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Thanks Dave, good analysis and good counsel about the stops.
FWIW I am also considering put options as insurance to prevent catastrophic losses.
Isn't that what hedge funds do for a living?
Glad the charts helped. I agree we are in early days of a possible anti-correlation between SP and HUI, but it sure looks like it is heading that way. The price action over the last few days has only reinforced the move.
Congratulations on taking 'the next step' (heard that one somewhere before…). And getting your funds under more of your control.
However, as your pen pal, I will say honestly that ETFs make me very nervous. I really don't trust the U.S.PM ETFs, but admittedly don't know much about the Zurich ones you mention. You should read the prospectus very carefully to see if the ETF has the option to settle in cash. I realize that by buying ETFs, you can follow your convictions about the fundamental value of precious metals.
This is not a theoretical issue, but has happened as recently as March 2013 with the Dutch bank ABN AMRO defaulting on delivery of gold to gold certificate holders:
Based on a letter to clients over the weekend, it appears Dutch megabank ABN Amro is changing its precious metals custodian rules and "will no longer allow physical delivery." Have no fear, they reassuringly add, your account will be settled at the bid or offer price in the 'market' and "you need to do nothing" as "we have your investments in precious metals."
more on the story at zerohedge.com
Thus holding 'paper gold' means you are at the mercy of the custodian, their trustworthiness, and the government re national financial controls. Apologies, these days my trust of these type entities is very limited.
You may be aware that true PM believers are unyielding about holding 'physical metal' in their possession. "If you can't hold it, you don't own it". I realize that may not be a possibility for you. But it is worth a look, if you are convinced about the value of PM, to look into withdrawing your funds and paying a penalty and possibly taxes on it.
This is the case for 401Ks in the U.S., but many of us are willing to 'take the hit' of penalties for withdrawal for the tradeoff of actually taking physical possession. Just some more food for thought.
On a separate note, it seems you are from Switzerland. I have been to Geneva by way of Zurich, and Lausanne and had a great time dining on a resteraunt while traveling across the lake. Look forward to going back with my kids.
Yes, I was wrong. But you are teaching me to be not so stubbornly adherent to my guess that it prevented me from listening to the market and from buying metal today.
There is always a possibility the big players will drive price down one more time, but given the current CoT structure, I was afraid we may never see 21 and 1300 again. So I bought more.
Ok sports fans, I have a friend with some dry powder who wants to know whether to buy gold and silver now or wait for a week or two.
I admit I am conflicted and confused about the next 7-14 days and PM direction. So which is it, silver next week with a 19 handle or a 23 handle? Same for gold, 1350 handle or 1280 handle?
You have to pick one or the other.
Factors for silver 23/ gold 1350
1) We seem to have broken out of a bottoming trend and crossing some technicals mainly DMAs (day moving averages), i.e. 10, 20, 50 for silver
2) Fed has weakened its taper talk and is leaving more uncertainty about how much and when to taper
3) Oil and inflation in an uptrend. This could be exacerbated greatly by war/ instability in Egypt, the Middle East- unpredictable, but market-moving if it happens.
4) Signs of economic uptrend (yes they are weak), GDP growth, U3 headline rate decreasing, deficit decreasing
5) Of course all the fundamentals I believe in re endless currency destruction via money-printing and deficit spending
6) Some CoT data that suggest the bully, I mean bullion, banks are now net long in their contracts
Factors for silver 19/ gold 1280
1) Speculation strong that Bernanke will indeed follow up on his threats and actually taper by 20 billion in bond purchases. I believe this has not been fully "factor-in" in the market and will lead to similar effect that we say in April, i.e. everything falls as people go to cash and are starved for liquidity (my new favorite word!), perhaps bigger in magnitude.
I also believe this taper will not last long when the Fed sees the reaction to the market, but I believe this is a mini experiment to see what happens, and is designed to give the Fed cover to do as much or more QE.
2) Flight of money /capital out of the troubled world, into the USD. China, Japan, EU, some BRICS. Most of these guys are worse off than we are. This will tend to strengthen the USD (shortterm), drive up Dollar Index, thus drive down PM prices.
3) The greed of the PM market manipulators to fleece just a few more spec buyers by driving the price down, and going long even more metal. I am always underestimating the greed and immorality of the gang.
4) Tendency of Aug to be a down month historically, and interest doesn't pick up again until Sept.
Please feel free to add any forces that I missed.
Personally, I am going to advise to wait til end of next week if possible, so my bet is silver 19 handle, gold, 1280 handle. I would be buying again if we saw those numbers again. I would keep my finger limber for getting in at silver 23 and gold 1350, thinking we run the risk of never seeing those numbers again in our lifetimes if we blow through them strongly, signalling that the commercials are net long and are ready let price roll, perhaps in a "managed ascent".
I will take a stab at some thoughts. With the preface that I have not been an investor in miners because that seems the complicated route to own gold and silver. But miner fans seem to point to a higher/ faster upside than simple gold and silver prices.
I would just caution from an investing perspective, miners are companies, as in publically traded corporate entities. In contrast, gold and silver are not companies, they are just gold and silver.
Gold prices may be (I believe clearly are) pushed around to move counterintuitively, because of the big players wanting to make short term profits, generally speaking, gold and silver respond pretty predictably to a manageable number of forces. Inflation, a falling dollar (which is related to inflation), and as Chris mentions – a negative real interest rate (real interest rate = Nominal Interest Rate – Inflation), again related to inflation.
If you own miners, you of course have to know that the price of PM drives much of their value, but you have to worry about all of the following, since they can sink a company independently of a falling PM price: 1) good or bad management generally, 2) price of fuel and energy, since these operations require huge amounts of fuel (see http://srsroccoreport.com/ for a detailed analysis of energy costs as they relate to PM miner profits), 3) labor costs, availability or lack there of based on demography, labor strikes etc., 4) ability of the co. to explore and find new deposits, or buy companies for a good price that have untapped mines, 5) governmental restrictions or permissions to mine, 6) mother nature's tendency to mess up your mine (see Kennecott mine accident recently), 7) ability of malicious entities to manipulate your stock price using the same general tactics that are used to manipulate PM price.
So you can see why I find miners a bit scary to buy. If I were interested in miners, I would give my money to a dedicated funds manager that specializes in this sector only. Too much for me to track.
That said, let's look at your chart, the one I post below, pulling all 3 together and over a slightly longer time frame. HUI blue, XAU green, SP red:
To my eye, I see your point about 2008 – 2009 and HUI dropping faster and recovering faster than SP500. But when you look both before and after this focused area, I see two more things, illustrated by the above plus the following chart:
HUI, XAU and SP500 seem to have gone through two phases- 1) moves well-correlated from 2003- Jan 2013 (despite some jitteryness in 2008-2009), and 2) movement anti-correlated, 1997 to 2003, and Jan 2013 to the present. They are now anti-correlated and separating, but if the 1997 trend holds, then they should start to move back to correlated i.e. what happened from 2000 to 2003. Maybe you or some wise person can explain the exogenous factors that explains or predicts the two phases. From this simple chart examination, I would expect if the SP500 rolls over, then HUI and XAU will roll the opposite way i.e. up significantly.
Food for thought.
I agree with many of your points. I have been actually pointing out to my friends that the Tea Party and the Occupy movement have a lot of overlap in that they both recognize the problems with the current system is using centralized power to enforce a system that harms them and benefits the priviledged few. The difference is that the Tea Party focuses on the excesses and corruption of government, and the Occupy group focuses on the excesses and corruption of big corporations. The bigger picture is that the American system is a fascist system that intertwines both, and that they are both equal parts of the problem. However, I perceive a strong leftist and anarchist strain in the Occupy movement (perhaps I am painting with a broad brush), and a strong limited but strong government and free market capitalism in the Tea Party movement. Thus they both agree that the current system is bad, just disagree on what utopia looks like.
Either I should have been more clear about the left v. right dichotomy or you are off the mark a bit on your definition. Your point is well taken that figures historically labeled as 'right' such as Nixon and Cheney (because they are Republicans?) are statists, and I would agree. But I don't conflate Republican with Right, or more precisely, Republican with constitutional conservatism. And I agree with your excellent example of Democracy Now, and there are other 'left-wing' groups that are equally anti-spying that we could find common ground.
The main dichotomy I point to is that there are those groups that believe that the best government is a powerful, all-controlling, all-knowing state, composed of the smart elite of society, to control and tell the unwashed masses what is the correct way to live, in the name of utopia (by force, if necessary) and the American founding ideals of limiting government to the things that are absolutely required for government to do and no more, and the power and sanctity of the individual and the individual's rights and responsibilities. Fascism, Communism, Marxism, Socialism are all strains of statism, whereas "constitutional conservatism", libertarianism (though not including the "zero government strain" of libertarianism), free market capitalism are all strains of what could be called "Americanism". Of course clearly American founding ideals had their roots in numerous European political thinkers and philosophers, and the Bible among other sources, but at the end of the day, the founding fathers started with an instinctive fear and distrust of concentrated power, due to the natural tendency of man to end up using power in a corrupt and reckless way that harmed the general population.
By that framework, I would never put Hobbes in the category of constitutional conservative. While he had strong ideas about individual rights and liberties, the social contract and all that, somehow he ended up in a place where a strong central government to control the masses was required (see "Leviathan"). Putin, Cheney, and Nixon are also examples of belief in a strong central government (progressivism) versus a natural instinct to downsize and prune an invasive government that the founding fathers had.
Sorry, but my analysis of Diamond is based on his actual work, specifically his multi-part documentary based on Guns Germs and Steel. It was very clear to me that beneath the interesting and perhaps scholarly work looking at cultural forces, his thesis was that America was lucky, not good. I can't recall one positive thing he had to say about American or European settlement of the New World (perhaps I just missed). I don't think everything is black and white. If a wonderful, beautiful society is built next to a super volcano that erupts and eliminates it, well yes that is bad luck and doesn't prove much. Those rare examples are few. The common pattern is centralized power leading to temporary success, with increasing corruption, mismanagement, misery and death for the peasants, leading to collapse. See the Soviet Union, the Roman Empire, and now EU and USA. I make the judgement about Diamond based on his public work, not based on his associations. I always find it such an interesting paradox that the statists/ Marxists who claim to be so scholarly and analytical, end up thinking massive central power is a good thing now all of a sudden, considering the total sweep of history. I guess 'this time it's different'.
I sort of understand and sort of don't understand your last point. Let me just say I love nature and the environment, and would generally am against large-scale destruction of it. I don't have a particular love of gold or silver (yes it is shiny and makes for good jewelry), rather my attraction to it is due to its historical value as recognized money, and thus as an insurance policy against crazy and destructive monetary policy of fascist corporations, central banks and central governments. Gold and silver cannot be vanished with stroke of a keyboard or congressional or presidential pen, cannot be rehypothecated, is globally recognized, and represents a concentrated and portable form of wealth arising exactly from the reasons you cite- it is rare and hard to extract from lots of earth and energy inputs. However, to your point, the idea of money is something that is a fungible and transferable "marker of wealth". I would be happy as a clam with a sound money system (google "sound money" if this is unfamiliar) instead of a fiat money system, that used some type of environmentally friendly marker, even an electronic one if it was airtight security, trustworthy and auditable, and was representative of true wealth and not a fractionalized 'promise to pay' wealth. I.e. a monetary system that did not involve digging up and damaging large swaths of earth and harming many innocent people.
I think we have more in common than you may realize.
Great answer. Very clear explanation of liquidity crisis and the role of the Fed.
I would note that you, Investopedia, and my post all gave different answers to the definition of liquidity-
Hrunner: Available money (credit, currency) to spend
Investopedia: Ability to sell an asset without changing its price
Dave: Amount of cash on hand relative to debt
Maybe these are related, but still look different to my eye. See what I mean about discussing a concept that has a variable definition, and no agreed metric to measure it? This makes me nervous since I value clarity and precision. Perhaps I ask for too much.
I would make a second request of Chris to bring in a guest to talk about leverage and liquidity.
Questions would be about- Definition of liquidity, are there any measures of liquidity or is this just too loose a term, like "animal spirits"? Is there a metric we should follow to now when we are in a liquidity crisis?
Leverage. How is it commonly deployed? What assets underpin it, serving as collateral? What levels exist? Is there a way for investors to track it from a public source? What are the banking regulations around it? What is the number where we should get worried? What are the usual margin requirements for different types of assets (I know the ones for Comex gold and silver trading are public rules, and interestingly are subject to somewhat unpredictable changes) and when do those margins get called?
Maybe someone could point to a blog or expert that specializes in leverage analysis.
Thanks for your post, I enjoyed reading your response.
Since we seemed to have partially or completely hijacked the PM thread, I'll keep it short and if we want to pursue it further, we can consider opening a new thread. I really do come to PP to focus on financial issues but I also value the wide-ranging discussion.
" In fact, I did not villify anyone, including big banks or the government, and that's because I believe an us versus them dichotomy, or a moral vs. immoral mentality whether when it comes to gold buying or just about anything else, is unproductive and also inaccurate, as the world is a more complex place than some of our narratives try to paint it. In the last paragraph of my post I deliberately said, "dispropoportionately wealthy people of any country," and I did not say that such people were bad, I said that a narrative that paints "us" as little guys, or victims and them (big banks) as bad guys, was questionable."
I guess I either not as morally conflicted/ uncertain as you about this area (and possibly Chris, as he mentioned in his last Off the Cuff he was not sure about the banking cartel's being immoral) and perhaps I have focused on the simple aspects of the situation.
To say it this way, if you and I play a game of basketball, and you make more shots than I do, without shoving me i.e. fouling me, without traveling or going out of bounds, in other words, without breaking the agreed upon rules, then that is fair and not immoral. You just have more ability than me in basketball, and you "deserve" to win.
If a commodity market is set up such that producers can offer up certain amounts of commodities for delivery in the future, and sell the futures contract to actual goods on an open and competive market, and there is a separate set of participants who create fake futures contracts, i.e. naked shorting for commodities that they don't produce and don't ever intend to produce, and are sold in the same market and represented as the same as the futures for real goods, then that is simply cheating and it is immoral. Maybe someone will chime in and tell me the Comex rules allow that through some contorted or back-door route. If Comex rules technically allow that, then the system is immoral and codifies cheating. Cheating is wrong. It is the same as lying. Cheating and lying to make profit off of participants that are not cheating and lying is wrong. Profiting from cheating and lying is wrong. I am not conflicted about this. This is not complicated to me, but perhaps I am simple.
So if there is a group of market participants that knowingly cheat and profiteer, and a group that is in good faith abiding by the rules, then yes, this fosters an us v. them mentality.
Do you think Chris wants his subscribers to pay for their access with promised payment that they never intend to fulfill? Do you or Chris have some moral theory or "complexity" where that general behavior is acceptable? Is there room for judgement and discernment in individual cases? Yes. Is that different from a garden-variety cheater? Yes. That type of moral ambiguity doesn't seem to be good for society and I am certain will lead to some fairly painful outcomes.
"In other words, the strong are taking from the weak, and that's an importat part of the reason that I am so comfortable and have so much. JP Morgan is better at it than I am, but every time one of us fills up a car with gasoline that originated in Nigeria, Equatorial Guinea, or Iraq, or buys a bar of silver that contains ore that originated in Guatemala or even Mexico, we are inadvertently part of a political, economic, and military organization that gives us disproportionate benefit at others' expense."
I won't get into a long discussion about leftist views of America. I think I can speak from experience since I went to a fairly well-known and respected liberal arts university, and I also took numerous university courses in Sociology, Cultural anthropology and others. I enjoy the life of the mind and want to hear well-reasoned views even if they don't agree with mine. However, I have found that most of these so-called investigations and academic studies, like a lot of our news media, start with a bias or an agenda that starts from an anti-capitalism, pro-statist mindset, and simply pull together some facts to support their agenda.
I did see Mr. Diamonds work via a documentary and you summarize it well. Your view above, and Mr. Diamond's, and the majority of the leftist academic circles comes from a Marxist view of the world that capitalism in general and America in specific has exploited the masses around the world. Thus the copious uses of words such as "lucky" to describe the American experiment. Since they 'fundamentally' seek to disprove the concept that one set of values is better than another. This process happens for whatever reason and despite the track record of one set of values leading to more prosperity and opportunity. They reject these values, and therefore they must be diminished, possibly destroyed, and replaced with, well, different values. Leading to world led by a different group of smart elite people who agree with Mr. Diamond and will make everything right, once everyone is collectivized, and all means of production are "controlled" and all social organizations are monitored and 'guided' to think the 'right way'. Now this may not be Mr. Diamond's overt thesis, but it is the thesis that underpins the left in this country.
While I think Mr. Diamond and others raise some interesting points of history, the flaw is that he focuses on what I believe are less important details and misses the proverbial forest for the trees. The native American population had thousands of years of non-Western involvement in the same resource-rich environment, yet did not build trans-atlantic ships, develop the printing press, advance medical knowledge, explore the solar system and develop calculus and algebra. I am not saying they were of lesser value. I am not saying it was okay to exploit them. I am saying the culture and value systems of a group have a primary, not a secondary or passing importance as Mr. Diamond proposes, in the successes and advancements of a society.
I think of a football quote about a coach who always seemed to end up with a winning team, which goes to approach, i.e. culture and value system. It goes "he was such a good coach, he was so good he could take his'uns and beat your'uns, or he would take your'uns and beat his'uns"
Successful cultures that bring widespread opportunity to their members generally thrive whether they are in the desert (Israel) or the Alps (Switzerland). It may seem unfair and not the way Mr. Diamond wishes it were, but it is repeating pattern.
Fair point. We should note that Americans produce more CO2 per capita, because they use more energy per capita, because they produce more per capita. Admittedly some of what America produces is financialized nonsense, but we also produce a great many useful things. And we innovate and do R&D, and R&D consumes energy and resources.
China is less per capita because they have more "capita". But they are biggest total CO2 producer and climbing.
But the big picture is that both countries produce a lot of CO2. And I want both to find ways to greatly decrease their fossil fuel burning. One would think that a great non-fossil alternative would be attractive to both. America for cheapness, non-CO2 emitting, and less reliance on unstable countries, China for, well, cheapness, (I'm not convinced that China authorities care at all about the environment, given their miningand air quality standards, plus an iron-fist grip on their citizens public lives including healthcare) and non-reliance on unstable countries. Like the U.S.
Dave, Jim, HughK, PPers,
The longer post above got me side-tracked off of my main question of the day: Liquidity. HughK used it in his post #3 about selling gold and silver to meet margin calls and "liquidity needs".
I think it goes to many of the posts about gold and silver prices, and the inflation / deflation war.
So thinking about liquidity brought forward some questions.
First, everyone throws the phrase around, but I would like to make sure we all define it the same way.
Investopedia.org defines it as:
1. The degree to which an asset or security can be bought or sold in the market without affecting the asset's price. Liquidity is characterized by a high level of trading activity. Assets that can be easily bought or sold are known as liquid assets.
2. The ability to convert an asset to cash quickly. Also known as "marketability."
There is no specific liquidity formula; however, liquidity is often calculated by using liquidity ratios.
Investopedia explains 'Liquidity'
1. It is safer to invest in liquid assets than illiquid ones because it is easier for an investor to get his/her money out of the investment.
2. Examples of assets that are easily converted into cash include blue chip and money market securities.
I always defined it as "money (currency, credit-money) available to spend". Perhaps too simple. I would be happy if Dave, Chris or anyone else would expand on the definition.
We hear it used all the time interchangeable with money, and in phrases as 'liquidity crunch', 'liquidity trap' 'world is awash in liquidity' etc. Apparently China is having a liquidity problem. But I never find a metric or a published dataset that includes the term 'liquidity'. So we use a word a lot but we don't have a measurement for it. Kind of interesting don't you think?
Is liquidity something we should be very focused on? It seems to me liquidity describes two extremes of financial conditions, based on inflationary v. deflationary environs.
Condition 1: People are running scared and selling everything because
A) the Fed is threatening to taper or is actually tapering, so they are worried that assets will deflate and they will lose money. There seemed to be a test run for this in April 2013 (Chris alluded to this on Off the Cuff a short time ago).
Or B) some other black swan like war, gap up in oil prices, is triggering recession and asset/ futures price drops.
Or C) a critical mass of market movers and major investors come to their senses and realize the market has no clothes, they are not getting paid back in non-devalued dollars for their holdings and are running for the exits. I.e. "negative animal spirits" (I think it's also called 'fear'), if such a thing exists.
=Liquidity Down environment
Condition 2: Financial Players are pushing asset prices up higher and higher because the Fed has decided to up the ante with even more QE. Just doubling down on the current QE paradigm, or QE for consumers (my personal prediction). Because, you know, deflation cannot happen.
=Liquidity Up environment.
It got me to thinking about markets and leverage. Check me if I'm wrong, but aren't markets (and therefore asset valuations) set at the margins? If a few large players dump assets all at once, as many believed happened in the April PM price massacre, for example, doesn't that devalue and destroy wealth of all holders of the asset, even if their outstanding holdings are much, much bigger than the relatively small amount dumped into the market. Even if the majority of holders did nothing but sat on their holdings? Kind of like what happens to home values for the whole neighborhood, via "comps" (comparative home sale prices), if just one homeowner decides for whatever reason to sell at a below market price.
As an aside, were not the Chinese famous for 'dumping' as a strategy to at least temporarily decreasing the price of good so low that a Western competitor could not stay in busines at that price?
Seems like this is a template to ruin your competition.
Why this is relevant is because in today's world of high leverage, it seems like it wouldn't take much to devalue a competitor's holdings, either intentionally as part of a strategy, or as collateral (pun) damage from some big player just wanting to get out in a hurry (buy a deserted island, Gulfstream, scandal and indictment ala SAC, whatever). Maybe they just want to hold cash.
If a bank or investor has 10 dollars of an asset used as collateral, say gold, and 400 dollars of purchased assets at 40:1 leveraged off of that gold collateral, then a $1 drop in gold price means they can now only hold $360 dollars of leveraged asset. Meaning they must now sell off $40 of Asset 2 (much more in dollar terms than the $1 drop of the primary asset). Do I have that right?
What seems really scary in this system is that it seems that if Asset 2 is Asset 1 in another players account as primary collateral, then you have the setup for a nasty feedback loop which quickly leads to everything being sold off.
Doesn't leverage really amplify either one of these conditions?
Is that what everyone thinks happened in April? If yes, what stopped it- attractive prices brought in buyers? Fed shoveled money under the table?
Is this liquidity crisis likely again, especially if we get the correction that Chris is pointing toward, if stocks are held as primary collateral for leverage, i.e. Asset 2 in my example above? Can anyone speak in an expert way on which assets tend to be used as primary collateral in leveraged accounts? I would guess gold, cash/ UST, major currencies.
This would be a great topic for a "Featured Voices" or "Off the Cuff". Either Chris or Charles opin, or bring in a Mish, Karl Denninger or someone very experienced in leverage accounts to talk about the mechanism, and any circuit breakers that exist.
Absent really good circuit breakers (I know they exist for the stock market, do they exist for bonds?, but that doesn't preclude a multi-day sell-off), my current feeling is that we will get an April-type total market sell off again in possibly Sept/Oct (if Chris is right, and I have no reason to bet against it), but we need to brace ourselves for another big drop in gold and silver prices for the liquidity reasons above.
Followed by a heroic intervention by the Fed/ Government, followed by a big rebound in asset prices. This pattern could happen more than once. Kind of like the harmonic oscillations that occurred in the famous Tacoma Bridge collapse, or in any under-damped oscillating system. But we all know what happens at that last oscillation.