Robert Reich Gets These Seven Economics "Fundamentals" Very Wrong

https://mises.org/wire/robert-reich-gets-these-seven-economics-fundamentals-very-wrong

When Fundamentals No Longer Apply, Review the Fundamentals

http://sprott.com/markets-at-a-glance/when-fundamentals-no-longer-apply,-review-the-fundamentals/

The Screaming Fundamentals For Owning Gold And Silver

http://www.chrismartenson.com/blog/screaming-fundamentals-owning-gold-and-silver/59850?utm_source=zerohedge&utm_medium=syndication&utm_content=link0&utm_campaign=59850

A Tale of Two Cities (part 2)

Here's the bad news for equities. This graph (click to enlarge) charts the DJIA relative to the price of 1 ounce of gold. At the height of the internet bubble, the DJIA/gold ratio was 44--and clearly unsustainable. At the depths of previous bear markets, the ratio was unity (1:1).

Currently, the ratio is around 10:1, and trending downward in the short- and mid-term. In order for the ratio to reach unity, the Dow Jones index has to either decline by a significant amount, or the price of gold per ounce has to increase by a significant amount--or both have to occur simultaneously. Simply put, the numerator (DJIA) has to match the denominator (gold price per ounce).

The take away message from the disaggregation of both charts is that while financial asset values may increase appreciably in nominal terms, in real terms (i.e. inflation-adjusted or indexed against gold), the returns for equities do not appreciate nearly as much when measured over a long period of time. In other words, the rate of return for equities is impaired due to the devaluation of the USDollar.

No one has a crystal ball, but the short US equities / long gold trade seems like the logical play going forward. Of course, with governments and central bankers wreaking havoc by manipulating markets worldwide, logic doesn't always win out initially. Fundamentals become distorted beyond recognition as bubbles are created and burst, causing investors to lose money, despite making correct market calls. Timing becomes the enemy, not the ally. So tread carefully. Read the disclaimers in the sidebar. Perform your own due diligence.

Disclosure: long biotech and energy sector equities, long gold and silver mining shares.

Gold bull market: a bubble?

Skeptics claim the decade-long bull market in gold is a bubble waiting burst. The reasoning is that the rally in gold lacks fundamentals. Here is a counter argument given by Jim Willie.

One must suppose that skyrocketing gold investment demand and rush to diversify out of a collapsing dollar do not qualify as fundamental. And the absence of metals exchange gold inventory also does not qualify as fundamental. And the Chinese pledge to lift their gold reserves 10-fold to 10 thousand metric tonnes in eight to ten years, that is not fundamental either. And the G-20 pledges to formally move toward an IMF basket of currencies, known as the Special Drawing Rights, and away from the USDollar, that is not fundamental either. And the Saudi announcement of a phase-out of sales for crude oil in US$ terms over the next few years, neither is that a fundamental. And the grossly insolvent banks in the Untied States, England, and Europe, which are simultaneously struggling, unable to extend loans, desperately suckling from government teats, that is not fundamental either. Burnedstein plainly fails to recognize that the entire world is grasping for something tangible within the global monetary system overrun by toxic paper, and that anchor reached for is gold.

Gold--due for a pause--or ready to explode again?

I questioned whether gold was due for a pause a couple days ago, as the price of gold kept spiking up, breaking resistance levels. Well, the price shot up again overnight in Asia, BUT the mining shares didn't move much this morning. So I hedged this morning, not selling my positions, instead buying a couple puts, which will profit should ABX correct. Think of it as a cheap form of insurance in case gold pauses--without having to trigger a taxable event from profit-taking.

The price of the mining shares usually lead the actual price of the underlying commodity. In other words, it's gone up too fast and is looking heavy. There's that Physics training kicking in again...:-)

Having said that, I'm still bullish on gold medium- and long-term, as the fundamentals are unimpaired, to borrow a quote from Jim Rogers. But gold mining shares do look a bit tired at these levels. More conservative investors may want to take some profits off the table--a 100% profit in two months is nothing to sneeze at.

Oversold

Even tho I think financials have terrible fundamentals (too much toxic debt), I flipped Citigroup today for a one-day round trip profit of 20%. Regional banks should do okay, as they didn't leverage up on sub-prime mortgage-backed securities, like the big money center banks. But the landscape has changed for partially nationalized banks like JPMorgan Chase, B of A, Citi, and Goldman Sachs. So even tho I went against my investment principles, I repeated my flip of Morgan Stanley last quarter, doubling my money on that trade. The panic selling of Citi shares created an oversold condition, so I pounced. Probably not smart, but I'd rather be lucky than good.

I also nibbled at oil at $34/barrel with the ETF DXO, which leverages crude oil moves. No one is bullish on oil, so my contrarian instincts compelled me to dive in. This is a short-term trade for me, and if oil moves to my favor, I'll take profits. If oil keeps declining, I'll again go against my principles, sitting on it for however many months or years it takes for oil to rebound--I won't put in any stop losses. Oil is still in a secular bull market, so time is on my side.