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The global
economic system is deflating a lot faster than even I had forecasted.
However, for the time being the renewed, all mighty dollar will survive
because at the moment there is no other currency to take its place; but it
too will eventually succumb to hyperinflation. In the meantime, we and the
rest of the world will soon be in a depression that may eclipse the Great
Depression of the 1930's.
GOLD
In an effort to
get a truer picture of Gold, let's take a trip around the world to get a
bird's eye view of the situation. Since I really hate traveling, let's make
it an imaginary trip, at least that way the tickets are free and we do not
have to take our shoes off. Before we start, keep in mind that Gold is now
almost 30% below its all time high of USD $1,030 hit in March/08. Despite
having mounted an impressive rally, it is now in the process of retesting the
September lows (more on that later). As we begin our journey, let's note that
relative valuations of currencies are having a tremendous impact on the price
of Gold, so what in New York may appear to be a continuation of a nearly eight-month
Gold sell-off, it is something entirely different at our 1st stop Canada.
After enjoying parity with the U.S. dollar as recently as July, the plunge in
the prices of commodities has caused the Canadian dollar to fall off sharply,
resulting in Gold rising to more than CDN $1,060, a new all time high (Gold
was a nice place to have parked your CDN $'s AY?) Canada also happens to be
home to many of the world's best-known gold miners, like Barrick Gold
(NYSE: ABX) and Goldcorp
(NYSE: GG), but to date
these mining equities have fallen hard, lagging the international breakout for
Gold bullion prices but setting up some fantastic buy opportunities,
especially in US$. Next we head over to Euroland, with a stopover in London,
where we see more of the same. Gold priced in Euros and British Pounds has
vaulted back into new, all time high territory protecting the purchasing
power of their savings held in Gold. Meanwhile in Germany, Gold dealers have
for a time stopped taking new orders for Gold Coins and Bullion amid
"exploding demand," and in London, bullion dealers have reported
lines going out onto the street. Moving half way around the world we come to
Australia, where the Perth Mint has doubled Gold coin output in an effort to
keep up with rising demand and we find the most dramatic breakout of
them all, with Gold gaining more than 30%: Not surprisingly, the Aussie
dollar has dropped more than 20% against the U.S. dollar since late
September. Following the pattern visible everywhere, Australian miners like Lihir
Gold (Nasdaq: LIHR) and BHPBilliton
(NYSE: BHP) have likewise
crashed. What a Fantastic Opportunity to pick up quality Gold producers by
selling out of the money puts as a way of picking up either cash or more
stock at below 10 year low prices. But hold on to your shorts - with the U.S.
dollar index being only a relative measure and a temporary one at that, it
won't be all that much longer before Gold breaks out to new all time highs in
USD$ terms as well.
THE
WORLD'S RUSH TO BAILOUT
The
BIG question is: What will the effect on Gold be from the trillions of new
US$, Euros, Yen etc. that are continuously being poured into the system?
Possibly a Weimar or Argentina type hyper-inflation within a year or three
followed by an eventual return to some form of link with Gold. However, I do
not think there is any possibility for a return to a full Gold Standard: Not
in the near term anyway.
The
Master Planners have failed to hyper-inflate this economy, while $13 trillion
(one entire year's GDP) has been wiped out so far from stock and housing
market losses in the USA alone. The bailout plan has been raised from $700
billion to $850 billion. A huge chunk has not been used, yet nothing is
earmarked for the continuing real source of this mess, the rancid financial
position of the American household. So far, this all spells deflation and
economic depression which precious metals and the HUI have noticed. However
the world's governments will continue pumping trillions upon trillions in an
effort to stop the depression from happening, but they well fail as
hyperinflation must result as they attempt to fix this mess. Hyperinflation
always ends in Depression and a crashing currency.
At
this juncture, inflationary pressures are receding and in their place,
powerful deflationary forces are now sweeping across the world. That's
an important change in the world around us, but not in our outlook. For now
at least, it means that instead of a falling dollar, we have a rising dollar.
Instead of focusing on alternative investments that go up when the dollar
falls - like commodities or foreign markets (which we have never done) - it's
now more important to focus on building cash and putting it in the
safest place you can: GOLD and US TREASURIES.
It
will be a financial war zone. But despite the wealth destruction everywhere,
U.S. Treasury bills and GOLD will stand head and shoulders above every
other investment, returning 100% of your money plus not much interest, but
with your money available when you need it.
When
markets are falling, investors often throw out the baby with the bath water -
dumping good investments to help make up for the losses and margin calls
they're suffering in bad investments. Silver has been more vulnerable to this
because it's more of an industrial commodity. But Gold has also been affected
by this kind of selling. On the way up, it is easy to say "Sell your
losers and keep your winners." But when the market is crashing, that is
a lot easier said than done as most sell their winners to cover the margin
calls generated by their losers.
NOW
FOR THE GOOD NEWS
The
chart below demonstrates the strong increase in Gold lease rates in the last
90 days.
What
does that tell us about the future price of Gold? Well, for one thing it now
costs more to borrow Gold than it does to borrow money, which is a clear
indication that the supply of Gold for leasing is tightening considerably
while demand grows ever stronger. Most central banks have stopped lending
Gold. The most common question being asked is, "If Gold is in such
strong demand and short supply, why is the price so weak?" The
bottom line is: ONLY IN AMERICA as the massive repatriation of US Dollars as
a result of de-leveraging and the unwinding of the massive Yen Carry Trade
(it has already bankrupted Iceland) is making the US Dollar look strong even
though its fundamentals have sure NOT improved; while the Gold manipulation
cartel is exerting its utmost effort to keep the spot price of Gold low through
concentrated short positions on the COMEX. The price of Gold will emerge from
this negative influence on the next leg down in the economy as it goes into a
broader paralysis instead of being limited as it is now to real estate and
financials. Most credible analysts are now recommending a minimum 30%
exposure to Gold for institutional portfolios.
Though
its hard to imagine in the current price environment, both Gold and Silver
are on the verge of a tremendous breakouts to the upside, so do your best to
get your hands on the physical bullion over the next 24 months. Before
Bullion starts to really take-off, the producing companies will take-off
first followed closely by well financed junior explorers with million ounce+
deposits. Ignore the negative press on Gold, and recognize the current price
weakness for what it is: The last time you'll ever see Gold and Gold stocks
this cheap.
The
secret to making money in both good markets and bad is knowledge and courage;
knowledge about investment analysis, the markets and a solid knowledge of
history. Knowledge has made me look "brave" when everyone else
seemed fearful. Knowledge has made me look like a "visionary" when
all I did was study history. And knowledge has made me into the ultimate
"Contrarian."
Why
the fall in Gold Prices when physical Gold remains in huge demand?
A
major part of the Gold price decline was due to forced liquidation by hedge
funds and other large-scale speculators who were not long Gold coins or bullion
but were forced to liquidate their Gold holdings of stocks, Gold ETF'S and
Gold derivatives (Paper Gold). Central (small minded) bankers, always eager
to earn a small return on their official reserve holdings, have long been
lenders of Gold. But more importantly, the ownership of Gold lent to the
bullion banks remains with the central bank lender. Thus, Gold-lending
activities are off the books and Gold lent continues to be counted by the
lender as official monetary reserves. Hence, there is no statistical
reporting by any of the central banks engaged in Gold lending: Also Gold
loans to bullion banks in recent weeks and months have been an off-balance
sheet tool utilized by central banks to augment their efforts to provide
liquidity to the banking system -- since Gold lent (placed on deposit) is
sold for cash and typically reinvested in U.S. Treasury Bills by the bullion
bank/gold dealer. Governments will sell Gold to keep their paper currencies
from falling. If too many people rush to Gold, it's a (usually
well-justified) vote of no confidence for that nation's central bank. So be
it. There is simply no way that 50 nations borrowing against their future to
bail out their bankers and stockbrokers can be anything but inflationary. In
the short term, the dollar may rise. But It like all the other developed
nations' currencies - can only plunge. In that event, Gold will be "THE
LAST ONE STANDING."
Gold's
latest swift decent is a direct consequence of the unfolding global economic
situation, the playing out of the credit crisis, and the onset of recession.
The yellow metal was simply overwhelmed by the massive indiscriminate panic
liquidation of financial assets and commodities - liquidation prompted NOT by
the reassessment of economic prospects and the likely diminishing demand for
one commodity over another, but by sheer panic. Gold was also sold because it
is included in several large indexed baskets of commodities that have been
liquidated en masse by hedge funds, institutions and pension funds. In addition,
negative momentum, automatic program selling, and technical trading has
compounded the damage."
THE
GOOD NEWS IS: That game has just about run it course.
GOLD
AS A SAFE HAVEN
This
does not mean that Gold is no longer a safe haven in times of financial crisis,
but it does demonstrate that at times of financial panic it can fall victim
in the short run to developments in other asset markets. Gold may fluctuate
in price, but it always retains the majority of its value and NEVER falls to
zero. It does demonstrate that at times of panic even Gold can fall victim to
emotional, irrational behavior. Although I remain extremely confident of
Gold's bullish longer-term prospects and feel they are as bright today, if
not brighter than they were when Gold breached the $1,000 level earlier this
year; in the short term, Gold remains vulnerable to the exact same forces
that are driving the US$, but is also presenting a golden opportunity to buy.
A
HISTORY LESSON
You
have often heard me say that history repeats and that in order to be able to
peer into the future you must first study the past. So how about we take a
little trip back in time (tickets are Free and you can keep your shoes on)
and take a peak at Gold's behavior during its last 1972 - 1980 Bull Market.
Gold began its move in 1972, trading then at $35, it moved steadily upward
and peaked in Dec. 1974 at $198, right into the time when Americans would,
for the first time since 1933, be allowed to own Gold (Jan 1975) since FDR
confiscated the nation's Gold in 1933. That was a $163 or 446% move in 3
years. Not too bad, AY? Instead of the expected explosion, it had a two year,
50% (62% of it's rise) sell-off right into Sep.1976. Gold then took another 2
years just to get back to $200. But the fun did not really begin until Sept.
1979 and by Jan 1980, Gold hit $850. NOTE: Of the 5 wave move ($200 to $850),
the largest and fastest part of the move was the last 5 months (Wave 5).
What
does that teach us for today?
1- If
history repeats and we were to have a similar 62% correction of Wave I
($775), that would amount to a $480 correction down to $550. However, in my
opinion, our worst case down side risk will be a 50% correction ($385) down
to $645.
2- Time
wise, the 1974-76 correction took 24 months. Does that mean the correction we
are now in could last another year or so in a worst case scenario? Maybe, but
I think information and money move a lot faster today than they did back
then. Also this time around, we are in a 16 year Bull Market instead of a
truncated 6 year 1970's Bull Run. Therefore all 3 advancing waves will have
quite clear 5 wave subdivisions such as we have witnessed for Wave I and the
bull runs will be much longer and stronger than it was back then. Should the
correction only last a more common 38%, then the pull back will only be $295
down to about $730, which may have already been reached. The $730 level is
being tested right now. It is quite possible that the Gold Market is now
retesting its lows which, if it does hold the correction, could be over by
the middle to end of November. This is one of the greatest opportunities
to buy PM stocks; you are getting companies that are still in the midst
of a great bull market, at fire sale prices.
3- The
good news is that its highly likely that this Golden Bull repeats percentage
wise what its 1970's brother did. The projected high is: 1970's was $35 to
$850 or 2430%. 2001 to 2017 would be equal to 2430% X $255 or $6200: Not too
shabby AY? All you need is: KNOWLEDGE, COURAGE AND MOST IMPORTANT OF ALL,
PATIENCE.
The
Oil "Crisis" - The Peak OIL Myth
It is
estimated that Iraq has more reserves than Saudi Arabia and the truth is
there's plenty of oil left in the world. In fact, there's close to 2
trillion barrels of black gold just sitting in our backyard right now
waiting for our government to get out of the way. That's right, the U.S.
has the largest oil reserves plus the largest coal reserves in the world! Our
Natural Gas Reserves are pretty big as well.
REGULATIONS
and DAMED REGULATIONS
Welcome
to the Brave New World, post-November 2007, when the final regulations
keeping the playing field level between individual and institutional
investors were completely abolished. These regulations had dampened
volatility and ensured orderly markets for more than 70 years. The
regulations I refer to include the SEC's July 2007 elimination of the up-tick
rule. In its decision, the SEC said the rule "does not appear necessary
to prevent manipulation."
Next
we come to the trading collars: After the most volatile percentage day in
history, October 19, 1987, "trading collars" were placed on index
arbitrage transactions via NYSE Rule 80A. (Index arbitrage was a favorite
tactic of big institutions to circumvent other selling restrictions.)
However, on November 2, 2007 the NYSE, in its wisdom, abolished these
"circuit breakers. "The Exchange is making this change since it
does not appear...that market volatility envisioned by the use of these
"collars" is as meaningful today as when the Rule was formalized in
the late 1980s." Have you ever heard of the Government eliminating
superfluous or outdated rules or any rules at all for that matter?
In
2005, in response to public complaints, the SEC took the half-hearted step of
beginning to regulate naked short selling, absolutely illegal for individuals
but, in a startlingly dangerous double-standard, perfectly OK for the
"professional" primary dealers. Regulation SHO was allegedly
enacted to curb naked short selling, requiring that broker-dealers have grounds
to believe that shares will be available for a given stock transaction.
The SEC's logic seems to have been that, as long as the fox swears he won't
eat any chickens regardless how hungry he gets, it's OK to trust the fox.
Effective September 18, 2008, amid even more public outcry, the SEC finally
decided to get tough. They warned the foxes to really, really make sure they
thought they would really, really be able to get and borrow the stock, this
time. Really. Except that other departments of the SEC were still defending
the practice in limited form as "beneficial for market
liquidity..." Yeah Right.
Now
add to these massive loopholes the whole idea of "program trading,"
which the NYSE defines as "a wide range of portfolio trading strategies
involving the purchase or sale of 15 or more stocks having a total market
value of $1 million or more." What they are unwilling to admit is that
these "portfolio trading strategies" usually mean gargantuan
computer-to-computer arbitrage strategies. Program trading is extremely
popular with the large broker/dealers and hedge funds, where traders
manipulate the markets using short term automated strategies they could never
execute without computer assistance.
Is it
coincidence that the declining market of October 2008 has been the most
violent and volatile week in history?
On
October 8, 2008, at 3:58 EDT, I happened to notice that the market was up 107
points. Two minutes later the market closed down 190 points. That's a
300-point swing in two minutes. There was no news of interest to account for
such a panic. There is no way enough individual investors or even
institutions acting rationally could have possibly sent the market into such
a tailspin. It takes millions of shares untouched by human hands,
"programmed" to sell as a certain price is touched, or the LIBOR
goes to "x," or whatever. As a senior trader on October 19, 1987, I
can tell you it was Portfolio Insurance that has morphed into today's Default
Swaps in conjunction with the novelty of computer program trading that was
primarily responsible for the 1987 crash - and the current crash as well.
Facilitating instantaneous execution of enormous blocks of stocks, index
stocks and futures resulted in blind selling of stocks as the market fell,
intensifying the decline in both 1987 and 2008.
It
gets worse. A friend of mine was at a conference in San Francisco the week
Lehman Brothers went under. He was astonished, stunned, and shocked to find
that, on the day Lehman Brothers was put out of business, no one cared. The
only subjects on the agenda of these institutional traders were "dark
pools" - trading through "private exchanges" like Sigma X, a
Goldman Sachs company. These trades are never reported on the tape, but they
can add millions of shares to the day's trading volume and drive stocks up or
down 5%, 10%, or 20% -- and "algorithmic trading," a software
application designed to take an outsized order, break it up into 100-300
share lots to make it look as if it is a bunch of small individuals and not
institutional trading.
RULES
THAT MEAN SOMETHING
If we
are to reinstate reasonable and logical trading rules, we MUST first abolish
program trading in conjunction with the re-establishment of Glass Steagle.
Confidence, the backbone of the stock markets, would return very quickly and
actual investors (rather than program traders) would be back in
charge. WE must reign in program trading, dark pools and algorithmic trading.
It's all trading - none of it is investing! Perhaps what we need is a
Depression and a 90% crash in order to get the government to come up with an
updated Securities Act of 1933-34. We could call it, "The Securities Act
of 2010-11."
As a
matter of fact, mutual funds, pension funds, hedge funds, et al, have come to
admit (to themselves at least) that they typically cannot beat the market or
even individual investors. To goose their returns, they must resort to
playing follow the leader, market manipulation. If you doubt it, look at a
chart of options trading the week before expiration of any given month.
You'll find a disquieting pattern. With institutions comprising 76% of all
trading (up from just 6% in 1950) the people entrusted with your pension
money are resorting to rank gambling. Note from as many charts as you care to
view, that the week before options expiration most often tends to be negative.
This is due to program-selling that depresses the market so the sellers can
buy expiring-in-a-week options for next to nothing. It doesn't always happen,
but the sheer volume of the transactions confirm that it is the institutions
that talk about buying and holding for the long term that are doing
this. Of course they want to make sure you and I are locked in for the long
term - they need the float to goose their returns by buying options for a
dime on the dollar, then selling them a week later in response to their own
colossal underlying stock buy-programs which drive the market back up and let
them take their day-trading profits on the options.
IT
GETS A LOT WORSE
In
1995, Treasury Secretary Rubin in conjunction with Paulson and the rest of
their frat buddies, finally managed to convince then President Clinton to
eliminate Glass Steagle. That was the law that prohibited the merger of banks
with any other form of business such as brokers, insurance companies and
mortgage brokers, etc. It didn't take but 13 years to see the resulting
debacle and yet it goes unmentioned whenever NEW REGULATIONS are being
discussed. Mark my words, we will soon be having "show trials" to
make sure we keep our eyes and focus on the Red Herrings and off of the real
culprits, the Big Wall Streeters and their bought and paid for Politicians.
If we
are to ever enjoy a reasonable market again, we must level the playing field.
No naked shorting at all. Reinstate the up-tick rule for everyone. No program
trading once the market has moved "x" percent - None. No algorithms
to hide actual activity - Period. And finally a return to Glass Steagle. WE
cannot rely on Chinese Walls.
WHAT'S
AHEAD FOR GOLD?
Resource
stocks are always more leveraged than the prices of their underlying
commodities. Gold quadrupled from 2000 to 2008 whereas the HUI index went up
13 to 1 during that same period of time.
When a
dividend paying stock like Freeport Copper and Gold declines from 120 to 23,
you better wake up and take notice. Many Gold stocks are now trading at below
book value and some at half book value. Some juniors are even trading below
cash value. The XAU has fallen an amazing 55% since early July. It is down
40% in October alone!
The
XAU's ratio to Gold is currently at .09; that is the lowest ever!!!!!
It is 40% lower than at the 2000 bottom. This means that in comparison to
Gold, Gold stocks are 40% cheaper now than in 2000 when Gold was $250 an
once. So stop whining and take today's prices for what they are, a once in a
100 years BUYING opportunity: TAKE IT! REMEMBER GOLD STOCKS ALWAYS LEAD THE
WAY BOTH UP AND DOWN. You must have the courage to stand alone and like
Warren Buffet, YOU BUY WHEN EVERYONE ELSE IS SELLING.
WHERE
TO NOW DOW?
I am
sorry, but I do not have a strong conviction either way for the short term. I
can't seem to get a handle on either the government's manipulation or the
public's reaction to it. So I follow the cardinal rule: WHEN IN DOUBT,
STAY OUT. I am sure that I don't have to tell you what kind of fantastic
2 months I (we) had. Having gone short starting in Aug. by buying Oct. Calls
on the SRS, DXD, SDS and QID (all double short ETF's) as well as Puts on IWM
and USO, I took all my profits into the Oct expiration date. I have stayed
mostly in cash since.
Short-term,
I have both Bullish and Bearish scenarios each implying a 2000 + move but in
which direction? Each have a 50% probability. Their could be a major change
in the ideological direction our country might be taking this coming Tuesday
which is probably the reason for my indecisiveness. A
major move will most likely occur right after the election. .The only buying
I have been doing is to continue to accumulate Gold Stocks especially the
juniors. It's now time for me to take a little rest and rejuvenate my mind
while I recoup from my 4 day stay in the hospital. We all should have a much
clearer picture of what is happening after the elections.
However
because of the size of the expected move it may be a good time to buy
STRADDLES. (a straddle is buying both a Put and a CALL each 1 0r 2 strikes
out of the money)Examples are: DIA, buy both Nov 95C (davkq) & Nov85P
(davwg) for $5.00, QQQQ, buy Nov 35C (qqqki) and Nov 30P (qavwd) for $2,00.
And/or IWM Nov 54C (iwmkb) and Nov49P (iwmww) for $2,00
Aubie Baltin CFA, CTA, CFP,
PhD.
UNCOMMON COMMON
SENSE
2078 Bonisle
Circle
Palm Beach Gardens FL.
33418
aubiebat@yahoo.com
561-840-9767
Also
by Aubie Baltin
Please Note: This
article is for education purposes only and is designed to help you make up
your own mind, not for me to make it up for you. Only you know your own
personal circumstances so only you can decide the best places to invest your
money and the degree of risk that you are prepared to take. The Information
on data included here has been gleaned from sources deemed to be reliable,
but is not guaranteed by me. Nothing stated in here should be taken as a
recommendation for you to buy or sell securities.
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