Posts

May 8, 2019

Global Market Comments
May 8, 2019
Fiat Lux

SPECIAL GOLD ISSUE

Featured Trade:
(THE ULTRA BULL ARGUMENT FOR GOLD),
(GLD), (GDX), (ABX), (SLV), (PALL), (PPLT)
(TESTIMONIAL)

The Ultra Bull Argument for Gold

Gold has become the ugly duckling during this bull market for stocks and bonds. However, that is not going to last.

Gold will eventually come back in fashion and when it does, how high could it really go?

The question begs your rapt attention as the possibility of Britain leaving the EC has suddenly unleashed a plethora of new positive fundamentals for the yellow metal.

It turns out that gold is THE deflationary asset to own. Who knew?

I was an unmitigated bear on the price of gold after it peaked in 2011. In recent years, the world has been obsessed with yields, chasing them down to historic levels across all asset classes.

But now that much of the world already has or is about to have negative interest rates, a bizarre new kind of mathematics applies to gold ownership.

Gold’s problem used to be that it yielded absolutely nothing, cost you money to store, and carried hefty transactions costs. That asset class didn’t fit anywhere in a yield-obsessed universe.

Now we have a horse of a different color.

Europeans wishing to put money in a bank have to pay for the privilege to do so. Place €1 million on deposit on an overnight account, and you will have only 996,000 Euros in a year. You just lost 40 basis points on your -0.40% negative interest rate.

With gold, you still earn zero, an extravagant return in this upside down world. All of a sudden, zero is a win.

For the first time in human history, that gives you a 40 basis point yield advantage over Euros. Similar numbers now apply to Japanese yen deposits as well.

As a result, the numbers are so compelling that it has sparked a new gold fever among hedge funds and European and Japanese individuals alike.

Websites purveying investment grade coins and bars crashed multiple times last week, due to overwhelming demand (I occasionally have the same problem). Some retailers have run out of stock.

And last week, the fever went pandemic as silver rocketed 14.28%, and others like Platinum (PPLT) and Palladium (PALL) were also frenetically bid.

So I’ll take this opportunity to review a short history of the gold market (GLD) for the young and the uninformed.

Since it peaked in the summer of 2011, the barbarous relic was beaten like the proverbial red-headed stepchild, dragging silver (SLV) down with it. It faced a perfect storm.

Gold was traditionally sought after as an inflation hedge. But with economic growth weak, wages stagnant, and much work still being outsourced abroad, deflation became rampant.

The biggest buyers of gold in the world, the Indians, have seen their purchasing power drop by half, thanks to the collapse of the rupee against the US dollar. The government increased taxes on gold in order to staunch precious capital outflows.

You could also blame the China slowdown for declining interest in the yellow metal which is now in its fifth year of falling economic growth.

Chart gold against the Shanghai index and the similarity is striking until negative interest rates became widespread in 2016.

The brief bid gold caught in 2015 over war fears in Syria, Ukraine, and then Iraq was worth an impressive $160 rise.

That is when the diplomats got involved and hostilities were at least delayed causing gold to roll over like the Bismarck.

In the meantime, the gold supply/demand balance was changing dramatically.

While no one was looking, the average price of gold production soared from $5 in 1920 to $1,300 today. Over the last 100 years, the price of producing gold has risen four times faster than the underlying metal.

It’s almost as if the gold mining industry is the only one in the world which sees real inflation since costs soared at a 15% annual rate for the past five years.

This is a function of what I call “peak gold.” They’re not making it anymore. Miners are increasingly being driven to higher risk, more expensive parts of the world to find the stuff.

You know those tires on heavy dump trucks? They now cost $200,000 each, and buyers face a three-year waiting list to buy one.

Barrack Gold (ABX) didn’t try to mine gold at 15,000 feet in the Andes, where freezing water is a major problem, because they like the fresh air.

What this means is that when the spot price of gold fell below the cost of production, miners will simply shout down their most marginal facilities, drying up supply. That has recently been happening on a large scale.

Barrick Gold, a client of the Mad Hedge Fund Trader, can still operate as older mines carry costs that go all the way down to $600 an ounce.

No one is going to want to supply the sparkly stuff at a loss. That should prevent gold from falling dramatically.

I am constantly barraged with emails from gold bugs whom passionately argue that their beloved metal is trading at a tiny fraction of its true value and that the barbaric relic is really worth $5,000, $10,000, or even $50,000 an ounce (GLD).

They claim the move in the yellow metal we are seeing now is only the beginning of a 30-fold rise in prices similar to what we saw from 1972 to 1979 when it leaped from $32 to $950.

So when the chart below popped up in my inbox showing the gold backing of the US monetary base, I felt obligated to pass it on to you to illustrate one of the intellectual arguments these people are using.

To match the gain seen since the 1936 monetary value peak of $35 an ounce, when the money supply was collapsing during the Great Depression, and the double top in 1979 when gold futures first tickled $950, this precious metal has to increase in value by 800% from the recent $1,050 low.  That would take our barbarous relic friend up to $8,400 an ounce.

To match the move from the $35/ounce, 1972 low to the $950/ounce, 1979 top in absolute dollar terms, we need to see another 27.14 times move to $28,497/ounce.

Have I gotten you interested yet?

I am long term bullish on gold, other precious metals, and virtually all commodities for that matter. But I am not that bullish. These figures make my own $2,300/ounce long-term prediction positively wimp-like by comparison.

The seven-year spike up in prices we saw in the seventies, which found me in a very long line in Johannesburg, South Africa to unload my own krugerands in 1979, was triggered by a number of one-off events that will never be repeated.

Some 40 years of unrequited demand was unleashed when Richard Nixon took the US off the gold standard and decriminalized private ownership in 1972. Inflation then peaked around 20%. Newly enriched sellers of oil had a strong historical affinity with gold.

South Africa, the world’s largest gold producer, was then a boycotted international pariah and teetering on the edge of disaster. We are nowhere near the same geopolitical neighborhood today, and hence, my more subdued forecast.

But then again, I could be wrong.

In the end, gold may have to wait for a return of inflation to resume its push to new highs. The previous bear market in gold lasted 18 years, from 1980 to 1998, so don’t hold your breath.

What should we look for? The surprise that your friends get out of the blue pay increase, the largest component of the inflation calculation.

This is happening now in technology, but nowhere else. When I visit open houses in my neighborhood in San Francisco, half the visitors are thirtysomethings wearing hoodies offering to pay cash.

It could be a long wait for real inflation, possibly into the mid-2020s, when shocking wage hikes spread elsewhere.

You may have noticed that I have been playing gold from the long side virtually every month since it bottomed in January. I’ll be back in there again given a good low risk, high return entry point.

You’ll be the first to know when that happens.

As for the many investment advisor readers who have stayed long gold all along to hedge their clients’ other risk assets, good for you.

You’re finally learning!

 

 

 

 

 

 

 

 

January 30, 2019

Global Market Comments
January 30, 2019
Fiat Lux

Featured Trade:

(WHY WATER WILL SOON BE WORTH MORE THAN OIL),
(CGW), (PHO), (FIW), (VE), (TTEK), (PNR),
(WHY WARREN BUFFETT HATES GOLD),
(GLD), (GDX), (ABX),

Why Warren Buffet Hates Gold

After seven years in the penalty box, gold is finally starting to come alive, and the Armageddon crowd is absolutely loving it. Maybe after ten years of rising, stocks are finally expensive on a relative basis?

These are the guys who are perennially predicting the collapse of the dollar, the default of the US government, hyperinflation, and the end of the world.

Better to keep all your assets in gold and silver, store at least a year’s worth of canned food, and keep your untraceable guns well-oiled and supplied with ammo, preferably in high capacity magazines.

If you followed their advice, you lost your shirt.

I have broken many of these wayward acolytes of their money losing habits. But not all of them. There seems to be an endless supply emanating from the hinterlands.

The “Oracle of Omaha” Warren Buffet often goes to great lengths to explain why he despises the yellow metal.

The sage doesn’t really care about the gold, whatever the price. He sees it primarily as a bet on fear. I imagine he feels the same about Bitcoin, the modern tulips of our age.

If investors are more afraid in a year than they are today, then you make money on gold. If they aren’t, then you lose money.

The only problem now is that fear ain’t working.

If you took all the gold in the world, it would form a cube 67 feet on a side, worth $5 trillion. For that same amount of money, you could own other assets with far greater productive earning power, including:

*All the farmland in the US, about 1 billion acres, which is worth $2.5 trillion.

*Seven Apple’s (AAPL), the second largest capitalized company in the world at $731 billion.

Instead of producing any income or dividends, gold just sits there and shines, making you feel like King Midas.

I don’t know. With the stock market at an all-time high, and oil trading at $53/barrel, a bet on fear looks pretty good to me right now.

I’m still sticking with my long-term forecast of the old inflation adjusted high of $2,300/ounce.

It is just a matter of time before emerging market central bank buying pushes it up there. And who knows? Fear might make a comeback too.

 

 

October 25, 2018

Global Market Comments
October 25, 2018
Fiat Lux

Featured Trade:

(THE LAZY MAN’S GUIDE TO TRADING),
(ROM), (UXI), (BIB), (UYG),
(THE NEXT THING FOR THE FED TO BUY IS GOLD),
(GLD), (GOLD), (GDX), (ABX), (NEM)

October 9, 2018

Global Market Comments
October 9, 2018
Fiat Lux


SPECIAL REPORT ON GOLD

Featured Trade:
(TAKING A LOOK AT GOLD LEAPS),
(GLD), (ABX), (AMZN)

October 1, 2018

Global Market Comments
October 1, 2018
Fiat Lux

Featured Trade:
(THE MARKET OUTLOOK FOR THE WEEK AHEAD,
or DON’T NOMINATE ME!),
(AMZN), (NVDA), (AAPL), (MSFT), (GLD), (ABX), (GOLD),
(JOIN US AT THE MAD HEDGE LAKE TAHOE, NEVADA,
CONFERENCE, OCTOBER 26-27, 2018)

The Market Outlook for the Week Ahead, or Don’t Nominate Me!

I have a request for all of you readers. Please do not nominate me for justice of the Supreme Court.

I have no doubt that I could handle the legal load. A $17 copy of Litigation for Dummies from Amazon would take care of that.

I just don’t think I could get through the approval process. There isn’t a room on Capitol Hill big enough to house all the people who have issues with my high school background.

In 1968, I ran away from home, hitchhiked across the Sahara Desert, was captured by the Russian Army when they invaded Czechoslovakia, and had my front teeth knocked out by a flying cobblestone during a riot in Paris. I pray what went on in Sweden never sees the light of day.

So, I’m afraid you’ll have to look elsewhere to fill a seat in the highest court in the land. Good luck with that.

The most conspicuous market action of the week took place when several broker upgrades of major technology stocks. Amazon (AMZN) was targeted for $2,525, NVIDIA (NVDA) was valued at $400, and JP Morgan, always late to the game (it’s the second mouse that gets the cheese), predicted Apple (AAPL) would hit a lofty $270.

That would make Steve Jobs’ creation worth an eye-popping $1.3 trillion.

The Mad Hedge Market Timing Index dove down to a two-month low at 46. That was enough to prompt me to jump back into the market with a few cautious longs in Amazon and Microsoft (MSFT). The fourth quarter is now upon us and the chase for performance is on. Big, safe tech stocks could well rally well into 2019.

Facebook (FB) announced a major security breach affecting 50 million accounts and the shares tanked by $5. That prompted some to recommend a name change to “Faceplant.”

The economic data is definitely moving from universally strong to mixed, with auto and home sales falling off a cliff. Those are big chunks of the economy that are missing in action. If you’re looking for another reason to lose sleep, oil prices hit a four-year high, topping $80 in Europe.

The trade wars are taking specific bites out of sections of the economy, helping some and damaging others. Expect to pay a lot more for Christmas, and farmers are going to end up with a handful of rotten soybeans in their stockings.

Barrick Gold (ABX) took over Randgold (GOLD) to create the world’s largest gold company. Such activity usually marks long-term bottoms, which has me looking at call spreads in the barbarous relic once again.

With inflation just over the horizon and commodities in general coming out of a six-year bear market, that may not be such a bad idea. Copper (FCX) saw its biggest up day in two years.

The midterms are mercifully only 29 trading days away, and their removal opens the way for a major rally in stocks. It makes no difference who wins. The mere elimination of the uncertainty is worth at least 10% in stock appreciation over the next year.

At this point, the most likely outcome is a gridlocked Congress, with the Republicans holding only two of California’s 52 House seats. And stock markets absolutely LOVE a gridlocked Congress.

Also helping is that company share buybacks are booming, hitting $189 billion in Q2, up 60% YOY, the most in history. At this rate the stock market will completely disappear in 20 years.

On Wednesday, we got our long-expected 25 basis-point interest rate rise from the Federal Reserve. Three more Fed rate hikes are promised in 2019, after a coming December hike, which will take overnight rates up to 3.00% to 3.25%. Wealth is about to transfer from borrowers to savers in a major way.

The performance of the Mad Hedge Fund Trader Alert Service eked out a 0.81% return in the final days of September. My 2018 year-to-date performance has retreated to 27.82%, and my trailing one-year return stands at 35.84%.

My nine-year return appreciated to 304.29%. The average annualized return stands at 34.40%. I hope you all feel like you’re getting your money’s worth.

This coming week will bring the jobspalooza on the data front.

On Monday, October 1, at 9:45 AM, we learn the August PMI Manufacturing Survey.

On Tuesday, October 2, nothing of note takes place.

On Wednesday October 3 at 8:15 AM, the first of the big three jobs numbers is out with the ADP Employment Report of private sector hiring. At 10:00 AM, the August PMI Services is published.

Thursday, October 4 leads with the Weekly Jobless Claims at 8:30 AM EST, which rose 13,000 last week to 214,000. At 10:00 AM, September Factory Orders is released.
 
On Friday, October 5, at 8:30 AM, we learn the September Nonfarm Payroll Report. The Baker Hughes Rig Count is announced at 1:00 PM EST.

As for me, it’s fire season now, and that can only mean one thing: 1,000 goats have appeared in my front yard.

The country hires them every year to eat the wild grass on the hillside leading up to my house. Five days later there is no grass left, but a mountain of goat poop and a much lesser chance that a wildfire will burn down my house.

Ah, the pleasures of owning a home in California!

Good luck and good trading.

 

 

 

 

 

 

 

 

 

We’re Taking Calls Now

August 15, 2018

Global Market Comments
August 15, 2018
Fiat Lux

Featured Trade:
(WHY BONDS CAN’T GO DOWN),
(TLT), (TBT), ($TNX), (TUR), (TSLA),
(HOW TO MAKE MORE MONEY THAN I DO),
(AMZN), (LRCX), (ABX), (AAPL), (TSLA), (NVDA)

Why Warren Buffet Hates Gold

The Armageddon crowd must be slitting their wrists today watching gold hit a new four month low in the wake of the global interest rate rally.

No flight to safety here.

The Armageddon crowd are the guys who are perennially predicting the collapse of the dollar, the default of the US government, hyperinflation, and the end of the world.

Better to keep all your assets in gold and silver, store at least a year?s worth of canned food, and keep your guns well oiled and supplied with ammo, preferably in high capacity magazines.

If you followed their advice, you lost your shirt.

I have broken many of these wayward acolytes of their money-losing habits. But not all of them. There seems to be an endless supply emanating from the hinterlands.

The Oracle of Omaha, Warren Buffet, often goes to great lengths to explain why he despises the yellow metal.

The sage doesn’t really care about gold whatever the price. He sees it primarily as a bet on fear.

If investors are more afraid in a year than they are today, then you make money on gold. If they aren’t, then you lose money.

The only problem now is that fear ain’t working.

If you took all the gold in the world, it would form a cube 67 feet on a side, worth $5 trillion. For that same amount of money, you could own other assets with far greater productive earning power including:

*All the farmland in the US, about 1 billion acres, which is worth $2.5 trillion.

*8 Apples (AAPL), the largest capitalized company in the world, at $634 billion.

Instead of producing any income or dividends, gold just sits there and shines, making you feel like King Midas.

I don’t know. With the stock market at an all time high, and oil trading at $50/barrel, a bet on fear looks pretty good to me right now.

I’m still sticking with my long term forecast of the old inflation-adjusted high of $2,300/ounce.

It is just a matter of time before emerging market central bank buying pushes it up there.

And who knows? Fear might make a comeback too.
gld gdx abxGold Coin

Maybe Feeling Like King Midas is Not So Bad