When everything looks overbought

or has already started to break down, it is time to look for the general market to break down. I think we start heading down within a week and it will be a quick and potentially nasty correction. Everywhere I look I see charts screaming "short me, dude!"

Couldn't resist buying some BHP shorts today as we got close to 49 and have an order in to buy some more. Bought my final shares of SRS near 50 (I'm loaded to the gills with SRS now). I was looking through charts today and found this gem that I plan to short tomorrow: Best Buy (ticker BBY).



The retail sector in general, like most sectors, is oversold as well. I believe gold stocks have broken down and today (and possibly tomorrow) was probably the last day of hovering before the gold mining sector correction begins in earnest. I bought some puts on gold miner AEM today at the highs of the day.

Don't forget, all of these moves should be counter-trend down moves. I don't think the entire correction of the fall panic is over, but it won't go in a straight line and I am trying to squeeze extra pennies of profit out of the bigger twists and turns. Come next month, I'll be starting to look at re-entering the gold miner trade from the long side for a big move up. Rallies need rests, and this one is no exception.

I think people are too bullish right now. Notice the previous bear market in 2000-2003 and our current bear market and the percentage bullish sentiment (black line) versus what happened next in the S&P 500 (blue area chart in the background):

BHP - a possible short set-up

BHP Billiton Ltd. (Ticker: BHP) is a multinational blue chip base metal miner (and mines some gold, too, but not its focus). Its chart has a potential pattern that could be worth some good money as a short-term trade. I believe this pattern could complete as early as this week and if BHP gets to the 50-55 level, I'm in for some put options as a quick trade trying to make 20-30%.



The $VIX or Volatility IndeX is low, low, low relative to very recent history. This means options are cheaper and means they should be about to get more expensive, which can be a wind in your profit sails if you buy at the right time (easier said than done, of course). Take a look at the current 6 month VIX chart:



Bottom line, if we get to 50 on BHP this week (or early next week), the risk-reward balance will have me looking to buy puts as a less than one month trade.

Post-bubble Japan

It hasn't been fun for domestic stock investors in Japan the past two decades. Most real estate speculators who bought 20 years ago aren't exactly thrilled with their returns either. A recent investigation of mine into the approximate price returns (i.e. non-dividend/non-yield adjusted!) on stocks, real estate, Yen cash, and the gold divided by the Yen index as a proxy for the Japanese gold price over the past roughly 19 years was quite telling to me.

To estimate real estate returns in Japan, I used the Japanese real estate index chart below, which I have seen somewhere in cyberspace (can't give proper credit). Please notice that this chart only goes up to 2006, so the calculated approximate return does not include the last two years' price action.



Anyhoo, this exercise yielded the following information:



To calculate the amount of money you would have after investing $100, I added in an assumption of a 3% dividend yield annually for the Nikkei over the past 19 years and I assumed a similar 1.5% yield on Yen cash. No dividends were used for real estate.

Domestic Japanese investors who got out of stocks and buried their money in CDs or gold bars 19 years ago can now buy 2 times as many stocks and 4 times as much real estate. Japanese stock investors' 19 year return is -20%!? Gold has acted almost exactly like cash/Yen over the past 19 year disinflationary and/or deflationary bust in Japan. The Japanese experience argues that bursting stock and real estate bubbles leading to a lasting deep recession (sound familiar?) can be a great environment in which to own gold. Gold also offers a foolproof insurance policy against a currency crisis.

Gold and its leveraged counterpart, gold stocks, are not always a good investment. But sometimes they are, dammit, and right now is one of those times. Once the Dow to Gold ratio gets back to one, I will trade most of my gold and gold stocks for general stocks and real estate. Until then, non-gold stocks are to be avoided, shorted or traded only. Buying and holding the DOW or S&P 500 right now for the long term would be buying and losing.

Do as we say, not as we do

Is the message of our hypocritical central bank and those of other major countries. They all hold tons of gold - why? Gold is a worthless metal with no role to play in modern economic theory or modern economies! It is a barbarous relic for kooks and pirates to worry about. So why do central banks around the world, especially ours, supposedly own tons of it? Why are the Saudi, Chinese, Iranian, Russian and Venezuelan government leaders openly talking about increasing their gold reserves by a significant amount? Why don't they sell their gold and make lots of cash?

Why are many government agencies that are supposed to mint coins for public consumption/buying shirking that role at a time when demand is high? The U.S. Mint has led the charge with claims that it no longer wants to make enough coins to meet the demand despite ample productive capacity to do so. So large central banks are buying physical gold bars hand over fist but sorry Johnny Sheeple, we can't make any one ounce coins or bars for you to protect your savings. Be a good patriot and suffer through our forced confiscation via potential hyperinflationary policies that are bound to kick into gear eventually.

Those who do not understand gold do not understand history or the collective wisdom of thousands of years of human experience. Paper will be printed and pushed into the system with shovels, trucks, and helicopters by our government to try to start a new boom. This makes every piece of paper that is already in existence worth less. Period. Inflation means currency debasement/depreciation. Costs go up due to the printing press destroying the value of phony money.

The harder Hanky, Benny and the Capitol gang push on the monetary accelerator, the more they punish all of us and our children because they don't have the political courage to let our economy heal from its wounds in a sound manner. Whether through a complete deflationary implosion or a lurch into near hyperinflationary conditions, you can be sure that money and its role in society are about to be thrust into the spotlight big time around the world.

When people finally start to question and read about where all this is headed to, the gold rush will begin. You ain't seen nothing yet when it comes to the price of gold. Ask someone in Zimbabwe how much they would pay for an ounce of gold! If deflation carries the day, you will have lost nothing and will have been in the only sector that can protect you in a deflationary environment - cash! Gold is money and has always reverted to this role in a crisis. What other investments besides cash and gold were up percentage wise in 2008?

I think 10% of one's portfolio at a minimum should be in physical gold and 30% is not unreasonable. When the Dow to Gold ratio gets under 2, start thinking about moving back into paper assets. Until then paper is for trading, not holding.

Time for a correction

Today was a telling sign in my mind that gold stocks and gold are due for a correction. While commodities, commodity stocks and the general stock market rallied hard to the upside, gold and gold stocks were down. They are overextended, losing momentum and ready for a correction. This is healthy and normal - markets do not move in a straight line unless they are in a blow-off top or bottom.

The gold price first:



And gold stocks, represented by the ETF with ticker GDX (the best "easy" way to play the gold stock sector and diversify away individual company risk):



After over a 100% gain in 2 months, gold stocks as a sector need a rest to solidify price gains and get ready for the next leg up. The relative outperformance of gold stocks compared to the S&P 500 over these past two months forms a ratio chart (i.e. GDX divided by the S&P 500) that looks just like the chart of gold stocks themselves:



Precisely timing trades is obviously difficult or everyone who tried it would become rich. However, one of the many things I have learned about trading is that there are times when the risk to reward ratio is against you and times it's in your favor. It's always better to trade the latter to improve your odds of success. I wouldn't advise those with a longer-term investment horizon to sell gold stocks here, but I also would advise against putting any new capital into this sector until a decent correction occurs.

When gold stocks correct, it generally takes them 1-2 months to do so if they are in the midst of a bull leg up. I would wait until early February to consider new positions in this sector, unless you want to go short as a quick trade in which case I would say today would have been a good day to place your bet.

You can see my prior real-time calls on trying to time the gold stock sector during the fall crash here, here, and here - not perfect (except the last one...) but not bad and this sector made me some good money over the past 2 months. I shall return for more bullish action in this sector in 4-8 weeks!

I added to my SRS position today, as the commercial real estate sector also showed weakness and managed a 3% loss today while the S&P went up 3%. This is a quick trade looking for a 10-15% return in a few weeks. I even opened up a small trade against the gold sector today, buying puts on blue chip gold miner Newmont (NEM) that I plan to sell within a few weeks.

Gold - a mirror

Paper and electronic money created using a printing press and computer, respectively, are inherently unstable because they are inherently non-valuable yet mandated to have value by governments. When money, the lifeblood of any economy, is phony, terrible dislocations in the society that uses that phony money occur.

If I told you tomorrow that new pieces of red paper I had created with stars and squiggles on them were money and asked you to trade me your car for some of these pieces of paper, I'm guessing you wouldn't make the trade. We have had money backed by nothing tangible since 1971 when Nixon closed the gold window. Fortunately, the possession of gold was de-criminalized shortly thereafter by our loving government, giving people a way to protect themselves.

Look, if you want proof that a fiat money system is destroying our country economically, look at investment returns since 1971!

If you had bought the S&P 500 in 1971 and held it until the end of 2008 (i.e. two days ago), you would have made about a 1000% return on price and we'll be overly generous and say with dividends that you would have made 1300% return on your investment. If instead, you illegally bought and hoarded gold at $35/oz. in 1971, you would be sitting on gains of 2500% as of 12/31/2008.


Let me repeat this: the 37 year returns for physical gold coins and bars are almost DOUBLE the S&P 500 even after including dividends.


Are you fucking kidding me (excuse my French)?!

Why put money in risky stocks at all? Gold has no risk (other than somebody stealing it from you)! Gold has intrinsic value, unlike our paper currency and many of our over-leveraged, riddled with fraud paper corporations. Gold is a mirror and shows the depravity of a fiat money system, exposing its intrinsic corruption and decay.

Our international central bankster cartels can create money and debt at their whim and then ask us to pay them for that privilege. Our governments are all too happy to comply, as members at its highest levels are openly bribed to play the game and make the bankers even more money. It is the corruption of our money that has led to the corruption of our society.

Bernard Madoff did NOT act alone in creating his multi-billion dollar Ponzi scheme, I promise you. People at the highest levels of our government happily looked the other way and allowed his scam to occur. With the payoffs that must have been involved and the generalized government and corporate fraud that occurs today, it is not really all that surprising, though it remains disgusting.

He with the power over society's money supply has more control over that society's ultimate economic fate than any other. Obama will be but an obedient lapdog to the corrupted money men and their corporate arms that will reward him handsomely for his servitude. Our monetary system is crumbling and gold is simply reflecting this back at it.

Gold is money because humans chose it after thousands of years of experimentation. You cannot make that collective human wisdom go away by bureaucratic decree. Gold is not increasing in value, paper promises are decreasing in value. Gold has a steady intrinsic value, which is why it should be our money of choice. Rapid currency fluctuations and volatility will now become the norm as our weightless and phony paper money system starts to fall apart faster and faster.

Gold will maintain its value and will far outperform the stock market, real estate and bonds in the years to come. It also won't go bankrupt, get nationalized, commit fraud or lie to you. I am not talking about paper gold (i.e. the GLD ETF), either. Buy physical gold coins and bars as the bedrock of your investment/retirement portfolio and keep at least some of this gold yourself so there is no counterparty risk involved.

Gold - an end of the year assessment

Gold as an asset has been the best, most consistent, and least risky investment of the past 8 years. Better than stocks, bonds, real estate and other commodities. The table below lays out the consistent and steady gains for gold that have not been seen with other investment vehicles:



To the people who say gold did not perform as expected during the financial crisis this fall I would say: "scoreboard, yo." While every darling asset class was hammered in 2008, gold managed to eke out a respectable 5.5% gain for the year. Oil was crushed, real estate was massacred, the stock market had little old ladies crying, corporate bonds went below the basement and assets like the dollar and U.S. bonds are Johnny-come-latelies that have fared poorly over almost all of the past eight years.

A shiny-ass piece of metal that has no growth prospects, pays no dividend and has no story to tell or marketing campaign to back it up. We are still in the "stealth" part of this gold bull market. The big money hasn't even been made yet! To have an asset class outperform all others, have positive returns for 8 straight years and get absolutely no respect from the mainstream investment community is the essence of an early bull market. The point of recognition has not even reached the typical mainstream investor yet.

Translation: you can still buy gold for cheap and you can still make a huge return by doing it, as the mania phase for gold has not hit yet. Once the public and mainstream investment community wakes up to gold, the truly staggering price rises will occur. The bull market won't be over until everyone realizes it is the "next sure thing." We ain't even close to this point yet. Most people still think those who invest in gold are terrorists or freaks.

Gold isn't going away and its fundamentals are stronger than ever. I think gold stocks will outperform the metal over the next few years, but both are the only sectors to seriously consider as long-term investments given the current financial climate. I think $2000/oz. is the lowest possible price target and $6,000/oz. before this bull market is over wouldn't surprise me.

For those looking to time their purchases, we are due for a correction in both the gold price and in gold stocks, so you may want to wait a month or so before investing new money into gold and/or gold stocks.

Bought some more SRS yesterday for a short-term trade. Wish me luck...

Paper claims on real assets

The United States, although a very wealthy country, has a finite amount of wealth in terms of the resources of its government, its land/natural resources and its citizens. When every tree, building, mine, deposit, bank account and company is valued and added together, there is an actual value that could be "assigned" to the country.

Every time we issue a new bond (also known as an "I.O.U."), this is essentially a claim against a portion of the assets the United States "owns." Alternatively, you could consider each U.S. dollar as a share of stock in the USA company. While these are wild oversimplifications, you get the idea.

If the USA company starts issuing bonds and stocks without increasing the value of its underlying assets and/or revenue streams, the company is diluting the value of the stocks and bonds held by existing investors. Investors know that when a company issues new stock, the stock price is usually punished because of the anticipation of the future dilution.

Currently, the USA company is issuing stocks and bonds at a record pace to stave off short-term pain caused by a recession. This weakens the future prospects of the USA company and also ensures that its stock price (i.e. the value of its currency) will be punished and will decline significantly.

Where this analogy fails is the fact that American citizens are essentially forced to own stock in the USA company, as this stock is the only legal currency in our country. When people begin to learn that every time they get a piece of paper with a number printed on it that the real value of the number on that paper bill is declining every year consistently, moral values change and begin to decay.

As inflation proceeds down the path of least resistance that has plagued every fiat currency in the history of the planet, hard work and savings begin to be replaced with speculation and borrowing. Since you cannot save money and maintain purchasing power without taking significant risks, why save at all? If you're going to embrace risk, why not go for a bigger risk and bigger reward? If it doesn't work, just borrow more money and try again!

Persistent, continuous inflation leads to moral and social decay. It has led to the bling bling, big screen TV, Hummer, McMansion culture that we find ourselves in today. Think end of Roman empire decay. Why save for tomorrow when you can borrow and have it today? The overwhelming majority of people don't realize that monetary decay leads to moral and social decay. As the government prints more and more money and gets itself further and further into debt in a fiat money system, it essentially encourages its citizens to do the same by both the example it sets and the debasement of our currency that it sets into motion.

The U.S. government is a subprime borrower looking to max out another credit card after it spent all its family's money and then hocked all their possessions and spent that money, too. Instead of correcting its ridiculous fiscal habits, it makes new promises to new naive family members (e.g., China) to draw them into yet another round of the ultimate Ponzi scheme. The current power brokers in Washington no longer care about debt reduction and are scrambling to increase the debt load of our country at an ever-increasing pace. In addition, the government wants banks to resume lending despite the fact that most people have already borrowed too much from banks as it is.

The government cannot save you. It hardly knows how to save itself and no longer even pretends to think beyond the next election. Common sense is ridiculed and bread and circuses are favored over serious intellectual or political debate. This is a direct end-stage effect of the cancer introduced into our society when we gave control of our money to a private, secret cartel of bankers and then severed all links between our currency and gold in 1971.

The early highs of an inflation cycle are positive and pleasant as they affect asset classes like stocks and real estate and make most feel prosperous and bold. Now, in the later stages of inflation, we have a rabid and unsustainable addiction to cheap money that reveals us for what we are: junkies needing a fix as bad as a heroin addict does. Though the printing presses will run full steam, the highs produced by this easy money are no longer pleasant and simply keep us from going into withdrawal. We spend more and more and accumulate more and more and feel hollower than ever.

The debt created by all this inflationary borrowing and spending in both the public and private sectors has painted our government into a corner. The only realistic options are extremely aggressive further attempts at inflation (which will either fail or lurch us into a hyperinflationary currency crisis) or a deflationary collapse where all domestic money moves from the stock market into government bonds. There is no turning back from this debacle and there is no "goldilocks" scenario. The world is not ending but your 401k might if you don't move to protect yourself.

Gold is a protector of savings in times of uncertainty. It holds its value in a deflationary debt collapse as well as a runaway inflation. In short, gold becomes strong when the currency it is denominated in becomes unstable. As we all know, promises made by an addict are not particularly reliable. If the government gets desperate, they will confiscate assets and will declare anyone making over $20,000per year a rich swine that deserves to be taxed at a 90% rate. Gold is no ones liability and asks for nothing. It can be buried in the backyard quietly until our government dries out, wises up and kicks its addiction so that a new cycle of prosperity can begin.

Got out of DIG with my 10% profit today. Got out of RGLD and looking to re-enter in the next several weeks on a decent correction. Looking to get back into SRS as a short-term trade if the price dips a little further into the 50-55 range.

Dow to gold ratio - how long will it take?

If a continuation of the current deflationary bust is the way we are going to get to a 1:1 ratio between the Dow Jones Industrial Average and the price of one ounce of gold, it won’t take very long if the last time it happened is a guide. The peak of the Dow:Gold ratio in early fall 1929 was slightly less than 19 when the Dow was at 386 and ratcheted down to a 2:1 Dow:Gold ratio nadir by 1933. The gold price didn’t change a bit during this period, as it was pegged to the dollar at fixed price of $20.67/ounce. The Dow, on the other hand, fell by 90% to reach 40 in the summer of 1932 – less than 3 years!

If you think a similar Dow:Gold ratio can’t happen again today, ask yourself why. Is it because we are smarter today than we were then? Gimme a break. Is it because we are more sophisticated today and have learned from our mistakes? The only thing we have learned is how to increase financial leverage to an even greater extent so that the subsequent bust promises to be even worse! Is it because you don’t want to believe it can happen? This is a plausible explanation for most, because who wants to believe everything we have been taught is wrong?

Buying and holding general stocks for the long haul was built into the psyche of the current generation of investors because it worked so well from 1982-2000. Everyone is now starting to realize that maybe it doesn’t work. We’ll have a nice stock bounce into the spring to keep a few holdouts in the bull camp, but then a tsunami of reality will destroy the portfolio of every Pollyanna praying for profits. Then you’ll really see the market crash as people stumble all over each other to get out of the market at any price.

For those who doubt this bear market can get any worse, do you honestly believe that our stock market can escape with a one year bear market when:

• The United States’ (and the world’s for that matter) banking system is insolvent
• Nearly half of the large Wall Street firms no longer exist due to recent bankruptcy
• A housing crash that is already giving the Great Depression a run for its money is just starting to pick up serious steam
• Our government has added nearly a trillion dollars of debt to its balance sheet in the last year despite already being bloated with debt
• Unemployment is still surging in earnest at the exact same time consumer debt loads are higher (in both relative and nominal terms) than ever
• Commercial real estate has begun to implode at an astonishing rate and retailers are about to start going out of business in droves
• The big 3 auto firms need government handouts just to stay alive until spring

This is not a gloom and doom scenario for the prepared, it is an opportunity. What a relief that all you have to do is buy some pieces of metal and hold onto them to come out of this mess with your retirement money unscathed! What could be easier and less scary? No need to worry about fraud, recession, counterparty risk, currency crisis, industry nationalization or corporate bankruptcy! Gold is the easy, low risk way to achieve a reasonable rate of return and maintain your savings. Buy physical gold and forget P/E ratios, growth estimates, and hot stock tips and just relax!

I have had people ask me how to reconcile this advice with the fact that their 401k/403b only offers limited investment choices. Let me give you a scenario to clarify your thinking: let’s say you know your stock investments in the 401k/403b are going to lose at least 40% more of their value over the next few years. OK, well that scenario is reality. What should you do? If your retirement option is to get a 30% tax break up front so that you can lose 40% of your money, I would say you should avoid that option!

If you have the energy, you can petition your employer to expand choice or allow you to set up a self-directed account. You can also sell everything in the account this March or April after the current bear market rally is near its end and move to cash. In the mean time, don’t throw more good money after bad just because you pray and hope things will get better! This means you have to seriously consider whether or not you should continue to put your hard-earned money into a retirement plan with shitty investment options.

General stocks will lose money/value relative to gold over the next few years and should be avoided except by short-term traders. For the more adventurous, a higher risk, higher reward play over the next few years would be to buy a basket of blue chip gold mining stocks. Government bonds have made the bulk of their bull move already and offer low returns and high risk and are no longer a good way to protect savings – cash under the mattress at this point has a similar return with less risk (and I would recommend gold as more reliable cash option).

Bottom line: I think the Dow to gold ratio reaches one in less than 5 years, which means stocks have a long way to tumble in the near future and gold will rise up to meet them. I also wouldn't be surprised if the ratio falls below 1 and one ounce of gold becomes worth more than the once mighty Dow Jones.

When trust evaporates

The Bernard Madoff ponzi scheme has everyone talking. Why don't most people seem to recognize these scams until it's too late? The short answer: trust.

Madoff was a former chairman of the NASDAQ stock market, so people trusted him. Hmmmm. Isn't this sort of like people now trusting Bernanke, Paulson, and Obama to fix the economy and restore prosperity?

Do you think government bureaucrats are smarter than average people? Do you think getting a PhD in economics from Princeton University (Bernanke) makes you an expert on what to do during a global financial crisis? Our current government leaders and central banksters are EXPERIMENTING with taxpayer money in an attempt to keep the biggest Ponzi scheme of all going: trust in the promises made by the United States government.

We as a country are broke and yet borrowing money at an accelerating rate. Does this meet the common sense standard? We have ABSOLUTELY ZERO MONEY SAVED to pay for baby boomer social security or medicare benefits, yet everyone pretends the money will somehow be there when the poop really hits the fan. Pretending to believe this lie told by our government is asking to be swindled. Why do people insist on believing things that are obviously unrealistic and likely to be false? Because it's easy.

The key to successful investing is to do your own learning, thinking and analysis, not to put all your money into an S&P 500 index fund and forget about it. Yes, it takes effort, but why wouldn't it? Do you think that everyone else will take care of your money and be concerned for your future because they are altruistic?

Trust is breaking down and it should be. The world is not ending, it is changing. All the people living in a debt dream who thought they were wealthy because they leveraged to the hilt to buy things they didn't need are silently (or not so silently) screaming in agony right now. The debt bubble has popped.

A debt bubble popping is a good thing for the long term global economy but requires a painful adjustment period to heal and cleanse the economy of the toxic sludge created by debt. Debt is a noose around the economy and it has reached the point where the noose is too tight. Bernanke and Paulson say they want to "stimulate" bank lending or the creation of more debt. This is the opposite of what is needed. Bernanke and Paulson, as financial people, should and probably do know this, but bankers make money by creating indebtedness. Obama most likely has no clue about economics and is listening to advisers who tell him the economy needs to be "stimulated."

The government stimulated the living shit out of the economy during the first great depression. Anyone who tells you otherwise is ignorant or dishonest. Period. What did it accomplish? Nothing except to prolong the recession required to liquidate the excess debt so that a new cycle could begin. Japan has been "stimulating" its economy for almost two decades now, to no avail. People who tell you the Japanese did it wrong or were too slow or nonaggressive are ignorant or dishonest.

Remember the most important lesson of economics to help you in your investing career: governments don't control markets, people with real jobs do. Bureaucrats are parasites on the economy who can only distort or divert the primary trend, not reverse it. A deflationary bust must run its course before central gangster (I mean bankster) money printing can work. Once the deflationary bust is over because the people with real jobs decide that it is, the bad monetary medicine applied by those who envision themselves as financial alchemists will make the recovery more erratic, fast and volatile than it would ordinarily be due to their incompetence and impatience.

Home prices will not stabilize until people with real jobs in aggregate decide they should and are able and wanting to do something about it. The stock market will not stabilize until people with real savings decide it is time to buy and have the funds to do so. Commodities will not stabilize until people who run private companies demand enough raw goods due to orders from people with real jobs.

When governments are buyers of assets, any price gains are temporary and illusory, as central planners have no incentive to be smart and careful with other people's money. If this were anything but true, communist governments would always have the fastest growing economies in the world and no one would espouse free markets or democracy!

Trusting in bureaucrats to save your house, pension or 401k account is as misguided as trusting in Bernie Madoff was. The preposterous paper promises of paupers are burning and when they go up in smoke, there is only hope to replace it, not truth or real money. Hope won't put food on your table. Buy physical gold, the only true money in today's world, and protect some of your savings from theft by aggressive devaluation and fraud.

By the way, happy holidays! I believe 2009 will be an enormously profitable year for those investors willing to turn off CNBC and do their homework. If you want to buy some stocks and forget about all this financial crap for a few years, buy solid, blue-chip gold stocks and come back in 2-3 years.