This Week in Barrons – 9-29-2013
“Go East Young Man”… said one gold nugget to another
If the Fed isn't tapering its QE program, why was gold attacked and sent lower just two days after the announcement? One would think that continued money printing would be a good reason for gold to rise, right? But it didn't, and I think I know why.
When The Ben Bernanke announced the first QE (to help stabilize the markets after the big melt down), the world accepted that as a valid response by a Central bank to inject liquidity into the system. In that case gold was allowed to rise ever higher because of the perceived inflation and the uncertainty of the times. In November of 2010, QE 2 was announced (which was really an extension of the QE 1), and the Fed said that they would continue to buy $600 Billion worth of Treasuries – allowing gold to continue to work its way higher.
But in September of 2011, it was the announcement of ‘Operation Twist’, when everything changed. From that day forward, gold started to take a beating – as the world (and especially China) realized that the U.S. was NOT going to rebound. Gold hit its all-time high in the same month that ‘Operation Twist’ was announced. From a high of $1,900 an ounce, gold has continued to fall – especially after additional QE announcements.
Allow me to set the stage. Remember 1998 and 1999, money was everywhere, jobs were plentiful, the stock market was going ballistic, and the U.S. was in the midst of a computer revolution of epic scale. The technology explosion was furious. Every few months there was a newer (hotter) computer chip that everyone ‘had to have’. Along with the computers, we were all purchasing headsets, cameras, mice, keyboards, modems, speakers, monitors, and more. It was frustrating trying to keep-up, but something massive was also happening in the global financial arena that most people didn't consider. Most of the world’s technology manufacturing had shifted to China by that point. And while we were spending our U.S. dollars buying the latest and greatest, China was taking in Billions of dollars manufacturing these components. The Chinese companies (and the Chinese Government) were flush with cash.
What does a country do when it's taking in so much money? In stable times, countries go to the bond market(s) and purchase secure treasuries and sovereign bonds. China did just that. China became an enormous owner of U.S. Treasury debt. The U.S. Treasury officially states that China is the largest holder of our debt, and now owns $1.3 Trillion dollars worth of our Treasuries. They amassed the bulk of that debt during the late 90’s – the tech explosion, and since the tech melt-up, that amount has just continued to grow.
Fast forward to today, with China having a major problem. They own over a trillion dollars worth of our debt, and yet they stand helpless as the U.S. Central bank destroys the value of these dollars right before their eyes. China knows that we’re playing the age-old game of "devalue your currency and repay your debt with cheaper dollars". Imagine how it feels to lose over $25B/yr. of purchasing power – simply by holding onto U.S. debt. (I.E. the Fed has announced that they want a minimum inflation rate of 2% per year.) The only reason that the U.S. dollar is holding up as well as it has is due to the ‘rigged’ deal we have in place to be the world's reserve currency. If we ever lose our reserve currency status, the dollar will be worth a lot less, and China certainly doesn’t want that to happen.
Therefore, the Chinese have been furiously trying to buy up "real" things with their dollars while the dollar still has value. They've purchased oil fields, U.S. theatres, IBM’s personal computer division, Smithfield foods, and a ton of California commercial real estate. The Chinese realize that the fat lady is singing, and the U.S. is NOT going to recover and be the super power for much longer. They also realize they have enough U.S. debt that they could crush us like a bug if they started selling those bonds on the open market. So what would you do if you were China?
1. Tell the U.S.: “If you don't want us dumping hundreds of billions of your treasuries onto the market, then find us a way to purchase ‘gold’ inexpensively – so we can become a part of the NEXT global reserve currency.”
2. Begin to back your country’s currency with significant amounts of gold.
3. And, tell the U.S. to reduce the price of gold, so that U.S. dollars can purchase more of the physical metal.
The good news for The Ben Bernanke is that I think he’s scored a “Two For.” You see, often when gold moves up in price, it’s actually not gold increasing in value but rather the dollar going down in value while gold remains the same. So, as The Ben Bernanke:
- Continues to print money (to keep this economy moving),
- Continues to ‘naked short’ gold – supporting the dollar and reducing the price of gold,
- AND therefore allowing the Chinese to purchase more gold with their existing supply of U.S. dollars. The Ben Bernanke constructed a great “two for” one deal.
The global ‘powers that be’ realize that the U.S. cannot possibly repay its debts. The European Union is technically insolvent, and there's going to be a global reset. None of the real countries want anything to do with U.S. dollars any more. So, there's going to be a reset where the U.S. dollar is no longer the sole reserve currency of the world. When that reset comes, the Chinese (with enough gold backing) want to be considered solid enough to be a part of the new global reserve. So each time you see these insane attacks on Gold, you can rest assured that they're lowering the price so that China can buy up another batch of gold, and make the dollar look like it isn't Monopoly money. That appears to be the "wink and nod" deal that we have with the world's Central banks and the IMF (International Monetary Fund).
If you match up physical supply and demand for gold, you will see that there’s more demand than available supply. Now, add to that – the Central Banks colluding to paper ‘short’ the gold market every time the dollar loses significant ground. And finally add in the Chinese buying-up all available gold inventories. This gives the illusion of a stronger dollar, while agreeing to sell China all the gold they want at a discounted price.
So what do we do? We buy when the Chinese buy – on pullbacks. This will end in an inflationary blow-up, and then gold will be re-priced along with a new global reserve currency. Be patient. It took 11 years for gold to go from $295 in the year 2000, to $1,900 in 2011. Gold will have its new all-time highs, and I’m thinking we begin to see all ‘heck’ break loose before the end of 2015.
Some people think an announcement about gold will come on October 8th, with the birth of the new $100 bill. If you look at the new $100 bill – it’s loaded with gold inferences: a big gold ink well, a gold feather for the ink well, a gold liberty bell, even the $100 turns from Green to Gold if you move the bill. I can only imagine how high gold would move on any sort of hint to a gold supported U.S. currency. I don’t think that this will happen anytime soon; however, that day will come when the Chinese feel they've got enough physical gold to satisfy the world.
Peas ‘n Carrots – Peas ‘n Carrots. The market is pouting over the Government fiasco that is playing out, and honestly I thought they would have ignored these shenanigans by now. Over the past 30 years, the market has dipped for ‘roughly’ the ten days before a debt-ceiling crisis, and then recovered over the ten days following. Because it’s so common, I thought that this time the market wouldn't go through it’s pout, but I am wrong.
The market has sold off for 6 out of 7 sessions. The DOW is below its 50-day moving average, while the S&P is still well above its 50-day average. There hasn’t been much ‘technical’ damage done, and (in fact) the IWM (which is the Russell 2000 ETF), is actually just a few points off its all time highs.
A couple myths that are out there (thanks to BL for the numbers):
- Myth #1: “There’s a lot of cash on the sidelines.” - False. There is currently 3.5 times more money allocated to stocks than is invested in money market funds. This is a 30-year high. The last two highs occurred during the top of the last two bull markets of 2000 and 2007.
- Myth #2: “Investors are waiting for a pull-back in order to buy.” – False. Currently there is significant margin debt at NYSE firms. In fact, the current margin debt is larger than was present in 2007. This says that investors are currently buying.
- Myth #3: “P/E ratios are right in the investing sweet-spot.” – False. P/E multiples in the S&P are currently at 21.5. Excluding 2000 and 2007, this is one of the most expensive markets in history. Multiples have virtually doubled over the last four years, and are not sustainable.
So this is nothing more than a garden variety pull back, as lower volumes and a few ‘nervous nellies’ ponder how the Government showdown is going to play out. This could (however) morph into something much larger if both sides decided to shut down the Government for weeks (instead of a day or two). At that point things could evolve into a true 10% correction, but I don't think either side wants that.
While the beginning of October has the ability to be a bit nasty, I think that the ‘animal spirits’ will run and will move well into year-end, setting an all-time high. Therefore, we have to be patient and work through the ongoing Democrat / Republican slugfest. But remember, since The Ben Bernanke did not taper (and there's no way he will taper in October), the market will (eventually) have a green light to go run wild.
Congrats to those of you who adopted the strategy of selling slightly out of the money covered call options last week. For example: on Apple (AAPL) you netted over a 60% annual return last week, and I would suggest that you do it again this week. For example: Apple is selling for $480+ (per share) right now. If you own some, you could sell the $485 weekly call option (expiring on Friday, Oct 4) – and collect the $6 per share. If the option expires worthless – that’s about a 65% annual return, and if you’re ‘called out’ the return is even greater. “Rinse ‘n Repeat” with many of the weekly options stocks – some with better returns than Apple. I will elaborate on this strategy as the weeks go on.
My current short-term holds are:
- FB – in at 25.61 (currently 51.24) - stop at 49.00,
- SIL – in at 24.51 (currently 13.45) – no stop
- GLD (ETF for Gold) – in at 158.28, (currently 128.97) – no stop ($1,338.40 per physical ounce), AND
- SLV (ETF for Silver) – in at 28.3 (currently 20.96) – no stop ($21.78 per physical ounce).
To follow me on Twitter and get my daily thoughts and trades – my handle is: taylorpamm.
Please be safe out there! a
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