Market Opinion

Gold closed at $999 on Tuesday. Then, yesterday, it closed down $2.

There’s a time to buy gold; and there’s a time to sell it. Which time is it?

The question rose with the gold price itself. It needs an answer.

The price of gold today, adjusted for inflation, is about where it was 26 years ago. After peaking out at nearly $2,000 (again, in 2009 dollars), in 1980, the price fell to the $1,000 level (in today’s money) in 1983.

We were gold bulls back then. And we were idiots. It was the end of the gold bull cycle, not the beginning. The gold price fell for the next 17 years.

Some people draw the wrong lesson from this experience – that gold is always a bad place for your money.

Today’s Financial Times:

“In spite of low interest rates, that make owning gold cheap, the opportunity cost of owning it is still unattractive in the long run. Smarter ways to anticipate inflation include bricks and mortar, mineral rights or even equities, all with vastly superior historical returns.”

But we would prefer to look at it a little differently. Gold is not always a bad place for your money; and we are not always idiotic.

What were the returns from stocks over the last 10 years? The Dow has lost about 15% in nominal terms. In real, inflation adjusted terms, it is probably down nearly 40%. Meanwhile, gold has nearly quadrupled.

Was it smart to buy stocks or bricks and mortar during the ’70s? Not at all. Stocks bounced around, but they were no higher at the end of the…

….read more HERE

 

Since founding Agora Inc. in 1979, Bill Bonner has found success and garnered camaraderie in numerous communities and industries. A man of many talents, his entrepreneurial savvy, unique writings, philanthropic undertakings, and preservationist activities have all been recognized and awarded by some of America’s most respected authorities. Along with Addison Wiggin, his friend and colleague, Bill has written two New York Times best-selling books, Financial Reckoning Day and Empire of Debt. Both works have been critically acclaimed and internationally. With political journalist Lila Rajiva, he wrote his third New York Times best-selling book, Mobs, Messiahs and Markets, which offers concrete advice on how to avoid the public spectacle of modern finance. Since 1999, Bill has been a daily contributor and the driving force behind The Daily.

Special Report:The Endless PAYCHECK PORTFOLIO: In three simple steps, unleash a steady flow of work-free income… starting with up to 75 automatic “paychecks” deposited directly into your account.

The Dow/Gold ratio

Posted by ChartoftheDay.com

on Friday, 11 September 2009 11:04

20090911
For some perspective on the current rally that began back on March 9th, today’s chart presents the Dow divided by the price of one ounce of gold. This results in what is referred to as the Dow / gold ratio or the cost of the Dow in ounces of gold. For example, it currently takes 9.7 ounces of gold to “buy the Dow.” This is considerably less (78% less) than the 44.8 ounces it took to buy the Dow back in 1999. Since 2007, the Dow / gold ratio has declined at an accelerated pace (see dashed lines). As a result of the recent rally, the Dow (priced in gold) has moved up significantly and is currently testing resistance of its accelerated downtrend.

To subscribe to the Free Chart of the Day go HERE. (chartoftheday.com)

Bullion or Equities – Which one Now

Posted by David Morgan - Silver-Investor.com

on Friday, 11 September 2009 8:32

 

It seems more and more people are waking up to the fact that gold and silver are not only moving up but are also much safer investments currently than any other alternative. At the present time, I treat the commodity differently than I treat the underlining mining equities. As far as buying bullion or coins, basically I think investors should buy them at any time. Certainly you’re better off buying silver at $15.00 than you are if you’re buying it at $20.00, but the metals themselves, from a long-term perspective, will preserve your wealth and possibly multiply it. Many agree that the real metal is your core position. That is the investment that really counts the most. 

After that’s accomplished then you can move into a higher risk-to-reward profile, such as your underlying mining equities. I have found those to be actually better risk/reward profiles than futures or options. This is where timing plays a more important part, because these markets can be very dull for a fairly long period of time, as we’ve witnessed during this long consolidation. And their moves can be extraordinary to both the up- and the downside. Many of the juniors that have substantial merit are still undervalued, relative to where they were a few years ago when gold was at the $800.00 level. 

We have a long way to go to the upside for the mining equities. But mining equities trade as stocks. In other words, normally, if the general stock market is not performing well, most of the mining stocks won’t either. Of course there are always exceptions. If a company makes a great discovery, that stock will take off; or if a company misstates their financials, their stock will go down substantially. But generally, the mining equities pretty much go with the general stock market. 

A bit of caution is advised here, because there is a point—and I believe we’re approaching it rather soon—where the mining equities in general will go opposite to the general stock market. So there will be a day when you’ll see the general stock market going to the downside and the metal stocks going to the upside. Again, I think we’re getting close but think it will actually be taking place in 2010. It might start before the end of this year; at this point, it is a difficult call to make, as gold is moving around the $1,000.00 level again.

It is my belief that most people who are going to participate in the gold and silver market from the next leg up to the top are going to do it through the stock market. Most people are not that comfortable buying physical gold and silver, although it’s the easiest investment you can make. Basically, it’s a phone call . . . send your money and get your metal. It’s literally that simple. Yet as simple as that is, many people will not buy the physical but will jump into the mining shares.

Most people have some type of trading platform, Ameritrade, Scottrade, E*TRADE, you name it. They’ve got a stock portfolio of some type and it’s very simple for them to sit there and press a mouse and buy a stock. That is what is going to take these mining equities to heights we’ve probably never seen before. We’ve still got some more work to do, as far as I’m concerned, going through the general stock market, the general malaise that is hitting the American and world economies, and how that’s going to play out in the short term. I’m rather cautious. Longer term, again, you’re going to see more and more interest in anything gold and silver related, particularly in the stock market. 

It is a distinct possibility that buying the physical metal is going to be tougher and tougher at some point. We witnessed that last summer for a fair amount of time, several weeks. The premiums on the physical metal were extraordinary high, relative to what they had been in the past. This was because there was a demand squeeze. In other words, there was a strong demand and the amount of metal that was being put into the market was rather low, relative to the demand. So the premiums went up and up and up, and again stayed there for several weeks. 

The premiums are more reasonable right now. But I think the summer of 2008 was a precursor to what we can expect in the future. There could be a time when some dealers are flat out of silver. It’s just too hard to get. The dealer might think they have to pay the wholesaler too big a premium so might not bother with it. Let us not overstate the situation because we’re not there, but we did get a hint of it already. 

Most people are probably going to look to the gold and silver equities. They might think, “Oh, the heck with it—I don’t want to pay a large premium on a gold coin or a silver bullion coin when XYZ Mining I just read about on the Internet is going to go to the moon. Get me in.”  That is going to bring more and more people into the sector as time moves forward.

It is an honor to be.

Sincerely,

David Morgan

Ed Note: Mr. Morgan has just written a free report titled, Silver Fundamentals, Fundamentally Flawed, which can be accessed here: Free Silver Report.

si_logo

Mr. Morgan has followed the silver market for more than 30 years. He wrote the book Get the Skinny on Silver Investing. Much of his Web site, Silver-Investor.com, is devoted to education about the precious metals; it is both a free site and does have a members-only section.  To receive full access to The Morgan Report, click the hyperlink.

Citizens urged to put 3% to 5% of their net worth in precious metals

Two years ago, on August 21, China’s government allowed its citizens to invest in an entirely new asset. It allowed them to invest in Hong Kong-listed stocks.

Hong Kong is a special region of China. It’s one of the most dynamic, capitalistic places on Earth. The move from the government was a move toward “investment freedom” for the Chinese people.

On that day, Hong Kong’s benchmark stock index rose 8.74%. Over the next two and a half months, it skyrocketed from 11,000 to over 20,000. It was a chapter in a story that you should get used to over the coming years: When the Chinese decide to invest in something, it causes giant ripples across the world.

This sort of situation is starting to happen again: This time it’s happening in precious metals, especially silver.

The Chinese have a centuries-old affinity with silver. It began in the 1500s with the explosion of trade with Mexico via the Spanish galleons. These sailing ships were the super-tankers of their age. They made one voyage per year, carrying tea, silks, and spices from Asia to Mexico. The ships returned to Asia with gold and silver. After the Chinese threw off imperial rule in 1912, the country used silver money. Today, the Chinese word for “bank” means, “silver movement.”

And now that China is becoming one of the richest, most dynamic capitalistic countries on Earth, this story is about to take a modern twist. The Chinese want silver again.

Thanks to a decade of wealth accumulated by regular Chinese citizens, there is plenty of cash to chase good investments. As the famed global investor Jim Rogers points out, these people are the best capitalists in the world. They are great savers. Chinese people want their money to work for them… so they invest.

I recently watched a China Central Television piece on gold investing. According to the program, there are some 400 million households in China, with an average ownership of about 0.1 ounces of gold. The average gold ownership in most emerging countries works out to about one ounce per household. The Chinese are beginning to make up that gap. From 2006 to 2007, domestic demand for gold rose 60% to around 700,000 ounces. Experts continue to urge citizens to put 3% to 5% of their net worth in precious metals.

Chinese government statistics show the average urban Chinese household has about $1,300 in disposable income to invest. While that doesn’t seem like much, when you add up all those households, there’s about $36 billion that could move into the next big investment opportunity – precious metals.

The government is now actively encouraging its citizens to buy gold and silver. They recently unveiled silver bullion for investing (you can see the video here). The premise is that gold was 50 times more expensive than silver in 2007, but is now 70 times more expensive.

The government is promoting silver bullion as an investment for regular citizens. And remember, a bunch of Chinese students laughed at U.S. Treasury Secretary Tim Geithner this year when he claimed the dollar was safe. The Chinese know the value of real assets – real money like gold and silver.

What does this mean for silver prices? It’s impossible to say. But here’s a little math that interests me. According to the Silver Institute, demand for silver in 2008 (for industry, jewelry, and investing) was 832 million ounces. At today’s price, that’s an $11.5 billion market, or about 1/3 the capital available in China alone.

The most important thing to understand about this situation is the Chinese people become freer every time the government loosens up a restriction. These people couldn’t legally buy silver bars before. Now, they can. They’re becoming richer, and they will continue to do so for decades.

Add this to a world already waking up to the grand currency debasement you have a recipe for the continuation of the big bull market in silver and other precious metals.

CHINA AND ITS OIL FUTURES

There are two significant events that have recently transpired. Spurred by
rumors of speculation in the oil markets Washington (Gary Gensler’s CFTC)
is reviewing its futures market regulatory stance.  New CFTC Chief Gary
Gensler promises an increase in regulation.  Because Mr. Gensler is a
Goldman Alum, we think any serious re-regulation is unlikely.  We have
always been fans of the options (not the futures market) here at Disocvery
Investing.com.  Cash settlement in the futures market leaves us cold – just
as it did during the massive equity market decline of October 1987.  

Will we ever learn?  

How many OTC derivative and futures-induced bubbles must burst before
we properly design our derivative contracts (position limits, margin
requirements, no cash settlement, etc.) and regulate naked shorting – which
is nothing more than stealing from honest shareholders.  Birch Mountain is
the most painful example of naked shorting, in my opinion.  

And in academe, teaching CAPM, Value at Risk, Black/ Scholes and Binomial
option pricing as the major risk discounting vehicles on which base risk
analysis and valuation of  the markets is naïve. In reality it has become
mark-to-model in all markets. Assuming the world is Normally
distributed (Gaussian) in its risk profile is a simplifying yet failed assumption.
Mathematics as the driving force is out.  Perhaps Pimco’s Bill Gross is correct
there is a New Normal – fat tails and Black Swans anyone?

We do not agree with all the talk in New York and Washington, especially
from the naive meanderings of the Obama capital market people, on the
evils of speculation.  Simply design a fair and transparent listed options
contract and then establish the framework to run the options markets properly.
Because we can print cash, according to the Federal Reserve’s Bernanke,
unbridled cash settlement of futures is a no, no.

Never mind, the big players have been lifted from the muck and mire by
the “too big to fail” label and the egregious violation of Moral Hazard.  
Really what does risk taking mean anymore to any large institution?
Perhaps this is China’s concern.

A fair, listed and transparent derivative market cannot be beyond the reach
of today’s capital and futures market thinkers.  Goldman Sachs and JPM
could take the lead here. Citizens, investors and legislators need to become
self-educated and must demand no less.

The second issue of importance is China’s recent threat (See China Economic
Review September 2, 2009) to walk away from some of its futures contracts
in the oil market. More important is the rumor that China has made the long
side of the gold and silver futures market for the likes of Bear Stearns,
JP Morgan, HSBC and other shorts.

Should China walk away from its gold and MORNING NOTESsilver positions
all hell will break loose. Ted Butler, the most well known and prescient silver
analyst, in the world, has recently written on the potential of this.

Twenty two years ago (early October 1987), I presented at the Citigroup Asian
Country Head seminar run by Harvard University in Singapore. At that time I
forecast the great market collapse of 1987 reasoning that the equity futures
market would be undone by the futures market.  I reasoned that portfolio
insurance (another can’t-fail futures product of Wall Street) would crash the
market. Following that I spent a good deal of time in the next decade in Asia.   
In 1995 I was invited to present my analysis of China’s nascent T-Bond Futures
market.  I presented to the CSRC (the equivalent of the US SEC) in both Beijing
and Shanghai.  It was a wonderful experience.  Most of the terminology did not
exist in the Chinese language at the time (simultaneous translation). In any event,
after I finished and described the effects of the 1987 equity market demise they
abruptly shut the futures market down. It reopened only a few years ago. This
AM I sent this email to my good friend Chris Tibbs who had invited me on behalf
of CitiGroup and China to speak.

“Chris,

We said all these things (position limits, margin, cash settlement, etc.) about the futures
market in 1995 while in China.  The case study of the1987 portfolio insurance debacle
should have been enough. What we did not mention then were fast trading strategies,
unlisted derivatives and the morality of the other side. I am amazed that China is threatening to walk away from some of its oil futures positions. They would not do this if they did not know much more than they are reporting.  Sure, they lost money on their oil futures but they made a contract. Based on our experiences I assume no one twisted their arms to buy.

What do they know about their losses that have them angry enough to threaten so publicly to walk on futures contracts? The particular issue here is the hundreds of millions of dollars that Chinese SOE’s lost on their oil futures positions.  

The next issue of interest may be the gold and silver futures markets – JPM and HSBC (up to four firms according to Ted Butler via his excellent analysis of the COT) recently established the largest commercial short position ever – on silver. China has encouraged its citizens to buy silver in up to 5 kilogram bars – which could make Revett and Quaterra much more valuable. But with commercial silver shorts at record high levels would China also walk from its silver and gold futures contracts?  What might happen?  

Would new CFTC Chief Gary Gensler (a Goldman Sachs alum) re-regulate and modify the oil futures market / contracts and not the gold and silver futures market?  Unlikely.

I think Ted Butler has it right on – this AM we have gold over $1000 – let’s see what happens by 11 AM on the COMEX.

I emphasize this because I remember so well your comments, Chris, that when Chinese authorities act they act very quickly – as per our futures market presentations to the CSRC in 1995 in Shanghai and Beijing and the subsequent shut down of their futures market for years.  Personal experiences!

Perhaps China would actually like to see gold and silver prices fall so dollars could be swapped more economically for the precious metals. Interesting times – the shoe may most definitely be on the other foot now. Maybe it is simply a message from China as there have been so many lately.

http://www.chinaeconomicreview.com/dailybriefing/2009_09_02/SASAC_clarifies_
statement_on_derivatives_contracts.html”

It will be a most interesting time for gold and silver investors as we move forward.  
Please be sure to have a core discovery position in gold and silver.

2. DISCOVERY INVESTING TUTORIAL

Finally I have completed a University style lecture on Discovery Investing.  I would be
most interested in feedback that you may have, good, bad or indifferent as long as it is
constructive.  This is an introductory seminar.  I plan to present several amore which
will be more detailed and focus on specific topics; the 10 point grid, the 8 point discovery process and risk analysis.  We will also present three case studies (both winners and losers) to help in the teaching of the technique.  The video is about 30 minutes in duration so I do not think it will be a waste of time. I am available to present these topics at any live conferences that you may be attending.
….read more HERE.

3. PRINCETON CLUB SEMINAR SEPTEMBER 10TH 4:30 PM

PLEASE JOIN US !!!                   

QUATERRA RESOURCES

Dr. Michael Berry will open with a discussion “Where Are We Headed in the Economy?”
followed by Dr. Thomas Patton, CEO, Quaterra Resources “The Bright Future of Quaterra.”
Quaterra’s silver exposure in Mexico is one critical aspect of his discussion

Thursday, September 10, 2009
4:30 PM to 6:30 PM

Cocktails    4:30 PM            Presentation promptly at 5:15 PM

 

You can sign up for Dr. Berry’s free Morning Notes  HERE.

Michael Berry has been a portfolio manager for both Heartland Advisors and Kemper Scudder where he successfully managed small and mid cap value portfolios. Dr. Berry has specialized in the study of behavioral strategies for investing and has been published in a number of academic and practitioner journals. His definitive work on earnings surprise, with David Dreman, was published in 1995 in the Financial Analysts Journal.

Previously, Dr. Berry was a professor of investments at the Colgate Darden Graduate School of Business Administration at the University of Virginia and has also held the Wheat First Endowed Chair at James Madison University.

Dr. Berry is a respected and dynamic speaker. He regularly presents around the world on topics such as value investing, the role of Austrian Economics in investment management, behavioral investing strategies and is a specialist in developing case studies to teach investors how to invest. While a professor, he published a case book, Managing Investments: A Case Approach.