This Week in Barrons - 9-1-2013

This Week in Barrons – 9-1-2013
 

As the World Turns

We’ve seen some disturbing elements concerning gold come out of India recently.  Currently, India runs the world’s third largest account deficit.  They have been having a very hard time defending their currency, and they've employed a lot of underhanded tricks to try and halt its erosion.  In a twisted flashback to what the U.S. did back in the 30's (when our government confiscated everyone's gold), India appears to be running straight down the same track.  Since the middle of last year, India has implemented 24 "gold un-friendly" actions in order to have their citizens avoid buying gold, and instead use their own currency (the Rupee) for transactions and savings.  Each one of these 24 measures has failed miserably, and the latest action in the Indian stock market shows that things are indeed – broken – over there.

The people of India have cherished gold for thousands of years.  From Temples to jewelry, Indians have always known that "gold is king".  They learned during centuries of tumult that personal ownership of gold would afford them some protection of their family wealth.  Unfortunately India’s government has lost control of their economy.  And (just like in the U.S.), when things get desperate – they look for money in every nook and cranny.  The Indian Government knows that their citizens want gold much more than they want Rupee's, and they continue to try ways to push them away from gold.  They have:

-       Increased gold import duties – 3 times,

-       Asked the jeweler’s guild to stop selling gold bars,

-       Halted sales of gold coins,

-       Increased taxes on gold, and

-       Implemented trading stoppages.

One of the largest components of their large trade deficit is their importation of gold to satisfy consumer demand.  Therefore, the government is taking measures to halt importing gold.  The idea being that if there is no gold coming into the country, there will be no gold to buy.  Currently the government is also starting a program where banks are trying to get customers to "sell" their gold – to the banks – in exchange for currency.  The government knows that they will have to offer a premium for the gold, but that's okay – because they print the Rupees anyway.  If they have to print more of them to pay the premium, so be it.  I think India is going to try and settle some of the gap in their trade deficit account by amassing ‘extra’ gold from it’s citizens and selling it into the market.

The problem is that the Indian people aren't going to change 2,500 years of culture overnight.  I can’t see husbands deciding that they would rather have slips of paper adorning their wives necks rather than gold necklaces.  But desperate countries do desperate things.  I think that their next step will be to forcibly "take-back" a percentage of the average citizen’s gold.  The very same thing the U.S. did to our citizens in 1933.

I bring this topic up for a couple reasons.  One, to demonstrate that it isn’t just the U.S. and Europe that are technically insolvent and desperate.  There are many countries in this same situation.  Second, since I am a stout believer in holding gold, this will cause a disturbance to the gold market when it happens.  When the government of India grabs a large portion of gold from their citizens, and sells it back to the world to satisfy it’s account deficit – this will indeed have a large impact on the gold market.

I don't think that the price of gold will actually fall that far, and I think that the June lows are the lows for many years to come.  But, if the Indian government announces that they are going to implement a form of confiscation with the determination to sell it into the market, the price of gold will go down.  But in what currency?  Gold is priced in home currency – dollars – rupees – euros – yen, etc.  If India dumps tons of gold into the market, I think that India and her neighbors will indeed see their currency reset on value, but all across the globe others will scramble to get their hands on as much gold as they can – so that they can "hide it", and thereby support the global price.  If I'm right and this plays out over the next year, I could easily see a pretty hefty dip hit gold's price, only to see it soar right back up and even considerably higher.

What we're seeing is another country in the death throws of a failed (print-till-you-drop) economic policy.  I dislike the idea of a global melt down and reset, but I cannot ignore the fact that one is coming.  We've seen Greece, Spain, Italy, Ireland, and Portugal – all kick the can down the road.  We've seen the U.S. up its debt ceiling a dozen times.  We've seen Japan come out with a monetary ‘shock and awe’ program.  And India will need to try their way as well.  Keep your eyes open for news out of India, and when you see it, prepare yourself to "buy the dip".  The initial action will hit the global gold market, but it will not be the end of gold's rise.

Oh – before I forget - I hope you all can forget about all this craziness for a few days and enjoy your Labor Day holiday with family and friends.  Some good food, good drink and good company can do wonders for the soul, if even for just a couple days.

The Market...

This week, the DOW was only off 200 points from beginning to end of week.  The Fed’s taper, tensions over the Middle East, combined with some poor results coming from the emerging markets – has the markets more eager to play "safe than sorry".  The current market action resembles walking on eggshells.  One word out of a Fed head about tapering, or one Kerry appearance on TV – and we’re down 100 DOW points.  There's simply too much going on out there for anyone to feel that they can take a new position and not have it tossed right back in their face.  The fact that we're ONLY down 200 this week is a true testament to how savage the appetite for stocks still is out there.  With all of the ills facing the globe, we could easily fall another thousand points.

We still have crazy Ben Bernanke and his band of Merry Fed heads to deal with on September 18th.  If he announces tapering (even if it's just "Taper Light" of $10B), I think that this market will have a tough time continuing upward.  And with President Obama asking Congress for approval on his bombing plan – that should give the market time to put in a bounce this week.  It won't take us to the old highs, you can’t marry it, but I do think it will be buyable for a decent trade.  

D.S. wrote us with some information from legendary investor – Jim Rogers.  Mr. Rogers is a commodity and gold guru and owns a fair amount of oil and gold.  He told Reuters:  "If there is going to be a war, and it sounds like America's desperate to have a war, commodities and gold are going to go much, much higher.  Stocks are going to go down, but commodities are going to go up.  No matter how well the plans are made, strange things happen in war, and who knows what unintended consequences will come.  But, throughout history, whenever you had war, things like food prices have gone up a lot, energy prices have gone up a lot, along with copper and lead."

Mr. Rogers goes on to comment about emerging markets: “India, Indonesia, Turkey — all have huge balance of trade deficits – which they've been able to finance by printing artificial ‘free’ money.  This artificial sea of liquidity is going to end, and when it ends, all of the people depending on this free money are going to suffer – and suffer badly.  We haven’t seen much of anything yet.  Normally, in bear markets, things go down 40 to 80 percent, and people give up.  People throw their shares out of the window.  We have not yet seen panic and terror, but we will when central banks finally pull back from their easing.  This is the first time in recorded history that all major central banks have been flooding the market with artificially printed money – all at the same time.  When this ends, it's going to be a huge mess."

Tips:

I stopped out of FCX last week for a $2 gain.  When looking at the charts – I’m thinking the following look good for a trade:

-       SLCA over 24.00,

-       UNXL over 19.65,

-       FMC over 67.50 is interesting, and

-       LL over 103.00 could pop nicely.

My current short-term holds are:

-       FB – in at 25.61 (currently 41.32) - stop at 39.00,

-       SIL – in at 24.51 (currently 15.43) – no stop

-       GLD (ETF for Gold) – in at 158.28, (currently 134.71) – no stop ($1,396.10 per physical ounce), AND

-       SLV (ETF for Silver) – in at 28.3 (currently 22.67) – no stop ($23.46 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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