A summary of my long term investment positions

Here is a list of the trends that I expect in the coming year :



1. Real Estate is going down relatively speaking in the medium to long term. The long term trend is very clear. Prices will follow volumes, especially in the local markets where the statistics do not show a fall yet. In the markets where the fall has already happened, it might become exaggerated.

2. Inflation will come, but not necessarily right away. The forces of deflation have not played out yet. There will be a second round of forced foreclosure and this is when the fall of real estate will become real in countries like France, that have been spared so far. This second round of deflation will ultimately force an even bigger round of bailouts, stimulus plans and quantitative easing (QE). This is only then that Inflation will appear in force

3. All the rest is a question of timing. In the short run, I might be inclined to think that the rise of the stock market could continue until the Spring, if only for reasons of seasonality. But a second semester of rising stock prices would invalidate the secular bear market, and this is not the scenario I envisage. Therefore I favour a fall of stock prices in the short term, maybe followed by a further rise. Basically, we might move inside a channel during the whole year, with wild swings in between.

A general rise of all asset prices will come only later., when inflation manifest itself.

But I admit it is a close call. This is probably why I don’t feel very confortable with my losing position shorting the stock market right now.

As far as the Hui/S&P500 ratio is concerned, it has bounced on a support and it should continue its rise.

There are other ratios to study :
1. Gold/oil ratio : it shows signs of consolidation before a new rise. Basically it measures the probability of a real crisis environment (depression and or hyperinflation) versus the probability of classic recession/disinflationary environment.
2. Agricultural commodities vs oil : this ratio is still very low but seems to be bottoming and starting a new ascent. It would mark a new era if agriculture prices outpace oil prices (not a good omen)
3. S&P500/gold : a new leg down is likely. The 15+ cycle is not over
4. S&P500/oil : this ratio is already very low by historical standards but should still go lower.


How to analyse these facts in regard to the inflation/deflation debate.

It seems to me that Gold performs better than Oil in times of real crisis, and relatively worse in periods of accelerating inflation.

Right now the Gold Oil ratio is at a turning point, sitting on a support.
Depending on its behaviour, we will have our answer on this debate and the best way to invest in the medium term.

I’m inclined to bet on deflation in the medium term, and gold outperforming oil.

We are in a period of stabilizing real estate prices and talks of a rebouind ar prevalent, but it is only a counter-cyclical rally.
There will be a new wave of asset depreciation shortly.
It will come in May at the latest, but probably sooner.


But, REGARDLESS of this debate, we are still in a long term phase where stocks underperform the commodities, and where economic activity has peaked in the developed world.
It is also a phase where peak oil is fast approaching with huge repercussions for the world economy.

For the developing world, I am not so sure, but I suspect that only the resources-rich countries will prosper.
Not the whole BRIC, but rather BRIC without the I and the C.
I would rather bet on the Brazil and Russia but also Canada, Australia, and maybe Argentina and Africa, depending on the socio-political situation there.



And then, there is the main problem : the amounts of debt and the huge economic imbalances in the world economy.


The Developed countries will have to get rid of their debt, without breaking the world economy (by letting inflation develop) and the geopolitical balance (by blatantly letting their currencies slide).

The Developing countries (and China first) will have to continue their growth and avoid the mounting protectionism and dollar devaluation.

But the tensions will mount and a global decrease in the real GDP growth is predictable.
New bubbles will form and then explode, in an accelerated fashion.

Dollar Oil inverse relationship

Over the last year or so almost everyone’s been pointing to the inverse relationship between the US dollar and crude oil. In a special issue of Currency Snapshot we included a chart that showed the recent breakdown of this correlation. Here’s an updated chart:

At the very left of the red and grey triangle we’ve drawn onto this chart is where the tight inverse correlation began to break down. That’s when the dollar bounced higher from its all-time low. Crude soared well beyond its record high at the same time.

Crude rallying and the dollar drifting slowly higher simultaneously? That’s certainly no inverse correlation.

But from the furthest right point of that red and grey box is where the tight inverse correlation has resumed. Only this time, the direction is in favor of the dollar. And it comes exactly after a new all-time high for crude prices.

A major turning point?

Platinum's warning for Gold

Gold is coming up on its moment-of-truth -- and a potentially great spot to re-enter long positions, as we recently took profits up at $966. Gold is in a very clear "triangle" consolidation period, which is the typical way that parabolic up trends re-energize following a hyper-growth period. Often these consolidation periods can last a year or more. So far gold's triangle consolidation has been quite benign, and clearly bullish, and if gold turns around after a brief undercut of the lower boundary line -- as expected -- it will give us a perfect re-entry to catch the next leg up. But there is another scenario that gold bulls need to be aware of, and that is what is happening in platinum, which is suffering through a shocking decline as it tumbles out of its triangle consolidation. This could have been a highly bullish consolidation pattern in platinum, but any bullishness inherent in the post-spike triangle pattern has been obliterated over the past month. Most commodities are in consolidation patterns following spike highs caused by the collapse of the dollar, so it's important to recognize that platinum could be the "canary in a coalmine" that is warning of danger for all commodities, including the bull market pattern in gold. If gold breaks down out of its very clear triangle, the downside target could be as low as $680. Often such a breakdown move is very swift, as we're seeing now in platinum. Such an obviously serious breakdown can create a feedback cycle in a market, where the energy releases to the downside with barely a pause. So again, gold investors need to be aware of the potential for this same type of swift breakdown, if the triangle in gold does not hold up. Another template for such a breakdown came from copper back in late 2006, as it tumbled down very quickly after a triangle consolidation following a spike high. Copper quickly recovered from that brutal one-way decline, and platinum will undoubtedly recover as well, but it's important to note that it was this breakdown in copper that started a multi-year consolidation period, and copper has not really made any serious progress above the high from 2006. So for gold I'm bullish for another strong leg up to start very soon, and we are poised and ready to re-enter if we get our specific trigger. Gold could easily rebound as high as $965 on this next leg up. But we also want to be aware of the potential for a serious breakdown in gold, similar to what happened in platinum and copper under similar circumstances. If this is the case, it will throw the gold market into turmoil, and the only way to survive such a period will be with hedges and short positions. Please follow this link for more information on the Fractal Gold Report, which also includes a daily report on equity markets, as well as reports on silver and platinum for subscribers on the annual and 2-year subscription plans.

Gold investment fundamentals and the transfert of capital

The Secular Bull Market in Gold Investments corresponds directly to the Secular Bear Market in Financials. We explain why this trend will continue and why a short-term buying opportunity in Gold presents itself.

Central Banks are in all sorts of a pickle.

With overwhelming evidence that the global economy is slumping badly:
* UK Retail Sales see Worst Slump in 20 Years
* Business confidence in Germany is at lowest level in 2 years
* New Zealand's central bank cutting interest rates saying slowing economic growth will curb inflation.
* Japanese exports decreasing YoY, and imports climbing on record Oil prices.
* US unemployment at 4-year highs

The knee jerk reaction by central banks is to man the printing presses and hit the accelerator. And whilst this medicine has worked well over the last 25 years, Central Banks are now hitting a brick wall that they haven’t encountered since pre-Keynesian 1930s.
Freshly minted fiat currency is falling into the hands of a crippled banking sector with little capital, ability or desire to carry out the multiplier effect and make loans to real people in the real economy. In a debt laden global economy with no reverse gear this headwind is possibly the biggest threat the Federal Reserve and its ilk aka the establishment have ever faced in carrying out monetary policy

Point #1 – Gold investors are well aware of the risks inherent in the current financial system.

The beauty of capitalism and the associated free movement of capital is that smaller more focused entities aka Hedge & Private Equity funds can and are rapidly moving into long held banking preserves.
* Direct lending to mid and small cap entities is now a well worn hedge fund territory.
* Extracting value through Shareholder activism.
* A much larger pool of capital available for short selling.
* Private Equity funds increase investment time horizons.
Highly secretive and operating out of non-transparent domiciles these entities are by and large out of the reach of the central banking system.

Point #2 – Hedge Funds and Private Equity Funds do not benefit from Fed handouts and would be better served by a currency that acts as a stable store of wealth – Gold !

The transfer of the financial system is akin to the explosion of information on the internet. The players that used to have a monopoly on information become less effective. There will be winners and there will be losers. But right now a bet on Gold Investments like Gold Stocks and Gold ETFs is a bet against the Establishment and the out-dated mega-banking system.
Slower growth will continue to cause problems for financials as bad debts soar, and as a result Gold investments will continue to propel higher in its multi-year Secular trend.

Figure 1 - Gold Bull Market (GLD) accelerating as Financial Fears grow bottom (Gold ETF - GDX outperforming Financial etf -XLD)

Short-Term Opportunity

The above trend stretched too far technically over the last 3-months and there has had a rapid reversal over the last 2 weeks. This is a technical pullback only and the above fundamentals have not changed. There’s more to come in this fundamental story and Gold investments (we use GLD gold Exchange Traded Fund) and we could be getting close to another buying point for gold soon

Gold Investment GLD - $85 is strong support as a confluence of lateral support (green) and the 50-week Moving Average converge. Its just a matter of time before we have another entry point to add to our positions and or make another profitable gold investment.

Stock indexes and the 200 months moving average

Set against the magnitude of credit cycle issues of the moment that indeed have very meaningful implications for what will be the reality of domestic economic outcomes ahead, questions have arisen as to whether we are now facing a relatively run of the mill bear market for equities or perhaps a bear of generational proportion. The thought has clearly made the rounds that the US equity bear market started in early 2000 was simply interrupted to the downside in 2002/2003 by incredible domestic monetary and credit cycle stimulus, as was truly exemplified by the literal generational bubble that was blown in US residential real estate prices, acting to lift both the financial markets and economy itself for a time. Of course no one knows in advance what financial market behavior and price trajectory will be ahead, but we do hope there are some signposts that may be helpful in guiding us as to potential ultimate downside severity. The bottom line is that big time bear markets really do indeed come along maybe once in a generation. They are infrequent by nature. By this, we're really referring to the devastating bears. You know, the ones that can change lives, destroy fortunes, and generally have investors swearing off equities forever. As investors in the current generation, we've clearly been conditioned over the last three and one half decades to view equity market corrections as opportunities. For the bulk of American equity market history, this has indeed been the case. But every once in a while, it's different. Every once in a while, we hit a generational event.

Before going any further, we have absolutely no way of knowing if we've embarked on a big time bear. A big multi-standard deviation event. We just thought it topical to at least address the unthinkable as simply one possibility in a number of outcomes. As we've preached far too many times over the years, the key to successful investment management is risk management. And that quite simply means we need to have a game plan for all potential market outcomes. Although this is far from a pleasant thought, we're simply contemplating how we might identify "the big one," if you will, if indeed that is to occur at all. Sincerely, the reason we are addressing this rather unpleasant thought is that these types of devastating episodes often coincide with once in a generation financial market or real world events. In the 1930's, the devastating equity bear was accompanied by the peak of a generational credit cycle, ultimately leading to the reality of economic depression as reconciliation played out. In Japan during the late 1980's, the equity peak was accompanied by not only the obvious equity bubble, but also a generational bubble in real estate valuations driven by their own credit cycle mania of sorts, likewise leading to Japan's own version of a "contained depression" in economic activity in the aftermath of the bubble peak. Without attempting to sound melodramatic, at the moment and although intertwined in nature, the US is facing both potentialities - a possible generational credit cycle peak, and a generational bubble in real estate that is now deflating. We told you this was not going to be pleasant, didn't we? The following chart chronicles the credit cycle dating back to the early 1950's. Just as an FYI, the peak in the 1920's was estimated to have been 270%. We're just a touch beyond that at the current time, no?

Although it has been a very long time since we have covered this topic, there is an old truism in the markets that in very severe equity bear episodes, the 200 month moving average of the equity indices is a potential downside target. We believe this is an important review exercise right now for reasons we'll explain in a minute. From current levels on an index such as the S&P, the 200 month MA is roughly 20% down from here. Let's put it this way, we're really in no mood at all to find out "the hard way," if you will, whether we may be headed there and possibly beyond in the current cycle. Moreover, as we look back across historical experience, in those instances were equity markets have broken the 200 month MA to the downside, this has been accompanied by very somber real world economic outcomes. In other words, this little exercise of examining movement toward the 200 month equity index MA has implications above and beyond simply tracking and/or anticipating equity price movement. This historical rhythm simply reinforces in our minds the very meaningful importance of the equity market as truly being a leading economic indicator. So to that end, are there warning signs of historical importance to keep us from this type of fate in the equity markets? Can we use the historical messages of the equity market as a potential forward marker of magnitude for the real economy in terms of trying to identify potential significant forward trouble? As always, history is a guide as opposed to a guarantor. We have a lot of charts to come that we apologize for in advance if indeed they play havoc with the printer friendly page.

First, a little trip back in time to view a bit of historical precedent across various markets and across various periods of time. In our own recent experience in the US, it's the NASDAQ that really walked us through its own crash event earlier this decade. As is absolutely clear in the chart below, the aggregate price destruction carnage in this index was stopped virtually dead in its tracks at the 200 month moving average, very near the lows of the broader US equity market in late 2002. As you also know, and with meaningful monetary stimulus also being an important factor, the real US economy went on to experience recovery as the NASDAQ has likewise not come near its 200 month MA again after the late 2002 touchdown. Point being, in terms of assessing risk in equity prices, the big time bear episode in the NASDAQ ended at the important 200 month MA. And given the fact that the 200 month MA was not broken to the downside in any sustainable fashion, the market was "telling us" back then that the real economy was not about to spiral downward.

If we roll back the clock to a decade earlier than the NASDAQ crash episode and have a look at Japan, the ultimate outcome for both equities and the real Japanese economy was quite different. From the peak, it took the NASDAQ two and three quarter years to touch down at the 200 month MA. For the Nikkei a decade earlier, it took close to five years (early 1995) before the Nikkei actually not only touched, but initially breached the 200 month MA to the downside. And, of course as is clear in the chart, post a multi year recovery above the 200 month MA after the initial breach, the second down side breach of the 200 month MA in early 1997 for the Nikkei was confirming not only a meaningful or generational equity bear market in Japanese stocks, but also an environment of economic malaise that continues to this day a good decade plus later. Was the breach of the 200 month MA associated with a serious real world negative economic outcome? Yes indeed. And since that time, the 200 month MA for the Nikkei has stood as meaningful upside resistance. In our minds, the multi-decade bear market in Japanese equities will be over when the Nikkei sustainably trades above its 200 month MA. It's pretty much as simple as that.

To reinforce the fact that the 200 month moving average of equity indices is quite the important secular demarcation line, as you'll see below, the last time the S&P 500 encountered its 200 month moving average was over 30 years ago in 1977. And that very brief kiss, if you will, was really part of a recovery process that started with a meaningful, and albeit temporary, down side breach of the 200 month MA by the SPX in 1974. But again, was the 1974 breach of this technical barrier then telling us something about the character of the domestic US economy in the 1970's? Sure it was, in the clarity of hindsight. As we all know too well, the latter 1970's were characterized as a period of stagflation, a term really not used too often again until just quite recently.

Following along this road of conceptual thinking just one more time, let's pull the curtains of historical experience way back and have a look at close to nine decades of S&P 500 experience (as being representative of the broad US equity market). Prior to the 200 month MA breach in the 1970's, one has to travel all the way back to the 1930's and early '40's to again see a violation of the 200 month moving average of equity index prices. As we have been saying and suggesting, we're looking for markers of once in a generation type of experience in this discussion. If the following chart is not representative of this type of generational magnitude or meaning in market message, we just don't know what is. The breach of the 200 month SPX MA in the early 1930's was certainly, like the Japanese experience of the present, foretelling of a generational bear in equities accompanied by the economic reality of a depression environment. And much like the Nikkei of the last two decades, there was indeed a brief period of equity index price recovery above the 200 month MA between mid-1935 and mid-1937 before yet another extended down side relapse for another four plus years. And during those subsequent years, much like the Nikkei of the present, the 200 month MA acted as important upside resistance.

In summation, a very meaningful technical demarcation line for equities in important bear episodes is the 200 month moving average. And it takes one mean bear market environment to get there. But as you can see in these examples we've shown, history tells us an actual encounter with the 200 month MA is rare. History also suggests to us that if indeed a 200 month moving average is broken sustainably to the downside in the midst of a bear market in equities, then the bear market itself and the economic outcomes surrounding this type of event are apt to be of generational down side importance. This is exactly what transpired in the US in both the 1930's and 1970's, and in Japan over the last two decades. We view these as very meaningful lessons of literally secular importance. Of generational importance. So although it's pretty darn easy to get caught up in the day to day of financial market and economic news events, we believe stepping way back and viewing the true long term provides us lessons that are quite simply invaluable.

The Runway?

Personally, we're believers in the almost monumental importance of the 200 month moving average. How wonderful to have such meaningful historical context from which to learn and help to interpret forward movement, right? But, of course, by the time an equity index arrives at its own 200 month MA, it has left a trail of incredible price destruction in its path, and it's a darn good bet that the tone of the real economy in such an environment where an encounter with the 200 month MA has already occurred would be very somber at best. In other words, by that time, an incredible amount of damage has already been done. Damage we'd rather avoid, thank you. You already know this brings up the most important issue of the moment - how can we perhaps anticipate an event such as this? How can we protect ourselves against the potential for a generational event, despite the fact that it's statistically a relatively low probability occurrence? When do we play perhaps the ultimate risk management card? We have a few thoughts.
In terms of trying to anticipate the character of the "runway" (the environment) toward the type of generational event we have been describing, we believe it's helpful to look at life in terms of percentage degrees of movement. Quite simply, how far above or below is the S&P at any point in time from its 200 month MA on a percentage basis? The answer to that question looking back over four decades lies below.

Before taking even one step further, we'll be the first to admit that this type of analysis is art, not science. That being said, as per the chart above, it has been very rare to see the S&P within roughly 20% of its 200 month MA. Very rare. As you can see, it happened for literally three months in 1970, but then not again until it was ready to plunge below the 200 month MA in 1974. Was the 1970 three month breach of the 20% line a warning? After the period of financial market and real world economic turmoil we shaded in from November of 1973 through June of 1980, the S&P breached the 20% barrier one last time in 1982 as if to bookend the period of financial market and economic pain, likewise the reversal back up heralding the major equity bull and prosperous economic period to come. Since 1982 right up until the present, the S&P 500 has never again been even 20% away from its 200 month MA. So can we suggest that when/if the S&P is 20% or less from its 200 month MA, we need to prepare and perhaps anticipate a less than pleasant forward outcome? As we look back across historical experience, we believe that 20% line is a warning bell to be heard. As you can see, not even at the equity market lows of 2002/2003 did the S&P breach the 20% line to the down side. Remember, we're looking for generational warning bells here. As the chart shows us, at what were the major lows of the S&P in late 2002/early 2003, the S&P remained 23.8% above its 200 month MA. Today that number is just shy of 29%, with the S&P having lost nowhere near the nominal top to bottom experience of 2000 through 2002. Point blank and germane to the current market environment, IF the S&P were to come 20% or less away from it's 200 month MA (which currently stands at 982, but is moving higher every month) anywhere ahead in the current cycle, we'd have to think long and hard about a potential full court press in terms of risk management.

Let's step back again one more time for some long dated perspective. One more time, from 1920 to present here's a look at the same data from the chart above spread over close to nine decades. We've circled in red the occurrences of a breach of the 20% line we discussed directly above. Outside of the periods we described in the chart above, the only other extended occurrence of a down side breach of the 20% line came during a six month period in 1949. Conceptually as was the case in 1982, was this also a bookend to the entire depression period? Heralding the big equity bull and real US economic expansion to come in the 1950's, as was the minor breach in 1982? The final retest? It sure looks that way to us. As always, historical precedent has an uncanny way of rhyming.

One last what we hope is a corroborative view of life before ending this discussion. Again, thinking in terms of truly long cycle or generational experience, the chart below shows us close to one century of the 10 year moving average of S&P 500 price only returns. Generational enough for you in rhythm? And this is exactly the importance we attach to a view of life such as this. You've probably heard the old adage far too many times that "over the long term, stock prices always rise." Of course, this depends what your definition of long term is, now doesn't it?

Okay, here's the deal as we view the historical context below. The only times the 10 year moving average of S&P 500 prices went into negative territory over the last 100 years were during periods of meaningful real world economic (and of course accompanied by financial market) upheaval. The fact is that over the 1913 through 1924 period you see, the US experienced four official recessions, two lasting almost two full years each (1913-1914 and 1920-21). The next breach of the zero line was the depression era. And then we had to wait a generation until the mid-1970's (the oil crisis and stagflation) for this breach to occur again.

Of course the very important issue of the moment is our present circumstance. NEVER since the early 1980's have we even been near the zero line for this indicator. Even at the equity market lows of 2002/2003, this 10 year moving average rested near 100%. But as of right now, the number is approximately 14%. Without reaching for melodrama, it will not take much nominal dollar downside from here to push this into negative territory. If that indeed comes to pass, it would be yet another indicator of important historical magnitude suggesting we batten down the hatches in generational fashion. It will be strongly suggesting meaningful economic upheaval has arrived, if indeed equities have retained their character as being a meaningful leading indicator for the real economy. You can see that in the aftermath of the historical peaks in this indicator (1920's and 1950's), it ultimately fell below zero in rhythmic fashion before the long cycle bottomed. We'd have a very hard time saying we're not in the process of tracing out the same behavior ahead in the current cycle, given that the prior peak in the late 1990's/early this decade was a record number of price extension to the upside.

So as we move ahead in our present circumstance, we suggest using the 10 year moving average of S&P price in conjunction with the relationship between the S&P and its 200 month moving average to perhaps signal us as to levels of true generational risk in both the financial markets and real economy. Remember, what we have presented in this discussion is interpretive art. We're simply trying to identify the appropriate rhythm of historical experience against which to view the current cycle. We know US credit cycle issues of the moment are incredibly important. We have called them generational in character in our discussions for literally years now. The advent of economic and financial market globalization is incredibly meaningful change. From a demographic standpoint, we have the baby boomers on the cusp of theoretical retirement at the exact time the ten year moving average of equity price only returns is as low as anything we have experienced in close to a generation. And we know the boomers are going to need to at least partially liquidate the financial assets they have accumulated along the way (inclusive of pension assets) to fund retirement lifestyles they believe they deserve. From our standpoint, we believe the multiplicity of issues converging at the moment are far from routine. They are far from cyclical. This is secular in terms of convergence. Again, we warned you this perhaps venture into the dark side would not be fun at all. We simply believe that in cycles such as we now find ourselves, having a sense of the very big picture is quite important. We have no way of truly knowing what lies ahead. Plenty of guesses? You bet. No matter what the probability, we just want to make sure we've at least thought through and are prepared to act relative to any potential outcome. After all, the last time we checked, luck favors the prepared.

Commodities broad consolidation underway

KEY POINTS:

• Short-term weakness in August for CRB; upward pressure back by September; 400 to 420 main support zone in consolidation
• Broad, flat trading pattern potentially building; increased caution needed over the next two to three months
• Range-bound trading continues for oil above $120 support level this month; peak price remains at $141 to $147 for 2008
• Natural gas finds support at $9.00; target back to $14 by 4th quarter
• Slow growth in global economy gives slow growth to copper; $5.00 target holds
• Gold season starts by late September; second half of the month offers good pricing opportunities on precious-metal securities

Of the four main markets – currencies, commodities, bonds and stocks – natural resources are the clear winner in this game. Much to the likely dismay of big-cap, blue-chip equity investors, tangibles are providing portfolios with welcomed profits in a bear market. And this pattern is not expected to change in the near future. With the mighty greenback steadily drifting lower (the U.S. is $9 trillion in debt, and counting) and China’s and India’s economies expanding at more than 8% gross domestic product (GDP), this secular combination of events remains very bullish for commodity-based investors over the long term.

Potential blowoff by September?

In last month’s issue, I commented about a potential blowoff by September. As we all know, nothing advances forever, and corrections are part and parcel of bull markets.

Chart 1 illustrates the dynamic advance of the Consumer Research Bureau (CRB) Index in 2008. The target zone for the rise was 480 to 485, and it nearly reached that, with 473.97, in early July. Summer is historically a weaker time for the CRB Index. For the last five years, June through to August has been marked with flat-to-down numbers, only to recover and advance once again in the fall. This is the normal seasonally pattern.

Your comments are always welcomed.

Last warning ?

SO ALAN GREENSPAN - former chairman of the Federal Reserve - thinks this equals the Great Crash, if not out-bads it.

"It's getting increasingly evident that this is a once-in-a-century type of phenomenon," he told the ever-fragrant Maria Bartiromo in an interview with CNBC this week, "not the standard type of liquidity crisis that we have seen in the past."

"It's verging on the issue of solvency."

To gauge the true scale of this crisis, Greenspan went on, just consider the fact that it took sovereign credit to stabilize first the UK and then US financial systems. When Northern Rock went belly-up last Sept. and then Bear Stearns blew up this spring, Treasury bonds had to be lent out like adjustable-rate home loans circa 2006, covering short-term black holes with government debt.

Without these loans of government bonds, the banks simply wouldn't lend to each other. They needed securitized tax payments to gain the credibility needed for raising new funds in the market. Short of offering government debt to put up as collateral, they found the cost of borrowing money - when they found any money to borrow - simply too high to bear.

"It's still very evident from [inter-bank lending] spreads that we have not gotten closure yet," Dr.Greenspan continued, pointing to the ongoing premium charged for loans backed by anything other than sovereign credit. So to fix the problem - or at least tease it out for months if not years - clearly the world needs more government bonds for the big banks to borrow and put up against cash loans in the market.

"It's essentially, fundamentally the price of homes in the United States which are determining...the ultimate collateral of mortgage-backed bonds, pretty much around the world."

Looking ahead, he concluded that "we're still nowhere near the bottom of the home-price thing" - the word "thing" standing in for "crash...collapse...crisis...deflation" and all the other phenomena Greenspan must still believe can never apply to real-estate prices.

As key contractor, if not the architect, of today's pan-global banking crisis, he chose to keep US interest rates way below the rate of inflation - making debt pay and savings a suck of real value - for three years straight starting in August 2002.

That period marked the first run of sub-zero returns paid-to-cash since the inflationary '70s, back when loose money worldwide led to a bubble in prices that needed 20% interest rates to revive the world's faith in the Dollar.

The start of this decade also saw the Gold Price - dormant-to-dead ever since the US took that strong medicine at the start of the '80s - double inside five years.

"First warning," as Marc Faber wrote in his Gloom, Boom & Doom Report of Sept. '07, of trouble ahead.

"Ultra-expansionary US monetary policies with artificially low interest rates led to bubbles all over the world and in every imaginable asset class. The price of Gold more than doubled in nominal terms and against the Dow Jones Industrial Average."

So why didn't gold take a dive when Greenspan's successor - Ben Bernanke - tip-toed his way back to 4% real rates of interest in late 2006...? Because early gold buyers never believed the Fed would succeed in keeping rates there. With housing now a political issue - and home ownership a god-given right for even the flakiest debtors - the first sign of trouble would cause a collapse in real rates, destroying the value of money in the hope of achieving "Reflation Part II".

Hey, it worked after the Tech Stock bubble blew up. Why not again? And faced with a much greater crisis, or so Ben Bernanke believes, he's managed to out-Greenspan the Maestro...pushing real US interest rates way down to minus 3% and worse.

Take Gold as a marker of stress, and the true extent of today's crisis becomes clearer still. Bear Stearns' fire-sale to J.P.Morgan in mid-March - which required an open-ended loan of $29 billion from the Federal Reserve - saw Gold jump to $1,032 per ounce. We think it's signal that Alan Greenspan ignores it.

"Central banks, of necessity, determine what the money supply is," as he told Congress in a 1999 hearing. "If you are on a gold standard or other mechanism in which the central banks do not have discretion, then the system works automatically.

"The reason there is [now] very little support for the gold standard is the consequences of those types of market adju`stments are not considered to be appropriate in the 20th and 21st century. I am one of the rare people who have still some nostalgic view about the old gold standard, as you know, but I must tell you, I am in a very small minority among my colleagues on that issue."

Today, almost a decade later, the Federal Reserve and its peers across the world are trying to prevent the money supply from shrinking again. That was the fear amid the "Deflation Scare" of 2002, which caused the Fed to ordain sub-zero rates, creating not only the bubble in housing but also the collapse of true money values against oil, food and pretty much all raw materials.

The world's nostalgia for gold, in response, has seen it treble in price vs. the Dollar and more than double against the Euro, Yen and British Pound. But the cheerleader for cheap money when running the Fed, Alan Greenspan points instead to government bonds when gauging the size of today's crisis. A true policy wonk, Greenspan thinks only of political bail-outs to protect the system, rather than considering how private investors might choose to protect themselves and their wealth.

Heaven knows they won't get any help from Bernanke's repeat of the Maestro's "reflationary" error.

Why invest in a Royalty company ?

Why invest in a Royalty Company? Here are some good reasons:

"Still looking for a good way to strike gold while investing in it? As gold moves solidly above $700 an ounce amid turbulence in the credit markets and on the back of a weak dollar, you don’t have to be a dyed-in-the-wool goldbug to see some merit in investing in the precious metal.
ADVERTISEMENT


An efficient way to do so would be with shares of Royal Gold Inc. (Nasdaq: RGLD), which bills itself as the world’s leading publicly traded precious metals royalty company. It’s an unusual company with an unusual business strategy. How many companies can you name that have a market cap of $875 million with only $48 million in annual revenue and 14 employees?

Royal Gold’s revenue consists of royalty payments based on its interests in mines operated by the world’s leading gold mining companies, making it a relatively pure play on gold. As the company puts it, its sliding-scale royalties provide investors with upside leverage when gold prices rise, as they are now, while providing a floor when gold prices fall.

Currently, the company—which traditionally has been based on a single mining complex in Nevada—faces the happy prospect of gold reaching a new 26-year high just as the company’s recent diversification in other mining projects is beginning to pay off with these mines coming on stream.

Denver-based Royal Gold more or less stumbled into the royalty business after the company, founded in 1981 as Royal Resources, abandoned oil and gas early on to become a gold mining company. The stock market crash of 1987, though, put a stop to that idea and the company realized it could invest in projects operated by others with much less risk. If a site doesn’t pan out, so to speak, Royal Gold still loses, but doesn’t have to worry about permit delays, rising operating costs or the myriad other factors that cut into an operating company’s margins when it does strike paydirt. Instead, it can sit back and wait until the mine starts pouring gold and then collect its royalty on the sale of it.

As a result, Royal Gold’s operating cash flow margin is 50%, compared with 19% for North American majors like Barrick Gold Corp. (NYSE: ABX), Newmont Mining Corp. (NYSE: NEM) and Goldcorp Inc. (NYSE: GG). Royal Gold’s net profit margin is 41%, compared with 11% for the majors.

Moreover, as the operating company seeks to maximize its return on a site, Royal Gold benefits from the additional reserves found through further exploration without having to contribute more capital. For instance, the Cortez mine in the Pipeline mining complex in Nevada began with reserves of 300,000 ounces in 1995, but had 2.3 million ounces of reserves at the end of 2006, even after production of 8.2 million ounces, because of new discoveries totaling 10.2 million ounces.

Royal Gold still derives 80% of its revenue from mines in Nevada, but that is due to change after its diversification into development sites in Mexico, Argentina, Chile and Burkina Faso in West Africa. The Taparko mine in Burkina Faso began pouring gold in July; Royal Gold hopes to begin seeing revenue from the project in the coming quarters. The Penasquito project in Mexico, which Royal Gold believes will be a major producer for two decades, is due to come on stream in the second half of calendar 2008.

In addition, Royal Gold is in the process of acquiring Battle Mountain, a smaller royalty company, which has four producing royalties and one development property, including the promising Dolores mine in Mexico, which is due to commence production early in calendar 2008."

Peter Brimelow on the recent Gold moves

Interesting article from Marketwatch's Brimelow.
It deals with one of my favorite themes, that is the relationship between the Oil price and the Gold Price.
Actually, here's a graph of the Gold/Oil ratio above

And here's a quote :

Similarly, FreeMarket Gold & Money Report's James Turk noted: "Crude oil closed Friday at 4.429 [grams of gold] per barrel. Since the end of the second world war, crude oil has only been this expensive on 33 days, or about 0.002% of the time. So clearly, we are in the extreme tail-end of the bell-shaped curve, meaning that gold is extraordinarily cheap compared to crude.

"But here's the interesting point. All of these 33 previous days when crude oil cost more than 4.429 grams per barrel occurred in 2005. What's more, they occurred in a short period from the end of July to mid-September, which was another period of extreme price manipulation by the gold cartel ..."

Turk is emphatically in the camp of those who feel that the present credit crisis has brought on more official attempts to manipulate gold. See Website

Oil was 4.37 grams of gold per barrel on Friday. Quite possibly this extreme has caught the eye of important trading pools.

Euro Ressources SA Analysis

One way to profit from the rise in the Gold price is to invest in quality Gold Stocks

I forward you on my french blog "Alex Kerala" that contains many analysis and news about this small company called "Euro Ressources SA".

Since a restructuring in late 2004, it has transformed itself from a gold exploration company to a royalties company.

Its main asset, the Rosebel royalty, a is a world class quality asset, based on a producing mine located in Suriname, with over 7 million ounces of reserves.

I will write more about it on this present blog in english later.

Inflation, inflation, inflation !

It has taken some time, but now talks of inflation are all the rage.
A few days ago, it was about it was about food prices in developing countries, but now it's in the statistics of developed countries.

And most of all it has found its way in many mainstream publications.

I even read an article in Le Monde that explained how it was not so bad, because it encourages spending.

There are also new plans to encourage people to borrow and buy houses.

It looks a little bit like desperation.

The greatest fear is the economic slowdown and a recession.

Do they feel that a recession now would be particularly disastrous ?

But postponing it is not going to change anything.
It only makes the whole affair more unfair : bailing out Wall Street and irresponsible consumers and borrowers. That's not a very moral proposition.

Transition Period

This is difficult to predict anything these days.

Gold has corrected heavily but has since rebounded a bit.
The general stock market has rebounded and a lot of people are clamoring that the worst is behind us.

So the Dow/Gold ratio has significantly rebounded, but it is still in a very steep downward spiral since July 2007, and still just below 14 as of today.
The low point was on 14th March at 12, when Gold was just over 1000$ and the Dow was just below 12000

Since the Summer 2007, the inverse correlation has between these two assets has finally caught up after deceiving so many people in May 2006 and March 2007.

The World of finance has been in panic mode since last summer.

On the Gold Stocks front the situation is extremely frustrating;
the bonanza that the hardcore enthusiasts expect is still nowhere to be found; but I think this is the exact moment when the opportunity is the best.

The Rally in the general stock market and a stability in Gold might produce a super rally for Gold Stocks, finally.

This is one of the possible scenario.

The other possible scenario is a new low for the Dow/Gold ratio in the short term, which might postpone the rally of Gold stocks, but produce even better performance in the medium term.

Or we might see a bit of both, which would mean a rally for the Dow, Gold and Gold stocks.
In that case it would be reminiscent of May 2006, except that in this period the stock market was near its highest.

Any prediction ?

I have been anticipating a Rally in the general stockmarket for some time now (and this is why I was not willing to bet on a Bear market in stocks) but it hasn't happened.

Maybe it is also because I lost some money in the summer of 2006 betting on a Bear market.

I am much more comfortable betting on gold stocks, even though they are quite anemic right now.

Ultimately I am confident that they will profit from the high gold price. It is just a question of time and shifting sentiment.

I have read somewhere that they will catch up only when both stocks and bonds fall, but it hasn't happened yet.

It is clear that market manipulation by the FED and the Plunge Protection Team is affecting sentiment. It is scary for stock bears.

So people become bullish almost reluctantly I should say.

But let's not forget that the trend is now clearly bearish

So I will consider this bearish position as a test : it is a small position for now, and I already exited half of it with a small loss.

I might reposition it a little higher. I know I should have this position as a complement to my gold stocks position. But let's be cautious. because it might be too late in the short term.


In other words, I am not ready to make any precise predictions for now.

Even the magnitude of Gold rise has surprised me.

I did not think it would reach 1000$ so soon and without a significant correction.

But now it might go farther before it falls: 1100-1150 ?

Good Bye Bear Stearns !

What happened ?
Bear Stearns probably lost A LOT of money in derivatives, probably Credit Default Swaps especially (but we won't know how much) and was on its way to bankrupcy.Then it was purchased by JP Morgan last Sunday for 2$ a share while it quoted 30$ on friday's close.The whole deal was encouraged and financed by the FED.At the same time it annouced a 25bps cut in the discount rate.
This is getting weirder and weirder.
It's becoming obvious that the public is not told the whole story about this Wall Street mess.
But Gold broke the 1000$ level on Friday even before this announcement.
Gold is definitely telling its own story.
on Sunday night (european time), when the deal was announced and Asia opened, Gold even 1025$, but then there was strong selling.Today it's at 1005$
But something definitely happened this week, and it has even reached the headlines of mainstream newspaper, and television broadcast.
They have noticed, but from what I see they have not really understood what is going on.
Now we're waiting for the FED decision concerning rates, in 1 hour.

Stocks in Asia and Europe took a pounding on Monday, but recovered on Tuesday.

I took a small bearish position and apart from that, I stick with the gold stocks

New records are getting broken

Gold is currently at 958$ an ounce.

EUR/USD is now above 1.50, at 1.5124 at the close of Europe's stockmarkets.

After I wrote my last predictions about Gold last months, I looked again at the seasonality data and I realized that I had made a mistake. The seasonality peak was actually earlier than I thought.

But Gold is actually going higher even in the face of a weak season.

An excellent commentary about Gold

I took it from a commentary to a marketwatch article concerning IMF Gold Sale.

We will have to check later if it is correct: 1250$ target on this run then a correction to about 700$.

Long Term Target about 5000$

Here is the link http://www.marketwatch.com/news/story/gold-drops-report-us-backs/story.aspx?guid=%7BEF0E8443%2DA6E1%2D4B89%2DB7A4%2DE7874836DC2C%7D&dist=TNMostRead#comments

by RowWhack 8 hours ago
DEFICITHAWK - even f* nuts can be right sometimes (for wrong reasons even, but right nonetheless)..it seems you will buy gold when everyone is bullish at the peak. I don't agree with the conspiracy theories necessarily, but there does seem to be enough smoke to consider there may be a fire. A wise man will always consider all ideas without necessarily subscribing to them.
I was a stock bug and now am a gold bug (until stocks or real estate becomes cheap) and here are some points to consider:
1. Gold is going to $1250 and no more on this run..then it will be $780 (maybe even $680) before it is $1650 (no matter what Sinclair says). Eventually $1650 is too low..think $5K plus (by 2011-12). $1650 is probably the fair value of gold per Sinclair's formula, but fair value is irrelevant to market perception.
2. You buy paper gold to trade..you buy physical gold to protect yourself and keep it off paper..Most governments would not buy gold in the modern age (not as a reserve anyway)..they will confiscate it if they need it. In countries like China and India, most people save in gold, not just because of hedging against inflation, but also because they can hide it from the government. It cannot be confiscated because it is buried somewhere, so China/India CBs may buy eventually. That is when you should be selling..there is not enough gold in the world (nor is it costly enough yet) for the CBs to hold a reasonably large reserve ratio in gold, so by the time they get to it, the reserve status for gold is already priced in by the free-market system. Yes, governments manipulate and all that, but they eventually are just a player in the markets and markets discount them. Look at interest rates, Fed is lowering but long yields are rising, so instead of the Fed helping homeowners, it is screwing them over more. Markets may not be efficient as prescribed by the Efficient Market Hypothesis, but they are also not something anyone can control/manipulate.
3. Other commodities can only be traded or held as paper assets..I don't think you want to store a few tons of wheat or sugar (maybe if you are a heavy drinker and like to make your own potions). That is where gold comes in..it is the ultimate anti-establishment asset. If you think your government is screwing you, you buy gold and physical gold. There is a huge difference between precious metals and other commodities including base metals. All other commodities are derived from supply and demand over long-ish periods of time, if the price is too high the usage is reduced or production increased (if possible). Over short periods, there is hoarding etc. by speculators but in the long term commodity prices moderate. When it comes to precious metals, no price is too high because the price is not determined by utility. The concept of diminishing marginal utility does not apply to precious metals because they are pretty much useless metals. If they were useful, their value would be tied to their use and hence they would never be able to serve as money. Money has to be useless (non-utilitarian). As a result, in the right circumstances, when precious metals need to be perceived as "monetary assets" rather than "financial assets" one could theoretically perceive infinite demand (everyone wants more money, right?) and limited supply. That is why IMF sales do not matter - the demand side of the equation will overwhelm anything from supply side. There is 150,000 tons of gold out there, not being used for anything and that is all part of the supply equation (overhang). With precious metals, demand is the only variable of significance since supply is 1% or so every year. Precious metals proceed from a "commodity" phase to "financial asset" and final "monetary asset" phase. Monetary asset phase is where, precious metals are treated as proxy money but not real money. We are still in the financial asset phase..the monetary phase will be parabolic and will be good for owners of gold only if the fiat system does NOT collapse. If it does collapse and precious metals are again used as money, then all that a gold bug has been able to do is preserve his/her wealth, not increase it. A true gold bug should not want the fiat system to collapse, only come very close to it.
Sorry about the long thesis..but I hope everyone got something out of it (just to consider..thou shalt not judge)

Is this the end of the Party ?

Yesterday, Gold corrected by 2%.
The most recent participants in the rally were really scared.

Do I think this is a major market top ?
-Not Yet

I think we still have about 1 month to go, and this last leg might take us to about 970

And the rally in the junior gold stocks might happen during this last period.


Then there might be a significant correction towards 700 $

That's my humble opinion anyway...

Article of the day

THE DOUBLE WHAMMY OF GEOPOLITICAL GLOBAL GOLD GAMES
by Antal E. Fekete

Even the most rabid silver bugs admit the possibility that the Chinese are the Big Silver Shorts. This suggests that the Big Gold Shorts are also governments. Neither are naked by any stretch of the imagination. The double whammy of gold and silver accumulation by unnamed governments is the big puzzle of the present financial crisis in the world as it holds the key to the resolution.

For a better understanding of the Chinese silver picture you have to know a little background of the role of silver in China. The facts are as follows.

China has been on a silver standard since time immemorial. China stayed on the silver standard after other trading nations of the world demonetized silver and embraced the gold standard at the end of the 19th century. China's external trade was insignificant, but the volume of silver currency for domestic use must have been enormous. In addition, there was an avalanche of silver from abroad raining on China. As the silver price fell over 75 percent from $1.29 in 1873 to $0.25 by 1932 (with a brief spike back to $1.29 at the end of World War I), other governments were dumping silver on China mercilessly. China was the only country on the silver standard and the Chinese central bank had to take all the silver offered to it at a fixed price. This situation lasted right up to 1949 when the Communists took over the government. In fact, several Western historians blame the Communist victory on the unprecedented silver inflation that Western governments inflicted on the Chinese economy by their insane silver dumping policy before World War II.

Nobody knows how much silver the Chinese Communists found in bank vaults and in the safe deposit boxes of Chinese merchants who fled the country, when they took over the mainland. Nobody knows how much silver is still hidden in the mattresses of Chinese peasants. The amounts must be enormous. The best estimate is that most of that silver has never been consumed and still exists in monetary form. China's primitive economy under Mao was in no position to put that silver to industrial use. All that silver is now at the disposal of the Chinese government that could easily buy up silver coins scattered around the cities and in the countryside, at the present rising price of silver.

China is the only country in the world that has consistently run trade surpluses since 1950. As far as it is known, silver never figured in China's exports (except re-exporting foreign-owned refined silver.) Why should the Chinese export silver, when they could export almost anything else? Silver to the Chinese mind is money. You don't export money unless you are forced to cover your trade deficit, of which China has none. China has always paid for its imports with exports, a smart thing to do, too.

The Chinese are alive to the fact that escaped the silver bugs in the West, that you can derive a silver income from your pile of silver by covered short selling, even while retaining physical control of your silver hoard. THIS IS AN UNPRECEDENTED BONANZA IN THE HISTORY OF MONEY. It has never before happened that you earn interest while retaining physical control of your money. Typically you have to release control of money in order to earn interest income, that is, you have to assume risk. Lending money necessarily involves risks: the borrower may default. But if you don't give up physical control, then you will escape the monetary debacle unscathed. Because of the imbecility of the managers of the paper dollar standard there exist durable risk-free profit opportunities in holding monetary metals in the balance sheet. The trick is: covered selling. That's possible because the price of monetary metals has been allowed to fluctuate. The price fluctuation of a monetary metal, like the flow-and-ebb of the oceans, represents energy. Energy that can be harnessed. Energy that can be harnessed only by those who understand monetary economics.

The Chinese are not stupid. They looked askance at the silver and gold demonetization farce perpetrated on a gullible world by Western governments. (Gold was demonetized 100 years after silver had been, in 1973.) They are not falling for the cheap trick. They hang on to their silver. They make most of the stupidity of their adversaries. Nor are they in a hurry to push the silver price to three or four digits in order to sell their silver for a quick profit in irredeemable dollars (which is what the get-rich-quick crowd plans to do). Rather, it is in their interest to derive constant and consistent income in silver from covered writing, or using other dynamic hedging strategies. Why should they trade their silver for dollars, when they have far more dollars already than they want?

From the point of view of the Chinese, a slow rise in the silver price (and a gradual rather than an abrupt depreciation of the irredeemable paper dollar) appears more desirable than an overnight jump in the silver price to three digits that would put an end to their lucrative silver income from covered writing. They certainly have the clout to dictate the pace of silver price appreciation, and probably also of paper dollar depreciation.

The Chinese are inscrutable. They don't show you their blueprint for the new international monetary system which they plan to impose on the world after the inglorious end of the paper dollar era. It may be a born-again silver standard. The Chinese are using their cash silver and the silver income derived from covered writing as a hedge for their exposure to irredeemable paper dollars to the tune of $1.3 trillion, by far the largest accumulation of dollars the world has ever seen. What they will lose on their paper portfolio they will gain on their cash silver position. They will probably gain much more. While the finance-capital of the world denominated as it is in paper dollars is programmed to self-destruct, the Chinese will control much of the liquid capital in the world after the dollar-debacle. They will be a great source of capital exports, if you can pay their price, that is.

The Chinese can earn their way in the world. They can work when work is necessary, and they can save when saving is called for. They are doing fine, thank you very much. You need not worry about the Chinese losing their kitty of $1.3 trillion invested in U.S. T-bills and T-bonds.
However, you had better start worrying about America which is no longer in control of its economic and financial destiny. It has let world monetary leadership slip out of its hands. America's industrial capital is in shambles. From the largest creditor it turned itself into the largest debtor. The light has gone out at the great American universities as far as monetary science is concerned. Through bribe, blackmail, and attrition all upright and serious monetary economists were bumped from their academic chairs. The Great Chinese Cultural Revolution was a picnic in comparison to the Great American Cultural Revolution eliminating monetary economics from the curriculum. Courses on money presently taught consist of pure Keynesian and Friedmanite bunk.

It is a farce to blame the present financial crisis on lax lending standards and rogue traders. What we see is the return of the chickens to roost. This crisis has been in the making for over a century, involving the so-called demonetization of both monetary metals. The move was inspired and led by the United States. In particular, the so-called demonetization of gold was designed to camouflage the default of the U.S. Treasury on its gold-obligations. The industrial nations of the West did not even say 'ouch' when America's default caused them losses measured in hundreds of billions on their holdings of dollars in 1971. They became accomplices eager to start milking their own savers and producers by joining the paper-money farce. The day of reckoning dawns.

America's plight is self-inflicted. Yet America could still turn the train of monetary events to its advantage, reclaiming monetary leadership, if it opened the U.S. Mint to gold and silver. It should do it before China or Russia opened theirs. Unfortunately, there does not seem to exist one grain of wisdom in Washington to see this, let alone to do this. It would take the election victory of the maverick candidate, Dr. Ron Paul, Minority of One in the House of Representatives, to pull it off. It is certainly a proof of the American genius that great crises produce great men who are capable of dealing with them. If the Chinese beat America to the finish line by opening their Mint to silver, then the silky metal would be the international currency of the future.

Next to the Chinese the Russians are the most inscrutable players, ganging up against America's monetary hegemony. Their turf is gold. Perhaps it will be the Russians who will beat America to the finish line by opening the Russian Mint to gold, even before the Chinese open theirs to silver. Either way, America would be left in the lurch, denuded of its industrial capital, its savings, but left with a pile of worthless paper, and paper-worshippers in charge of the Treasury, and in charge of teaching monetary economics at all levels.

America can then embark on the arduous path to accumulate capital from scratch, while Russian and Chinese capitalists will be producing goods in spanking new plants, aided by spanking new equipment, complemented by shiny gold and silver pieces to trade their products world wide.
It is past wake-up call. To save itself, America had better listen to the message of Ron Paul who, in a counter double whammy, would open the U.S. Mint to both gold and silver if elected President.

GOLD STANDARD UNIVERSITY LIVE

Article of the day

Gold Mining Stocks – What’s Wrong With The Juniors
By: Kenneth Gerbino

The reasons Junior mining stocks are underperforming are as follows:
1. The larger companies are getting all the action from newly converted gold enthusiasts and interested investors.
2. The junior market is still being weakened by insiders and promoters who are always sellers.
3. There are hundreds if not thousands of new promotional mining stocks being foisted on the readers of gold pages in the last three years and there is just so much money to invest in this sector. Therefore premium prices are diluted.
4. The invasion into the Hard Money camp by the Uranium companies. Every investor I know who owns gold and precious metal stocks but never owned a uranium stock now owns some. This diversion of capital to uranium diluted some funds that would have entered the Junior market.
5. Gold ETFs. Investor money can now go into an easy way to invest in bullion. This also could be argued that it helps the miners as it creates demand for gold.
6. Delays in drilling, engineering reports, permits.

A Big Rally Soon?

We are very near a major turning point in the mid tier and junior mining sector. The chart below shows the lowest junior mining valuation ratios in the last six years. We are using the TSX S&P Venture Index which is mostly mining stocks. The current ratios are at levels that in the past have signaled a major and substantial rise in the smaller gold and silver mining stocks.


As a reality check we can look at the ratio of the XAU to the Gold Price to see if this ratio is at a speculative level that may be signaling a major top in the making for all the gold stocks, which would of course include the juniors. During the above mentioned time period (September-November 2002) the Gold/XAU ratio was 4.8 (not shown). Today it is 4.8. This means the XAU gold stocks are tracking the gold rise at the same ratio when gold was $320, signifying a stable relationship. It confirms that the juniors on a relative basis are extremely undervalued and that a substantial rally should be starting soon.

New money into the gold arena is going into the big names. These managers and investors have not started to look at Canada and the junior sector yet. But as they eventually get more familiar and comfortable with the industry they start looking for smaller growth and value situations and that leads them into the junior sector. Quality juniors will eventually have a substantial move up from these levels but most others with speculative exploration programs will be left behind because of the stark reality that only one exploration stock out of a few thousand ever produces an ounce of minerals. This old ratio should change for the better as high metal prices, technology, more sophisticated exploration groups and increasing demand for resources increase their chances but it is still long shot investing.

The Three Amigos

Gold has many developments impacting it’s price and we have mentioned them many times. But currently we see three drivers at work that spell out a higher gold price: 1) The dollar has no where to go but down since interest rates are being sent lower and lower by the Fed to bail out the banks and our friends on Wall Street. 2) The credit/mortgage/real estate bubble dictates inflating the money supply or face possible immense institutional disasters. 3) Global money supply increases are continuing at a torrid rate especially in India and China.

Mining Analysis

The mining sector despite the volatility allows one to have a very clear idea of value. This intrinsic value is an inventory of basically rocks. These rocks contain a certain known percent of minerals. When companies spend $20-50 million with hundreds of drill holes and thousands of man hours on an area the size of 3-4 city blocks (maybe 400 feet thick, and underground) you have a pretty good idea what is in that mass of rock and what it is worth at various metal prices. When they do sophisticated testing on sometimes 5-10 miles of drill core, one can evaluate how easy or hard and costly it might be to extract the minerals.

Basic mining costs are known from hundreds of other mining projects: the cost to build the roads, buy crushers, build small towns for the workers, power and food costs etc. These are known factors and estimates can be made. Then it’s a matter of math and know how. That’s how you find winners. That is how you know if you have a good project. That is all we care about at my company on hundreds of projects and mining companies. You should try and do the same if you want to get serious about investing in this sector.

The key to making an above average return is competent evaluations and patience. This sometimes takes many years. Patience will outweigh the volatility of the gold and silver mining sector as intrinsic value eventually gets recognized. The laws of supply and demand let you sleep comfortably.

Inflationary Future

With all the money, people, and industrial progress globally we are confident that minerals (especially the precious ones) will be well above average investments for the next decade.

We are at a time when the central banks should be at least attempting to control inflation but instead most are printing more money. As the future unfolds and inflation accelerates, tangible assets especially mining companies with known resources of valuable minerals should be a top priority for investors.

What a week !

This is the week that saw a real Market Crash
Let's call it the January Black Monday, 2008 edition.

It was probably caused by the unwinding of Société Générale's outsized fraudulent positions of a certain Jérome Kerviel.

It's ironic because I used to work for them as a consultant.

They were always very proud of their sophisticated models, their sophisticated traders, and, more generally, their own culture.

This is a perfect example of arrogance being punished.

Interesting Map

Let's look at the Long Term

In this time of uncertainties, including for Gold, I went back to a graph of the Dow/Gold that I had found a year ago. At the time the ratio was at about 20 and it is now 16.

We can notice two things : one, we are still in this trend which has been validated several times; two, the ratio could very well break its support at any time, given the bell curve shape of this graph.

Or it could go back to 18.

I would opt for the former, for two reasons : the Dow is going nowhere even if it might rally in the short term and Gold still possess huge momentum.

It is especially striking when we look at the monthly chart below considering the fact that the month of December is not even finished.

I think it is possible that we might end the year on a new high for Gold, even if it's getting late and that no bad news seem on the horizon

Stagflation is it ?

Today, the term "Stagflation" is finally in the news after being discussed so many times in Gold Bugs' circles. Just because Greenspan has decided to use it yesterday in one of his speeches (one more... this is getting annoying).
I am really surprised that he is still receiving so much attention.

Apparently he hasn't been totally discredited yet.
But this guy might well be a contrarian indicator that might be worth considering. But what would it mean ?

In any case, this is not news, as I said. We have been discussing this for a long time.
Now we have to look forward and try to prepare for what's next.

One of my best sources

Zeall is becoming one of my best sources of analysis.
When I look back to last August, I observe that their timing of the gold market has been very good.

And I also like the way they use correlations to justify their investments.
In particular their observation of the correlation between Gold and Oil has been very influential for me.

And they have a large amount of archive that we can use, and they go back to 2000

Correlation seems the most scientific method and the most successful over the long run.
I still believe in Technical analysis but this is proving ever more difficult to get it right, especially for the short term.
Probably because Psychology gets in the way.

December update

This blog is turning into a monthly publication.
It was not my intent and I am going to try at least to make it a weekly event.

At the same time it is a way to reflect on a longer period and to avoid being caught up in the daily action that tends to confuse us.

So what's going on ?

Fed cut 25 bps on both fed rates and the discount window on dec 11th.
But Market was disappointed and plunged on that same day
Let's assume that it is because some hoped for 50 at least for the discount window (but you never know the exact cause. 2 weeks before 25bps was supposed to be a good news, but it was co anticipated, and a "surprise" 50 bps was so hoped for that here's a correction.

But next day, Fed announces new injection of liquidity along with the ECB and other Central Banks, to help avoid a Credit Crunch that tends to become a recurrent news, and the market "kind of" rallies.

Of course the Fed says his action had nothing to do with the market's reaction of the day before. Right ?

Gold followed the stock market during these two days. Fell on the 11th, rallied on the 12th.

But Gold is still a small footnote in all these events.

Sentiment in the stock market (and the economy at large) is all that counts in the US right now.
The establishment is doing all it can to avoid a panic that would have disastrous effects (think Wall Street 1929 or Japan 1988).

Of course inflation is much less severe in their mind, but they won't say so.
They continue to say that inflation is a continuing worry.

But you cannot fight both inflation and recession at the same time.
And when you choose not to choose you put the economy in an intractable situation.
It's called Stagflation. I remember that from my History classes.

For Gold it is going to be perfect until they decide to really raise interest rates in the face of a weak economy.

But we are very far from there now.

High Up there

Record highs are getting broken everyday with the Gold price.
Yesterday's high was 845. Today's latest price is 838.

Journalists and market participants are wondering : is it going to last ? or how far will it go ?

In the short term, I don't know : markets are so unpredictable.
I know that for sure. As I know now that it is not necessary to predict the future in order to make money.

In the longer term, I am pretty confident that Gold will go higher, just because of its correlation with Oil ,and its inverse correlation with the Dollar and the Stock market.

Two or three years from now, Gold will probably be higher, and that's all that count for my little investment, because this is when my Gold Royalties will probably reap the biggest reward.

I would prefer if it happened earlier because I need a validation of my strategy before the end of the year. But this is irrelevant to the bigger picture.

Right now, I am excited by the rise of the gold and frustrated at the same time because my investment has not followed as much.

A summary of the last 6 weeks

Yes, I haven't written in this blog for 6 weeks.
The paradox is that these have been pretty exciting weeks for Gold.
(maybe that's why I forgot to write)

Anyway I promise to write more regularly from now on.

And Today I will make a short summary of these last 6 weeks.

On the 11th of September, one ounce of gold was worth 713, and it is now 780.
What produced such a rise ?

Actually the current rise started in Mid August and accelerated starting on the 4th of september to break the previous high on the 6th september. But it's only after the 16th that it broke the May 2006 high.

In August the Subprime crisis started to unfold but it did not help the Gold price right away and it was initially very frustrating to watch as I wrote on the 29th of August

What really fuelled the Gold rally was the realization that the Federal Reserve was ready to use desperate measures to solve the crisis when it decided a 50 points rate cut on September 18th. The Stock Market soared after that day but it also showed that the Fed did not care about the weakness of the dollar and that capping the Gold price was the last thing on their mind. It showed the Gold market participant how serious the situation was, and it triggered an additional short squeeze which was already in the making.

In retrospect you would think that this strong move was obvious from the beginning, but it was not. All along this rally, I was skeptical because there had been too many disappointments before.

Even now I think most Gold Bugs are worried about an impending correction.
But this Bull market has proved its worth and all the analysis from the best gold bugs analysts that I read have been vindicated.

But my worries probably also stem from the fact that my gold stocks positions haven't been profitable yet.
Actually the Gold stocks in general still lag physical gold.

And the risk remains of a general asset price deflation that would take Gold with it, just like it did in May 2006.

But now we might consider that May 2006 as an historic anomaly.
It was a costly "anomaly" for me (and we should always prepare for this and be ready to cut our losses), but it maybe was just an anomaly.

Stocks and Gold are just not correlated historically and so we might be going back to normal now.

Which should help me solve one of the questions that still occupy my mind. Is the Stock Market going to soar from November to April , and should I take advantage of it ?
If Gold continues to rise, and the historical inverse correlation holds, then it is going to be ugly for stocks in spite of the favourable seasonality (Buy in November, Sell in May). The seasonality can be wrong sometimes. Last time it was
The Stocks Bears might be finally proven right, after being wrong so many times.

So I should probably not buy stocks (even Tech which is back in fashion), or only in a very limited way.
Beside, it is going to increase my risks unnecessarily.

If the stock market rises, along with Gold, I will profit from it though my gold stocks anyway, so I don't need to add other risks.

It is not going to diversify my portfolio but only increase my risks.
I know better now.

Gold and Terror

Today is the 6th anniversary of the 9/11 terrorist acts in 2001. So it might seem an appropriate date to discuss the relationship between the price of Gold and geopolitical risks.

In general I tend to favor the liquidity factor as an explanation for high gold prices, as well as the link with the oil price, but ironically last week took place the most spectacular rise in the price of gold that I have witnessed since 2006.
Was it related to the anniversary of 9/11.

My first instinct was to relate it to the weakness of stock markets (with some lag), the crisis of liquidity and the particularly weak jobs statistics in the US on Friday.
But many see a relationship with geopolitical risk, and from there you might even create whole conspiracy theories about the price of Gold and the manipulation of the market by the central banks.

I think it is fun, and partly true in the short run. But in the long run, the gold price is dependent on more fundamental factors.

When "Peak Gold" joins Peak Oil

A very interesting posting in today's "Seeking Alpha", here

It seems to me that it's a very valid argument in favor of Gold.

Tangible things (and Gold is the ultimate tangible asset ) get more and more difficult to find and extract, whereas intangibles (money, credit and even technology) are commoditized.

The miners, the farmers and maybe even the industrial workers of the world might get some advantages after all.

In the long run, technology is going to be redirected toward real and tangible things, that used to be all important before the dot com revolution.

I remember for example that when we studied Geography (along with History) in High School, we used to examine the natural ressources of a country, along with its climate and lanscapes.

And we could how greatly it determined its economy and even history.

Interesting...

"Those concerned about the worst-case scenario recalled that large put contracts were placed on airline stocks, notably American, a unit of AMR and United Airlines, in the weeks leading up to the Sept. 11, 2001 terror attacks. "
This is an extract of this article

Gold price over a 26 years period

This Summer of 2007

Today, I am writing in the train, going back to Paris, and I take the time to reflect on this summer.

At the beginning of July I expected and also hoped for a kind of crisis.
In a way, I was afraid that nothing would happen.
Well, I can say that I was not disappointed by the extent of the financial crisis that happened this summer, but the consequences for the Gold price have been disappointing so far.

In truth, I am not surprised anymore, by this kind of counter-intuitive moves, especially since May 2006 when I exited the stock market at the best moment, but reinvested everything in a Gold stock and erased more than half of my substantial gains of the first 4 months of 2006.
I exited this stock and avoided the worst,but subsequently, I erased all my gains by trying to exploit the sell off, and misinterpreting and failing to take advantage of the volatility of that Spring-Summer 2006.

This is when I started to read everything about Gold and got really interested.
Actually I had started to get interested in late 2005, early 2006, but was not so much comitted. I guess the lesson is still the same : read everything BEFORE investing.

Anyhow, I decided to invest again in this gold stock in september when I observed that it had found some support and might be recovering.
Two or three months later, it went up spectacularly, and I was vindicated.
I had recovered a big part of my maximum gains for 2006.
But I wanted more after everything that I had suffered, and the time I had spent on this case (another common mistake). So I did not materialize these gains and later the stock started to fall.

But I still believe in this stock and especially since its value depends on the Gold price.
My guts told me that all this suffering would pay in the end. And in the mean time, I could learn a lot about finance, history, politics and market psychology.
It is very similar to what I experienced with a Silicon wafer manufacturer whose stock I bought in April-May 2002. (this particular timing was because I thought that the worst of the dot com bubble popping was over). When the stock started to fall, I did not want to sell, and I started to read everything about the technology and its market. Two years and 8 months later it finally paid, but I did not really took advantage of the whole increase. In truth, I could have made a lot more money if I had stuck to this stock longer.
This is probably why I decided to stay longer with this gold stock this time, in spite of the risks.

Sometimes, I have doubts about this strategy because it is incredibly risky to invest so much of your own money in only one small company.
But now I know its business pretty well and I also know how it moves compared to the gold price. And I also have studied the evolution of the Gold price as well.

To summarize my analysis, I am quite confident in the potential of Gold in the long term, for several reasons that I will expose later, but I am even more confident that at some time in the medium term (say, less than six months) it is going to spike higher and I will use this opportunity to cash substantial gains. At least I will start selling and reducing my “Value at risk”, and start breathing more normally.
It might not make an enormous annual return (if I count 2 years of activity since the beginning of 2006) but it will be positive.

BNP Paribas comes in

Gold ended down 2% today. It fell along with the rest of the stock market. The Dow was especially hit, finishing at the lowest point of the day and continuing the trend seen in Europe earlier. BNP Paribas made the news by announcing that it would suspend two funds made up of obligations affected by the US subprime mortgage market.

This is funny for me because I used to work for BNP Paribas in Paris, and it was not a very happy experience.

Meanwhile, it was announced that the ECB was injecting a record amount of liquidity in the money market. The highest since septembre 11.
This mortage crisis is turning into the beginning of a panic. But we will have to wait to see how it all turns out.

But I am convinced that in the medium term it will be good for Gold.
The Central banks will do anything to avoid a depression because this one would be a disaster.
They will have to relax their monetary policy further, until inflation becomes a real problem and at this point in a few years, Gold price will be much higher.
Right now , the FED, in particular onlly talks about fighting inflation, but won't be able to follow suit.
It talks the talk, but doesn't walk the walk.

In the short run, Gold suffers, but we've seen this before in May 2006 ane February 2007, and it doesn't contradict the long term bullish trend for gold.

Right now with the panic that we see in the Stock Market, many forecasts emanating from the Gold bugs camp are realized and it can only reassure us of this investment in Gold.

What The F. ? What's going on with Jim Cramer ?

If you don't know yet the CNBC presenter Jim Cramer, that should be a good introduction.

It sould be titled :
"Financial crisis are so much fun !"

Trench Warfare

The current trend on the Gold market is still up, but my Gold stocks have behaved in a very frustrating manner, or worse, lately.
In particular, my Harmony Gold stocks have suffered a true crash (-30% in 2 days) and it caught me off guard. Some other gold stocks have also been hit perhaps because of contagion.

But Harmony apart, the Gold stocks' trend is not bearish yet. It has just suffered a correction on an overall flat trendline.
In the meantime, the stockmarket has suffered a mini crash before recovering.

So the trench warfare continues.

Just like in May 2006 and February 2007, this type of correction is very frightening but it isn't a clue for what's coming. Moreover, the fact that this latest mini crash has been so publicized in the media leads me to believe that this is not yet the beginning of a new trend.
(Apparently, I am not the only one with this opionion. Click on this post from "The Big Picture" )


A bull market has to climb a wall of worries.)

But I don't really care how the stock market evolves as long as Gold goes up.

In the long run, Gold stocks are correlated with the Gold price, and not with the rest of Stocks.
But we have to remember that in the short run, appearances can be deceiving. (See this article from Zeal )

To summarize, with the crash of Harmony Gold and the absence of a sustained rally in the rest of my gold position, it is a tough period right now. But I have to remember the basis for my invstments. I should know that in the longer term, and maybe sooner than later, it is going to be a good investment.

And these are the fundamentals

Cautious optimism for Gold

From now on, I will try to write more regularly in this blog.
And I will start with an analysis of the Gold market.

My last analysis was a month ago, at an important juncture, because it was just after the rebound that I had (correctly for once) predicted.

At the time I was still cautious, but reasonably optimistic. I wrote that it would depend on the currencies market (which is much larger and more important).
Well the EUR/USD has reached new highs (and is now at a new juncture), but more importantly, the USD/JPY fell dramatically during the month of July. It broke some important support levels and these two factors (EUR/USD and USD/JPY) severely crippled the Dollar Index, which is also threatening important support levels.

At the same time, the stock market has suffered, and for the first time in two years, the Gold market has not followed.
It might be a sign that these two markets are finally going to diverge (which is their normal historic behavior).


Finally the price of Oil has hit new highs and has not suffered from US statistics showing a slowdown.

All in all, we are on track for a stagflation scenario which would be very bullish for Gold.

But I remain cautious, because Gold does have a tendency to disappoint.
This disappointment is only the consequence of the unique excitement that Gold creates.

In any case, the month of august should be interesting.