Tag Archives: gold

Pandora’s Grecian Riddle

This blog is published by Andy Waldock. Andy Waldock is a trader, analyst, broker and asset manager. Therefore, Andy Waldock may have positions for himself, his family, or, his clients in any market discussed. The blog is meant for educational purposes and to develop a dialogue among those with an interest in the commodity markets. The commodity markets employ a high degree of leverage and may not be suitable for all investors. There is substantial risk in investing in futures.

 

Pandora’s Grecian Riddle

Here’s a riddle for you. What could make the U.S. Dollar and Gold rally while keeping short term interest rates exceptionally low, in the face of a bleak domestic economy?

The answer: bigger troubles overseas finally finding their way into the light.

I have said for the last 6 months that there is big trouble brewingin Old Europe and the Mediterranean. Many of you who absorb information fromsources other than CNBC and Fox Business channel are already aware that Greeceis on the verge of catastrophe. Members of the EU met in Brussels yesterday,February 15th for the primary purpose of discussing what to do withGreece’s inability to bring their budget in line with national their nationaldebt expenditures, currently totaling about 300 million Euros. They will alsoneed to secure financing of more than 50 million Euros to maintain operationsthrough the end of this year. Currently, their deficit represents about 12.7%of GDP. Jean- Claude Trichet and the rest of the EU policymakers want thisnumber to be brought down to 4% for 2010. It is my understanding that there isa tacit agreement among members of the EU that deficit financing cannot accountfor more than 3% of GDP for EU members.

To put this in perspective, our debt levels here in the U.S. arerunning at approximately the same percentages as Greece. This would be theequivalent of the U.S. cutting its budget deficit, currently around $1.3trillion by more than $550 billion both this year and next. Can you imagine thecivil unrest this would create or, what it would mean to Medicare, welfare orsocial security? How about schools, police forces and the postal service? Thisis what the approximate proposal by the EU would cause in Greece.

Obviously, the next thought is, “its Greece. So what? How badcould it be?” Remember that we’re talking approximately 300 billion Euros.According to John Mauldin, this represents 2.7% of European GDP. Remember BearStearns? They held less than 2% of U.S. banking assets. The issue here is thatthe other members of the European Union would not have the collectivecoordination to operate swiftly and decisively in the event of contagion.Russia in 1998 had a very clear operating system. Decisions were made anddirectives were carried out. Argentina in 2002 was also able to implement thedefault, restructure, revalue and grow procedure within less than a year.However, according to yesterday’s meeting, as reported in both “The Guardian”and the “Telegraph,” there is virtually no consensus among what should be done.The mandate to cut debt was issued but, what enforcement power is there tocarry it out? How long will the other nations allow the European Union as awhole to be seen as impotent in the world financial markets?

Of course, Greece has choices. Most plausibly, they agree to EU concessions and implement them fractionally – like the teenage child that whose completion of the chore list is underwhelming, to say the least. Secondly, they could default on their debt. This would throw the country into a depression.However, unlike Russia and Argentina, who both had a wealth of natural resources to fall back on, over 75% of Greece’s GDP comes from the service sector and less than 4% comes from natural resources, which consist mainly ofagriculture. Therefore, they will not be able export their way to economic recovery the way the Russia and Argentina have. Finally, they could vote to remove themselves from the European Union. The benefits would include a devaluation of their debt and an instant competitive edge in labor pricing.Unfortunately, any savings – monetary or land (mark-to-market), left in Greece would be devalued immediately and it would leave them unable to securefinancing on the open market for quite some time.

Going back to where we started, I asked the question, “What would make the Dollar and Gold rally while keeping short term U.S. interest rates low?” As of this morning, (2/16/10), European Union leaders have broken offtalks with Greece over what to do. A Grecian default would place a huge strain on Germany, Switzerland and France, the three primary holders of Grecian debt(Mauldin). Great Britain and Spain are stuck dealing with their own problemsand the Swiss won’t get involved. If the EU were to bail out Greece, what wouldIreland say? Here in the U.S. we arbitrarily chose to save some firms and letothers fall by the wayside. Think Bear Stearns versus Goldman. The fallout was substantial. I can’t imagine the political chess game that involves picking which country to save and allowing which one to fail. From a tradingperspective, and this is about trading – not political rhetoric, this eventwill create uncertainty in the financial markets. Holders of Euros will diversify. Whether they buy U.S. Dollars directly or, simply move money out ofthe Euro and into other currencies, this action will devalue the Euro. Furthermore,this uncertainty will attract more money to Gold. Finally, uncertainty in theEuro Currency will reassert the U.S. debt markets as king, thus keeping short term rates low for the foreseeable future.

Any questions, please call.Andy Waldock866-990-0777

Who’s Right?

 

This blog is published by AndyWaldock. Andy Waldock is a trader, analyst, broker and asset manager.Therefore, Andy Waldock may have positions for himself, his family, or, hisclients in any market discussed. The blog is meant for educational purposes andto develop a dialogue among those with an interest in the commodity markets.The commodity markets employ a high degree of leverage and may not be suitablefor all investors. There is substantial risk in investing in futures.

This morning, (11/9/09) the U.S. Dollar is significantly lower and testing the ’08 lows. Gold is making new highs and holding over $1000 per ounce and crude is up $1.60. This is as it should be in a Dollar devaluing world, global assets priced in Dollars should climb in response to its decline. Economics 101 tells us that there is a negative correlation between global asset price and the price of the Dollar.

So far so good, right? Not so much. Every weekend, I download the Commitment of Traders Reports to see what the different categories of traders are doing. The three main categories  I track are the commercial traders, the small speculators and the funds. As many of you know, a big portion of my trading is based on the momentum of the commercial traders actions. There are three main reasons for this. First, they understand the fundamentals of the markets they trade – their markets are their business. Second, as the fundamental players in the business of their markets, they have a vested bottom line interest in pricing their products profitably. Finally, when they act collectively, based on their fundamental knowledge of their markets, they have the resources to move markets. Therefore, when they move, I want to be on their side.

Typically, the commercial positions rise and fall with the ebb and flow of the markets. They may act within the channel boundaries of a trending market or, they may be trading against support and resistance in sideways markets but, typically, they use their fundamental knowledge to pick the right side for the coming period of time.

Occasionally, we see these relationships pushed to the extreme and this is one of those times. I’ve selected three markets to illustrate this point – Gold, Crude Oil and the U.S. Dollar. As the Dollar has declined over this past year, we’ve witnessed a steady building of commercial long positions with a net accumulation of approximately 20, 000 contracts. Crude oil has seen commercial net short positions increase by more than 100,000 contracts since July. This also places Crude at a new net short record, eclipsing the August of 2007 mark. Finally, we have the Gold market. It’s been in the news everyday. Beginning in September, we can see that once the market started to breakout above the $990 level, commercial traders began to increase the pace of their selling. They have increased their net short positions by more than 30%. The final point to make is that people on the other sides of these trades are just that, people. Remember that it takes both a buyer and a seller to create a trade. The commercial entities need someone to take the other side of their trades. Those someones are the small speculators and the commodity funds. The commodity funds will always maintain a certain percentage of their assets in a given market. They adjust their asset base according to price, adding to their positions as prices rise and paring back their positions as the markets fall. Most importantly, they position themselves from the LONG SIDE ONLY. The small speculators can and do, trade both sides of the market and they are typically long at the top and short at the bottom. So, if the commercials have accumulated large, in some cases historical, positions that are opposite the markets’ current direction, who do you think is on the other side of their trades with historically sized positions betting on the trend to continue?

These are interesting times with the elastic band of the markets stretched to historical proportions. As a trader, I’m never one to bet my money against a trend’s continuation as my bottom line is only effected by the last traded price. Markets can remain irrational far longer than I can hold a bet against them. However, it would behoove those participants on the side of the small speculators to tighten up their protective stops as a reversal of fortune could send a record number of players heading for the exits.

 

U.S. Mint Gold Coins


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This blog is published by Andy
Waldock. Andy Waldock is a trader, analyst, broker and asset manager.
Therefore, Andy Waldock may have positions for himself, his family, or, his
clients in any market discussed. The blog is meant for educational purposes and
to develop a dialogue among those with an interest in the commodity markets.
The commodity markets employ a high degree of leverage and may not be suitable
for all investors. There is substantial risk in investing in futures.

I came across this in the Casey Daily Dispatch, this morning. Due to the number of inquiries into taking physical possession of Gold Bullion, I thought I’d post this as a reasonable means of physical acquisition. Please understand that this is neither a recommendation to buy physical gold nor, a solicitation for the resellers listed in the following post.

Generally speaking, Gold is a hedge against U.S. Dollar depreciation. It has been my experience that this hedge is more easily executed via the futures markets than in the physical market. However, in the best interest of our customers, I’ll always try to provide you with the best information I can find. After all, the only bad decision is a poorly informed decision.

Buffaloes Are Back!

By Jeff Clark

You may recall the U.S. Mint stopped producing the American Gold
Buffalo coin late last year when demand for all things gold and silver
skyrocketed and they couldn’t keep up. I was personally disappointed, because I
love that coin.

Well, I’m glad to report it’s back on sale! Beginning this
Thursday, October 22, you can once again buy the 2009 Gold Buffalo. The U.S. Mint
is officially releasing the coin for sale that day, and you can purchase them
from the Mint directly or from any dealer who’s got them available.

What many people don’t know is that the Gold Buffalo is the only
U.S.-minted 24-karat gold coin. Wait, you’re saying, isn’t the American Eagle
24 karats? Nope, it’s a 23-karat coin; it contains one ounce of gold, but it
also contains an alloy, about 10%, presumably to make it sturdier. The Buffalo
contains no alloy and is thus the purest form of gold you can buy.

If you’d like to own a Buffalo, I’d suggest calling Asset
Strategies International (1-800-831-0007). Why? Even though you can’t buy it
today, they’ll take your name and number now and then call you on Thursday to
lock in a price. They’ve also got the best price I’ve seen: they’re currently
asking a 6% premium (or lower for larger orders).

This is a better deal than Kitco, for example, because they’re not
taking orders yet and also said their premium is likely to be at least 8.25%.
Keep in mind, though, that premiums could easily be forced up if the demand,
like last time, is strong. I suspect it will be for this popular coin.

If you think the gold price is going to fall and could thus get it
cheaper, I’ll mention that the U.S. Mint projects they’ll produce enough coins
to keep up with demand. This doesn’t mean your dealer couldn’t run out, but
hopefully the mint’s calculations are correct and there will still be plenty of
coins available at later times. No guarantees, though, and premiums will certainly
fluctuate.

Customer’s Question

 

This blog is published by Andy Waldock. Andy Waldock is a trader, analyst, broker and asset manager. Therefore, Andy Waldock may have positions for himself, his family, or, his clients in any market discussed. The blog is meant for educational purposes and to develop a dialogue among those with an interest in the commodity markets. The commodity markets employ a high degree of leverage and may not be suitable for all investors. There is substantial risk in investing in futures.

I received the following email from one of my more erudite customers. I think, between us, we raised more questions than we answered. You will see my response below. Andy, I sent that same article (Swiss Bank say “goodbye to US”) to a European friend that I frequently have global economic discussions with.  He excused it as the “Swiss being the Swiss”.  He said they have been complaining for years as almost all of the European countries have demanded the same transparency from them. He feels that their historic dependence on secrecy and neutrality has been crumbling as the world gets smaller and hasn’t seen them as “playing ball”.  This is the sound of a “baby crying because its not getting its way”.  They used to command respect in international finance, but are becoming far less significant or impactful.  Excuse it.  Ignore it, he said.  It signals desperation, as to lash out against the US is an old European ploy to garner support from there brothers on “the continent”, in a “we stand together” approach.  He reminded me that their list of complaints about the US government approach to the economy and the private sector is, 1) well know , and, 2) the same complaints that you hear in the US itself.  “Who needs them to remind us of the obvious?  Its just rubbish!  Throw it away.”  Interesting …………… As I constantly try to summarize and update my outlook, her are my latest random thoughts……. Although a double dip recession is theoretically possible, what are the realistic chances when money is being printed around the world and interest rates are so low?? As our major companies have globalized over previous decades, and that pace continues to accelerate, is the statistical relevance of the US economic indicators disconnecting from our own stock market?  So many of our prognosticators and experts base there predictions and interpretations on models built from another era.   The rest of the world’s indicators are showing a bottom in place and a standard upturn based upon overprinting of currency and low interest rates – full steam ahead.  The fact is that we have the same, but our banks are holding onto money to protect themselves from the government changing the rules, and the housing glut is feeding the negative impact on household wealth perceptions.  So, our government policy nightmare could feed domestic fears of deflation, economic slowdown, and continued unemployment, while the rest of the world is full steam ahead.  They may worry about potential inflation, fed by the voices of the gold bugs and their own fears based upon many a small country’s own history.  But as you rightly pointed out, it will not be based upon scarcity of labor, material, or capital.  But those three factors usually only come into play at the end of the cycle.  Inflation is prompted by too much cheap money  funding speculation, which fuels growth, expansion, hyper growth and eventually scarcity of labor or material (usually not capital, as what politician in his/her right mind would shut off the spigot which provides their power?)  And since in a globally developing world with 2/3 of the population at poverty levels, and global companies able to readily locate or relocate production to cheaper labor markets – labor inflation will not be a problem.  This leaves only material, raw or manufactured, as the instrument of limited supply – too much money chasing limited supply. And those with true needs for production, will be punished by speculators crowding into their space. Gold is a monetary option, not an inflation indicator.  It is a currency equalizer.  It has risen in response to the drop in the USD, which is in response to our government’s unclear policies.  Gold should drop when these become clearer (the rules of the game) and the game restarts. Although the floor has risen as all currencies are being devalued. Also, has the education of the US investors expanded sufficiently that global investing differentiation has reached the level whereby their personal wealth could be positively impacted by successful investment returns from emerging or global markets, such that they spark retail here?  Or will they focus on reinvesting to rebuild wealth (having been burned recently) and link consumption directly to job security and taxes? We are seeing the condensed cycles we discussed previously.  Easy money has only been around for a year and already everyone’s worried about inflation. So where does that leave me?  With the intention of getting in early and out on time ….. Short term (start of cycle) opportunities would appear to be:  Emerging market stocks, and US stocks of global companies, or banks, small companies with a global labor supply or consumer market but little exposure to materials with potential price spikes or limited supply (SHIT !!!!!! Just realized I’m in the wrong business !!!!)  Perhaps some real estate. Middle term (mid cycle) opportunities would appear to be:  Global stocks and US stocks of global companies, raw materials with limited supply or long windows of new supply coming on stream Long term (late cycle) opportunities would appear to be: Start looking for tops:  to short all stocks, to sell commodity futures, End of cycle opportunities:   Short everything, buy bonds (as interest rates will need to be lowered in the next recession), hold cash (to start buying at the beginning of the next cycle). What should I do today?   Looks like commodities should have a floor, due to cheap money and economic recovery world wide.  So I should stop shorting against minor pullbacks.  Perhaps the only fear of a double dip is domestically?  Although global growth is recovering, it is no where near levels to spark commodity demand – just speculation due to cheap money, and limited alternatives.  Commodities may stay in a range for some time. (When gold retreats, so will many other commodities) Play USD recovery when policies become clearer. Invest in merging markets. Drink wine…. My response: There’s an awful lot to go on here. PhD’s  are working overtime to generate responses to each of your individual questions and you expect me to digest it, whole? I do have a couple of thoughts on some of your points. I’ve read it three times now, and I think I’m starting to wrap my head around it.     1)    Double dip recession – I think it’s very likely if the tax plans go through. It seems to me that taxes will rise and this will hurt our economy both by slowing new employment and, in turn, undercutting federal estimates of planned tax collection. Furthermore, these taxes will provide no long term benefits whatsoever to our infrastructure, our individuals or, our corporations. As you and I have discussed, profits have come through cost cutting and one time stimulus injections. We’re generating zero domestic demand and our exports are increasing, primarily, through the effect of the declining Dollar and its effect on the agricultural markets. Finally, on the inflation/deflation debate of the double dip, I think I’ve gotten my head around to the following argument for deflation as our primary focus. We’ve already had the excess land and labor argument and I think deleveraging has put a damper on capital demand. Throughout the financial crisis, we have g
lobal deleveraging on an unprecedented scale. In addition, the money that the governments are printing is going into a banking system where it is being used by the to fix their own balance sheets. Therefore, the newly printed money is not being lent out, has no velocity and is generating less inflation than would historically be the case.     2)    I tend to think that models have a finite lifespan. Through my experiences in programming them, I have separated quite a bit of wheat from the chaff. There are technical indicators showing our bottom in place like the major divergences in negative momentum from the March lows. There are fundamental indicators like the explosion in jobless claims two months ago or, so followed by declining claims that tends to serve as a predictive indicator. There are the earnings reports, particularly in the financials, that all would indicate the worst is behind us. Remember when the LIBOR (see U.S. Interest Rate Futures) had its own 24 hour window on CNBC through the crisis? I think that globalization has put the U.S. markets in a basket of “tradeable markets.” It’s no different than U.S. investors placing money overseas. Any investor is simply looking for return on investment. As long there are sectors or, markets as a whole, people will design new trading strategies to increase their risk to reward ratios and, in doing so, become less concerned with a market’s internals as the day’s closing price will be the only meaningful metric. This WILL continue to create bubble after global bubble. We will ALWAYS seek out our own financial best interest. The education of U.S. investors is to ride the wave until it crashes then, look for the next one. Ignorance is bliss the whole way into the beach.     3)    Where do we stand in the cycle? The simple version is to invest anywhere there is a growing middle class  with an historically high savings rate, both in population and demographic. That description does not exist domestically.

The High Cost of the Last Penny

This is a very succinct article on the high cost, both monetary and human, of squeezing the last dime out of a product and the consequence of “earnings blindness” and not being able to see past this quarter’s numbers.

There are some positive investment strategies touched upon below. We can help with short term metals and treasury commodity futures trading. Our customers’ accounts are in segregated funds and are not borrowed against or loaned out as collateral.

We haven’t been around as long as Lehman but, I am the second generation and I believe in the process of handing the reigns over to the next generation. Therefore, we will continue to endeavor in catching the fat part of the trade and leaving the tails to those who are unwilling to see the head.

Andy.

The Fall of Lehman: How To Fix It – Part II

By Michael Lewitt

History has a funny way of humbling men. So do markets. Perhaps the most disturbing aspect of Lehman Brothers’ fall is that it comes almost seven years to the day after 9-11. That day was supposed to teach us humility, and the fall of Lehman, coming six months after the collapse of Bear Stearns and coupled with Merrill Lynch’s disappearance as an independent company, are the result of a complete lack of humility on the part of those executives charged with leading the world’s most important purveyors of capital in the post-9-11 world. For all the talk of pulling together in the wake of the terrorist attacks that shook America to the core and that supposedly set our priorities straight, Wall Street rushed headlong back to its mindless pursuit of profits and speculation without consideration for the consequences of its actions. Now the chickens have come home to roost.

In April 2008, HCM published a controversial essay entitled “How To Fix It,” in which we outlined our (unsolicited) recommendations for how to correct the excesses that led to the credit crisis that began in mid-2007 and brought us to this historic day. We are republishing that issue of the market letter by attachment for those who did not read it the first time. Our key recommendations, which seemed much more radical in April than they do today, were the following:

  • Improve financial industry regulation and replace substance over form in the regulation we have.
  • Place absolute leverage limitations on financial institutions at much lower levels than the 30:1 levels that led to this crisis.
  • Place an absolute limitation on hedge fund leverage.
  • Regulate Wall Street compensation by basing it on multiple years’ performance, add clawbacks and high water marks, and limit cash compensation that is paid out and weakens these firms’ balance sheets.
  • Tax private equity firms’ carried interests at ordinary interest rates rather than capital gains rates and restrict private equity firms’ ability to go public.
  • Outlaw off-balance sheet entities.
  • Reinstitute the uptick rule with respect to short selling.

Finally, we made the point that too much economic activity in the United States was aimed at speculation rather than production. For example, the equity markets are increasingly dominated by quantitative investment strategies that are driven by considerations that are totally divorced from considerations of fundamental value. At the same time, the credit markets are increasingly utilized to finance change-of-control transactions for private equity firms that are done simply because low cost financing is available, not because a project is going to add to the productive capacity or capital account of the nation. As we wrote in that April issue, “t some point, society has to figure out that the way an investor earns his money is even more important than the amount of money he makes. This is why human beings were vested with moral sentiments, so they could distinguish the quality of human conduct from the quantity of its results.”

These changes cannot and will not be effected simply by legislative fiat. It is incumbent upon the gatekeepers of capital – the fiduciaries that make the decisions about allocating capital – to bring discipline to the system. This will require a rethinking of their priorities and a willingness to add to their investment calculus considerations that exceed their own narrow interests about short-term investment returns. Our system requires a new concept of fiduciary duty that encompasses systemic as well as single-firm interests, and that focuses to a greater degree on risk-adjusted returns than raw numerical returns. Obviously the forces that led to this weekend’s events have been building for many years, and the changes needed to fix the system will not be made overnight. But we should not let this occasion pass to reflect on what has occurred.

Imagine You Are On the Deck of The Titanic (Because You Are)

It is clear to us that the Federal Reserve and United States Treasury are not underestimating the enormity of the crisis. Continuing to write checks to bail out the private sector would have been the wrong decision, but the fallout is going to be severe. The next domino to fall may be the insurance giant, American International Group, Inc. (AIG), which is facing credit rating downgrades that will force it to post more collateral (that it doesn’t have )on a large volume of credit insurance contracts. AIG is a much larger systemic threat than Lehman Brothers ever was, so this situation is profoundly serious. In HCM‘s judgment, investors should not try to pick a bottom in today’s or this week’s market. The market is going to experience extraordinary volatility today and over the immediate future. Play the market at your own risk and only with money you can afford to lose. The indices are heading significantly lower, as we have previously forecast. Gold, short-term U.S. Treasuries, short-term Swiss and German government paper, the Swiss franc, and certain Asian currencies like the Singapore dollar are the safest places to park your cash for the moment. The U.S. dollar continues to be debased (less against the Euro, which remains compromised, than against Asian currencies and the Swiss franc), particularly by the startling and historic decision by the Federal Reserve to accept equity securities at its discount window. If nothing else, that decision alone suggests the enormity and depth of the crisis we are facing. We never thought we’d live to see the day that the American central bank would accept equity as collateral for loans. We have to admit that took us by surprise and made us very nervous.