The Bugs were right

Posted by Ray on May 12, 2010 under Main | Be the First to Comment

Much is being made over the price of gold over the past few days and questions are being raised. The main question is; why is gold going up while the dollar is gaining strength? To me it is fairly obvious, there is no faith in any of the currencies of the world at the moment. It is not as if gold is making highs in only Euros or dollars, but it is making highs in most currencies at this point. Again, it is because of a complete lack of confidence of currencies rather than, but not completely devoid of, inflationary fears.

In short, the gold bugs were right and the jokes that many made are suddenly not so funny any longer. What we are witnessing is nothing short of spectacular and one should not underestimate the importance of what is going on either locally or on the other side of the world. It is not very often that we see developed world economies default or come to the edge of default which should make everyone extremely nervous. This is not Ecuador defaulting or the Congo, but we are talking about Greece, which is no surprise in itself, Portugal, Spain and Italy who are or were on the verge of default. It does not end there though, even though they are the countries grabbing the headlines, because if they go France, Germany and the UK could all go as well, this is serious.

This has all the making, as I have said before, of a currency crisis and contagion that can and will more than likely grip the whole world, ending in the U.S. at some point in the near future. To many this is news to them as they fell into the “that cannot happen here” crowd, but the gold bugs, like myself, have been saying for years that at some point the markets will tell you that you have borrowed too much and they will cut you off. When that happens the currency becomes worthless and inflation will inevitably set in making life miserable for the inhabitants of said countries. This is why gold bugs accumulate gold for years because they see it coming and this is why we are witnessing Europeans scramble to buy bullion now. Rumors are that European mints are almost out of bullion, both gold and silver, which may be one reason why prices are spiking. The rumors are not verified, but it would not surprise me one bit as the Euro continues its slide and I do not believe we have seen anything yet in terms of the decline in the Euro or the price of precious metals.

Many wonder why people run to gold for safety during times of stress and the answer is simple, it is a well known store of wealth with a 5,000 year history. It is recognizable, rare, relatively speaking, it cannot be diluted, it is inversely correlated to currencies and you can usually tell if it is fake or not as well as it is portable. All of those reasons make it attractive as an alternative to currencies during times of stress and why people are buying it now. The common reason people present, lately, for not buying gold is that it is not a safe haven because it got crushed in 2008 with everything else. That is true, but the world was in liquidation and seeking dollars to try and settle trades, dollars were tough to find remember, which is why everything went down, except for treasuries. Others claim that other commodities are better, like food, that is true, but food goes bad, you would need a lot of it, it is not as rare and people always need a medium of exchange, currency, to trade with which is exactly what gold is. I am not saying it is perfect or it will work, but I would rather own it than not own it at this stage of the game.

What does have me concerned is the fact that while the jokes about gold bugs have stopped the talk about gold has escalated dramatically lately as we are pushing new nominal highs. I am bullish long-term on gold, I mean, come on, the Fed by its very nature devalues the dollar by about 3% a year by design which makes gold a no brainer for the long-term, but shorter term when everyone is bullish I get bearish, kind of. I believe this time is different as we are facing, literally, a confidence issue if a major currency which is bullish for gold, but I am concerned that the price might get ahead of itself in the near-term. This happened the last time we got in this area and all the chatter stopped when it broke its winning streak, which I was happy about, and the same thing might happen again. However, the situation is different and unlikely to resolve itself.

What amazes me is that while all the talk is about gold no one is talking about silver. We are pushing almost $20/oz on silver right now, which is close to a breakout, and conditions are right for silver to really take off. With JPM making headlines about price manipulation, a currency issue, tight and dwindling supply, high demand, a metal no one recycles, a metal that is in everything we use makes silver, in my opinion, the trade of the century. I can see silver trading much higher than it is currently based on figures I have seen which estimates all the above ground silver consumed within the next 5 or 6 years. If that happens, $20/oz silver is a steal.

Regardless, metals make sense right now and while one should wait for a better entry point the idea is to be looking for that entry point to begin with. This is not rocket science as metals have fixed extraction costs and then it is supply demand after that. With the world’s population growing precious metals make complete sense especially since the vast majority of the world’s population considers precious metals the ideal investments. That in itself should make you think of adding some to your portfolio since the emerging markets population dwarfs the developed markets by a long shot and I would rather be selling it to them at a profit rather than trying to buy it from them at inflated prices.

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Panic hits the market

Posted by Ray on May 6, 2010 under Main | Be the First to Comment

Was it Greece? Was it a fat finger trade? Was it high frequency trading? Was it quant funds run amok? No one knows for sure, but it was ugly to say the least. I believe the selloff was very, very real and a matter of no one left to buy the dip. We fell within 1.5 points away from all trading being halted and we miraculously reversed course and rebounded some 700 points. Some think it was the Fed or the plunge protection team, I would say that is not farfetched either.

The one thing this was definitely not was a fat finger trade, like originally reported. When trades are entered for equity orders they only use numbers, not letters so the whole “B” versus “M” argument is a bit irrelevant and merely makes a good news story. I believe this whole thing was a perfect storm of a hugely overbought market, yes it is and was overbought, mixed with Greece contagion fears sprinkled with a bit of tight orders by HFT or quant funds and no one left to buy, anything. All liquidity was sucked out of the market and when that happens, well you saw what the results are.

I believe this is only the beginning and things will get much worse. It was also odd to see mining stocks remain in the green along with gold. If this was a trading error these stocks should have tanked as well, but they did not. This tells me that the selloff was more than a bad trade or order imbalance and any other ludicrous reason the media can come up with. It was selling, real live selling from people who know what it is like to lose 40-50% of their money and did not want to repeat that again. Watch fund flows to verify this, I bet we see more bond fund inflows in the very near future.

Even if you were short it was a tough market for you, especially option traders who saw the bid/ask spread widen to levels I have rarely seen before. I am long VIX August and September calls and it took an hour to get pricing back to normal and there was no premium being given for being in the money. It was amazing to see the selloff today as I jokingly went to my wife’s office and said the market is crashing, it was down only 280 at the time, and when I turned it to CNBC to show here it was down 400 and moving fast to the downside. It was breath taking and luckily I was hedged, but the talking heads on TV and perma bulls that you talk to probably told you that hedging was not important and the market now only moves up, it doesn’t, sorry to tell you.

I always find it odd that when the market tank there is talk of manipulation, but if the market goes up for 8 straight weeks that is normal, come on now. I do not believe anything about today was manipulated, except for the massive rebound that “just happened” all of a sudden. No one seems to be really looking for the cause of this, in a serious manner I mean, and are chalking the decline up to a fat finger event, etc. I am a bit more inquisitive though and while I do not have an answer, I have some theories.

I have heard rumors that the overnight repo market in Europe is frozen, I do not know if this is true yet, and if you notice the overnight LIBOR has been creeping up and is close to the 1 and 3 month rate, this might mean the rumor of the repo market is true. On top of that the risk of contagion is extremely real, I wrote about that a week ago in the “Greece Does Matter” post, and the next up is Portugal followed by Spain, Italy and France who owns tons of PIIGS debt, $781B to be exact. After that it is anyone’s guess to who is next, but it is more than likely going to be the UK. What is happening in Europe should be a lesson, in advance, for the US who, ever since Obama has come into office, seems to think the European way of doing things is better than our system, it is not.

The reason for the debt crisis is the massive debt these countries accumulated to give away free health care, massive pensions, paid vacations and other luxury things to their populations. Clearly following the European lead is not a wise move, but that will not stop our politicians who are immune to market downturns because, A) they are all wealthy and B) they are paid very well for what little work they do. We are the next Europe and we will suffer the same issues they have now if we do not get our act together. I am fairly certain that the funding crisis which is a rumor today will be public knowledge in a few days and is one of the main reasons for our selloff today.

If Europe cannot fund itself, other than through the printing press, today will seem like good times moving forward. This is bigger than Greece and it is 10 times bigger than Lehman, we are talking about countries now, not banks. Essentially, we decided to save the banks at our own peril and we are now seeing the results of this action. We should have let them fail, all of them, because we now run the risk of major countries failing. Was Goldman Sachs really worth it? I think not.

What really stood out today was gold, it went up and is on the verge of a tremendous break out. Are gold bugs really that creepy now or is it that we knew something in advance? For those of you wondering, it is the latter. Gold is now the new reserve currency, period. We may suffer from deflation when this funding crisis escalates, but that will quickly turn into inflation, very, very fast. When dollars come into high demand and they are not available we will see this deflation, but remember, we have Helicopter Ben at our disposal. He will literally get into his helicopter and drop dollars all over the country. This will seem like nothing as the dollar stays strong, but that will be very short lived.

After the dollars are dropped inflation will be swift and unlike anything we have seen before. You see, even though Ben flooded the banks with dollars over the last 3 years none of those dollars made it to us, the people who spend them. Instead the banks bought treasuries, also a good option for investors right now, and this time the dollars will bypass the banks and hit us directly, think Bush stimulus instead of green energy stimulus from Obama. Putting that money in our pockets will mean people will spend, that is what Americans do, don’t ask me why. There is where inflation begins and that is only the start. I am not sure what they will do after that, but I am confident it will involve more spending and giving us money, thanks china!

There is where the problems will really begin because there will be a global funding crisis at that point. This means that no one will buy our debt so we can buy iPods. Ben will have to print it, literally print it to get it into our hands. Inflation is a funny thing and very misunderstood, but I assure you that we will not enjoy it, we will at first though if we pay off our personal debts. In the end we will merely be left with tons of worthless paper and sky high prices. What happens next is a mystery to even me and I am a doom and gloom guy, but it is not going to end well. This is why you must own gold, in your possession, because it will get that bad. The worst case scenario is the value of said gold drops, but it will still be better than holding only USD’s. I think the biggest risk is not owning it versus owning it at this point.

Perhaps this was a one day event though, I doubt it, and everything will be fine. Tomorrow we will receive news that the government hired tons of people and private companies hired more temporary workers, we know the number will be good because Obama already scheduled an 11 AM press conference to go over the jobs report. However, those who continue to think temporary jobs and government jobs are a good thing will be very disappointed to learn it is not. I believe that we will open up much lower, working off unclosed sell orders, and we will rebound some tomorrow, who wants to be short into the weekend.

The real show might be next week, depending what happens over the weekend. I am not sure of the near-term outcome or what will happen, I am holding my shorts and VIX calls though, but we did get a glimpse of what will happen longer term today. I do not know about you, but I did not think it looked pretty. As far as believing some trader pushed the wrong button, come on we can do better with our excuses than that.

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