Friday, March 11, 2011

What moves markets?
What is the market’s next move?

According to one RIDICULOUS headline today – Oil dropped below $100 per barrel because of the Japanese earthquake! Serious as it is to those affected, the earthquake DID NOT affect the oil market – not even one little bit…………

Last week it was war in Libya, this week it is a Japanese earthquake….next week perhaps a balding man with a greying beard speaks to a bunch more balding men with designer suits and the oil price will triple, quadruple or fall by half………..really, if you listen to the stations, channels, web sites and commentaries that pour forth these days you would be, probably are utterly confused.

Simple truth is that the Oil market is a ……..wait for it…….a MARKET! Wow, this guy knows his stuff!!

Really it is a market, made up of people who have varying interests in the market and the product. Together their emotional state combined with real supply and demand issues (not the hyped, supposed and ridiculous issues spewing from the media like a Texas gusher) dictate the Oil market’s next move.

To my mind there may well still be some more upside for the black stuff, but as I have stated before we are nearer the end of this run than the beginning. We probably need a little more hysteria regarding the supply of the stuff, most likely emanating from the Middle East and North Africa before we can call a top.

Gold, Silver and equities bounced around a bit more this week – What can we make of all this “bouncing”?

In truth, I am still waiting for a clear answer to that. The “risk” assets, incl equities, metals, commodities and just about everything else look like they are trying to form a top, but that top is not formed just yet. The yellow metal might have another push to new highs in store, along with the black stuff mentioned above. Silver is very dangerous at these levels, although with it’s history of vertical, intraday, moon shots we cannot rule out higher prices before the mania exhausts.
As previously stated the key to predicting the most probable “next move” in all these markets is understanding the emotional state of the market participants. At present they are ALL in anunequivocally bullish, high stress (by virtue of the leverage many have employed), overly excited state. That alone does not mean that these markets have to crash tomorrow, but the next big move should be easier to predict with this “background information”.

For some time the markets have been giving us another tool to use – The US Dollar! How?

For some years the markets – that is the risk markets have been moving more or less inversely to the US Dollar – “All the same market” was first identified and analysed by Robert Prechter of Elliott Wave International.

So what does this “extra indicator” tell us?

The US$, as you know has been falling for some time and has recently penetrated it’s multi year supporting trend line. The moments around the greenback’s penetration of this trend line elicited very excited chatter from all manner of participants and commentators. The trend line IS THE Line in the sand – If the dollar crashes below this trend line we all go to hell in a hand basket of hyperinflation…..or so we are told.

Interestingly the dollar rallied off this trend line this week – what are we to make of this?

Well, if the dollar continues to rally and the inverse correlation of all risk assets continues we will see a top in all risk assets and a new period of correction, sell off, panic – depending upon the degree of US Dollarrally we get. Is this going to happen?

To my mind – YES!But perhaps not just yet – I am not convinced thegreenback’s rally this week is the real deal – it might be, I am just not convinced. I still believe we might get a new low in the dollar, perhaps even a violent thrust below the said “line in the sand” – that would convince the 1 or 2 market participants that are not dollar bears to put on their grizzly suits…….then the stage would be set for a violent about turn and panic short covering.

Whether that happens next week or sometime later this year it is, in my humble opinion, themost likely outcome.

Other stuff

UK mortgage lending drops to 2008 crisis lows. The housing market in the UK has been weaksince 2007 – about 1 year or so behind the USA. It looks like this Spring the level of transactions could be very low indeed. Mortgage lenders are as tight as ever and in truth borrowers are just not that interested these days – As you know when it comes to housing – Prices follow transaction levels -UK housing looks headed for a double dip by year end.

PIGS can fly – Or at least their sovereign debt yields can. Irish, Portugal Greece yields increased to record levels this week. Speculation is beginning to build again regarding the timing of Portugal’s request for bailout funds – Cap should be in hand by May.

Spain gets a downgrade from those useless rating agencies who still insist on being years behind the curve – Never mind the reason is of most interest – More capital needed for the Spanish Banks – this is a story that has some way to run and the numbers of billions of dollars needed will likely increase four or fivefold before we get anywhere near reality.

Stock Market merger mania rumbles on! I have lost count – can someone tell me how many markets are openly talking about / engaging in mergers / takeovers. This could be the biggest SELL signal of all time – There must be something like 75%+ of all equity market capitalisation involved. – The world is merging!

IMF again calls for a Global currency. The noises from this quarter are getting louder. This will happen – We will have a global currency forced upon us sometime in the future. I think we will see a strong dollar first but in one form or another the Global dollar IS COMING……..more on this later.

Theme for 2011 – CHANGE – BIG CHANGE COMING SOON!

Starting in 1929, the world would witness one of the greatest economic downturns ever recorded. Originating in the United States, the Great Depression began in late October with an unprecedented stock market crash. How could a twentieth century economy nearly collapse? The Great Depression provides an example of falling markets and widespread poverty. However, one significant outlier existed in the market at the time: gold price. Exemplified through a brief analysis of Homestake Mining, gold industry stocks experienced extraordinary gains in share price and dividend payouts.

During the 1920s, the United States experienced a remarkably bullish equity market. However, gold stocks, in general, were not participants; instead, they underwent a downward trend. Gold companies had been afflicted by a bearish market since the late 1880s. This would all change with the onset of the Great Depression. Gold price stocks would prove to thrive during this global economic slowdown. Our central illustration will focus on the Homestake Mining Company, one of the world’s largest gold producers in the early twentieth century.
Homestake’s main operation was in the heartland of the United States, mining gold from the hills of South Dakota. Most gold sector historians agree that Homestake serves as a fair representation for the entire gold mining industry at the time. One must note that the U.S. government passed the Gold Standard Act in 1900 which placed the entire country on the gold standard, creating a fixed exchange rate with all other countries whose currencies were fixed to the gold price. With a fixed gold price, gold stocks fluctuated around production levels, growth rates, cash costs, and net asset value. Changes in the gold price were unable to affect the stock price when the country entered the Great Depression.

Homestake stock sold for about $65 per share in 1929. By 1933, the average stock price for Homestake was around $370. This represents a gain of more than 450% over the course of four years. The Dow Jones Industrial Average fell 89% over the three years between its 1929 peak to its 1932 bottom. Not only did stock prices increase for Homestake, but dividends also skyrocketed. In 1929, Homestake paid dividends of about $7 per share. By 1935, dividends had increased to $56, a staggering rate of 800% over six years. During these deflationary times, gold stocks not only retained their values but provided significant returns for investors.

Deflation, the underlying crisis during the Great Depression, results in heightened gold stock prices. The reason why is that deflation diluted the value of the U.S. dollar while the price of gold was fixed by the government. While some would argue that this fixed gold price ensured the rise for gold stock prices, this fallacy is simple to debunk by examining the positive effects on gold stocks after the removal of the gold standard in 1971. Even though the gold price was no longer fixed, gold stocks performed normally. Interestingly, Congress passed the Gold Reserve Act of 1934 and gave the government permanent title to all gold assets. Most importantly, it increased the gold price to $35 and further devalued the dollar. This certainly contributed to the spike in Homestake’s share price from 1934 to 1935.

Looking forward, gold stocks are very promising under the current market as deflation is likely. Should deflation enter the 2009 economic crisis, gold stocks will be set to perform at record highs. Gold prices would cross the $1000 barrier and further elevate gold company shares. The magnitude could be far greater than what was witnessed during the Great Depression when Homestake had annualized gains of more than 100%. Gold will no longer be seen as a placeholder for value, but as an investment for an uncertain future.

Instead of gold or silver bullion, many investors opt for precious metals mining stocks because they normally yield higher percentage increases than gold and silver when metals prices rise. However, investing in precious metals stocks carries risks beyond buying gold or silver bullion.

The risks are many and varied, and sometimes unforeseen problems can send stock prices plummeting, which, of course, is true of all stocks. Management mistakes cause most mishaps. With precious metals and other mining stocks, the sizes and grades of ore deposits can be overestimated or the cost of extracting the ore can be greater than expected, resulting in lower profits or even losses.

Additionally, businesses always struggle with economic downturns, interest rate increases, labor troubles, governmental interventions, and environmental requirements. Increases in energy costs–even energy shortages–could plague some mining companies, notably those operating in Nevada’s famed Carlin Trend.

For disastrous management decisions, Sunshine Mining and Refining Company comes to mind. Once a favorite of silver stock investors, Sunshine traded at $13 in early 1998 on the NYSE. However, by 2000 Sunshine was in Chapter 11, and its stock has traded at less than a nickel on the NASDAQ.

In 1996, Sunshine’s management borrowed $30 million and in 1997 an additional $15 million for development of its West Chance ore body at the Sunshine Mine, after which the company is named. Part of the borrowed funds were used to delineate what the company calls a “world-class” ore body in Argentina.

Although management claims the West Chance efforts were successful, management misjudged cash flow and was unable to meet interest and principal payments on the $45 million. Efforts to refinance were unsuccessful, and the lenders took control of the company and mothballed the famed Sunshine Mine. Shareholders wound up with about 3.6% of the company. Unfortunately, this was not Sunshine’s only brush with disaster.

In 1972, a fire in the Sunshine Mine nearly destroyed the company. While Sunshine’s stock price suffered, the company managed to survive. Now, Sunshine Mining essentially has been taken over by its creditors.

Ashanti Goldfields (Ghana) and Cambior (Canada), two gold producers, also exemplify what can happen to share prices when managements make bad decisions. In early 1996, Ashanti (ASL) traded at $25; in 2000, Ashanti’s stock traded below $1.50. In early 1996, Cambior, traded at $16; in late 2000, Cambior’s stock traded at twenty-five cents.

Both companies got caught up in forward sales, and their balance sheets were severely damaged by margin calls in 1999 when gold rallied from the $250s level to $338 on the announcement that 15 European central banks would limit gold sales and leasing for five years (The Washington Gold Agreement). Gold’s price move caused Ashanti and Cambior to liquidate assets and/or convert loans to equity shares at rates that severely damaged the value of their stocks.

Forward selling remains a threat to other gold mining companies because the amount sold short via forward sales is disproportionate to the size of the gold market. Some estimates have total forward sales equivalent to three to five years of production. One or two small short positions could be unwound with only minor price increases. But, the total position is enormous, and reversing it without the price of gold skyrocketing will be difficult, if not impossible.

Forward selling involves borrowing gold and selling it, and it is done mostly by mining companies because, logically, they should be able to replace the borrowed gold out of future production. Forward selling is profitable because the lenders, primarily central banks, lend with charges (lease rates) of about 1%, sometimes even less. The borrowers sell the gold with effective returns of somewhere between 6% and 10%, depending on the borrower’s credit rating.

If the funds from the sales of the gold are invested in high-grade bonds, the borrowers receive probably 6% to 8%, for a tidy margin of 5% to 7%. However, if the borrowers use the funds in operations, thereby permitting those to forego borrowing in the credit markets, then they effectively receive higher rates, depending on the companies’ credit ratings.

Hundreds of millions of dollars are made via forwarding selling. The central banks earn fees on an otherwise “sterile” asset. The mining companies earn 5% to 9%, and the bullion houses that arrange the central bank loans and handle the gold sales earn huge fees. Forward selling pays off like a broken slot machine–except for gold mining companies’ shareholders. Shareholders lose because forward selling distorts gold’s supply/demand fundamentals and puts downward pressure on the price of gold. However, forward selling is not without its risks.

If the price of gold rises, the lenders want additional margin deposits, which is what hammered Ashanti and Cambior. (Despite the borrowers having millions of ounces of gold in the ground, the central banks require “margin deposits,” usually US treasuries. This works much the same way as margin deposits do on futures and stock exchanges.) It is believed that some bullion houses have even given the central banks guarantees that the borrowed gold will be replaced. If so, then adverse developments in the forward sales arena could force government bailouts, such as was the case with the Fed-engineered rescue of Long-Term Credit Management.

Precious metals stocks are a way to participate in the gold and silver market; however, compared to gold and silver bullion, stocks are risky. No one ever went broke holding gold or silver. The same cannot be said of paper assets. Call the <a rel=”nofollow” onclick=”javascript:_gaq.push(['_trackPageview', '/outgoing/article_exit_link/1694742']);” href=”http://www.usgoldinvestors.com”>Superior Gold Group</a>today and start your account NOW!

Rick Munarriz, Popular Investments advisor from the Motley Fool thinks Google stocks and Gold are the two most popular investments in this age and time. Based on the above facts, a question can be posed: Between a share in Google and 1 once of Gold which is a better investment. As at 4th January 2008, investing in gold was profitable than investing in Google stocks, with 1 once of gold selling at $ 859.19 while I share of Google selling at $657 in the U.S stock market.

Comparisons between investments in precious metals and investments in financial instruments like stock are always a subject of debate in the financial world. In this decade particularly stocks have shown impressive performances in the various stock exchange markets in the world from the FTSE to the Dow Jones. The skyrocketing prices of stocks can be attributed to stable political environment in U.S.A, U.K and other developed countries. In the last seventy years there has been no war or a major political crisis in the major players in the global economy. The legal structures and the financial infrastructure in the developed world over the last seventy years have improved dramatically facilitating the smooth flow of trade in stock exchanges across the world. With all these factors about stocks noted, it still cannot be concluded that stocks are better than gold.

The year was 2008 and the world financial system was greeted by the rudest shock it has ever had. In a span of less than 24 hours, over 5 major stock exchange markets crashed leaving investors with losses running in billions of dollars. In that instance it was very clear that financial markets are the most vulnerable of markets in the world. It was immediately appreciated that the stability and certainty associated with investing in gold cannot be found in investments in stocks and bonds. Stocks are primarily short term investments. The person who buys stocks with the intention of selling them within a short period of time is bound to benefit more than the person who buys stocks for long run intentions. However when it comes to gold, gold is ideal for the investor with short term motives as well as the investor with long run motives. When the market is bullish gold can be purchased and sold at a massive price when the market becomes bearish. In the long run, the prices of gold are stable swinging in the range of $700- $1200 for 1 once of gold.

For the small scale investor, investing in gold entails purchasing gold coins or gold bars. The small scale investor can also own gold bank accounts or purchase gold exchange traded funds. Gold exchange traded funds are usually sold and traded in the major stock exchanges in the world. Large scale investors like commercial banks and central banks also keep more than 20% of their reserves in gold.

Investing in gold is the only way to store wealth over the long run without depreciation in the value of the wealth. Gold is also a profitable tool of investment in the short run.

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This company is within a few days of producing their first revenues from the sale of copper concentrate. They recently signed a deal with RBS Sempra to sell them 100% of their concentrate.

Their current market cap is about $30 million but they expect to have a positive cash flow in their first full year of about $40 million.

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This aired on July 24th, 2009 on CNBC

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regulators fall victim to greed and fear. No matter how much they fiddle

with interest rates, Bob Marley said it best: “One day the bottom will drop

out…”

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