Showing posts with label hedge funds. Show all posts
Showing posts with label hedge funds. Show all posts
Sunday, December 6, 2015
Friday, May 23, 2014
Sunday, August 4, 2013
Saturday, July 20, 2013
Wednesday, June 5, 2013
Wednesday, May 22, 2013
Sunday, May 19, 2013
Tuesday, April 9, 2013
Friday, February 8, 2013
Wednesday, November 7, 2012
Max Keiser: 'Barack Obama is clueless. Mitt Romney will bankrupt the country'
http://www.independent.co.uk/news/world/americas/max-keiser-barack-obama-is-clueless-mitt-romney-will-bankrupt-the-country-8269633.html
Of the many themes that Keiser returns to in his shows, one of the most interesting and incendiary is the relationship between big business and Congress. He has openly accused senior politicians of using investigations into financial malpractice as a way of acquiring market information so as to benefit themselves.
"Democracy is not well served by the current political configuration in America," he maintains. "The entire political establishment is designed around enriching a minority of people who have access to both information and capital. Take the CIA. They have recently opened up their services to hedge funds. Hedge-fund managers can now hire CIA agents to do research on pharmaceutical companies, defence contractors, or oil contracts."
Saturday, September 22, 2012
Peak Career Risk: Only 8% Of Hedge Funds Are Outperforming The Market
The smartest guys in the room aren't that smart. In other words, a monkey throwing darts would have outperformed 92% of hedge fund managers in existence.
http://www.zerohedge.com/news/2012-09-22/peak-career-risk-only-8-hedge-funds-are-outperforming-market
http://www.zerohedge.com/news/2012-09-22/peak-career-risk-only-8-hedge-funds-are-outperforming-market
Tuesday, November 29, 2011
Friday, April 15, 2011
Spot prices decoupling from mining equities
While physical spot prices for gold and silver continue to surge, some of the mining shares are stagnant, which prompted me to take partial profits in SLW yesterday <click here> . One possible reason is that the big money hedge funds are long the metals, but short the mining shares as a hedge. These shorts put a cap on the prices of mining equities.
It may work for a while, but with any arbitrage, if the market wakes up to the reality of higher profits for mining companies going forward, the shorts will be carried out in a body bag. In other words, this separation between the physical and equities markets is only temporary, and mining equities may not only catch up to the spot markets, but slingshot past the physical markets in the event of a huge short squeeze.
Wednesday, July 28, 2010
The Traders Who Make The Big Money
The Traders Who Make The Big Money
Why they refuse to do the same with gold is really difficult to grasp unless of course they are fearful of government regulators sniffing around their business. Maybe the word has gotten out that this will be the case with any hedge fund manager who dares to try to force the shorts to delivery the gold. One thing along this line – China or Russia nor mid-Eastern interests are under no such constraints and could break the back of the bullion banks tomorrow if they chose to do so. That they have not signifies that they are not through acquiring cheap gold yet.
Saturday, July 17, 2010
Who is buying US Treasuries?
http://www.zerohedge.com/article/chinese-treasury-dump-brings-its-total-holdings-one-year-low-uk-continues-exponential-accumu
Let me break down Bond Markets 101. The Fed and US Treasury have to issue a lot of debt in the form of US Treasury bonds (long expiry) and US Tresury bills (expirations of less than a year). They are basically IOU's with a coupon promise to pay a certain interest rate to the lender (i.e. bond investor). They have to issue trillions in debt to fund our overspending government. As long as demand is there for this debt (i.e. buyers), the yields or interest rates buyers demand will remain relatively low.
However, if supply exceeds demand, yields must increase in order to attract buyers. Hence, interest rates rise. Higher interest rates are problematic for the economy, because loans of all types are indexed to said bond yields. For instance, 30-year mortgage rates may be indexed to 10-year US Treasury yields. If interest rates rise, fewer homes and cars are purchased, and fewer businesses borrow money to fund their operations. That's why sharply rising interest rates are detrimental to economic growth.
Now, the Fed and US Treasury know this, and they know that foreign appetite for US Treasury bonds is waning--and for good reason. The US government is broke, and will never be able to pay back their debt obligations. But in order to maintain a semblance of the status quo (i.e., the US government is the borrower of last resort, the borrower with the highest credit rating), the Fed must artificially create demand and thus, prop up bond prices, while simultaneously suppress yields and interest rates (remember: when bond prices increase, yields decrease, and vica versa, by definition).
In other words, the Fed is buying its own US Treasury bonds, in order to keep interest rates low--and they're doing it surreptitiously through banking affiliates in the UK, in order to not spook the bond markets (which are several orders of magnitude larger than equities markets). But with this so-called debt monetization (which is really acceleration of the printing of currency), the Fed is flooding the market with USDollars, which ultimately devalues the currency. Once the bond market vigilantes wake up to this, they will drive the USDollar down even further, much like a predator senses weakness in its prey.
George Soros did exactly this in 1992 to the British Pound Sterling, driving rates up and bankrupting the UK. Remember: when a sovereign nation's currency is devalued, bond investors demand higher yields in order to compensate for the extra devaluation risk. Combine that with high sovereign debt levels, and bond prices plummet in a self-fulfilling death spiral. This, of course, devalues the currency even further, into a debt spiral with no escape. This also happened to Greece, Portugal and Spain recently, which had to issue bonds at much higher interest rates when high sovereign debt levels spooked the bond markets. In a nutshell, due to high debt levels, their creditworthiness was downgraded, causing their borrowing costs to soar.
The US, of course, has a huge advantage because the USDollar is the world's reserve currency, and that it can issue debt in USDollars, while the 16 Euro zone countries can only raise debt through Euros. Hence, the Fed can hide our Federal government's insolvency by issuing even more debt to pay off previous debts. But as any sane person knows, no household can solve their debt problems with more debt. It's the same for corporations, states, municipalities, and yes, sovereign nations like the US Federal government. Eventually, the creditors go into collection mode. And apparently, our biggest creditors in China and Japan have told the US government "enough is enough."
So the Fed is forced to go offshore with our allies in the UK to hide their purchases of its own US Treasury debt, because the American public has bailout fatigue--we now understand digging a deeper debt hole has bad consequences. This signals desperation on the government's part, and the gargantuan US Treasury bond market may be on its last legs. The shell game can be extended as long as confidence in the USDollar is intact. But when the "con" is up, the bursting of the bubble in the US Treasury bond market will be cataclysmic--much larger than the subprime mortgage bond market bubble.
Many entities may hold US mortgage-backed securities, but every sovereign entity holds USDollars and/or US Treasuries in their foreign reserves. When that bubble bursts, the global financial system itself would collapse.
Gold and silver may be the last currencies standing. Which is another reason why central bankers abhor increasing prices in precious metals, as it signals a crisis in confidence of paper currencies.
See disclaimers in the side bar.
Disclosure: long TBT, long gold, long silver.
The reason: in it we read that in May 2010, China dumped $33 billion in Treasuries, bringing its total to the lowest since June 2009. Furthermore, Japan also offloaded $8.8 billion in bonds, as did the Oil Exporters. Yet total foreign Treasury holdings increased from $3,957 billion to $3,964 billion almost exclusively as a result of ongoing exponential UK accumulation. It is time someone in the mainstream media asked just who is doing all this "UK-based" buying? It is not hedge funds, which operate out of Caribbean Banking Centers,...
Yet in what is (and continues to be) the most perverse observation, that proceeds without any questions from the mainstream media, the otherwise broke UK, once "bought: a stunning amount of Bonds, or just over $28 billion in the month of May, consisting of $27 billion in Bonds, and $1.3 billion in Bills. The "UK" accumulation patterns continues growing in an exponential pattern, and the country which owned "just" $180 billion in USTs in December, has doubled its holdings to $350 billion in less than half a year.
This is increasingly appearing as shadow Fed debt monetization operation, operating out of the United Kingdom.
Let me break down Bond Markets 101. The Fed and US Treasury have to issue a lot of debt in the form of US Treasury bonds (long expiry) and US Tresury bills (expirations of less than a year). They are basically IOU's with a coupon promise to pay a certain interest rate to the lender (i.e. bond investor). They have to issue trillions in debt to fund our overspending government. As long as demand is there for this debt (i.e. buyers), the yields or interest rates buyers demand will remain relatively low.
However, if supply exceeds demand, yields must increase in order to attract buyers. Hence, interest rates rise. Higher interest rates are problematic for the economy, because loans of all types are indexed to said bond yields. For instance, 30-year mortgage rates may be indexed to 10-year US Treasury yields. If interest rates rise, fewer homes and cars are purchased, and fewer businesses borrow money to fund their operations. That's why sharply rising interest rates are detrimental to economic growth.
Now, the Fed and US Treasury know this, and they know that foreign appetite for US Treasury bonds is waning--and for good reason. The US government is broke, and will never be able to pay back their debt obligations. But in order to maintain a semblance of the status quo (i.e., the US government is the borrower of last resort, the borrower with the highest credit rating), the Fed must artificially create demand and thus, prop up bond prices, while simultaneously suppress yields and interest rates (remember: when bond prices increase, yields decrease, and vica versa, by definition).
In other words, the Fed is buying its own US Treasury bonds, in order to keep interest rates low--and they're doing it surreptitiously through banking affiliates in the UK, in order to not spook the bond markets (which are several orders of magnitude larger than equities markets). But with this so-called debt monetization (which is really acceleration of the printing of currency), the Fed is flooding the market with USDollars, which ultimately devalues the currency. Once the bond market vigilantes wake up to this, they will drive the USDollar down even further, much like a predator senses weakness in its prey.
George Soros did exactly this in 1992 to the British Pound Sterling, driving rates up and bankrupting the UK. Remember: when a sovereign nation's currency is devalued, bond investors demand higher yields in order to compensate for the extra devaluation risk. Combine that with high sovereign debt levels, and bond prices plummet in a self-fulfilling death spiral. This, of course, devalues the currency even further, into a debt spiral with no escape. This also happened to Greece, Portugal and Spain recently, which had to issue bonds at much higher interest rates when high sovereign debt levels spooked the bond markets. In a nutshell, due to high debt levels, their creditworthiness was downgraded, causing their borrowing costs to soar.
The US, of course, has a huge advantage because the USDollar is the world's reserve currency, and that it can issue debt in USDollars, while the 16 Euro zone countries can only raise debt through Euros. Hence, the Fed can hide our Federal government's insolvency by issuing even more debt to pay off previous debts. But as any sane person knows, no household can solve their debt problems with more debt. It's the same for corporations, states, municipalities, and yes, sovereign nations like the US Federal government. Eventually, the creditors go into collection mode. And apparently, our biggest creditors in China and Japan have told the US government "enough is enough."
So the Fed is forced to go offshore with our allies in the UK to hide their purchases of its own US Treasury debt, because the American public has bailout fatigue--we now understand digging a deeper debt hole has bad consequences. This signals desperation on the government's part, and the gargantuan US Treasury bond market may be on its last legs. The shell game can be extended as long as confidence in the USDollar is intact. But when the "con" is up, the bursting of the bubble in the US Treasury bond market will be cataclysmic--much larger than the subprime mortgage bond market bubble.
Many entities may hold US mortgage-backed securities, but every sovereign entity holds USDollars and/or US Treasuries in their foreign reserves. When that bubble bursts, the global financial system itself would collapse.
Gold and silver may be the last currencies standing. Which is another reason why central bankers abhor increasing prices in precious metals, as it signals a crisis in confidence of paper currencies.
See disclaimers in the side bar.
Disclosure: long TBT, long gold, long silver.
Thursday, February 18, 2010
The George Soros head fake on gold
George Soros, perhaps the planet's most famous (or infamous) billionaire trader, recently caused a raucous among gold bugs and bears alike with this comment at the recent World Economic Forum in Davos, the so-called summit in late January 2010 of billionaire financiers, global bankers, media moguls, and government heads of state:
Many interpreted this comment that Soros was bearish on gold, and that its decade-long bull market was finally over, after more than quadrupling since 2001.
Within that context, here's a very interesting development in what George Soros' hedge fund has done--and not what he has said.
http://www.bloomberg.com/apps/news?pid=20603037&sid=aKs0jaibTSmY
Which begs the question: if he expected gold to be a bubble about to tumble in price, why would he double down on gold? Sounds to me like George Soros is "talking down his book" to throw his followers off his trail. "Do as I do, not as I say" seems highly appropriate advice here.
Remember: Soros became a billionaire not by telegraphing his next move--he became wealthy by fooling others into taking the losing side of a trade. For every buyer, there is a seller, and for every seller, there is a buyer. So despite his rhetoric, Soros has been a buyer of gold, not a seller. Add to the list of big hedge funds who were net purchasers of gold last year, including John Paulson, David Einhorn, Kyle Bass, Jim Rogers, Paul Tudor Jones, and one has to wonder who has more credibility: billionaire hedge fund managers who correctly bet on a subprime mortgage crisis exploding into a global financial meltdown--or government economists and leaders who totally missed the real estate bubble and bust?
Besides, who would you rather take sides with: successful billionaires with track records--or retail sellers of grandma's jewelry for 20 cents on the dollar after watching Cash4Gold commercials?
Ya think?
See disclaimers on the sidebar.
Disclosure: long gold and silver mining shares
When interest rates are low we have conditions for asset bubbles to develop, and they are developing at the moment. The ultimate asset bubble is gold.
Many interpreted this comment that Soros was bearish on gold, and that its decade-long bull market was finally over, after more than quadrupling since 2001.
Within that context, here's a very interesting development in what George Soros' hedge fund has done--and not what he has said.
http://www.bloomberg.com/apps/news?pid=20603037&sid=aKs0jaibTSmY
Billionaire George Soros’s Soros Fund Management LLC more than doubled its holding in the biggest gold exchange-traded fund in the fourth quarter after bullion advanced 8.9 percent to a record.
The $25 billion New York-based firm became the fourth- largest holder in the SPDR Gold Trust, adding 3.728 million shares valued at $421 million, according to a filing with the U.S. Securities and Exchange Commission yesterday. Its investment was worth about $663 million, the fund’s largest single investment, as of Dec. 31.
Which begs the question: if he expected gold to be a bubble about to tumble in price, why would he double down on gold? Sounds to me like George Soros is "talking down his book" to throw his followers off his trail. "Do as I do, not as I say" seems highly appropriate advice here.
Remember: Soros became a billionaire not by telegraphing his next move--he became wealthy by fooling others into taking the losing side of a trade. For every buyer, there is a seller, and for every seller, there is a buyer. So despite his rhetoric, Soros has been a buyer of gold, not a seller. Add to the list of big hedge funds who were net purchasers of gold last year, including John Paulson, David Einhorn, Kyle Bass, Jim Rogers, Paul Tudor Jones, and one has to wonder who has more credibility: billionaire hedge fund managers who correctly bet on a subprime mortgage crisis exploding into a global financial meltdown--or government economists and leaders who totally missed the real estate bubble and bust?
Besides, who would you rather take sides with: successful billionaires with track records--or retail sellers of grandma's jewelry for 20 cents on the dollar after watching Cash4Gold commercials?
Michael Vachon, a spokesman for Soros, declined to comment on Soros’s investments.
Ya think?
See disclaimers on the sidebar.
Disclosure: long gold and silver mining shares
Tuesday, February 2, 2010
Volcker says let 'em fail
Paul Volcker, former Fed Chairman and current adviser to President Obama, told the Senate Banking Committee that hedge funds and private equity funds should be allowed to profit and fail on their own, without government support.
Which is how capitalism should work, and hence, sound policy. The problem is that charities, foundations, schools, churches, states, and municipalities who speculated in over-the-counter (OTC) derivatives will go bankrupt when these toxic assets sink in value. Why exactly did these entities "invest" in these swaps? Who was minding the fence?
http://www.bloomberg.com/apps/news?pid=20601103&sid=axxnPYqTocfY
Which is how capitalism should work, and hence, sound policy. The problem is that charities, foundations, schools, churches, states, and municipalities who speculated in over-the-counter (OTC) derivatives will go bankrupt when these toxic assets sink in value. Why exactly did these entities "invest" in these swaps? Who was minding the fence?
http://www.bloomberg.com/apps/news?pid=20601103&sid=axxnPYqTocfY
Tuesday, January 5, 2010
Redemption suspension
The words "suspend redemptions" evoked panic and fear in hedge fund investors in 2008 after Lehman Brothers collapsed. Insolvent hedge funds had to delay investor demands for redemptions because they lacked access to liquidity during the financial crisis. A credit freeze ensued, and no one trusted their counterparties who were equally insolvent.
Fine, hedge fund investors are allegedly savvy and required to understand the outsized risks and rewards of investment in hedge funds. An accredited investor needs to have a minimum income of $200,000 and a minimum net worth of $1 million, but most have income and net worth levels much higher than the minimum thresholds. They understand "high risk/high reward"--at least they're supposed to.
But the latest financial reform being pushed by the Obama financial team "to protect consumers" includes the following language: "suspend redemptions to allow for the orderly liquidation of fund assets." This clause is in direct conflict with Securities Exchange Commission (SEC) Rule 2a-7, which provides minimal risk, no volatility, and redeemability for money market funds. In other words, when the average Joe parks his money in a money market account, he expects miniscule interest earned, in return for the safety and liquidity of funds being instantaneously accessible via a computer keystroke or a visit to the bank teller.
What this "financial reform" clause does is allow financial institutions to NOT guarantee your request for cash withdrawal if financial markets are collapsing. In other words, how "safe" is your cash if you can't even access it in times of financial distress--or when there's a run on banks?
This is the same SEC which is chartered to protect investors from unscrupulous swindlers and regulate free, orderly markets. Given their dismal track record of protecting investors from the likes of Ponzi schemers Bernie Madoff and Allen Stanford, it should come as no surprise that savers and investors will become incredibly vulnerable should the next financial iceberg hit again.
Fine, hedge fund investors are allegedly savvy and required to understand the outsized risks and rewards of investment in hedge funds. An accredited investor needs to have a minimum income of $200,000 and a minimum net worth of $1 million, but most have income and net worth levels much higher than the minimum thresholds. They understand "high risk/high reward"--at least they're supposed to.
But the latest financial reform being pushed by the Obama financial team "to protect consumers" includes the following language: "suspend redemptions to allow for the orderly liquidation of fund assets." This clause is in direct conflict with Securities Exchange Commission (SEC) Rule 2a-7, which provides minimal risk, no volatility, and redeemability for money market funds. In other words, when the average Joe parks his money in a money market account, he expects miniscule interest earned, in return for the safety and liquidity of funds being instantaneously accessible via a computer keystroke or a visit to the bank teller.
What this "financial reform" clause does is allow financial institutions to NOT guarantee your request for cash withdrawal if financial markets are collapsing. In other words, how "safe" is your cash if you can't even access it in times of financial distress--or when there's a run on banks?
This is the same SEC which is chartered to protect investors from unscrupulous swindlers and regulate free, orderly markets. Given their dismal track record of protecting investors from the likes of Ponzi schemers Bernie Madoff and Allen Stanford, it should come as no surprise that savers and investors will become incredibly vulnerable should the next financial iceberg hit again.
Sunday, November 22, 2009
Are precious metals reaching bubble status?
This question has been raised by inflationists and deflationists alike. Most people believe the prices of gold and silver have increased too far, too fast. In my opinion, they are wrong.
Without forecasting specific targets, let's look at facts. The US government national debt has climbed above $12 trillion. The 2009 budget deficit was $1.4 trillion--and rising going forward. Entitlement programs including social security, Medicare, Medicaid, and two ongoing wars bring our unfunded liabilities to over $100 trillion. There are only a few ways to cut the deficits and pay down some of that debt: raising taxes, reducing government spending, increasing productivity and economic growth, and inflating the money supply. We should expect all four. Inflation devalues the USDollar, reducing the burden of those huge debts. But savers and creditors are punished by artificially suppressed interest rates and a debased currency.
To provide personal context, I've been long gold and silver since November 2008--and have been ridiculed the whole way up by almost everyone. For those who believe we are in bubble territory for precious metals, I will offer the following counter arguments.
Many Americans are becoming aware of gold as an asset class, but MOST AMERICANS HAVE NOT ACTED UPON THIS AWARENESS. Furthermore, financial planners don't earn fees when clients buy gold and silver bullion or coins, so they haven't been endorsing owning precious metals as a hedge against inflation and financial crises. Despite foreign governments encouraging citizens to own physical gold and silver, the US government downplays the fact that precious metals prices have soared over the last decade.
Americans have seen Cash4Gold commercials ad nauseum, but these television commercials entice people to SELL grandma's gold jewelry, allowing the general public to gladly pocket an extra few hundred dollars. The problem is they are only getting 50 cents on the dollar--selling into a bull market. In any case, the scrap market is dwindling, as consumers aren't selling as much as in previous rallies.
The smart money is taking the opposite side of the trade: hedge funds led by billionaires John Paulson, Jim Rogers, George Soros, Paul Tudor Jones, and David Einhorn are BUYING gold and gold-related vehicles. So are central banks worldwide, who have been net sellers in the past. They are now buying.
Of course, gold and silver will eventually reach bubble status--every asset experiences peaks and valleys over time. But the secular peaks aren't $1150 or $18 per ounce, respectively. As a reference point, $2400 and $140 represent inflation-adjusted peak values of $850 and $50 in year 1980 for gold and silver, respectively. With the world awash with more trillions of dollars today than in 1980, the true value of gold is $6300, according to French investment bank Societe Generale. Divide that by 15, the historical gold/silver ratio, and one derives a peak value of $420 for silver.
Again, these are not forecasts, but valuation models based on historical precedent. One could argue gold will fall to $250, or silver back to single digits--back to year 2001 levels. No one has a crystal ball, but all we can do is make educated calculations, based on economic fundamentals and previous history. The commodities markets, specifically precious metals, are a very volatile asset class. Equity shares in resource companies producing said commodities can be even more volatile. Hence, the disclaimers. A long bet on commodities is a bet against central banks worldwide, which by extension is a vote of skepticism against sovereign governments' inability to keep their fiscal house in order. Some will accuse these trades to be unpatriotic. I view them as protection against the abuses of central bankers gone wild--a means to preserve the diminishing purchasing power of an impaired currency--the USDollar.
This is one potential scenario, but one that is becoming increasingly apparent, despite skepticism from our government economists, academia, banks, and the general public. I admittedly swim upstream when it comes to populist Keynesian economics. On the other hand, mainstream financial models haven't exactly worked like clockwork, either. Look at the carnage of collapsed banks and government agencies guaranteeing home mortgages, for instance. And look at equities and real estate. It hasn't been pretty...
Whether one chooses past performance, or money supply vs. above-ground gold supply dynamics, the prices of precious metals appear to be headed higher--much higher. With any bullish trend, it won't run straight up, so the corrections will be painful, but the spikes will be breath-taking--and unpredictable. Trading the tops and bottoms will be difficult to time due to high price volatility. Buying and holding, while averaging in on dips may be prudent. When and if the gold mania kicks in, I'll know it when the headlines are splashed across the major media outlets. I will probably average out at that point. And when bartenders and cab drivers recommend obscure gold mining companies, giving advice on "how to make a killing" on the next hot trading tip, I will be heading for the exits. We are not even close to that mania phase yet.
These are my opinions only, and not specific recommendations. No specific targets or position sizes are implied. Past performance does not guarantee future results. Do your own due diligence. Investing is risky and investors can lose most or all their capital. Holding US dollars could be just as risky.
Disclosure: long gold and silver mining shares.
Without forecasting specific targets, let's look at facts. The US government national debt has climbed above $12 trillion. The 2009 budget deficit was $1.4 trillion--and rising going forward. Entitlement programs including social security, Medicare, Medicaid, and two ongoing wars bring our unfunded liabilities to over $100 trillion. There are only a few ways to cut the deficits and pay down some of that debt: raising taxes, reducing government spending, increasing productivity and economic growth, and inflating the money supply. We should expect all four. Inflation devalues the USDollar, reducing the burden of those huge debts. But savers and creditors are punished by artificially suppressed interest rates and a debased currency.
To provide personal context, I've been long gold and silver since November 2008--and have been ridiculed the whole way up by almost everyone. For those who believe we are in bubble territory for precious metals, I will offer the following counter arguments.
Many Americans are becoming aware of gold as an asset class, but MOST AMERICANS HAVE NOT ACTED UPON THIS AWARENESS. Furthermore, financial planners don't earn fees when clients buy gold and silver bullion or coins, so they haven't been endorsing owning precious metals as a hedge against inflation and financial crises. Despite foreign governments encouraging citizens to own physical gold and silver, the US government downplays the fact that precious metals prices have soared over the last decade.
Americans have seen Cash4Gold commercials ad nauseum, but these television commercials entice people to SELL grandma's gold jewelry, allowing the general public to gladly pocket an extra few hundred dollars. The problem is they are only getting 50 cents on the dollar--selling into a bull market. In any case, the scrap market is dwindling, as consumers aren't selling as much as in previous rallies.
The smart money is taking the opposite side of the trade: hedge funds led by billionaires John Paulson, Jim Rogers, George Soros, Paul Tudor Jones, and David Einhorn are BUYING gold and gold-related vehicles. So are central banks worldwide, who have been net sellers in the past. They are now buying.
Of course, gold and silver will eventually reach bubble status--every asset experiences peaks and valleys over time. But the secular peaks aren't $1150 or $18 per ounce, respectively. As a reference point, $2400 and $140 represent inflation-adjusted peak values of $850 and $50 in year 1980 for gold and silver, respectively. With the world awash with more trillions of dollars today than in 1980, the true value of gold is $6300, according to French investment bank Societe Generale. Divide that by 15, the historical gold/silver ratio, and one derives a peak value of $420 for silver.
Again, these are not forecasts, but valuation models based on historical precedent. One could argue gold will fall to $250, or silver back to single digits--back to year 2001 levels. No one has a crystal ball, but all we can do is make educated calculations, based on economic fundamentals and previous history. The commodities markets, specifically precious metals, are a very volatile asset class. Equity shares in resource companies producing said commodities can be even more volatile. Hence, the disclaimers. A long bet on commodities is a bet against central banks worldwide, which by extension is a vote of skepticism against sovereign governments' inability to keep their fiscal house in order. Some will accuse these trades to be unpatriotic. I view them as protection against the abuses of central bankers gone wild--a means to preserve the diminishing purchasing power of an impaired currency--the USDollar.
This is one potential scenario, but one that is becoming increasingly apparent, despite skepticism from our government economists, academia, banks, and the general public. I admittedly swim upstream when it comes to populist Keynesian economics. On the other hand, mainstream financial models haven't exactly worked like clockwork, either. Look at the carnage of collapsed banks and government agencies guaranteeing home mortgages, for instance. And look at equities and real estate. It hasn't been pretty...
Whether one chooses past performance, or money supply vs. above-ground gold supply dynamics, the prices of precious metals appear to be headed higher--much higher. With any bullish trend, it won't run straight up, so the corrections will be painful, but the spikes will be breath-taking--and unpredictable. Trading the tops and bottoms will be difficult to time due to high price volatility. Buying and holding, while averaging in on dips may be prudent. When and if the gold mania kicks in, I'll know it when the headlines are splashed across the major media outlets. I will probably average out at that point. And when bartenders and cab drivers recommend obscure gold mining companies, giving advice on "how to make a killing" on the next hot trading tip, I will be heading for the exits. We are not even close to that mania phase yet.
These are my opinions only, and not specific recommendations. No specific targets or position sizes are implied. Past performance does not guarantee future results. Do your own due diligence. Investing is risky and investors can lose most or all their capital. Holding US dollars could be just as risky.
Disclosure: long gold and silver mining shares.
Thursday, November 19, 2009
Smart money
I keep seeing "bubble talk" on the price of gold, and perhaps we're due for a correction, but the bullish trend in precious metals will continue, imo. I'm not fighting the trend, even tho I took a little off the table.
John Paulson, David Einhorn, Paul Tudor Jones, Jim Rogers, and George Soros are all loading up on gold and gold equities. What's the common element? They're all billionaire hedge fund managers, who put their book where their mouths are.
The suckers in this play are selling grandma's jewelry to "Gold4Cash" outfits for 50 cents on the dollar, thinking they're getting a good deal. Scrap selling will eventually run dry, even as gold prices keep appreciating.
Staying with the supply side part of the equation, gold production peaked in 2000 and has steadily declined since. South Africa, once the world's largest producer (China is now the #1 producer), is now #4, and reserves are vastly over-reported.
Gold increases in price because supply growth is not keeping up with the increase in money supply. Gold's supply grows 2% a year, while the monetary base of dollars is growing at a much faster pace (15+%). The double-edged sword is that monetary easing also debases the USDollar, making gold even more attractive.
Let's be honest: gold and silver compete against the USDollar--and against every other major currency. A bet on gold is a bet against every central bank in the world with the ability to print currency. That's why they hoard it and that's why they hate gold bugs.
The downside of gold is that it doesn't earn interest or pay a dividend--it earns 0% interest. When interest rates are high, the demand for gold is low. But when interest rates are suppressed to near 0%, the flight to gold is justified, as no one wants to hold paper that is not earning a meaningful rate of return. To make matters worth, that same paper is losing value very week.
Do I think we are due for a correction? Perhaps, but the smart money (and more importantly, central banks themselves) are lining up on the long side of the trade, despite higher prices. As long as Congress and Obama continue to spend money they don't have (e.g. healthcare reform), I don't see any other alternative than Bernanke and Geithner stepping up the printing presses.
Just my opinion. See the normal disclaimers in the side bar.
Disclosure: Long gold mining shares.
John Paulson, David Einhorn, Paul Tudor Jones, Jim Rogers, and George Soros are all loading up on gold and gold equities. What's the common element? They're all billionaire hedge fund managers, who put their book where their mouths are.
The suckers in this play are selling grandma's jewelry to "Gold4Cash" outfits for 50 cents on the dollar, thinking they're getting a good deal. Scrap selling will eventually run dry, even as gold prices keep appreciating.
Staying with the supply side part of the equation, gold production peaked in 2000 and has steadily declined since. South Africa, once the world's largest producer (China is now the #1 producer), is now #4, and reserves are vastly over-reported.
Gold increases in price because supply growth is not keeping up with the increase in money supply. Gold's supply grows 2% a year, while the monetary base of dollars is growing at a much faster pace (15+%). The double-edged sword is that monetary easing also debases the USDollar, making gold even more attractive.
Let's be honest: gold and silver compete against the USDollar--and against every other major currency. A bet on gold is a bet against every central bank in the world with the ability to print currency. That's why they hoard it and that's why they hate gold bugs.
The downside of gold is that it doesn't earn interest or pay a dividend--it earns 0% interest. When interest rates are high, the demand for gold is low. But when interest rates are suppressed to near 0%, the flight to gold is justified, as no one wants to hold paper that is not earning a meaningful rate of return. To make matters worth, that same paper is losing value very week.
Do I think we are due for a correction? Perhaps, but the smart money (and more importantly, central banks themselves) are lining up on the long side of the trade, despite higher prices. As long as Congress and Obama continue to spend money they don't have (e.g. healthcare reform), I don't see any other alternative than Bernanke and Geithner stepping up the printing presses.
Just my opinion. See the normal disclaimers in the side bar.
Disclosure: Long gold mining shares.
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