RF's Financial News

RF's Financial News

Sunday, May 8, 2011

This week in Barrons - 5-8-2011

This Week in Barons – 5–8-11:

Do you make money – if you Buy a Depreciating Asset – with a Depreciating Currency?

One thing that I know that is ‘REAL’ is that today is Mother’s Day – so Happy Mother’s Day!

So what else is REAL:
- $4 gasoline = REAL
- Housing is in a proven double dip (which never really recovered despite tens of billions in loan modifications) = REAL
- Unemployment is at 9% officially, 17% unofficially = REAL
- Teen workers are in the worst shape of all time, because adults are taking their jobs = REAL
- The amount of people working part time because they can't find full time work is increasing = REAL
- The "household survey" polling hundreds of thousands of households showed a DROP of 190K jobs last month = REAL
- This week’s consumer credit showed a gain of $6 Billion dollars instead of the estimated $4.8B = REAL
- Housing foreclosure sales continue to be 40%+ of all sales = REAL
- The Government Jobs Report showing a gain of 244K jobs = LIE. 175k of the 244k jobs gain was as a result of the ‘birth –death’ model (fiction). If you're not familiar with the birth-death model – this website should help: http://www.bls.gov/web/empsit/cesbd.htm. In loose terms this means that for every “X” amount of people that get laid off, some percentage of those will go out and open a business and hire people. This number is just a ‘guess’ and is simply used to ‘goose’ the report higher when necessary.

What is REAL is that on April 19th McDonalds held a gigantic jobs push, and hired 62,000 people – with over ONE MILLION people standing in lines to get jobs. The employees got $8 an hour and virtually no benefits. Most of those hires were adults with nowhere else to go. So 244k jobs – minus the 175k jobs (birth-death model) – minus the 62k from McDonalds leaves you 7k jobs. So of all the people that read the 244k number and think good thoughts, remember the market has always had a knack for pulling in people at the wrong time and dashing them against the rocks of despair, and this time it's even worse.

You all know we're into gold and silver here as well as short term trading stocks, and we’ve done exceptionally well in those two areas. Now allow me to ask another question: Since gold isn’t used commercially for anything more than jewelry, why then has it risen from $270 in year 2000 to $1,500 today? Two reasons: the depreciating dollar and people losing faith in our economy.

This week, the dollar was perched on a very precarious ledge, and another nudge would have caused a considerable crash. You see - the U.S. Dollar index recently touched its lowest level against the Euro since December 2009, and was recently off 7.5% just in 2011. Since most commodities (including silver and gold) are priced in dollars, they generally move opposite to the greenback. On Thursday (surprisingly) Mexico took delivery of 100 TONS of pure GOLD. That would have been the nudge that pushed the dollar off the cliff; however, the Central Bankers decided that they ‘had no choice’ but to intervene and rescue the dollar causing oil to fall $10, gold to fall $50, silver to fall an additional $3 – but we saved the dollar from the crash (temporarily). But I ask you: If gold and silver are rising because gold is the only real money, followed by silver – and they’ve gone up because of the debasement of our own dollar, inflation fears, economy, etc. - Did we somehow fix that and I missed it?

So as much as I love to take Wall Street money via trading stocks, I still take my winnings and buy gold and silver. And ask yourself – if you’re not in the best performing asset class of the decade – why not? Lately, people have asked me if I would do a fund with them, and I’m seriously considering it. If you have the time – drop me a line on that thought.

The Market:
You cannot put trillions of dollars into an economy and not get some activity. Therefore, there are times and sectors when true economic activity is indeed growing. The issue of course is that without the enormous volumes of this liquidity (money printing) where would the markets be? One issue is that Wall Street itself gets instant money from the Federal Reserve virtually every day as the Fed buys Treasuries from the 18 "Primary Dealers" – which account for between $1 and $8B dollars each day. And the second issue is the good earnings reports from companies that are riding the wave of the stimulus money. But what happens if/when the easy money, Fed printing, quantitative easing programs are stopped?

A lot has been written about silver this week. It’s true that the CME (Chicago Mercantile Exchange) raised the margin requirements on silver futures four times in two weeks. Yes silver was due for a correction due to its recent parabolic path; however, this also shows (a) manipulation, (b) fear on the part of the 5 Big Banks that are openly short silver, and (c) some profit taking on the part of the big funds (George Soros – etc.) But ask yourself what has changed, as industrial demand for silver is still enormous. Nearly 75% of the world’s silver supply is used to make everything from chemical reagents to jewelry to solar panels to plasma TVs, and with the global economy expected to grow by 4.5% this year, the industrial demand for silver is only going to increase. Couple that with the mine supply of silver being tight. Silver fabrication demand grew by 12.8% last year, but silver mine production rose by only 2.5%, and mine supply accounts for 70% of all silver supply, according to GFMS. It’s hard for miners to crank up silver production because two-thirds of silver produced by mines is used as a by product to other metals. Mine supply is expected to rise this year, but it will be hard-pressed to keep up with the expected rise in demand. The fundamental fact is that, despite the recent correction, both gold and silver are in big bull markets. Until that changes, pullbacks and corrections are buying opportunities.

Also China (like many countries) used to be a major seller of silver supply, and now it’s an importer. So yes, we are seeing some air come out of the silver bubble - but I don’t think we’ve seen the real mania in silver yet. Can silver go down due to the Dollar rally or a global recession – of course! However, if you want to short silver in the face of strong demand – good luck to you because I think you’ll need it.

The market feels ‘heavy’ to me – and as much as we will continue to lean long, we're going to have our finger very close to the sell button. When the top arrives there will be no signpost. We're still making money in this manic market, but it’s harder as they fight off the market's urge to slide lower. Be careful out there folks, we are indeed in "uncharted" waters.


Tips:
It’s for weeks like this past one where setting stops really comes in handy. Nobody can ever get mad at you for taking a profit!

Our long holds still look like: SLV, NG, AAU, DNN, AVL, SLW and USSIF.

Most of our stop losses were triggered in our short term hold positions – and therefore we sold out of: FRG, QSURD, NGD, PAL, EXK, SVM, SD, NBR, all at profits – but we are still in: SQM

We started nibbling with small positions on SLV, SLW and GLD on Friday. And on Thursday and Friday I continued to purchase physical silver and gold with the profits on the previous short-term holds.

I’m watching SLW and some other miners this week - as we should begin to recover from the ‘dip’ that they just experienced. It’s the stock price that will determine when we dive back in or let it rest, and we’ll keep you posted via Twitter on anything there.


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