The Past Is Prologue

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Published : November 10th, 2008
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Category : Editorials

 

 

 

 

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.

 

 

The one year subscription is still a reasonable $259 and a two year subscription is only $449. Existing subscribers can still extend their subscriptions at the old prices

 

 

 

 

 

 

Data and Statistics for these countries : Argentina | Australia | Canada | Germany | Iraq | Saudi Arabia | All
Gold and Silver Prices for these countries : Argentina | Australia | Canada | Germany | Iraq | Saudi Arabia | All
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Aubie Baltin has spent his career identifying major trends in the markets and helping others to profit from them. He uncovers changes to the major trends in his newsletter, “UNCOMMON COMMON SENSE”, then presents specific, actionable recommendations to help his readers profit before they become obvious to everyone else.
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