update of the week from www.prudentbear.com
For the week, the Dow dipped 0.6% (down 12.1% y-t-d), while the S&P500 added 0.1% (down 11.6%). The Morgan Stanley Cyclical index added 0.6% (down 10.6%), and the Morgan Stanley Consumer index gained 1.2% (down 4.1%). The Utilities (down 13.3%) and Transports (up 12.8%) each declined 1.2%. The broader market was much stronger. The small cap Russell 2000 jumped 2.6% (down 1.7%), and the S&P400 Mid-Caps rose 1.0% (down 4.2%). Technology continues to outperform. The NASDAQ100 gained 1.6% (down 6.1%), and the Morgan Stanley High Tech index added 0.6% (down 5.8%). The Semiconductors jumped 2.5% (down 7.7%). The Street.com Internet Index increased 1.2% (down 3.6%), and the NASDAQ Telecommunications index gained 1.0% (down 0.2%). The Biotechs jumped 3.0%, increasing y-t-d gains to 12.3%. The Broker/Dealers dropped 2.8% (down 27.5%), and the Banks fell 3.1% (down 25.3%). With Bullion sinking $70, the HUI Gold index fell 5.7% (down 22.9%).
Well dear reader, I am still very busy unpacking boxes and therefore this musings will be short. First of all I did not want to post this week but due to the market situation I decided to give you my opinion. Well dear reader, my favourite investments, precious metals have been bashed this week. To be honest the strenght of the down move that developed surprised me. The move went through important technical support levels without stopping. There is certainly damage done. However I still have a positive long-term outlook. Due to the damage done, I am not sure anymore if we will be able to reach my year-end target of USD 1,200. In the past after such damage it took a couple of months until the up trend started to pick up again. In order to achieve a 20% performance on Gold we would need to reach a price of 996 USD per ounce by the end of the year. Is it possible? I do not know but my guess is yes. Normally, at least the last 8 years, August to February have been excellent months for the precious metals. So we still have the good month ahead. As there are many investors now on the short side, a rally is always possible. As mentioned I am surprised by the move but I must say the move as such is not unusual. The timing however is unusual. Why do I say that the move is not unusual? Well back in 2006 the Gold price fell from 730 to somewhere around 550 USD per ounce or an approximate 22% fall. Compared to the actual move, taking daily closing prices, we fell from 1022 to the 790 area, which is an approximate 22% fall too. So we had such moves in the past and might have to face similar moves in the future too. The last time the prices fell 22% it took some months to recover but the rally that followed was a really very strong rally.
Is it now the moment to start to accumulate more gold and silver? It might very well be the case. Are we at the bottom? We might have to wait a few days to see what’s happening. However to me it seems that we are at or close to the bottom and thus close to a situation where it makes sense to accumulate more precious metals. Anyway it seems that both metals are now at bargain prices thanks to the PPT.
According to Ted Butler, one of the most seasoned investors/analyst in Silver, Silver is way too cheap. He says I contend that the current price of silver is below the cost of marginal production, and if the price of silver does not rise, mine production will be reduced. As proof, I would direct your attention to the recent second quarter earnings reports of two well-known silver producers, Hecla Mining Company and Coeur d’ Alene Mining. Both companies reported operating losses, even though the price of silver averaged over $17 in the quarter, three times the price of several years ago. If someone told me 4 or 5 years ago that silver would be 3+ times higher and mainline miners like Hecla and Coeur would report operating losses, I would not have believed that. Then again, I wouldn’t have anticipated the shocking rise in the cost of silver production. Since silver is $2 lower, as I write this, than it was in the second quarter, it doesn’t take a rocket scientist to predict further losses for these miners, unless the price of silver rises. At some point, barring higher silver prices, silver production becomes questionable. No one can produce anything at a loss indefinitely. In my opinion, that puts a floor under the price of silver and strongly suggests that silver is undervalued.
Regarding Silver, it seems as there is a clear divergence between the paper market (paper Silver) and the real physical Silver. On www.lemetropolecafe.com (a web site strongly recommended to subscribe) many members comment that the price for physical Silver is much higher than the market price. One ounce for example cost 3 to 4 USD more than the official price. Furthermore the same commentators inform that actually it is almost not possible to buy any physical Silver for the moment being. At such low prices it would be a great business to buy Silver via Future markets and ask for physical delivery. Interesting time ahead indeed.
Now to the timing, why do I say that the timing is unusual? Well as mentioned Augusts normally have been friendly months for the precious metals. This time, so far this was not the case. Why? As the worldwide economic situation is looking shaky and the US economic situation looks abysmal, the bad news indicator has to be kept down. The PPT was working full time and once they were able to provoke a trend the trend followers entered and especially the “week hands” those who either economically or psychologically cannot stand strong falling prices in their investments sold their holdings in a panic way. Normally, once that happened it is the best moment to buy. Well dear reader the next move up can bring us to the 1,200 level, which at actual prices would be a 50% performance. I still believe we will see the 1,200 but I do not know if it will be in March 2009, as I thought before this week, or if it will take a bit more time. Well as precious metal investors we will have to face such attacks time and time again. As mentioned we have been there before but looking back after a couple of months it was almost a non-event.
Well the question of course is, are we now at a point of fundamental change? With other words is the actual precious metal or commodity bull cycle over?
Before we go to my opinion following a comment from Ed Bugos from Agora Financial
“So what would it take to see the same love in gold that we saw in tech stocks in 1999, the housing market in 2003-05 or oil recently? The answer is simple: more of the same.
“You will see it in gold when all the usual anti-gold arguments fall flat on their faces. When people no longer believe that the ‘modern-day’ central bank has a handle on inflation and interest rates; that inflation is ‘caused’ by oil, growth or a shortage of goods; or that prices will one day come down. You will see it when people realize that the bubble in commodities is really a destruction of confidence in the medium of exchange.”
Aside from the reason above, Ed sent us another of his top 10 lists. Enjoy:
Top 10 Reasons to End Cheap Gold
-Cost inflation slowing down development pipeline, hence future production growth
-Political risks in frontier countries also shrinking available supplies
-Faltering global economy persuading central bankers to abandon tightening plans
-Soaring government deficits
-Saber rattling between Iran and Israel and other geopolitical tensions heating up
-Another GLD ETF just listed on Hong Kong exchange
-Some countries already experiencing crackup and heightened gold demand
-Shrinking official gold supply
-Seasonal trends turning bullish again into the new year
-Large producer Anglo has yet to cover all its hedges
Well, of course, we never can be sure until after it happened. However I truly doubt that we are at the point of a fundamental change. Well we certainly have to face a slowdown in world economic activity. The US consumer has no money to consume anymore and as the US consumer has been some kind of economic motor through its consumption, the lower consumption will certainly have a negative impact of some kind. Will it be a severe negative impact or just a normal correction within the bull market? Again, time will tell. Looking back at history commodity bull markets lasted between 15 to 25 years, with some considerable fall backs which last up to almost 3 years. As mentioned in previous musings, I believe that, unless we fall in a real deep worldwide recession/depression, we will see the bull market regain again.
Well dear reader, the very positive side regarding lower prices of precious metals is, that all you readers that wanted to buy more gold can now do it at much lower prices. The prices are great indeed.
Following a comment from Jim Rogers
Commodities…Buy the Dips!
By James Rogers
The commodity bull market has a long way to go. This bull market is not magic. It's not some crazy "cycle theory" I have. It does not fall out of the sky. It's supply and demand. It's simple stuff.
In the 80s and 90s, when people were calling you to buy mutual fund and stocks, no one called to say. "Let's invest in a sugar plantation." No one called and said, "Let's invest in a lead mine." Commodities were in a bear market and in bear markets people do not invest in productive capacity. They never have. Perhaps they should have, but they've never done it throughout history and probably never will. There has been only one lead mine opened in the world the last 25 years. There's been no major elephant oil fields [of more than a billion barrels] discovered in over 40 years.
Many of you were not even born the last time the world discovered a huge elephant oil field. Think about all the elephant fields in the world that you know about. Alaskan oil fields are in decline; Mexican oil fields are in rapid decline; the North Sea is in decline. The UK has been exporting oil for 27 years now. Within the decade, the UK is going to be a major importer of oil again. Indonesia is a member of OPEC. OPEC stands for the Organization of Petroleum Exporting Countries. Indonesia is going to get thrown out because they no longer export oil; they are now net importers of oil. Malaysia has been one of the great exporting countries in the world for decades. Within the decade, Malaysia is going to be importing oil. 10 years ago, China was one of the major exporters of oil, now they are the 2nd largest importer of oil in the world. Oil fields deplete, mines depletes. This is the way the world's been working for a few thousand years and it will always work this way. So supply has been going down for 25 years.
Meanwhile, you know what's happening to demand. Asia's been booming. There are three billion people in Asia. America's growing. Most of the world has been growing for the last 25 years. So supply has gone down and demand has gone up for 25 years. That's called a bull market.
One of the things you'll find if you go back and do your research is that whenever stocks have done well, such as the 1980s and 90s, commodities have done badly. But conversely, you find that whenever commodities have done well, such as the 1970s, stocks have done poorly. I have a theory as to why this always works, but it doesn't matter about my theory. The fact is that it always works this way and it's working this way now.
So before I set off to my second trip around the world, I came to the conclusion that the bear market in commodities was coming to and end. So I started a commodities index fund. [Editor's note: An ETN based on the Rogers International Commodity Index trades on the AMEX under the symbol: RJI.] This is an index fund. I do not manage it. It's a basket of commodities we put in the corner. If it goes up we make money; if it goes down we lose money. But since Aug 1st 1998, when the fund started, it is up 471%.
I [mention this index] to show you that the commodity bull market is not something that will happen someday. It's in process right now, and it's going to go on for years to come, because supply and demand is out of balance. And by the time we get to the end of the bull market, commodities will go through the roof. There will be setbacks along the way. I don't know when or why, but I know they are coming; cause markets always work that way. Commodities have done 15 times better than stocks in this decade and they're going to continue that [trend].
You remember my little girls. My 5-year old never owns stocks or bonds; she only owns commodities. She's very happy owning commodities. She doesn't care about stocks and bonds, but she knows about gold. I assure you, she knows about gold.
Some of you probably diversify, or believe in diversification. I do not diversify; I am not a fan of diversification. This is something that stockbrokers came up with to protect themselves. But you're not ever going to get rich diversifying. I assure you. But if you DO diversify, commodities are the best anchors because they are not going to do what the rest of your assets are going to do.
I will give you one brief case study about oil, because it's one of the most important commodities. Some of you know that oil in Saudi Arabia is owned by a company called ARAMCO. It was nationalized in the 70s. They threw out BP and Shell and Exxon. But the last Western company to leave did an audit [of Saudi oil reserves] and came to the conclusion that Saudi Arabia had 245 billion barrels of oil. Then in 1980, after 10 years, Saudi Arabia suddenly announced that it had 260 billion barrels of oil. Every year since 1988 – 20 years in a row - Saudi Arabia has announced, "We have 260 billion barrels of oil."
It is the damnest thing. 20 years; it never goes up; it never goes down, and they have produced 67 billion barrel of oil in this period of time. When nuts like me go to Saudi, we ask, "How can this be? How can it be that they always have 260 billion barrel of oil?" (By the way, last year they said they have 261 billion barrel of oil). And the Saudis say, "You either believe us or you don't," and that's the end of the conversation.
I have never been to the Saudi oil fields, and even if I had, I wouldn't know what I was looking at. But I do know something is wrong. I know that every oil country in the world has a reserve problem, except Saudi Arabia of course. I know that every oil company in the world has declining reserves. So I know that unless someone discovers a lot of oil quickly, the surprise to most people is going to be how high the price of oil stays and how high it goes eventually. That is the supply side. Let's look at the demand side.
The Indians use 120th as much oil as their neighbors in Japan and Korea use. The Chinese use 1/10th as much per capita. There are 2.3 billion people in India and China alone. Well, the Indians are going to get more electricity. The Indians are going to get motor scooters. They are going to start using more energy, so are the Chinese. But if the Indians just doubled the amount of oil used per capita, they would still use only 1/10th of what the Koreans use. If the Chinese doubled their oil use, they would still be using only 1/5th what the Japanese and the Koreans are using. So you can see what kind of pressures there are on the demand side for oil and energy, at a time of terrible stress on the supply side. These are simple things.
So I would urge you are to take a lesson from my little girls. My little girls are learning Chinese. My little girls are getting out of the US dollar. My little girls own a lot of commodities. I would urge you to do the same.
Well dear reader, what would the alternatives to invest in commodities or especially precious metals be?
Equity?
Equities might do well for some weeks but I doubt that equity will do well over the longer periods. Although we have from time to time some rallies, to me it seems that we will see only short rallies and that we are still in a long-term secular bear market in equities.
Having time deposits in banks. Might work well, at least according to Kondratieff cycle cash and gold are the investments at the beginning of the K winter. But be careful with which bank you hold your deposits. Some estimates are that several smaller banks will disappear over the coming months and some 65% of the experts expect at least 1 big institution to have the same fate over the coming 12 months. The name that comes into my mind is a US institution that has been mentioned by some to be a candidate.
Well anyway seeing what is going on in the markets and seeing that the financial sector is in deep problems, which are far from over, I still, believe that holding gold is a wise thing to do.\
Regarding commodities in general terms, we can say that several commodities are clearly oversold now and therefore have potential to rally over the coming months. Natural gas seems to be an interesting buy. Oil might be the same although it might fall a bit further.
USD
Well the USD has rallied strongly over the last days. Will the rally last and has the downtrend finally stopped? Well dear reader, personally I doubt it. I do not see that the fundamental situation regarding debts and so on has changed. Although there has been a rally over the past days, I do not see that the trend has changed.
Following a few comments found on the net
Ambrose Evans-Pritchard: Implosion of Europe will make $800 gold a bargain
Stage 2 of Gold Bull Market Is Just Beginning
By Ambrose Evans-Pritchard
The Telegraph, London
Tuesday, August 12, 2008
A war breaks out in the Caucasus, pitting Russia against a close ally of the United States. Inflation reaches a new peak in the euro-zone. The CPI reaches the highest in Britain since Bank of England independence. Rampant inflation sweeps the developing world.
Please read the full article
http://blogs.telegraph.co.uk/ambrose_evans-pritchard/blog/2008/08/12/stage_two_of_the_gold_bull_market_is_just_beginning
and another excellent article from the same source
State error led banks to ignore the lessons of history and overdose on too-cheap money, writes Ambrose Evans-Pritchard
Three years ago, the world's top watchdog warned that the global economy was veering out of control. Defending orthodoxy against the easy debt policies of the Greenspan era, the Bank for International Settlements said interest rates were being held too low for safety in most of the mature economies.
http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2008/08/08/ccrisis108.xml&page=1
Well dear reader, the following article is certainly a MUST read. Well whatever will happen to the price of gold, I will hold on to my precious metal investments.
http://www.thecuttingedgenews.com/index.php?article=685
Following the comment from the source of the information
This piece is by James Quinn, Senior Director of Strategic Planning at the Wharton School of Business. It suggests that the American public has been kept in the dark for some time now. In particular pay attention to the "level three" assets list. If these assets turn out to be 50-75% failures, the list of insolvencies will include these and many others institutions.
This is what a credit contraction is about. These level 3 assets were essentially more exotic, more risky, loans that were packaged into investments. They cannot be properly valued because there is no market for them. When these are marked down to whatever level needed to clear the market, i.e. [make a transaction] the selling institution must either raise an equal amount of capital to offset the loss or reduce its [sell] investment portfolio by some multiple of the loss. The institution will need to sell a multiple of their loss because these assets were purchased on margin, i.e. borrowed money. The original purchasing capital has been wiped out and then some. This will also reduce the amount of available capital for new loans in the future. A credit based system needs ever more credit to survive. Once credit begins contracting, this shrinkage must reverse quickly or it cannot be reversed.
Unquote
Well dear reader, do you think the credit crisis is over? Reading the following comment it seems to me that we are far away.
The next wave of mortgage defaults More borrowers with good credit are defaulting on their home loans, and that's going to make it even harder for the staggering housing market to recover. By Les Christie, CNNMoney.com staff writer Last Updated: August 12, 2008: 8:51 AM EDT NEW YORK (CNNMoney.com ) -- Prime mortgages are starting to default at disturbingly high rates - a development that threatens to slow any potential housing recovery. The delinquency rate for prime mortgages worth less than $417,000 was 2.44% in May, compared with 1.38% a year earlier, according to LoanPerformance, a unit of First American (FAF, Fortune 500) CoreLogicthat compiles and analyzes residential mortgage statistics. Delinquencies jumped even more for prime loans of more than $417,000, so-called jumbo loans. They rose to 4.03% of outstanding loans in May, compared with 1.11% a year earlier. And prime loans issued in 2007 are performing the worst of all, failing at a rate nearly triple that of prime loans issued in 2006, according to LoanPerformance. "The extent of how bad these loans are doing is very troubling," said Pat Newport, real estate economist with Global Insight, a forecasting firm. Washington Mutual (WM, Fortune 500) CEO Kerry Killinger said last month that the bank's prime loan delinquencies are on the rise. As of June 30, 2.19% of the prime loans issued by WaMu in 2007 were already delinquent, compared with 1.40% of prime loans issued in 2005. Also last month, JP Morgan Chase (JPM, Fortune 500) CEO Jaime Dimon called prime mortgage performance "terrible" and suggested that losses connected to prime may triple. For the second quarter, the bank reported net charges of $104 million for prime rate delinquencies, more than double the $50 million recorded three months earlier. The latest shoe Prime loans are just the latest class of mortgages to suffer a spike in failure rates. The first lot to go bad was, of course, subprime mortgages, whose problems set the housing meltdown in motion. Next were the Alt-A loans, a class between prime and subprime loans that doesn't require strict documentation of a borrower's assets or income. Now, as prime loans are added to the mix, the resulting foreclosures could haunt the housing market for a long time, according to Global Insight's Patrick Newport. "Home prices will drop for quite a while - maybe several years," he said. Prices are already off nearly 20% from their 2006 highs, according to the S&P/Case-Shiller Home Price index. And there's a strong inverse correlation between home prices and defaults, according to Lawrence Yun, chief economist for the National Association of Realtors. "It's a feedback loop," he said. "Price declines lead to more defaults, which leads to more price declines." More foreclosures will add to an already massive oversupply of homes on the market. Inventories are up to about 11 month's worth of sales at the current rate. Indeed, about 2.8% of all homes for sale were vacant as of June 30, according to Census Bureau statistics. That's up about 50% from three years ago, and near historic highs. More foreclosures, fewer loans The failure of prime mortgages will also make it more difficult for new borrowers to find affordable loans - and that will slow sales even more. Lending standards have been tightening for months, but if prime loans start to look risky, lenders will be even more conservative about who gets a mortgage. About 60% of the loan officers surveyed reported that they tightened lending standards for prime mortgages during the first three months of 2008, according to the April 2008 Senior Loan Officer Opinion Survey on Bank Lending Practices from the Federal Reserve, which is released quarterly. That number will likely be even higher for the second quarter, according to Mike Larson, a real estate analyst for Weiss Research. "It's already harder and more expensive to get loans," he said. "Lenders pull in their horns when things go south." While easy credit fueled the housing boom, restricted credit is certainly contributing to the bust. "Eventually," said Newport, "time will break the cycle. Pricing will drop enough to attract more buyers, and inventories will decline." But there will probably more hard times ahead before markets come back into balance and recovery begins.
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