Saturday, November 29, 2008

Unsustainable fear dissipating

Santa Claus rally dead ahead. The fall panic is over and a tradable rally into the spring has begun. Yes, it will be choppy, but the trend is your friend and for stocks and commodities, the trend is up. If you hold a bunch of stocks in your 401k/403b/IRA, you should stay put and you'll get some of your money back. Remember, though, that come March or so, it will be time to sell ALL OF YOUR GENERAL STOCKS! No excuses.

Also remember that by March or so, everyone will be saying that things are going to be OK, our government is so smart, Obama and Bernanke have fixed everything, blah, blah, blah. It will all be bullshit and completely incorrect. This is an expected technical bear market rally, nothing else.

Panic is a quantifiable item in general equities thanks to the $VIX or volatility index. High volatility = high fear = markets going down and/or uncertainity is in the air. Looking at an 18 year chart of the volatility index, it is clear to see that this fall's panic was one for the history books and that the fear won't last:

Now, the shorter term picture for the $VIX:

Everyone panics, the world is coming to an end, everyone sells, and then the funniest thing happens: the markets stop going down and actually go up. Nothing has changed, our economy is still heading for its worst recession in 50-80 years, yet we're going to go higher into the spring. As the fundamentals get worse, stocks will temporarily go up. Why is this? Sentiment or feelings/attitudes/emotions. Forget the rational market hypothesis crap. What a joke! The S&P was worth 1500 one year ago and last week it was only worth 750 based on rational investor analysis? I call bullshit when I see it and that's complete bullshit.

Though longer term the market is fairly rational, short term it absolutely is not. We just had a classic fall "panic," which means, ummmmmmmm, people panic! One of the worst legs of this bear market is over. I'm not sure if it will be the worst leg down, but it wouldn't surprise me. The long term trend is down. However, because markets are not rational short term, good money can be made by going long here despite knowing that general stocks are in a nasty bear market.

Friday, November 28, 2008

Freeport McMoran - a current play

Freeport McMoran (stock ticker: FCX) is a large multinational blue chip mining company that focuses on copper, gold, molybdenum and silver. It often leads the mining sector on the way up. Like most mining stocks this fall, it got absolutely taken to the woodshed and beaten to a bloody pulp. Because it has a large copper component, I don't like it for a long-term play, but it is a current trade of mine to play the bear market bounce and it has a margin of safety fundamentally because it also mines gold.

UYM, the ticker for an ETF in the basic materials sector, is a more diversified way to play this bounce and gives you 2:1 leverage while trading like a stock. However, FCX has fairly liquid (i.e. heavily traded) options, which give more like a 3:1 or 4:1 leverage, so I am using options on this stock as a trading vehicle. There is a decent precedent for the current bounce in FCX that I am using as a road map to help make trading decisions. Following are my thought processes related to this FCX trade.

First, the current chart:

What I think will happen next, based on the prior "crash" in the stock in 1997:

Again, what makes the current opportunity so exciting is that it should only take a few months to make over a 100% return (200-300% with options) from the current levels. Due to impatience and my love of the game, I actually plan to sell my options when we reach the 50 day moving average, then buy new ones all over again two weeks later on the pull back. Again, this is a trade, not a buy and hold stock, as the copper component means this company won't do as well as "pure" gold stocks and copper stocks generally do quite poorly during recessions.

Remember that some of the greatest short-term opportunities to go long occur during bear markets, not bull markets. Traders love bear markets because of the ability to play the wild swings back and forth and make money both short and long. One need only look at the 2000-2003 bear market in the S&P 500 for a classic example of this phenomenon, where monthly swings gave gains and losses that looked more like annual returns for an unstable emerging market:

Even if you traded poorly during the prior bear market shown in the chart above and only caught half of each swing in each direction, you would have made 80% in 2 years time (assuming no leverage) instead of losing 50% of your money by buying and holding and gritting your teeth and waiting for the market to come back "like it always does" (eventually, anyway).

Wednesday, November 26, 2008

Another fractal encouragement

Fractals are repeating patterns that can be predictive at times. Take a look at the charts below of Newmont Mining (NEM), an old blue chip gold mining company on every institutional investor's radar.

Then (in 2000, notice the months on the chart):

Now (notice the months on the chart):

If you believe, like I do, that the fundamentals are solid and a general equity bear market condition exists that is similar to 2000, then there is no reason to think a similar pattern can't repeat and this often happens in markets. See my previous post for a fractal example that made me a lot of money in the recent past.

If the current chart pattern "rhymes" with the previous one (since they're rarely perfect matches), we might could make some money by anticipating this. By the way, did you notice the lower MACD indicator on the two charts above for some more uncanny similarity? Anyhoo, this is what happened next back in the old days of 2000-2001:

By the way, if you're more patient than I and you're an actual investor, here is what happened next in good ol' 2000 for someone with a 3 year time horizon on Newmont (NEM):

Me, I'm in for the ride. Gold stocks are the GO TO SECTOR FOR THE NEXT FEW YEARS. Embrace this. Enjoy this. Buy low now so you can sell high later. Buy! Comprar! Buy! Acheter!

Tuesday, November 25, 2008

S&P 500 bear - the pause that refreshes

The bear market is not over by a long shot. I believe we have begun the bear market rally or "bounce" that will take us into the spring and then we will have another wicked leg down. This is not "just another recession." You don't crash the entire world banking system with a routine recession. Housing bubbles are notorious for causing protracted, long recessions when they pop. Just ask Japan. Why is this so?

The banks get heavily leveraged when real estate is involved, even when people are willing to put 20 or 30% of the purchase price down in cash. The current bubble had people literally taking a check from the bank to move into a house with 103%, 105% and in some cases up to 110% loan to property loan value. The banks are screwed and they're still not admitting to half the losses they will need to take before this mess is over.

The S&P 500 chart also gives some clues that this bear market is not over:

I believe the bottom is in, but it's only a temporary or intermediate-term bottom. We still need to go through at least one more significant leg down to complete a 5th wave in Elliott wave terms (a charting technique) and set up a momentum divergence before we can have a year or longer cyclical bull market rally occur. When momentum goes this far (using the MACD and RSI indicators on the chart above), a second reaction back to test these levels is likely and the momentum indicators will probably not reach these same momentum lows the next time they "try", though the price should set a lower low. This will set up a price and momentum divergence on the chart and get we tea leaf readers ready to go long for more than a few weeks or months. The bear market is not over but it won't last forever.

The chart below compares the Nikkei Japanese stock bubble of the 1980s (in red) with the Nasdaq stocks bubble of the 1990s (in black). Gives you an idea of what to expect ahead. History doesn't repeat exactly, but it sho' do rhyme.

So, it's opportunistic transient bull for now, but the bear market is alive and well. If you're playing the markets long it should only be for a short time (i.e. 2-4 months), as the real money to be made is when this bear market rally is over and it is time to go short again.

Monday, November 24, 2008

Pssst! Want to make some quick, easy money?

Then buy UYM, a double bullish ETF that tracks companies in the basic materials/commodities sector. Companies like Monsanto, Du Pont and Freeport McMoran. Do your own diligence at the website.

When these companies in aggregate go up 10% the ETF is designed to go up 20%, though the tracking mechanism is far from perfect. This extra leverage can also hurt you if you guess wrong, but no risk, no reward. The chart of this ETF shows massive carnage:

Just to get back to its 50 day moving average, a reasonable target for a bear market bounce after a vicious sell-off, implies at least a 100% gain from current levels and it should only take a few weeks to a few months to get there. Should be a quick and easy way to double your money and this instrument can be bought and sold in any account that is able to buy and sell stocks. Any takers?

Sunday, November 23, 2008

Counterparty risk - what?!

None of us want to believe that the government or corporations will fail to deliver on the promises they have made, yet we know it has happened many times before.

From the U.S. government's gold seizure from its citizens in the 1930s, to the U.S. government defaulting on its international gold obligation in the early 1970s, to Enron, MCI, Bear Stearns, and Circuit City - counter party risk is real. It's a low-likelihood event, but if/when it happens, it can be really expensive.

Physical gold is an insurance policy against counter party risk as long as you hold it in your possession or store it via an appropriate custodial relationship. The GLD ticker ETF as trustworthy as any random bank promise and is not the same as holding physical gold. We are entering a time in our history when promises will be broken at an accelerating pace. The government cannot possibly afford the promises it has already made and it is soon to make even more to please the sheeple.

Physical gold is portable, universal, and not subject to debasement by incompetent bureaucrats. Trust is in a bear market, which means gold and cold, hard cash are more valuable than promises and projected future streams of revenue based on hope. The U.S. Dollar is king for now, but the torch will be passed to gold soon. Will you be ready? If your 401k doesn't offer the chance to buy gold, does that mean it is appropriate to ignore your obligation to look out for #1 and avoid stepping in #2? I wonder if most E*trade customers know about their counter party risk.

Hold at least 5-10% of your wealth in physical gold outside of the system. It's no longer appropriate to pretend everything is going to be OK. It's no longer appropriate to pretend Obama can and/or will change anything and ignore your own obligation to prepare for an economic crisis. Gold has survived every recorded crisis over the past 3000 years and is now in a strong bull market compared with stocks, corporate bonds, real estate and especially corporate and government promises.

Saturday, November 22, 2008

Back to the fundamentals

Fundamentals are how we're supposed to invest, although technical analysis (i.e. tea leaf or chart reading) can be helpful to time entry and exit points. Gold stocks have the best fundamentals they have had in over two decades. Gold mining companies with operating mines that can generate cash flow and don't need to borrow money (since loans are now difficult to obtain) are in the best position they've been in for over 20 years. How do I know? The chart below, a ratio of gold divided by other commodities, tells me.

Gold mining companies dig gold (or real money as it's known to some) out of the ground. It's hard, labor-intensive and energy-intensive work. When the cost of digging money out of the ground drops, profit margins increase. In a deflationary environment, costs drop, because most commodities like oil as well as labor costs drop. For most companies, so does demand. However, cash (and real money [gold]) are in high demand in a deflationary environment because people are risk averse.

Thus, the gold mining companies have a product in high demand whose price is stable to rising while costs are going down. This means expanding profit margins and profits and that eventually translates into a higher stock price and often, higher dividends and dividend yields.

While other companies struggle to survive, gold mining companies are about to start making money hand over fist. Buy the ETF with ticker symbol GDX to get a diversified basket of senior mining stocks and start making some of that money. The 26% gain GDX had yesterday was just a taste of things to come. Gold miners are already making more money as we speak and earnings surprises will be to the upside for several quarters for producing gold mines.

All stocks are about to rally, but when the next brutal decline hits, it will be just a routine correction for gold stocks, which will now start to separate themselves from the general stock indices and become THE premier asset class for the next few years. This is not an inflation play, it is a deflation play, and the gains should be tremendous.

Thursday, November 20, 2008

Deflationary shitstorm

Excuse my French and all, but it's game over. The 2008 stock market crash is one for the history books. The government and for profit "Federal" "Reserve," which is neither of these things, has lost the battle. Not that they really had a decent shot anyway. The scenes coming to America in a short while will test every citizens' faith in the "system."

This is end of empire type stuff we are witnessing. Those who think we're going to bounce back because that's what America does are no longer using reason or common sense, but blind hope and faith. There is nothing wrong with hope, but it's time to come to grips with reality. Our system is in for a complete overhaul that will be forced upon our leaders by external realities, since they are incapable of being forward thinking or proactive.

A serious currency crisis no longer seems implausible and is the only real alternative to a long lasting deflationary depression that will make the first one not seem so bad. If you have not bought physical gold coins or bars to be kept in a safe physical location near you, stop procrastinating. Paper money and the banks behind it are broke, desperate and suspect.

I only have one chart for today, which I ask you to look at long and hard - Citigroup over the past 15 years or so:

How many times have we been deceived by and about this company? Remember when the government banned short selling this company? Remember when everyone and their brother on CNBC/MSNBC/Cramer's show said to buy this company on the dips? This company has been dog shit sitting on a foundation of cancer for years. Who warned you? Who helped the poor retail/individual investor avoid losing everything they owned? This is a widow and orphan stock, people. Apparently, financial planners in this country don't think much of our widows and orphans.

Stop listening to people who got it wrong. Stop believing all the bullshit you're told about investing in blue chip companies and holding them forever. Gold doesn't bullshit anyone. India, China, Russia, Saudi Arabia and Iran are all buying the precious metal hand over fist. When promises can no longer be kept and all the illusions are shattered, gold will remain real money and a real store of value. Did you know we've been in a secular bear market since 2000? Did you know the bull market from 2003-2007 was composed essentially entirely of currency debasement/inflation and recklessly low government sponsored interest rates?

OK, enough gloom and doom. It's time for a brief rally already. I think the lows for this leg down will be put in this week, although tomorrow has the potential to be crazy as all hell.

Gold is holding strong and actually managed to go up today amidst the carnage. Unfortunately for me, that means my final gold stock low ball order offers didn't fill. It doesn't pay to chase stocks up in a market like this.

One ounce of gold will buy the entire Dow Jones Industrial Average before this bear market is over. At $750/ounce gold and a 7500 Dow Jones level, we're still at a 10:1 Dow to gold ratio. We're going to get to a 1:1 ratio. You do the math. This is what opportunity is made of - BUY PHYSICAL GOLD! Traders should buy gold stocks (or any old turkey stock really) and look for a multimonth rally potentially starting tomorrow. Investors should buy physical gold and gold stocks mingled with short-term US government bonds of 1-5 years' duration (or other cash equivalents).

By the way, once the coming short-term rally is over, there will be HUGE profit potential going short next spring. If you don't know anything about going short stocks, you have 3 months to learn. The next leg down after the obligatory 2-4 month bear market bounce may be almost as wicked as the one now ending. This is more opportunity knocking up ahead.

Wednesday, November 19, 2008

Blood in the Streets again - Buy!

Tomorrow and/or Friday may be the last chance to board this train before the next intermediate trend, which will be up, not down. Trying to call an exact bottom is a mug's game, but we're VERY close. Not only gold stocks, but all stocks will rally for at least a few months, and it should be fast and furious.

Remember, the fastest, craziest, and highest percentage positive gains over the short term occur in BEAR markets, not bull markets. Yes, it's counter-intuitive, but history repeats and this year has been no exception. Gold stocks are the best fundamental buys out there, but if you're stuck in the ol' company 401k with 4 shitty mutual funds to choose from, you're still going to make some of your money back over the next few months, so sit tight and don't sell everything at the bottom.

To the charts, yo. The put to call ratio over the last 6 months is shown, which looks at the ratio between people betting for the market to go down versus those betting it will go up. When the chart is high/up, people are heavily betting on a further decline. The herd is usually wrong when it goes to extremes.

Next up, the VIX/Volatility index or the "fear" gauge. When it's high, people are scared and the market is going down. The concept of declining momentum takes a while to get comfortable with, but it helps predict trend changes before they occur.

Commodities have been crushed and will be "done"/in a bear market for as long as deflation lasts. However, no market moves in a straight line and this one has had a straight line trajectory toward zero and is due for a fast and furious "relief" rally. This relief rally may well be good for a 40-50% gain within a few months once it starts.

Remember, gold is schizophrenic because it is lumped together with commodities (unfortunately for my portfolio), but it is also the world's safest currency. This means it will outperform commodities (and already has by losing less than other commodities like oil) and revert to its role as money if deflation persists. The gold play is not based on it being a commodity but being a safe currency that cannot be debased by the government (though confiscation is always possible, which is why gold bugs often also like guns, but we'll save that story for another day...).

Real estate - stop holding your breath

It's not coming back any time soon. Trust me. If you own a house, you're screwed. If you're waiting to buy a house, wait longer. There has never been a housing bubble in history that has reached bottom within 5 years and many take 10-20 years to reach a true bottom. This bubble peaked in 2005-2006, so hoping it will bottom before 2010 is unrealistic.

There are a few charts you need to be aware of to help put things in perspective. The first, courtesy of the Japan Real Estate Institute, compares the Japanese real estate bubble to our own and doesn't show the early downturn that began for the U.S. (as well as the UK and Australia, among others) shortly after this chart's data ended in 2005.

Notice that Japan went down for 14 years after the peak and they are now almost starting to stabilize after 18 YEARS OF DECLINING REAL ESTATE PRICES. You think we're better/different? You think Japan doesn't have a lot less land to go around than we do? You think our government will fix the mess?

Next up, mortgage rate resets, courtesy of Credit Suisse:

That big peach-colored peak that starts ramping up next year and continues until early 2012 is "option adjustable rate" loan resets. These are predominantly the "pick a pay" loans, where the home debtor can pay the minimum payment (what 80% are actually doing) and get into negative amortization. Negative amortization means every month you owe more and more on the house because you are paying less than an interest only payment so you end up owing $410,000 on a house that you bought for $400,000 with 100% financing. The loans often "trigger" a demand for ASTRONOMICALLY HIGHER payments when you owe over a certain amount of the original loan value. Though the other 20% of people with these loans pay interest only or a full interest plus principal payment and should be fine for a while, the other 80% of this herd is stampeding over a cliff as we speak.

Additionally, these loans and the clustered peak of "Alt-A" loans (usually 3/1 or 5/1 adjustable rate mortgages [ARMs] with low documentation and high credit scores) are for higher amounts/larger homes than subprime and are usually low documentation or no documentation loans based on a high credit score alone. This means that those who think "ritzy"/high-priced areas are immune from the ongoing housing massacre are ignoring the reality that lies dead ahead. These loans are how so many seemingly low or average paid people kept up with the Jones's and moved into McMansions.

Next up, the transmission mechanism is broken because banks and their potential customers are both broke or about to become so because of job losses (chart stolen from Dr. Housing Bubble via U.S. Treasury and Freddie Mac):

This is important. If you want to know what mortgage rates are, you can generally follow the 10 year U.S. Treasury bond rate and get a good idea of the trend. But notice the lack of drop in mortgage rates with the recent drop in the 10 year bond yields in this chart. Translation: banker's want a much higher premium in the rate they charge relative to historical trends, which means mortgage interest rates are the same or more compared with last year despite the Federal Reserve cutting their short-term rates and doing everything they can to "stimulate" lending.

Second translation: The "Fed" is not all powerful like the Wizard of Oz, but the free market is. The Fed is now trying to bypass the banks and reduce people's loans for them, which means anyone who doesn't take advantage of it or who isn't a homeowner will have to pay for their share of it anyway. After all, the Fed, when it prints money out of thin air, just puts it on the U.S. Treasury's tab and the taxpayers are then liable, either through inflation (the invisible tax that screws us all) or through increased taxation. By the way, what happens in a few years when interest rates actually start going up again?

Lastly, and probably most importantly, is the devastating psychological shift that will slowly transform the way we all think about housing:

"Housing always goes up."
"If you buy a house and hold it for at least 5-10 years, you'll make money."
"They're not making any more land."
"The tax benefits alone make it cheaper to buy than rent."

I used to believe all this B.S., too, so don't think I didn't drink the Kool Aid myself before I got educated on market cycles and financial history. All of these statements are false and only apply until they don't. Well, they don't anymore.

"Why buy a house when you can rent."
"Renting is cheaper than buying."
"Why pay taxes and maintenance on a house and deal with repairs when you can rent."
"Housing prices will continue to go down."

These are the new mantras that apply until they don't and they're just getting started. Ask me in 2012 if I think we've hit bottom, because I'd bet your first child it won't be before then. If real estate does bottom before then, it will only be in nominal terms because we will have destroyed our currency. In this setting, your house will be worth $1 million dollars but gasoline will cost $50/gallon.

Priced in gold, the best "real" money out there (have you traded any of your monopoly money for some yet?), real estate has a long way to fall. What you think is a good deal now will be too pricey in a few years.

Sunday, November 9, 2008

Gold around the world

Gold is a currency. Gold is money. Gold is traded by the currency desks at big financial firms, not the commodity desks. Sound money not backed by politicans in a time of financial crisis is always a good idea. Because gold is priced in U.S. dollars, the recent strength in the U.S. dollar has made the gold price correction steeper than in other countries. And make no mistake about it: the recent move in the U.S. dollar is a correction within a longer term trend of devaluation, not the start of a new bull market (i.e. a "bounce" that is countertrend to the primary bear market). Bull markets do not rise so fast and furious in their early stages, but corrections are often violent and fast.

Below is a monthly chart of the U.S. dollar and an indication of where I think we are in this correction, which could potentially last another 6-12 months.

Gold, on the other hand, is a currency undergoing a normal and healthy bull market correction. Remember, cash that pays no interest is not a way to "get rich quick" except in very rare circumstances, but it is a way to preserve wealth. Let's see how well gold has done in this regard during the recent market turmoil for citizens in some other countries. Keep in mind that global markets have lost 30-50% of their value over the past few months just like ours have and many markets have been hit harder than the U.S.

Buy some physical gold, secure it, and forget about it for a few years. You won't regret it.

Sentiment - tying it all together

Fundamentals are now and will be quite bad for the next few years, but just as importantly, sentiment has turned. This is a long-term (i.e. greater than 5 years) secular shift that promises to make the ultimate lows in stocks lower than they would be if sentiment was positive and fundamentals were poor.

If you doubt this, think about headlines used to explain daily or weekly movements in stocks or other investment assets. There always seems to be an "explanation." Think of this past summer when everyone was talking about oil:

"Stocks rise due to energy strength."
"Stocks fall due to expensive oil."
"Stocks fall due to weakness in the energy and commodities sector."
"Stocks rise due to cheaper oil."

Huh? No wonder retail investors who watch CNBC are confused. "Show me the price action and I'll give you the headline," to paraphrase an old saying. Some of the so called maxims of stock investing are based on fallacies that can be easily disproven, yet they persist. The perfect example: when the Fed cuts rates, stocks go higher. If you want to do a little of your own research on this, all you have to do is look at the last year or so to know this is complete garbage. Yet everyone hangs on the Fed's every word as if their magic fairy wand controlled the economy and/or stock prices. Just like the Wizard of Oz, pay no attention to the man behind the curtain.

Sentiment, or emotion/mood, is a big part of what drives stock prices. The price to earnings ratio is a good way to assess sentiment. In certain periods of history, people are willing to pay more money per dollar of corporate earnings than others. In other periods, stocks are shunned even when a good long-term buy. Look at the chart below, which I copied/stole from another site a while back and can't give proper credit for:

People who say P/E ratios make stocks "cheap" right now are not accurate and are not taking sentiment into account. The price people are willing to pay for a dollar of earnings has peaked and is heading down. The chart above is almost a perfect sine wave and our down slope for this cycle is ahead of us, not behind us. History tells us the P/E ratio will drop for general stocks until it is less than 10 before a new long-term (i.e. decade or more) bull market is born. Prices of stocks are falling right now, but earnings are falling just as fast or faster and we have a LONG WAY TO GO before a P/E ratio of less than 10 signals that it may be time to dip your toe back into general equities.

But why is this true? Why was someone willing to pay $100/share for a stock with no earnings in 2000 and why isn't someone willing to pay $1/share for a similar company now? The answer is simple: sentiment. The social mood has turned against stocks. We are at the beginning to middle stages of this social mood turn. The first glimpse came in the 2000-2003 bear market, but now the fast, furious and devastating turn comes that will destroy your investment portfolio if you don't change to match the times. Buy and hold will work only if you're willing to wait 20 or more years just to get back to even.

Once the P/E ratio for stocks gets below 10 and one ounce of gold can buy the entire Dow Jones Industrial Average, I will change my bearish tune and become a wild general stock bull. You will no longer hear me talking about gold and gold stocks, unless it is as a shorting opportunity. Until that time, however, general stocks are a short-term trade or a shorting opportunity only. Gold and gold stocks on the other hand are currently a long term, dream-come-true opportunity to protect and enhance your wealth.

Saturday, November 8, 2008

We've written a check our asses can't cash

Our government and its master, the for-profit Federal Reserve, have now written checks that they can't cover. It is important to understand this and believe it in order to know and plan for what comes next. We as a nation are broke, deep in debt, and have just started a wicked recession. Over the past few decades, we have outsourced most of our productive capacity abroad and the last financial cycle in this country was based on selling over-inflated assets to each other. This is also known as "paper shuffling" or a "Ponzi scheme."

We have guaranteed bank deposits and money markets, given large loans to other countries, created an alphabet soup of "lending facilities" for private corporations that caused the mess we are in, nationalized the mortgage industry, and bailed out multiple corporations. Do I need to mention that all of this has happened within the last 6 months? By the way, we also sent Joe sixpack a check to shut him up.

The last positive business cycle in this country from 2003-2007 was based on the Wall Street Wizards of Finance and "Flip that House." If you take away real estate, finance and the insurance schemes used to protect these two endeavors, you are left with a fairly weak economic base relative to our history as a country. In an attempt to "muddle through" this severe and neccessary recession and kick the proverbial can down the road to the next generation, the powers that be have set us on a course for another Great Depression.

Do not believe those who tell you we are smarter this time or that policy mistakes related to not enough government intervention in the 1930s were the problem last time and that it "won't happen again." Actually, the opposite is true. This time it will be worse. Much worse. The reason: government intervention is just as aggressive (if not more so) than last time and the preceding bubble that has started to (and is going to continue to) burst is even bigger.

We are exponentially expanding the debt we owe to the world and our citizens at a time when we can least afford it. We have baby boomers wanting to retire and start collecting Social Security and Medicare benefits, but we don't have the money to make good on these promises. Taxes are now going to decline rapidly due to decreasing incomes and corporate profits. In turn our deficits will rise. Yet, we are bailing out banks, insurance companies and the auto industry. We are sending "stimulus" checks to people despite the fact that we don't have the money. We are spending billions on war with tiny third world countries who have never harmed us and are STILL talking about that "dangerous" Iran and expanding the "War on Terror."

People who think government can fix the mess we are now in, which has only just begun, don't truly understand the two most important things: goverment gets its money from the people it governs and government helped cause the problem. Our government is accumulating debt that is owed by we the people. We the people can't afford to pay it back. History shows that when that happens, the paper promises of the government in question are eventually revealed for what they are: hollow and worthless.

Also, the problem that led to this financial crisis was not lack of regulation, the problem is that the government isn't allowing those who deserve to fail or go to jail to do so. If Wall Street firms, banks, insurance companies and auto companies need government subsidies to exist, then they are bankrupt and non-viable business models and should cease to exist. Trust me, new and more efficient entrepreneurs and businesses will figure out a new way to provide these services if people want them. This is how free markets work (does anyone remember?).

Our government needs to reduce spending rapidly and aggressively to stave off a currency crisis in the near future, but instead they are aggressively spending even more money they don't have. How is this rational? Think of someone who maxes out one credit card, rolls the debt over to a new card, then maxes out the new card and starts the cycle over. Do you think that person can continue such a scheme perpetually? In fact, many Americans have done this exact same thing until just recently when the banks tightened lending standards. Our government led the way in teaching its citizens how to run a financial scam but failed to teach them how to recognize one in advance.

But what happens to our country when the interest payments on our debt are greater than the amount of money our country takes in via taxation? How long can we go on by borrowing the money needed to make the interest payments on our debts while at the same time increasing our debt load even more? Other central banks of the world continue to allow our debt to get further and further out of control by agreeing to purchase our bonds, but how long can this last? Do you think China, Japan and the oil producing nations of the world will be there to bail us out once their own economies get deeper into the current turmoil?

The United States is fast approaching the point in time where its economy and currency will no longer be respected or have the confidence of the world. The large majority of Americans are totally unprepared for this slow-motion event that has already started. Once the true crisis stage occurs in a year or two, which may entail an overnight 50% or more devaluation of our money, most Americans will say that there was "no way to see it coming," yet it now essentially seems inevitable and obvious.

The good news is that the deflationary shit storm going on right now will keep our currency valuable for at least another year, so there is time to use the current strength of the currency to move into tangible goods that are not subject to debasement by a government pen. Gold is the best of the bunch in this regard and the final dip into the $650/oz or so range will present an enormous long-term opportunity for those who are prepared. I would recommend physical gold, not paper substitutes.

As a glimpse into what other things are likely to happen in an attempt to "fix" the crisis, see this link:

If you think it can't or won't happen once this crisis gets bad, you are in the exact state of mind your government needs you to be so that it can catch you by surprise. Our government has become a big, mean, hungry, out of control beast and anyone who has managed to save a little money is in its sights. Ask the people who live in Argentina.

Tuesday, November 4, 2008

GDX has had a quick 50% gain from its recent bottom. Unfortunately, it had to lose a quick 70% in the 3 months prior, making the recent move of little consolation to long-term holders. Gold stocks can be volatile, without a doubt. However, the major bottom should be in with a potential re-test of these recent lows the worst case scenario. The chart below shows the first major test for gold stocks, represented by GDX.

There should be at least a brief pause at the point denoted in the chart. Even if GDX breaks through, it will probably come back to this level for a re-test before launching higher. A reversal after reaching this level and going back down to re-test the lows made in October is a possible scenario. How much you try to time your trade depends on your time horizon. If you're in for 2-5 years, there will be no regrets buying at this level. If you're in for a few weeks, timing is pretty durned important.

One of the things I have to remind myself in my own little financial journey is to be patient. It's not one of my strong suits. "To be right and sit tight," as they say, can be a hard but potentially very profitable endeavor. How does 200-300% profit in 3 years sound?

If you don't believe me, how about Alan Greenspan?

Long before he became chairman of the Federal Reserve, Alan Greenspan wrote about gold and the need for gold-backed money. You can read his entire essay from 1966 at:

Below is what I think is the key excerpt:

...the opposition to the gold standard in any form-from a growing number of welfare-state advocates-was prompted by a much subtler insight: the realization that the gold standard is incompatible with chronic deficit spending (the hallmark of the welfare state). Stripped of its academic jargon, the welfare state is nothing more than a mechanism by which governments confiscate the wealth of the productive members of a society to support a wide variety of welfare schemes. A substantial part of the confiscation is effected by taxation. But the welfare statists were quick to recognize that if they wished to retain political power, the amount of taxation had to be limited and they had to resort to programs of massive deficit spending, i.e., they had to borrow money, by issuing government bonds, to finance welfare expenditures on a large scale.

Under a gold standard, the amount of credit that an economy can support is determined by the economy's tangible assets, since every credit instrument is ultimately a claim on some tangible asset. But government bonds are not backed by tangible wealth, only by the government's promise to pay out of future tax revenues, and cannot easily be absorbed by the financial markets. A large volume of new government bonds can be sold to the public only at progressively higher interest rates. Thus, government deficit spending under a gold standard is severely limited. The abandonment of the gold standard made it possible for the welfare statists to use the banking system as a means to an unlimited expansion of credit. They have created paper reserves in the form of government bonds which-through a complex series of steps-the banks accept in place of tangible assets and treat as if they were an actual deposit, i.e., as the equivalent of what was formerly a deposit of gold. The holder of a government bond or of a bank deposit created by paper reserves believes that he has a valid claim on a real asset. But the fact is that there are now more claims outstanding than real assets. The law of supply and demand is not to be conned. As the supply of money (of claims) increases relative to the supply of tangible assets in the economy, prices must eventually rise. Thus the earnings saved by the productive members of the society lose value in terms of goods. When the economy's books are finally balanced, one finds that this loss in value represents the goods purchased by the government for welfare or other purposes with the money proceeds of the government bonds financed by bank credit expansion.

In the absence of the gold standard, there is no way to protect savings from confiscation through inflation. There is no safe store of value. If there were, the government would have to make its holding illegal, as was done in the case of gold. If everyone decided, for example, to convert all his bank deposits to silver or copper or any other good, and thereafter declined to accept checks as payment for goods, bank deposits would lose their purchasing power and government-created bank credit would be worthless as a claim on goods. The financial policy of the welfare state requires that there be no way for the owners of wealth to protect themselves.

This is the shabby secret of the welfare statists' tirades against gold. Deficit spending is simply a scheme for the confiscation of wealth. Gold stands in the way of this insidious process. It stands as a protector of property rights. If one grasps this, one has no difficulty in understanding the statists' antagonism toward the gold standard.

This is from Alan Greenspan, people. He gets it. He decided, like many of us, to abandon his ideals so that he could hold the keys to the kingdom. I don't blame him for the current disaster, human nature being what it is. The point is that the "boom times" from 1980-2000 were real only if you managed to save the "paper profits" you booked and turn them into something real. Now that we are in the inevitable "bust" time frame, gold will maintain purchasing power and protect you against the attempted re-inflation of the money supply to "cure" the recession. It's not rocket science, it's common sense.

To keep pace with inflation, you need to be ready to shift between asset classes every 10-20 years or so. Stock are SO OVER for the next decade. If you understand this, it's no big deal. Simply change your investment strategy. "Buy and hold forever" is a TOTAL SCAM invented by the financial industry. It works during 10-20 year bull markets and fails completely during the subsequent 10-20 year bear market. If we started the bust in 2000, we're roughly halfway to the time when a new bull market can occur, but as recent events in the market have shown, the last half is going to be rougher than the first half.

In fact, the excesses of the past boom period were so bad that we may even need a paradigm shift in how we deal with the concept of money. Perhaps a return to the gold standard will occur, despite how crazy that may sound. Certainly, by the time this secular, long-term bear market is over, our ability to print money at will and make the rest of the world accept it at face value will also be over. Those who hold physical gold during this adjustment period as portfolio insurance will maintain wealth and purchasing power no matter what McObama and their pals decide to try next.

Sunday, November 2, 2008

When and where will the gold price bottom?

I think the paper gold price will bottom in the $600-$650 range and it will happen in the next 3-5 months. A 50% retracement of the entire bull market so far (i.e. $1030/oz high last March minus the $255/oz low at the start of the bull market and the result multiplied by 50% and subtracted from the high in March) puts us at the $640/oz range and is a reasonable price correction for a bull market.

Having said this, the low may only last a few days before the price starts to power higher and the actual price retail investors will have to pay to get physical coins or bars in their hands will be roughly $40-120/oz higher, depending on the specific product(s) desired/available (e.g., American Gold Eagle coins, Vienna Philharmonics, etc.). The retail gold and silver shortage has become worldwide. Central banks are now holding their gold tight, wealthy investors are buying up large amounts of physical precious metals in bulk, and Indian, Middle Eastern and Asian retail investors are buying hand over fist with every price drop.

The strongest part of the gold bull market lies ahead, not behind. Gold is overall still a shunned and despised asset class in America. This will change before the bull market is over. No bull market ends with mainstream media and investment advisors laughing at people who buy into the item in question. The current price levels reflect an outstanding buying opportunity for long-term investors. Holding physical gold in your possession eliminates counter party risk and gold can never go to zero like Bear Stearns stock. It is an important part of your investment portfolio when rough times lie directly ahead (like, ummmmmmmmmm, NOW!). Think of gold as insurance, only there is no sketchy company involved that can deny a potential future claim you might need to make.

Just like no insurance policies are written on a home after it gets destroyed, no physical gold will be available at any reasonable price if things get really bad. The current physical market tightness in gold and silver is unprecedented in terms of scope and duration. Physical metal prices have completely decoupled from the "paper" price of the futures markets. This is a clear warning signal to act now before it is too late to protect your hard-earned money from the hurricane of financial destruction coming our way.

Saturday, November 1, 2008

Why is gold a hated asset?

A recent article on ( is typical of mainstream investment advice related to gold. I couldn't help but notice that this article has been a "headline" article on the site for almost two weeks now. I have never seen an article stay in this position on the bloomberg site for this long. I have put original quotes from the article below in italics and my comments below in bold:

"Gold May Pay Only in Case of Maximum Despair: Jane Bryant Quinn"

(You mean like the 250% gain for the gold price since 2001 versus the 30% loss for the S&P 500 since 2001?)

"Oct. 22 (Bloomberg) -- Gold is for rich guys -- buying physical gold, that is. The metal's highest and best investment use is as insurance policy against a currency collapse. For that purpose, you need a lot of it, stored around the world. Owning 20 or 30 coins is nice but won't protect your standard of living in a world where dollars are dust."

(Let's see. If someone has 20-30 one ounce gold coins and the currency collapses, this means the price of gold would reach infinity in that currency and you could use the gold to trade for goods or services while those who put their faith in the government would have absolutely nothing. Gee, where can I sign up for more fiat currency, since I'm just a stupid non-rich guy who would rather have my life savings turn to dust than be worth something in a crisis...)

"Gold isn't even a reliable hedge against inflation. It reached $850 an ounce in January 1980, a price not seen again until January 2008. During those intervening 28 years, gold plunged and reared but lost more than half of its purchasing power. For a 1980 investor to break even after inflation, gold would have to reach $2,200."

(Stocks aren't even a reliable hedge against inflation. The Nikkei Japanese stock index reached 7000 in 1981 and was back at the 7000 level in October, 2008. During those 27 years, the Japanese stock market bucked and gyrated and lost more than half its purchasing power. For a 1981 investor to break even, blah, blah, blah...)

Gold probably hasn't bottomed yet, but it's close. The stock market, on the other hand, isn't even close to its pending multi-year wicked deflationary bear market bottom. The secular investment pendulum has swung against general stocks and people with no clue like Ms. Jane Bryant will lead the sheeple to yet another slaughter. I don't intend to be part of her flock.

The government will fix the economy

Is the biggest lie told to and believed by investors. Everyone waits with anticipation and trepidation when the Federal Reserve meets to decide the discount rate. What a joke! If you want to know what the Fed is going to do, just follow the 90 day T-Bill rates, as this is what the Fed does. The Fed never leads the bond market, they follow it around like a lost puppy.

The government can fix the economy as well as Cramer can pick a stock. In other words, if a government action is taken to help the economy and the economy improves, this is due to COINCIDENCE, not causation. Roughly 47% of Cramer's picks make money just like roughly 50% of coin tosses come up heads.

You want proof the government can't stop market forces? How about these myths:

"China won't let their stock market fall before the Olympics." WRONG!
"It's an election year. They won't let stocks go down." WRONG!
"The Fed will cut rates and the market will come back." WRONG!
"The Fed will just print the money and all that liquidity will put a floor under stocks." WRONG!
"The Fed will bail out [Bear Stearns, Fannie Mae, Wachovia, Citibank, AIG, etc.] and this will fix the credit markets." WRONG!
"The government will continue to devalue our currency to help exports." WRONG!

The government has incredible power to do harm, but they CANNOT and HAVE NEVER caused an economic expansion. They can cause a monetary expansion and add gasoline to an out of control speculative frenzy (a la tech stocks 1999), but they CANNOT and HAVE NEVER "fixed" the economy or made it better. Market forces will always prevail and any attempted intervention will only have an effect for a few weeks at most.

Government is a PARASITE on the economy. Government regulation is not the answer, as hopeless bureaucrats failed to enforce the many laws that were already on our books and allowed the current mess to unfold in front of their eyes without so much as blinking. Greater regulation increases expense and hassle for businesses, so they ship our jobs to Mexico, India, China, Vietnam or wherever it's cheaper and easier to make money.

Remember "subprime is contained," "our economy is basically sound" and "housing has reached a bottom"? Do you really believe that nobody saw this mess coming? Do you really believe the people who tell you that the worst is over and that they know how to fix the problems they created or watched happen while in a state of ignorant bliss? Did you know that Henry Paulson profited enormously from this financial mess when he directly helped to cause it a few years back while head of Goldman Sachs?

Getting ahead of the curve

Gold stocks are forming a base right now from which to start a powerful cyclical bull market that should last 3 or more years. General stocks are forming a base for a bear market rally that will last 2-5 months and then the general stock market bear will continue. You want to buy gold stocks or stay in cash or cash equivalents (gold or short term U.S. government bonds of 5 years or less duration) and you want to avoid stocks like the plague unless you are a trader looking to play the bear market rally bounce before the next plunge that will begin in the spring.

For longer term investors, the time to act is now. Forget "buy and hold forever" and forget "long term, the stock market always goes up." This is only true if you have a 50 year investment horizon, meaning it's only true if the fact that you'll be dead by the time you make money in stocks is of no concern.

Investors who bought in 1929 waited until 1955 to break even again (26 years). Investors who bought the Japanese stock market at the beginning of 1990 are down 78% in 2008 (18 years later). The year 2000 in the United States is the equivalent of 1929 here or 1990 in Japan. Get over it and adapt or lose all your hard-earned investment money.

Gold stocks or cash are the place to be for the next 2-3 years. Cash will be safe and gold stocks will make you money. Real estate, general commodities and the general stock markets are going to get crushed. Gold stocks do well during a contractionary / deflationary environment. If you know this, you don't fear the coming recession as an investor, you simply switch your investments accordingly. The stock market crash is already telling you what happens next in the economy.

Mark my words: the retards on TV are going to pretend to be surprised at the massive lay-offs and economic contraction coming. However, the stock (and bond) markets have already told you what's coming in the "real" economy: a crash.

Let's forget the bulltards in fantasy-land and get ahead of the curve by looking at the gold to oil ratio to see what's coming next for gold miners' profits:

Since energy and labor are major mining costs and the cost of energy and labor are going to fall much faster than the price of gold, gold miners' profitability will rise. This is the same concept as the "real" price of gold using a gold to commodities ratio. Additionally, the price of gold should turn around soon and start going up again. This means a higher price for the product they sell and lower costs of production. Basic market talk 101: profits will expand, dividends will increase, and the stock price will rise to reflect the increased profits. Gold mining is a difficult business and not all gold miners will do well, but a basket of blue chip gold miners will do great with very little risk due to diversification (translation: buy ticker symbol GDX).

Look at how gold miners performed during the last contractionary bear market from 2000-2003:

If you switched from general stocks (the S&P 500 indicated by the red and black squiggles in the chart above) to gold miners (GDX indicated by the smoother black line in the chart) once it was clear the bull market in stocks was over, you not only preserved capital, you made money. The NASDAQ lost a lot more than the S&P 500, but we're going to ignore that here.

Take two investors that used or ignored this strategy and didn't get the timing right (notice in the chart above that the exact tops and bottoms for stocks and gold miners were not used), both starting with $50,000.

Investor#1 listened to Cramer and Ben Stein and Suze Orman and held on for the long term. He/She lost 40% and ending acount balance was $30,000.

Investor#2 went against the buy and hold crowd and sold general stocks and bought gold stocks. He/She gained 100% and ending account balance was $100,000.

Investor#1 in this example would now need a gain of 233% to catch up to investor#2.

Take home message: sell general stocks and buy gold stocks. If you're too scared to take the plunge (or your crappy retirement fund doesn't offer the ability to buy gold stocks), sell your stocks and get into cash or short term U.S. government bonds. If you believe centuries of history contain more wisdom than Bernanke and Obama or McCain's brains, buy some physical gold as portfolio insurance and hope you don't need it (hint: you will).

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