Tuesday, September 4, 2012

Why Billionaire Frank Giustra Is Making A Massive Bet On Inflation

We had the opportunity to sit down with Frank Giustra last week, the lion behind Lionsgate Films, and an early architect of countless resource companies—most notably Wheaton River Minerals (now known as the $33B Goldcorp, which spun out the $12B Silver Wheaton), Petro Rubiales (now the $7B Pacific Rubiales), and Urasia Energy.

By all accounts Giustra is brilliant, connected and wealthy. He made headlines in 2007 by pledging over $100 million and half of his future earnings to establish a charitable foundation with President Clinton. Outside of philanthropy however, Giustra has been reluctant to draw attention to himself, and rarely speaks publicly about investing.

In 2002 however, he moved heavily into gold and published, “A Tarnished Dollar Will Put the Shine on Gold”, when it was trading under $300 an ounce. Ten years later and with gold now priced over $1600/oz., it still occupies the largest percentage of his investment portfolio, and his views remain the same.

In discussing gold during the interview he said, “I believe it’s going a lot higher…it’s going to have a parabolic spike, caused by some event or some loss of confidence…a US dollar crisis would be a perfect example. That will cause gold to go through the roof, and then everybody will want to own it…I don’t think we’re even close to that yet…Gold will probably have a much greater run than some of the other hard assets–because it’s also a currency.” (19:16)

On the subject of inflation he remarked, “It’s easier to make money with inflation than with deflation. All you need to make money with inflation is money…Those that influence policy are usually the ones that have access to money, or can borrow it very cheaply… They have a conflict of interest… [Inflation is] where a lot of people are getting rich, and the public is being educated—quote “educated” to accept that type of [inflationary outcome].” (11:10)

When asked about the parallels between today’s Western societies and previous civilizations, he replied that a strong example would be, “Sixteenth century Spain. In just over 100 years, it went from an almost nothing nation, to a great empire, and back to a nothing nation. They became a consumption economy…They waged a number of wars with almost everybody on the planet…because they felt they were a superior nation…[and] that’s what’s happening in America today…There’s no way out except currency debasement.” (15:30)

With respect to the mining shares, he said, “The resource market is in the worst state I’ve ever seen it in…people usually connect irrational and stupid market behavior with peaks of markets, but it takes place at the bottom of markets too. And it’s just as bad [at bottoms]…fear is a much stronger emotion than greed…[There are] companies developing world-class assets trading at pennies on the dollar.” (21:50)

Additional topics discussed included agriculture, success, and mentorship (31:07).

Giustra’s predictions for the western world economies are sobering, but his view of the resource sector is optimistic, and his case for inflation is impossible to ignore. We feel this interview is required listening for all those who seek and desire wealth.

So without further comment, here is billionaire mining and entertainment mogul Frank Giustra in conversation at the Vancouver Club last week. Special thanks to Cambridge House and VC for putting us up, and to Frank for joining the program.

System Signals More Gains in this Holding...

Last week, my 26-week rate of change (ROC) system signaled a sell for bonds, an indication that risk has increased in the fixed-income markets. While I follow the signals, I also try to understand what causes each signal. One of the biggest drivers of interest rates is inflation, which seems to be steady... although policy makers say there is nothing to worry about on that front.

After every Federal Reserve meeting lately, the official statement includes a phrase about "temporary price pressures," which means we shouldn't worry about inflation. That's difficult for consumers who are forced to pay higher prices that feel more and more like they are permanent.

Traders also seem to be concerned about inflation, which has led to increased interest in commodities. Drought conditions have also pushed corn prices to record highs, and the futures contract for corn is up more than 42% since the beginning of the year. Teucrium Corn (NYSE: CORN), an ETF that tracks corn prices, is up just 20%. From the bottom in June, corn futures are up 70% while the ETF CORN is only up 44%.

There are a number of reasons an ETF can lag a futures contract. Management expenses of 2.55% for CORN plus trading costs almost guarantee some underperformance in the ETF. However, it is likely that most of the difference results from the fact that CORN holds futures contracts for different months. Futures contracts have an expiration date. CORN splits its holdings into three different contracts, and more distant expiration dates have seen smaller gains than the contract that most futures traders are using to profit from corn.

Despite the performance differences, both the ETF and the futures contract follow the same general trend. Corn prices appear to be forming a top and the stochastics indicator is already pointing down. For corn, the price pressures do seem to be temporary, although elevated food prices are possible for some time.

Gasoline prices tell a similar, but less dramatic, story. Traders can use the United States Gasoline Fund (NYSE: UGA) to gain exposure to this commodity. Futures, with a 25% year-to-date gain, once again beat the ETF, which gained 19%. UGA has an expense ratio of only 0.84%, which decreases the tracking error, and uses only the near-term futures contract.

The stochastics indicator is also bearish for gasoline, again pointing to the probability that the uptrend is due for a pullback.

Corn and gasoline prices will impact official inflation measures, and there may well be temporary upward pressures on retail prices. But it looks like after these temporary pressures recede, new pressures may develop from livestock. Reports indicate that ranchers and farmers are decreasing the number of cattle and hogs they feed because of higher grain prices, and supply decreases could lead to higher prices later. Inflation seems to be rotating between commodities for now, explaining why they could be called "temporary" while feeling permanent.

Gold, a commodity that does not directly impact consumer prices, shows a completely different picture. Here, the SPDR Gold Trust (NYSE: GLD) ETF has slightly outperformed the futures since the start of the year. Gold futures have gained about 4.9%, while GLD is up 6.5%. The very low-cost ETF holds gold bars, and physical gold has slightly outperformed gold futures.

Both gold futures and GLD have recently broken out of consolidation patterns. That makes gold the best buy right now for traders looking for an inflation hedge. GLD has been in the ROC system portfolio for several weeks now and should continue to offer protection against inflation.

Will We Collapse by August 7th 2013? Martin Armstrong

Will We Collapse
by August 7th 2013?

click here to read

Moody's Downgrades European Union To Outlook Negative

Not entirely surprising following the outlook changes for Germany, France, UK, and Holland but still an intriguing move right before Draghi's big unveiling: Moodys maintains AAA rating but shifts to outlook negative.

Moody's believes that it is reasonable to assume that the EU's creditworthiness should move in line with the creditworthiness of its strongest key member states considering the significant linkages between member states and the EU, and the likelihood that the large Aaa-rated member states would likely not prioritize their commitment to backstop the EU debt obligations over servicing their own debt obligations.

Interestingly they also note that a further cut could occur due to: changes to the EU's fiscal framework that led to less
conservative budget management... (more)