Making Sense of Gold's Strength and Goldman's Weakness

Making Sense of Gold’s Strength and Goldman’s Weakness

By Eric Fry

04/21/11 Laguna Beach, California – The stock market “rallied huge” yesterday…and it continues rallying today – lifting the Dow Jones Industrial Average to a new three-year high. But the shares of market leader, Goldman Sachs (NYSE:GS), haven’t been doing much of anything.

The conspicuously feeble performance of GS is not the only curiosity of recent trading action…

In no particular order: Gold has jumped decisively through $1,500 an ounce to new all-time highs, silver is on a moon-shot that won’t quit – rising to new three-decade highs almost every trading day, the dollar is imploding faster than a Tokyo sidewalk, and sovereign financial conditions – from Athens to Lisbon to Washington – remain disasters-in-progress.

Your editors have no idea what these freakish macro-economic juxtapositions portend. But if forced to guess, we would guess that the strongest trends in the marketplace are the most important trends…and the ones most deserving of attention…and investment.

The strongest trends on the planet right now remain what they have been for more than a decade: “precious metals up.” A related trend – and almost as strong – would be “oil up,” followed closely by an all-encompassing “commodities up.”

These robust trends are both chicken and egg to a very strong, offsetting trend: “dollar down.” As these strong trends interact with one another, a variety of other financial markets thrash around in the resulting crosscurrents.

Stocks, for example, are probably as much a “dollar down” trade as anything else. We have suggested this idea numerous times here in The Daily Reckoning. In a world of near-zero interest rates and a rapidly declining dollar, coincident with rising inflation and rising inflation expectations, the precious metals are the most obvious refuge for capital. Oil and the rest of the commodity complex offer similar appeal.

But commodities are not the only game in town for dollar-phobic investors. Stocks provide a different kind of refuge. While inflation tends to punish stocks over the short term, stocks do “re-price” to inflation over longer time frames. Furthermore, stocks, as partial shares of capitalistic enterprises, provide growth potential that commodities do not. Net, net, a great, big ugly bear market in stocks does not seem very likely very soon…as long as you are measuring the performance of stocks in dollars.

Year-to-date, the Dow is up a robust 8.7% in dollar terms, but up only 2.5% in Brazilian reals…and down 1% in Norwegian kroner terms. Heaven forbid, you conduct this calculation in terms of gold or silver! Since the end of 2009, the Dow has chalked up a hefty total return of 24%…in dollar terms. But in gold terms, the gain flips to a 10% loss, and in silver terms, a 50% loss!

However, since most folks count their stock market winnings or losing in dollars, we’ll do the same. Thus, in dollar terms, an imminent, great, big ugly bear market in stocks seems unlikely…at least not until and unless Ben Bernanke discontinues flooding the financial system with dollars. However, a series of small, annoying bear markets seems very plausible.

From a technical standpoint, the shares of Goldman Sachs seem to portend stock market weakness. The shares of the market-leading, world-beating financial wizard have been conspicuously weak lately.

According to a variety of Wall Street analysts, the stock is weak because of “earnings-sustainability concerns.” But the analysts here at The Daily Reckoning offer an alternative analysis: the stock is weak because the stock is weak. The growth profile of Goldman Sachs has been taking a beating for months, and yet the stock continued rising.

No matter that widespread public contempt for the firm arose from the ashes of the 2008 crisis, and that the SEC sued the firm for a variety of fraudulent activities and that the Dodd-Frank law forced Goldman to divest extremely profitable operations and/or discontinue extremely profitable corporate activities, no matter that various banking reforms have forced the firm to reduce the leverage that contributed to its strong results, the shares of Goldman Sachs continued rising…day after day.

But now that the shares are falling, everyone’s got a reason why. We say the stock is falling because it is falling. And the only other thing we would say is that when market-leading stocks fall for no reason – or for any reason – while the rest of the stock market is continuing to rise, bad things often happen.

Eric Fry
for The Daily Reckoning

Eric Fry

Eric J. Fry, Agora Financial’s Editorial Director, has been a specialist in international equities for nearly two decades. He was a professional portfolio manager for more than 10 years, specializing in international investment strategies and short-selling. Following his successes in professional money management, Mr. Fry joined the Wall Street-based publishing operations of James Grant, editor of the prestigious Grant's Interest Rate Observer. Working alongside Grant, Mr. Fry produced Grant's International and Apogee Research— institutional research products dedicated to international investment opportunities and short selling.

Mr. Fry subsequently joined Agora Inc., as Editorial Director. In this role, Mr. Fry supervises the editorial and research processes of numerous investment letters and services. Mr. Fry also publishes investment insights and commentary under his own byline as Editor of The Daily Reckoning. Mr. Fry authored the first comprehensive guide to investing internationally with American Depository Receipts. His views and investment insights have appeared in numerous publications including Time, Barron's, Wall Street Journal,International Herald Tribune, Business Week, USA Today, Los Angeles Times and Money.

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The articles and commentary featured on the Daily Reckoning are presented by Agora Financial.

Read more: Making Sense of Gold's Strength and Goldman's Weakness http://dailyreckoning.com/making-sense-of-golds-strength-and-goldmans-weakness/#ixzz1KDEG6ric

All information on this website is for educational purposes only and is not intended to provide financial advise. Any statements about profits or income, expressed or implied, does not represent a guarantee. Your actual trading may result in losses as no trading system is guaranteed. You accept full responsibilities for your actions, trades, profit or loss, and agree to hold MinKL Invest harmless in any and all ways.

What Is Silver Screaming About?

What Is Silver Screaming About?

By Adrian Ash

04/16/11 London, England – The current surge in bids to buy silver might seem dramatic, but it’s more measured by far – to date, at least – than the true silver bubble of September 1979 to January 1980.

Even so, you may as well call this a record price. In real terms, as Matt Turner at Mitsubishi told me this week, one ounce of silver briefly rose above 40 of today’s US dollars per ounce in 1864, when the American Civil War neared its climax. In nominal dollars, the Hunt brothers’ multi-billion-dollar corner only saw it more highly priced on 5 trading days in January 1980. And while US investors waiting to buy silver are also still waiting for it to record a new intra-day high, it’s already broken new ground against the British pound and for most of the Eurozone, too.

The cause? Gold investors have long tried to explain how the metal is “telling us” something. “First warning” of the looming financial crisis, said Marc Faber in his Gloom, Boom & Doom Report of September ’07, was when “the price of gold more than doubled in nominal terms and against the Dow Jones Industrial Average [because of] ultra-expansionary US monetary policies with artificially low interest rates.”

In which case, and with global interest rates further below zero today after inflation than at any time since 1980, what in the hell is silver telling us now?

“TIPS pay a lower rate of interest than regular Treasuries,” explained Bloomberg News when the yield offered by 5-year Treasury Inflation Protected Securities briefly dipped below zero (and $20 silver broke a 28-year high) back in March 2008.

“[That’s] because their principal rises in tandem with a version of the consumer price index which includes food and energy prices. Rising demand for TIPS [which pushes up prices and so pushes down the nominal yield] indicates investors expect the inflation adjustment to make up the difference.”

What great expectations TIPS buyers must have of Uncle Sam’s “inflation adjustment” today! They’re buying 5-year index-linked bonds with a nominal yield of minus 0.6%, anticipating a full 2.8% per year fillip from Washington when compared with the annual yield now offered by conventional 5-year bonds. And what greater hopes still must the new rush of silver investment hold…rejecting TIPS in favor of metal, and breaking silver’s tight connection with both gold prices and TIPS yields as our chart above shows.

Note the point at which silver breaks higher – right when Fed chairman Bernanke vowed to begin QE2 in summer last year. That a fast-growing nugget of the world’s private wealth is fearful of the result is clear. That silver looks a turbo-charged play is clearer still. Because as an industrial as well as monetary metal, silver is exposed to strong economic growth – as well as loose central-bank policy – in a way that its cousin, gold bullion, isn’t. You could point to 2010’s record levels of Indian and Chinese gold demand coming off their continued economic booms, but Asia’s silver investment demand is surging faster still. And the aim of all this easy money, remember, is to keep GDP stoked, whether in Beijing, Washington, Frankfurt or London.

Little wonder then that Chinese, US, Eurozone and UK inflation is rising sharply. And so no wonder either then that…

• By value, London’s wholesale bullion market last month saw silver volumes jump to one-sixth the daily turnover of gold plus silver, according to the LBMA’s new stats, released to members today. That’s a 13-year high. In raw dollars, silver turnover set new all-time records for the second month running.

• By number, New York’s Comex saw the volume of silver futures contracts overtake the volume of gold futures on Monday and Tuesday this week. By value, silver trading rose to one-seventh of total gold and silver volumes, up from a seventeenth just a month ago.

• ETF Securities say their silver exchange-traded products saw “more flows than any other individual commodity ETP” in the first quarter

• Here at BullionVault – the world’s largest gold ownership service online – our customers have pushed silver trading up from 22% of daily volumes by value in January to 27% in both March and so far in April.

There’s no bull market like a silver bull market, in short – just ask the Hunt brothers ahead of their bankruptcy, eight years after their corner blew up with the big inflation-fueled 1970s’ bull market. Double-digit Fed interest rates popped the bubble back then (plus a good dose of anti-speculative action by regulators and the exchanges, otherwise known as “saving the system” of course. It was sparked in turn by the Hunt brothers’ own naked greed, otherwise known to them as “inflation protection”). The most recent time silver got hot, however, it took oil at $150 and then the Lehman Brothers’ collapse to do to GDP growth and commodity prices what central bankers wouldn’t dare. Because raising interest rates to double digits to kill a “speculative frenzy” wasn’t politically possible.

Silver’s bull run, unlike gold’s, is all about inflation. Which is worth bearing in mind whether you’re quitting, holding, ignoring or looking to buy silver today.

Regards,

Adrian Ash
for The Daily Reckoning

Adrian Ash

Formerly the City correspondent for The Daily Reckoning in London and head of editorial at Fleet Street Publications Ltd, the U.K.'s leading financial advisory for private investors. Adrian Ash is also the editor of Gold News and head of research at BullionVault.

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The articles and commentary featured on the Daily Reckoning are presented by Agora Financial.

Read more: What Is Silver Screaming About? http://dailyreckoning.com/what-is-silver-screaming-about/#ixzz1KDDP4cul

All information on this website is for educational purposes only and is not intended to provide financial advise. Any statements about profits or income, expressed or implied, does not represent a guarantee. Your actual trading may result in losses as no trading system is guaranteed. You accept full responsibilities for your actions, trades, profit or loss, and agree to hold MinKL Invest harmless in any and all ways.

The rock is called phosphate....

By Chris Mayer

04/21/11 Gaithersburg, Maryland – The silver market has been on a tear, no doubt about it. The price of this shiny white rock has soared 50% in 2011, alone. There’s good reason for this huge move (Hint: His name is Ben Bernanke). But I want to tell you about a different white rock – one that’s also quite precious.

The rock is called phosphate.

There is no substitute for it. It is crucial to the world’s food supply, for which it serves as a fertilizer. And most of the world’s mines are in decline. Foreign Policy magazine recently called it “the gravest resource shortage you’ve never heard of.”

Demand for the rock is growing as demand for food rises. As I write, food prices are surging. Wheat is up 110% over the last 12 months. Corn is up 87%; soybeans, 59%; and sugar, 22%. Soaring food prices helped set off protests in Tunisia and Egypt, toppling regimes and threatening to spread similar uprisings to other poor countries in the region.

There is no quick remedy. Many of the trends that created today’s situation have been long in the making. The world population continues to grow. The amount of arable land per person continues to fall. Gains in crop yields have slowed. And more people around the world are eating a more calorie-rich diet. Prosperity in China, India, Brazil and other places have added millions of middle-class consumers eating more meat and processed foods. Plus, let’s not forget biofuels, which place energy and food in direct competition.

These happenings are no secret. I’ve written about them for the last couple of years. Now these things are on the front pages of newspapers and magazines. And – not surprisingly – the stocks of many agricultural firms have soared.

But there is still one story that has gotten little play from investors so far. It’s about a rock called phosphate, a key ingredient in making fertilizers. It is one of the three main nutrients for crops (nitrogen and potash being the other two).

It’s hard to overstate the importance of these fertilizers right now. About 40% of the world’s food supply depends directly on the application of these three nutrients. Yet the world still applies far less than the scientifically recommended rates.

Phosphate itself is important for root development and water efficiency. But most critically, like all fertilizers, it boosts crop yields. You get more per acre using it than not. In a world where arable land per person is falling and food consumption per capita is rising, crop yields are key.

Plus, consider the path of phosphate prices.

In the last food crisis of 2008, the price of phosphate rock soared to nearly $400/tonne. Then it crashed, like everything else. But it’s been making its way back up. Today, it’s about $150/tonne.

With all that’s happening right now, doesn’t it seem reasonable to think we’ll see another test of that peak? I think so.

The price of many commodities spiked in 2008, and then crashed in 2009, only to subsequently recover. Oil was over $140 per barrel, and dropped below $30, only to rebound strongly. As with oil, long-term demand and supply issues created phosphate’s spike too, and remain unresolved.

When I ask myself what’s changed from 2008, my answer is not much.

In fact, the oil analogy is not a bad one. As with oil, phosphate production is concentrated. Whereas some 75% of the world’s oil reserves are in the hands of OPEC, about 90% of the world’s phosphate is in the hands of just five countries: Morocco, China, South Africa, Jordan and the US.

As with oil, more and more countries need to import it, and it is getting hard to find big, low-cost supplies. The US is the largest consumer of phosphate and has long been an importer. Mosaic is one of the big producers down in Florida, which is the main source of phosphate in the US. But Mosaic has had trouble lately expanding that mine. They’ve actually had to stop mining from their Fort Meade facility over permitting issues. The US ought to import for many years to come. Latin America imports even more. And Asia imports even more still. India, for example, doesn’t have any phosphate and will become a major importer in years ahead.

Hence, the world begins its scramble to find more sources of phosphate. We’ve already seen a flurry of activity among the fertilizer companies last year. For example, Vale (the big Brazilian fertilizer and iron ore company) picked up phosphate mines and processing facilities from Bunge and Fosfertil.

Mosaic took a 60% stake in a Peruvian phosphate project, Bayovar, with Vale the other partner. Vale bought Bayovar, an undeveloped phosphate deposit, for $300 million in 2005. The 2010 deal valued it at $1.1 billion.

Still, based on what we know today, there is no significant new supply coming until at least 2014. All of the above will make phosphate a hot commodity in the next few years.

Therefore, buy phosphate.

Regards,

Chris Mayer,
for The Daily Reckoning

Chris Mayer

Chris Mayer studied finance at the University of Maryland, graduating magna cum laude. He went on to earn his MBA while embarking on a decade-long career in corporate banking. Chris has been quoted over a dozen times by MarketWatch, and has spoken on Forbes on Fox. He has also spoken on CNN Radio, and has made multiple CNBC appearances. Chris is the editor of Capital and Crisis and Mayer's Special Situations, a monthly report that unearths unique and unconventional opportunities in smaller-cap stocks. In 2008, Chris authored Invest Like a Dealmaker: Secrets From a Former Banking Insider.

Special Report: Ben Bernanke’s Dirty Secret… Head of the Fed Ben Bernanke is kicking the printing presses into overdrive to “save the economy.” But by doing so, he’s stuffing his dirty paw into YOUR pocket and handing your hard-earned wealth to his Washington and Wall Street chums. Now’s the time to get the scoop on what inflation REALLY means for the economy and you… Click here to watch this presentation now!

View articles by Chris Mayer

The articles and commentary featured on the Daily Reckoning are presented by Agora Financial.

Read more: The "Other" White Rock http://dailyreckoning.com/the-other-white-rock/#ixzz1KDBsCwwa


All information on this website is for educational purposes only and is not intended to provide financial advise. Any statements about profits or income, expressed or implied, does not represent a guarantee. Your actual trading may result in losses as no trading system is guaranteed. You accept full responsibilities for your actions, trades, profit or loss, and agree to hold MinKL Invest harmless in any and all ways.