Another month has passed by.
Markets have experienced the usual drama, just some variation on the script. We’re gone from some people screaming oil at 250 $ to other people screaming it at 30 $, from people calling the near demise of our contemporary monetary system and advising you to bury yourself in a hole with a year or more supply of food, medicines, ammos and weapons, possibly not too far from the other hole where you before put all your wealth in the form of gold and silver, to people calling the end of the bull market in gold and silver and all the commodities. Sometimes the same people said the first thing one month ago and are saying the second thing now. It will not takes too long to have people chattering away deflation again. It’s incredible the effect that some uptick on the US Dollar Index have to a lot of people.
Obviously, those of them in bona fide have simply no clue, looking like brains with thoughts guided by the changes in the markets’ prices; the others have their agenda. It’s frankly annoying to refute their flawed arguments every time; those same arguments will be anyway presented the next time, and again and again. A complete waste of time, time that could be employed much better searching for some good business to pick or a bad one to avoid.
All I had to say about economy and finance I’ve said in less than 10 pieces; I refer you to them, in the proper category on our website. Nothing to add because there’s been nothing new. On a more practical note I recommend to you the Grandfather wisdom; it will make you aware about many things you’ve experienced in your life since you’re born without maybe paying them the right consideration. Read it, and the next time you meet someone talking deflation you’ll know the place where to send him.
So this report will be very short, my friends, and you have to grow accustomed to ever more briefness. There’s really no need to add to the tons of words wasted everyday in the world. What I think you’ll know from my actions, the changes in our model portfolios, the alerts and their rational you can read on the website. I’ll better serve you employing this time and efforts to research stocks and concrete ways to perform the current financial environment.
No words even about our performance this month: it speaks for itself. We are fully satisfied with the results of our allocation to date (even our worst performer this month, the Currency Index, has held very well the enormous strenght of the US dollar), and we plan no major change for the next future. Our model portfolios are behaving very well too, even if €uroIncome and Julians still need some time testing.
Just a few considerations about the equity markets, the Forex and the precious metals.
As I said in the last report, I want a test of the July low to consider deploying our dry powder. Just a successful test of that low can give us the necessary confidence in a tenable surge in the stock markets. Markets have instead used the middle of August and its low volume to go straight in the resistances; they failed as expected to clear them. I don’t like this behavior, and keep on advising caution. Markets seems now searching for the next screaming to follow. I have noticed a good relative strenght of financials and housing related businesses. This would be a wonderful news for equity markets, but I have to point again to the low volumes. We are playing anyway a not distant bottom in those sectors with our last portfolio, Julians.
Other than a successful test of July lows, a convincing close (one week at least in these volatile times) above 3470 on the €urostoxx and 1325 on the S&P500 will be able to put more comfort in the markets, and we could consider to be more aggressive. But I doubt about that.
I’m out of the Forex, as you know, and I advice everyone to do the same. I am not buying the suggestion that the US Dollar Index has bottomed, at least I don’t think this is the final bottom. Sure, it seems a good intermediate bottom: my target of 1.6 $/1 euro has been achieved some months ago and it’s since january I have been warning that euro looked a bit stretched.
But a case could be made about one more high of the euroland currency against the US dollar, I’d dare to say 1.8 $/1 euro, even if it’s probable that we’ll see more euro weakness before that. I know it looks like a bold call, and it is, but even my call for 1.6 $/1 euro was considered crazy five years ago. Anyway, I’m gladly looking by the sideline at this time. I’d be a buyer if euro would test the neckline of the massive head and shoulder breached last year, around 1.35, with a tight stop.
About the precious metals arena, you know that I’m not impressed by the massacre occurred in August at the Comex paper market. Since 2003 this kind of things has happened a few times, every time with the same script (again, refer to my past essays and, for more details, to the good work of Ted Butler), and are as faked as a 3 dollar coin. As painful as it is we’ll hold our course, looking for much higher prices for gold and silver.
I want to clear however what I consider a misunderstanding. Most of people refer to gold as an hedge against inflation, a protection against the ever increasing cost of life in the age of a (for the first time) global fiat-money regime. Well, I don’t think so. If you look at the return an investment in gold would have delivered in the past decades, you’ll find that it has not even tracked the mere change in the CPI. I think the reason for this is the fact that in the last century the Governments have finally realized their oldest and wildest dream: to put permanently the Money out of the payments’ system, everywhere in the globe, replacing It with their debt. They still call that money, but it’s just an Orwellian speaking. Money as a good does not exist anymore in the contemporary payments’ system, replaced by money as a concept (mere governments’ debt, in substance).
Deprived of its monetary role, gold is not able to adjust its price for the increase in the cost of living. The real hedge against inflation in the long term is a good business with a tenable competitive edge, a decent management and a good dividend (possibly not worse than T-Note yield, or at least ever increasing).
Gold anyway retains its monetary role in the people’s subconscious, a hidden knowledge inside everyone telling them that gold will stand still when everything is falling apart. It reaffirms its ancient nobility then, it claims its exclusive rights to that abused name, Money, it makes clear once again that it’s the only legitimate payment, the payment in full, not depending on the willingness of nobody else. Gold is the hedge against financial crisis, not inflation.
Now and then the world is assailed with doubts about the sustainibility of the current monetary regime, and gold come back on the monetary scene. When it happens it’s possible that its price will adjust tens of times higher until the crisis ends; it was the case in the 1971-80 and I think it could be the case this time too. It’s enough clear that in 2001 started a decade full of those doubts and so it’s reasonable to expect the same outcome about gold price when it will end.
Even more compelling is the case for silver. Not only it has been the most circulated Money, but even if we completely dismiss its hidden monetary role silver is the most undervalued commodity on the planet. If you adjust its current price for inflation you’ll find that it’s never been so cheap since the last Glacial Age, it’s in very tight supply against demand with no substantial stockpiles anymore anywhere (but if you want paper-silver you can confidently turn to the Comex and its fair, fair, fair regulator) and could be scarcer than gold. In fact, all of the gold mined since the beginning is still around at this time (obviously, that does not mean it’s available), while most of silver lately is consumed for industrial use; in any case, in nature gold is just 18 times scarcer than silver, but its price currently is 60 times more.
I advice to use the metals to play this call more than mining shares. Even if it’s true you could get leverage with them, mining is a terrible business, very challenging and full of operational and management’s dangers, and you could very well end up looking at price of gold going bananas and your stock price in the dust. So, unless you can pick on the cheap tons of leverage with almost nil operational risk (SLW) or proved operational skill with reasonable reserves and very good cash flow (NXG) or enormous metals reserves unfairly priced (NG, here a different management would be a real plus, those guys are great geologist but have no clue how to operate a mine), you better avoid them or use a good proxy as GDX, above all for trading purpose. We are near to a major buying opportunity in the sector, with a risk/reward ratio comparable to the fall of 2001.
Since a few months it’s possible to sell option on GLD. So now gold can even pay you a “dividend”. I hope it will soon be possible for SLV too.
Well, I conclude here. If you will not receive this report in the next months, don’t worry: it will be just because I have nothing new to say, and it’s vain to repeat always the same concepts. All you have to do is to read the alerts on the website, that’s what really counts, the concrete operative side. Other than that, I’ll write to you again just if I have something worth to say or to answer to your questions, but even in that case I think I’ll use protected alerts on the website. You’ll be better served if I’ll employ this time studying and researching for you.
Many thanks for your attention.
Disclosure – Author owns physical silver and gold, and is long silver futures, NG, NXG, GDX.