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Free Samples The
following excerpts from TSI commentaries should give those who are
unfamiliar with our service a taste of the sort of financial-world
analysis provided on a twice-per-week basis to our paying subscribers.
Note that during a typical week our subscribers receive two market
reports, with each report generally containing 2500-3500 words and 7-12
charts. This page will usually be updated every Tuesday with one or more excerpts from recent commentaries.
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| Date posted as sample | Commentary Excerpt |
| 23-Jun-09 | From the 22nd June 2009 Weekly Update: Bond Market Update The following chart makes the
point that a long-term upward trend in the TBond/gold ratio ended in
2001, and that the ratio has fallen faster over the past 8 years than
it rose over the preceding 20 years. Relative to gold, the Treasury
Bond recently hit its lowest level since 1983. And yet, many 'smart'
analysts and economists still refuse to acknowledge that there was a
major reversal in the inflation trend during the early years of this
decade.  In nominal dollar
terms, T-Bond futures have been in an intermediate-term decline since
last December and have been trending lower within a well-defined
channel since late March. The following daily chart of the September
contract shows the current situation.  |
| 23-Jun-09 | From the 17th June 2009 Interim Update: The following chart
shows that the silver/gold ratio has tracked the broad US stock market
over the past two decades. Thanks to the extreme volatility displayed
by silver from time to time, the silver/gold ratio has experienced
greater short- and intermediate-term swings than the stock market;
however, the two entities have shared the same long-term trends over
the period covered by the chart.  |
| 16-Jun-09 | From the 15th June 2009 Weekly Update: Gold Stocks  |
| 09-Jun-09 | From the 1st June 2009 Weekly Update: Gold Stocks ...Last week's upward acceleration in the gold sector has resulted in the AMEX Gold BUGS Index (HUI) moving to near its highs of the past decade RELATIVE TO its 50-day moving average (it ended last week 22% above this moving average). This increases the risk that an intermediate-term peak is close at hand, especially considering that we are still within the May turning-point window (since the beginning of the long-term bull market there have been several important gold-sector turning points between the first week of May and the first 2 trading days of June). Consequently, we have downgraded our intermediate-term outlook from "bullish" to "neutral". The most plausible intermediate-term bearish scenario goes something like this: The rally that began in mid April is the final leg of the intermediate-term advance that began last October. This rally, which is now close to an end, will be followed by a correction that will most likely bottom during October-November of this year in the vicinity of the HUI's 200-day moving average. Alternatively, it is possible that the sideways movement in the HUI between mid-December and mid-April effectively reset the clock, meaning that the rally of the past 6 weeks is just the first upward leg of a NEW intermediate-term advance. Due to last week's upward acceleration we think the odds are now slightly in favour of the intermediate-term bearish scenario. However, under either scenario the HUI will trade at or below its 50-day moving average within the next 2 months. This could be accomplished via a quick downward correction over the next few weeks, but given that the 50-day moving average is now rising at the rate of about 8 points per week it could also be accomplished by the HUI rising further over the coming 2-3 weeks and then pulling back over the ensuing 4-6 weeks to near its current level. For own accounts we did some buying last week from amongst the micro-cap gold/silver stocks mentioned in the latest Interim Update, and did some partial profit-taking during the Thursday-Friday surge within the ranks of the larger/more-liquid juniors that have recently had big run-ups (stocks such as WGW, NGD and NXG). However, we were net sellers. Also, we have a few above-the-market sell orders in place with the aim of raising even more cash if there's an extension of 'the surge' over the coming week or so. It's almost a mechanical process for us. We methodically scale into our favourite gold/silver stocks during extreme weakness or following long periods of dormancy and then methodically scale out during extreme strength, all the while maintaining sizeable core exposure to the gold/silver sector in line with the long-term bullish trend. |
| 02-Jun-09 | From the 27th May 2009 Interim Update: The Trend  |
| 26-May-09 | From the 20th May 2009 Interim Update: Gold Seasonality Since the beginning of its long-term bull market gold has tended to be flat from late May through to mid August. In fact, during the 7-year period from 2001 through to 2007 the average change in the gold price between 21st May and 15th August was only 3% and the maximum change was only 6%. Last year was an outlier in that it produced a 15.6% decline during the aforementioned period. Here are the details: Year: Net Change in Spot Gold Price Between 21st May and 15th Aug: 2001 -2.8% 2002 -0.3% 2003 -2.4% 2004 +3.9% 2005 +6.0% 2006 -5.2% 2007 +0.9% 2008 -15.6% 2004 and 2005 were the only two years in which the 21st May through to 15th August period produced gains in excess of 1% in the spot gold price. In both of these cases gold entered the period near its low for the year, which is not the situation this year. If gold follows the pattern of the past 8 years then 12 weeks from now the gold price will be within a few percent of where it is today (most likely a few percent lower). However, with the US economy in its worst condition in more than 60 years it would not be smart to blindly assume that gold will follow its seasonal pattern this year. In other words, don't sell your gold today on the assumption that you will be able to buy it back a few percent lower at some point over the next three months. Just be aware that seasonality is about to become a head-wind that could result in better buying opportunities over the months ahead. |
| 19-May-09 | From the 18th May 2009 Weekly Update: Bear Market Comparison  The 1937-1942 Model involves the stock market maintaining an upward bias for about 5 more months and then spending a few years working its way back to the March-2009 low. Under this scenario the ultimate low in nominal price terms was essentially put in place earlier this year, but a new bull market will not begin until 2014. Even if the US economy is in the early stages of a depression (our view), the above-described scenario is plausible if we assume that there will be enough US$ inflation to prevent the economic problems from being fully reflected in nominal stock prices. Under this scenario the US stock market would lose a large percentage of its value in gold terms while remaining above its March-2009 bottom in depreciated dollar terms. The 1937-1942 Model is not the most likely scenario; it is the most optimistic of the PLAUSIBLE scenarios that we can come up with. We don't know what the most likely scenario is, other than it's very likely that the US stock market is a long way from its ultimate bottom in real (gold) terms. |
| 19-May-09 | From the 13th May 2009 Interim Update: Gold's Fundamentals There are people who are widely considered to be experts on the gold market who believe that the combination of falling jewellery demand and rising scrap supply means that gold's fundamentals are presently very bearish and, therefore, that the metal's upside potential is minimal. For example, see the article posted HERE. These people are proof that 'experts' can be totally clueless. Organisations such as Gold Fields Mineral Services (GFMS) probably do a stellar job of gathering data on things like mine supply, jewellery demand, industrial demand, scrap supply and central bank gold sales. The problem is: none of these things have a significant influence on gold's price trend. As we have discussed many times in TSI commentaries over the years, gold's price trend is determined almost solely by changes in investment demand, and the investment demand for gold is, in turn, largely determined by the investment demand for financial assets such as equities. In fact, on a long-term basis it is reasonable to think of the gold market and the broad stock market as being at opposite ends of the investment seesaw. It is therefore not just a coincidence that the secular bull market in gold and the secular bear market in US equities began at around the same time. How could the folk at GFMS be so totally wrong about a market they spend so much time analysing? Because they spend almost all of their time analysing about 2% of the market. What we mean is that the combination of new mine supply and scrap supply adds about 2% per year to the total aboveground gold supply, while fabrication-related (jewellery and industrial) demand represents about 2% of overall demand. They focus on this 2% and pretty much ignore the remaining 98%. We aren't saying that it is isn't possible to put together a plausible bearish case for gold at this time; we are saying that you can't make any case whatsoever, the bullish or the bearish variety, based on irrelevant factors such as jewellery demand and scrap supply. To be rationally bearish on gold beyond the short-term you would have to believe that the bear market in equities has ended, or that governments and their central banks were about to start pursuing sensible fiscal and monetary policies, or that gold had become so over-priced relative to other commodities and investments that the market had already fully discounted gold's bullish fundamentals. |
| 12-May-09 | From the 11th May 2009 Weekly Update: Currency Market Update  Since writing the
above there has been a strong 2-month rebound in the A$. There is no
evidence that this rebound is complete, but we suspect that the bulk of
the short-term upside potential has been exhausted.  |
| 05-May-09 | From the 29th April 2009 Interim Update: "Global Warming" Notes 1. There are natural long-term temperature cycles, including 100-year and 1000-year cycles. For example, 800 years ago -- many centuries before humans began to burn fossil fuels in significant quantities -- the Earth's atmosphere was considerably warmer than the highest average global temperature of the past two decades, whereas in between then and now there were periods when temperatures were much lower than they are today. The fact is that global warming periodically occurs, as does global cooling. Polar bears have obviously been able to adapt to these temperature cycles.2. There are shorter-term temperature cycles of around one decade in length that appear to be influenced to the greatest extent by sunspot activity. The sizeable decline in the average global temperature over the past two years, for example, has coincided with a large decline in sunspot activity (a large rise in the number of "spotless" days). 3. The sunspot-related temperature decline of the past two years has been "inconvenient" for the Global Warming Alarmists because it has resulted in the polar ice caps expanding to their average level of the past 30 years and the global temperature dropping back to 1980s levels, despite the greater amount of CO2 now in the atmosphere. But as discussed in item 5 below, the Alarmists have an ace up their collective sleeve. 4. Some time ago it was discovered that there has been a positive correlation over the millennia between temperature and the level of CO2 in the atmosphere. Al Gore used this correlation to dramatic effect in his much-heralded promotion of the Global Warming cause, but additional data collected since then shows that the CO2 level FOLLOWS the temperature change, not the other way round. In other words, the empirical data suggest that if there is a long-term cause-effect relationship between CO2 and temperature it works the opposite way to the way in which Gore and Co. claimed. 5. There is evidence that the world has embarked on a cooling cycle, but not to worry: the term "Global Warming" is in the process of being replaced by the more general term "Climate Change". Altering the terminology in this way is smart because the Earth's climate has been changing since the beginning of time and will continue to do so REGARDLESS of what mankind does or doesn't do. In other words, the climate alarmists are ensuring that they will have justification for imposing their collective will no matter what. 6. Some scientists extrapolated the most recent upward trend in temperature to yield cataclysmic forecasts. This was akin to someone in the Northern Hemisphere noticing, in August, that the temperature had been rising month after month since March and exclaiming: "If this keeps up we'll all be dead by December!" 7. The claim made by the current US President and other politicians that the science of Global Warming is beyond dispute is a lie. Many scientists dispute the idea that human-generated carbon emissions have a significant effect on global temperature, including the more-than 100 scientists who signed the petition at http://www.cato.org/special/climatechange/ClimateAd_ChicagoTrib_Rev.pdf and the 31,000 scientists who signed the petition mentioned in this Telegraph article. 8. Despite the US Environmental Protection Agency's assertion to the contrary, CO2 is NOT a pollutant. |
| 05-May-09 | Also from the 29th April 2009 Interim Update: Uranium Stocks In the latest Weekly Update we discussed the strange divergence between the price of natural gas (the commodity) and the prices of natural gas equities. Specifically, we noted that natgas equities had been rallying while the natgas price had remained in a relentless decline that had taken it to 5-year lows, and that this divergent behaviour had pushed the XNG/natgas ratio (the AMEX Natural Gas Index relative to the natgas price) way above all previous extremes. It's a similar story with regard to the relationship between the price of uranium and the prices of uranium equities in that uranium has been one of the strongest stock market sectors since last October even though the price of the underlying commodity remains near a multi-year low. That being said, the divergence between the price of uranium and the prices of uranium equities is easier to explain than the divergence between natural gas and natural gas equities. For one thing, there is no near-term supply glut weighing down the price of uranium. It is clear that speculation drove the uranium price way too high during 2006-2007, but the price now appears to be at a level where mine supply combined with the supply from other sources is barely adequate to satisfy current demand. For another thing, there are only a handful of listed companies in the world with significant current uranium production, so it takes only a small increase in the investment demand for uranium equities to create a strong sector-wide rally. As is the case with natural gas equities, we think investors/traders should look for opportunities to scale back their exposure to uranium equities into strength over the next few weeks. There is significant additional short-term upside potential in the uranium sector, but as we get closer to mid-year the downside risk in all non-gold stocks will ramp up. However and as is also the case with natural gas equities, we think it will make sense to retain a core uranium position in line with the sector's longer-term bullish outlook. Global Warming, discussed earlier in today's report, is one aspect of the aforementioned longer-term bullish outlook for uranium and uranium equities. Global Warming (the man-made variety) is most likely a giant hoax, but the political ship has set a course that it probably won't deviate from regardless of the facts. Additionally, whether or not mankind's burning of fossil fuels is an important cause of "climate change", all things being equal it would certainly be better to have less air pollution. And at this time it seems that the most economically feasible way to achieve a meaningful reduction in GLOBAL air pollution is to expand the use of nuclear power. The main reasons why this is so are outlined in a very good article by Peter Huber that John Mauldin re-produced in his latest "Outside the Box" letter. Mr. Huber explains that most of the world's pollution is generated by the 5 billion poor people, which means that for a cleaner-energy solution to be truly viable it must also be cheap. He also explains that the expensive clean-energy solutions that are presently fashionable within the ranks of the 1.2 billion rich people not only don't have the ability to bring about a material reduction in global pollution, they will very likely cause pollution levels to INCREASE by making relatively dirty energy sources even cheaper for the most inefficient energy consumers. For example, the less coal that gets used in the US the lower the international coal price will become, leading to more coal being burned in countries such as China that use energy less efficiently than the US. Lastly, he points out that governments put their own economies at a major disadvantage when they force the use of expensive energy alternatives. To end this discussion, here are excerpts from the above-linked article: "The oil-coal economics come down to this. Per unit of energy delivered, coal costs about one-fifth as much as oil -- but contains one-third more carbon. High carbon taxes (or tradable permits, or any other economic equivalent) sharply narrow the price gap between oil and the one fuel that can displace it worldwide, here and now. The oil nasties will celebrate the green war on carbon as enthusiastically as the coal industry celebrated the green war on uranium 30 years ago. The other 5 billion are too poor to deny these economic realities. For them, the price to beat is 3-cent coal-fired electricity. China and India won't trade 3-cent coal for 15-cent wind or 30-cent solar. As for us, if we embrace those economically frivolous alternatives on our own, we will certainly end up doing more harm than good. By pouring money into anything-but-carbon fuels, we will lower demand for carbon, making it even cheaper for the rest of the world to buy and burn. The rest will use cheaper energy to accelerate their own economic growth. Jobs will go where energy is cheap, just as they go where labor is cheap. Manufacturing and heavy industry require a great deal of energy, and in a global economy, no competitor can survive while paying substantially more for an essential input. The carbon police acknowledge the problem and talk vaguely of using tariffs and such to address it. But carbon is far too deeply embedded in the global economy, and materials, goods, and services move and intermingle far too freely, for the customs agents to track." ..."So the suggestion that we can lift ourselves out of the economic doldrums by spending lavishly on exceptionally expensive new sources of energy is absurd. "Green jobs" means Americans paying other Americans to chase carbon while the rest of the world builds new power plants and factories. And the environmental consequences of outsourcing jobs, industries, and carbon to developing countries are beyond dispute. They use energy far less efficiently than we do, and they remain almost completely oblivious to environmental impacts, just as we were in our own first century of industrialization. A massive transfer of carbon, industry, and jobs from us to them will raise carbon emissions, not lower them." |
| 28-Apr-09 | From the 22nd April 2009 Interim Update: Taking a wider view  The gold sector plunged with the broad stock market in 1929 and then embarked on a 6-year upward trend that ultimately resulted in gains of around 500% for the leading gold stocks of the day. Note, though, that the gold sector didn't do much during 1930 and that the bulk of the gains occurred during 1932-1934. Comparisons with both the 1930s and the 1970s suggest that the gold sector will strengthen over the course of the next 12 months, but will not make spectacular gains. |
| 21-Apr-09 | From the 20th April 2009 Weekly Update: Gold and Economic Confidence The gold price relative to the general level of commodity prices (as represented by the gold/CCI ratio) can be thought of as the real gold price. In our opinion, few things in the financial world consistently behave as rationally as the real gold price. As a result, we have had far more success over the years at predicting the performance of the real gold price than at predicting the performance of any other market price. For example, in mid-2008 we correctly anticipated a large rise in the real gold price and at the beginning of this year we correctly anticipated a multi-month period of weakness in the real gold price. Unfortunately, being close to 100% right about the real gold price during the second half of last year didn't do us any good from a practical investing/trading perspective because we wrongly thought that the rise in gold-mining profit margins that would stem from the rise in the real gold price would support the prices of gold mining equities. The real gold price (the gold/CCI ratio) is an indicator of economic confidence in that a rising trend in gold/CCI is usually associated with declining confidence in the economy and/or the financial system, while a falling trend in gold/CCI is usually associated with rising confidence. "Economic confidence" is a fairly vague term, but aside from the gold/commodity ratio its intermediate-term trend can be observed in the performances of the yield curve (the differences between long-term and short-term interest rates) and credit spreads (the differences between the yields on high-risk and low-risk bonds). For example, the following chart of the HYG/TLT ratio shows how high-risk (junk) bonds have performed relative to much lower-risk US Treasury Bonds. The plunge in this ratio during the second half of last year was indicative of a massive widening of credit spreads, which was, in turn, indicative of falling confidence, whereas the ratio's subsequent rebound tells us that confidence has been gradually improving over the past few months.  The recent rebound in
economic confidence evidenced by the rise in the HYG/TLT ratio should
have been accompanied by weakness in the gold/CCI ratio, which, of
course, it has.  If our economic
outlook is in the right ballpark then the rebound in economic
confidence and the associated decline in the real gold price could
continue for another 1-2 months, but not for much longer than that.
Furthermore, we perceive more upside potential than downside risk in
the gold/CCI ratio, even in the short-term, because the rise in
confidence that's propelling equity markets and industrial commodities
upward (and gold downward) has fragile underpinnings. |
| 21-Apr-09 | From the 15th April 2009 Interim Update: Preparing for the worst It is, of course, possible that our economic outlook will prove to be too pessimistic and that, for reasons currently unknown to us, the economy will begin a sustainable recovery later this year despite the huge misallocation of resources being orchestrated by the US government and other governments. However, we aren't fretting over this possibility because as things currently stand the cost of being overly pessimistic is trivial compared to the cost of being overly optimistic. As noted in our 4th February 2009 commentary: "...if you prepare for a depression -- by, for example, getting out of debt and building up substantial reserves of cash and gold -- and things turn out better than expected, you won't lose much. On the other hand, you will probably lose a lot if you prepare for a rosy scenario and a depression actually occurs." The current stock market rally, which probably has further to run, and the associated increase in economic optimism are creating a reasonable setting for preparing for the worst. In our opinion, these preparations should include: 1. Reducing, but not totally eliminating, exposure to non-gold equities (it would be reasonable to have some long-term investments in non-gold commodity stocks and other companies that stand a good chance of remaining financially solid even if the economy continues to weaken) 2. Building up cash and eliminating debt 3. Taking advantage of the temporary shift away from "safe havens" to increase exposure to gold bullion 4. Spreading financial assets across multiple countries and geographic regions to mitigate political risks, such as the risk that capital/currency controls will be introduced 5. Storing physical gold inside and outside your country of residence 6. Keeping cash amounting to at least a few months of living expenses outside the banking system |
| 14-Apr-09 | From the 8th April 2009 Interim Update: Gold April gold futures broke below support at $890 on Monday. This breakdown creates a measured objective of around $800, but another possibility is that the gold price is consolidating within a channel (as indicated on the following daily chart) and will bottom-out in the mid-$800s. At the moment, movements in the US dollar's foreign exchange value seem to be almost irrelevant to the gold market. A lot of gold buying was prompted over the past few months by fears about what was happening to the financial system and what governments/central-banks were doing to their currencies and economies. The result was a sharp rise in the gold price from $700 to $1000 at the same time as the price of just about every other asset was falling. These fears were rational and will almost certainly re-emerge later this year, but they are temporarily abating in response to the global stock market rebound.  Gold's decline from
its February peak is good news for anyone who doesn't have a full
position. For those wanting to increase their bullion exposure our
suggestion is to begin buying in the $850s. |
| 07-Apr-09 | From the 6th April 2009 Weekly Update: Gold The spot gold price fell $32 last week, with the entire price decline occurring over the final two days of the week. Considering that price changes in global markets such as gold are the net result of the buy/sell decisions of millions of people, attempts to explain short-term price fluctuations are often futile. However, there were two bearish developments late last week that almost certainly contributed to the price action. The more important of the aforementioned bearish developments was the stock market strength that resulted in a significant upside breakout in the NASDAQ100 Index (as discussed earlier in today's report). When senior stock indices strengthen and break above obvious resistance levels it is indicative of reduced risk aversion and promotes a further reduction in risk aversion. A knock-on effect is that safe havens such as gold temporarily lose their appeal. The second bearish development of note was news that the IMF is pushing ahead with its plan to sell about 400 tonnes of gold. Although 400 tonnes sounds like a lot of gold, it's an amount that could be absorbed by the market with minimal fuss. For example, around 750 tonnes of physical gold changes hands every day via the London Bullion Market Association. Also, China's government could well be interested in purchasing all of the IMF's 'excess' gold. Like the gold sales conducted by European central banks under the Washington Agreement, mooted IMF gold sales garner a lot more press than they deserve. This occurs because most journalists and other commentators, including so-called gold specialists such as GFMS and the WGC, don't understand the gold market. They try to analyse the gold market as if it were the same as any other commodity market, which means that they end up fixating on the <2% of the overall market represented by new mine supply and jewellery demand and ignoring the >98% of the market represented by the aboveground gold stock. Gold is vulnerable to bearish news right now, even unimportant bearish news such as the proposed IMF gold sales, because a tentative shift towards riskier investments is underway and because the decline in the gold price from its February peak did not shake many weak hands out of the market (at least, that's the message of various sentiment indicators). |
| 07-Apr-09 | From the 1st April 2009 Interim Update: Sabina Silver (TSXV: SBB). Shares: 84M issued, 113M fully diluted (including this week's deal). Recent price: C$0.74 SBB has entered into an agreement to purchase the Back River assets of Dundee Precious Metals for C$7M plus 32M SBB shares (17M shares on closing of the transaction and an additional 15M shares if/when future milestones are achieved). The newly acquired properties are located in the same part of Northern Canada as SBB's Hackett River silver/zinc project. We like this deal because it gives SBB significant gold exposure and increases SBB's overall exposure to precious metals. Hackett River has 200M ounces of silver in the Measured and Indicated (M&I) category plus 60M ounces of "Inferred" silver, but it's as much a base metals project as it is a silver project. However, upon inclusion of the Back River assets SBB will clearly be a precious metals miner because these assets will immediately add 2.36M ounces of gold, 1.2M of which are in the M&I category. In effect, the new SBB will have about 6M ounces of gold-equivalent resources in Nunavut (4M ounces M&I and 2M ounces Inferred) plus a substantial base-metal resource. SBB's current market cap of C$62M (assuming 84M shares at C$0.74/share) is extremely low given its resource base. Also of importance is that the company is financially solid. Specifically, after paying for the Back River assets and its 2009 exploration work it should still have about C$20M of cash in the bank. Turning to the price chart (see below), SBB is presently testing resistance at C$0.75. After that there is no significant resistance until C$1.50. We think SBB is a speculative buy below C$0.80.  Energy Fuels Inc. (TSX: EFR). Shares: 53M issued, 62M fully diluted. Recent price: C$0.22  |
| 31-Mar-09 | From the 30th March 2009 Weekly Update: The Relevance of the Fed John Hussman wrote an article in August of 2001 titled "Why the Fed is Irrelevant". Commenting on this article in the 16th August 2006 Interim Update, we wrote:"...Dr Hussman argues, quite correctly in our opinion, that the Fed generally has very little direct control over monthly or even yearly changes in the money supply because: a) The quantity of bank reserves -- something over which the Fed does have considerable influence -- no longer determines the amount of lending carried out by commercial banks (the "money multiplier" taught in basic economics courses no longer exists in any meaningful way) b) These days, a lot of money is created outside the banking system c) The Fed tends to follow market-controlled interest rates rather than lead them" However, we went on to say: "...there's a bigger picture that will be missed by someone who draws conclusions about the Fed's relevance based solely on what the Fed does during its day-to-day operations. It's not, for example, a coincidence that during the 100 years prior to the creation of the Fed the US$ didn't lose any purchasing power and that during the 93 years since the creation of the Fed the US$ has lost more than 95% of its purchasing power. There's a cause/effect relationship at work here. The important point missed by Dr Hussman is that it's the existence of the Fed that gives the government the ability to issue huge (unlimited, actually) amounts of debt. With the Fed in place the US Congress could vote to issue 10 trillion dollars of new debt tomorrow and if there were no other buyers of this debt then the Fed would buy it all with newly created dollars. If not for the Federal Reserve the US Federal Government would be a relatively small institution that never went far into debt." We remembered the "Why the Fed is Irrelevant" article when reading Dr Hussman's 23rd March 2008 commentary. In this recent missive Dr Hussman rails against the latest plans of the Fed-Treasury combo on the basis that these plans will crater the US$, allow foreigners to purchase US assets at artificially low prices, and mortgage the future of the US economy; all for the sake of preventing the bondholders of US financial corporations from taking losses. Perhaps he now understands why the Fed is not irrelevant. On a related matter, some analysts have emphasised that today's monetary system is credit based. Their point, as we understand it, is that the private banks create credit and then, some time later, the Fed boosts the monetary base to reflect the additional credit. That is, in the realm of credit/money creation the Fed follows, rather than leads, the private banking industry, the implication being that if the private banks don't lend then deflation must occur. These analysts are effectively making the same point that Dr Hussman made in his August-2001 article, and it is a point that we agree with to a certain extent. Again, however, we think the bigger picture is being missed. For one thing, the banks only behave in this way (make new loans without regard to their current reserves) because they know that the Fed will always be around to top-up their reserves as needed. In other words, even though the Fed usually doesn't provide the initial monetary impetus to the credit expansion, it is the Fed's existence that makes the unrestrained expansion of credit possible. For another thing, when push comes to shove, as it has over the past seven months, the Fed has shown itself to be quite capable of taking the lead in the money-creation process. In fact, arguing at this time that the Fed can't keep the supply of money and credit expanding in the face of reduced lending on the part of the private banking industry is akin to arguing that it can't rain whilst standing in the middle of a rainstorm. It is happening right now and it has been happening since last September. |
| 31-Mar-09 | From the 25th March 2009 Interim Update: The Global Currency The financial crisis of the past two years and the resulting turbulence in the foreign exchange market has spawned calls for a new currency to be the primary means of payment in international trade. This new global currency would take over the role currently performed by the US$ and would probably be modeled along similar lines to the Special Drawing Rights (SDRs) used by the IMF. In its present form the SDR is a basket of currencies comprising the US$, the euro, the Pound and the Yen, but the main advocates of such currency market reform -- most notably the Chinese and the Russians -- would prefer that the new global currency were based on a broader index/basket of currencies. Naturally, the Chinese and the Russians would prefer that the Yuan and the Ruble were incorporated into the new currency. On the surface it seems that the introduction of a new "global currency" would be viewed by US policymakers as an unappealing prospect, but this is not necessarily so. To the detriment of freedom and economic growth, the world is currently dominated by "Keynesian" thinking; and as Murray Rothbard noted a long time ago, a world with a single fiat currency controlled by one World Central Bank is the Keynesian Dream. Under such a monetary system there would be far more scope to inflate at will because the changes in currency exchange rates that inevitably arise when one country inflates faster than another would be removed from the equation. To quote Rothbard: "[Keynesians] have long dreamed of a world without gold, a world rid of any restrictions on their desire to spend and spend, inflate and inflate, elect and elect. They have achieved a world where governments and Central Banks are free to inflate without suffering the limits and restrictions of the gold standard. But they still chafe at the fact that, although national governments are free to inflate and print money, they yet find themselves limited by depreciation of their currency. If Italy, for example, issues a great many lira, the lira will depreciate in terms of other currencies, and Italians will find the prices of their imports and of foreign resources skyrocketing." For the reason mentioned above, policymakers in the US would probably be in favour of a new global fiat currency provided that the US were able to exert considerable influence over the new currency. Other countries would naturally want to reduce US influence, but the reality is that there won't be genuine progress -- if you can call it progress -- towards a global currency without US support. If it is implemented in the near future there is very little chance that the new global currency will include a gold component. This is because no government will limit its ability to inflate until it is left with no other choice. Having said that, we don't think it is reaslistic to expect that a new global currency will be implemented within the next few years. By the time it is implemented it is quite possible that things will, indeed, be so bad that governments will be forced to limit their respective abilities to inflate by bringing gold back into the official monetary system. Finally, it is important to understand that the US$ isn't the world's dominant currency solely because central banks choose to keep most of their reserves in dollars. If every central bank in the world decided tomorrow to stop treating the US$ as the reserve currency the US$ would still be the world's dominant currency. The fact is that the US$ is the only universally-accepted fiat currency. |
| 17-Mar-09 | From the 16th March 2009 Weekly Update: Currency Market Update  As one central banker after another confirms their commitment to something they call "quantitative easing" and we call "inflating as if there were no tomorrow", it is becoming increasingly difficult to be bearish on the US$. At this time we are only short-term bearish on the US$ in anticipation of a euro rebound to the mid-1.30s. |
| 10-Mar-09 | From the 9th March 2009 Weekly Update: The Stock Market There is no question that the US economy is in bad shape and is still deteriorating. For example, the latest Purchasing Managers' Index (PMI) confirms the continuation of a strong downward trend in manufacturing, the unemployment rate has risen to around 15% (based on correct measurement, not the headline number), and one in eight US homeowners are now delinquent on their mortgages. This, however, is well known. It is a large part of the reason why the stock market has been incredibly weak and why sentiment surveys reveal extreme negativity.Because it is well known, today's miserable economic backdrop won't prevent the stock market from rebounding, or, for that matter, from embarking on a new long-term upward trend. Note, though, that we don't think there's a realistic chance of a new equity bull market starting anytime soon. This is partly because valuations are still much higher than they usually get near the ends of major bear markets and partly because the actions being taken by policymakers to "stimulate" the economy will prolong and deepen the downturn. Note, as well, that the capitulation we expect to see towards the end of the equity bear will probably encompass the gold price rising to some unbelievable price as well as widespread acknowledgement that the interventionist economic theories of Keynes et al are wrong. The current situation is that gold is yet to exceed its March-2008 high, and most people still seem to believe, or have not yet completely rejected, the idea that the government can help by creating money out of nothing and by stealing from Peter to pay Paul. A new bull market appears to be out of the question, but we continue to anticipate a tradable multi-month rebound. After a promising start the anticipated rebound failed to materialise during the first quarter, but we are now entering a 2-week time window when intermediate-term equity market turning points have regularly occurred over the past 9 years. Once a rebound begins it will probably NOT take the form of a consistent upward trend, at least not initially. The most likely pattern following a low will be a sharp 1-3 week bounce and then a pullback to test the low prior to the start of a consistent upward trend. |
| 10-Mar-09 | From the 4th March 2009 Interim Update: Gold Below is a daily chart of April gold futures. Tuesday's break below support at $927 indicates that a short-term peak was put in place at around $1000 late last month. However, the gold price has now fallen for eight days in a row, which means that a rebound should begin almost immediately.  Although a rebound
should begin within the next day or so it is unlikely that the downward
correction has run its course. The reason is that the eight consecutive
down-days do not appear to have put a significant dent in bullish
sentiment. For example, at the close of trading on Wednesday the
Central Gold Trust (GTU) and the Central Fund of Canada (CEF), two
funds that invest in bullion, were priced at premiums of 20% and 10% to
their respective net asset values. These premiums are quite high and
are only about 2% below recent peaks. |
| 03-Mar-09 | From the 25th February 2009 Interim Update: The Real Gold Price Gold is either expensive or cheap at its current price, depending on how you measure the price. Here's what we mean: In US$ terms the gold price still looks cheap. In particular, the following chart shows that the gold/TMS ratio (the gold price adjusted for changes in the supply of US dollars) is in the bottom 15% of its 30-year range and is no higher today than it was in 1973. It also shows that the gold price would need to increase by about 400% relative to the US money supply in order to match its 1980 bubble top. Gold would look a bit more expensive relative to the US$ if we accounted for the increase in gold supply over the decades, but it would still only be about 30% of its January-1980 peak. It is therefore not reasonable to say that the US$ gold price is presently in 'bubble territory'.  Relative to the Dow
Industrials Index gold is no longer cheap, but it is not yet expensive.
The last two secular bear markets in equities resulted in the Dow/Gold
ratio falling to 1, versus this ratio's recent low of around 7.  Over the long-term
the copper price is limited on both the upside and the downside by the
cost of copper production, but no such limitation applies to gold. New
mine supply is such a small component of overall gold supply that the
cost of gold production does not have a significant effect on the gold
price. Instead, the gold price is driven almost totally by investment
demand, and investment demand is driven by the general perception of
the economic and monetary situations. For example, gold tends to be
bid-up in response to increasing fears of economic weakness and
currency debasement. |
| 24-Feb-09 | From the 18th February 2009 Interim Update: Jump-starting the economy To get it to make sense, just make a slight change to the wording If the story unfolds roughly as we expect then a lot of mainstream economic commentary over the year ahead will begin with the word "despite". And in most cases the commentary will be a lot closer to the truth if you replace the word "despite" with the words "because of". For example, when you hear/read something along the lines of "despite the government's huge stimulus package and various schemes put in place to support troubled financial institutions, there are no signs of economic recovery", just pretend that the commentator said/wrote "because of the government's huge stimulus package..." |
| 24-Feb-09 | Also from the 18th February 2009 Interim Update: Northgate Minerals (AMEX: NXG, TSX: NGX). Shares: 255M. Recent price: US$1.51 The weakness in the Australian Dollar combined with the strong US$ gold price should ensure that NXG's Australian gold operations generate substantial cash flow during Q1-2009. Furthermore, these operations could generate sufficient cash flow over the remainder of this year to fund much of the construction of the company's Young-Davidson gold mine in Canada. Like many gold stocks, NXG has risen a great distance from its lows of the past few months and now looks extended on a short-term basis. Also, the following daily chart shows that it will soon encounter short-term resistance. However, we doubt that it is close to an intermediate-term peak. Our longer-term valuation, assuming that Young-Davidson is brought into production over the next 2 years and a gold price in the US$900-$1000 range, remains at US$5/share. Also, the stock won't encounter intermediate-term resistance until it reaches US$2.50. In our opinion it is not too late to buy NXG, although the optimum time for new buying would be following a pullback to US$1.25-$1.30.  |
| 17-Feb-09 | From the 16th February 2009 Weekly Update: ...With regard to the intermediate-term, it is becoming increasing difficult to justify a bearish view on the Dollar Index because euro-related risks are growing. As outlined in last week's Interim Update and in Ambrose Evans-Pritchard's 14th February article in the Telegraph, European banks have huge exposure to 'dodgy' emerging-market loans. Also, the euro remains over-valued against the US$ on a purchasing-power-parity basis and the interest rate advantage currently enjoyed by the euro is likely to disappear over the months ahead. Lastly, there's the ever-present risk that Europe's monetary union will begin to break apart as the member countries with the weakest economies decide that they need the freedom to inflate at will. The USD/EUR exchange rate constitutes more than 50% of the Dollar Index, so euro weakness will almost always boost the Dollar Index even though this index includes several other currencies. We turned intermediate-term bearish on the Dollar Index last November, but since that time the euro's downside potential has increased relative to the US dollar's downside potential. As a result, we are now upgrading our intermediate-term Dollar Index view to "neutral". If nothing else changes in the mean time, a decline by the Dollar Index to the low-80s within the coming 2 months would cause us to further upgrade our intermediate-term Dollar Index view (to "bullish"). |
| 17-Feb-09 | From the 11th February 2009 Interim Update: Gold Gold Sentiment Gold looks overbought on the charts relative to most currencies (not the US$) and most other commodities. Also, some short-term sentiment indicators reveal excessive optimism towards gold, and gold's attractiveness as an investment has lately been getting a lot more play in the mainstream financial press. These are all warning signs. However, optimism about gold still seems to be restrained, and in most cases the analysts who are 'beating the bullish drum' are missing the main points. We cite, as an example, the Mineweb article posted on 11th February that discusses the recent 'bullish' gold forecast of BMO Research. BMO's so-called bullish forecast is that a confluence of factors in gold's favour will lead to gold averaging $850/ounce in H1-2009, $925/ounce in H2-2009, and $925/ounce in 2010; in other words, BMO's view is that the gold price will essentially go nowhere over the next two years. People who agree with this 'bullish' forecast should sell now. As well as hardly being bullish, BMO's analysis betrays a fundamental misunderstanding about gold. According to the above-linked Mineweb article, BMO expects gold to rally "once there is evidence that fiscal and monetary policies are starting to work. This is projected to lift confidence in the banking sector and among consumers -- lifting the money multiplier and igniting inflation risks." However, one of the best reasons to be bullish on gold isn't that the fiscal and monetary policies will start to work; it's that these policies are guaranteed to fail. To the extent that they APPEAR to work in the short-term they will boost confidence in the banking system and put DOWNWARD pressure on the gold price, but over the intermediate-to-long term they will lead to an even weaker economy. The weaker economy will then be used to justify even more fiscal and monetary stimulus, and so on. In sum, we see some sentiment-related evidence that gold's SHORT-TERM upside potential is limited to a test of the 2008 peak, but the so-called bullish gold forecasts of mainstream analysts are a long way from being aggressive. At this stage, there doesn't appear to be anyone outside the "lunatic fringe" who expects gold to move much higher than $1000/ounce over the next two years. |
| 10-Feb-09 | From the 9th February 2009 Weekly Update: Gold and Silver  |
| 10-Feb-09 | From the 4th February 2009 Interim Update: In Sunday's report we
noted that the huge run-up in the gold price during 1978-1979 was
accompanied by stability in the US dollar's foreign exchange value. The
following chart comparison illustrates what we were talking about. The
chart shows that between November of 1978 and January of 1980 the US$
gold price gained almost 300% while the Swiss Franc was virtually flat
against the US$. The spectacular rise in the gold price at the end of
the 1970s was driven by a general decline in monetary confidence, as
opposed to a decline in US$ confidence.  What are the chances
that a general decline in monetary confidence will lead to a
spectacular rise in the gold price over the next 12 months? |
| 03-Feb-09 | From the 2nd February 2009 Weekly Update: Gold  The next chart shows
that gold has built on its recent upside breakout in euro terms (the
euro-denominated gold price has moved further into new-high territory).
It also shows that gold/euro is now a long way above its 50-day moving
average and is therefore 'overbought' on a short-term basis.  Note that the huge run-up in the gold price during 1978-1979 was accompanied by stability in the US dollar's foreign exchange value. |
| 03-Feb-09 | From the 28th January 2009 Interim Update:
  |
| 27-Jan-09 | From the 26th January 2009 Weekly Update: Gold  Eventually it will, but probably not over the next few weeks. |
| 13-Jan-09 |
From the 12th January 2009 Weekly Update: Money on the Sidelines One of the worst bullish arguments we regularly hear is that there is a lot of money on the sidelines, the idea being that the huge pile of money sitting in money-market funds and bank accounts could, at some point, go into the stock market. This idea is nonsensical because all the money in the economy is always, in effect, on the sidelines. Money never goes into equities or any other asset class; it just gets shuffled around between money-market and bank accounts. The reason is that for every buyer there must be a seller. For example, when Johnny buys Microsoft shares from Freddy he doesn't put money into the stock market or into Microsoft; he transfers money to Freddy. There was more so-called "money on the sidelines" in January of 2008 than in January of 2007 and there is now more money on the sidelines than there was at this time last year. Furthermore, as long as the total money supply keeps growing there will be more money on the sidelines in January of 2010 than there is now, and more money again in January of 2011. It's called inflation and it has been relentless since 1933. |
| 13-Jan-09 | From the 7th January 2009
Interim Update: Gold's response to military conflict Although many people believe that international military conflict is bullish for gold, as far as we can tell gold has NEVER made a sustained advance on the back of such an event. Due to the common belief that war is bullish for gold it is usual for gold to rally when geopolitical tensions increase, but any gains made on the back of such developments are generally retraced in full. Two fairly recent examples of the way gold tends to behave in response to military conflict are shown on the following chart.  Under the current monetary system gold is a hedge against -- and only a hedge against -- a loss of confidence in the official currency, which, in most cases, stems from monetary inflation. War will usually lead to higher inflation, but military conflict itself is not bullish for gold beyond the very short-term. The battle between Israel and Hamas is therefore not a good reason to buy gold. |
| 13-Jan-09 | Also from the 7th January 2009
Interim Update: Gross Output In the 22nd December Weekly Update we noted that the calculation known as "Gross Domestic Product" (GDP) is actually "Net Domestic Product" in that it omits all intermediate stages of production. As a consequence, the economy is much larger than suggested by the GDP calculation and consumer spending is a much smaller proportion of the US economy than most people think.Interestingly, the US Bureau of Economic Analysis (BEA) reports -- but does not, for some reason, publicise -- a figure known as "Gross Output" that does a better job of indicating the size of the US economy than the far more popular GDP calculation. The "Gross Output" calculation is displayed on a yearly basis at: http://www.bea.gov/industry/gpotables/gpo_action.cfm?anon=85267&table_id=23981&format_type=0 As far as we can tell, "Gross Output" does not include investment; so although "Gross Output" is a much better measure than GDP there is a good chance that it, too, understates the size of the overall economy. The bottom line is that consumer spending is probably no more than 30% of the US economy. Note that we are not arguing against the view that there are large imbalances within the US economy, because the reality is that many years of rampant monetary inflation and government intervention have inevitably led to HUGE imbalances. It is simply a matter of getting the facts right. The main problem with the almost universal belief that consumer spending dominates the economy is that it encourages bad economic policy. In particular, it prompts policies designed to increase spending when what is really needed to lay the groundwork for a strong recovery is more saving. In other words, it prompts policies that are guaranteed to make things worse. |
| 04-Jan-09 | From the 22nd December 2008 Weekly Update: The Stock Market The economic and earnings
news will continue to be lousy, but the stock market remains set for a
multi-month rebound. The reason is that almost everyone vulnerable to
being forced out of the market by price weakness has already
liquidated, meaning that most of the leveraged speculators still
standing are net-short. This is reflected by the high level of
pessimism still being indicated by various sentiment surveys.  |
| 04-Jan-09 | From the 17th December 2008
Interim Update: Commodities The Commodity-Currency RelationshipEven though we showed a chart comparing the CRB index and the euro as recently as the 8th December Weekly Update it's worth doing so again because the sharp rally in the euro over the past week has created an interesting divergence. Unless the strong positive correlation between the euro and the CRB Index is about to vanish (we don't think it is), the divergence shown on the following chart suggests that a strong commodity rebound will soon begin. Once the commodity rebound gets going the commodity currencies (the A$ and the C$) should begin to exhibit relative strength.  The following chart shows how the boom/bust cycle caused by central banks and fractional reserve banking is reflected in the performance of the industrial metals (represented by GYX) relative to the performance of the monetary metal (gold). Specifically, booms are characterised by relative strength in the industrial metals while gold does much better during the busts. The GYX/gold ratio's spectacular collapse since mid 2007 highlights the severity of the current bust. At the same time, the almost vertical decline in this ratio over the past 4 months suggests that the markets have come too far too fast in terms of discounting the economic implications of the bust. We don't think it's realistic to expect a new boom to commence within the next 12 months, but the markets are probably in store for a multi-month period of relative tranquility during which the industrial metals claw back some of their recent losses against gold. It should be noted, though, that there is not YET any evidence in the price action that the industrial metals complex has reached a short-term bottom in either dollar or gold terms. Also, the copper, lead, nickel and zinc markets are all in "contango", and with the exception of lead their LME inventories are in rising trends. This suggests that there is ample supply relative to demand at this time. The bottom line is that we currently have some very extended trends that are likely to partially retrace over the months ahead, but no evidence that the retracing process has begun.  |
| 16-Dec-08 | From the 15th December 2008 Weekly Update: Gold Stocks Gold versus other investments and commodities One of the most important gold-stock drivers is gold's performance relative to the broad stock market, as measured by the gold/SPX ratio. The following chart, for example, shows that the HUI and the gold/SPX ratio trended together over the past 5 years, with divergences usually being quickly eliminated. At least, that was the case until about 4 months ago when a huge divergence began to develop thanks to the HUI plunging at the same time as gold/GYX was rising. If the broad stock market does what we currently expect it to do and rebounds over the next few months then a multi-month period of consolidation is probably on the cards for the gold/SPX ratio. However, because the HUI is so far below where it SHOULD be based on the current value of gold/SPX, some short-term weakness in gold relative to the broad stock market shouldn't prevent the gold sector from maintaining an upward bias.  As noted in our 26th November and 1st December commentaries, it is reasonable to expect that gold will also consolidate for a few months relative to industrial commodities such as oil and the base metals. Quite simply, gold's recent near-vertical rises relative to other commodities will most likely have to be 'corrected' over the months ahead. However, some short-term weakness in gold relative to other commodities, which would, by the way, be more likely to arise from strength in other commodities than weakness in gold, should again not prevent the gold sector from maintaining an upward bias. This is because current gold-stock prices are yet to reflect the substantial improvement in gold-mining profit margins that will stem from the dramatic relative strength exhibited by gold over the past few months. |
| 16-Dec-08 | From the 10th December 2008
Interim Update: The Velocity Confusion In the 6th October 2008 Weekly Update we wrote: "Many analysts will undoubtedly claim that the increasing rate of money-supply growth isn't important because the velocity of money will remain low, but such claims reveal a misunderstanding. There is no magical quantity called "velocity" that operates independently of money supply and demand, causing prices to rise during some periods and to fall during others. Like changes in the purchasing power of money, the thing commonly called "money velocity" is simply an effect of inflation. By way of further explanation, during the early part of a major upward trend in money-supply growth it will typically be the case that inflation is not widely perceived as a problem. Actually, it's quite likely that deflation will be seen as the bigger threat. This is the situation that we often refer to as a "deflation scare" -- rising money-supply growth (inflation) combined with rising fear of deflation, with the fear of deflation being fanned by falling commodity and equity prices. During the early part of an inflation cycle the demand for cash balances will tend to be relatively high -- due to falling inflation expectations -- and the average economist will perceive a low "velocity of money". But as time goes by the effects of the increased rate of money-supply growth will start becoming apparent and people will become a little more conscious of the inflation threat, the result being a decline in the demand for cash balances (people will begin to save less cash). The average economist will interpret this as an increase in the velocity of money and may well conclude that prices have begun to rise in response to the increased velocity. Clearly, though, both the increase in velocity and the rise in the general price level are just lagged EFFECTS of the preceding money-supply growth. The bottom line is that "money velocity" is a redundant concept at best and a misleading one at worst." Predictably, many analysts are now talking about the decline in the so-called velocity of money. For example, John Mauldin allocates the bulk of his 5th December weekly letter to a discussion of how "money velocity" impacts economic growth and inflation/deflation (where inflation and deflation are wrongly defined as a rise and a fall, respectively, in the general price level). Mr. Mauldin's discussion of velocity is, in turn, largely based on the famous exchange equation, or quantity equation of money, that links nominal economic growth (Y) with changes in money supply (M) and money velocity (V). The equation can be expressed as: Y = MV. The above-mentioned exchange equation has minimal practical value and does not paint an accurate picture of how monetary changes affect the economy. There are a number of reasons for this, chief among them being that the economy cannot be modeled by any equation, let alone a simple one-line equation. Using a mathematical equation to make an argument creates the impression that the argument is scientifically based, but when an equation is used inappropriately, or when an equation is used to describe something whose very nature prohibits mathematical modeling, the outcome is decidedly unscientific. The performance of the economy is determined by the daily actions of millions of individuals. Even the world's most complex equation could not come close to modeling, or even approximating, such a system, so the idea that a simplistic one-line equation can do so is ludicrous. And yet, most economists labour under the misconception that the exchange equation is useful. As explained by F. A. Hayek in his 1974 lecture titled "The Pretence of Knowledge", the futile attempt to apply the methods of the physical sciences to the realms of economics and human action is a large part of the reason why economists have made such a mess of things. As far as popular misconceptions go, the notion that the exchange equation describes how the economy works is particularly dangerous because it gets in the way of real progress. It does so by leading to the following wrong conclusions: 1. The money supply must increase in order for the economy to grow 2. Increasing the money supply is a good thing, up to the point where prices begin to rise too rapidly 3. Gold is unsuited to be money because its supply cannot be increased at will 4. Economic growth can be brought about via policies that cause people to part with their cash more quickly 5. A fall in the general price level -- commonly referred to as "deflation" -- is always a bad thing The reality is that a STABLE money supply maximises the economy's growth potential and that per-capita economic growth is driven by increased productivity and capital investment. Furthermore, FALLING prices are a natural (and desirable) effect of REAL economic growth. When more stuff is being produced (the economy is expanding) and yet prices are rising it means that the government and/or the banking system is STEALING, via inflation of the money supply, the benefits that would otherwise have accrued to savers as a result of economy-wide productivity gains. |
| 09-Dec-08 | From the 3rd December 2008
Interim Update: The probability of another Great Depression In the minds of most rational observers it's a foregone conclusion that the economic recession will continue for some time, but very few people consider another major depression to be a legitimate threat. The consensus seems to be that some additional weakness is on the cards, but there's no chance that things will get as bad over the next few years as they got during the 1930s. Of course, almost no one was forecasting the Great Depression in December of 1929, either. Based on what we've read, the consensus during the months immediately following the 1929 stock market crash was that a period of economic weakness probably lay ahead, but there was no chance that things would get as bad as they were in 1870s. Not only did they get as bad, they got much worse.When someone claims that there is no chance of a major depression occurring within the next few years they are betraying a lack of knowledge about what led to the problems experienced during the 1930s. In our opinion, if they had a good understanding of what caused the economic malaise of the 1930s they would have to conclude that the probability of a great depression is considerably higher today than it was in December of 1929. Given that a great depression actually occurred during the 1930s can't we say that in December-1929 the probability of such an outcome was 100%? The answer is no; in December of 1929 the probability of a great depression was very low. What caused the depression was the massive credit expansion of the 1920s combined with numerous major policy blunders following the bursting of the credit bubble. In December of 1929 most of these policy blunders lay in the future. The major policy blunders we are referring to do NOT include the Fed's failure to prevent a substantial contraction of the money supply during the early 1930s. We are referring, instead, to government efforts to counteract the economic downturn by promoting the further expansion of credit, forcing prices to remain at unrealistically high levels, increasing taxes on high-income earners, depleting the pool of real savings by transferring savings from the private sector to the government, and generally creating an environment in which there was greater uncertainty and, therefore, lesser desire on the parts of entrepreneurs to invest for the long-term. For example, both the Hoover and Roosevelt Administrations passed laws that increased the price of labour, which naturally led to greater unemployment. Also, to elevate the prices of agricultural commodities the US government paid farmers to destroy their crops, which resulted in less food and higher food prices at a time when a larger quantity of lower-priced food would have been extremely helpful. The recent Washington Post article linked HERE covers some of the policy blunders. We can't quantify the probability that a great depression (or greater depression) will occur over the next few years, but we can say that the probability of a great depression is higher now than it was in December of 1929. We can say this because the recent credit bubble was many times the size of the 1920s bubble and because governments are now making similar policy blunders to those that were made almost 80 years ago. Moreover, the current batch of policy-makers is blundering much more rapidly and on a much grander scale. |
| 09-Dec-08 | Also from the 3rd December 2008
Interim Update: Gold Stocks  The following chart
shows the HUI/gold ratio and HUI/gold's 40-day moving average. The
rally in the HUI/gold ratio since its October bottom looks very
different to the counter-trend rebounds that occurred over the
preceding 12 months, and the difference will become even more
pronounced if HUI/gold can hold above its 40-day MA during the current
consolidation and then move above its late-November peak. Such an
outcome would be additional evidence that a major bottom is in place.  |
| 25-Nov-08 | From the 24th November 2008 Weekly Update: Gold Stocks  |
| 25-Nov-08 | From the 19th November 2008
Interim Update: Gold and the Dollar The US$ has been trying to reverse downward and gold has been trying to reverse upward, but the stock market keeps getting in the way. In the current unusual environment stock market weakness prompts de-leveraging, which puts upward pressure on the US$ (and the Yen) and downward pressure on most other currencies and gold. But despite the pressures exerted by the on-going de-leveraging, gold is holding nicely in the $730s and the Dollar Index has thus far been unable to exceed its late October peak. Daily charts of December gold futures and December euro futures are displayed below. The euro needs a daily close above 1.30 to confirm a low, but note that a daily close above 1.28 would be a clear warning that a short-term low is in place. As discussed in previous commentaries, December gold needs a daily close above $770 to confirm a low.   A downward spike in
the S&P500 Index to the vicinity of its 2002 bottom could push the
Dollar Index up to 90, but we suspect that a new high by the US$ would
not be confirmed by gold. |
| 18-Nov-08 | From the 17th November 2008 Weekly Update: Inflation Watch Last week was more of the same on the monetary inflation front, with another large increase in reserve bank credit and little change in broader measures of money supply such as TMS and M2.Currently, the US Treasury has $621B on deposit at the Fed and the commercial banks have a combined total of $364B of excess reserves on deposit at the Fed. This means that there is now close to 1 trillion dollars of money at the Fed that should eventually work its way into the economy and into the broader measures of money supply. The big question is: how long will it take for this to happen? We don't know, although we suspect that the current administration will want to allocate a large chunk of the Treasury's $621B over the coming two months, because after that it will no longer by the current administration and will lose the ability to control who gets what. |
| 18-Nov-08 | Also from the 17th November 2008 Weekly Update: Currency Market Update The G-20 Meeting In last week's Interim Update we wrote the following regarding the likely outcome of the 15th November G-20 Heads of State Meeting in Washington: "We will be surprised if anything earth-shattering comes out of this meeting. We certainly don't expect a new monetary system to be one of the outcomes. Our guess is that the heads of state will encourage each other to spend more (and thus inflate more) and create more regulations, as if the inflation that has already occurred and the regulations that are already in place haven't caused enough problems." Unfortunately, we were close to the mark. According to the Associated Press article posted at http://biz.yahoo.com/ap/081115/meltdown_summit.html: ""We must lay the foundation for reform to help ensure that a global crisis, such as this one, does not happen again," the leaders said in lengthy statement after the emergency summit. The plan endorses an early warning system for problems such as the speculation frenzy that fed the U.S. housing bubble. It also calls for the creation of "supervisory colleges" of financial regulators from many nations to better detect risky investing and other potential problems." And: "Leaders backed efforts to improve international monitoring of markets and bolstering rules about how companies value their assets, a weakness seen as partly responsible for the crisis at hand. Those steps are aimed at making the global financial system more accountable to investors and more transparent to regulators." And: "A thorny issue was whether all nations should pledge to enact government spending plans to stimulate their economies. The leaders supported the benefits of that approach, but stopped short of a commitment for all to act at the same time, as some Europeans had favored. The leaders pledged to "use fiscal measures" to energize individual countries' economies "as appropriate." They recognized the importance of the Federal Reserve and other central banks to order interest rate reductions to help cushion the economic fallout." In other words, governments have placed the blame for the crisis on greed and frenzied speculation within the private sector. Furthermore, they have decided to expand their own power with the aim of preventing a similar crisis from occurring in the future, and generally support the idea that an increase in the rate at which they spend taxpayers' money will help stimulate economic growth. Not unexpectedly, the heads of state have chosen to ignore the root causes of the crisis. Chief among these root causes are central bank manipulation of the price of credit, government intervention in the economy (regulations designed to promote sub-prime lending, for example), and a debt-based monetary system under which new money is created 'out of thin air'. The responses of policy-makers are usually predictable, at least in general terms. However, it is far more difficult to predict the short-term responses of financial markets to the actions of policy-makers, because a lot depends on what the markets had discounted prior to the actions. For example, the outcome of the G-20 Meeting was really just more of the same, but we don't know how the markets will react because we don't know what other traders/investors were expecting. Current Market Situation It looks like the Dollar Index successfully tested its October high last week in parallel with the stock market's test of its October low. However, a downward reversal hasn't yet been signaled. The following daily chart shows that the December euro has short-term support at 1.24 and resistance at 1.30. A downward reversal in the US$ would be signaled by a daily close above 1.30 by December euro futures. Also, a daily close above $770 by December gold would be a reliable indication that the US$ had made a peak of at least short-term significance.  As things currently
stand a currency market reversal has not been signaled, leaving open
the possibility that the Dollar Index will spike up to around 90 within
the coming 1-2 weeks. However, we think that the dollar's short-term
downside risk now exceeds its upside potential and have therefore
downgraded our short-term dollar view from "neutral" to "bearish". |
| 11-Nov-08 | From the 5th November 2008
Interim Update: Gold Displayed below is a monthly chart of the SPX and the SPX's 50-month moving average (the blue line on the chart). Notice that major corrections during the SPX's long-term bull market (1982-2000) ended at, or just above, the 50-month MA, but that during the long-term bear market (2000 to the present day) the SPX has oscillated around this moving average.  What has this got to do with gold?  In the short-term
gold has again held support at around $720, but is not yet 'out of the
woods'. A daily close above $770 in the December futures contract would
confirm that a short-term bottom was in place and project further gains
up to the mid-$800s, whereas a daily close below $720 would suggest
that a drop to the mid-$600s was on the cards. We think the former
outcome is the more likely.  |
| 04-Nov-08 | From the 3rd November 2008 Weekly Update: Currency Market Update Part of the reason for the US dollar's recent strength was the exodus from leveraged speculations in commodities, stocks, and debt securities. When the boom was in progress there was large-scale borrowing of the weakest of the major currencies -- the US$ and the Yen -- with the aim of leveraging the expected gains, but once it became clear that the boom was over there was a rush to close-out speculative positions that were turning sour and to repay the associated debt. The sudden need to obtain dollars and Yen for debt repayment caused the demand for these currencies to surge above their supply, despite the supply-generating efforts of central banks. However, whatever boost the US$ is going to get from the global de-leveraging process might now be in the past because there are signs that the immediate crisis is over. These signs include the recent worldwide rebound in equity prices and the plunge in LIBOR mentioned earlier in today's report. With some semblance of stability returning to the financial world it is likely that last week's quick drop in the Dollar Index will prove to be the first step in a multi-week correction. As mentioned in earlier commentaries and as noted on the following daily chart, the low-80s is a reasonable target for this correction. At this stage we expect that if the Dollar Index pulls back over the coming weeks then it will turn out to be a counter-trend move within a continuing intermediate-term upward trend. This is mainly because the dollar's recovery against the euro is based on more than just the 'dash for cash' that has characterised the market environment over the past couple of months. The recovery is also, we think, based on the euro's substantial over-valuation relative to the US$ and the growing recognition of the euro-zone's economic problems and political risk. In other words, whereas the gains achieved by the dollar over the past three months were largely driven by real strength in the dollar, we expect that future gains will be driven mostly by weakness in the euro.  The Australian Dollar
has behaved in an extraordinary fashion since the beginning of this
year. Firstly, the steady upward trend in this currency during the
first 6.5 months of the year made no sense at all, especially the
strength between mid March and mid July because by then it was obvious
that much slower global economic growth was on the cards. Secondly, the
A$'s decline from its July peak to its October trough was, as far as we
know, the fastest-ever decline by a major currency in the modern era.
It managed to wipe out more than 5 years of bull-market gains in a
little over three months.  |
| 28-Oct-08 | From the 27th October 2008 Weekly Update: Gold The dash for cash Gold has done well over the past couple of months relative to most commodities and most currencies, but it hasn't done well relative to the US dollar. This is not, as some gold bulls have suggested, because gold is being manipulated downward or because the dollar is being manipulated upward. The upward move in the dollar and the downward move in the US$ gold price have been associated with the global de-leveraging trend, a trend that both the Fed and the Treasury have been fighting 'tooth and nail'. As part of this trend, anything that could be sold was sold in order to obtain the funds -- primarily dollars and Yen -- needed to repay debt. Gold's good performance relative to secondary currencies and almost all other commodities indicates that the yellow metal has attracted significant additional investment demand, but this additional investment demand has been more than offset by the urgent need to reduce indebtedness on the parts of hedge funds and other large traders. In brief, hedge-fund managers have been exiting long positions in gold for the same reason that Aubrey McClendon, the CEO of and the world's biggest bull on Chesapeake Energy, recently sold almost every share he owned in the company he founded. The article posted HERE and re-produced below describes the force that's currently dominating the gold market and many other markets. "It's all speculation at this point, but it seems highly likely we'll find out that one or more major hedge funds imploded this week, especially given the dramatic moves in currencies, commodities and emerging markets. Wild swings in the markets most frequented by speculators are "only the result of imploding hedge funds leading to massive liquidations," writes Ashraf Laidi, Chief FX Strategist at CMC Markets. (Laidi declined to name names.) Other than John Paulson, whose funds are up 15% to 25% this year, the WSJ says, it's been a brutal year for hedge funds, including many well-respected names, as the Times U.K. reports: *Investors redeemed about $31 billion of global hedge fund assets in the third quarter and a further $179 billion was wiped off the value of their holdings by falling markets, according to Hedge Fund Research. *Hedge funds lost 4.6% in September, according to EurekaHedge, another research firm, which said that the investment class was on course to post annual losses for the first time since 1998. *Several legendary funds have suffered heavily this year, including Toscafund, which is down 55% year to date, and Citadel, which has lost an estimated 27%. While few tears are being shed for the "pirates of finance", forced selling by hedge funds is having a direct affect on the portfolios of "average" investors, especially those overweight emerging markets and commodities." When you make a trading or investing loss it is emotionally and financially unhealthy to look outward for someone to blame for the loss. The only good thing about suffering a financial loss is that it affords an opportunity to learn, but if you look outward rather than inward then you will learn nothing. Like many other gold bulls, we have been surprised that gold has not done better in response to the financial crisis. We expected gold to sell-off during the initial phase of a US$ rally, but we thought that fundamental gold positives would begin to dominate as soon as the euro bulls had been flushed out of the gold market. However, we greatly underestimated the speed with which the financial world would be forced to de-lever. The financial backdrop changed so quickly that even gold bulls were forced to sell gold to obtain cash. Under the current monetary system gold represents safety, but it does not represent liquidity; and over the past three months the need for liquidity has trumped all other considerations. Current Market Situation In last week's Interim Update we noted that CEF's premium to its net asset value (NAV) had dropped to about 5%, which suggested that a price low was close at hand given that the gold market's September bottom had occurred two days after CEF's premium had fallen to 5%. We also said that investors should consider accumulating CEF while its premium was around 5% or lower. The opportunity to purchase CEF at a premium of 5% or lower only lasted for two days because after dropping to 4.1% on Thursday the premium had moved up to 13.8% by the close of trading on Friday. We would definitely not buy CEF at anything like Friday's premium. Friday's surge in the CEF premium is a little disconcerting because it shows an eagerness on the part of the retail investing public to jump into gold and silver in response to the first sign of strength, which is not the sort of sentiment we would expect to see near an important price low. The sentiment situation as reflected by the CEF premium is therefore now a little 'muddier' than it was when we wrote last week's Interim Update. The Commitments of Traders (COT) Report is another sentiment indicator worth following. The latest COT report shows that sentiment in the gold futures market was as depressed last week as it was during the week of the September low. Gold's price action during the final two days of last week was interesting in that gold traded well below $700 on both days but failed to close below $720 on either day and ended the week just above important support defined by the May-2006 peak. The following weekly chart illustrates the situation.  Our guess is that
both gold and silver have just set important lows, but at this stage
there is scant technical evidence to support this guess. To confirm
that its correction has ended gold will have to break its sequence of
declining tops, meaning that it will have to close above the
early-October short-term peak. Alternatively, a daily close below $720
would be a short-term bearish sign. |
| 28-Oct-08 | From the 22nd October 2008
Interim Update: The government 'leverages up' It seems that just about everyone capable of getting some air time, including Warren Buffett, is advising the government to increase its own leverage in order to offset the de-leveraging going on in the private sector. This is terrible advice, but the US government and most other governments have taken it to heart. The extent to which the US government has taken this terrible advice to heart is evidenced by recent changes in the US federal debt. The total debt of the US Federal Government is reported daily at http://www.treasurydirect.gov/NP/BPDLogin?application=np and has increased from $9.668 trillion on 2nd September to $10.467 trillion on 21st October. This amounts to an increase of $800B in just 7 weeks, or an annualised growth rate of $5.9 trillion dollars. Putting it another way, if the US government continues to spend at the rate it has spent over the past 7 weeks then it will rack up a budget deficit of close to 6 trillion dollars over the coming 12 months. The actual deficit won't be that high because the current frenetic spending pace won't be maintained over the full year, but it will almost certainly be in the trillions. The financial markets have more immediate concerns than the government's burgeoning debt load and these immediate concerns are, for the moment, dominating all other considerations. However, the markets will eventually have to account for the inflationary ramifications of the 'moonshot' in government indebtedness. |
| 30-Sep-08 | From the 24th September 2008
Interim Update: The Boom-Bust Cycle One of the most absurd aspects of the current financial crisis is that central banks, the primary instigators of the crisis, are receiving almost none of the blame. Instead, they are routinely being portrayed in the press as "knights in shining armour" coming to the rescue of a financial system corrupted by the greed-driven acts of evil private bankers and financiers. Moreover, rather than being chastised for their pivotal role in bringing about the crisis, it seems that central bankers are going to gain from the debacle by having their powers expanded!The private bankers and financiers that levered their balance sheets to the hilt with no real thought about the future, except for the amount of money they would be able to pocket at the end of the year, should be held accountable for their actions, but it must be kept in mind that the Fed and its central banking cohorts facilitated the inflations of the various bubbles that have now ruptured. Without the central bank acting as the monetary backstop and ensuring that all increases in the demand for new credit could be satisfied without any significant increase in the price of credit, the boom, and therefore the subsequent bust, could not have happened. When the central banks create an environment whereby huge amounts of new money can be borrowed into existence cheaply and easily, the average private banker will naturally find ways to profit from the situation. In fact, placing bankers in such an environment and expecting them to remain prudent is akin to leaving hungry children in a candy store for a few hours and expecting them not to eat anything. There will undoubtedly be some bankers who refuse to play the game, but they generally won't last long because while the inflation-fueled boom is in progress the banking-industry survivors will tend to be those who are willing to take full advantage of the inflation. During an inflation-fueled boom, reckless extravagance is rewarded and prudence is punished. One way to visually represent the boom-bust cycle created by central banks is via a chart of the Industrial Metals Index (GYX) relative to gold. Such a chart is presented herewith. The message, here, is that industrial metals do much better than the monetary metal (gold) while the boom remains intact, but once the boom inevitably turns into a bust the monetary metal begins to dominate. Our view is that 'the bust' will continue for at least another year, so we are anticipating at least one more year of strength in gold relative to the industrial metals.  |
