow. And the resources to keep them breathing are dwindling.

First it was Greece. Both European and Greek officials swore off all speculation that Greece was a problem. Finally, they admitted they were bankrupt.

Then it was Ireland. Again, Irish and European officials said “nothing to see here.” And then, they asked for aid.

Last week it was Portugal. As late as Wednesday afternoon, Portugal’s finance ministry spokesperson said it could meet ALL its financing needs. Later that evening, they made a formal request for aid.

Now, Spain is on the clock. And again, the adamant message from Europe and Spain is that the buck stops with Spain. There is no risk. The sovereign debt crisis is over, they say. Spain can handle its problems itself.

I think we’ve seen this movie before.

Dominoes Still Falling!
What about the Euro?

What hasn’t played out yet is a total collapse of the euro. After all, the euro is at the core of the sovereign debt problems in Europe. It’s the monetary union of the euro-zone countries that keeps these bankrupt countries from righting their own ships.

They can’t cure their insolvency by currency devaluation. And they aren’t free to restructure their debt.

Consequently a no-win situation continues to play out in Europe, but the can continues to roll down the road!

Why?

Because the euro is the reason these bailout schemes are being undertaken in Europe. It’s the second most widely held currency in the world. And global partners, like China, have more than enough interest in helping Europe buy time by persistently keeping the euro stable and reasonably strong. But when does that time run out?

When do China and a consortium of other global central banks (through the Bank for International Settlements) back away from buying the euro, and let nature take its course?

Based on recent history, there are two good reasons to think that time could be now.

Take a look at this chart below of the euro.

EUR/USD weekly chart

Reason #1:

Before last week, the last time the ECB hiked rates was in 2008, in the face of an unraveling financial crisis. That triggered a sharp 22 percent decline in the euro as you can see in the far left of the chart.

So it wasn’t a surprise when the ECB hiked rates last week, even in the face of a confluence of global economic threats, not the least of which resides in Europe.

Could that move get the euro ball rolling down hill again?

Reason #2:

When Greece formally asked for aid, it triggered a 13 percent decline in the euro — until China came in to turn the tide of the euro and stabilize sentiment in Europe. After Ireland’s formal request for aid, the euro quickly dropped by more than 6 percent. Again the bottom was marked by China buying euros.

Then last week, Portugal made a formal request for aid AND the ECB raised rates. Could these two events mark another sharp downturn for the euro? And this time, will the global community be there to support it?

Either way, the situation in Europe and with the euro looks very much like a game of musical chairs …

When the music stops, and the fallout in Europe confirms the next major wave of global economic crisis, expect the world’s focus to turn back to concerns about growth and away from concerns about inflation.

So the time to look for a chair is now — before the music stops.

Regards,

Bryan

Read more here:
Why the Euro Is in the Path of a Slow-Moving Train

Commodities, ETF, Mutual Fund, Uncategorized

Buying Gold on the Price Inflation Guarantee

April 15th, 2011

At my age, I have pretty much figured out that people don’t like me because they fear me.

I don’t know why, exactly, but perhaps they fear me because I am a cynical, paranoid, gold-bug old man who thinks that the Federal Reserve has turned into an evil institution by creating So Freaking Much Money (SFMM), now so that it can commit the sin of monetizing new government debt by the truckload, increasing the money supply and guaranteeing a roaring inflation that hurts the poor, and hurts the almost-poor, and hurts the not-quite-poor, and (now that I think about it) it hurts everybody, which hurts me personally because they come whining to me to give them some of MY money!

The lesson is that everybody suffers from higher prices to one degree or another.

Or maybe people fear me because I know that The Only Thing To Do (TOTTD) when the money supply is being so seriously expanded is to buy silver and gold as a defense against the inflation that will result, and even though I have literally spent hours and hours with these people over the years, monopolizing every conversation to tell them to buy gold and silver, they don’t!

And then they turn around and get all upset with ME, like it’s my fault, when I politely inform them that I figure that not buying gold and silver, especially silver, despite the entire corpus of the last 4,500 years of economic history proving the wonders of doing so, and the idiocy of not doing so, over and over and over again, is, by sheer tonnage of evidence, completely stupid.

I mean, how stupid is it not to buy gold and silver when the Federal Reserve is creating so much money that it guarantees – guarantees! – inflation in prices.

The fact that most Earthlings do not buy them seems to indicate that most Earthlings are stupid creatures, and that maybe, just maybe, the whole planet should be “sterilized” by sending a couple of Zargmagarth battle-cruisers through hyperspace to deliver a couple jolts from their onboard Exterminator 3000 ray guns, sort of like how America goes swaggering around the world blowing up large pieces of the planet and killing people.

Relying solely on anecdotal information and stuff I just make up in my paranoid confusion, I figure that widespread gene malfunctions are causing this stupidity, and it also explains why terrified people do not recognize that (as is classically said in the movies) resistance is futile, both to Zargmagarth battle-cruisers and to the ruinous inflation in prices that is caused by the constant creation of too much money.

Normally, I would expect them to say, “Okay, strange visitor from another planet! You win! I’ll buy as much gold and silver as I can! Just don’t let the Zargmagarths or the Fed destroy us!”

It is, you may be happy to know, not too late to turn back the Zargmagarths, but it is, unfortunately, too late to prevent the Federal Reserve from destroying the planet with inflation in prices.

And with a dichotomy like that, the decision to buy gold and silver is so easy that you involuntarily giggle in delight, “Whee! This investing stuff is easy!”

The Mogambo Guru
for The Daily Reckoning

Buying Gold on the Price Inflation Guarantee originally appeared in the Daily Reckoning. The Daily Reckoning recently featured articles on stagflation, best libertarian books, and QE2

.

Read more here:
Buying Gold on the Price Inflation Guarantee




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

Retail Sales: The Next Chapter of the Financial Crisis

April 15th, 2011

It was a good effort…but “federal debt held by the public would double under the President’s budget,” says the Congressional Budget Office (CBO).

While we were exploring gold storage, junior miners and asset protection in Zurich, the CBO did some heavy lifting on the budget proposal advanced by Mr. Obama on Wednesday.

Even as the president promises to raise taxes, protect consumers and cut spending, the CBO shows the federal portion of the national debt held by the public growing from $10.4 trillion (69% of GDP) at the end of 2011 to $20.8 trillion (87% of GDP) at the end of 2021…adding $9.5 trillion to the nation’s debt in nine years.

“Even if the president could persuade Congress to enact all of his proposed tax increases,” Alan Reynolds from the Cato Institute adds, “in addition to surtaxes already included in [the health care reform bill], the CBO finds we would still face endless budget deficits averaging 4.8% of GDP…”

What kind of solution, we humbly ask, is that?

“We are in a financial no-man’s land,” muses our friend Doug Casey, surveying the landscape. “‘Investing’ is problematic because of a deteriorating economy, unpredictable and increasing regulation, rising interest rates and wildly fluctuating prices.

“Nothing is cheap in today’s investment world. Because of the trillions of currency units that governments all over the world have created – and are continuing to create – financial assets are grossly overpriced. Stocks, bonds, property, commodities and cash are no bargains.

“Meanwhile, real wages are slipping rapidly among those who are working, and a large portion of the population is unemployed or underemployed.

“The next chapter in this sad drama will include a rapid rise in consumer prices. Raw commodities are the first things to move in an inflationary boom, largely because they’re essential to everything.

“Retail prices are generally the last to move,” Doug sums up, citing a couple of themes we’ve been keeping our eyes on, “partly because the labor market will remain soft and keep that component down, and partly because retailers cut their margins to retain customers and market share.”

Retail may, indeed, be moving now. This morning, the Bureau of Labor Statistics (BLS) announced the consumer price index rose 0.5% last month.

The “core” rate that strips out food and energy – the one the Federal Reserve watches to determine whether we have any “inflation” – was a tame at 0.1%. But look these annualized rates of change:

What Doesn't Factor Into Core CPI

The first column of numbers is for the six months ended last September. The second column is for the most recent six months.

Over the last 12 months, the CPI has risen 2.7%, according to the BLS. John Williams at Shadow Government Statistics, who crunches the numbers the way the government did during the Carter presidency, comes up with a slightly higher figure of 10.2%.

“It’s Atlas Shrugged time,” Doug Casey chimes back in…and by that he doesn’t mean tonight’s release of the movie based on the novel.

“Few large fortunes have been made by investing. Most are made by creating, building and running a business. But running an active business is increasingly problematical.

“Sure, there will be plenty of people out there to hire – but in today’s litigious and regulated environment, an employee is a large potential liability as much as a current asset.

“Business itself is seen as a convenient milk cow by bankrupt governments – and it’s much easier to tap small business than taxpayers at large. Unless it’s a special situation, I’d be inclined to sell a business, take the money, and run.” Atlas Shrugged, indeed.

Addison Wiggin
for The Daily Reckoning

Retail Sales: The Next Chapter of the Financial Crisis originally appeared in the Daily Reckoning. The Daily Reckoning recently featured articles on stagflation, best libertarian books, and QE2

.

Read more here:
Retail Sales: The Next Chapter of the Financial Crisis




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, Uncategorized

The Simple but Important Support Line to Watch in Goldman Sachs GS

April 15th, 2011

Goldman Sachs (GS) appears to be in trouble before Congress again – or at least before a Senate panel.

What might that mean for the stock?  Or more specifically, what current price level should we be watching as a critical pivot level between buyers and sellers?

Good question!  Here is the simple but critical short-term pivot level to watch in GS share prices:

Getting right to the point, it’s the $155 area which is a prior price pivot level (important) and the 38.2% Fibonacci retracement as drawn ($155.09).

Taking it a step beyond, the 200 day simple moving average – a key refernence point between buyers and sellers – rests just above at $157.11.

Notice how price held the 200d SMA as support in March and then snapped under it yesterday as news (Thursday) broke that Senator Carl Levin suggested Goldman Sachs may have misled investors and Congress.  Ouch.

News aside, the chart-based “IF/THEN” statements seem to play out this way as the chart stands right now:

“IF the confluence support at $155 holds, THEN all is well with price.”

However, “IF sellers push price under $155, THEN look for an immediate decline to test the next support zone at $150.  Anything under $150 puts shares  on a collision course for downside targets $142.50 then $135 (simple prior price lows).

For fun, I’ve also drawn a potential Head and Shoulders pattern formation with neckline at $155 or $150 depending on your criterion (strict or not so strict).

If we take the H&S Neckline at $155 here, then to get the Price Pattern Projection Target, we take the distance from the top of the Head ($175) to the neckline ($155) for a distance of $20.00.

We would then subtract that $20 from $155 to arrive at a downside target $20 lower at $135.

Magically, that also happens to correspond with the August 2010 low which is already a distant downside target as mentioned above.

So for now, watch $155 in Goldman Sachs (GS) very closely – failure for buyers to hold this level opens the door to $150, $142.50, then a full H&S target to $135.

Corey Rosenbloom, CMT
Afraid to Trade.com

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

Corey’s new book The Complete Trading Course (Wiley Finance) is now available!

Read more here:
The Simple but Important Support Line to Watch in Goldman Sachs GS

Uncategorized

Making Friends With Precious Metals

April 15th, 2011

The stock market continues wobbling today, as gold and silver continue soaring – gold has jumped almost $30 an ounce over the last two days to a new all-time high of $1,485.00, while silver has popped almost two dollars to a new three-decade high of $42.75 an ounce.

And the show is probably not over yet…

Your editors here at The Daily Reckoning have been long-standing – and sometimes long-suffering – fans of gold and silver. And yet, even they are amazed by the robust price action in the precious metals pits. Like watching a hotdog-eating contest, you know ahead of time what you’re going to see. But when you actually see it up close and personal, the images before your eyes are still hard to believe.

Most financial market observers say the precious metals are “way overbought.” This hotdog-eating contest is over, they insist, and the folks who have gorged themselves on gold and silver are likely to suffer severe indigestion.

Your editor’s disagree. The precious metals markets will certainly digest their gains. But indigestion is the fate that awaits Treasury-bond buyers and dollar-holders, not gold-holders.

“The trend is your friend,” as seasoned investors like to say…and few trends are friendlier at the moment than the upwardly sloping trend of precious metals prices.

Ironically, this friendly trend results directly from one of the unfriendliest trends of all: the dollars in your pocket are losing value as quickly as a freshman Congressman loses credibility.

The dollar’s bearish trend is well established…and actively nourished by the Federal Reserve itself. Ben Bernanke has promised to erode the dollar’s value…and we believe him. So does billionaire hedge fund manager, John Paulson.

Gold will continue to rise, Paulson predicts, “in proportion to the creation of paper dollars… In these times of uncertainty for paper based currency, I feel more secure in holding gold; [it] offers good protection against the paper currencies devaluation and even the possibility of generating a return.”

Putting his money – and his clients’ money – where his mouth is, Paulson has amassed sizeable positions in various precious metals investments.

The Paulson Fund’s number one holding, representing 15% of its assets, is the SPDR Gold Trust (NYSE:GLD). The fund holds more than 31 million shares of GLD, along with 41 million shares of Anglogold Ashanti (NYSE:AU) and large positions in Gold Fields Ltd., Kinross Gold Corporation (NYSE:KGC), Novagold Resources Inc. (AMEX:NG), $40 Million of Randgold Resources (NASDAQ:GOLD), and Barrick Gold Corp. (NYSE:ABX).

Importantly, Paulson is not trading his gold positions, he is simply amassing them. Perhaps there is a lesson there.

The high day-to-day volatility of the precious metals tempts some of us non-billionaire investors to trade in and out of them. Probably, that is a temptation worth resisting.

Recently, an acquaintance made one of the best investment calls of his life…and one of the worst trades of his life. He did both things at the same time in the same market.

Sometime around last Halloween, this acquaintance concluded that silver was poised for a major move to the upside. The move he anticipated was so major, in fact, that he decided to purchase call options on silver, rather than just buying and holding some silver.

He loaded the boat on call options – buying various strikes with various expiration dates between November 2010 and April 2011. He established his largest position in far-out-of-the-money April calls. Hold that thought.

The friend booked small profits on his November and December options. But then his fortunes turned south. After hitting about $31 an ounce in early January, the silver price tumbled toward $26.

This sharp, swift correction wiped out his January and rendered his February calls almost worthless. He lost a lot of money. He panicked. As silver rebounded from its February lows, he salvaged what he could from his disastrous trade by unloading his February options for a large loss and his April options for a small loss.

Silver continued rallying…and rallying…and rallying. The friend watched. (Perhaps he cried privately). Today, the April options he sold for no gain are worth about eight times his original purchase price.

Too bad he traded silver, instead of simply buying it.

Your editor’s friend is a big boy. He won’t rue his unfortunate trade for long. But most of us probably would.

Bottom line: Silver, like gold, is money. Silver and gold are hedges. They are “anti-dollars.” So if it’s anti-dollars you want to own, just own them.

Eric Fry
for The Daily Reckoning

Making Friends With Precious Metals originally appeared in the Daily Reckoning. The Daily Reckoning recently featured articles on stagflation, best libertarian books, and QE2

.

Read more here:
Making Friends With Precious Metals




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.

OPTIONS, Uncategorized

Silver Is Getting Too Popular… Right?

April 15th, 2011

It’s no secret that the silver market is red hot. As I write, silver American Eagles and Canadian Maple Leafs are sold out at their respective mints. Buying in India has gone through the roof, especially noteworthy among a people with a strong historical preference for gold. Demand in China continues unabated. Silver stocks have screamed upward.

So, as an investor looking to maximize my profit, I have a natural question: is the silver trade getting too crowded, meaning we’re near the top? Have the masses finally joined the party such that we should consider exiting? After all, it’s not a profit until you take it, and you definitely want to sell near the top.

There are several ways to measure how crowded the silver market might be. I prefer to look strictly at the big picture and not get caught up in the weeds. This means I’m looking for signs of market exhaustion or the masses rushing in. Nothing says “peak” more than an investment everyone is buying.

So how crowded are silver investments right now? Let’s first look at the ETFs.

Silver ETF Investments

At $35 silver, all exchange-traded funds backed by the metal amount to $20.7 billion. You can see how this compares to some popular stocks. All silver ETFs combined are less than a quarter of the market cap of McDonald’s. They’re about 10% of GE, a company that still hasn’t recovered from the ’08 meltdown. Exxon Mobil is more than 20 times bigger. And this isn’t even apples-to-apples, as I’m comparing the entire silver ETF market to a few individual stocks.

This comparison is even more interesting when you consider that it’s the ETFs where most of the public – especially those that are new to the market – first invest in silver. So while the metal has doubled in the past seven months, total investment in the funds is still far beneath many popular blue-chip stocks.

Okay, maybe all this money is instead going into silver mining stocks. How does the market cap of the silver industry compare to other industries?

Silver Industry vs. Other Major Industries

While you fetch your magnifying glass, I’ll tell you that the market cap of the silver industry is $73.1 billion. It barely registers when compared to a number of other industries I picked mostly at random. The dying newspaper industry is over 26 times bigger. Drug manufacturers are 213 times larger. Heck, even the gold market is 19 times greater. And here’s the fun one: the market cap of the entire silver market, with all its record-setting prices and stock-screaming highs, represents just one-third of one percent of the oil and gas industry.

To be fair, there are a number of sectors that are smaller than silver. Radio broadcasters ($43.2B), video stores ($10.9B), and sporting goods stores ($2.5B) have puny market caps, too. But then again, who’s buying DVDs or baseball mitts to protect their wealth from a coming inflation?

Silver hardly resembles the picture of an investment that is too crowded.

I’m not saying one should rush to buy silver right now. After all, it has doubled in seven months. Unless this is the beginning of the mania, prudence would certainly be called for at this juncture. The price will always ebb and flow in a bull market, and an ebb is overdue.

The question, of course, is from what price level it occurs. What if a correction doesn’t ensue until, say, a month from now, and the price falls back to…where it is now? I remember some articles in January that insisted silver would fall to as low as $22, and, well, they’re still waiting and have in the meantime missed out on some huge gains. For silver to fall back to $22 now would require almost a 50% drop!…Not impossible, but I wouldn’t hold my breath.

Fixating on market timing takes your focus off the ultimate goal. In my opinion, instead of worrying about what will happen next week or even next month, focus on how many ounces you have, and then buy at regular intervals until you reach your desired allocation. This has the added benefit of smoothing out your cost basis. And don’t forget to buy more as your assets and income increase.

This is a market where you’ll want to be well ahead of the pack. Someday in the not-too-distant future, average investors will be tripping over themselves to join in. That will make the market caps of our silver investments look more like some of the others in the charts above. And that will do wonderful things to our portfolio.

Regards,

Jeff Clark
for The Daily Reckoning

Silver Is Getting Too Popular… Right? originally appeared in the Daily Reckoning. The Daily Reckoning recently featured articles on stagflation, best libertarian books, and QE2

.

Read more here:
Silver Is Getting Too Popular… Right?




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.

ETF, Uncategorized

Silver Is Getting Too Popular… Right?

April 15th, 2011

It’s no secret that the silver market is red hot. As I write, silver American Eagles and Canadian Maple Leafs are sold out at their respective mints. Buying in India has gone through the roof, especially noteworthy among a people with a strong historical preference for gold. Demand in China continues unabated. Silver stocks have screamed upward.

So, as an investor looking to maximize my profit, I have a natural question: is the silver trade getting too crowded, meaning we’re near the top? Have the masses finally joined the party such that we should consider exiting? After all, it’s not a profit until you take it, and you definitely want to sell near the top.

There are several ways to measure how crowded the silver market might be. I prefer to look strictly at the big picture and not get caught up in the weeds. This means I’m looking for signs of market exhaustion or the masses rushing in. Nothing says “peak” more than an investment everyone is buying.

So how crowded are silver investments right now? Let’s first look at the ETFs.

Silver ETF Investments

At $35 silver, all exchange-traded funds backed by the metal amount to $20.7 billion. You can see how this compares to some popular stocks. All silver ETFs combined are less than a quarter of the market cap of McDonald’s. They’re about 10% of GE, a company that still hasn’t recovered from the ’08 meltdown. Exxon Mobil is more than 20 times bigger. And this isn’t even apples-to-apples, as I’m comparing the entire silver ETF market to a few individual stocks.

This comparison is even more interesting when you consider that it’s the ETFs where most of the public – especially those that are new to the market – first invest in silver. So while the metal has doubled in the past seven months, total investment in the funds is still far beneath many popular blue-chip stocks.

Okay, maybe all this money is instead going into silver mining stocks. How does the market cap of the silver industry compare to other industries?

Silver Industry vs. Other Major Industries

While you fetch your magnifying glass, I’ll tell you that the market cap of the silver industry is $73.1 billion. It barely registers when compared to a number of other industries I picked mostly at random. The dying newspaper industry is over 26 times bigger. Drug manufacturers are 213 times larger. Heck, even the gold market is 19 times greater. And here’s the fun one: the market cap of the entire silver market, with all its record-setting prices and stock-screaming highs, represents just one-third of one percent of the oil and gas industry.

To be fair, there are a number of sectors that are smaller than silver. Radio broadcasters ($43.2B), video stores ($10.9B), and sporting goods stores ($2.5B) have puny market caps, too. But then again, who’s buying DVDs or baseball mitts to protect their wealth from a coming inflation?

Silver hardly resembles the picture of an investment that is too crowded.

I’m not saying one should rush to buy silver right now. After all, it has doubled in seven months. Unless this is the beginning of the mania, prudence would certainly be called for at this juncture. The price will always ebb and flow in a bull market, and an ebb is overdue.

The question, of course, is from what price level it occurs. What if a correction doesn’t ensue until, say, a month from now, and the price falls back to…where it is now? I remember some articles in January that insisted silver would fall to as low as $22, and, well, they’re still waiting and have in the meantime missed out on some huge gains. For silver to fall back to $22 now would require almost a 50% drop!…Not impossible, but I wouldn’t hold my breath.

Fixating on market timing takes your focus off the ultimate goal. In my opinion, instead of worrying about what will happen next week or even next month, focus on how many ounces you have, and then buy at regular intervals until you reach your desired allocation. This has the added benefit of smoothing out your cost basis. And don’t forget to buy more as your assets and income increase.

This is a market where you’ll want to be well ahead of the pack. Someday in the not-too-distant future, average investors will be tripping over themselves to join in. That will make the market caps of our silver investments look more like some of the others in the charts above. And that will do wonderful things to our portfolio.

Regards,

Jeff Clark
for The Daily Reckoning

Silver Is Getting Too Popular… Right? originally appeared in the Daily Reckoning. The Daily Reckoning recently featured articles on stagflation, best libertarian books, and QE2

.

Read more here:
Silver Is Getting Too Popular… Right?




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.

ETF, Uncategorized

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