Black Swan Insights

Showing posts with label gold. Show all posts

Marc Faber's June Outlook: Deflationary Collapse or Inflationary Bust

Marc Faber is out with the latest issue of his famous Gloom, Boom, and Doom Report which is always a must read for serious investors. Unlike most of the other talking heads, Faber has an excellent track record. He predicted the top in the equity markets in Nov 2007 and caught the bottom in March 2009, making his subscribers a lot of money. Let's see what he is up to in June 2011:

1. Stocks--Faber is still cautious on equities, believing that a more significant market correction is around the corner. However, shorts should beware because they are fighting the Federal Reserve. If you have to be in the market, stick to consumer staples like MO, JNJ, KO, PG, etc. For the ultimate contrarian investor, take a look at some select housing stocks (TOL,LEN, KBH), but only if you have a high risk tolerance.

2. Bonds--Likes Treasuries for a trade. Says 10 year yields could fall to 2.5% during a stock market correction. Longer-term Faber hates Treasuries and dismisses Albert Edwards call for sub 2% yields for the 10 year.

3. Commodities--Stay away from industrial commodities. Global growth is slowing, which means weaker demand and lower prices.

4. Gold--Still likes gold and recommends a gradual accumulation despite market fluctuations. Says that longer-term gold can only go higher because of negative real interest rates. Even a deflationary collapse is unlikely to hurt gold because the Fed will simply debase the dollar to get nominal prices higher. If the Fed gets it right and successfully re-inflates asset prices, then inflation will be in the double-digits, which would be bullish for gold.

5. Dollar--Any temporary bounce in the dollar (say 10-20%) would be met with more money printing by Bernanke and Co. This factor limits any sustainable gains for the dollar. In fact, the only scenario where you could see a much higher dollar would be nothing short of a worldwide financial collapse.

5. Macro--Faber says it is very hard in this environment to predict what will happen in the markets. The Fed's manipulation of asset prices has caused large distortions. However, one thing is clear: the Fed will not let the markets fall too much. This is why Faber thinks the stock market will trend higher (in nominal terms) or at least trade sideways for the forseeable future.

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JP Morgan Says Not To Worry About Surging Bond Prices

JP Morgan is out with a report telling investors not to worry about surging bond prices and that they do not necessarily mean we are entering a deflationary spiral as some have postulated. Looking back at prior economic cycles, JP Morgan notes that bond yields often bottom out approximately 2.5 years after the end of a recession. So the current rise in price of the 10-year Treasury is not completely unexpected and is simply following the pattern from previous recoveries. The firm also says that the two primary catalysts for the recent rise in bond prices are a decrease in inflation expectations and record buying of US bonds by US households. The current 5-year break-even rate on bonds is 1.3%, down from around 2% reached backed in June. Furthermore, US household purchases of treasuries has surged 46% year over year in Q1 2010. In fact, households are the second largest holder of US treasuries, ahead of Japan and only $100 billion behind China. If that was not enough to arrest deflationary concerns, JP Morgan goes on to mention that the strong resiliency of commodity prices indicates that deflation is a remote possibility at this point. I agree, oil at 75, copper at 3.30, and gold at 1238 hardly make sense if we are entering a deflationary period. The deflation scare mongering is just a ploy by central bankers to print more money. Below is a chart which shows the 10-year Treasury over the last 35 years.

Here is the full report from JP Morgan:

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Weekend Reads and Audio

1. We are running out of helium--only 25 year supply left--maybe helium is the next great investment

2. The Death of Quant Funds

3. Stock Market is Still for Suckers

4. King World News Interview-- John Williams of ShadowStats

5. Goldseek Radio--Ron Paul and Harry Dent

6. Peak Oil Theory Has Peaked

7. The Stealth Debt Restructuring: Inflation

8. Emerging Markets are Still Looking Good--Deutsche Bank

Posting will be lite over the weekend. I am recovering from food poisoning courtesy of the Getty Villa Restaurant. Don't get the triple cheese pizza and cheese platter!!!

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How A Mistake By The Supreme Court Allowed Fiat Money In the US

Here is a very interesting research paper from the Bank of Japan which discusses how the US got off the bi-metallic system and evolved into a purely fiat-money system. The real culprit according to the author is not FDR or Nixon, but the US Supreme Court which failed to properly distinguish between fiscal and monetary policy when deciding the constitutionality of Greenbacks (notes issued by the government to finance the Civil war) and Legal Tender Laws in the 1860's. The Court affirmed the legality based on an incorrect interpretation of the Constitution which allows Congress to borrow money. The Court argued that issuing fiat currency was within the government's power to borrow. These important decisions were vital to destroying America's metallic based monetary system and the purchasing power of the dollar. The author concludes that "that monetary arrangements in the U.S. have departed sharply from those specified by the Constitution, and that the change has been based in crucial ways on invalid reasoning."

Here is an excerpt from the article:

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Thoughts From Marc Faber--- Aug 1

Legendary investor Marc Faber is out with his monthly report which discusses the US economy, QE 2, equity markets, China's property sector, and the EU debt crisis. Here are a few highlights:

1. Stock market outlook is uncertain. Faber is less confident that markets will fall to 850-900 because of the inevitable money printing (aka QE 2), which will boost asset prices. Possible trading range developing with 1040 as the bottom and 1170 as the top for the S&P 500. Even so he would be reducing equity exposure on any stock market strength.

2. Euro is likely to bounce around erratically between 1.25 and 1.35. Faber hates the dollar and euro but likes undervalued Asian currencies.

3. If you have to buy stocks make it Asian equities and REIT's in Thailand, Singapore, and Malaysia. They have high yields and are attractive compared to 3% 10 year treasuries. Asian economies will continue to grow at a healthy clip even with weakness in the US and Europe, which makes them good investments.

4. China's economy will continue to do grow even if the property market declines sharply. The growing Chinese middle class will support increased domestic consumption. Wages in China have gone up giving hundreds of millions of people increased purchasing power.

5. US municipal debt will likely become a major problem in the future. As of the 1st quarter of 2010 there is an estimated $2.8 trillion in outstanding municipal debt, which can never be repaid and will require a federal bailout. Another issue is state and local government pension plans, which are severely underfunded.

6. Gold is a buy after its seasonal bottom usually in September. Long term trend is up and as long as Bernanke is Fed Chairman, gold will do well.

7. Likes agricultural commodities and related stocks (but says avoid commodity ETF's because of the roll). In particular Faber likes wheat, rice, and soybeans. He also likes the fertilizer and seed stocks.

8. Faber expects rising agricultural prices will lead to civil unrest and violence in some countries.

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Gold Breaks Trendline Support

Well the cartel was back today to hammer gold and force it below trend line support. This will likely force the momentum and technical funds out of the gold market. Why is gold down today? It is not entirely clear--EUR/USD is relatively flat along with the stock market. The only explanation is that fears of a Euro collapse are dissipating with the release of the (bogus) bank stress tests. A large reason for the run-up in gold was because Europeans (particularly Germans) feared a dissolution of the EU and were buying gold to protect themselves. It seems the bank stress tests results along with the bailout package for Greece have temporarily eased concerns (long term is a different story). Other explanations suggest gold options expiration is to blame for the decline. But all is not lost, the long-term trend is still up as long as gold stays above $780. I am happy gold is declining in the short-term. It is always interesting to watch people get depressed when gold goes down when they should rejoice as they can now purchase gold at a lower price. Yet people never think of it that way. If you are interested in accumulating gold this is a good thing for you. Personally, I am looking for gold to fall to around $1050 before I buy any more. My goal is to have around 25% of my portfolio in gold bullion (right now I only have 5%). If the Fed keeps printing money that may eventually rise to 100%.

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Another takedown of Gold

Like clockwork Gold gets hit in the NY session. This pattern is too regular to be just another random occurrence. I am starting to think that a great trade in Gold is to short the futures at around 7:00-8:00 am eastern standard time and cover for a large gain by 10-11. As I have previously discussed, Gold has a routine trading pattern throughout the day that defies belief. It rises in Asia, flattens in Europe, and gets smacked in NY. This happens every day. It may be time to profit from this manipulation.

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Why Gold fell today

One of the more peculiar aspects of today's trading was the large plunge in gold. The yellow metal fell approx $43 to $1200 which seemed curious because the dollar was down against the euro. More importantly gold closed right at its lows for the day which could foreshadow further losses in the days ahead. But the question is why did gold fall so much? From what I have heard from a few commodities traders was that it was due to the surge in the Euro. After the Spanish bond auctions went relatively well investors seemed to interpret it as a positive the Euro and EUR/USD surged about 200 pips. Euro strength was seen against all pairs, even EUR/CHF (which has been in free fall). Traders said the move in the euro caused unwinding of the long gold/short Euro trade which many hedge funds and institutions had put on in recent months (worked pretty well too). This trade had become rather crowded and the large moves caused forced liquidations by some. Is this the real cause? I really don't know but it makes sense to me.

Good Luck

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Words of Wisdom from Leonardo da Vinci

1. I have been impressed with the urgency of doing. Knowing is not enough; we must apply. Being willing is not enough; we must do.

2.Simplicity is the ultimate sophistication.

3.Life well spent is long.

4.Life is pretty simple: You do some stuff. Most fails. Some works. You do more of what works. If it works big, others quickly copy it. Then you do something else. The trick is the doing something else.

5. Marriage is like putting your hand into a bag of snakes in the hope of pulling out an eel.