Gold & Precious Metals
Bloomberg reported on a study this past week that points to decades of manipulation in the gold market. Whether there is credence to this study is something that is yet to be proven, but it highlights periods of suspicious trading activity around the time when the London Bullion Market Association fixes the price of gold every day. It also ads support to the notion that the way the price of gold is fixed is archaic in nature.
We have to begin with a bit of background. The London Bullion Market is not the one we commonly think of in North America. In North American trading hours we are often focused on the New York Mercantile Exchange,
commonly referred to as the Comex. The London Market in 2013 saw close to 76 percent of gold trading in terms of volume in 2013, whereas Comex volumes were closer to 16.5 percent. Numbers for London are quite often best estimates because not all clearing is actually reported. Regardless of volume, research into which market leads the price of gold is inconclusive between the two. Despite London dwarfing all other markets, volume does not necessarily mean influence.
Twice a day in London, the price of gold is fixed. It’s done so for many reasons, some being settling client orders who purchase or sell based on that fix. Clients may be precious metal dealers, mining companies, or jewellers. The fix is also used by financial institutions for portfolio valuation. To fix the price, five member bullion banks come together to determine a price. The member banks are Scotia-Mocatta, Barclays, Deutsche Bank (who recently announced they were giving up their seat), HSBC, and Société Générale. They hold a conference call where they offer their book of client good ‘till cancelled orders along with their own orders. Once they have a price where they can settle within 50 kilos matching buyers and sellers, the price is fixed.
The potential issue with the gold fix is that member banks that participate are not restricted from proprietary trading (trading for their own positions) and are not restricted from trading derivatives markets (like the Comex) while the conference call is underway. As well, the banks continue to take client orders while the call is taking place. It becomes a problem of adverse information as the five members have insight into the direction of the market before all other market participants, and the author of the study seems to suggest collusion between the five banks in terms of manipulating the price.
The motivation for the research paper comes from suspicious trading activity seen on the Comex in a brief period during the conference call of the second fix and following publication of the London Fix. Nothing has been proven at this point, but the researcher making the observations has also been credited for research that unveiled potential manipulation in the setting of the LIBOR. A probe that has led to banks being penalized along with the traders participating in that rate setting process.
It is more a story of potential corruption amongst bankers than manipulating the price of gold. For a brief moment, perhaps five minutes, there is opportunity of making excess profit by knowing the direction of the market, before the market itself has time to adjust. And stories of late show it is not just the gold market and the LIBOR scandal, over the last year there have been probes into the currency markets showing evidence of rate rigging. Unfortunately though, these markets are so vast, ethics seems to be the only regulation that can guide these particular people in power, and clearly that does not always work.
About Border Gold Corp
All investments contain risks and may lose value. This material is the opinion of its author(s) and is not the opinion of Border Gold Corp. This material is shared for informational purposes only. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed. No part of this article may be reproduced in any form, or referred to in any other publication, without express written permission. Border Gold Corp. (BGC) is a privately owned company located near Vancouver, BC. ©2012, BGC.
“(I’m) liking platinum and palladium more than gold, but will still give gold the benefit of the doubt for further gains, especially (if) a currency war could be unfolding between Russia and the U.S.,” he said, referring to the tensions between Ukraine and Russia over the Crimea.
Mark Leibovit, editor VR Gold Letter, said he also sees higher prices next week.
To see what others had to say:
Survey Participants Split Over Gold Direction Next Week
Dividend Stocks from 3.8% to 8% Yield
At Canada Stock Channel, we screen through our coverage universe of dividend paying Canadian stocks, and we look at a variety of data — dividend yield, book value, quarterly earnings — and compare it to the stock’s trading data to come up with certain calculations about profitability and about the stock’s valuation (whether we think it looks ”cheap” or ”expensive”).
History has shown that the bulk of the stock market’s returns are delivered by dividends, and so we pay special attention to dividend history. And of course, only consistently profitable companies can afford to keep paying dividends, so profitability is of critical importance. Dividend investors should be most interested in researching the strongest most profitable companies, that also happen to be trading at an attractive valuation — maybe there is a company-specific reason causing the stock to be ”cheap” or maybe the entire sector is taking a hit, but whatever the reason, we think there is great value in ranking our coverage using our proprietary DividendRank formula.
….read the other 9 HERE
Dow down 35 (on March 5th). Gold up slightly. A dull day on Wall Street, with investors holding onto most of Tuesday’s gains.
Here’s another record that was broken recently…
In the late 1970s, Michael Milken persuaded his boss at Drexel Burnham to let him start a high-yield bond trading department. (High-yield bonds are non-investment grade bonds that carry high default risk. Hence their nickname: “junk bonds.”) Soon, Milken’s trading department started earning a 100% return on investment.
The junk-bond market was tiny – with total issuance only rising to about $30 billion in the mid-1980s. Milken was right about junk bonds being hugely profitable. But that didn’t stop the feds from putting him in jail in 1990 on six counts of securities and tax fraud. (Milken didn’t just stop at legitimate means of making money in the high-risk world of junk bonds.)
Nevertheless, the junk-bond market continued to grow. At the end of the 1990s, issuance was hitting new records – at about $150 billion. Then junk-bond issuance collapsed with the tech bubble.
But unlike tech stocks, junk bonds were soon flying higher than ever. In the middle of the 2000-07 period, annual junk-bond issuance rose above the $150 billion mark. But in 2013, the junk really topped the charts – with about $330 billion of new bonds issued.
Dumpster Diving for Yield
Why so much junk?
Ah, for that… as for so much else… we have a central bank to thank. Lower yields on Treasury bonds and investment grade corporate bonds, as a result of Alan Greenspan’s driving down the federal funds rate in the wake of the tech-wreck and the 9/11 attacks, encouraged investors to stretch beyond their comfort zone for higher rates of return in lower quality issues.
By 2007, they were driving into bad neighborhoods to get what they needed. And by 2013, they were dumpster diving for a measly 5%.
Can you blame them, dear reader?
With the Fed holding down interest rates, there was less and less reason for anyone to default. A mismanaged zombie business didn’t need to stop paying its coupons; it just had to rollover its debt. Borrowers and lenders were deceived. The former found lenders unusually motivated; the latter believed borrowers were uncharacteristically solvent.
All of which just serves to highlight our latest dictum: The Fed’s $4.1 trillion balance sheet is a standing invitation to trouble.
Hello, Trouble
Mr. Trouble walks through the door every morning and into a party every night. But he is a master of disguise.
One day, he comes with the healthy mien of a robust high-yield debt market. The next day he is crumpled over, as if depressed by unusually low consumer price inflation. And on the weekend here he is again – a big shot from Wall Street with the highest profit margins in 60 years.
Yes, dear reader, trouble comes in many guises and disguises. An honest, properly functioning economy spots him immediately and promptly shows him the door. But a trumped-up, highly manipulated and mountebank economy is like a carnival hoedown. You can find anything you want… but nothing is exactly what it appears to be.
Economists refer to this as the problem of “distortion.” The real cost of real capital is usually set by the prevailing interest rates. When the Fed permits Mr. Market to function normally investors can take the facts at face value. When the Fed intervenes the effect is to distort the economy and the markets.
Artificially sending interest rates lower makes capital too cheap. It is borrowed too easily and spent too readily. The result is over-speculation… and over-investment.
That is why we have a record issuance of junk bonds in 2014. It is just one more of the many drag queens and carnival kings that have been corrupted by the Fed’s heavy-handed meddling in the markets.
On display, too, is the US “recovery” – the weakest ever in postwar history! Never before has such a strong recession been followed by such a weak bounce back. Quarter after quarter, job growth, GDP growth and consumer price growth substantially underperform every other recovery since World War II.
Another record! And just one of the many jolly revelers who opens the door for Mr. Trouble when he shows up.
Regards,
Bill
P.S. If you’re worried about the worst US economic recovery on record… and the effects on the dollar of rampant Fed money printing, maybe it’s time to get out of Dodge. Our colleagues at International Living magazine have just published a book on retiring overseas on a budget. Here are details of how to pick up a copy at special pre-order price.
Market Insight:
Five Years of Bull
From the desk of Chris Hunter, Editor-in-Chief, Bonner & Partners
Today, we doff our cap to the wizards of central banking at the Federal Reserve.
As you can see from the chart below, the remarkable 181% rally in the S&P 500 that started this day five years ago, has moved more or less in lockstep with the expansion of the Fed’s balance sheet from about $1.5 trillion to $4 trillion.
Although correlation and causation are two different things, this chart raises an interesting question: If the correlation between the size of the Fed’s balance sheet and gains on the S&P 500 holds… and the Fed’s commitment to shrink its balance sheet stays firm… where will this leave the S&P 500?
We don’t know the answer…
But we’re reminded of Rule No. 2 of former Merrill Lynch technical analyst Bob Farrell’s 10 “Market Rules to Remember”:
Excesses in one direction will lead to an opposite excess in the other direction.
What Farrell meant was markets that shoot higher on the upside will also shoot lower on the downside. Think of a pendulum: The farther it swings in one direction, the farther it swings in the other direction. [par break] The fate of the US stock market relies on breaking its five-year correlation with the size of the Fed’s balance sheet. If it can, then US stocks could continue to rally.
If not, look out below…
Is the Stock Market rally finished? That is the question that Eddy Elfenbein of Crossing Wall Street addresses in his analysis below. He focuses what effect actions by the Russian Central Bank and the extent of their Currency reserves, as well actions of other Central Banks had on Putin’s with semi-withdrawal of troops in the Ukraine.
He also brings up to speed on the big debate on Wall Street, specifically how much poor weather really to blame for the soggy economic news . Perhaps most interestingly he updates his Buy List, which so far has an 8 year compounded gain of 124.76% vs the S&P 500’s 8 year compounded gain of 75.62%. Take note of the “Buy List Stocks” but be sure to search out the risks involved in purchasing any of the stocks on the list – Money Talks
CWS Market Review March 7, 2014
I can’t remember a week that started off so scary yet ended so optimistically. The U.S. stock market dropped sharply on Monday on the news that Russian troops had moved into the Crimea, or as our government worded it, made “an uncontested arrival.” Soon there was talk of a possible invasion of eastern Ukraine.
While Vladimir Putin was ignoring Western leaders, he may have been paying attention to the financial markets. On Monday, the Russian ruble was the worst-performing currency in the world. The ruble, which is already down 10% this year, plunged to its lowest level ever against the dollar. In order to defend its currency, the Russian Fed jacked up interest rates by 150 basis points, from 5.5% to 7.0%. That’s a huge move, and it has a cost.
We don’t know for sure, but it’s estimated that the Russian central bank shelled out somewhere between $10 billion and $12 billion to defend the ruble. For now, Russia’s foreign currency reserves are large enough to take the hit, but they can’t keep it up forever. On Monday, the Russian version of the Dow Jones, the Micex Index, plunged 11% for its worst loss in more than five years. Interestingly, Bloomberg estimates that several Russian oligarchs lost billions of dollars due to the Crimean incursion. In other words, perhaps this arrival wasn’t entirely uncontested.
Well, somebody felt the heat, because on Tuesday we heard that Putin had ended Russia’s military exercises in western Russia. Everyone breathed a huge sigh of relief. Even though the Crimea crisis is still an issue, it doesn’t look like it will become something bigger and far more unpleasant. The S&P 500 celebrated on Tuesday by shooting above 1,870 to a new all-time high. It didn’t end there. On Thursday, the S&P 500 closed at yet another new all-time, 1877.03. This is the index’s 50th record close in the past year. Since February 3, the S&P 500 has tacked on more than 7.7%.
In this week’s CWS Market Review, I’ll bring you up to speed on the big debate on Wall Street — how much is poor weather really to blame for the soggy economic news. I’ll also share more good Buy List news with you. Qualcomm announced a 20% dividend increase, DirecTV cracked $80 per share (it’s already a 16% winner in the year for us) and eBay is at a 14-year high. Not bad. But first, let’s look at why all the weather excuses may have been correct.
The Bad Weather Excuse Has Won the Argument
Over the last few weeks, there’s been a debate raging on Wall Street about the soft economic data. The last two jobs reports weren’t so hot. The bears have said that the economy is soft and getting softer. The bulls have blamed the weak numbers on lousy weather. So who’s right?
This is a hard debate to resolve, which is probably why it’s intensified. This week, however, we got some more data that indicates that the poor-weather thesis was probably correct. This is good news for investors, and it may suggest that 2014 will be the best year for the economy since the recession. In fact, in President Obama’s latest budget quest, he forecasts real growth of 3.1% for this year. That would be the fastest growth rate in nine years. Not only that, the president sees growth accelerating to 3.4% in 2015.
Of course, those are just forecasts, and worse yet, forecasts from politicians. But let’s look at some hard numbers. On Monday, the ISM Manufacturing index, a report I follow closely, came in at 53.2, which was above the Street’s expectations of 52.3. Any number above 50 indicates an expansion, while one below 50 signals a contraction. This was an important report because the ISM for January was a dud — just 51.3. That report came out on February 3, which marked the S&P 500’s recent low. Now that we’ve seen a healthy rebound, I think it’s safe to say that the January report wasn’t the start of a new trend.
That’s not the only evidence. We also learned on Monday that real personal-consumption expenditures rose by 0.3% in January after a 0.1% pullback in December. On the other side of the ledger, consumer spending rose by 0.4% in January after a contraction of 0.1% the month before. The January spending was led by a 0.9% increase in services. That was the biggest jump in 13 years, and it was most likely due to a greater demand for utilities. In other words, folks were trying to keep warm. Another check mark for bad weather.
But the biggest evidence to support blaming the bad weather was this week’s Beige Book, which is a collection regional surveys done by the Federal Reserve. Eight of the 12 districts reported modest economic improvement. New York and Philadelphia had slight declines, which they blamed on the weather. Kansas City and Chicago said they were stable. Consider this stat: The December Beige Book mentioned “weather” five times. That jumped to 21 times in January. In February, “weather” was mentioned 119 times.
The next big economic report will be the February jobs report. I’m writing this early Friday morning, and the jobs numbers come out at 8:30 ET, so you may already know the results (be sure to check the blog). As I mentioned earlier, the last two jobs reports were rather weak. The economy created 75,000 net new jobs in December and 113,000 jobs in January. That’s not so hot. Put it this way: The economy averaged more than 205,000 new jobs each month for the year prior to that. If we see a big increase in non-farm payrolls for February — say, over 200,000 — then it would another signal that the economy suffered a minor weather-related blip.
We got a sneak preview of the jobs report on Wednesday, when ADP, the private payroll firm, said they counted 139,000 new jobs last month. However, the ADP report doesn’t always sync up with the government’s figures. But another promising number came out on Thursday: The number of Americans filing first-time jobless claims fell to 323,000, which is a three-month low.
Lately, a number of Wall Street firms have pared back their growth forecasts for Q1 GDP. Just a few weeks ago, Goldman Sachs had expected 3% growth. Now they’re at 1.7%. JPMorgan just cut their forecast from 2.5% to 2%. I don’t have a firm view just yet, but I’m beginning to think those forecasts are too pessimistic. Either way, we’ll get our first look at Q1 GDP in late April.
The bottom line is that a lot of the market’s resiliency this week was due to more than just the calming effect in Ukraine. Investors are beginning to realize that this might be a very good year for economic growth. Let me add another point about the current market. I caution you that I’m not a technical analyst, but many chart-watchers have been impressed by the breadth of this market. In other words, a rising tide is lifting a heckuva lot of boats. It’s not a rally led by a small number of monster-sized winners like we saw during the Tech Bubble. Now let’s look at how ourBuy List has been faring.
Qualcomm Raises Its Dividend by 20%
The good news for the market has been even better news for our Buy List. We’ve beaten the S&P 500 for six of the last seven days. Through Thursday’s close, our Buy List is up 2.22% for the year, which is more than the S&P 500’s gain of 1.55%. This is a pleasant turnaround for us. Less than one month ago, we were trailing the index by close to 1%. I’ve also been impressed that our systemic risk (that’s beta for you smart kids) is less than the overall market’s.
Last week, we got a 17% dividend increase from Ross Stores (ROST). This week, we got a 20% dividend increase from Qualcomm (QCOM). I like this stock a lot. Their quarterly payout will rise from 35 cents to 42 cents per share. The board also approved a $5 billion increase to their buyback authorization. That brings the total authorization to $7.8 billion.
If you recall, just a few weeks ago, the company handily beat Wall Street’s earnings estimates and bumped up its full-year guidance. Qualcomm also announced that Steve Mollenkopf will take over as CEO and Paul Jacobs will become the executive chairman. On Thursday, QCOM broke $77 for the first time in 14 years. Qualcomm remains a very good buy up to $79 per share.
Last week, I mentioned the public feud between Carl Icahn and eBay’s board. It got even nastier this week. The immediate positive for us is that the brawl has helped the stock. Shares of eBay (EBAY) nearly cracked $60 this week.
Honestly, this fight is rather tedious, but I’ll boil it down for you. What happened is that eBay had bought Skype, but it didn’t do much for them, so they sold it for $2.75 billion to an investor group led by Mark Andreessen’s company (he serves on eBay’s board). Two years later, Microsoft bought all of Skype for $8.5 billion. Andreessen said that everything he did was above board and fully disclosed at the time.
Icahn ain’t buying it. In fact, he said that he’s “never seen worse corporate governance than eBay.” Really, Carl? Icahn’s goal isn’t a secret; he wants eBay to sell off PayPal, but the board has zero interest. Don’t get me wrong: I’m an Icahn fan. We need more people putting pressure on corporate boards, but even I concede that he can take things too far. Don’t expect a PayPal spinoff anytime soon. The board has made it clear that that’s a non-starter. My take: Ignore the bickering and concentrate the business. eBay remains a solid buy up to $62 per share.
More Buy List Updates
Several of our Buy List stocks have rallied strongly lately. Warren Buffett recently disclosed in his yearly Shareholder Letter that Berkshire Hathaway continues to have a big stake in DirecTV(DTV). Buffett owns 22.2 million shares in DTV, which is 4.3% of the company. Last month, the satellite-TV crushed earnings by 23 cents per share. I also like that they’re really reducing share count with their buybacks. DTV is up 16% this year, and it’s our top-performing stock on the Buy List. This week, I’m raising our Buy Below price to $84 per share.
In January, Moog (MOG-A) became our first dud of the year. The maker of flight-control systems missed earnings by a penny per share and guided lower for the year. The stock was clobbered and fell as low as $57 per share. But this is why we like high-quality stocks — they tend to rebound. (We just don’t know when.) Or as Peter Lynch put it in today’s epigraph, “the best stock to buy is the one you already own.” Moog shot up more than 5% on Tuesday and closed at $64.21 on Thursday. Moog continues to be a good buy up to $66 per share.
On Thursday, Wells Fargo (WFC) got to a new high, as did Express Scripts (ESRX). Remember it was only a few days ago that ESRX fell after its earnings report. Now it’s at a new high!
Also on Thursday, Oracle (ORCL) came within 15 cents of hitting $40 per share. Larry Ellison’s baby last saw $40 in October 2000. The company will release its next earnings report after the closing bell on Tuesday, March 18. On the last earnings call, Oracle said to expect fiscal Q3 earnings between 68 and 72 cents per share.
I also want to remind you that Cognizant Technology Solutions (CTSH) will split 2 for 1 on Monday. This means that shareholders will now own twice as many shares, but the share price will be cut in half, so don’t be surprised when you see the lower share price on Monday. The stock has recovered very impressively from its January sell-off. CTSH is currently up more than 20% from last month’s low. I’m raising my Buy Below on Cognizant to $112 per share, which will become $56 per share on Monday. This is a great stock.
That’s all for now. Next week will be a slow week for economic news. I’ll be curious to see the retail-sales report which is due out on Thursday. This will give us a clue as to how strong consumer spending is. Be sure to keep checking the blog for daily updates. I’ll have more market analysis for you in the next issue of CWS Market Review!
– Eddy
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