Buy Gold, Sell Oil

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Posted by Chris Mayer via The Daily Reckoning

on Friday, 28 September 2012 07:46

Yeah, yeah, I know…gold and oil are both hard assets, but that doesn’t mean they will both provide a reliable hedge against the inflationary trend Ben Bernanke is creating.

In short, I like gold much better than oil…at least for the next couple of years.

The best reason to own gold is also the most well-known reason. The US government prints a lot of money, as the nearby chart plainly shows.


In round numbers, the Fed conjures about 55 million fresh dollars into existence every hour. By contrast, the entire world’s gold mines only manage to extract about $15 million worth of gold from the earth every hour and US mines only extract $2 million worth of gold per hour. In other words, Ben Bernanke creates US “money” about 27 times faster than US gold mines.

Wild stuff.

It is hard to fathom a readjustment of gold to keep up with the amount of money created. But that readjustment seems inevitable.

Obviously, inevitable is not the same thing as imminent. But there is good reason to think the gold price will top $2,000 fairly soon. The Deutsche Bank report shows how the gold price has pretty much marched in step with the Federal Reserve Bank’s money printing since 2000.

Based on all this kind of statistical analysis, even the mainstream Deutsche Bank predicts gold will top $2,000 in the first half of 2013.

The obvious take-away is to own some gold. Second, look at gold stocks — which have lagged the metal for some time and seem to be showing some life finally. The GDXJ, which is an exchange-traded fund made up of small gold stocks, is up over 25% since early May. It remains a good way to play a gold stock rally if you don’t want to take on the risks and frustrations of owning individual gold stocks.

Meanwhile, the outlook for the price of crude oil seems much less upbeat. In fact, I think the price of crude is likely to tank over the next couple of years.

I have said before that I think the oil bull market is on its last legs. In this, I’m just playing the odds. History and economics dictate what those odds look like.

For example, we know stock markets don’t trade for 30 times earnings — as the US stock market did in 2000 — for long. That was a figure far above the long-term average for stocks. And stocks subsequently crashed.

We know housing prices can’t sustain a price of 32 times the cost to rent them — as they did when housing prices peaked in 2006. That was again far above the long-term average of just 20 times. Housing prices later crashed.

Similarly, we can conclude that the current oil price — which is currently 230% above its long-term inflation-adjusted price — won’t last either.

The current bull market began in 1998. The average oil price in 1998 was just $11 per barrel. So the current bull market is 14 years old. And the US oil price is nearly nine times what it was in 1998. It’s been a great run.

Just how great you can see by looking at the previous chart. Crude oil is 230% above its long-term average in inflation-adjusted terms.

Besides, it is not as if we can’t see what will slay the oil price. There are many sharp swords all over the place.

Let us consider demand. The biggest economies on the earth — the United States, Japan, China and the EU — are all slowing down or contracting.

Let us consider supply. New technology continues to unveil giant sources of supply once thought uneconomic. David Fingold, a portfolio manager at DundeeWealth, writes:

More oil? It turns out that on top of US oil shale, Alberta oil sands, West Africa and Brazil there’s yet another massive source of oil that may be coming to market. It’s called the Bazhenov Shale, it’s in Russia and it’s big. I’m no geologist, but I’ve been told it’s similar to the Cardium in Alberta. Exxon starts drilling there next year. The energy boom of the 1970s ended when the North Sea and Alaska North Slope came on line at the same time. It seems likely more than two major fields will hit the market this decade. It’s hard to see oil becoming relatively scarce anytime soon.

The Bazhenov shale could be another game-changer for the oil industry. It is yet another massive oil source to add to a list that keeps getting longer as new technology cracks open sources once thought unreachable.

People will come up with all kinds of reasons to discount the new oil supplies. But history shows that human beings are creative and tenacious.

I was among the early investors in the Bakken in 2008. I recommended Kodiak Oil to the subscribers of Mayer’s Special Situations. The stock subsequently doubled. Back then, I remember hearing some geologists scoff at the Bakken and its potential to produce significant amounts of oil at low costs. Yet, here we are. Even now, I think people still underestimate the amount of oil the United States could produce.

On oil, I must disagree with my friend Byron King, who writes Outstanding Investments and (in a revision to his older “Peak Oil” views) now says we’re at “peak cheap oil,” or the end of cheap oil. I could not disagree more.

So one thing is certain; one of us is correct.

I say it is also a certainty that oil will be cheap again. And then it will get expensive again. Then, cheap again. And so on. In other words, just like any other commodity, it will continue to boom and bust and go through cycles. Timing is the great uncertainty.

I am interested in putting my money in areas where the odds favor me. Increasingly, I don’t see the odds favoring me when it comes to oil prices. To me, oil is much like stocks in 2000 or housing in 2006. It’s overpriced and due for a sizeable selloff.


Chris Mayer
for The Daily Reckoning


About Chris Mayer

Chris Mayer is managing editor of the Capital and Crisis and Mayer’s Special Situations newsletters. Graduating magna cum laude with a degree in finance and an MBA from the University of Maryland, he began his business career as a corporate banker. Mayer left the banking industry after ten years and signed on with Agora Financial. His book, Invest Like a Dealmaker, Secrets of a Former Banking Insider, documents his ability to analyze macro issues and micro investment opportunities to produce an exceptional long-term track record of winning ideas. In April 2012 Chris will release his newest book World Right Side Up: Investing Across Six Continents

Special Video Presentation: Urgent Message About Your Net Worth The single, solution-packed book that could... literally... mean the difference between growing wealthy or suffering an ugly, vicious decline in your net worth. Discover how to claim a FREE copy of this book, right here.






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Posted by by Jim Willie CB Editor of the “HAT TRICK LETTER”

on Thursday, 27 September 2012 11:04

More loyal Jackass wannabee followers will recall a story (repeated often) that on the Easter Sunday weekend of April 2010, a secret gathering of over 200 Arab billionaires convened in Abu Dhabi. They arrived in unmarked jets. My source was one of only two or three white faces in the crowd, invited by his clients. One result of the meeting was an accord struck between the Persian Gulf oil producers, led by the Saudis, to work toward a pact with Russia and China as protector of the gulf in return for financial cooperation, economic construction, and forward progress. The implicit message was that the Untied States would be phased out in the protectorate. In the balance would lie the Petro-Dollar defacto standard as victim. Events continue to this day in movement toward that end.

However, since the Syrian uprising, a new lethal element has entered the mix. Account will be kept brief, since so volatile and controversial. Just some bare notes. The Assad family in Syria has suffered some assassinations. Apparently, the Saudis had a hand in the killings. HezBollah has vowed retaliation. Their ties to Iran might be longstanding, but perhaps are exaggerated. My view is their home is in Lebanon. In August, Prince Bandar was assassinated. He was the Saudi head of security, and long-time ally to the USGovt. The Saudi regime is concealing his death, with outdated photos and false statements. They are working toward a transition. The House of Saud has been unstable from threats to the south in Yemen. It is unstable from internal threats tied to the fundamentalists. Although cooperation and respect has been shown between Riyadh and Tehran, the Bandar hit has created an entirely new environment. The Saudi regime with high likelihood is in its final months.

More importantly, the Petro-Dollar is losing its all important Saudi leg. Implications are vast. The US public takes the USDollar for granted, with almost no concept of FOREX exchange rates. If the House of Saud falls, when it falls, the impact crater will include the entire waistline of the USEconomy and its financial dog tail that wags it. The USGovt and its banker handlers have relied heavily upon the Petro-Dollar in general, and on the Saudis in particular, ever since Henry Kissinger signed an accord that governs over the grand surplus recycling back in the 1973-1974 era. Watch the Saudis convert USTBonds to Gold, then bug out of the desert to their new mansions in Southern Spain

The recent decision by the US Federal Reserve to contaminate the financial body until it responds favorably was the last straw in my book. Witness a declaration of permanent QE and hyper monetary inflation of the most virulent strain, unsterilized. The USFed is essentially admitting failure. The signal serves as the loudest death knell for the USDollar among many in a sequence. On a similar parallel note, lighter and more humorous, one might be reminded of the pirate swash buckling style of yelling at the swabbies that the beatings will continue until morale improves. The QE bond monetization of USGovt debt has turned viral and entrenched. It is sold as stimulus, when in fact it acts like a giant wet blanket on the USEconomy. It is intended as stimulus to businesses, but the effect is felt on the financial speculation and on Asian direct business investment. In the past the emergency lever device had been successful only because it was used on a temporary basis. But now the USFed high priest assures it is a permanent fixture, a sign of their failure. The public is too ignorant to comprehend the ruin. They can only see the threat to their personal ruin.


gold-dollar image004

gold-dollar image002





"The prettiest horse in the glue factory"

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Posted by Mark Leibovit - VR Trader

on Wednesday, 26 September 2012 07:44


The Dollar moved slightly higher on Tuesday on more safe haven buying.

The US Dollar Index gained.034 to settle at 79.552. 

Spain successfully sold 4 billion euros of 3 and 6-month bills on Tuesday, although yields were higher than the previous auctions. Spanish Prime Minister Rajoy on Thursday is expected to unveil additional austerity measures when he presents his 2013 budget. Italy today successfully sold zero-coupon 2014 bonds at 2.532%, down from 3.064% on Aug 28. 

Spanish ten year bond yields rose over 6 bp to 5.745%.

The GfK Oct German consumer confidence index of 5.9 was unchanged from September's 5.9 and was in line with market expectations. 

The Euro was up .22% against the Dollar.

Japan's Sep small business confidence index rose slightly to 45.1 from 44.8 in August. 

The Yen was down .05% against the Dollar.

China's Aug leading economic indicator rose 1.7% m/m after a +0.6% m/m gain in July, which was a possible sign that the Chinese economy is stabilizing. Positive factors in the leading indicator included a rebound in real estate and credit growth, and an improvement in consumer expectations. The market consensus is that Chinese GDP likely eased to about +7.4% in Q3 from +7.6% in Q2. 

China's central bank today injected a record 290 billion yuan ($46 billion) into the banking system to address a liquidity squeeze ahead of next week's Chinese holiday week.

As long as there is faith in the dollar and fiat money as a whole-and by and large there is, I see the system holding together for quite a while. I think it's Ian McAvity who calls the dollar "the prettiest horse in the glue factory." This became dramatically evident this week.

Owning Dollars other than for trading purposes is a fool's bet in my opinion. As a long term plan, you should be looking to exit Dollars and move into hard assets or strong natural resource based currencies. I particularly favor the Canadian Dollar. Other choices include the Australian Dollar, the Singapore Dollar and, of course, the Chinese Renminbi. My view is that we're ultimately headed back to the March 18, 2008 low of 70.698 and will later see 66.00 or much, much lower, possibly even the 30.00 area. This could occur between 2014 and 2018. Short-term (between now and early 2013) we should see the 73.00-74.00 area. For political reasons we may never experience the sudden overnight sudden devaluation as seen by Argentina, Brazil or Mexico in recent decades, but instead continue to see a slow diabolical deterioration. -Ed Note: Try Mark Leibovit's Special Trial Offer HERE

Prettiest Horse



“U.S. Dollar Index Headed For Rapid Collapse” Over The Next 3 to 4 Weeks

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Posted by Mac Slavo via Peter Grandich

on Thursday, 20 September 2012 00:00

Mac Slavo: If you think the Federal Reserve’s quantitative easing will only affect the U.S. dollar, think again. Now that the United States has officially begun it’s third round of money printing to the tune of at least $40 billion monthly, central banks around the worldwill also act to ‘defend’ their currencies in kind.

Moreover, because everyone is joining the fray, all of that extra money will make its way into key resource stocks and commodities, adding further upside price pressure to essential goods like food and fuel.

It’s a race to the bottom, and the losers are the 99.9% of us who aren’t being kept in the loop.

Quantitative easing is really another word for currency wars. A weak U.S. currency puts continued pressure on the Japanese Yen, the Chinese Yuan, the South Korean Won, the Australian dollar and other currencies.

Cheap money also fuels speculation and this money quickly drifts into commodity markets and the ETFs that help propel commodity market speculation. This is inflationary for food prices.

The lower the U.S. dollar the greater the intensity of currency wars.The break below the key uptrend line on the Dollar Index chart was an early warning of the third round of quantitative easing (QE3).


The most important question now is to use the chart to examine the potential downside limits of a QE3 weakened U.S. dollar.

The weekly close below this uptrend line was the first signal of a major change in the trend direction. It came before the announcement of QE3, last week.

The third significant feature is historical support near 74.5. This is the upper edge of a consolidation band between 73.5 and 74.5. This is the downside target for the Dollar Index following a fall below 79.

This target can be reached very rapidly over three to four weeks. A rapid collapse of the U.S. dollar puts immediate pressure on other dollar-linked currencies.

There is a very low probability the U.S. dollar will resume its uptrend. The move below the value of the uptrend line and a fall below 79 confirm thata new downtrend has developed.

The weakness in the U.S. Dollar will hurt export dependent economies and companies.


There are two ways this may end – neither of which is going to be good for the average Joe:

  • The Fed et. al. continue to print, so much so that prices for food, gas, utilities and other key commodities that are linked to US dollar movements will rise exponentially. This rise in prices will accelerate the pressure on consumers as more jobs are lost in an ever progressing, self reinforcing economic death spiral. The pressure of rising prices, even though the Dow Jones may reach 20,000 or 50,000 points, will be so great that American consumers simply won’t be able to pay their bills or put food on the table.
  • The Fed and their brethren around the world won’t be able to print fast enough to maintain stable financial markets, leading to stock market crashes in Europe, Japan, China and the United States, which then leads to a shift of capital to US Treasury bonds, ironically strengthening the dollar. A weak US economy that isn’t creating jobs and is adding tens of thousands of people to an already overburdened social safety net every week will eventually lead to confidence being lost in the US government’s ability to repay its debts. As we noted in 2012 Predictions of a Mad Tin Foilist, the end result will be a currency crisis, or de facto default by way of hyperinflating away our debt.

Both scenarios are virtually the same, as both will end with complete and utter destruction of Americans’ wealth.

Despite the mainstream notion that inflation is under control and most of the money is sitting on the sidelines with banks, all we need to do is look at the price increases for consumers since private and public bailouts begin in late 2008. Gas has doubled. Food is up over 25%. Electricity costs and the cost of just about every other non-debt based asset has steadily risen.

This is not going to stop.

While timelines remain elusive because of never ending government intervention into financial markets and economies, the policies being instituted by central banks around the world can only lead to continued degradation of paper currencies and the rise in prices of all goods linked to those currencies.

In January of 2010 we suggested a strategy of buying physical commodities at today’s lower prices and consuming those commodities at tomorrow’s higher prices. The trend for fiat paper money and physical assets has not changed and is, in fact, more pronounced now than ever before.

The US dollar is being systematically weakened until it no longer exists as a viable means of exchange. When this happens you’d better be prepared to operate in a society where traditional money is replaced with mechanisms of exchange like precious metals, food, critical supplies and production skills.

You can begin taking simple steps to prepare now. The collapse of the existing global paradigm is accelerating and if you’re not ready for it the price you’ll pay will be severe.


Related Tickers: SPDR Gold Trust (NYSEARCA:GLD), iShares Silver Trust (NYSEARCA:SLV), Ultra Silver ETF (NYSEARCA:AGQ), Dollar Bullish ETF (NYSEARCA:UUP), Dollar Bearish ETF (NYSEARCA:UDN).



Guru Follies

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Posted by Jack Crooks - Black Swan Capital

on Wednesday, 19 September 2012 07:49


From February 2010: 

“Shorting Treasuries is a ‘no brainer…every single human being should have that trade.’” 

Nassim Taleb 

LOL…hoisted on the horns of a Black Swan petard were you Mr. Taleb? 


Picture 1


Commentary & Analysis 

Guru Follies 

The newsletter crowd, to which I plead guilty, loves to tell you scary stories that often seem to be missing an important element—facts. Let’s take a short stroll down memory lane and review the latest stories from the gurus.

1. Always a favorite, the US dollar is going to get killed. This one is back on the front burner thanks to QE3. Of course, the fact that the dollar didn’t get killed by QE1 or QE2 seems not to matter. It is QE3 that will surely do the dirty deed this time. The newsletter gurus seem to lose sight of one very important axiom of price, it is this: If supply increases, but demand for the increased supply increases even more, price doesn’t collapse; it tends to rise (cateris paribus). The demand for dollar liquidity in a world where the European banking system is desperately deleveraging and many in the private world are doing the same likely means the world reserve currency remains supported. 

2. Inflation will soar. This is one of my favorites, as the newsletter crowd remains stark-raving loony over this one despite the facts. After all, this inflation call is simple…more money means more inflation. Slam dunk! But we haven’t seen inflation as defined by the newsletter crowd. We have seen some commodity prices surge on investment liquidity and supply problems, granted. As I have shared with you many times before, if money doesn’t make it into the real economy to be used by real people to bid up the prices of real goods, it isn’t inflation in the normal sense we think of when we say “inflation.” But if we say there has been a massive inflation in financial assets; that would make sense. That’s because much of the money the Fed has created has leaked into financial assets. We can say there has been asset inflation driven by the financial economy. We can say that overall there has been a decline in the purchasing power of global fiat currencies as we view the price of gold. But this is different and more easily deflated. 

3. There is a massive bond bubble out there just waiting to pop. I believe we are on our third fear-mongering bond bubble theme since QE started…it could be more, I really have lost track of this favorite scare story. And of course with QE3 fresh in the minds of newsletter buyers, this bubble story is hot again. The flimsy logic behind a bond bubble is the idea that money has moved into bonds irrationally, for some speculative gains and all these investors just don’t understand that hyper-inflation is just around the corner. And if you hold US bonds, you are really in trouble because QE3 is the straw that has broken the greenback’s back and that will add to the pain for bonds. Let us consider some real reasons why bonds are loved and why they could remain loved for a very long time: a. Global demographics – As people get older their portfolio tends to shift toward what they perceive is less volatile and more safe investments such as fixed income. 

b. Secular change in consumption patterns – The credit crunch really was a sea change I think. Massive personal balance sheet overleverage, coupled with the decline in the biggest personal asset—real estate—seems to have triggered a sea change in both real consumption and attitude toward future consumption. This means more savings. More savings tends to mean more money in fixed income net…net. 

i. The knock-on effect of a change in global consumption/increased savings is the catalyst for rebalancing the current account deficit nations with the current account surplus nations. It is especially bad news for those with export-dominated growth models who will take the brunt of the adjustment domestically…and we know who you are: China, Germany, and Japan… 

c. Massive global debt levels equals below capacity future growth. Below capacity future growth will tend to push down the expected return from growth assets—stocks—relative to fixed income. And slower growth is usually accompanied by lower future inflation expectations. And lower future inflation expectations are usually discounted into the current yield for fixed income. Thus, bonds will tend to remain supported. 

d. Risk bid. If I am right that the Eurozone crisis is far from over, and that China will likely experience either a hard landing or lead to a major negative growth surprise, the idea of a major risk bid of global money running for safe haven is still a high probability. And safe haven money flows into…you guessed it…fixed income. 

e. Historical parallels. This from Hoisington Research, a fixed income investment management firm based in Houston who has been more right on bonds and interest rates for the last five years than anyone I have seen…. 

“Long-term Treasury bond yields are an excellent barometer of economic activity. If business conditions are better than normal and improving, exerting upward pressure on inflation, long-term interest rates will be high and rising. In contrary situations, long yields are likely to be low and falling. Also, if debt is elevated relative to GDP, and a rising portion of this debt is utilized for either counterproductive or unproductive investments, then long-term Treasury bond yields should be depressed since an environment of poor aggregate demand would exist. Importantly, both low long rates and the stagnant economic growth are symptoms of the excessive indebtedness and/or low quality debt usage.” 

We know that debt levels in the industrialized world are in the ozone and still rising. Now take a look at what yields did historically during three similar crisis periods—Japan 1989, United States 1873, and United States 1929--when debt levels were much lower globally than they are now. 

Picture 2

Back to Hoisington: 

“In the aftermath of all these debt-induced panics, long-term Treasury bond yields declined, respectively, from 3.5%, 3.6% and 5.5 % to the extremely low levels of 2% or less in all three cases (Chart above). The average low in interest rates in these cases occurred almost fourteen years after their respective panic years with an average of 2% (Table below). The dispersion around the average was small, with the time after the panic year ranging between twelve years and sixteen years. The low in bond yields was between 1.6% and 2.1%, on an average yearly basis. Amazingly, twenty years after each of these panic years, long-term yields were still very depressed, with the average yield of just 2.5%. Thus, all these episodes, including Japan’s, produced highly similar and long lasting interest rate patterns. The two U.S. situations occurred in far different times with vastly different structures than exist in today’s economy. One episode occurred under the Fed’s guidance and the other before the Fed was created. Sadly, there is no evidence that suggests controlling excessive indebtedness worked better with, than without, the Fed. The relevant point to take from this analysis is that U.S. economic conditions beginning in 2008 were caused by the same conditions that existed in these above mentioned panic years. Therefore, history suggests that over-indebtedness and its resultant slowing of economic activity supports the proposition that a prolonged move to very depressed levels of long-term government yields is probable.”

Picture 3

Now, you may want to sell this bond market here based on the view it is a bubble. But before you do, let me share an anecdote. I remember it vividly. The recently deceased renowned global strategist, Barton Biggs, who spent most of his years toiling away at Morgan Stanley and was a rock-star when global strategists played those roles, made a bond bubble call back in the mid-1990’s. He said that shorting the Japanese government bond market was the “trade of a lifetime.” Well, maybe. Unfortunately Mr. Biggs didn’t live long enough to see that trade work out. 

Webinar Announcement: I edit two currency trading newsletters for Weiss Research. I am doing a free webinar on Thursday, September 20th, at 12:00 p.m. ET, covering key global macro themes and my view on the direction of the dollar and other major pairs as we head into 2013. I invite you to attend and encourage your questions during the event. 

The webinar is free. All we ask is that you seriously consider becoming a Member of one of our services offered by Weiss Research. 

Please click here to register. 

Thank you. 

Jack Crooks 

Black Swan 





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