Sunday, May 31, 2009

How to get rich in the stock market over the next decade

Buy and hold a basket of Gold mining stocks or buy a Gold stock mutual fund or ETF (like GDX). There's only one catch, and it's a minor one: you should wait until the price comes down from current lofty levels.

Gold stocks are a good countercyclical asset to own, meaning they tend to do well when general stocks are doing lousy. Well, most of us already know that general stocks are doing lousy (other than the past two months). This can be seen in the table below, using Homestake Mining (now part of Barrick Gold Corporation, ticker ABX) as a proxy for the Gold mining sector:

Keep in mind that the table above ignores dividends and inflation, which are absolutely NOT trivial. But the general point is that when stock markets do lousy for a decade or more, Gold stocks tend to do well and vice versa. This point can also be made in graphic form by comparing long-term charts of U.S. Gold mining company stocks to general U.S. Stocks (i.e., Dow Jones Industrial Average), as the chart below stolen from Gold technician Frank Barbera demonstrates:

I believe we have started a deflationary economic depression, but Gold stocks can do well during heavy inflation or heavy deflation, as the data above shows. In other words, whether you believe we are headed for a rhyme of the 1930s or the 1970s, Gold stocks are a safe bet to prosper as general economic activity sputters. With unemployment skyrocketing, the housing crash nowhere near a bottom and the U.S. debt load reaching levels that seem impossible, it's a safe bet that traditional stocks will be a lousy investment for at least the next few years (short-term rallies aside).

The current bull run in Gold stocks is near complete and those looking to enter this sector should "sit on their hands" and be patient, as another buying opportunity will be here soon enough. Those in general stocks have a great opportunity to sell at the current levels and escape the next brutal wave down in general stocks, which will make lower lows than those seen in March. This capital can then be re-deployed into the one sector of the economy poised to make an historic bull run over the next decade or so.

The fundamentals for the Gold mining sector are superb as the Gold price is holding firm near its all-time highs while the costs of mining are declining. This fundamental back drop is best exemplified by the ratio of the Gold price to the price of a basket of commodities, which is a crude measure of miner profitability. For example, energy costs are significant for Gold miners. This ratio provides an estimate of the "real" price of Gold and the higher the real price, the higher the miners' profits. Below is a monthly chart of the Gold price divided by the CCI Commodity Index ($CCI) showing how crude Gold miner profitability (all other things being equal) is now higher than at any point in the past 20 years:

This alone indicates that Gold stocks should move back up to and exceed their previous highs. But even better is the fact that this ratio is about to start moving even higher, which will really get investors' attention as Gold miner profits are getting ready to explode to the upside. Below is a shorter-term 1 year daily chart of the Gold to CCI ratio:

When this ratio explodes to the upside again, the increase in profits that will occur for Gold mining companies currently in production will be dramatic. Gold stocks, like every sector of stocks, are not immune to getting caught up in downdrafts created by strong downward plunges during general stock bear markets. However, Gold stocks are in a strong new bull market and every correction that occurs in this sector will simply be another buying opportunity. While general stocks will be lower one year from now than they are now, Gold stocks will be much higher one year from now than they are today.

This Gold stock bull market is young and fresh and the largest gains are by far ahead rather than behind us. The current positioning of Gold stocks is much like Internet stocks in the early 1990s - it's that big of an opportunity. I, for one, intend to be along for the ride.

Saturday, May 30, 2009

Shoulda, coulda, woulda

is a game most traders play. I went bullish on Goldcorp (GG) and Novagold (NG) at almost the exact right time this spring for a trade, but bailed when things didn't play out exactly like I had planned. This was a mistake. This is the problem with trying to trade a bull market.

My previous analysis on Novagold (NG), in retrospect, looks pretty damn good if I may say so myself. But I didn't make a dime on the trade and I am of course kicking myself. Here's what happened to me in real-time:

When to have conviction and stand your ground and when to take a small loss/break even and move on is the life of a trader. I expected something to happen in a certain time frame and it didn't, so I bailed.

My point in showing you my mistake is to return to a valid question: why trade a bull market, why not just buy and hold? I know that a new bull market in Gold stocks started this fall and I know it will last several years, so why am I trading? As is often the case, the best answer is greed. I want to leverage the profits of the Gold stock bull market using options, which have a finite life span. The risk of this strategy is missing out on profits due to timing mistakes, as this example clearly shows.

For most, a buy and hold strategy makes much more sense. This will be my plan later, once I think this cyclical bear market in general stocks is near finished (we're not even close, by the way). Because I expect Gold stocks to be pulled down in a correction with each steep new bear leg down in general equities, my plan is to avoid the steep corrections with most of my trading capital. In this case, however, I ended up missing a steep bull move! As, they say, can't win 'em all...

Friday, May 29, 2009

All the little guy can do

is hedge when you get right down to it. This is why I started this blog and why I pound the table regarding Gold to anyone who will listen (and believe me, my friends and family are tired of it despite the fact that most have no exposure to Gold or Gold miners in their portfolios). Look, the deflationary versus hyperinflationary outcomes are really the only ones left on the table at this point. I favor deflation, as it is the natural, current market-driven force. Can I guarantee a massive dollar devaluation won't take place? Not unless I can predict with 100% certainty what China, Russia, the Middle East, and Brazil will do!

You see, the United States has painted itself into a corner. We are debtors with soiled reputations. Our creditors help to call the shots. Yes, we are still the big dog and can drag the world into economic depression (as we have already done), but what happens next is more important from a "big picture" view. A 1930s repeat should happen, as Europe is in the same basket-case scenario we are and, make no mistake about it, the British Pound should collapse before the U.S. Dollar does. But the "import" countries are maxed out on all their credit cards and the countries that own the credit card companies (i.e. China, Japan, Middle East oil producing countries, Brazil) are hurting because their best customers are curled up in the fetal position begging for more credit and asking to print up paper tickets in return for labor and vital industrial goods.

The citizens of America and Europe will default for sure. But the currency/government games are much different, as governments just keep issuing more debt without a care in the world. Will we just wither on the vine for the next 20 years like Japan or will we have a currency crisis and go the banana republic route? I favor the Japan scenario, but a determined coalition of some of our creditors could shoot themselves in the foot to spite and dethrone the current system. Not that I think China or Brazil are great countries and not like Japan isn't loaded with debt, which makes the currency game more tricky. I don't see the world as ready to accept China as the beacon for safe financial investment and I don't accept the de-coupling theory (yet). But once the U.S. exported most of its manufacturing jobs and relied on "smarts," financial trickery and endless credit to support its economy, this did create a bit of vulnerability, no?

Gold is a hedge against any monetary storm, whether a deflationary credit crisis or hyperinflationary blow-out/currency devaluation. Yes, you can argue that the Dollar is better in deflation (it does pay interest, after all) and oil is better in hyperinflation, but all the little guy can do is hedge IMO and Gold wins in either scenario. Buying physical Gold means you don't have to care which scenario plays out, as you are protected either way. Gold is money and the strongest currency possible, as it is no one's liability.

Gold is the only investment I know of that can prosper in aggressive deflation or aggressive inflation/hyperinflation. And physical Gold held outside the system is the only way I know of for the little guy to keep their money away from the prying eyes of an out-of-control government hell-bent on turning a democracy into a socialist and/or fascist parade.

I'll leave you with the chart that got me off my ass in an aha! moment and made me realize there is an alternative to "buy and hold" - the Dow to Gold ratio (below is a monthly log candlestick chart from 1980 to today's close):

Keep the faith. Keep your Gold (but don't buy more now when prices are high!).

Thursday, May 28, 2009

The Primary Economic Trend is Not Created by the Government

The government cannot “fix” the economy and has never been able to do so. All the regulations were in place to prevent the mess we are now in but the laws on the books were either ignored, not adequately policed, or revised/reversed due to bribery (i.e. “aggressive lobbying” by “special interest groups”).

Government does have the ability to make things worse by prolonging the economic depression that has already begun, however. In the spring of 1931, very few thought a prolonged economic depression had begun. It is repeatedly stated by those who claim to know about such things that “things are different this time” and “government didn’t do enough last time,” so another depression is not possible. I call bullshit and I have the facts to back it up.

See if any of these things from the last Great Depression look familiar (current thoughts and/or goings on are in parentheses):

• Short sale stock restrictions (fall, 2008 and the battles for more restrictions are ongoing)
• “Conference on Home Building and Home Ownership” (it seems like The National Association of Realtors has one every month and they have been calling the bottom in housing every month for 3 years now. They even got Alan Greenspan to talk about the “seeds of a bottom” in housing at their last big meeting)
• Government aid for low-income housing and government subsidized long-term credit for housing (nothing new here...)
• “National Credit Corporation” to stimulate lending by banks and extend credit to banks created with federal reserve assistance – morphed into the RFC (Reconstruction Finance Corporation), which was a political boondoggle used to pay off debts to bankers like JP Morgan and rife with corruption/theft of public funds to line bankers’ pockets (TARP-o-rama!)
• Federal Farm Loan Board/Bank System made to promise that they would not foreclose on any farm unless the debtor wanted to leave his/her farm (foreclosure moratoria also being used intermittently now)
• Home Loan Bank System created to provide discount mortgages (Fannie and Freddie morphed into monsters this time around!)
• Reform bankruptcy laws to weaken creditors’ position (GM and Chrysler – now, we just ignore the laws already on the books rather than bother to make new laws. Straight government gangsta!)
• Public Works Administration to create jobs and build infrastructure (pending Obama plan)
• Increased taxes including personal income, sales, gasoline, auto, electric energy, toiletries, jewelry, stock, telephone usage, corporate and gift taxes, among others (man, we all know it’s coming much more than we’ve seen so far)
• Emergency Relief and Construction Act to aid states in trouble (California, anyone?)
• Glass Steagall Act, which permitted the federal reserve to accept commercial paper as collateral for its notes and broadened assets eligible for rediscounting (current federal reserve alphabet soup programs)
• Excess reserves build up in banks despite record “money printing” due to a lack of bank lending (happening in spades right now)
• Bank failures at double to triple the normal rate (happening now)
• Hoover angry at individuals and banks that don’t use or give credit and calls them “hoarders” (prudent banks now being singled out as “irresponsible”)
• Unemployment rate at 8-9% in 1931 (ditto)
• Federal deficits explode to new record levels (duh!)
• “Emergency Committee for Employment” (Obama should just re-use this one verbatim, eh? Are you listening, sir?)

These things were all enacted/all happened while Hoover was still in office between 1930 and 1932, before anyone acknowledged there was an economic depression and before the stock market had bottomed, not after. FDR came later and he just went bat-shit insane with taxpayers’ money, but to no avail. Anyone who thinks FDR fixed the last depression or did anything besides prolong it should have their economic credentials revoked.

A secular debt bubble popping / credit contraction cannot be solved by creating more debt. Irresponsibly ramping up public debt in the name of expediency and need for centralized control (i.e. socialism/fascism) can make things worse, though, by prolonging the agony and leaving us vulnerable to a currency crisis. Gold hedges against government policy failure because it is the currency of last resort.

“Gold still represents the ultimate form of payment in the world. Fiat money, in extremis, is accepted by nobody. Gold is always accepted.” - Alan Greenspan, 1999

Gold miners should outperform Gold over the next decade in the Kondratieff Winter that has already begun, but holding some physical Gold as the ultimate form of cash and an insurance policy against the whims of policy makers and the currency markets is always prudent. The Gold sector will be the best place to make money over the next decade and it is not too late to profit at all, particularly in the Gold miners. I believe an intermediate-term top in Gold miners is near, but yet another great buying opportunity in the mining sector should occur before the end of the year. It is also not recommended that Gold purchases be made when the price has risen significantly (like now), but rather when it has made a sharp decline (the whole buy low, sell high thing…). I believe a new nominal price high for Gold is highly likely before Independence Day despite deflation.

Tuesday, May 26, 2009

Not to point out the obvious

and oversimplify things, but when you tune out the daily noise and ignore the intra-day squiggle jumpers (i.e. day-traders, who I envy 'cuz I ain't got time to be 'em), what really is the difference between the two circled areas on the daily candlestick 2 year chart of the NASDAQ ($COMPQ) below?

Could we have another up today tomorrow? Sure. But a month from now we will be significantly lower and since I can't watch the market intra-day very often, that's knowing more than enough to make an intermediate-term investment decision.

I think Gold and Gold stocks need a rest, too, but I suspect we'll get nominal new highs in the Gold price before the 4th of July in spite of a suspected imminent rise in the U.S. Dollar Index.

Monday, May 25, 2009

Historical data supporting a resumption of the bear market

I know that there are a lot of people who are bears and yet believe March 9th was "The" intermediate-term bottom. I also know there are perma-bulls who still think it was the end of the bear market altogether. The latter I won't even trifle with, as perma-bulls and me just ain't gonna see eye to eye right now. The stock market bulls were always right in the 1980s and 1990s and now they are always wrong - such are long-term market cycles. It is indisputable that we are in a secular bear market IMO and I would rather focus on the intermediate-term swings from the bear perspective than argue with wounded perma-bulls.

When markets are collapsing quickly in the throes of a wicked bear market, it is rare for them to rise significantly above the 200 day moving average (or 50 week moving average) for more than a few weeks. A touch of such moving averages is usually enough to provide resistance and resume the downward trend. This generally occurs in severe cyclical bear markets until the bear market is over. Sure, there are a few exceptions, but this has worked out well in past brutal bear markets.

Additionally, "important" bear markets in equities usually last 2.5-3.5 years or so. Below, I show some examples that I think are relevant, as I do believe this is a bear market that will take a prominent place in history. Those not convinced this is the case need to review the fundamentals IMO and recognize that this is the beginning of a secular credit contraction (the last one began in 1929-1930).

The current bear market began in mid-October, 2007 and is therefore only 1.5 years old. It is too early to be calling for a huge rally. To me, this would essentially be the equivalent of calling for a cyclical bull market as it would require a significantly rising 200 day moving average and this is very unusual in a strong bear market.

I don't think there's a snowball's chance in hell that this cyclical bear market is over. It must be remembered that we need to wipe out decades excessive optimism to restore balance and sanity to the stock markets. Because the 1970s were the inflationary zig-zag sort of secular bear market in nominal terms, this one should be a deflationary downward spiral like the 1930s.

Below are examples of daily charts of what I think are relevant bear markets with the 50 and 200 day moving averages drawn in for illustrative purposes. The first is the 1930s bear market and starts with early 1930 (chart "stolen" from - a great site for historical chart data):

Next is the NASDAQ bear market from 2000-2003:

Finally, the blow-out of the Japanese miracle market in 1990, which is still mired deep in secular bear territory after 18-19 years:

So I guess one of my keys is time. Previous relevant historical examples take at least 2.5 years before a significant counter-trend rally can occur, because nasty bear markets take that long to express themselves fully. Only then can a "big bounce" that goes far beyond the 200 day moving average occur, which is essentially saying that a cyclical bull run within this secular bear market is still a long ways off. Right now, of course, it doesn't really matter for traders, as most bearish traders are positioning/positioned for a downward move here. However, a bounce that occurs 100 S&P points lower will be interpreted by some as a signal to go intermediate-term long while I'll be staying intermediate-term short as I'm not looking for another leg higher in this bear market rally and I think it's over.

Elliott wavers get overly technical sometimes in my opinion - I am a novice EW follower and think it can be one of many useful tools in analyzing markets. Because I understand the fundamentals and know that it is too soon to even start talking about the economy, banks or housing bottoming, and too soon to start talking about unemployment bottoming, I would never let a single technical method in a vacuum give me my "big picture" trading ideas. Remember, Prechter and other Elliott Wave practitioners are often wrong and then just change their wave counts as we all have to change our views when the markets move against us. Without worrying too much about the little individual squiggles on the longer-term charts, I think the action since the fall crash lows has been very corrective-looking in almost all the indices I follow.

We'll find out soon enough...

Friday, May 22, 2009

They actually are ringing a bell at the top

though you have to know what it sounds like to recognize it. I am as uber-bearish as ever on general markets and plan to profit from the chaos like a greedy little capitalist pig. I have previously delved into the reasons why the rally was almost over and now I believe it is over. I expect reality and common sense to return over the long holiday weekend. As for the bell ringing at the top, it is related to the $VIX bottoming on a weekly chart with a very bullish candle (market hasn't closed yet at the time I am writing this and following is an 18 month log scale weekly candlestick chart):

Other indicators are supportive and allow one to be ready to hear the loudly ringing bell, starting with the NYSE Summation Index ($NYSI):

A similarly positioned $NYA50R warns bears that the time to get short is already past its prime for many individual stocks:

I believe it is time to revisit hell (i.e. 666 on the S&P 500) before mid-August is here - these lows may hold or we may breach them slightly, then I see a boring and weak summer bounce to set up another nasty plunge this fall. Unlike most, I believe all of the action in general equities has been corrective since the November 2008 crash lows. I think those looking at the current rally as the first wave up in a big correction are wrong and that we have just witnessed the end of the final leg up in a 3-legged correction that began in November 2008. Happy days are here again for the bears IMO. Are you ready?

Thursday, May 21, 2009

Time for Uncle Buck to rise from the dead

and astound its critics once again. This will only compound the downward pressure on general U.S. stock averages as their nominal value automatically declines due to a re-pricing upward of the paper/electronic fiat tickets (i.e. U.S. Dollars) in which the general stock averages are denominated.

Following is an 18 month daily candlestick chart of the Dollar ($USD):

I think a run toward 90 on the U.S. Dollar Index in the cards. This doesn't mean that Gold will do poorly, as all fiat currencies are sinking relative to Gold right now. Why? First, trust in politicians to fix things they cannot possibly fix (i.e. the economy and insolvency of the banking system) erodes confidence in the pieces of paper they push onto people to use for their daily transactions. Second, government insistence on increasing public debt while the private sector attempts to decrease debt devalues those paper tickets. Because the U.S. Dollar Index merely compares the Dollar to other fiat paper tickets, the illusion of strength is only revealed by a Gold price making new highs.

Remember that Gold is a currency, not a commodity. It is the strongest currency in existence right now and will benefit from the chaos as people search for something reliable to preserve what they have left. As the credit contraction grinds on, Gold will become the go to asset for all those in the know. Won't you join us by purchasing physical Gold to be held outside the system? And please avoid the GLD ETF, which defeats the purpose of owning Gold and allows paper games to control the Gold price to continue longer than necessary.

Wednesday, May 20, 2009

Regional banks

are canaries in the coal mine for this coming leg down in the bear market, which is far from over. These are the banks that are not backstopped by taxpayers, are not part of the fascist kieretsu business model evolving in the United States, and hold lots of commercial and consumer loans on their books that will default. These regional banks will be failing in droves over the next few years and will drag down the "real" economy with them.

To the 6 month daily candlestick chart:

I am out of the office so I can't doodle on the chart, but notice this index of regional banks ($KRX) has now crossed below its 50 day moving average with a vengeance and isn't buying the final bullish gasp of the general stock market averages. All the pieces of the bearish puzzle continue to fit together, although I have to admit that I am shocked at how low the $VIX has managed to push. It is a gift to any bears who play with options and who haven't already committed their capital to buying puts.

Gold and Gold miners are performing well. This is the only sector in the economy in a true bull market right now and will remain the only sector in this position for the next year or two. I remain long physical Gold, long the Gold royalty company Royal Gold (RGLD) and short the base metal miner Freeport McMoran (FCX).

Saturday, May 16, 2009

Why would it be different this time?

This is the question I find myself asking over and over again whenever I hear about this new proposal or that new "stimulus." Why would people believe that government intervention changes the primary trend? Why do people believe Bernanke, Obama, or Geithner can do anything besides screw things up even more?

Governments don't stabilize economies, economies stabilize governments. Now that our global economy is unstable, government is powerless to fix it in a meaningful way. Yes, they can borrow and tax more, but this simply turns a severe recession into a depression. And in case there are some who don't believe it, yes, another economic depression has already begun. Everyone has this vision of people starving in the street, bread lines, etc., which is only true for a proportion of the population. However, these things have already begun. Do you not think that tent cities developing around California are a modern-day equivalent? If not, ask yourself why. How is it different this time? What about soup kitchens and shelters overwhelmed by the volume of folks showing up and having to turn people away?

But I am primarily interested in the investment side of things for the purposes of my blog. Why do people think that we won't have a vicious 19 year bear market like Japan is in now? Look at this chart of the Nikkei Index, Japan's rough equivalent to the S&P 500, since 1970 ("borrowed" from, a great site for historical information):

Why do people think this can't happen in the U.S.? Is it because we're smarter? Harder working? Because our government takes on more debt? Because our government is creating the same zombie banks Japan did but the end result will be different because, dammit, we're America?!

How about an example from the good ol' USA? Look at this chart from the late 1800s to now for the Dow Jones Industrial Average (also from

And why am I so sure that we're heading for a deflationary depression? The bond market, which is usually (not always, of course) smarter than the stock market (again from

Notice the long, sort of sine wave pattern of bond yields and notice how long we scraped along the bottom last cycle before turning back up into a new Kondratieff spring, heralding the return of inflation. We're not going to go from a 1% yield to a 15% yield in the T-Bill in one year. The one exception to this statement is a geopolitical event that abruptly dethrones the U.S. Dollar. This is why I hold most of my cash in the form of Gold, since the yield on the T-Bill doesn't adequately compensate for the risk of this type of event. Additionally, banks and other financial institutions aren't trustworthy custodians of cash at this point in the financial cycle, as they are BANKRUPT. People who don't understand Gold is money don't believe Gold will hold its value during a deflation, but it has already shown that it can and will during a brutal deflationary wave (i.e. the last year proves it!).

Governments cannot stop this cycle from playing out, but they can prolong it by increasing public debt in the midst of a debt crisis. Japan has been doing just that for some time now. We in the United States have also started down this road vigorously, ignoring the lessons of generations past and doomed to repeat the same cycle of a prolonged economic depression.

The word depression conjures up emotional reactions from people. It isn't all bad for everyone. Savers who can manage to keep a modest revenue stream/income (I am not saying this is an easy task in an environment where unemployment will probably double from current levels) will be able to purchase more goods with their savings. Deflation lowers prices. A perfect example is cars. Think about how much cheaper cars will be in a year. With GM and Chrysler going out of business, credit hard to come by, and unemployment and uncertainty running high, cars may be 20% cheaper next year. Housing prices have fallen 50% already in some areas and are still falling aggressively.

What is clear is that those who insist on being bullish despite overwhelming fundamental evidence that this is a bad idea are going to lose a lot of money. A LOT of money. Stocks, corporate bonds and commodities aren't coming back any time soon. Yes, there will be bear market rallies like the one that is ending (or already ended) as I type this, but the trend is down and we are not even close to being out of the woods yet.

The ways to make money in this environment are:

1. Preserve capital. This is a better option than most people think. If you can manage to hold onto your $100 (or my preferred $100 worth of Gold) for another year or so, you'll be able to buy twice as many stocks or twice as much real estate with that money, which is the equivalent of buying a stock or piece of real estate and then having it turn a 100% profit!

2. Trade the bear market. It's hard, trust me. But a time like right now is a wonderful shorting opportunity if one has the patience to wait for the inevitable payoff to play out and one uses risk management principles.

3. Buy Gold stocks. Perhaps not right now if one is a trader, as many senior Gold stocks are closer to an intermediate-term top than a bottom, but I believe this fall will provide potential life-changing (in terms of finances) opportunities in the Gold mining sector. Those with a buy and hold mentality in this sector can simply dollar cost average into the only decent nascent bull market in town. Remember, Gold miners thrive during deflation for those who haven't looked at how Gold mining stocks did during the last deflationary depression in the 1930s.

Wednesday, May 13, 2009

Long Gold during deflation?!

I am repeatedly asked how I can reconcile my belief that we have begun a deflationary depression with my belief that Gold is still in a bull market. As everyone supposedly knows, Gold does well during inflation but lousy during deflation. This is one of the greatest misconceptions ever perpetuated by Wall Street and Gold bug lore.

Wall Street either hates or ignores Gold most of the time with good reason. There's no growth prospects in Gold, no yield, and who needs a Wall Street analyst to buy Gold? Storing and handling Gold is also a pain. Gold is the antithesis of leverage. Having said all these things, even Wall Street is happy to oblige when demand calls via futures contracts and the GLD ETF. Wall Street's favorite disparaging comment on Gold relates to a theoretical person who bought Gold at its highest possible price at the peak of the Gold bull market that ended in 1980. This mythical investor, who picked the exact highest tick on the Gold price in 1980, had to wait until 2008 just to get back to even in nominal terms and what about inflation?

Valid argument. I have no quarrel with it. However, those same Wall Street people will not tell retail investors about those who invested in the Nikkei stock index at its peak in 1990 (down 76% as of today's close and it's been 19 years so far), those who bought the Dow Jones at the 1929 high (took 25 years to get back to even in nominal terms) and those who bought the Dow Jones at its highest point in 1959 (less than 10% gain 21 years later during a period of brutally high inflation).

Gold "bugs," on the other hand, who ought to know better, think Gold is a buy because the fiat money system will implode at any second and hyperinflation is imminent. They are always looking for a replay of the late 1970s bull run and think of Gold only as the anti-dollar. Such folks are also often into the commodity scene and are simply looking to flee paper fiat dollars and get into tangible assets.

Me, I'm a thinking man's Gold investor and I am much more worried about deflation than inflation right now. Yes, I know that inflation follows deflation like night follows day in a fiat system, but deflation first. This is the start of a credit and debt bubble collapse and such events lead to deflationary depressions (and Kondratieff Winters if you're into cycles like I am).

In deflation, cash is king as all other items decline in price and the purchasing power of money increases. The fiat currency of interest does well during deflation as it can buy more things. As the world's reserve currency, the U.S. Dollar should do better than every other fiat currency if this deflationary cycle plays out according to historical precedents.

So why am I into Gold? Why not just hold U.S. Dollars and forget about Gold? Well, there are several reasons, which I would like to detail individually, not necessarily in order of importance:

1. Gold is money. Gold is a form of cash just like a U.S. Treasury Bill is. I know you can't spend Gold at 7-11 but you can't spend a T-Bill at 7-11 either and yet they are both cash equivalents. The advantage Gold has over the U.S. Dollar is that Gold is not backed by debt and does not represent debt. Debt is bad thing to have hanging over your head during deflation as debt burdens become more and more oppressive as deflation grinds on. So, Gold is the only form of money on the planet (allow me to neglect other precious metals for now) available right now that is accepted world wide, is nobody's liability/promise/debt instrument and requires effort to produce so it is valued for its relative scarcity.

2. The U.S. Dollar will likely lose its status as the reserve currency of the world. This will be a geopolitical event, not an economic event. Economists and financial analysts often miss this point when they talk about the U.S. Dollar outperforming Gold during deflation. Deflation can be blown out in a heartbeat in the United States if the rest of the world starts using other means besides old Uncle Buck to settle the bulk of international trade. The demand for dollars is based not only on people needing to pay debts back in the currency the debts were contracted under but also because demand for U.S. Dollars is created by their use in international trade. The former demand should stay strong for a least a few years, but the latter has a cloudy future. Gold protects against this geopolitical event, which in my mind is an eventual certainty. Though I don't know what will replace the U.S. Dollar, I do know that Gold will benefit from the uncertainty and instability such an event would produce around the world.

3. Even in a secular deflationary depression, there are periods of cyclical inflation. Economic activity will be weak and lethargic; asset bubbles have already blown out in oil, stocks, and real estate; and Gold has just emerged from the famous 28 year bear market Wall Street loves to point to, so "it's just time" (to steal a phrase from a recent Martin Armstrong piece) for Gold to have another bull market and any inflation that can be created in the next business cycle will at least in part flow into Gold. Gold has only gone up 4 fold since its bear market bottoming process during the 1999-2001 time period. After a 28 year bear market, don't you think it is reasonable to expect that Gold will manage to go up a little bit more than 4 fold before its current secular bull market is over?

4. Part of the big picture in my mind is that the global fiat currency system itself is what's failing. Many do not understand that when Nixon severed the final link to Gold for the U.S. Dollar, the planet embarked on its first ever global experiment in fiat currency, where no major currency anywhere in the world was backed by anything besides hot air and the foul promises of apparatchniks and their central bankstas. This experiment has failed in every society it has ever been tried in and for good reason. The power to create money out of thin air is a power that corrupts absolutely. The world is littered with examples from the famous Weimar Germany example to the Continental in the United States and the recent Zimbabwe example. Just because the experiment is larger doesn't mean human nature has magically changed and believe me, Helicopter Ben and widdle Timmy Geithner are not any smarter than those who came before them with the same goofy formulas, unshakable confidence and sheer arrogance. I think all currencies are sinking relative to Gold right now and the U.S. Dollar Index only compares the U.S. Dollar to other anchorless fiat currencies. Though many currencies may gain relative to each other or relative to stocks or real estate, I think they will all sink relative to Gold.

5. Trust is breaking down. In the U.S. and U.K., intentional lying and deception as well as outright theft are now being perpetuated against the citizens of these and other countries in the name of "saving" this or that or "stimulating" this or that. What percentage of people who follow financial markets actually believe the so called "stress testing" of the banking system in the U.S. was not an intentional deception designed to mask the reality of our financial situation from retail investors? When trust breaks down, Gold is trusted because it cannot lie or deceive and its value will not evaporate overnight or during a harried private Sunday morning meeting behind closed doors.

When trading with an electronic broker as most people do these days, how do you really know if you bought the stock your broker said you did? What if the government decides to confiscate 401(k) and IRA accounts to fund the Federal deficit, as they have already begun to discuss behind closed doors? What if you get caught in a trading position when the market shuts down for a day and stop loss orders don't fill at all? All of these risks are increasing as this bear market and economic depression for the record books grind on and these risks are no longer trivial. Physical Gold held outside the financial system protects against these risks.

6. Governments and their central banks own more Gold than anyone. Let me repeat this: Governments and their central banks own more Gold than anyone. If things get bad, these institutions can simply by decree declare that their Gold is worth $20,000/ounce and start the game all over again because they will still hold all the Gold/money. Think of 1933 and what Roosevelt did after confiscating everyone's Gold - he simply declared the Gold the U.S. Government stole was worth more than when they stole it! Yes, confiscation is thus a risk when holding Gold but things are much different than in the 1930s and few in the U.S. hold actual physical Gold. The GLD ETF, on the other hand, would be a great and easy way to confiscate Gold from U.S. citizens and thus I don't advise it for anything other than short-term trading for those who like to trade currencies without leverage.

7. Gold is a global market and is subject to global demand, yet it is quite a small overall market. It will only take a 1-2% shift of global asset allocation into Gold to cause huge price moves and as more and more people look to have their capital returned and kept safe rather than looking for a return on their capital, Gold will be an obvious choice.

8. Recent price action has confirmed Gold's strength in the face of strong deflationary pressures. Gold is only off 10% from its all-time high versus oil being down 60% and the CRB Commodities Index being down 50%. Gold has also outperformed the U.S. Dollar since the current deflationary bear market began on October 11th, 2007. Using closing prices for Gold and the U.S. Dollar Index on 10/11/2007 and today (5/13/09) yields the following data:

Missing from this return data is the yield on U.S. Dollars. If we use roughly 3% per year interest for U.S. Dollar cash, the U.S. Dollar has returned closer to 10-11% since the bear market started. This still falls short of the return from holding Gold.

9. The Dow to Gold ratio. My favorite long-term chart. A thing of beauty in defining trust in financial assets versus lack thereof. Anyone interested in Gold should be aware of this chart and appreciate its implications. The version of this ratio chart that I like to use is from (a great site) and is now a little outdated as it doesn't contain the most recent price action in this ratio, but it gets the point across:

This chart matters because most of us who read pieces like this one are people who have some of their money invested in the stock market. If the Dow to Gold ratio is going to 1:1 (i.e. the price of one ounce of Gold will soon equal the "price" of the Dow Jones Industrial Average), will you really be sorry you bought Gold if all it does is hang around $1,000/ounce and the Dow crashes to the 1,000 level? I won't because I'll be able to buy a heckuva lot more stocks in companies that were strong enough to survive the crash (i.e. not go bankrupt) than someone who "bought, held and prayed" for the next bull market in stocks. I personally feel the ratio has a good chance of going all the way back to 1:1 this cycle (we're at 9:1 as of the close 5/13/09) and this expected ratio reversion alone makes Gold a great investment relative to stocks.

10. What else are you going to invest in that has such a rosy outlook? Look, if the commodity bull market comes raging back and the hyperinflationists are right, do you think I'm going to be bummed I own physical Gold? Gold protects against monetary crises, crises of confidence and government defaults/collapse. A monetary and/or credit storm, whether deflationary or inflationary, makes people turn to Gold for its stability. Breaking even is the best case scenario with stocks, real estate and corporate bonds right now and yet it is the worst case scenario with Gold! Now, some will argue that shorting the market is better or going long Gold stocks will make more money and I don't argue these points. I am into these investments as well. But Gold is the cash-equivalent anchor of my portfolio because bear markets are hard to trade even for long-term veterans and I want to have a margin of safety for at least some of my portfolio (see point #5 related to trading risks).

11. Gold is shiny and beautiful. I get a fever and I notice that chills run down my spine whenever I am near it. I want, no need, to get more. Hmmmm, maybe there is something to this Gold bug stuff...

[Article reprinted on]

Royal Gold - This is it

I have been patient and methodical with Royal Gold (ticker: RGLD) and have previously covered this stock's long-term breakout and implications here, here and here. So now that I am heavily invested via 2010 bullish LEAP call options, I want to focus on where I think this stock is headed based on the technicals, as the fundamentals for this stock and all Gold stocks are wildly bullish given the severe nature of the current deflationary forces.

To the weekly 18 month RGLD chart:

Here is my "guestimate" of Gold price action over the next few months:

After an anticipated slight nominal new high in the Gold price, I'm thinking a rest through the rest of the summer to set us up for the parabolic stage in the Gold bull market this fall.

Also, some have been asking about my lack of bullishness on other Gold stocks. I am not of the opinion that Gold stocks won't all go higher, I just think the senior blue chip Gold stocks have already made the bulk of their move for this run and would recommend using stop losses to protect profits for traders. Smaller cap stocks like RGLD are the ones making explosive moves right now, but senior Golds are certainly having a nice short-term run as well. For long-term investors in Gold and Gold miners, sleep well my friends!

Tuesday, May 12, 2009

Seeing what we want to see

it's a problem for all of us. As a current bear, I tend to see the glass half empty. Alan Greenspan right now sees the glass as half full when it comes to the real estate market, at least that's what he told a conference of the National Association of Realtors (NAR) according to Bloomberg. Of course, telling a group of perma-bulls on real estate that the bull market in real estate is coming back is sort of like telling a Gold bug that hyperinflation is just around the corner. It's like shooting fish in a barrel, really.

I wouldn't be surprised if Mr. Greenspan got a standing ovation for speaking bullishly about real estate to a group of realtors - truth be damned. Of course, the data don't support a bottom and the NAR has called a bottom in real estate every month since before the top was even in, so the credibility issues here are huge. Even though Greenspan and the NAR have been completely wrong in all their real estate predictions so far, they continue to get mainstream media attention because they tell it like the corporate sponsors want Americans to hear it.

How about Deutsche Bank's assessment on commercial real estate, which uses actual data and those pesky little things called "facts"? Not only are delinquency rates soaring at an accelerating pace, but the value of commercial real estate is dropping rapidly even though many loans in the 2009-2011 time frame will need to be refinanced. Of course, these properties can't be refinanced because credit is drying up and these loans will be underwater just like in the residential sector when it comes time to refinance. Only a lender-of-last-resort pledging other people's money like the federal reserve would even consider offering such high risk, underwater loans.

And how about the large number of residential homes banks are keeping on their books after foreclosure and not listing for sale? No sale means banks can continue to mark these properties to their fantasy value and avoid collapsing for a few more months. Think this might weigh on the real estate sector for at least another year or two?

We should also consider the Alt-A and Option ARM mortgages that were so heavily used in bubble markets like California, Nevada, Arizona and Florida. These loans affect higher end homes, which means there will be a greater loss per home foreclosed upon than with subprime, which was of course only the first wave of the foreclosure tsunami. By the way, that first wave of subprime foreclosures bankrupted half of Wall Street (the other half was kept solvent by the generous taxpayers of the United States), Fannie Mae and Freddie Mac, AIG and many banks and mortgage lenders. So this second larger wave of foreclosures on residential properties worth even more per house I'm sure will be tolerated well by our strong banking system - especially since they just passed the rigorous stress tests of widdle Timmy Geithner.

The rapidly changing public psychology of preferring to rent for a while rather than rushing to own a home at all costs I'm sure won't be an issue for Alan and the NAR's predictions of a stabilizing real estate market, since fewer eager buyers and speculators shouldn't dampen prices at all. Also, since lending requirements are now becoming rational again, I'm sure a large decrease in the number of qualified buyers won't matter to price stability in the real estate market.

Since unemployment is still rising, many people are now so underwater in their mortgages that it makes sense to walk away rather than honor the mortgage contract if they have no "skin" in the game (i.e. no equity), and baby boomers are looking to downsize and sell real estate to raise cash, I'm sure those seeds of a real estate market bottom are just around the corner (the next few years aside).

Real estate is one of the keys to understanding this mess. The banks and Wall Street are overleveraged in many credit-related vehicles (e.g., credit card loans, auto loans, student loans, recreational vehicle loans, gambling on the outcomes of all these loans, etc.), but real estate is the big Kahuna. Real estate and the leverage associated with it will drag our banking system further into insolvency and the country deeper into a deflationary depression as credit dries up and banks start failing left and right.

The federal reserve and U.S. Treasury will end up "pushing on a string" as their "stimulus" measures do nothing but add to an overwhelming debt burden and push us closer to a currency crisis, which seems the only viable option for ending the deflation that needs to occur. It is my hope that market forces continue to overwhelm bureaucratic efforts to stop the primary trend, which is deflation.

So I'll take the other side of Sir Alan's prediction, thank you very much. I won't be investing in real estate, copper, lumber or Home Depot unless I see a shorting opportunity I like. In 2-3 years, I may change my tune, but trust me, there's no rush. Once real estate bottoms, it will still drag along the bottom for a few years. Once a bubble in real estate pops, it ain't coming back until decades later when there is a new generation that needs to learn the same lessons all over again.

Another nail in the bullish coffin

comes from the Russell 2000 Small Cap stock index ($RUT). Clean break of the trend line shown below using a 4 month intraday 60 minute chart:

The nails will start coming fast and furious over the next 2 weeks - sorry, bulls.

Monday, May 11, 2009

Since I can't say it any better

here's the link. A succinct summary of where we are and why I am freaking out, too.

Volume clue of future direction

I follow the Toronto Stock Exchange (TSX) Diversified Metals and Mining Index ($SPTMN) as a proxy for interest in the base metal mining sector. Today's action is telling when looking at the volume supporting the move. To the 6 month daily candlestick chart:

Copper has broken down and base metal miners are going down with the rest of the economy and stock market. The dollar is at support and about to turn up in my opinion. I don't care if China and India are supposedly stockpiling commodities for now. The cracks in the bull case are going to start rapidly appearing over the next two weeks and the hibernation season for bears is ending. Buyers and inflationistas beware...

We will soon get another chance to see how Gold does during a brutal deflationary wave. Senior Gold stocks will not be immune to a big downturn in the markets. I continue to hold my long-term bull LEAP option calls on Royal Gold (RGLD) as a small cap Gold royalty company play but am not intermediate-term bullish on senior Gold stocks right now after the nice recent run up they have had.

Thursday, May 7, 2009

Think the opposite and you'll do fine

This link speaks of the wave of relief that everyone is experiencing due to the banks passing their "stress tests." Of course, this is a lie intentionally spread to deceive and soothe the troubled spirits of those who pretend to give a shit but are too lazy to look into the matter beyond what mainstream headlines say.

The stress test was an obvious farce, our banking system is insolvent and getting more so by the week, and widdle Timmy Geithner inspires as much confidence as Eddie Haskell did on Leave it to Beaver.

No, stocks are not in a new bull market. No, banks are not a safe place to keep large sums of money. No, the private corporation called the federal reserve is not a government institution and it does not have your best interests at heart. No, Obama cannot (and will not try to) fix this mess. No, you should not buy a house right now.

Yes, things are going to get worse before they get better - much worse. Yes, buying physical Gold (not the GLD ETF, which will turn out to be a HUGE scam), getting out of the stock market and questioning everything your government says is patriotic. Yes, this bear market will devastate people who insist on buying and holding stocks despite overwhelming current and historical information to suggest this is a terrible idea. Yes, I will shut up now and go to bed.

Noble Bears - a call to arms

Not surprisingly, the NASDAQ was the first to crack. It held up better than the S&P 500 and Dow Jones Industrial Average in the early spring and thus, appropriately, it will help lead us back into darkness. A call to arms, noble bears, as it is time to fry up some bull meat.

To the charts, a 4 month daily candlestick affair of the NASDAQ ($COMPQ), followed by a 2 year weekly chart:

Now, I'm not saying we won't bounce again tomorrow and maybe even the next day, but it's time for bears to get positioned for some cash register ringin'. And if you do decide to go short the NASDAQ after waiting for a slightly better entry point than today's low (which is a good idea), here's how to know when to close the position:

The black squiggly line on the above chart is the NASDAQ, while the colored area plot in the background is the $NASI or a summation index/medium term breadth indicator for the NASDAQ. The $NASI number isn't important, it's the RSI plot of the $NASI at the top of the chart that is meaningful - once the RSI gets back down to 10 on the $NASI, get ready to close the position (or use stop-losses to protect profits, etc.). Is it really that simple? Hell no, but I betcha it works out just fine in terms of catching the bulk of the coming move down.

I still believe the move from the panic November lows was the intermediate-term bottom and that we have been correcting for almost 6 months now. It's time for the bear market to resume, the pending topping process in the major indices aside. We are going to dramatic new lows in the major indices before the year is over and we are going to get moving to the downside before the month is over. Sell in May and go away unless you're a bear and you like to play [the short side]...

Wednesday, May 6, 2009

The Lonely Gold Bug

Holders of physical Gold in the United States are a lonely bunch. What percentage of the population in this country do you think holds actual physical Gold relative to the number of people who own stocks, bonds and CDs? We collectively worship Warren Buffett and shun the asset that pays no dividend and has no growth prospects.

This is all starting to change in a big way. The turn has been slow and subtle, but it is starting to pick up steam. The next leg down in the bear market for general stocks, which will start any day now, should really start to turn people towards Gold. As the bank failures start to accelerate and the woeful underfunding of the FDIC becomes clear, people who take their money out of the market won’t all trust banks to keep their money safe.

Since the yield on cash is laughably low and set to decline again, the arguments for not holding Gold are all starting to drop like dominoes. Growth is dead for now and any yield left in the private sector means little when your principal on corporate bonds can get wiped out overnight by some harebrained government scheme/decree. Many will run to their nanny state to protect them with government bonds, but others are getting worried about the astronomical debt load our country has now pledged to carry.

The role of Gold as money and a store of value will help fuel the next leg of the secular Gold bull market. Yes, we are “printing” money like crazy, but deflationary forces are still quite powerful right now and inflation is unlikely to be a problem in the U.S. until the greatest real estate market crash of the last 100 years starts to slow down. We are not close to this point yet - housing doesn’t have a snowball’s chance in hell of bottoming before 2011 and a housing crash is a highly deflationary event.

So we are left with Gold in the setting of a deflationary banking and credit crisis due to a real estate crash. But doesn’t Gold do poorly during deflation? And aren’t Gold bugs always looking for hyperinflation? We are actually finding out in real time how Gold does during a deflationary implosion, as it is happening right in front of our eyes. So far, so good.

As trust in banks and the government breaks down, not everyone will turn to the pieces of paper that currently function as money right now. Paper dollars are created in the United States by a private, for-profit corporation that is run in total secrecy with no oversight and every paper dollar created is born as a debt. Now that the federal reserve is “monetizing” our debt, this means that dollars requested by our government obligate the next generation to pay interest directly to the federal reserve. More and more people are starting to realize this for the scam it is.

While a deflationary crash may not make Gold bugs rich in nominal terms, it will make them relatively rich if Gold reverts to its function as money. You see if stocks go down 80%, real estate falls by 50-75%, and corporate bonds default, those in cash (such as Gold) who avoid these losses are actually becoming rich! While fiat paper money (i.e. the U.S. Dollar) can also function in this role, it provides no hedge against a currency crisis, which is no longer a trivial risk. To blow out a deflationary collapse, our government and their private, for-profit central bank corporation would have to become much more reckless than they have been to date. However, a geopolitical event could easily dethrone the U.S. Dollar as the reserve currency of the world and this would rapidly devalue the Dollar. Holders of U.S. cash therefore do not have the built-in insurance policy that Gold provides.

That insurance policy Gold provides is growing more valuable by the day. In the meantime, Gold holders are rapidly accumulating wealth by not losing what they have. Patience, Gold bugs. You’re in the only sustainable bull market out there, so sit tight and be right. If Gold “only” goes to $1500/ounce but the Dow Jones Industrial Average goes down to 2,000, will you really be sorry that you bought physical Gold and kept that money out of the stock market? I won’t.

And please don’t accept paper substitutes for physical Gold. This defeats the purpose of owning Gold in times like these. Does it make people feel secure to know that JP Morgan and Goldman Sachs are a few of the custodians behind the GLD ETF?

The lonely Gold bug is about to be the toast of the financial world. Soon, holding Gold will be all the rage and everyone will be telling stories of how they bought physical Gold when it was only $250, $600 or $1000 an ounce. Sadly, this is about the time I will be quietly leaving the party and selling my Gold to the new and frenzied retail investors that just don’t get it. You see, investing in a bull market is supposed to be lonely until the very end. Once everyone’s on board, the bull market will be just about over.

Maybe being lonely ain’t so bad after all when it comes to investing...

[Article also published on]

Tuesday, May 5, 2009

Wildly bullish on the VIX

or Volatility Index ($VIX) and the last few weeks haven't changed anything but to make me more bullish. When one is bullish on the $VIX, this means one expects increasing volatility and thus, one generally expects the stock market to decline. Have I mentioned lately that I am bearish on the stock market?

The 3 year weekly chart of the $VIX below screams for a resolution to the upside. Those interested in going short via puts with an intermediate to long-term horizon should be buying at these $VIX levels, as we may not see them for a while. When the $VIX goes up, the price of puts goes up (all other things being equal).

Icing on the cake!

Confirmation that the bear market rally is on its final legs and running on the last of its fumes comes directly from the top. Ben Bernanke, the chairman of the federal reserve, says that we should pull out of the recession by the end of 2009.

Folks, given the extended nature of the current sucker's rally, the stretched technicals and sentiment indicators, and the true horrid state of the underlying economy, this is icing on the cake related to my call for the bear market to resume. Yes, we could last another week or so, but I don't think we may make it out of May without resuming the downward spiral in this cyclical stock bear market for the ages.

I presume such pronouncements were made by Mr. Bernanke based on hubris and misplaced optimism rather than to entice the last of the retail investors left to jump into the shark pool to feed Goldman Sachs and JP Morgan, but the way things have been going I can't be too sure...

Mo' Money, Mo' Problems

as stated so succinctly by the late Notorious B.I.G. Though few strive to have a lack of capital, those who have capital are finding that they are quite anxious about it right now. Many around the world have switched, appropriately so, to simply trying to protect what little they've got. Systemic risk is at a multigenerational high.

This link gives concrete examples of people's 401(k) money being inaccessible. Now, those in the finance business that sell such toxic products can claim that it was all in the prospectus and investors need to be cognizant of the risks entailed in such investments. I call bullshit because it is. Trying to read a prospectus these days without both a law degree and an MBA is an exercise in futility. When someone looks for a "stable value" fund or "money market" fund, they are seeking safety, not risk. Yet these products may be as risky or riskier than a penny stock it turns out.

The house of cards is tumbling down on cue, as fast as any slow motion train wreck can do, and it will really start to fall apart when people finally realize how truly insolvent the entire U.S. banking system is. We have a situation identical to the 1930s where banks are now ailing and failing left and right. The worst stressors in the system, namely high end Alt-A and Option ARM residential mortgages and commercial real estate loans, are now starting to implode and these make subprime look like the warm up act that it is.

Think about that for a minute before you go rushing back into the new "bull market." Subprime lending is not the biggest problem and yet it tipped almost all of Wall Street into bankruptcy, imploded AIG, caused Fannie to be nationalized, and has rendered nearly the entire U.S. banking system insolvent. What happens when the next LARGER wave of loan defaults hits the shores of our financial system (which it absolutely, unequivocally will)?

I am uber-bearish right now because it is appropriate to be so when one understands the fundamentals. Large banks like Citibank are completely insolvent/bankrupt. This is the equivalent of 500 banks failing back in the 1930s, as it a mega-bank with its tentacles in every region of the country. Such massive retail banking corporations didn't exist in the 1930s. This is why saying that we've "only" had tens of bank failures versus over a thousand in 1930s is a nonsensical argument. Citibank should not be a corporation any more, but our government is hiding the truth from its citizens to prevent panic. The panic will come anyway as the truth leaks out, but for some reason buying time is felt an appropriate use of taxpayer money.

When you vaporize the banking system of a country that is overleveraged to the hilt, the leverage wipeout implodes the economy. This is already happening as we speak on a global level and is intensifying, not abating. The Euro zone is now as I type this experiencing its highest unemployment rate in the last 60 years, so which recession are you comparing the current bear market with since unemployment is still accelerating to the upside in Europe?

The other thing that happens when you vaporize a banking system is that some people aren't going to get their money back from their bank. I don't believe the FDIC and federal reserve could promptly handle a public demand for paper dollars/actual pieces of physical money once the big bank run(s) materialize(s). Their best hope is that everyone remains comfortable with digital computer entries that say someone actually has money. The FDIC does not have unlimited resources and there aren't enough printing presses in operation to meet a big surge in retail demand. Do your own due diligence on your bank, avoid the "too big too fail and yet failing right in front of your eyes" multinational banks, and hold a supply of physical cash to meet a minimum of 2 months worth of expenses.

The spring silliness in the markets is in full force. A bear market requires hope to return periodically so that it can extract maximum pain from the largest number of participants. The bear market will resume shortly and your best protection against it is Gold and cash - just make sure your cash and Gold are safe and shun all the counterparty risk that you can.

Eating Humble Pie

on my Freeport-McMoran (ticker: FCX) puts. I was too early and too early = wrong when trading the shorter time frames. This is an intermediate-term trade for me, however, and I'm not buying the blow-off top to FCX or the general stock market rally at all. Ahhh, the joys of posting one's trades for anyone in cyberspace to see...


More later today of substance but wanted to get that off my chest.

Sunday, May 3, 2009

Gold - The apex of the pyramid

John Exter's liquidity pyramid that is. Exter was a central banker who worked at the federal reserve in the 1940s and 1950s and somehow emerged with his intellect intact. He was on the inside, knew how the system worked and yet didn't like Keynesian or Friedmanite economics. His concern about a global fiat money system, once it emerged, was that it would eventually blow out in a deflationary implosion rather than an inflationary one. This is the opposite of what most Gold bugs believe and yet results in a similar conclusion: Gold Gone Wild (i.e. strong bull market in Gold).

How can Gold have its cake and eat it, too? It's actually quite simple. In a hyperinflation, almost every asset goes up in price. Bread, guns, real estate, silver, Gold, commodities, stocks. Almost anything besides cash and bond prices does well. So, really, Gold is not super special in a hyperinflationary blow-out, though as a currency that has high intrinsic value per unit of size, it can be transported across the border easily if chaos erupts (which it usually does during a hyperinflation) and used to make bribes along the way if needed.

In a hyperdeflation, Gold also does well, but in contrast to a hyperinflation, it is one of the only things besides cash that does well. This is why I keep pounding the table about Gold. I think we're headed for a deflationary economic depression and in this setting, cash and Gold will perform similarly (at least for a while). However, if I am wrong and a geopolitical event somehow dethrones the U.S. Dollar, cash will be rapidly devalued whereas Gold will increase in value.

People who don't understand that Gold is a non-debasable currency can't understand the dichotomy. In other words, how can Gold bulls have it both ways? If you think of Gold as the strongest currency in the world that requires no faith in government, it is easy to see why this dichotomy works. In Zimbabwe, U.S. Dollars are "as good as Gold" (implying the strength of Gold, obviously) because they were recently in a hyperinflation. Zimbabwe dollars, however, were very close to completely worthless. In other words, think of Gold as a foreign currency that remains strong in the face of a domestic currency crisis (i.e. it's not Gold that's rising, it's the local currency that's sinking).

Now, in the reverse setting of deflation, people scramble down Exter's liquidity pyramid:

Exter hypothesized that as deflation intensifies, people "scramble" down the pyramid towards its apex to get "more liquid" during a deflation, since cash is king and other assets are all declining in price together in tandem. Those who are most liquid are most able to survive the asset price deflation and benefit from the massive asset price declines once the dust settles.

If the deflation we are in continues to grind onward, and I believe it will for a time, Treasury Bill (i.e. the 90 day U.S. government bond) yields will go negative as they did in the 1930s - yes, that's a yield of less than zero percent. The 10 and 30 year bonds will fall out of favor as the longer term outcome becomes murky (i.e. their yields will rise) but the shorter the date of maturity for U.S. government debt, the higher the price (i.e. lower the yield) will go.

Once we get to negative yields on the T-Bill, people will just want to hold physical pieces of cash and stuff them under the mattress as the saying goes, because banks will become too suspect as the cascade of bank failures grinds on and the FDIC is unable to keep up with the demand for paper dollars. Electronic digital money can be created with a keystroke, but actually figuring out a way to print enough paper money will be problematic, as the government and federal reserve are currently unprepared.

This may force the government to declare that only digital money needs to be used, but paper U.S. Dollars will have a premium attached to them. Yes, it seems paradoxical. And yes, I would advise everyone to set up a "rainy day, outside the bank" paper money fund to cover emergency expenses despite my concerns regarding the long-term health of the dollar.

At the apex of the pyramid sits Gold, the true and real money that the human race has decided upon, the current 40 year shenanigans aside. Gold is the real king during a deflationary depression and Gold miners will benefit tremendously from a glorious new bull market once the dust settles. Real estate and general stocks, on the other hand, will remain mired in a multi-year devastating bear market (with a few upward swings along the way as false "green shoots" of hope spring up and then wither away).

There are now $1.4 quadrillion worth of global derivatives (that's 1,400 trillion for those not familiar with fantasy-level numbers like this) on a planet with an annual GDP of well under $100 billion. These derivatives are actually increasing in number during the current economic downturn, which to me suggests that we have a long way to go before the most brutal point of deflation hits the United States, which will be when this nuclear pile of toxic paper implodes.

This is why I hold physical Gold (and a little fiat U.S. paper cash for emergencies) and why I think all prudent investors should, too.

[Note: This commentary has also been published in its entirety on and on]

Saturday, May 2, 2009

Only 3 bank failures this week

(link). Looks like our policy makers have got this problem licked as the one week trend for bank failures is down. Thank goodness we have Obama, Geithner and Bernanke. As the new stock bull market has shown, our policy makers have been highly effective and we are now wildly bullish on the economy. The housing market has been stabilized, commercial real estate is showing "green shoots," banks are going to pass the revised stress test with just a little bit more stimulus money, and retail businesses are reporting some brisk spring shopping. Unemployment appears to have stabilized and the Chinese are going to make an announcement next week apologizing for buying Gold and copper rather than holding their U.S. Dollars in perpetuity. Because the stock market is forward looking, it is discounting a recovery that should begin by the 3rd quarter of 2009. Though it will take time to fully recover from our problems, the worst is behind us and stocks are a screaming buy.

Have I summarized the Cramer/CNBC/perma-bull case succinctly?

My reply:


I cannot call the top or bottom in this market any better than anyone else who follows markets. It's a fools' game. Yes, you can be right a few times but it's more important to get the bigger trend right and catch the bulk of the moves that occur in markets. The potential upside from here is 2 weeks and 10%. The potential downside from here is 2 years and 70%. Trading is trading and has a different set of rules than longer term holding.

Yes, bear market rallies can go higher and last longer than one expects. They are NOT based on fundamentals, so you can't use fundamental data to try to sort out why they are happening or how they could possibly go that high or last that long. The fundamentals are awful and will re-assert themselves, causing the primary trend (which is down for stocks, corporate bonds, and commodities by the way) to resume.

Don't forget this chart, which I have posted before after copying it from Michael Panzer's Financial Armageddon site:

After the fall crash (The Panic of 2008), we rally out to the spring. It's classic and textbook. Short-term timing these things is tough and trading is hard work that can make or lose you money. But for the investors, nothing has changed. Longer-term oriented folks should be out of stocks, out of corporate bonds and out of commodities and they should be in U.S. Dollar cash, Gold, U.S. short-term government bonds, or shorting the things in a bear market right now.

I absolutely do not think it is impossible to go up another 10% from here in the S&P 500 in a final blaze of glory, but I wouldn't bet on it and I don't think we make it out of May before the top is in. And I am not talking about an "A" wave of an "A-B-C" correction, I am talking about a full resumption of the worst cyclical general equity bear market any of us will likely see in our lifetimes. The Dow to Gold ratio is currently at 9. We will be at 1 (and I believe will likely go below one) before this bear market is over.

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