Wednesday, September 30, 2009

Gold and the Dow - Technical Musings

Great day for Gold - back above $1000/oz (chart courtesy of

Here's a 3 year daily chart of Gold thru today's close:

If we go higher tomorrow, it is an easy trade to go long with minimal risk by placing a stop loss a few bucks below $1000. I'm currently long RGLD, TRE and RIC and remain a long-term holder of physical Gold.

The Dow, unlike Gold, looks sick and toppy. It has broken down out of its terminal wedge, a very bearish sign after the type of bear market rally we have had and the economic conditions. Here's a 1 year 60 minute intraday candlestick chart:

The U.S. Dollar was MIA today. Man, this is a sick looking currency - and I am a [current] deflationist! The U.S. Dollar rally looks like it may have to wait a while for its intermediate term rally to get going. This, of course, is bullish for Gold but I am again looking for both currencies (Gold is money) to rise together later this fall.


Monday, September 28, 2009


The meeting of "G" Groups causes more trader gossip than the "G" spot at a porn convention. Much like the days surrounding federal reserve meetings and announcements, rumors of the pending announcements get people all worked up about pending short-term moves. This is an aura that the federal reserve and G-5/G-7/G-20/G-Worthless apparatchiks would like to maintain.

Of course, as I have stated time and time again, governments and central banks can distort or amplify the primary trend, but they cannot create it. Everyone thinks Bernanke can wave his magic wand and all of the economies' troubles will go away with a sprinkle of some pixie dust (and money, of course). Ok, here, let's extrapolate this out a little bit.

I wager that U.S. stock markets will be 30-50% lower one year from now. If I am right, then it must mean Bernanke cannot do what everyone thinks he can. Because, as we all know, Bernanke wants the stock market to keep going higher. Keep in mind the ridiculous amount of stimulus applied to the stock markets and financial institutions during late 2007 and the first half of 2008, which did not prevent the Great Panic of 2008 from occurring last fall.

Many of us love to believe in wizards. But much like the wizard of Oz, pulling back the curtain at the federal reserve reveals a few crusty old white boyz with Princeton degrees and no common sense. Yes, the figure heads at the federal reserve take orders from the behind-the-scenes owners of the non-federal, for-profit federal reserve who are the real brains and brawn of the operation. And yes, these folks have an unfair advantage over the rest of us. C'est la vie.

But this does not mean investing in the primary trend is unprofitable for the educated masses who throw their hats into the rigged casino for the long term. Buying Gold will be a good choice until the Dow to Gold ratio gets to the 0.5-2 range, regardless of what the secretive central bankstas and G-20/G-Worthless apparatchiks do.

By the way, notice that the G-20 came up with nothing of value and made no concrete plans or decisions on a single important issue. Lots of rhetoric and lots of wasteful spending of taxpayer dollars, but no results. The more apparatchiks in a room, the less that gets done. It's like any federal government on steroids. Trading the "news" that comes from such public displays of incompetence is a great way to lose all your money. When the important changes come, they are never announced in advance by costumed buffoons.

Forget the central banksta and apparatchik wizards. Focus on the long-term trends: economic depression, lost decade(s), Gold is good, stocks are bad and real estate is bad. No government or banksta meeting will change these trends until they have run their course, short and intermediate-term swings aside.

More Bearish Real Estate Info

Those who have done their homework and "get it" that real estate is toast don't need any more data. Housing is done. Kaput. Put a fork in it. STAY AWAY!

Whatever you think is a good deal now will be significantly overpriced in 1-2 years. We just had the top in 2005-2006, so the bottom takes more than a few years to occur, particularly in bubble states like California, Florida, Nevada and Arizona. The depth of the fraud that fed the final upward push in sales and prices is slowly being discovered and reported. Of course, this is several years too late, but mainstream media sources were busy promoting the bubble housing mania instead of cautioning people to beware. Now they are cheerleading every sub-1% blip in the data as "the bottom" and a "great time to buy," just like they did all the way down when the tech bubble collapsed in 2000. Wash. Rinse. Repeat.

This article shows the depths of the fraud in some markets. This was the moral hazard fostered by the U.S. government, which encouraged reckless lending on homes (Alan Greenspan thought exotic mortgage products designed to explode in the "homeowner's" face were peachy keen and said so publicly). Fannie and Freddie purchased many of these toxic mortgages, giving them the implied backing of the U.S. Government.

Wall Street basically told mortgage originators to bring them any loans on any houses, regardless of quality, and those who did so were rewarded financially. Americans who took on houses they knew they couldn't afford were allowed to get something for nothing, albeit temporarily and with a great cost to society and America's reputation in the financial sphere.

The way the fraud works, with various twists, is to create "straw" or artificial buyers by enticing them with kickback payments. The builder and/or a mortgage originating company helps the pseudobuyer fill out the paperwork using a "no documentation loan." The pseudobuyer (i.e. fraud accomplice and/or naive speculator) intentionally overpays for the house in return for a cash kick-back at closing. The builder gets the house off their books at a profit. The mortgage originator gets their fees plus any kickback if one is arranged. Wall Street and Uncle Sam get toxic garbage.

In the case of Wall Street, the toxic garbage is re-sold to institutional investors like pension funds and mutual funds, and labeled as a high-grade/"AAA", ultra-safe investment by firms like Moody's who openly solicited bribes and/or exorbitant fees to put their stamp of approval on a shitty product. Wall Street gets a lot of this stuff off their books, but is so drunk with greed and feelings of invincibility that some of the firms keep some on their own books as a speculative investment. The government, of course, is "fully invested" for the long haul. This is why Fannie and Freddie are costing U.S. taxpayers trillions of dollars.

Now, on a much larger scale were those buyers who weren't committing fraud but rather were chasing the American Dream. People who were running as fast as they could (sprinting, really) to get a leg up on their competition (the Joneses). In areas like southern Florida, southern California, Las Vegas and parts of Arizona, this required more and more toxic loan products to get people into a high end ($500,000-$1.5 million) home that was far beyond their means.

This high-end real estate is the next shoe dropping right now. These high-end homes will become absolute bargains as the pool of available buyers shrinks massively once the current economic conditions play out and lending returns to rational standards. Of course, the government is pledging taxpayer money to disallow reason to return to lending, which is why 90% of new mortgage loans are now backed by the U.S. government. Private firms know the game is over and can't find anyone to lend to that is of interest to them/meets their new more stringent loan guidelines!

Please don't forget this chart, which anyone who has done any investigation into the current housing debacle has hopefully seen by now:

Those Alt-A and option ARM mortgages are now blowing up right on schedule, are for homes with higher values than subprime-backed homes, and will be "contained" (to use Bernanke's phrase) about as well as subprime was. The high end of the real estate market in many areas is about to detonate and it will be even uglier than subprime. Living in a home that once cost a million dollars while squatters and decay cause blight in the home next door will cause a lot of people to lose it. And you can bet many will walk away from their obligations, damn the consequences, once they realize just how much they've been had. When you paid $1 million for a house and a foreclosure next door goes for $500,000, how can you possibly justify continuing to throw good money after bad based on a vague concept of ethics that our federal government and financial institutions refuse to follow? This is especially true once the following happens to your "re-cast" option ARM loan:

The bulk of these option ARM loans are based in California, which already has a 12% unemployment rate that is continuing to rise. By the way, 80-90% of people with these Option ARM loans have actually been paying the "minimum allowable payment" that creates negative amortization, so this re-cast scenario is not hypothetical - it is actually happening! And this is a "re-cast," of the loan, which is different than an interest rate change. It means the entire terms of the loan change from "pay less than interest only every month while your principal owed goes up every month" to "your loan balance is now above the limits we put in small print at the closing, so now we want a traditional fixed 30 year interest and principal payment every month starting right now or you are in default." Interest rates could be at less than zero and these loans would still explode on cue (except for the fact that people are walking away before this can even happen). And Alt-A is one step behind option ARM in terms of toxicity (notice they are both spiking together in the first chart above).

This means we have 2 years (give or take) before we even hit the peak of foreclosure activity. On top of this, banks are now delaying foreclosure proceedings for up to 2 years (at times, delays are mandated by the government itself!), banks are renting homes and/or failing to list or auction homes once they have taken them back (Wells Fargo execs need a place to party, after all), and the government is stepping in to try to artificially prop up the housing market with taxpayer money (which, of course, will fail utterly and completely).


And once CNBC finally tells you to sell your home and/or walk away from your mortgage, it will be time to buy again. Wash. Rinse. Repeat.

Sunday, September 27, 2009

Gold was $850 in 1980

Everyone into Gold has heard it many times and some, like me, want to scream every time some mainstream financial analyst puts this comment into one of their articles or commentaries. It must be part of the Wall Street and financial planner training manual. It goes something like this, for those who haven't heard or seen it yet: "Gold was $850/ounce in 1980 and in 2009 it is only around $850/ounce. When you factor in inflation, if you bought Gold at the exact top of its previous bull market in 1980 at $850, this would have been a terrible long-term investment."

Yes, this is why buy-and-hold forever is stupid advice in any asset class, and yet those who use this argument for Gold typically then tell you to just buy stocks and hold for the long term. The next time you read this argument about Gold (if you ever read mainstream financial articles you will read/see it again, trust me), remember the following historical data points:

*Gold at $850: 1980 and 2009 (29 years)
*Nikkei Japanese stock index at 7,000: 1980 and 2008 (28 years)
*Dow Jones Industrial Average at 386: 1929 and 1954: (25 years)
*Dow Jones Industrial Average at 40: 1897 and 1932: (35 years)

Similar examples can be found throughout history if one takes the time to look. What the typical Gold-bashing article fails to mention is exactly what it means for an asset class to have the same price 25-35 years apart. In an inflationary fiat world where the value of every currency is constantly sinking over the long term (i.e. inflation), it probably means that that the asset class in question is undervalued! It probably means it's a decent long-term buy. On the flip side, I know U.S. stocks and real estate are HORRIBLE investments right now for the long term precisely because they ran up too high in their most recent cycles. General U.S. Stocks may be a long-term buy again in the 2014-2020 time frame, but before then they are a losing proposition on an inflation-adjusted basis for buy-and-hold investors.

Because every asset class is cyclical, underperformance by an asset class for 20-30 years is a sign to think about going long that asset class! This is what "buy low and sell high" means. In order to do this, you have to buy when no one else is interested with an eye towards the future.

Gold is in a secular bull market that is not close to being over. Those that talk about a Gold "bubble" after Gold has only increased 300% from its lows are idiots or have an agenda and should never be trusted for their financial opinion again. Try 1329% for the recent oil bubble (1999-2008), 1489% for the S&P 500 (1980-2000) stock bubble, and 2328% for the 1970s Gold (1970-1980) bubble.

The easy money has already been made in Gold, but there is plenty of upside potential left in Gold relative to other asset classes like general stocks, corporate bonds, commodities and real estate. And once the Dow to Gold ratio hits 2 again (which it will and it may well go below one this cycle), it will be time to sell Gold and look around for the next secular bull market. Perhaps Japan's ongoing 20 year economic depression and secular stock bear market will be coming to an end by that time...

Saturday, September 26, 2009

Asset Class of the Decade: Gold

In the end as an investor, it's all about the scoreboard. For those who aren't traders, allocation to the correct asset classes is critical to long-term returns. Following are the returns for the S&P 500, the U.S. Dollar (using the Dollar Index as a proxy), Commodities (using the Continuous Commodity Index [$CCI] as a proxy) and Gold. These returns ignore dividends, yields, and expenses, which are important concepts over the long-term and make this a less than ideal comparison. You can plug in whatever figures you think are appropriate and make your own comparison(s) if you're so inclined.

How is it possible that a hunk of metal has returns comparable to the stock market over the past 15 years? Does this surprise you? Are you familiar with the Dow to Gold ratio as a long-term concept? If not, perhaps it is not too late to familiarize your self with this concept, especially since the Dow to Gold ratio will drop to 2 at a minimum and may well drop below 1 this cycle.

Here's an up-to-date log scale chart of the Dow to Gold ratio over the past 5 years:

The long-term chart (20 year log scale candlestick chart) of Gold shows a strong bull market with no trend line breaks over the past 8 years and with aligned and rising 50 and 200 week moving averages:

The bull market in stocks and commodities is no longer in force using basic chart analysis. Things are always subject to change, of course, but with a trailing P:E ratio of 150 (based on reported earnings, not the garbage operating earnings spewed by CNBC bulltards) and a very weak global economy, stocks and commodities will likely not resume a secular bull market any time soon. This is also the message in their long term charts (following are 20 year log scale charts of the S&P and everyone's favorite commodity, oil [$WTIC]):

Since the Dow to Gold ratio will get back to 2 (at a minimum), those who sell their general stocks and buy physical Gold will be able to trade their Gold for at least 5 times the number of stocks within the next decade. This is equivalent to a 400% gain in stocks over a decade or less without taking the risk of owning stocks! The Gold bull market is alive, well, and not close to being done in time or price.

Friday, September 25, 2009

Fraud and Propaganda - The Norm

Even people with only a casual interest in real estate know that there are seasonal trends in home sales. When one talks of sales in a certain month it makes sense to compare those sales to the period from one year ago during the same month. Comparing a month to the month immediately preceding it is rarely useful unless there has been a change of more than 5-10%, as anything less is statistical and/or seasonal noise.

Statistics can certainly be manipulated by bulls, bears and agnostics alike. My bias is clearly bearish. What irks me is that mainstream financial reporting has not been truthful for a long time in the United States. This article on home sales is one of many typical examples.

The headline reads that home sales are up 0.7% (break out the champagne!), but only compared with the previous month. This change on a month to month basis is meaningless, as it is within the parameters of statistical noise. This is the incorrect headline for the data presented in this article from a rational/neutral point of view. Much more important are the following, quoted directly from the article [info in brackets is not a quote from the article]:

* Sales were 4.3 percent lower than the same month last year.
* The median price [of homes dropped] to $195,200, off 11.7 percent from $221,000 a year earlier and 9.5 percent below July's level of $215,600. That was the largest monthly drop on records dating to 1963 [i.e. not statistical, month-to-month noise, but a meaningful price decline in only one month!].
* It's taking more than a year to sell the homes on the market.

A meaningful and realistic headline would have been that residential real estate is still doing poorly according to the new data. So why the spin? Why is the news no longer real but instead an Orwellian collection of garbage meant only to paint a rosy picture and ignore anything that would make a bad headline at all costs?

Perhaps this is why an increasing number of people (like myself) no longer trust or rely on mainstream media sources for the news. Dumbing down data points and spinning everything in a positive light to make a bullish headline regardless of reality is not news, it is propaganda and dishonest. It is doing people a disservice to tell them that real estate is bottoming or about to turn (newsflash: it's not) when this is not what the data indicates. Good money will end up chasing bad for anyone who relies on the media to tell the truth. Since I and my fellow taxpayers are now being put on the hook for these bad real estate investment decisions, I would prefer the media tell the truth on this issue.

Conspiracy theories aside, there is a vested interest of many media companies in not telling the truth, but rather saying what won't offend their advertisers. The "don't worry, be happy and consume more" crowd is helping to push many people (its customers) off the debt and stock market cliffs and into the economic abyss. Remember, though, that it takes two to tango. Watch, read and listen to such intentionally misleading data sources at your own peril.

Research In Motion - How Fast the Turn Can Be!

Research In Motion (ticker: RIMM) is one of the darling tech stocks, like Apple and Google, which can do no wrong when the bull is raging. But the turn in RIMM today, like previous turns, came quick and without a whole lot of warning. When the bellweather stocks start to turn, the bull has no more fuel to keep the flame going and the torch will be passed back to the bears.

Here's a 20 month daily candlestick chart of RIMM thru 8 AM today:

When the stock bull rally "darlings" like Apple and Goldman Sachs crack, it's over for the bulls. This bear market has a lot more damage to do, both in time and price. RIMM is not a bad opening salvo/warning shot. Until the Dow to Gold ratio gets to 2 or less, stocks are a poor long-term investment.

Thursday, September 24, 2009


is quite high right now in most asset classes. A nice drop today in U.S. stock market indices and the Asian markets are tanking right now. Doesn't mean this stock bear market rally is over (it could be), but everyone with a brain and their sister knows we're awful close. Going long here on anything besides the U.S. Dollar, oversold junior Gold miners or volatility is risky on an intermediate-term basis.

Don't forget Mr. Vix (the Volatility Index or $VIX). A nice base has been building for some time now as everyone forgets about risk and jumps into the frothy bull party. Everyone's hammered and giddy with success as everything keeps going up seemingly every day and every dip is bought with confidence. In the mean time the percentage of stock bulls is over 90% and the media and "powers that be" declare that the recession is over.

It's true - the recession is over. We have entered an economic depression, so the term "recession" no longer applies. Screaming "fire" in this theater has been a losing proposition for months now, but the building is sending up the kind of smoke that can no longer be ignored. With a real P:E ratio (i.e. actual reported earnings over the past 12 months, not estimates of the future and not operating earnings) in the 150 range for the S&P 500, a new long-term bull market in general equities is years away.

Here's a 3.5 year chart of the Volatility Index ($VIX) just to remind people where we are in this bear market:

And here's a rough measure of sentiment in chart form over the past 3 years, the 10 day moving average of the equity put to call ratio:

Cash is not a bad position here, even if you hate the U.S. Dollar. Going short with a long-term time horizon is a good trade here. Staying in physical Gold and ignoring the markets until the Dow to Gold ratio gets to 2 or less is a no-brainer play. Risk is extremely high right now and this cyclical (and secular) bear market is far from over.

Wednesday, September 23, 2009

Gold - Technical Position Piece

I love fractals, or repeating patterns in markets, to try to predict what comes next. They don't always work and sometimes they fail miserably, but they let you know what's possible and what has happened in the past with similar chart set-ups. Since we're all just guessing in the short and even intermediate-term, it's nice to try to pretend that a technical crystal ball has merit. I'm just a dude with an opinion (which has been off relative to the market lately, so grains of salt all around), but I still like the 2005 time frame as a potential rhyme.

This implies a brief period of Gold strength here to make new highs, then consolidation to confirm the new highs and establish $1000/oz. as a new floor for the Gold price. I'm not wildly bullish on Gold right here and right now, but I am bullish. When one anticipates stocks, corporate bonds, real estate and commodities are going to take the kind of plunge that will make widows and orphans cry, there are only two choices: get short or get out of the way. U.S. Dollar cash is a good trade here on an intermediate term basis, regardless of what the Dollar permabears think, and Gold is just another way to stay out of the casino. With only 3% bulls on the Dollar and oversold conditions, the risk is to the upside in the Dollar, not the downside, regardless of fundamentals (which have nothing to do with short or intermediate-term swings in ANY market).

If Gold can hang around $1000/ounce, I'll be very happy, as this means the "real" price of Gold will be rising and Gold miner profitability will be rising. The only stocks I am bullish on over the long term are Gold stocks. Period. Gold stocks are a deflationary play for the current cycle, not an inflationary one.

Anyhoo, here's the action of the U.S. Dollar versus price of Gold during the mid-2003 to late-2006 time frame using a daily chart (Gold is a candlestick plot and Dollar is black line plot):

And here's the Gold miners (using $HUI index as a proxy - the black linear plot) versus Gold (candlestick plot) during this time frame:

Now, this is not a wildly bullish proposition. Anyone hoping Gold is going straight to $2000/oz right here and right now is going to be disappointed in my opinion. However, staying around $1000/oz. while the stock market is cut in half makes Gold a pretty good option in my mind! Nimble traders can instead try going long the U.S. Dollar, but I hold physical Gold as a long-term investment rather than a trade. I get plenty of exposure to Dollars by existing in America. Gold miners are risky here, though they could easily move a little higher before a correction. I wouldn't be putting new money to work in senior or even medium sized-Gold stocks here. Juniors march to their own drummer and oversold junior Gold miners are oversold, not necessarily risky.

When the stock market tanks (and it will), it will take most Gold stocks with it. Period. When the real turn comes in risk-based assets, it ain't gonna be some gentle 10% correction and then the bull market resumes. It is going to be another wicked leg down in the ongoing cyclical and secular stock bear market that is far from over. I am very bullish on Gold stocks and Gold over the long-term, but believe caution is warranted for those who aren't in it for the long haul. Any surprises in the short-term should be to the upside, but every anti-dollar play out there is getting VERY long in the tooth on an intermediate-term basis and the pending 6 month return for the U.S. Dollar may well be higher than for Gold. Over the long haul, I maintain my thesis that Gold will continue to outperform the U.S. Dollar (and all other fiat currencies).

Tuesday, September 22, 2009

Another day of $1000 Gold

Every day Gold hangs around $1000 is another day this important psychological price point is burned into investors' and speculators' brains. Humans can be emotional and irrational creatures when it comes to round numbers. Every day spent above or at $1000/oz increases the odds that we are about to have a strong break to the upside in the nominal Gold price, regardless of what the U.S. Dollar does.

Once we get this break higher, $1000 Gold will become the new floor for Gold prices for a long time to come. We could break out a few hundred dollar and then come back and re-test the $1000 level, but once this breakout occurs, sub-$1000 Gold will be a thing of the past.

The strength of Gold here is unmistakable relative to other asset classes. It has outperformed the U.S. Dollar, the stock market, real estate and many commodities over the last decade. Gold is an international debt-free currency. Gold is money and cash will be king over the next decade as other asset classes experience price implosions (current intermediate-term irrational exuberance aside).

Monday, September 21, 2009

The Afghan War - Another Symptom

of a declining nation. We don't know why we're there, we don't have a clear objective, and yet the only debate is on the number of troops there and the strategic points of the "battle."

Today's headlines talk of the need for more troops if Afghanistan. I am no military expert, I just know that war is a horrible use of economic resources. We are a broke country pretending to be otherwise and we are making things worse by starting wars with random small countries that are no threat to us. The War on Terror is not meant to be won, it is meant to feed the military-industrial complex and it wastes an awful lot of money to do it.

We can't afford it and this is just another straw set to break the camel's back at some point. The camel, by the way, is our currency. After another deflationary wave causes another short-squeeze/intermediate-term rally in the U.S. Dollar, the rubble of the economy and popped real estate bubble left behind will finally expose the naked emperor for all to see. The massive debt overhang with no way to reasonably service it will require our currency to be sacrificed. This may be intentional or due to abrupt capital flight, but it will happen.

Gold is the best protection against a government gone mad that insists on spending more money that it doesn't have at a time when we need to save and pay down debt. Though we cannot default on the Gold standard this time around, rest assured our currency will again be debased in some type of rapid event. And I am not talking about a 10% haircut. Holding Gold is your best protection against what is now inevitable. We can debate about the timing all day, but at the end of the day, this is an event you don't want to be a day late for. Get prepared if you haven't already.

In a country with almost no net savings that has a rapidly rising unemployment rate, taking on more debt to restore prosperity lost in the private sector not only can't work, but is now pushing us dangerously close to the edge. I don't know when the levee will break and we are certainly not the only country in trouble, but similar situations historically never end well.

Gold is in a bull market relative to all fiat currencies. As the country who owns the right to the printing press for the world's reserve currency, the United States stands to lose more than most. Military empires often end because they collapse under the financial strain maintaining such an empire presents. Our country is broke and overextended and looking to other more peaceful nations to borrow more money to keep the bloodshed going. So the global bully needs to borrow money to keep picking on people?

We need to stop our aggression. Whether you support our military policy or not is irrelevant: we can't afford it any more. And since our apparatchiks refuse to tackle the issue realistically, the inevitable will occur and our currency will pay the price. Keeping a portion of your long-term savings in physical Gold will help protect you from this outcome. It is not a question of if, it is a question of when. Just because I believe that the U.S. Dollar can rise for a period of time against other paper fiat currencies does not mean I perceive the U.S. Dollar as a store of value or anything more than a trade. All paper fiat currencies are sinking relative to Gold over the longer term and this will continue for the foreseeable future.

Sunday, September 20, 2009

Gold - Long Term Thoughts

The short and intermediate-term future for Gold and any investment for that matter are tricky to navigate. I have guessed right and wrong many times on shorter-term moves. It seems that the best most investors can hope to do is identify the long-term secular bull market (i.e. the major bull market of the current 10-20 year period) that is in progress, buy into it, and hold on.

Since it is easier, safer and more comfortable for most investors to go long rather than go short (due to risk management issues, availability of different types of trading in retirement accounts, margin, etc.), most would like to invest in a bull market rather than a bear market. To each his own, and I like a little of both, but the majority of people with money to invest are looking for a buy and hold bull market.

I can tell those investors that, without a doubt, that bull market is no longer in general stocks. Period. Buy and hold for stocks and corporate bonds (individual specific stocks or bonds aside) is dead for the next decade. I can also tell those investors to avoid real estate (same caveat related to unique individual opportunities). Commodities are more of a question mark as the inflation-deflation debate rages on and are certainly not a slam dunk in a weak global economic environment.

Government bonds are very high risk at the local / state level and are again a little more uncertain at the federal level. This is related to currency risk (again, the inflation-deflation debate) and the paltry yields paid to take on this risk. The likelihood of significant appreciation is also very close to zero, as yields will not go below zero percent for any length of time.

Which leaves us with Gold. Yes, that shiny piece of metal that you can't eat, has no growth prospects and that pays no dividend. Yes, the Gold that crazy people seem to like - the ones who are always talking about guns and the end of the world. Yes, the Gold that mainstream financial "advisers" always say is a bad or risky investment. Yes, the Gold that is up 300% for the decade while the S&P 500 is down 20% over the same period. Yes, the Gold that just had it highest weekly closing price in United States history on Friday (in nominal/non-inflation adjusted terms).

Gold is in a beautiful, long-term secular bull market with a technically perfect uptrend that shows no sign of having started the "blow-off" top that ends nearly all major bull markets (think oil last year or the NASDAQ in 2000). Here's a look at a monthly Gold price chart in log scale over the past 10 years:

A bull market chart doesn't get any clearer than this. Yes, you can try to guess when the bull market will end based on fundamental data you see on the news or in cyberspace, but the trend is unmistakably up and very strong. And this trend will continue for a long time after the fundamental reasons for the Gold price to go higher are there (remember dot-com mania in 2000 or how the world was going to run out of oil any second last summer?).

I have certainly tried and will continue to try to time this bull market when considering buying more physical Gold (I like to buy on weakness rather than strength and view every significant pull-back in the Gold price as a buying opportunity) and when trying to trade Gold miners with my speculative capital. But my core Gold position is not for sale and won't be until I see concrete signs we are near the top of this Gold price bull market. I hear many people think they are seeing these signs (e.g., Gold television commercials), but let me ask you a question: if you were to poll 100 random U.S. investors right now, what percentage of them do you think have a significant portion of their investment portfolio in Gold or Gold miners? Even more importantly, what percentage of them have purchased actual physical Gold? We are not even close to full participation in this bull market and we will be before it's over.

Stepping back from the short and intermediate-term moves in the Gold price, I want to show you in a "big picture" sense where I think we are in this Gold bull market. Below is a chart stolen from Approximity's Gold Charts page (love your site, man, thank you!):

Once we broke above and held the $850/ounce level in Gold we set the stage for MUCH higher prices. There are NO long-term overhead price resistance points that currently exist. The "sky is the limit" in a sense. I believe we are closer to the beginning than the end of the current Gold bull market, at least in price. A 7-fold rise in the Gold price would lift us to $1785/oz., which I think is the absolute minimum long-term secular high in the Gold price. I personally don't think it is reasonable for Gold to top out before we reach the $2000/oz. level. And these are the worst case scenarios for the Gold price!

Depending on what happens to the U.S. currency in the future, prices could certainly go much, much higher. In fact, here's what I see as a move comparable to Gold's break-out above $850 in terms of where we are in this secular Gold bull market (chart stolen from sharelynx - also love your site!):

The Dow Jones went up 10 fold once it was finally able to break above the 1000 level for good. For those who follow oil, it went from a $10 low around the turn of the century to $147 per barrel at its peak last year (a 1370% gain - a similar-sized gain would put the coming peak Gold price at $3500/oz.). These numbers are meant to show what a secular bull market is capable of doing over years. It is Gold's turn to shine and its bull market is not over!

The fundamental underpinnings of this bull market have to do not only with unprecedented money/debt creation (this fiat paper money/debt backed only by hot air/promises rather than real assets), but also with the nature of money and our monetary system itself. The Chinese government is now openly telling its citizens to buy precious metals for investment and making them widely available. Many countries are now starting to clamor for a new global reserve currency to replace the Dollar. Trust in the government and its promises is starting to break down significantly in the United States as more and more people no longer believe our government has their best interests at heart or has the money to pay for all its promises.

A powder keg is also waiting to be ignited in the paper metal ETFs, which cannot possibly have even a fraction of true access to the physical Gold or silver they claim to be in custodial (or sub-custodial) possession. These metal ETFs are diverting investment money away from the actual physical metal and are slowing its bull market progress (this was one of the intentions of these instruments, by the way). Once people realize they cannot trust bankstas at all and need to obtain a little actual physical Gold to be held outside the system, look out!

I am not sure what's going to happen to the Gold price over the next few weeks or even months. I am actually in the deflation camp for now and think the U.S. Dollar will soon have a strong rally. This may or may not affect the Gold price on an intermediate-term basis. Gold is true money and cash is king during deflation, yet the Gold price is denominated in U.S. Dollars. Gold has risen in the past right along side the U.S. Dollar and I believe this can and will happen again.

However, even if Gold is due to take another rest here on a short or intermediate-term basis, I do know that the Dow to Gold ratio will get back to 2 and may even get below one before this secular Gold price bull market is over. And until that time, Gold will vastly outperform stocks, real estate and corporate bonds. Any surprises in a strong bull market are almost always to the upside and Gold will be no exception.

Saturday, September 19, 2009

We're All Going to Pay For the Housing Mess

The citizens of the United States will be paying to clean up the collapse of the real estate bubble. It doesn't matter if one participated in the housing boom or not - we are all going to pay and pay dearly for this mess. Renters, owners and speculators are all equally on the hook if they are taxpayers (did you know that 40% of people living in the U.S. pay or owe no federal income tax?).

Now it is true that those who go through a foreclosure or bankruptcy will have much stress and will take a big hit on their credit score. Those who avoided the bubble, have paid off their house in full and/or don't look at their home as an investment but rather a place to live won't have to deal with these stressors, assuming they don't become a victim of unemployment in the months ahead.

But make no mistake about it, a big chunk of the losses from the housing bubble are going to be put on the taxpayer's tab. The first round of the "bailout ball" was forced upon the unsuspecting American citizenry by Hanky Panky Paulson and his crew to "save the world" from a certain and horrible economic death. The second and third rounds will involve similar sums of money but will come from different angles.

First and most obvious is the number of bank bailouts that the FDIC, and thus the American people, will need to fund. The FDIC will absolutely tap its new $500 billion line of credit from the U.S. Treasury. To pretend otherwise is silly and/or dishonest, as hundreds of additional banks are going to fail before this fiasco is over. In the linked article above, Sheila Bair is quoted as saying:

"Marking banking assets to market prices doesn't make sense."

No, of course it doesn't make sense. Telling the truth and doing the rational and responsible thing would immediately bankrupt our entire banking system overnight. It is much better to pretend that you haven't lost any money on any of the assets you have and instead tell people that they are still worth what you paid for them, even if their value has been reduced to zero. This is our government-banker keiretsu hard at work discouraging reality, honesty and integrity. If the head of the FDIC feels this way, there is no hope for improved transparency of bank balance sheets and no realistic way to fairly value these banking firms (Stay away! Sell!).

In the mean time, these bank "assets" are trending towards zero or less than zero (in the case of some derivative instruments and homes that have gone through severe "trash outs"), which means that when the FDIC finally does step in, it will cost U.S. taxpayers much more than biting the bullet and bailing out these banks now. All the profits for bankers are and will remain privatized but any and all of the big losses will be put on the taxpayer's tab as much as possible. The larger banks are not stupid and have found a way to try to salvage some extra profits out of this mess (in addition to being able to stay in business) by asking their pre-bought bureaucrats to jump into the shark pool.

This is where the second of the two remaining big components of the government housing bailout comes into play. This is even more nefarious than the direct bank bailouts. It has to do with Freddie Mac, Fannie Mae, the FHA and Ginnie Mae. These institutions are now guaranteeing 90% of new home loans generated in this country, including the refinancing and modification of loans gone bad. Why make lots of loans in the middle of a real estate collapse? Oh yeah, I forgot - it's because all the inevitable losses will just be put on the taxpayer's tab, so who cares?

This is, in essence, a transfer of toxic loans from private balance sheets to the government balance sheet. Underwriting standards have been subprime and lax for these new government-sponsored loans. Private mortgage originators are going hog wild signing up anyone with a pulse who still wants to buy a house (Don't buy - rent!) if they can meet the government standards because these originators know they can turn around and pass the hot potato onto the government, making a profit/commission in the process.

In the mean time, these loans are already going bad at a alarming rate akin to subprime loans. Capital reserves are dangerously low at the government sponsored entities and rapidly declining, which means more taxpayer money will be needed down the road to bail these quasi-companies out (don't believe articles like this where officials say they won't need extra funding - they will). The low down payments and lax lending standards required for many home loans are what helped get us into trouble in the first place and I would hazard a guess that many of the home owners partaking of these new toxic government loans are going to be close to underwater by the time the ink dries on the final loan documents.

This scheme is also why private banks are ignoring overdue debtors for up to 2 years without finishing the foreclosure process. Not only have Sheila Bair and other apparatchik ilk encouraged private banks to avoid taking losses by allowing banks to keep home loans on the books as assets with an inflated and unrealistic value to bolster their balance sheet and make them look vaguely solvent, but the other part of the plan for banks is to stall while trying to find a way to get their toxic loans onto the books of Uncle Sam and the American taxpayer. They will find a way, believe me.

The private, non-federal, for-profit federal reserve corporation is warming up to the scam and moving things along nicely by purchasing large amounts of commercial and residential mortgage debt. This, of course, will all be foisted onto the taxpayer tab at the opportune time. When this occurs, it will sold as "an investment," but this will be yet another cruel joke on the American people.

So, in the end, it's all coming together for many bankers. The housing and commercial real estate collapse continues unabated and the bill is increasingly going to be put on the U.S. taxpayer's tab, allowing many bankers to get off scot-free and pocket some dough in the process. This moral hazard Uncle Sam is creating ensures more risk-taking and speculation in a real estate market the government has no business encouraging people to speculate in right now. It also absolutely guarantees an even bigger disaster down the road for Uncle Sam's balance sheet. Privatizing gains and socializing losses - damn it feels good to be a banksta!

Such moral hazard also encourages debtors to just walk away from any bad housing debts. When people aren't paying their mortgage, they rarely will make property tax payments, so this federal government interference/moral hazard and willful banker neglect of past due loans will also impact local governments tremendously. It is likely that these local governments will try to squeeze some blood out of a stone by asking those left standing who either own their homes or still pay their mortgage to pay higher property taxes. Being financially responsible increasingly means being asked to bend over and accept higher taxes and/or currency debasement while feeling "left out" of the debtor party.

Many citizens support the government "stabilizing" housing prices based on self interest. Yet such folks don't realize that government can only waste money while making things worse for the whole country and not doing anything but prolonging the pain that has to happen to allow the market to heal. Bad debts must be liquidated, not hidden or subsidized. Government cannot "stabilize" housing, but they can put lots of toxic liabilities on the taxpayer tab while the real estate market proceeds lower to the same levels it was going to go anyway.

Unfortunately, all of this government interference does mean that housing will take longer to find its true bottom - I think we're looking at 2014 or later. It also means that the government debt load is going to increase astronomically over the next few years (what's a few extra trillion, eh?), almost ensuring a serious currency dislocation at some point down the road. Be sure to watch with feigned amusement when the apparatchiks tell you in a year or two that no one saw it coming as the next bailout is announced or a currency crisis/capital flight rears its ugly head. Home sweet home, my ass. We're all going to pay for the housing mess - one way or the other.

Friday, September 18, 2009

Golden Breakout?

I was expecting Gold to provide another buying opportunity before it rose to new highs. I don't trade Gold, I own it. I buy more on weakness when I have the capital to do so. I missed the latest buying opportunity because I was waiting for a better price. I am not mad I missed this opportunity, as other opportunities will arise in the future.

I think that Gold is on the verge of a major break-out. That doesn't mean it is going to happen, but the odds are certainly getting better. There are a few things that argue against a Gold break-out here but that doesn't mean it won't happen. In no particular order, here are the common arguments against Gold breaking out right here and right now with my devil's advocate reply in parentheses:

* Gold is overbought on momentum indicators (only on a daily chart, not on a weekly or monthly chart)
* There are too many bulls and sentiments reading are too high (this can persist for weeks before a trend change and large moves can be made in Gold during short periods of time)
* The "commercial" category of traders (i.e. the large Wall Street firms like Goldmun Suchs that are always net short Gold) are heavily short Gold right now (see chart below)
* The U.S. Dollar is about to make an intermediate term bottom (I believe this is true but don't know exactly when it is going to happen and a rising dollar does not preclude a rising Gold price)
* The IMF announced physical Gold sales (Yawn. This is bullish, not bearish, as it shows the desperation of apparatchiks trying to keep the Gold price "contained"!)

I don't know what's going to happen to the Gold price here. But Gold is the strongest bull market out there right now. Stocks, corporate bonds and commodities all broke down significantly during the Great [Fall] Panic of 2008 and interrupted their long-term trends in a significant way while Gold did not. The U.S. Dollar has been in a bear market for 9 years now with an end not currently in sight (countertrend bounces aside). U.S. federal debt/bonds also remain in a bull market, but yields aren't going to go significantly below zero for any length of time, so the upside here is quite limited in short-term bonds and long-term bonds are a dislocation event waiting to happen.

Sometimes, bull markets move higher because they want to move higher. Bull markets can ignore changes in fundamental conditions, ignore technical analysis and overbought conditions, and shake off those who try to short them. "The trend is your friend" and Gold is one of the only markets in a clear, indisputable long-term bullish trend.

Anyway, below is a 5 year weekly chart of the Gold price using a log scale. Two things I have added to the chart include the open interest (i.e. number of open contracts) in the COMEX Gold futures market (i.e. Commitment of Traders [COT] report) at the early stages of Gold breakouts and the mention that Gold rose along side the Dollar in 2005 (i.e. both went up at the same time) versus the more typical "Gold up, Dollar down" move in 2007 to remind Gold investors that a rising dollar is not the death of an up move in the Gold price.

So much for the recent COT reports being bearish for Gold.

Gold closed at a new all-time weekly high today. That's right, an ALL TIME NEW HIGH IN NOMINAL TERMS FOR THE GOLD PRICE ON A WEEKLY CLOSING BASIS. This is psychologically important and cements the $1000/oz. Gold price in investors minds as a "reasonable" price for Gold. Once $1000/oz. becomes the floor for the Gold price, $2000/oz for Gold is not a great leap of faith for most investors. Until the Dow to Gold ratio reaches 2, I won't even be thinking of selling any physical Gold but I will continue to try to accumulate more on weakness.

Thursday, September 17, 2009

Deflation and Bankers Mix Like Oil and Water

Why is deflation bad? If one can manage to keep one's job and one has some savings, deflation is the greatest thing since sliced bread. Stuffing cash under the mattress is actually profitable during a true deflation, as the prices of most goods fall during deflation. Why exactly then is deflation bad?

Deflation is bad for debtors and bankers that have made loans on assets that are declining in value. Debt increases in its relative burden during deflation, as a $100 debt is a heavier burden on the debtor once money itself increases in value and the debt must be repaid with more valuable money. For bankers, deflation means too many defaults and too little money recovered when the assets backing debts-gone-bad are liquidated.

One of the hilarious and clearly fallacious arguments from those aboard the paper fiat economic train to hell is that a Gold standard is too restrictive and prevents "adequate" monetary expansion. This, it is so postulated by the people who pretend to know, is bad and results in satanic episodes of deflation. In other words, if we had a Gold standard, savers who didn't want to take risk in the asset casino markets would be periodically rewarded by having their savings increase in value. The horror!

Now, please don't misunderstand me - I am not saying a Gold standard is the answer to the world's problems. Far from it. But to say that a paper fiat system is the best we can come up with is so ridiculous that it is only worthy of rebuttal because no one seems to want to let the emperors know that they are not only naked but ugly and incompetent. Economics has become a political science disconnected from reality. Should the mighty wizard of a private central bank corporation pull the lever slow or fast - should they push button A or button B? People honestly and truly believe that central bankers set short-term interest rates and control the bond markets! This is a really bad joke and as untrue as any of the other myths about financial markets and our monetary system.

The reason deflation is feared and even hated is because the study of economics is perverted by the thoughts and desires of banking interests. Bankers hate deflation because they have a hard time making money during deflation. Again, I am not saying that deflation is a desirable situation, but to pretend that it is worse than inflation is not only dishonest, but absolutely false.

Inflation benefits those with assets and debt, because assets increase in value as currency is debased and debt can be paid back with devalued currency. Deflation benefits savers and anyone else who holds cash. In a "modern" fiat system, deflation is death because every unit of currency brought into existence is a debt.

Those who want to live beyond their means and extend themselves financially benefit from inflation because inflation bails them out of their debts (much like a bull market bails you out when you time your purchase wrong). In a sense, inflation allows us to live "the dream" that we cannot afford. I am not saying this is a bad thing, but people who want to live prudently and within their means are punished by inflation because their savings decline in value as currency is debased. Conversely, those who live beyond their means are punished by deflation while savers are rewarded. In other words, deflation and inflation reward and punish different groups but to say one is bad and the other is good is economic bigotry.

In the end, bankers hate deflation and thus the field of economics hates deflation. It really is as simple as that when you understand who sanctions, edits, approves and publishes the economic textbooks that make their way into the schools of developed nations around the world. This is not a conspiracy theory, it is a true conspiracy embraced by economists who want to make a living just like everyone else. Paul Krugman was actually given a Nobel Prize in 2008 - need I say more?

Just because deflation and bankers mix like oil and water doesn't mean that deflation is bad. It just means that a modern fiat paper money society ridicules savers and glorifies debtors. You gotta bring, bring the bling, bling to get respect 'round here. Up is down and right is left - which part don't you understand?

Physical Gold is a vote of no confidence in the current state of paper affairs and is the easiest, no-brainer investment out there if one is willing to price things in Gold rather than paper fiat units. Stocks, corporate bonds, real estate and commodities will continue to decline in value relative to Gold in the longer run (short- and intermediate-term swings aside). I also believe Gold will continue to outperform paper cash over the next few years as a critical mass of people begin to question how a government can create unlimited amounts of money to service the so-called "needs of the people." Gold is debt-free money and nothing else. Gold is not a get-rich quick scheme, it is a way to save money while the paper fiat edifice erected over the past 38 years is burned in effigy.

Wednesday, September 16, 2009

But What of the Future?

Every government "stimulus" and every "loan" is simply a tax on tomorrow. When we use a credit card or get a loan to buy something, we have created a future liability that will will impair our ability to consume more in the future. This, of course, assumes our wages don't rise as we would all like to think they are going to do.

When we take on massive liabilities that are beyond our ability to pay, or if we lose our ability to pay through job loss, etc., we end up defaulting on the debt or have to curtail all other spending to try to pay down the previous debt. This is the tipping point that the private economy in the U.S. (and other nations) finds itself in right now. We are at the saturation point where we are unable to take on more debt. This is due to a combination of too much previous debt, a collapse in the price of the assets that back the original debt, a plateau and/or loss of earnings and banks being hesitant to loan more money.

This is a normal long-term cyclical phenomenon that is due to a complex interplay between social mood and prevailing economic conditions and structure (availability of credit/debt, job market, free vs. controlled economy, etc.). The last 3 decades have witnessed a debt bubble of historic proportions in the United States. People who literally were dead, illegally in the country, in jail or even household pets would be sent pre-approved credit card offers in the mail. Loans were made for houses with no money down and with the mortgage on the home 10-12 times the persons' annual gross income.

This historic credit market reversal into contraction is a secular event that has already started and cannot be stopped by apparatchik decree. And it's not that our leaders are not trying. Cash for clunkers is a perfect and textbook example of the asinine and counterproductive means governments will go through to try to "get the party started again."

But this government debt and "stimulus" is much like the private debt orgy that preceded it: it "steals" from the future. The more we squander now at a time when we should be saving and paying down debt, the longer and harder the ultimate retrenchment will be. This isn't rocket science, it's basic math.

People think that somehow when governments do it, that it is magically different because things are couched in terms like "stimulus" instead of "robbing Peter to pay Paul," "bond sales" instead of "selling the country into hock," and "creating jobs" instead of "spending the money of tomorrow's entrepreneur today."

In the end, it is all just pulling forward future demand and it can be wasteful and reckless when done in the private sector, but it is almost always reckless and wasteful when done by the public sector (because of the waste and fraud inherent in government proceedings). The more we spend now to stave off what must happen now, the longer we draw the process out and the more we weaken our economic future. Nothing is free even though it may seem like it right now.

Those who are unconcerned with the future are usually unconcerned with the past and are doomed to repeat it. Governments have tried spending their way out of trouble when the debt bubble hits the wall before. Many, many times. But it has always failed and always will fail because the premise of Keynesian stimulus is stupid and counterintuitive. It is taught as dogma and only the methods and amounts of stimulation are debated in mainstream circles. Much like our War on Terror is an unwinnable war because a military tactic is not an enemy, taking on more debt to fix a "too much debt" problem cannot work and never will.

In the end, such fiscal insanity serves its purpose. It keeps the masses voting for he or she who promises the most bread and circuses. And when the reality that what our government is doing cannot and was never even meant to work finally sinks in with a critical mass number of Americans, most of those in government who were responsible for increasing the size of the mess will be long gone. It takes a hypervigilant, educated and engaged citizenry to safeguard the principles of democracy. Since that ain't gonna happen any time soon, the plundering (oops, I mean "stimulus," "mandatory health care that privatizes any profits left standing and socializes all the expenses" and "job creation") will continue unabated and the fiscal madness and government intervention into all aspects of the economy will increase, not decrease.

Any thoughts of something more than a brief cyclical recovery in this atmosphere are sillier than Keynesian economics itself. Japan's 20 year ongoing economic depression is still going strong - do we really think we're going to do better as we continue to make even bigger mistakes than they made? An important question is not asked enough by those in positions of power who continue to squander the country's wealth and future borrowing capacity: but what of the future?


Sorry, but I have no commentary other than to say that once $1,000/ounce becomes the "floor" price for Gold, then $2,000 is believable and conceivable to the herd. Regardless, the Dow to Gold ratio has a long way to go to get back towards parity. There are a million reasons Gold could top right here and a million why it could go even higher. Either way, I think its strength at a time when "everything is well" in CNBC land is telling. Gold investors, enjoy the day!

Tuesday, September 15, 2009

The Retail Sector

is in trouble from a fundamental perspective. The secular turn in attitudes toward consumption is underway and this leaves many retailers with a murky future. Don't anticipate having a Starbucks on every corner 3 years from now. Best Buy is hanging in there in part because some of its competitors are folding. Home Depot is hard to sell as a long-term growth story once the "Flip that House" and "use your home as an ATM and investment" concepts disappear from the American consciousness.

Retail sales have been lousy and the anticipated back-to-school sales ramp that happens every year failed to materialize this year. As with almost every other stock sector, retailers have been ignoring reality and moving higher with the general markets, but their bear market rally is getting rather "overripe."

Here's a long-term chart from the non-federal, for-profit, federal reserve corporation website showing the historic trend in retail sales from the late 1940s through the early 2000s (discontinued data series) in log scale format:

And here's a more recent and "newer" data series on retail sales from 1992 through the most recent data point of 9-15-09 (I chose a data series that excludes auto sales to remove the distortion created by "cash for clunkers"), also on a log scale:

And here's a non-seasonally adjusted (i.e. most of the jaggedness of the chart plot is due to normal seasonal trends) 10 year linear chart of a newer E-commerce retail sales series, also updated this month:

As unemployment continues to rise and unemployment insurance runs out for many who have been unemployed for a while now, retailers will feel it. As more and more people feel "trapped" by an underwater mortgage, retailers will feel it. And the new trend of saving more money because much of your paper wealth is gone due to the stock market and real estate melt downs, which are far from over, retailers will feel it. These are longer-term, fundamental trends that will weigh on retailers for at least the next few years. Many more will go out of business, which will also weigh on the overbuilt and overleveraged commercial real estate sector and the banking system that holds the loans on these properties.

Here's a 7 year weekly log-scale chart of the S&P Retail Index ($RLX):

And here's a 6 month daily candlestick chart of the $RLX:

And for those who are going to pretend to be shocked when it happens, let me save them the drama: Christmas retail sales this year are going to be bad - shockingly bad. I don't know how much longer the retail sector will hold up, but this is one of the sectors that will clearly be making lower lows before this bear market is over. And without the conspicuous American consumer behind it, many other sectors of the economy will feel the pain going forward as well.

Sunday, September 13, 2009

When There's No One Left to Trust

Fraud and corruption are being exposed at the highest levels of our financial markets. The integrity of our so called "free" markets has been badly damaged and rightly so. The cover up, fraud and deceit have reached biblical proportions.

When the government decides to intervene on behalf of certain market participants and ignores its own role in the previous bubble and its subsequent collapse, a dangerous precedent is set that destroys trust. When trust breaks down, paper assets become worth less in the eyes of those with money to invest and people turn to reliable asset classes like Gold instead. So far, nothing has been different this time around - history is repeating right in front of our eyes. The old shiny "barbarous relic" is the best performing asset class of the past decade with no end to the Gold bull market in sight. Gold has outperformed Buffett and Gates combined over the past decade by more than a country mile and will continue to do so.

Fannie Mae and Freddie Mac and their willful support of a housing bubble that kept housing unaffordable for most citizens, the Madoff scandal (keep in mind this guy was the chairman of the NASDAQ stock exchange and the SEC willfully ignored obvious evidence of blatant ongoing fraud), bailing out auto companies while trampling on the right of creditors and ignoring our bankruptcy laws and procedures, Hanky Paulson and his looting of the U.S. Treasury, Geithner not paying taxes he knew he owed (he ain't that stupid even though he seems like it sometimes), AIG executives partying in expensive hotels with taxpayer bailout money, the FDIC ignoring obviously insolvent banks and thus increasing taxpayer expense when they finally take over a bank, the SEC banning short selling in its favorite firms while ignoring the fact that its favored firms have illegally used naked shorting for years as a tactic to destroy small firms, etc., etc.

There will always be fraud in financial markets and government. But it has reached a feverish pitch at this time precisely because the secular credit contraction has begun and is now revealing who has been swimming naked. Unfortunately, the government is rushing to put a towel around the biggest and worst offenders, including itself. These are secular sign posts that indicate a long-term change is now well-entrenched: a lack of trust in "the powers that be."

What the government is trying to do is to delay and prolong the pain so that it can be taken over a decade or two instead of letting the chips fall where they may. The common concern is that if free markets were allowed to do their job, then the system would implode and collapse. This, of course, is ridiculous and is why the last U.S. economic depression lasted 15 years instead of 5.

But our government has gotten so large and all-encompassing that it demands to control everything. If prices go up, ban investment and chastise the speculators. If prices go down, ban and chastise the short sellers. If spending doesn't fix things, spend more then act shocked when the deficit comes in at levels higher than expected and raise taxes. If foreclosures get excessive, ban foreclosures. If industries fail, take them over and pretend you are going to make them stronger. If some firms are succeeding despite all the obstacles presented by our regulatory and taxation system, over-regulate them and increase their taxes to help out the firms that are struggling. And if none of this works, label the groups that annoy you or get in your way as "suspicious" or "unpatriotic" - maybe even throw around the "terror" word a little.

Government is a parasite on the economy. Parasites cannot succeed if they kill the host. And yet, the government is killing its economic host, the U.S. economy. The same thing happened in the 1930s in the U.S. and in Japan in the 1990s. It's not the end of the world and it's not doom and gloom, but it does create hard economic times for those not suckling on the government teat.

Stocks and corporate bonds do not thrive in such an environment. Stocks are dead for the next decade as a buy and hold investment and should be avoided unless one is a trader ready and able to play the swings. Because real estate is in a popped bubble, it is a lousy investment for at least the next 5-10 years. Commodities do poorly during a weak economy, which we undoubtedly have, unless one's thesis about rapid currency debasement is correct (i.e. the inflation vs. deflation debate).

When trust breaks down there are few places to hide. Gold and Gold stocks thrive during such times. This is not a 2-3 year general stock bear market and then we return to "the good old days" of a secular bull market for the ages (i.e. 1982-2000). This secular stock market bear has legs and needs ample time to complete. An historic 18 year stock secular bull market requires at least 12-15 years to correct. The "peek-a-boo" plunge below the 2002-3 lows in the major U.S. stock market indices was not a one time event, it was a preview of things to come.

The Dow to Gold ratio is a way to measure these "big picture" swings in the stock market from secular bull through secular bear. The Dow to Gold ratio will reach 2 and may well drop below one during this secular bear market. This is how much damage is required before people will put their trust back in paper promises made by financial markets and the government. In other words, such asset classes backed by paper will need to become this cheap before a new bull cycle in paper assets can occur. The government will fight tooth and nail to prevent this paper decline (because those backing the paper filled campaign coffers with contributions the last election cycle), which will only prolong the agony and not change the ultimate outcome.

We are now entering the hard phase of a Kondratieff Winter, a cyclical phenomenon that is alive and well. The debt must be defaulted on or paid down. The fraud must be purged. Gold must be restored to the center stage. A debt-free asset that requires no trust or economic activity, Gold is not increasing in value and never really does. It is the value of other things that fluctuate relative to Gold. Right now, paper promises and asset prices are collapsing all around Gold because those who stand behind the paper promises have lost the trust of the marketplace.

Once trust is lost, it takes a long time to restore. The only real question for those who understand such long-term cycles and don't want to trade the shorter time frames is what form of cash to hold to help weather the storm. This is the only importance of the deflation versus inflation/hyperinflation debate. Cash is king in this environment as it will outperform stocks, real estate and corporate bonds. I choose Gold as my cash because it is reliable and I live in the United States. Typically, the greatest debtor nations are at greatest risk of currency debasement/capital flight when paper promises crumble during a Kondratieff Winter. Though I could be wrong, I believe this leaves the U.S. Dollar and British Pound suspect over the longer term (I remain intermediate-term bullish and long-term bearish on the U.S. Dollar).

But in reality, the bigger overarching theme that makes this longer-term cycle just a little different than some of those in the past in the presence of an anchorless global fiat monetary system created by the U.S. when we defaulted on our Gold promise and quasi-Gold standard in 1971. I believe Gold will outperform all global currencies for the foreseeable future until this glaring monetary deficiency is corrected.

Gold will survive this mess (and the next) because it has served as money on and off for thousands of years. It will increase in value relative to stocks, corporate bonds, real estate and commodities at least until the Dow to Gold ratio reaches 2 (and quite possibly less than 1). Those betting against this long-term trend fail to understand history and why this cycle will inevitably recur. And as long as there is fiat money backed by nothing but the foul breath of costumed apparatchiks and a private, non-federal, for-profit federal reserve bank corporation, the swings in this Dow to Gold ratio will continue to get wilder and wilder.

This is why major central banks and governments around the world know to hold some Gold and keep it listed on their balance sheets as money. And this is why I recommend people invest at least some of their money in Gold stocks, as the firms that dig money out of the ground when cash is hard to come by will be handsomely rewarded. When there's no one left to trust with your money, turn to Gold.

Friday, September 11, 2009

The Party Rolls On

The Dollar breaks to new lows, the $VIX breaks to new lows and the stock market seems to have an endless supply of bulls to keep the game going. Though I know the ultimate outcome is way down for general U.S. stock indices (to new lows below the March lows), watching has not been fun for this equity bear.

When I started my campaign to "conquer the markets," I decided to put much of my money into physical Gold and use the rest to trade stocks with an emphasis on Gold stocks. Let's just say that based on my trading performance the last 6 months that I am glad I kept a large chunk of my investment money in physical Gold.

I believe the themes will be proven right but the time frames have been wrong and this has cost me a lot of money. This bear is demoralized and has been gored into submission by the bulls. I need to learn to be a better trader and improve my risk management. This is my new quest. Knowing what the markets are going to do in the longer term and making money on this knowledge are not the same thing.

My physical Gold will be held until the Dow to Gold ratio reaches 2 and probably until it reaches one (I will re-assess at 2 and see how things look). This physical Gold is a long-term investment thesis that I believe in and refuse to trade. However, I need to start accepting my limitations as a trader and improving upon them. I think going long here in anything, including Gold and senior Gold miners, is absolutely nuts. However, the next time I start a short position I need to do a better job of executing my trade, managing it and choosing the appropriate time horizon. I have been frustrated in my trading efforts lately.

I know in my heart that I should just buy Gold stocks on the next panic sell-off and hold for the longer term. The lure of "the big" bear market was irresistible to me. I still believe we are in the middle of the nastiest bear market any of us will see in our lifetimes. I still believe an S&P 500 level below 500 is not only possible, but it is the most reasonable and likely outcome.

But I had to vent and apologize to anyone following some of my shorter term charts. I also want other stock bears out there to know that they are not alone in getting creamed trying to short this market. I am uber-bearish but have strangely depleted much of my speculative capital at a time when I know it is needed most. Everyone I read and looked up to as I started to learn about markets and economics explained how difficult it is to trade a bear market. I have paid the price to learn that they were right.

Mea culpa.

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