Currency

CURRENCY WARS REDUX: IS THE US DOLLAR NEXT?

The U.S. Dollar has made a sharp move since October against a basket of currencies

Who wants a strong currency? If that question was for an opinion poll of finance ministers and central bankers, the response would be a firm no one. But in reality, no poll is needed. The last couple of weeks’ action has spoken louder than words.

Forex traders were once again reminded that when a currency makes strong gains the chances of verbal or monetary intervention are probably not far off. Losses on long positions can swiftly follow. Those long the U.S. dollar (USD) should be cautious.

Talk of currency wars has made the headlines regularly since the outbreak of the financial crisis in late-2007. A lack of economic growth prompts countries to try and grab a slice of someone else’s demand. The quickest way to do that is to devalue the national currency giving goods and services of that country a short-term competitive advantage.

The yield advantage made AUD and NZD attractive to investors engaged in carry trades – that’s borrowing in a low interest rate currency to buy a higher interest rate one. However, policy makers in those two countries decided recently that enough is enough.

Last week, the European Central Banks cut interest rates ostensibly to avoid deflation. But many observers interpreted it as a move to also weaken the EUR. It worked. On the same day of the ECB announcement the Czech Central Bank intervened sending the CZK plummeting.

A currency war victory for the ECB

P1

How strong of a U.S. dollar is the Fed prepared to stomach?

With EUR/USD (FOREX:EURUSD) down, GBP/USD (FOREX:GBPUSD) stalled and the USD/JPY (FOREX:USDJPY) weakening, that leaves the (USD) as a potential stand-out among the majors. Since late October, the U.S. Dollar Index (NYBOT:DXZ13) has moved from around 79 to just over 81 against a basket of currencies – a fairly sharp move — although USD is still sitting below a high of 84.58 reached in September.

The question is, “Will the U.S. Federal Reserve allow USD to make continuing substantial gains against other major currencies?” After all, the U.S. economy, although not quite firing on all cylinders, is still doing better than most European counterparts. And Japan has yet to prove it can sustain its recent growth.

But the answer is that the Fed probably does not want a strong USD. That will certainly be one dilemma it faces if it ever manages to taper its quantitative easing program. Another often overlooked factor is that U.S. debt is substantially held by foreigners. This gives the U.S. authorities a strong motive to devalue – a form of default by stealth. 

If USD does start making sustained gains – particularly sharp ones – dollar bulls should be cautious.

 

About the Author Justin Pugsley

Justin Pugsley is the forex and gold markets analyst for New Zealand-based trading platform provider MahiFX. He is a keen student of markets, economics and history. Prior to working with MahiFX, Justin worked for a number of leading media organisations such as Thomson-Reuters and Dow Jones/Wall Street Journal.

 

Eric Sprott: Silver Rarer Than Gold -The silver market in 2013

silver bars“Silver has outperformed gold – between December 2008 and March 2010 it gained 53%, almost double that of Gold.

Yesterday Thomson Reuters GFMS released their latest report on the silver market. We take a look at it and assess what it means for the silver price.

There are several factors, some positive and others negative, that will affect the price of silver going forward.

First up, let’s have the not-so-good news facing the silver price.

In 2013, total supply of silver is expected to climb by around 0.7%, much of this is thanks to the 7% or 28 Moz (million ounce) increase in mine supply but offset by the 8% decline in scrap silver supply.

This leaves the silver market in a residual surplus of 287 Moz (forecast for 2013).

Of course, the other glaringly obvious negative issue for silver is its role as a safe haven during times of economic turmoil, inflation etc. With rumours that everything will suddenly be fixed where does this leave silver along with its gold friend? Well, as we describe below, silver investors don’t seem so convinced that all is well and that they can turn their backs on the safe haven just yet. Added to this silver is an increasingly industrial metal, perfect for a global recovery.

Gold and silver

So far in 2013, silver has suffered more than gold having fallen by 29% so far to gold’s 22%. Currently the gold silver ratio is around 60 and has averaged 59.4 in 2013. Whilst we frequently refer to the historical average being 15:1, 60:1 has in fact been the average since 2000.

The current silver to gold price ratio favours buying silver. This hasn’t gone unnoticed. Eric Sprott recently reported that coin and bullion sellers are seeing equal amounts of capital being spent on gold and silver, meaning 60 times more ounces of silver being purchased than gold.

In the past three years the ratio has been around 55 therefore the currently higher ratio is very much seen as a positive by the authors of the report who suggest that this may set the metal up for outperforming the gold price in the coming months.

Speaking of outperforming gold, in previous episodes of quantitative easing announcements, silver has outperformed gold – between December 2008 and March 2010 it gained 53%, almost double that of gold.

Silver investment

In the last ten years demand for silver as an investment has climbed from accounting for just 4% of total demand to 24%.

Whilst silver might appear to be a better buy than gold, it is in fact rarer than the yellow metal when it comes to investment purposes. Eric Sprott believes the ratio of investment grade silver to investment grade gold to be 3:1. Sprott calculates that there is in fact only 120 million ounces of gold and 350 million ounces of silver available for investment.

Whilst gold ETF outflows are regularly blamed for the fall in the gold price. The same cannot be said for silver ETFS and the silver price – so far in 2013 silver ETF holdings have risen throughout the year reaching a high of 650 Moz.

Holdings of SLV are ‘much more diverse’ according to Ted Butler than those of GLD, for example institutional holders of SLV only account for 16% of total holders, compared to 41% in GLD. Therefore when we see huge sell-offs, the majority of SLV holders remain where they are, indicating they’re in it for the long-term.

….read page 2 HERE

HISTORIC EVENTS SHOCKING THE FINANCIAL WORLD

KWN 11-13-2013 Sotheby’s auctioned a 59.60-carat pink diamond for a record staggering $83 million. As for art, an Andy Warhol painting recently sold for a breathtaking $105 million. If you were impressed by that, then you should know the all-time record for the sale of any work of art took place this November at an astonishing $142.4 million. 

While the mainstream media says this is just the super-wealthy pushing their weight around in these markets in order to buy trophies, this is actually a much larger push by the wealthy to get out of fiat paper currencies and into hard assets.  This is very similar to what the Chinese are doing. 

From the highly respected Godfather Richard Russell, 89 years old and still writing every day:

“The Dow crept up higher, moving ever closer to the melt-up that I’ve been predicting.  Yesterday’s Wall Street Journal carried a front-page story about retail buyers coming optimistically into the market again.  I expect the retail entrance to the market to reach flood tide buy-in sometime within the next year.  

Thus I believe we are approaching an historic period where funds travel from institutional hands to the retail public. 

The gold base continues to enlarge, and pessimism toward gold is comparable to that which you see at a bear market bottom.  In the meantime, bullion creeps imperceptibly higher.  China is clearly on a new path which will result in a bulging population and a pull-back on its imports. 

The big picture for the US is “under-inflation” and underemployment.  Neither suggests a taper in QE.  In the meantime, smart money is buying tangibles. This can be seen in towering prices for art at recent auctions.”

Cisco as Lucy (with chart)

McIver Wealth Management Consulting Group / Richardson GMP Limited
Cisco Price Chart – Lucy & the Football

Late yesterday Cisco Systems released its earnings which were significantly below expectations and it gave some pretty dismal guidance with respect to revenue going forward.

This is a stock which under the leadership of CEO John Chambers has been enough of a darling that it has been able to push the limits with its rosy proclamations and withholding bad news until the last minute. This style of investor communications began in 2000 and, yesterday, we were reminded that it is still the way that things are done.

The best analogy to describe this is where Lucy encourages Charlie Brown to take a kick at the football that she is holding only to lift it away at the last minute, causing Charlie Brown to go flying through the air.

Why haven’t investors conditioned themselves to expect this after so many years?

The answer is a little like the situations with Nortel and Blackberry. It is hard for investors to let go after having initial success in these once prominent brands.

The advantage that Cisco has over Nortel and Blackberry is its massive cash pile. The easy-money era of Alan Greenspan & Ben Bernanke at the U.S. Federal Reserve has made it a lot easier for companies with dated and uncompetitive business models to protect themselves.

Cisco has also had the added advantage of favourable U.S. tax laws that permit U.S. multinationals to keep their international earnings offshore. As long as they don’t repatriate earnings, it is like a tax deferral. Cisco has been a major participant in the lobbying effort to maintain this advantage.

It is also hard to let Cisco go because of how dominant it was. Not only did it rule the networking sector, but in March 2000 Cisco became the largest company in the world in terms of stock market value. That kind of valuation pedigree likely helped it in 2009 to be selected as one of the 30 stocks in the Dow Industrials Average.

However, this last earnings release may really sting. The company even suggested that the Chinese internet spying scandal contributed to its poor performance. The reality is that the products in which Cisco used to lead have become commodities and have been copied and heavily marketed by Chinese firms such as Huawei for many years now. Cisco’s competitive advantages have long since eroded. Despite that, not much has changed in terms of product focus or its business model since the 1990s when everything worked so well.

Another issue is that Cisco has an enormous institutional following. That also appears to be a significant source of the “benefit of the doubt” over the years.

It will be interesting to see if investors become more critical going forward rather than taking the company’s sunny comments at par value.

Cisco Systems Inc. is not held in the McIver-Jasayko Model Portfolios as of November 14, 2013. Comments about investments are not intended as advice and do not constitute a recommendation to buy, sell, or hold.

The opinions expressed in this report are the opinions of the author and readers should not assume they reflect the opinions or recommendations of Richardson GMP Limited or its affiliates. Assumptions, opinions and estimates constitute the author’s judgment as of the date of this material and are subject to change without notice. We do not warrant the completeness or accuracy of this material, and it should not be relied upon as such. Before acting on any recommendation, you should consider whether it is suitable for your particular circumstances and, if necessary, seek professional advice. Past performance is not indicative of future results. 

Richardson GMP Limited, Member Canadian Investor Protection Fund.

Richardson is a trade-mark of James Richardson & Sons, Limited. GMP is a registered trade-mark of GMP Securities L.P. Both used under license by Richardson GMP Limited.

Late yesterday Cisco Systems released its earnings which were significantly below expectations and it gave some pretty dismal guidance with respect to revenue going forward.

This is a stock which under the leadership of CEO John Chambers has been enough of a darling that it has been able to push the limits with its rosy proclamations and withholding bad news until the last minute. This style of investor communications began in 2000 and, yesterday, we were reminded that it is still the way that things are done.

The best analogy to describe this is where Lucy encourages Charlie Brown to take a kick at the football that she is holding only to lift it away at the last minute, causing Charlie Brown to go flying through the air.

Why haven’t investors conditioned themselves to expect this after so many years?

The answer is a little like the situations with Nortel and Blackberry. It is hard for investors to let go after having initial success in these once prominent brands.

The advantage that Cisco has over Nortel and Blackberry is its massive cash pile. The easy-money era of Alan Greenspan & Ben Bernanke at the U.S. Federal Reserve has made it a lot easier for companies with dated and uncompetitive business models to protect themselves.

Cisco has also had the added advantage of favourable U.S. tax laws that permit U.S. multinationals to keep their international earnings offshore. As long as they don’t repatriate earnings, it is like a tax deferral. Cisco has been a major participant in the lobbying effort to maintain this advantage.

It is also hard to let Cisco go because of how dominant it was. Not only did it rule the networking sector, but in March 2000 Cisco became the largest company in the world in terms of stock market value. That kind of valuation pedigree likely helped it in 2009 to be selected as one of the 30 stocks in the Dow Industrials Average.

However, this last earnings release may really sting. The company even suggested that the Chinese internet spying scandal contributed to its poor performance. The reality is that the products in which Cisco used to lead have become commodities and have been copied and heavily marketed by Chinese firms such as Huawei for many years now. Cisco’s competitive advantages have long since eroded. Despite that, not much has changed in terms of product focus or its business model since the 1990s when everything worked so well.

Another issue is that Cisco has an enormous institutional following. That also appears to be a significant source of the “benefit of the doubt” over the years.

It will be interesting to see if investors become more critical going forward rather than taking the company’s sunny comments at par value.

Cisco Systems Inc. is not held in the McIver-Jasayko Model Portfolios as of November 14, 2013. Comments about investments are not intended as advice and do not constitute a recommendation to buy, sell, or hold.

The opinions expressed in this report are the opinions of the author and readers should not assume they reflect the opinions or recommendations of Richardson GMP Limited or its affiliates. Assumptions, opinions and estimates constitute the author’s judgment as of the date of this material and are subject to change without notice. We do not warrant the completeness or accuracy of this material, and it should not be relied upon as such. Before acting on any recommendation, you should consider whether it is suitable for your particular circumstances and, if necessary, seek professional advice. Past performance is not indicative of future results. 

Richardson GMP Limited, Member Canadian Investor Protection Fund.

Richardson is a trade-mark of James Richardson & Sons, Limited. GMP is a registered trade-mark of GMP Securities L.P. Both used under license by Richardson GMP Limited.