June 22nd, 2015

The True Reserve Value of Gold

For thousands of years, in countless cultures around the world, gold has been recognized as an exceptional store of value and, as such, accepted in all forms of transactions.  Up until the twentieth century, most nations were still using the gold standard and the gold standard has historically provided long-term stability and inflationary controls.

However, as a result of central banks around the globe issue incredible amounts of debt in an effort to prop up or to stimulate their economies (and to not let their currency be left behind in a rush to the bottom in terms of exchange value), there just isn’t enough gold to support all the fiat currency that’s been created.

A recent article in Business Insider very graphically explains the problem in the following:




You read that correctly.  The price of all the 184,000 ounces of gold estimated to have ever been mined would have to increase 30x to around $34,000 per ounce if all the currency created would be converted into (spent to buy) that gold.  Clearly that’s never going to happen but it’s also true that the price of gold will have to increase from the current $1200/oz if it’s to continue backing up fiat money.

The only way this won’t be the case is if a global, recognized and accepted digital currency (like Bitcoin) replaces gold.

Check out the article here.

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August 21st, 2012

Stock Market Recover Sidetracked by European Sovereign Debt Crisis

I think one of my most prescient posts was entitled Housing and Finance: Two Superimposed Crises and Bear Markets of September 17, 2010, almost exactly two years ago and just before the last mid-term elections.  The market had already bottomed the previous March and were breaking above what I saw as an inverted head-and-shoulder interim bottom.  As noted in the post,  there appeared to be the beginnings of a bottom in the housing market due to once-in-a-lifetime affordability.

Specifically, I envisioned the market being victimized for the first time in history by two economic crises: financial crisis hitting banks and other financial enterprises plus the housing crisis hitting consumers.  I suggested that before the market can advance to new highs, both these industry groups would have to bottom and begin moving higher.  The keystone of that post was the following chart on which I attempted to visually superimpose the impact of those two crises on the stock market:

Here we are, two years later, with the market having ground 24.6% higher from 1126 to 1420 today.  I wrote then:

The reason the market appears to be bottoming again (the inverted head and shoulders) may perhaps be that housing is beginning to bottom and turn also. The number of foreclosures continues to rise (although at a lesser rate than last year) and the improved affordability index (historic low mortgage interest rates and closeout prices of houses) has not yet stimulated a pickup in the housing sales turnover. But a pickup may be around the corner [triggered by an up-tick in interest rates?]. Without a turnaround in housing, the stock market recovery will be short-lived.

Unfortunately, I didn’t have sufficient courage to invest in homebuilders and missed out on the Industry Group with one of the biggest moves over the past twelve months, Homebuilders, at 75%:

We thought our Financial Crisis had been contained by the Fed’s first round of Quantitative Easing and that banks would begin their recovery however the effort was sidetracked because of the European Sovereign Debt Crisis beginning towards the end of 2009.  The recovery in the stocks of the country’s larger banks began to falter towards the beginning of 2010 and only now has begun to show signs of renewed life:

The “herd’s” big money flow again beginning to be directed into financial stocks gives hope that, absent a new major crisis (although our own Federal debt and budget debate is still looming on the horizon), the market will be able finally to continue to the previous all-time highs and ultimately break the grips of the 12- going on 13-year secular bear market.  A cross of the XLF above 16 will trigger for me the another clear indication that financials will begin leading the market higher.

It’s been a long, frustrating two years.  We’re facing another national election, this one even more important than the last.  Continuing to look at all the negative news continues to make our investment lives feel dismal.  Seeing the possibilities of some positive news for a change opens the mind to a totally different stock market future than the one we have become accustomed to.  I may be nothing more than an incurable optimist but that’s the best way to remain committed to the stock market and, ultimately, long-term financial well-being.

May 11th, 2012

Why the fixation on foreign exchange?

I’m always surprised and bewildered seeing the “Alert” image and hear the special effects sound whenever CNBC wants to say something about foreign exchange and make it appear as if something really significant has happened.  This morning it was a “breaking news” story about a move (or absence of a move when actually one was expected) in the €EU.

I understand that currency fluctuations are important since the world figuratively revolves around the free exchange of wealth (money) and goods.  And I also understand that countless speculators, investors and governments are involved in foreign exchange markets.  Furthermore, I understand that currency markets are extremely leveraged since the players can put on and lever up to huge positions with small equity of their own.  And finally I understand that the exchange values of one currency against another is based on supply and demand amongst all those players tempered by the policy positions of governments and central banks who attempt to influence (control) and stabilize those exchange values.

But as a trader who trades foreign exchange only on an extremely limited basis through ETFs, I don’t understand foreign exchange as a trading vehicle when currencies don’t fluctuate really that much.  Take the €EU (Euro) as an example.  It may be hard to believe given all the discussion about sovereign defaults and debate about the currency’s possible breakup, the €EU today is where it was in 2006 as reflected in the price of FXE (the Rudex CurrencyShares EuroTrust ETF:

The following chart compares the $US Index (a composite exchange rate index for a basket of currencies of our largest trading partners) with the more volatile S&P 500 Index:

To add another dimension to the €EU’s volatility, I superimposed the FXE on a chart of YUM (Yum Brands) for the same period to compare the two (the FXE is in blue):

Businesses surely need to pay attention to foreign exchange since those fluctuations impact revenues, costs and profits but I don’t understand where the fascination for individual investors comes from given that you’d wind up paying margin interest and wouldn’t earn the dividend yield (which in the case of YUM is currently 1.6%).

Why do most of the search results for the term “technical analysis” focus on foreign exchange?  If it weren’t for the huge margin possibilities (up to 90%) which makes it a more risky game, why should the average investor be interested at all in foreign exchange?  I can’t predict the future of the €EU or the $US but my guess is that fluctuation in the short run future won’t be all that significantly different than they have been in the past regardless of the EU outcome.  Can someone please answer the question “What am I missing?”

May 9th, 2012

Buffett and Precious Metals

It’s been some time since last discussing precious metals so I thought I’d revisit those charts to see if something new might be revealing itself.  What struck me was the near perfect patterns in both the charts that stretch back almost a year to the early days of the European sovereign debt crisis began in August 2011.  The only problem is that one can interpret the emerging patterns as either consolidation (flags) or as reversal (right triangles or head-and-shoulders) depending on whether you’re a gold bug or Warren Buffett.  On CNBC this past Monday, Buffett stated that

When we took over Berkshire, it was selling at $15 a share and gold was selling at $20 an ounce. Gold is now $1600 and Berkshire is $120,000. Or you can take a broader example. If you buy an ounce of gold today and you hold it at hundred years, you can go to it every day and you could coo to it and fondle it and a hundred years from now, you’ll have one ounce of gold and it won’t have done anything for you in between. You buy 100 acres of farm land and it will produce for you every year. You can buy more farmland, and all kinds of things, and you still have 100 acres of farmland at the end of 100 years. You could you buy the Dow Jones Industrial Average for 66 at the start of 1900.” Gold was then $20. At the end of the century, it was 11,400, and you would also have gotten dividends for a hundred years. So a decent productive asset will kill an unproductive asset.

As is usually true with statistics, there are several interpretations depending on what you’re trying to prove.  Forbes points out in that same article that Berkshire would have outperformed gold over the 20 years since Buffett started Berkshire Hathaway but the reverse was true over the last 10 years as gold far outshined Berkshire stock.

What do the charts say?  Again, it depends on the frame of mind of the observer:

Both charts contain familiar features:

  • descending channels;
  • potential necklines;
  • a zone that could indicate whether the controlling pattern is a consolidation or reversal;
  • lack of clarity as to whether price will cross below the potential neckline

I’m not an economist but it would seem to me that with all the uncertainty surrounding the future of the Euro money would continue to boost the prices of precious metals.  Instead, Euro Zone investors have been dumping money in what they assume to be the world’s last safe haven, the $US … even when they earn near next to nothing.

But with another round of our own debates on our deficits, federal budgets and taxation coming at the beginning of the year after the Presidential election, so analysts say it’s going to be like falling off a cliff.  If anything happens to interest rates here it’s going to have to be that they go higher and bond prices are going to decline.  Foreign investors are going to begin seeing increased risk in US bonds and will jump ship quicker than they climbed on board.

With all that upcoming uncertainty in the $US, I can’t imaging that the emerging pattern in precious metals isn’t a consolidation and, with all due respect to Warren Buffet, there won’t be another run higher beginning towards the end of the summer.  For all those conspiracy afficionados out there, perhaps Buffett wants us all to sell our gold so that he can scope it up at this price and lower.  After he’s bought all he wants and these prices , he could even come back in August and say that everyone should own some gold and thereby start pushing the price higher.  He’s a nice guy but he didn’t get to be the richest man by being a sweetheart.

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December 19th, 2011

Shorting Treasuries: Conventional Wisdom Gone Awry

One of the perplexing aspects of the monetary and fiscal issues  around the world (especially here in the US) has been the absence of inflation and the strength of the $US.  In “Short TLT Rather Than Be Long TBT” (January 2010), I quoted from the NY Times:

“Liquidating investments that pay almost nothing in order to shift to long-term bonds that pay substantially more may not make sense right now, said Robert F. Auwaerter, the head of fixed-income investing at the Vanguard Group….interest rates — at both the short and the long ends of the yield curve — are likely to rise this year if the economy keeps expanding…..When bond yields rise, their prices fall. The effect is magnified for longer-term securities, so a 30-year Treasury bond would fall in value much more sharply than, say, a six-month Treasury bill.”

That was the conventional wisdom and has continued to be for some time.  To take advantage of what seemed patently obvious, one could play the rise in Treasury bond yields by either buying TBT, the ultrashort ETF or shorting TLT, the ultralong ETF.

But this was just another case of conventional wisdom goes awry.  The turmoil in Europe has caused money there to seek out a safe haven and,  as incredible as it is, that safe haven has been the $US and US Treasuries.  Rather than seeing yields rise as prices decline, rates continued to decline to historic lows.  Holding TBT in the expectation of rising rates has been an unmitigated disaster for all those holding TBT:

20-yr Treas Yields vs. TBT 2010-2011

Not only have yields declined rather than rising this year causing TBT to also decline but TBT has declined further on a relative basis (some of the difference is compensated by dividend distributions).  Holding TBT in the hopes of increases in yields due either to inflation or fears brought on by the budget disputes has resulted in a nearly a 50% loss.  If interest rates reverse and return from the current 2.5% to above 4.0%, the levels it was at the beginning of the year then TBT could be expected to nearly double.

It could be a long wait but perhaps at this point one that might be worthwhile.

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November 30th, 2011

Impact of Coordinated Central Bank Action

“These are the times that truly try investors’ confidence.”  Just when you thought the market was going to perform in a relatively predictable way, out from somewhere in left field jump the Fed, 5 European and the Chinese central bankers promising what appears to be a coordinated “global Q(uantitative)E(asing)?”.  Quoting from the CNBC newswire,

“The world’s major central banks made it easier Wednesday for banks to get dollars if they need them, a coordinated move to ease the strains on the global financial system. Stock markets rose sharply on the move.”

Yes, the market’s initial reaction was a greater than 2.5-3.0% jump in market futures but, as some more level-headed analysts see it, is this not also a sign of the bankers’ frustration and desperation at the inflexibility and inability of legislators to act to cut spending and deficits.  Bottom line, things actually may be worse than we thought.  Remember the market’s reaction when the Fed launched QE I and QE II.  It skyrocketed 30% over the succeeding 8 months but we’re still laboring under 9+% unemployment and the market failed to sustain the gain and is still stuck in a trading range with yesterday’s close 13.94% higher than it was prior the QE I and actually below the level prior to QE II.

Let’s take a look at the chart as of last nights close:

S&P 500: 11/29/2011

If professionals can’t see what lies in the future and complain about not knowing whether to buy long or sell short, then clearly individual investors like you and me are having a very difficult time of it.  There’s only two ways to go: 1) stay long, collect your dividends, weather the storm and hope for the best, or 2) insulate your money as best as you can by either moving into cash or being portfolio protection in the way of hedges like index put options of leveraged short ETFs.

In other case,  the best to close your eyes and ears from the daily news (some call it noise) and stay focused on the long-term.  I’m looking at the trendline around 1220-1225 which has acted as an impenetrable resistance level several times.  The second event I’m watching is the the 200-dma inevitably crossing below the 300-dma, something that can’t be prevented without the market moving above 1260-1275 for several weeks.  The Market Momentum Indicator with which my subscribers are very familiar is based on 4 moving averages plus the position of the Index itself relative to those four.  As I outlined in my report to subscribers this past weekend,

Without some sort of dramatically positive surprise, the moving averages will move into a precise bearish alignment (arranged from slowest to fastest). May 29, 2009 was the last time we saw a perfect bear market alignment as the market was exiting from the Financial Crisis Crash. That period of perfect bear market alignment began just over four years ago on November 7, 2007 as the market was entering the start of the Financial Crisis Crash.

Was today’s announcement that “dramatically positive surprise” or is the market about to enter a period similar to November 2007?  No one knows with confidence so, for right now, rightly or wrongly I’m not willing to gamble and am basically watching from the sidelines.

February 15th, 2010

1930 or 1974 Recovery? Are You A Pessimist Or An Optimist?

I watched a disturbing video earlier this week from MarketClub. True, it was a promotional video to convince investors to buy their service but it was disturbing none the less. The video’s title, “Is it Deja Vu Again For The Dow?” says it all (although leaving themselves options by posing it as a question). What most struck me was that their case, one we hadn’t heard for about a year, the case that the market today might be similar to the 1929-33 Great Crash.

They summed up the argument in what they claim is an old Hungarian saying, “The past is the teacher of the future,” meaning that historical precedent has a lot to teach about the present. The similarities they find emerging are – again – between the Great Crash and the current situation. Here’s the lead slide from the video:

I, too, believe models for today’s situation can be found in the past. But the “past” is a very long time; one can overlay many past periods onto the present and find well-fitting models. Rather than going to the extremes of the Great Depression (something that might be good for marketing but not necessarily good for investment decision-making), I’ve long found similarities with the 1970’s (see “1973 and 2001 Market Crashes and Today’s S&P 500 Index” from nearly -can’t believe it – two years ago) and today’s market.

For example, I’ve tracked the S&P 500 Index since 1938 and monitored its 7.5% per annum growth bounded within a band +/- 44% from the midpoint; I labeled the chart “Reversion to the Mean” (click on image to enlarge):

Over the past 70 years, the Index has fallen marginally under the lower boundary only three times, the first time in 1974. According to Wikipedia:

“The 1973–1974 stock market crash was a stock market crash that lasted between January 1973 and December 1974. Affecting all the major stock markets in the world, particularly the United Kingdom, it was one of the worst stock market downturns in modern history. The crash came after the collapse of the Bretton Woods system over the previous two years, with the associated ‘Nixon Shock’ and United States dollar devaluation under the Smithsonian Agreement. It was compounded by the outbreak of the 1973 oil crisis in October of that year. It was a major event in the 1970s recession.”

How, then, is today’s market tracking against that recovery? Very well, thank you. Since the bottom of the two crashes, the recoveries have been nearly identical:

After a correction which, based on the 1974 track, should extend to 1000 but for reasons I’ve outlined elsewhere could stretch to 960, the market could resume its recovery track and peak at around 1250 by year-end.

So history does offer some precedence and can be a good teacher. If you’re an pessimist and believe the world is hurling towards another world-wide depression, go back to 1932 as your model. If you believe that a monetary crises “only” on the scale of the collapse of Bretton Woods (floating exchange rates replacing fixed rates), revaluation of currencies relative to the US Dollar, the unpegging of gold prices and an Oil Embargo Crises, you need look no further back than 1974.

However, all bets are off for 2011. We wouldn’t be out of the woods, so to speak, because there was another test of the lower boundary again in 1978, corresponding to 2011 today, back again at about today’s Index equivalent of 950-1000.

February 7th, 2010

Thailand and Ruble Then, Greece and Euro Now

Everyone seems to be looking at historical precedents for gauging the severity of this correction. When the Great Depression was on everyone’s mind last spring, many used the1933-35 recovery to benchmark this Financial Crises Crash recovery (see “Two Market Consolidation Models” of Sept 30, 2009). As we crossed the neckline of the inverted head-and-shoulder bottom, I looked to the 2004 nine-month correction from the dot-com Bubble Crash as the model of what this correction might look like. A fairly compelling case could have been made for either.

However, since this correction has been so severe and so fast (in 12 trading days already reached the extent of the 2004 correction, down 7.4%), I continued combing the long-term S&P 500 chart and discovered something I’d completely overlooked before:

The market twice before had 20+% short, severe moves over the past 12 years, both times down from around 1150-75 to 950 in a matter of weeks:

  • 1998 Russian Financial Crises and LTCM Collapse
  • 9/11/2001 World Trade Center Terrorist Attack

We remember the 9/11 tragedy in the midst of the dot-com Crash; it can’t be called a correction. But the 1998 crash is another matter. The Ruble financial crisis hit Russia on 17 August 1998 was triggered by the Asian financial crisis, which started in July 1997 [in Thailand]. During the ensuing decline in world commodity prices, countries heavily dependent on the export of raw materials were among those most severely hit. Petroleum, natural gas, metals, and timber accounted for more than 80% of Russian exports, leaving the country vulnerable to swings in world prices.

Russia’s default on their bonds triggered a major crises in the US with the collapse of Long-term Capital Management (LTCM):

“…..in 1998, Russia defaulted on its bonds- many of which Long-Term owned. This default stirred up the world’s financial markets in a way that caused many additional losing trades for Long-Term. By the spring of 1998, LTCM was losing several hundred million dollars per day. What did LTCM’s brilliant financial models say about all of this? The models recommended waiting out the storm. By August 1998, LTCM had burned through almost all of its $4 billion in capital. At this point LTCM tried to exit its trades, but found it impossible, as traders all over the world were trying to exit as well. With $1.2 trillion dollars at risk, the economy could have been devastated if LTCM’s losses continued to run its course. After much discussion, the Federal Reserve and Wall Street’s largest investment banks decided to rescue Long-Term. The banks ended up losing several hundred million dollars each.” [from “When Genius Failed“]

And what did the S&P 500 chart for 1998 look like?

The great bull market of the late ’90’s came to a severe bump in the road in the fallout of Thailand and Russian monetary crises. It would be ironic if the current market recovery similarly paused due to the Euro crises from Greece, Austria, Spain, Hungary, et al. Market top then around 1150 – same as recent top on January 19. Bottom at 950 four months later – same as neckline of inverted H+S bottom in June.

History may not repeat itself but it surely has echoes. One thing that’s certain, at least to me, is that Friday’s bounce was encouraging but totally unconvincing. I’m betting on a bottom again around that 950 neckline.

November 21st, 2009

One Reason the US Dollar Index Might Increase

Have you heard the story about the man who bought a U.S. Treasury Bill for $1000 knowing before hand that he’d only get back $995 at the Bill’s maturity. “What kind of idiot would do something like that?”, you ask. It’s irrational, it doesn’t make sense. Give someone $1000 knowing you’re going to get back – not more money in the form of interest but less money. You’re paying someone to take your money. Again, it makes no sense.

I pondered how and under what circumstances something like this might make sense and then – I figured it out. No one living in the US would do something so irrational. But there are some who would. People who live in, do business in and aren’t dependent on the $US might do it. If I lived in the U.K., for example, I might convert my Pounds into $US in order to buy some Treasury Bills if I thought, or knew, that when I converted those Bills back into British Pounds they converted back into more Pounds than I original paid. As a matter of fact, if I lived almost any place in the world other than the U.S. (or China, for that matter) I could see making a profit by parking my money in $US’s if I had a fair degree of certainty that $US’s become more valuable to me in my currency down the road. What I gave up in interest (or paid in “negative interest”) I might recoup in exchange conversions.

That’s what I’m guessing might be happening. Foreign investors or sovereignties are looking at the distinct likelihood that the $US will soon increase in value, more than the increases over the past 4 days (the DXY, US Dollar Index, is up to 75.61 from 74.88, or 1%, since November 16).

Does this signal the end of the Dollar’s decline? Has a deal been made to prop up the $US. Does this have anything to do with negotiations to have the Chinese allowing the Yuan to edge up in value also?

One can speculate about all sorts of conspiracy theories that are way beyond our understanding or comprehension. What we do know and fear, however, that a rise in the $US, a rise in the US Dollar Index, will probably be detrimental to US stocks. Perhaps that’s what has lead to the market’s recent weakness.

Something like this was last suspected about a year ago (November, 2008) when the rise in the Dollar’s value of came to a surprising, abrupt and screeching halt. Perhaps its mirror image has begun to be re-enacted today. And what better time to pull something like this off than Thanksgiving week, a time when many have already begun taking time off for an early Holiday break.

By the way, while you’re contemplating, look at the tops that have been made in the graphs of most of your foreign exchange and foreign market ETFs. Conspiracy theories are so much fun …. unless you’re counting on a continued fall in the $US.

November 3rd, 2009

US Dollar Index (DXY), Gold (GLD) and the S&P 500 (SPX)

Several days ago, in “Managing Portfolios Today With Three Indicators“, the first indicator in the list of three indicators impacting today’s market listed was $US. You’ve heard the talking heads say this and you read other blogsters write about this but have you seen the relationship presented graphically. I haven’t so I thought I’d research it and bring the results to you.

The charts below are the value of the S&P 500 Index (.SPX) and the price of the gold etf (GLD) in both cases compared against the US Dollar Index (.DCX) which measures the performance of the Dollar against a basket of currencies: EUR (Euro), JPY (Yen), GBP (Pound), CAD (Canadian), CHF (Swiss)and SEK (Swedish).

Each panel contains trading over the past three trading sessions for the S&P; you should note that currencies trade 24-hours/day so you’ll see gaps between the Dollar Index on one day and it’s value at the opening of the US market’s the next day. The Dollar Index is the blue line; the S&P Index and GLD are the multi-collar (or tan) lines.

  • S&P Index vs. US Dollar (click on chart to enlarge): Sure enough, there is a pretty distinct inverse correlation these between the value of the dollar and the US market (most clearly seen in last Thursday trading). Today, the market had a terrific first hour and a half of trading as the Dollar Index was declining. But at around noon, the Dollar Index starting rising and the market starting falling. It continued until 2:10 when both reversed direction. Is the tail (dollar) wagging the dog (market) or the other way around?

    I’m sure the reasons are complex and convoluted but there’s no mistaking the fact that as the dollar’s value drops, US stocks become more valuable because of the large percentage of profits made overseas, because its less expensive for foreigners to buy stock in US companies …. all the above reasons and more.

  • Gold vs. US Dollar Index (click on chart to enlarge): Underlying worldwide supply/demand factors (industry and jewelry usage, sovereign demand) impact the price of gold and gold is also traded around the clock so the relationship between Gold and the US Dollar Index, although inversely correlated, is less direct.

    Each time the US Dollar index increased, the price of GLD (in $US) went down and vice versa.

Granted, three days offer only a peak and more data over longer periods are needed for sound economic or academic conclusions. But when I looked at the same data others have been looking at, I clearly see the relationships.

Editorial Comment: I feel somewhat unpatriotic but, for the sake of exports, our stock market seeing higher earnings, improved ability to pay our debts to foreign holders (in cheaper dollars), and improved export opportunities I’m rooting for a weaker $US.

The biggest risk will be in the importation of inflation through higher worldwide commodity prices (expressed in the lower valued $US Dollars) and higher cost of all the cheap goods we’ve come to expect flooding our retail stores. It may be a simplistic, short-term perspective but a weaker Dollar may actually help rejuvenate our industrial sector by reducing our reliance on imports.

What do you think?